Offshore Tax Havens
Where Taiwan's Billionaires Stash Their Cash
Are the offshore dealings of Taiwan's billionaires legal wealth management, or do they border on financial crime? Leaked information on companies, trusts and tax haven funds gives us a glimpse of the financial dealings of the super-rich.
Where Taiwan's Billionaires Stash Their CashBy Yi-Shan Chen, Judy Lin
From CommonWealth Magazine (vol. 540 )
Tax havens have long enjoyed great popularity among rich individuals and powerful multinational corporations for their secrecy, anonymity, low or zero taxes and absence of regulatory control. For ordinary citizens outside this exclusive circle of world wealth, it is virtually impossible to lift the veil of secrecy.
CommonWealth Magazine was granted access to financial information on Greater China companies not yet posted on the International Consortium of Investigative Journalists (ICIJ) offshore leaks database, a "Who's Who of Tax Havens." We matched this information with the financial reports of companies run by billionaires on Forbes magazine's "Taiwan's 50 Richest" list. We eliminated the names of individuals who appear in the database because they serve as the authorized representative of companies in which the family-controlled company has invested.
At least 12 of Taiwan's billionaire owner families behind the island's large corporations have assets overseas. They are: Want Want Group (the Tsai family), Fubon Group (a separate, unrelated Tsai family), Ting Hsin International Group (the Wei family), Kings Group (a third, unrelated Tsai family), Delta Electronics (the Cheng family), Standard Foods Corporation (the Tsao family), Koos Group (the Koo family), Chinatrust Financial Holding (another branch of the Koo family), United Daily News Group (the Wang family), Daphne International Holdings (Chen family), and GSP Group (the Wu family).
The intermediaries chosen by these twelve conglomerates for their offshore companies or trusts include the Hong Kong and Singapore branches of UBS, the Hong Kong branch of HSBC, Taiwan's four major accounting firms, the Hong Kong branch of Deutsche Bank, and law firms Baker & McKenzie, as well as Lee and Li Attorneys-at-Law.
What readers need to keep in mind is that ICIJ's Offshore Leaks Database only contains the financial information of some 100,000 companies created by just two offshore services firms – Singapore-based Portcullis TrustNet and British Virgin Islands-based Commonwealth Trust Limited (CTL), which presents only part of the picture. It does not mean that other super-rich clans have not taken advantage of tax havens.
On Jan. 23, 7 p.m. Taipei time, ICIJ made available all Greater China data in its online database, enabling people worldwide to search secret offshore accounts.
The rich exploit tax havens using three approaches: offshore trusts, offshore holding companies, and offshore investments.
Financial Trick No. 1: Offshore Trusts
Taiwan's richest billionaire on the Forbes "Taiwan's 50 Richest" list, Chinese snack food king Tsai Eng-meng (Want Want Group), and the third-ranked Wei brothers – Ing-chou, Ying-chiao, Ying-chun and Yin-heng – of food and beverage giant Ting Hsin International Group use offshore trusts to manage their wealth.
According to the ICIJ database and the annual report of Ting Hsin's subsidiary Ting Yi (Cayman Islands) Holding Corporation, the Wei family's share ownership structure has five levels with four family trusts at the top. The Wei family has placed its stakes in these trusts, which are managed by HSBC International Trustee Limited.
A trust structure of this variety, according to one accountant, is designed to prevent power struggles over company management in the event of disagreements among family members at shareholders' meetings, since individually held shares have been pooled into the trust.
The Want Want Group's Tsai family is using a similar trust structure. However, clan boss Tsai Eng-meng denies that he owns the trusts and companies that are listed in the ICIJ database.
Why are billionaires so fond of offshore trusts? Portcullis TrustNet (Taiwan) Pte Ltd. general manager Morris Huang explains that Taiwan has too many legal restrictions and not much flexibility, so only very few trust products can be offered. Therefore, very wealthy individuals with huge fortunes overseas choose to set up trusts in countries that provide the best conditions for their needs.
In Taiwan, the Trust Law stipulates, for instance, that any downward adjustment of beneficiary assets requires prior approval of the trustor, trustee, beneficiary and trust supervisor. Requirements are much less strict for offshore trusts where sometimes the trustor (settlor) can make changes as he or she wants.
"Very often this is what the settlor wants," explains Huang. "The settlor feels that this is his right and that the simpler the procedure the better." Tax avoidance in these cases is limited, because what the Wei brothers and the Tsai family placed in offshore trusts is stock in their Hong Kong-listed holdings, which is income from foreign sources in the first place.
Financial Trick No. 2: Offshore Holding Companies
The ICIJ database also lists examples of Taiwanese companies who use offshore holding companies to control Taiwanese shares or assets.
Taiwan's first old-money family, the Koo clan, figures prominently in the ICIJ database, with at least 10 Koo family members holding assets overseas.
In 2007 the Koos Group sold a 60 percent stake in their China Network Systems Co. (CNS), the first instance of a major Taiwanese cable television operator selling shares to a private equity fund. The decision was based on a complicated back story.
"When they transferred this equity overseas, at the time it was definitely not to avoid taxes, but to borrow money, to attract capital," remarks a member of the Koos Group side of the family who knows the inside story.
He notes that while Taiwan's cable TV system is lucrative now, such was not the case ten years ago. Back then, Chester Koo, the eldest son of Koos Group chairman Koo Chen-fu, wanted to consolidate the island's cable TV operators. Therefore, he borrowed huge amounts from private investors, but still had a cash flow problem. Since CNS was already saddled with high debt, the banks were not ready to grant further loans.
In order to get loans from foreign banks and to attract foreign investors, Chester Koo asked his brother-in-law Nelson Chang to restructure the entire holding. Eventually CNS won Australian media tycoon Rupert Murdoch as a joint venture partner. "As far as Murdoch was concerned, he was much more familiar with the laws and regulations in the British Virgin Islands than in Taiwan," the Koo clan member recalls.
Regardless of the reasons, the example of the Koos Group side of the Koo clan stands out when it comes to shifting assets overseas. Once assets have been transferred to tax havens, the National Tax Administration has great difficulties tracking them down. Offshore tax havens have already become the biggest loophole in Taiwan's individual income tax system.
Financial Trick No. 3: Offshore Investments
When a Taiwanese investor turns foreign investor, how much of a tax difference does that make for a billionaire? For a long time Taiwan levied individual income tax only on income derived from sources in the Republic of China. Only in 2010 was an alternative minimum tax system introduced which takes into account overseas income.
To illustrate tax calculation, an accountant gives us an example: if a major shareholder holds stock in a domestically listed company and earns stock dividends every year, then an individual income tax rate of at least 40 percent applies to their income.
But, if they set up a holding company in Taiwan, the stock dividends become the holding company's corporate income, which is taxed at a maximum rate of 17 percent. The disadvantage is that eventually the holding company is forced to share profits with the big shareholders, and then the maximum tax rate of 40 percent on individual income kicks in again.
However, if a major shareholder registers his stake, funds or real estate under an offshore company, this income all of a sudden becomes income from abroad. Under the alternative minimum tax scheme, individuals only have to pay taxes on foreign-source income if it exceeds NT$1 million per year and their total income, including domestic sources, is more than NT$6.6 million per year, and then they only pay a 20 percent income tax rate, half of the original rate.
Even more absurd is that if such an offshore holding company is directly set up for the shareholder's offspring, he or she does not even have to pay the 10 percent gift tax.
If the money is not needed otherwise, it can be deposited into an account at an overseas banking unit (OBU) where it earns tax-free interest.
If the OBU account is opened in Hong Kong or Singapore, there are even more perks, since no tax is withheld at all from money inflows and outflows. As long as repatriated income does not exceed NT$6.6 million per year, the wealthy individual does not even pay a cent in income tax in Taiwan.
But don't the rich have to cover living expenses too? If they stash away their money overseas, how can they get by in Taiwan? The accountant, who has long witnessed how billionaires avoid taxes and manage their wealth, enlightens us: "Don't you know there are overseas credit cards? You can charge your expenses to an overseas credit card."
More Back Doors, Widening Wealth Gap
The tax evasion loopholes in Taiwan continue to get bigger just as Taiwan is trying to kick start its sluggish economy. The F share system, OBU regulations and the planned free economic pilot zones will only further open the back door.
Taiwan has no rules on "actual places of business" and "controlled foreign corporations." Once a company transforms into a foreign company listed in Taiwan, popularly known as F shares, it is treated like a genuine foreign company even if its board meetings are held in Taiwan, its business is conducted in Taiwan, and its chairman is a Taiwanese national.
As soon as the company becomes a Taiwan-listed foreign company, the maximum income tax rate on shareholder dividends is cut in half, from 40 to 20 percent. The same goes for the salaries that F share companies pay to their employees and the remuneration for directors and supervisors. Considered as income from foreign sources, they are taxed at half the rate.
The accountant does not mince words venting his anger over such privileges. "Who among us is not earning his money through hard work? We pay taxes for every dollar we make. These people are Taiwanese, they go to work in a Taipei office building day by day like you and me. The only difference is that they work for an 'offshore company' and therefore earn 'offshore income.' As long as they don't make more than NT$6.6 million a year, they don't have to pay any taxes. How can you be not angry about that?"
Louis Chang, author of How to Use an Offshore Company, remarks that the times when offshore companies were an exclusive privilege of the super-rich are long gone.
Banking industry insiders point out that wealth managers and investment advisors, faced with stricter financial supervision and pressure to boost personal sales performance, discovered early on that offshore companies were a convenient vehicle to help their clients exploit tax privileges for foreign investors.
The Taiwanese client establishes an offshore company and then opens an account for the said company with an OBU. Thus, the Taiwanese company instantly becomes a foreign enterprise nominally registered in a far-flung tax haven such as the South Pacific island state of Samoa, the British Virgin Islands in the Caribbean, or Belize in Central America. Such companies do not need to pay taxes on interest income and are able to invest in a broader selection of financial instruments.
In CommonWealth Magazine's latest State of the Nation Survey published on Jan. 8, the widening wealth gap emerged as the nation's number one complaint. Yet the Taiwanese do not resent the rich. Taiwanese people generally hold the view that entrepreneurs take risks and deserve their fortunes as the fruits of hard work.
However, the ICIJ databank shows that in the Greater China region Taiwanese companies and rich individuals are the most active users of tax havens. If lawmakers continue to condone such tax avoidance schemes and fail to close the tax loophole for foreign-earned income, social antagonism fueled by wealth disparity is sure to escalate, potentially leading to the biggest crisis in Taiwanese society.
Translated from the Chinese by Susanne Ganz