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Hong Kong may be next IRS focus

Agency seeks to find -- and tax -- money hidden in offshore accounts.

By Teresa Mears Mar 25, 2010 4:46PM

This news article comes from Martin Vaughan at partner site The Wall Street Journal:


The U.S. Internal Revenue Service for the moment has one person charged with investigating tax crimes stationed in Hong Kong, a jurisdiction that has played a prominent role in recent U.S. tax evasion cases.


That may be about to change. The IRS is in the process of hiring and training hundreds of agents world-wide to pursue U.S. tax dodgers who have hidden cash overseas. Tax attorneys and advisers in Hong Kong say they have been told the IRS plans to add several enforcement positions at the U.S. consulate here, though it isn't clear how soon.

IRS officials in Washington and Beijing, where the IRS senior attache for Asia is stationed, didn't immediately respond to inquiries about staffing levels.


Some see Hong Kong as the next logical focus of a global IRS push to ferret out hidden accounts that began with the prosecution of Swiss banking giant UBS AG.


"What has happened in Switzerland is a taste of things to come, and I believe that the next focus of U.S. law enforcement interest is going to be in Asia," said Scott Michel, a tax attorney at the Caplin & Drysdale firm, speaking at the University of Hong Kong this week.

Hong Kong's light tax system exempts interest on bank deposits by individuals, and doesn't tax capital gains, making it a prime destination for the world's wealthy. For corporations, only Hong Kong-source income is taxed, and there is no estate or inheritance tax.


The relative ease of setting up a corporation in Hong Kong has figured in some recent high-profile tax cases. At least three American UBS clients who have pleaded guilty to tax evasion used Hong Kong firms as conduits for assets or loans.

Unlike some tax haven jurisdictions like Switzerland, Hong Kong has no criminal sanctions for revealing bank secrets. Abetting tax evasion can even be considered a crime under Hong Kong's anti-money laundering laws.


On the plus side for would-be tax dodgers: Because Hong Kong doesn't tax bank deposits, its tax agency, the Inland Revenue Department, doesn't collect information on accounts that might otherwise be shared with the IRS. Hong Kong government officials declined to be interviewed for this story.


Hong Kong has also been promoted by marketers of tax shelters as unlikely to draw attention from foreign tax authorities like the IRS, because it is a large commercial center with a diverse economy.


"One of the major advantages of utilizing a Hong Kong company is that there is no immediate suggestion that the company is a tax avoidance vehicle as Hong Kong is a major trading entity in its own right," according to marketing materials on the Web site of Sovereign Group, an offshore tax planning firm.


For instance, this might have led some U.S. entrepreneurs involved in manufacturing in China or elsewhere in Asia to stash some income in a Hong Kong account rather than returning it home to be taxed, according to several tax attorneys interviewed for this story.


This month's disclosure of the theft of data on 24,000 Swiss accounts of HSBC Holdings PLC, one of the crown jewels of Hong Kong's banking industry, could also train U.S. law enforcement attention on Hong Kong. HSBC is headquartered in London, but it is one of the oldest banks in Hong Kong, and its CEO resides here.


Still, some are already predicting that an IRS enforcement ramp-up in Hong Kong will prove to be a fool's errand. "If they are coming to look for undeclared assets, they are coming to the wrong place," said Steven Sieker, a Hong Kong partner at the Baker & McKenzie law firm.


For example, thousands of affluent Hong Kong citizens sought and obtained citizenship in another country prior to the 1997 handover of the city from the U.K. to mainland China. But Mr. Sieker said tax considerations steered most toward Australia or Canada, not the U.S.


"If they were well-advised, most would have obtained foreign citizenship in a common-law country other than the U.S.," he said.


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