Hong Kong Is China’s Financial Gateway To The World

Hong Kong is not only an international financial centre, it is the most important gateway to Mainland China – and connectivity is the key to enhancing cross-boundary transactions. The Chinese central government is committed to ensuring that Hong Kong maintains its status as a free port and a separate customs territory, and at the same time focus on the development of the Guangdong-Hong Kong-Macau Greater Bay Area (GBA).

Hong Kong has long been a gateway to and from Mainland China, and different data points show that the city originates and intermediates about two-thirds of China’s inward foreign direct investment and outward direct investments. As one of the Mainland’s principal trading partners, Hong Kong not only provides a channel for goods and services to go global, but also catalyses the international usage of renminbi along to the process.

The renminbi (RMB) has retained its position as the fifth most active currency for international payments by value, with a share of 2.15% as of August 2021, according to Swift data. Since the launch of the pilot scheme for cross-border trade settlement in renminbi in 2009, RMB trade settlement handled by banks in Hong Kong has seen exponential growth.

Hong Kong remains the most important offshore RMB economy by weight, accounting for more than 75% of the global total. For the financial services sector, central and Hong Kong authorities are seeking to further promote cross-boundary RMB investment and financing activities, encourage competitive Mainland Chinese enterprises are also issuing green and sustainability related products in Hong Kong, aiming it to become a hub for green finance within the GBA.

“With complementary advantages of respective markets and systems in the GBA, the financial services industry in Hong Kong has much expectation on the coordinated development of the region,” said Laurence Li, chairman of the Financial Services Development Council (FSDC), a high-level cross-sectoral advisory body set up by HKSAR Government in 2013 to promote Hong Kong’s financial services industry.

“At the same time, different stakeholders have been engaging in conversations and preparatory work to enhance the connectivity and standards of financial services and product offerings. With some favourable measures being introduced and implemented in an orderly manner, the industry believes the ever-improving connectivity of financial markets will lead to uncharted market potentials.”

The FSDC has made efforts in facilitating Hong Kong’s financial services industry to capture market opportunities in the GBA. FSDC has recommended and advocated for connecting cross-boundary payment and transfer infrastructure, enhancing the convenience of remote account opening procedures, as well as fostering cross-boundary mortgage financing, mutual funds, insurance and wealth management.

In a recent research paper, the FSDC recommended connecting cross-boundary payment and transfer infrastructure, enhancing convenience of remote account opening procedures, as well as fostering cross-boundary mortgage financing, insurance and wealth management businesses. Through capitalizing on its unparalleled strengths, Hong Kong can play a unique role in driving the concerted development of the financial services industry, and in turn enjoy the growth momentum in the region.

The newly launched Wealth Management Connect scheme will help diversify investment portfolios through exposure to overseas markets via retail funds domiciled and regulated in Hong Kong, while attracting offshore investments to onshore wealth management products in Mainland. It will also allow Hong Kong investors to broaden their mainland exposure.

Wealth Management is a major breakthrough in which retail investment funds domiciled in Hong Kong and authorized by the Securities and Futures Commission (SFC) are eligible for the scheme instead of the traditional product by product approval approach.

The scheme further integrates the Mainland and Hong Kong markets and promotes cross-border trading, following on from the successful launch of the two Stock Connect schemes that linked the stock markets of Hong Kong with Shanghai and Shenzhen in 2014 and 2016, respectively.

According to a recent KPMG client note, Wealth Management Connect represents another “significant development” in the liberalization of Mainland China’s capital account following the launch of QFII/QDII, the Mainland-Hong Kong Mutual Recognition of Funds scheme and the Stock Connect and Bond Connect schemes. The firm expected these developments would accelerate RMB internationalization and strengthen Hong Kong’s position as a global offshore RMB hub.

Meanwhile, the new southbound leg of China’s Bond Connect programed will stimulate demand from Mainland Chinese investors for Hong Kong and US dollar-denominated bonds, boosting liquidity and, thus, facilitate a more efficient price discovery process. The launch of the southbound link could broaden the investor base for both Hong Kong dollar and offshore RMB bonds, whereas the support for the US dollar bond market could be strengthened even further.

Hong Kong should also be a main contributor to the collaboration in green finance, development of Fintech and digital assets in the GBA in the future. Last but not least, the various financial liberalization measures carried out in the region will foster closer exchange among different stakeholders, including regulators and market participants, provide an appropriate market dynamic, and are in line with the longer-term national objectives of financial liberalization and internationalization. Hong Kong, in this context, will continue to play its unique role as China’s only international financial centre.

The cross-boundary nature of Hong Kong’s financial services sector, especially asset management, is constantly being reshaped thanks to the joint efforts of the government and the sector, leading to an increasing number of available product types, a wider reach to more local, international and Mainland investors with different experiences, and more diversified investment strategies and preferences. Just as the Wealth Management Connect is on the horizon, Hong Kong is marching steadily towards its vision of becoming the world’s premier wealth and asset management centre.

Follow FSDC on Twitter or LinkedIn. Check out www.fsdc.org.hk to stay in touch with their thought leadership.

Financial Services Development Council (FSDC) was established in 2013 by the Hong Kong Special Administrative Region Government as a high-level, cross-sectoral advisory body to engage the industry in formulating proposals to promote the further development of the financial services industry of Hong Kong and to map out the strategic direction for the development. The FSDC has been incorporated as a company limited by guarantee with effect from September 2018 to allow it to better discharge its functions through research, market promotion and human capital development with more flexibility.

Source: Hong Kong BrandVoice: Hong Kong Is China’s Financial Gateway To The World


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Big Short Investor Says Bitcoin Is In a Speculative Bubble

There are plenty of Bitcoin bulls evangelizing the digital currency these days, but Michael Burry, the focus of the film and book The Big Short, is not one of them.

Burry, in a now-deleted tweet, warned that Bitcoin’s current levels are unsustainable—and current investors could suffer significant losses.

“$BTC is a speculative bubble that poses more risk than opportunity despite most of the proponents being correct in their arguments for why it is relevant at this point in history,” he wrote. “If you do not know how much leverage is involved in the run-up, you may not know enough to own it.”

Burry knows about bubbles, having made a fortune off the housing market’s collapse in 2007. And he warned that Bitcoin’s recent ascension seemed reminiscent of that time.

“Fads today (#BTC, #EV, SAAS #memestocks) are like housing in 2007 and fiber/.com/comm/routers in 1999,” he said.

Burry regularly deletes his tweets, but he has been quite outspoken on the platform about a number of issues. Last April he decried the coronavirus lockdown. He began tweeting last March, and his comments are closely watched by the financial community, though he does not talk much (if at all) about his own investments.

His bearish remarks come at roughly the same time that Citi gave Bitcoin a boost. A note from analysts at the financial institution said the cybercurrency could be on the verge of going mainstream, despite the many obstacles in its path.

“But weighing these potential hurdles against the opportunities leads to the conclusion that Bitcoin is at a tipping point and we could be at the start of massive transformation of cryptocurrency into the mainstream,” the analysts said.

While Elon Musk spent Sunday taking potshots at Sen. Bernie Sanders on Twitter, the Tesla founder became the target of a different kind of financial heavy hitter on social media.

Michael Burry, the celebrity investor who rose to fame by being one of the first to profit from the subprime mortgage crisis (and whose story was told in the film The Big Short), surfaced on Twitter over the weekend to accuse Musk of seeking attention solely to sell his company’s stock.

In a now-deleted Tweet (a frequent habit of Burry’s), the investor wrote, “Let’s face it. @elonmusk borrowed against 88.3 million shares, sold all his mansions, moved to Texas, and is asking @BernieSanders whether he should sell more stock. He doesn’t need cash. He just wants to sell $TSLA.”

Burry, in a separate (also deleted) Tweet on Monday, showed a chart of Tesla’s share price with an arrow pointing to the date when Musk said that the company’s stock was trading “too high.” (At the time, Twitter shares were trading at $55.22. In early trading Monday, they were at $53.46.)

The salvos against Musk come just a month after Burry deleted his Twitter account after denouncing what he called U.S. class warfare and disputing the argument that the wealthiest 1% don’t pay enough taxes. It was hardly the first time he has left Twitter and since rejoined. Burry’s social media presence is akin to a game of Whac-a-Mole.

Musk, on Sunday, dinged Sanders, replying to the Vermont senator’s tweet demanding that the extremely wealthy pay more in taxes. “I keep forgetting that you’re still alive,” Musk wrote, along with “Bernie is a taker, not a maker.”

Burry, however, has had Musk in his sights before this most recent war of words. On Friday, he scolded the billionaire for his comments about competitor Rivian, in which Musk said the company’s true test would be achieving high production and breaking even on cash flow.

“No, @elonmusk, the true test is achieving that without massive government and electricity subsidies on the backs of taxpayers who don’t own your cars,” Burry replied.

Burry, it’s worth noting, made a huge bet against Tesla earlier this year. Burry’s Scion Asset Management owned bearish puts against 800,100 shares of the electric-car maker as of March 31. The puts give Scion the right to sell Tesla shares on or before an unidentified

Source: Why the ‘Big Short’ Guys Think Bitcoin Is a Bubble


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There’s No ‘Supply-Chain Shortage,’ Or Inflation. There’s Just Central Planning

It’s great that so many have copies of Adam Smith’s The Wealth of Nations, but very unfortunate that so few have read it. The alleged “supply chain” problems we’re enduring right now were explained by Smith in the book’s opening pages.

Smith wrote about a pin factory, and the then remarkable truth that one man in the factory working alone could maybe – maybe – produce one pin each day. But several men working together could produce tens of thousands.

Work divided is what enables the very work specialization that drives enormous productivity. If this was true in an 18th century pin factory, imagine how vivid the truth is today. Figure that something as basic as the creation of a pencil is the consequence of global cooperation, so what kind of remarkable global symmetry leads to the creation of an airplane, car, or computer?  The kind that can’t be planned is the short answer, but more realistically the only answer.

Please keep this in mind as you read media coverage of the so-called “supply-chain disruptions” resulting in “shortages” that are said to be causing “inflation.” If you want a bigger laugh, read about what President Biden wants to do in order to get “supply” back on the market with an eye on replenishing U.S. retail shelves that are increasingly bare. He’s decreed 24-hour port operations! Yes, thanks to the 46th president we now know what held the Soviets back, and ultimately destroyed the Soviet Union: their ports weren’t open long enough; thus the shortages of everything

All of the above would be funny if it weren’t so sad. Media members, “experts,” economists, and politicians don’t even disappoint anymore. To say they do would be to flatter them.

Either they think we have inflation, shortages, or a combination of both. Wrong on all counts. Really, who was talking about supply-chain shortages or the impossibility that is demand-driven inflation in early 2020? Very few were, and that’s because the U.S. economy was largely free then. At which point politicians panicked. And in panicking, they imposed a rather draconian form of command-and-control on the U.S. economy.

Some were free to work, some weren’t, and more still were free to work and operate their businesses within strict political limits. From freedom to central planning in a very small amount of time. At which point it’s worth considering once again the simple pin factory that Smith witnessed in the 18th century versus the global cooperation that was the norm 19 months ago.

The supply lines of February 2020 were impossibly complicated structures that no politician could ever hope to design. Think billions of individuals around the world pursuing their narrow work specialization on the way to enormous global plenty. Put another way, the shelves in economically free countries were heaving with all manner of products based on economic cooperation that was staggering in scope. Brilliant as some experts claim to be, and brilliant as some politicians think they are as they look in the mirror, they could never construct the web of trillions of economic relationships that prevailed before the lockdowns. But they could destroy the web. And they did; that, or they severely impaired it.

In which case let’s please not insult reason by talking about “shortages” or “inflation” now. Let’s instead be realistic and talk about central planning. We know from the 20th century that when politicians, authoritarians or both substitute their intensely narrow knowledge for that of the marketplace that immense want for very little (and lousy) supply is the logical result. Yes it is. When we’re not economically free, bare shelves are the inevitable result.

Conversely, product and service abundance is a certain consequence yet again of the infinite actions and trillions of economic relationships entered into by billions of people. These commercial tie-ups were constructed by consenting individuals over many years and many decades only for them to be wrecked by a political class arrogantly seeking to protect us from ourselves. That’s what happens when command-and-control replaces voluntary order. The remunerative ties that bind us fray, or vanish altogether. Consenting, profitable economic activity was suddenly illegal. Yet politicians and other experts are only now wringing their hands about a lack of supply?

Really, what did they think was going to happen? While politicians couldn’t ever create or legislate billions working together around the world, they could and can surely break voluntary economic arrangements. When you have guns, handcuffs, the power to quite literally shut off power sources to the productive, not to mention the wealth produced by the productive, you have the power to impose command-and-control. And so they did, only for the “supply chains” painstakingly created in self-interested but spontaneous form over many decades to suddenly break apart. Just don’t call it inflation, or shortages.

Inflation is a devaluation of the unit of account. In our case it’s the devaluation of the dollar. And while Treasury hasn’t always done a great job as the dollar’s steward over the decades, that’s just the point. Devaluation was routine problem in the 1970s, it ceased to be in the 80s and 90s, but it reared its ugly head once again during the George W. Bush administration in the early 2000s. To say inflation is a “now” thing is to ignore that it’s more realistically been a 21st century-long thing.

We don’t suddenly have an inflation problem. To say we do is the equivalent of saying that the Soviets had inflation because all the goods worth getting were both difficult to find, and incredibly expensive if they could be found. In our case we’ve had a lockdown problem care of nail-biting politicians that suffocated commercial cooperation around the world. And with work divided less than it used to be care of government force, productivity is naturally lower than it used to be.

Please consider modern productivity in terms of Smith’s pin factory example yet again, and ask what it would do to supply. The only thing is supply shortfalls are not evidence of inflation. A rise in one price due to lack of supply implies a fall in other prices. Yes, we have a central planning problem. Were he around today, Adam Smith could diagnose this in seconds.

Follow me on Twitter.

I’m the editor of RealClearMarkets, and a senior economic adviser to Applied Finance Advisors. I’m also the author of five books. The most recent released in March is When Politicians Panicked: The New

Source: www.forbes.com


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How Are Developing Countries Spending Climate Financing Money?

Over the past decade, rich nations and private enterprises have raised at least $500 billion to help developing countries cope with climate change. This financing plan, hatched in 2009, was supposed to build to an annual mobilization of $100 billion by 2020, and was designed to offset the unfairness of climate change—of poor countries suffering because rich countries had already emitted their way to wealth.

Developed countries, as we’re finding out now, have missed that $100 billion target. Just as importantly, though, it turns out that no one—no individual, no government, no multilateral agency—knows precisely how all this climate funding is being spent, or even if it’s being spent at all. Even the best such database, maintained by OECD, is a broad-brush one and has many gaps—not least in the details of private financing. The very term “climate financing,” in fact, has often proved to be slippery and malleable, defined by parties according to their own need or convenience.

At the COP26 climate summit in Glasgow, scheduled to end on Nov. 12, ever-bigger climate financing numbers are being proposed: $130 trillion from a private sector consortium, an annual $1 trillion demanded by India, an annual $1.3 trillion demanded by African nations. But without a way to track how this money is used, these larger numbers “feel like greenwashing,” said Liane Schalatek, associate director of the Heinrich-Böll-Stiftung, a policy think tank headquartered in Berlin. “It isn’t just, ‘Tell me the number,’ it should also be, ‘Show me how the number is computed,’ otherwise it’s a fig leaf.”

Insofar as some funds are more important than others, these climate financing funds are among the most important quantities of money in the world; human civilization itself hinges on whether these funds are raised in full and spent well. The absence of a detailed, publicly available account of this financing, said Schalatek, risks all sorts of omissions: donors mislabelling their funding, or money being misspent, or an under-estimation of the true volume of money required. Which, in turn, risks leaving the world far less prepared for climate change than it needs to be.

How much money are countries raising to fight climate change?

In 2019, the last year for which the OECD has published full data, rich countries raised nearly $80 billion as part of their climate financing pledge. Most of this was either in the form of bilateral funds—loans or grants from one government to another—or multilateral public funds, whereby developed countries channeled their money through international banks or climate funds. The money is intended to help developing countries both mitigate the effects of climate change—including investing in cleaner energy sources—as well as adapt to a harsher climate.


The data available on these funds, Schalatek said, resembles an onion. At the core are projects for which the most details are available: those financed through multilateral agencies. Schalatek’s team tracks a portion of these, “covering the most important multilateral climate funds,” she said, “although we don’t know what fraction it is of the overall multilateral funding.” In the Heinrich-Böll-Stiftung database, for instance, grants can be found:

  • from the Global Environment Facility, in 2014, of $2.78 million to Argentina to introduce biogas technologies into the national waste management program
  • from the Green Climate Fund, in 2019, of $9.68 million to Bangladesh to build plinths that raise the land of high-risk villages above any potential climate-related floods
  • from the Adaptation for Smallholder Agricultural Programme, in 2015, of $4.56 million to Liberia to improve the climate resilience of its cocoa and coffee crops

Moving outward through the other layers of the onion, though, the details get less granular, Schalatek said. “Lots of bilateral initiatives, for instance, don’t give you a project-by-project breakdown.” A report by the non-profit Climate Policy Initiative (CPI), analyzing climate financing initiatives in 2019 and 2020, found, for instance, that “finance for buildings with high energy and thermal insulation  performances—green buildings—is growing fast but lacks transparency.” Even many multilateral funding efforts can only be slotted into broad categories: agricultural development, for example, or disaster risk reduction. As a result, Schalatek said, “there’s less data accuracy, more guesswork.”

Are rich countries greenwashing their climate funding pledges?

Another source of doubt has to do with how rich countries label the money they’re disbursing. Under the OECD system, countries attach a so-called “Rio marker” to any funds they claim to be pledging under the climate assistance rubric. The marker can either be a “2,” to signal that the money’s main purpose is climate-related, or a “1,” to signal that a significant part of the money’s purpose is climate-related.

But Schalatek pointed out that no standards exist for what the term “significant” might mean. Each country merely decides this for itself. “That makes the ‘significant’ tag very, very fishy,” she said. “There’s a risk that countries will overuse the ‘significant’ marker and inflate the overall amount of money they’re giving. There has been a lot of mislabelling—or uplabelling, you could call it—going on.”

Indeed, a study of the OECD database reveals projects that sound like traditional forms of assistance but that have been described as climate-related. Finland, for instance, gave Ethiopia a grant of $4.47 million to develop its water supply and sanitation systems, and labeled the money with a “1.” But water aid projects have existed for decades, and it is arguable whether the purpose of this grant—at least as described in the OECD database—has “significant” relation to climate change.

Some examples are even more egregious. Baysa Naran, a senior analyst who co-authored the CPI report, pointed out that her team had to regularly leave out projects that were tagged as climate financing but that were nothing of the sort: “energy-efficient coal, for instance.”

At Glasgow, developing countries called for tighter definitions of climate financing, and the United Nations Framework Convention on Climate Change is attempting to bring more transparency to the funding initiatives. There are so many undefined areas, Naran said. “Which sectors do you count for mitigation, and which for adaptation? Do you count loans, or should only the equivalents of grants be considered climate finance?

Some countries channel a lot of money through multilateral institutions, which then channel money to climate finance. In those situations, how do you account for each country’s contribution?”

Measuring what countries are ponying up thus becomes very tricky, Naran noted. “There’s no third party that reviews and audits and makes independent conclusions about this financing,” she said. “It’s going to be a very difficult topic to reach a united agreement on.”

Samanth Subramanian

By Samanth Subramanian

Source: How are developing countries spending climate financing money? — Quartz


Wealth And Windfall Taxes: Still Not Ready For Prime Time

One sign that post-COVID-19 normalcy is slowly coming to the tax world is that tax authorities are increasingly being accused of launching or seeking unwarranted investigations of taxpayers. Eighteen months or even a year ago, when liquidity was paramount during the height of the pandemic lockdowns, tax authorities across the world quietly backed away from tax enforcement, giving taxpayers some grace in a difficult time. But in some countries, the grace period appears to be over.

In New Zealand, the Inland Revenue Department is seeking contact information for high-net-worth individuals so it can follow up with inquiries about their financial affairs. That hasn’t been received well by the New Zealand Taxpayers’ Union, which recently accused the department of conducting fishing expeditions that could keep the rich from moving to or investing in New Zealand.

In the United States, the Biden administration received significant blowback when it released a bank reporting proposal that would have obligated financial institutions to report data on business and personal accounts with over $600. A second iteration that would have increased the reporting threshold to $10,000 didn’t fare much better. The idea was ultimately cut from a massive budget package winding its way through the government.

The South African Revenue Service, which recently beefed up its high-net-worth unit, is reportedly assigning specific staff to each high-net-worth taxpayer to engage in ongoing dialogue, reminiscent of private banking relationships, according to a report in South Africa’s BizNews.

Overall, this activity is a sign that governments are beginning to shift to the pandemic recovery phase instead of remaining in the pandemic emergency phase. Recent budget and legislative proposals issued in various countries back this up.

Yet the tax transition to recovery has not been as smooth or decisive as previous phases: It has been more hesitant and cautious because policymakers continue to grapple with taxpayer trust issues and slow economic recovery. This is particularly true with excess profits (windfall taxes) and wealth taxes, both of which have generated a lot of discussion.

Where Are We Now?

As a refresher, tax responses to the COVID-19 pandemic have generally followed three phases. The first was about liquidity and enabling taxpayers to keep cash on hand. Many tax administrations achieved this by allowing deferred tax payments, issuing faster tax refunds, increasing business deductions, and allowing taxpayers to shift losses to other years. In that phase, taxing authorities relieved taxpayer burdens and scaled back on enforcement.

The second phase was about maintaining liquidity and starting to ease into restructuring, which requires a careful balance between maintaining taxpayers’ access to cash and instating gradual and reasonable tax increases that do not impede growth or anger taxpayers.

Finally, there is what the World Bank calls phase 3: resilient recovery. This phase is about trust. According to the World Bank, if taxpayers think their lawmakers have been evenhanded and fair over the course of the pandemic by providing adequate relief when needed, then this phase’s needed tax hikes and tax base expansions will have the greatest likelihood of public acceptance.

Windfall Taxes Are Still Rare

At the beginning of the COVID-19 pandemic, many questioned whether countries should rely on windfall taxes to pay for pandemic-related support and recovery. There has been a lot of debate, but few takers. Malaysia stands out as one of the first countries to adopt a pandemic-related windfall tax.


COVID-19 battered Malaysia’s economy. In 2020 the country suffered a 5.6% decline in GDP — its worst economic contraction since the Asian financial crisis of 1997. The good news is that the economy is expected to steadily recover over the next year as part of the overall global economic recovery. But riding these economic coattails may not be enough for Malaysia, which has struggled with chronically low tax revenue collection.

In the run-up to the country’s October budget release, Deputy Finance Minister Yamani Hafez bin Musa said the government was considering a number of tax measures to fund recovery, “including taxing the profits on stock investments and imposing higher tax rates on a one-off basis on companies that generated extraordinary profits during the COVID-19 pandemic,” he said.

The government made good on that promise October 29 when it released a souped-up $80 billion budget, its largest ever, which features a controversial one-time windfall profit tax. Effective 2022 corporations will pay a 33% corporate tax rate on profits over MYR 100 million (about $24 million). The first MYR 100 million will be taxed at the regular 24% corporate tax rate. The government expects that a few hundred companies will cross the windfall threshold.

Malaysia did not arrive at this decision lightly, but there is precedent. Crude palm oil producers have been subject to the Windfall Profit Levy Act (Act 592) since 1999. The act imposes a tax on profits exceeding a crude palm oil market price of MYR 2,500 per ton for Malaysia’s peninsula and MYR 3,000 per ton for the states of Sabah and Sarawak.

Since its inception, the tax has generated MYR 4.1 billion in revenue, so expanding it and imposing it on other sectors was not a giant leap and reflects feedback garnered from various stakeholders.

Underscoring that strategy, the government refrained from hiking the windfall profit tax on crude palm oil producers. Instead, it increased the profit threshold by MYR 500 for peninsular Malaysia and Sabah and Sarawak, according to Finance Minister Tengku Zafrul Aziz.

But the initial response from industry was one of general displeasure; the country’s benchmark stock index, the FTSE Bursa Malaysia KLCI, fell 2% on the announcement, and some economists are warning that consumers will bear the cost of the tax. All told, Malaysia presents a case study for other countries considering similar measures.


In Canada, the manufacturing and extractives industries — mining, quarrying, and oil and gas extraction — performed handsomely in 2020. If the government imposed an excess profits tax on large companies that performed the best during the pandemic, they would bear the largest burden, according to data from Canada’s parliamentary revenue estimator.

The country’s New Democratic Party, which sits to the left of the ruling Liberal Party, has been the most consistent advocate for an excess profits tax.

In April New Democratic Party member of Parliament Peter Julian asked the Office of the Parliamentary Budget Officer to estimate how much an excess profit tax on the most profitable companies during the pandemic would raise, using the country’s previous World War II-era excess profits tax as a model.

When Canada imposed an excess profits tax during WWII, it calculated the average yearly profits that companies earned between 1936 and 1939 and levied a 100% tax on anything exceeding that figure. Using that formula, the parliamentary budget officer investigated what would happen if Canada, which has a 15% corporate tax rate, doubled the rate on excess profits.

Excess profits would be those made in 2020 by firms that earned over C $10 million in revenue for at least one year between 2016 and 2020 and exceeded their expected 2020 profits, which the office calculated using each company’s average profit margin between 2014 and 2019.

If Canada followed this formula, it could raise C $7.9 billion, according to the office’s estimates. That said, there’s very little indication that an excess profits tax is on the table. The measure wasn’t included in the country’s 2021 budget, released in April.

It was resurrected as a campaign point during the September general election, but the New Democratic Party, which has long held a minority of seats in Parliament, underperformed in the election. Prime Minister Justin Trudeau instead wants to rely on increased tax enforcement on businesses and the wealthy and to raise corporate tax rates on large financial institutions to 18%.

United Kingdom

Before COVID-19 became a worldwide pandemic, the U.K. Labour Party suggested the country should implement a windfall profits tax on oil companies. As the pandemic progressed, other stakeholders issued broader calls for a general business windfall tax.

In March the House of Commons Treasury Committee briefly analyzed the idea of a business windfall tax in a sprawling report, “Tax After Coronavirus,” that considered the country’s options for both COVID-19 recovery and general tax reform. Lawmakers asked private industry and civil society about the feasibility and wisdom of a windfall tax and emerged from the discussion skeptical about the future of a U.K. tax.

“There are downsides to a windfall tax, including its potentially retrospective nature. There would also be complexities, including the difficulties of identifying sectors to which any such tax should apply, ensuring that such a tax is fairly targeted at firms which have benefited excessively within those sectors, and identifying the element of a firm’s profits which could be reasonably attributed to excessive profits generated by the pandemic,” the report said.

The committee thought a windfall tax would be troublesome, but it also left the door open, adding that it might not “be impossible to introduce a windfall tax in certain circumstances in the future, if that was the political choice made.”

Wealth Taxes Gain More Traction

During the COVID-19 pandemic the ultrawealthy flocked to Singapore from all around the world, seeking a sophisticated, low-tax refuge in a time of chaos. But they wound up bringing chaos of their own, driving real estate prices to all-time highs amid a frenzy to put down roots.

According to Bloomberg, Singaporean authorities have been quietly asking high-net-worth individuals and the business community their opinions on wealth taxation. On one hand, the government is loath to disrupt the multimillionaire pilgrimage, but on the other hand, growing wealth inequality within the country may require creative wealth taxation, according to the head of Singapore’s central bank.

That creativity could arrive in the form of a property gains tax or inheritance tax — neither of which Singapore has — according to Ravi Menon, managing director of the Monetary Authority of Singapore. He shied away from proposing a net wealth tax, which historically has not performed well around the world.

In early November MP Jamus Lim offered the first concrete proposal: a graduated net wealth tax between 0.5 and 2% imposed on individual net worth in excess of SGD 10 million (about $7.4 million). Net wealth above SGD 10 million and up to SGD 50 million would be taxed at 0.5%, and wealth above SGD 50 million and up to SGD 1 billion would be taxed at 1%. Anything above SGD 1 billion would be assessed at 2%.

Latin America has embraced wealth taxation more than any other region during the pandemic, with several countries, including Bolivia and Argentina, introducing or expanding wealth taxes.

The next country to watch in the region is Colombia. In April lawmakers there introduced, as part of a broader tax reform package, legislation for a one-off wealth tax that would apply a 1% tax on net assets over the equivalent of $1.3 million and 2% on net assets over the equivalent of $4 million. The tax would apply in 2022 and 2023. However, the reform package was subsequently revised following public protest, and the wealth tax component was omitted. It is unclear where the idea stands.

Meanwhile, Belgium thought the COVID-19 pandemic presented a good opportunity to resurrect its controversial wealth tax on securities accounts. A securities tax was scrapped in 2019 after a Belgian high court found that it violated EU legal principles of equality and nondiscrimination and deemed it unconstitutional.

The country’s Constitutional Court found that the 0.15% tax contained some discriminatory exclusions, like real estate certificates, without a solid justification. The court also found that the tax applied unequally because individuals who own a share of an account can potentially avoid the tax if their share exceeds €500,000.

This time around, Belgium is applying a blanket tax on all securities accounts worth over €1 million — unlike the previous version, there are no exemptions. The government says the proceeds will be used to fund healthcare, but it remains to be seen whether this new provision will also be subject to legal challenge.

In the United Kingdom, the House of Commons Treasury Committee explicitly rejected the idea of an annual wealth tax, citing design and administration challenges as well as the fact that several other countries have abolished their wealth taxes because of administrative difficulties. As for a one-off wealth tax, the committee didn’t fully write off the idea, noting that “it could be used to raise significant revenue.”

The idea of a one-off tax has been floating around ever since a group of economists from the London School of Economics and Political Science and the University of Warwick formed an independent wealth tax commission to evaluate the country’s revenue-raising options. In a December 2020 report they estimated the country could raise £260 billion over five years if it taxed individual wealth over £500,000 at a 1% rate and would raise £80 billion if it taxed wealth over £2 million.

There are design concerns with that proposal. It would likely hit middle-income earners because “wealth” for purposes of the tax would include main home values. There also are concerns over retrospectivity.

Beyond that, some worry that a one-off wealth tax would simply open a Pandora’s box if the tax is imposed and succeeds because the government could very well impose it again. For now, wealth tax conversations in the United Kingdom remain academic: The measure failed to make it into the U.K. annual budget, released October 27.

A similar phenomenon happened in Germany when the center-left Social Democratic Party, which won a plurality in the country’s recent parliamentary election, vowed to resurrect the country’s wealth tax, which had been struck down over constitutionality concerns. But because the Social Democratic Party lacks a governing majority, it is seeking a coalition with two other parties — the Alliance 90/The Greens and the Free Democratic Party — and has decided to abandon the wealth tax to make a coalition possible. So it remains an academic topic, perhaps to be resurrected at a later date.

I am a contributing editor for Tax Notes International, where I write weekly analysis on various international tax topics including European tax developments, the digital economy, base erosion and profit shifting, and tax transparency. I also write for the Tax Analysts blog. I am passionate about the intersection of tax, law, and journalism, and I look for the accessible and interesting angle in tax. Before joining Tax Analysts I was a managing editor for Thomson Reuters in New York and a senior tax reporter for Law360. I have a BA from the University of Pittsburgh and a JD from Columbia Law School.

Source: Wealth And Windfall Taxes: Still Not Ready For Prime Time


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