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Maritime Logistics Professional

Dodging the mainland taxman keeps HK exports rolling

Posted to Far East Maritime (by on November 27, 2013

There is a large amount of bovine manure to be found in piles of Hong Kong trade figures.

The statistics manipulators - I mean, statistics department - issues regular statements on Hong Kong’s “imports and exports” as though it still has busy factories clustered in the New Territories with furnaces stoked and churning out products for the world.

The truth is that all Hong Kong manufacturing jumped over the fence into mainland China as soon as it was possible to make use of the cheaper labour. Chinese premier Deng Xiaoping’s reforms of the 1970s and 80s saw the establishment of the Shenzhen Special Economic Zone in South China. This allowed foreign investors to set up factories and before you could say “pass the dim sum”, Hong Kong factories became Shenzhen factories.

Yet the factories remain connected to Hong Kong by a financial umbilical chord that seems to be invisible to China’s tax authorities.

By handling what Hong Kong calls “re-exports”, the system can be manipulated. Here’s how it works: About 97 percent of the re-exports are goods the city imports, largely from the mainland. Hong Kong supposedly adds 15 percent to the value of these goods and then ships them off to the world.

But what really happens is that the mainland exporters sell the goods to their Hong Kong branches at just above cost price. The mainland tax rate is 25 percent, so by “earning” less they have less income to tax.

Then the price of the goods is marked up sharply and when exported to the world the profits are booked in Hong Kong at a 16.5 percent corporate tax rate. And if the exporter wants to take the earnings into China, mainland authorities regard it as foreign investment that qualifies for a bunch of its own incentives.

So as you can see, re-exports are little more than a means to evade mainland tax. But don’t be distracted by the word, “little”. There is nothing small about the amounts being round tripped through Hong Kong once the goods are sold to overseas buyers. Government statistics show that the value of goods re-exported through Hong Kong last year topped US$115 billion.

By dodging the mainland taxman, exporters are happy and the Hong Kong government gets to trumpet its make believe import and export industry. It’s good stuff.