Panama Papers | Economist: Local offshores bring ‘no real benefit’ to Macau

A marquee on a building in Panama City lists the Mossack Fonseca law firm

Next to Singapore, Dubai and Hong Kong, Macau is one of Asia’s biggest global offshore banking centers. The issue was  highlighted recently by the Panama Papers leak, which revealed around two dozen local entities to be linked to Panamanian law firm, Mossack Fonseca.
According to some reports, more than one-third of Mossack Fonseca’s business came from China, including the two SAR territories. This is nothing new for Macau, which has existed for some time as a low-tax offshore destination for wealthy corporations and individuals.
Among these is Macau magnate Ng Lap Seng – currently standing  trial over allegations of bribery of a United Nations officials – who has been involved with the Clinton family as a ‘donor’ over the past few decades.
While many of the intentions behind holding assets or money in offshore accounts are perfectly within the scope of the law for most countries, the mysterious and hidden world of the ultra-wealthy sometimes facilitates less tasteful activities. Undisturbed offshore accounts can sometimes be used for tax evasion, money-laundering or to bypass international or criminal sanctions, as is believed to be the case with Russia and North Korea.
Macau’s Decree-Law number 58/99/M, informally entitled “Offshore Regime of Macau,” specifically forbids the engagement of activities restricted  to credit institutions, investment companies and financial intermediaries. Under Article 65, it adds that offshore commercial and auxiliary institutions are “specifically forbidden to provide services to third parties other than the institution of which they are a subsidiary or branch.”
However, under the same law, companies can be fully tax-exempt as long as they do not operate in MOP, do not target Macau residents, and do not focus on other companies in the MSAR. In other words, they must “focus only on non-Macau markets.”
If the government cannot tax the companies and transactions, then “there is no real benefit to the local community of having offshore companies in Macau,” Albano Martins, a local economist, told the Times.
“They [offshore entities] only provide a benefit to the shareholders, with the possible exception of a small employment benefit. For example, some companies have a minimum amount of staff [required] for operating in Macau.”
According to the website of local accountancy firm, HMV & Associates, very little is required to set up an offshore in Macau: MOP25,000 in registered capital, the disclosure of the company owner (only to the licensing authority), a minimum of one director and one shareholder, and around three months’ waiting time for the permit application and entity incorporation.
“But there are firms in Macau that have these companies ready to go,” said Martins. “They hold these [newly created] companies and sell them to whoever is interested.”
In the absence of any measurable benefit to the local community, the danger is that these organizations may be used for illicit purposes, he added.
“In fact the environment facilitates these illicit operations because it has almost no [government] supervision at all.”
The Macau government has been quiet on the issue. After the news broke, the Secretary for Economy and Finance, Lionel Leong, told reporters that the government needs more time and information before commenting on the issue. Leong said that he has “no knowledge of the involvement of any local companies in this [Mossack Fonseca] scheme.”
However, Macau’s links with other popular offshore destinations are well-documented. According to data compiled in the Macau Yearbook 2015, the three biggest holders of foreign direct investment stock in Macau are the Cayman Islands, the British Virgin Islands and Hong Kong – all notorious for the existence of offshore entities.
As individual entities, their investment stock – accumulated over years of direct investment in Macau – exceeds that of mainland China, and is unrivalled among the documented countries and territories. The British Virgin Islands, the smallest of the three to invest in Macau, holds nearly twice as much stock as China (MOP41.6 billion in 2013), while the Cayman Islands holds more than three times as much (MOP66 billion in 2013).
Martins speculates that many of these sources “probably originate with local residents” who themselves own offshore companies in other parts of the world.
He warned that the system can be used to for the misapplication of resources in Macau. “Some transactions, that can benefit the government in terms of taxation, can be avoided through the use of offshore companies.”
While offshore entities are not allowed their tax exemption status if dealing directly in the market, once one organization has the rights to a resource in Macau – such as a plot of land – there is the danger of it being sold through a network of companies that are largely unregulated.
“The interests [of offshore organizations] are well-developed [entrenched] in Macau,” said Martins. “It means ‘business under the table’ and it should not be allowed.” Daniel Beitler