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Short-Term Solutions to Long-Term Problems

By Laurence E. Lipsher - Email Editor

February - March

Dear Valued Reader,

Property taxes in China are a popular topic of discussion in the Chinese press. Xinhua News on January 15 stated that property taxation, seen as a silver bullet to curb excessive growth in China's housing prices, is causing much debate within the higher echelon of Beijing's economic planners. A controversial figure in Beijing, nicknamed "Big Mouth Ren" by the local press, stated that only when supply and demand are in balance can property taxes really be effective in curbing speculative home purchases. Property taxes will never curb speculation in home purchases - if they are only a one-off situation. As a January 19 article in Shanghai Daily indicated, they will do nothing to satisfy the instinct of a culture hellbent on gambling.

Property taxation, based on legitimate appraisal valuation, is sorely needed as a means of financing those municipalities of the country where there is no more land left to sell. As a deterrent to spiraling housing prices, the property tax concepts introduced thus far for Chongqing and Shanghai are utterly worthless. There are bubbles in China that are now going down to fourth- and fifth-tier cities. Prices are too high in the highest tiers of cities of China. China has more than 250 cities with populations over 1 million people, so the lower-echelon municipalities are all subject to that gambling urge just like their upper-echelon neighbors. To deflate the bubbles is obviously the goal. This is causing the research departments of the State Council some real concern. China Daily, in a January 24 article, stated that the central government will soon expand the property tax and home buying limitations (based on size of dwelling and the number of dwellings owned by families) to Qingdao City, Tianjin, Shenzhen, Hangzhou, Ningbo, Nanjing, Xiamen, and Fuzhou. Bubbles are already appearing in these locations.

A one-time tax will temporarily deter speculative activity, but will not have a long-term effect. A shortterm capital gains tax of substance would have an impact, but I don't see that happening. The bureaucracy is simply not set up to handle the tasks necessary for either a true property tax or a capital gains tax.

The same day the property tax went into effect in Shanghai and Chongqing, a new rule requiring a 60 percent down payment on all second home purchases - anywhere in China - also took effect. I doubt it will be a deterrent. Inflation is so rampant that keeping savings in a bank in China means you will lose money. Second homes, based on purchase price, will now require a one-time tax (seems like an excise tax to me) of anywhere between 0.4 to 1.2 percent of purchase price. What’s to prevent bogus purchase contracts on cashonly deals? Chongqing will allow nonlocal residents to buy there — so much for curbing outside investment to keep prices down. Taxes in Chongqing will be staggered. They will be set at 0.5 percent if homes are valued at two to three times average housing prices. Homes valued at three to four times average housing prices will be taxed at 1 percent while anything higher will fall under a 1.2 percent tax.

In Shanghai, second home buyers will pay a tax of 0.6 percent unless homes are valued at less than double the average housing price. In that case, buyers will pay only 0.4 percent.

It is all quite Shakespearean to me: much ado about nothing. What I do see, though, is lots of yuan renminbi making their way outside China and affecting the economies (and housing prices) elsewhere.

I recently wrote about Hong Kong's stamp duty increase in reaction to the yuan renminbi influx. The Hong Kong Monetary Authority reported that yuan renminbi deposits increased 29 percent at the end of November, compared with October 2010, and that year on year, at the end of October yuan renminbi deposits in Hong Kong increased 246 percent. If you want to see what this means, come to Hong Kong and look at prices! That's why Hong Kong had to do something.

Effective November 20, Hong Kong's new stamp duties covered all properties resold within 24 months of acquisition. This levy is enforced even if there is no sale but the property changes hands by way of a gift - if the transferee sells that property within 24 months or if it is an inheritance and the inheritor sells within 24 months. Even if the buyer made the wrong gamble and has to sell at a loss (unlikely unless there is a bubble burst), the stamp duty will still be in effect.

There are three levels of Hong Kong stamp duty:

• 15 percent if the property is held for six months or less;
• 10 percent if the property is held between six and 12 months; and
• 5 percent for property held between one and two years.

I doubt that this will have any real effect on the Hong Kong property market. The South China Morning Post reported on January 29 that prices soared so much last year that luxury flats are now 112 percent more expensive than their comparables in London, Moscow, and New York. I love Hong Kong. I am a permanent resident of Hong Kong, but I cannot afford to live there. I am quite content to reside in Guangzhou, a mere two-hour commute by train.

What the price spiral is doing, though, is creating another humongous Hong Kong surplus - to the tune of HKD 75 billion when the fiscal year-end of March 31 comes. Stamp taxes are indeed profitable. What will happen because of this? I'd bet that Hong Kong's corporate tax rate will go down from 16.5 percent to 15 percent. We won't know until the Hong Kong budget is presented on February 23.

The Hong Kong Institute of Certified Public Accountants (HKICPA) issued its recommendations to the Hong Kong financial secretary on January 28. Instead of asking the government to give tax rebates, the HKICPA asked that the surplus be used to fund an otherwise nonexistent old-age fund and to raise allowances (tax exemptions) by 20 percent for dependent parents, grandparents, brothers, sisters, and the disabled.

To encourage hiring of disabled persons, the HKICPA asked the government to grant employment tax credits of 150 percent. It also asked for a reduction of the corporate tax rate to 15 percent for corporate income under HKD 2 million.

A year ago, Hong Kong was neither on the OECD blacklist nor the white list. I called Hong Kong gray. Boy, did I get flack for that one even though it was 100 percent correct. As of today, Hong Kong has 18 double tax avoidance agreements with tax information exchange agreements. The most recent signings were with France, Japan, New Zealand, and Switzerland, and more are on the way. Yet no matter how many are signed, Hong Kong simply will not catch up with Singapore in this area. What is notable, though, is that neither Hong Kong nor Singapore has anything on the books with the United States — and a U.S. double tax avoidance agreement for either jurisdiction appears highly unlikely.

Red-Hot Singapore

With all the talk of booming economies in Asia, the place that stands out from the rest is Singapore, whose economy expanded 14.7 percent last year - far and away the largest expansion in Asia.

On January 18 Singapore imposed new regulations aimed at curbing property speculation. In a statement issued by the finance and national development ministries and the central bank:

Low interest rates plus excessive liquidity in the financial system, both in Singapore and globally, could cause prices to rise beyond sustainable levels based on economic fundamentals. Therefore the government has decided to introduce additional targeted measures to cool the property market and encourage greater financial prudence among property purchasers.

Just how high is the tax increase going to be for owners who sell houses and apartments that they have owned less than four years? How does a 500 percent increase in the stamp duties tax sound? That might be drastic, but I seriously wonder to what extent it will curb the influx of money coming directly from China.

Bank loan tightening will not work even though companies purchasing residential properties can now borrow only 50 percent rather than the 70 percent mortgages they used to get. Individuals already owning one or more properties can still get a 60 percent mortgage compared with the 70 percent they used to get.

Chinese are taking money out to invest elsewhere. There are four basic ways to take money out of China:

• Every individual is permitted to take out US $50,000 per year. Let’s say someone in Shanghai needs to take out US $1 million. That person need only (assuming he has the financial wherewithal) give money to 19 other friends and relatives and have them wire money out of the country. It’s nice and easy and very legal to do it this way.
• Want to travel outside China? You are allowed to carry out CNY 20,000 each trip — plus US $5,000 (or an equivalent amount in any other currency). And while out of the country, that person can use an ATM to take out US $1,290 per day.
• Ever hear of a parallel account? If you work in China and have a business associate, customer, friend, or what have you in Hong Kong, set up a yuan renminbi account for that person who has a need for the yuan renminbi in China. You simply provide that person with the yuan renminbi while he gives you the equivalent amount in either Hong Kong dollars or other currency.
• My favorite, though, is the "mule train," the people who, at the Zhuhai or Shenzhen border, are handed money and then cross the border, handing over those funds to someone on the other side, in Macao or Hong Kong. It happens all the time. It is a well-organized underground banking network. The People’s Bank of China estimates that as much as US $150 billion crosses the border each year.

With that amount of money, it is little wonder that cash purchases are being made in abundance, driving up property prices in Singapore, Hong Kong, New York, and London.

It's not just property that has become scarce in Hong Kong - the mule train travelers, making their daily trips to Macao or Hong Kong, are stopping at stores before returning home to China to purchase baby formula produced from outside China. The Chinese government has been unable to regulate Chinese manufacturers in this field and Chinese parents are hesitant to purchase their locally made baby formula because of the ongoing melamine scare. Thus, non- Chinese baby formula is in demand in China and so scarce in Hong Kong that angry Hong Kong parents have called for a departure tax to be imposed on people taking supplies of infant formula out of Hong Kong.

Regarding Singapore's goods and services tax, which became effective January 1, timing matters. Businesses on an accrual basis are now responsible for GST liability at the time of invoice issuance, regardless of whether they have shipped the goods. Since pre invoicing is routine, as is not paying for the goods until received, businesses will now have to rethink how they operate because of their new tax liabilities.

There will be more Singapore tax changes coming up this month, when the annual budget report, something common for all British-based systems, takes place.

And Then There’s Taiwan

A client and friend, a well-respected academician, recently asked me how I am such a prolific writer. The answer is easy: I write like I speak and I have trouble shutting up. I have gotten in trouble because of that and I am likely to annoy some people because of what I write now.

Taiwan is a part of China, but it has willingly lost its economic independence. Because of the mutual benefits to both the P.R.C. and Taiwan, the former renegade province, that loss represents a win-win situation. There are some clients and friends (as well as the U.S. government) who are quite annoyed that I say this, but facts are facts.

The Economic Framework Cooperation Agreement, the "cross-straits agreement" signed last June, cemented the deal. Taiwan's benchmark Taiex index has gone up 21 percent since the signing and reached a 21-year high at the end of December.

What was the tax impact? Well, let's look at tariffs between the two jurisdictions. At signing, 539 Chinese duties were cut for Taiwan. As of January 1, 2011, an additional 557 items saw duties cut by China. Taiwan, in turn, lowered duties on 267 items.

Since 2008, 15 deals were signed between the two jurisdictions. China has now opened its markets to six service industries from Taiwan: banking, securities, insurance, hospital services, design services, and civil aircraft repairs. This past fall, when the tide was out and it was possible to walk between the closest Taiwan islands and Xiamen, on the mainland, there was a community "walk." I used to joke that there was always an ability to walk but the only question was which army would shoot you first.

On December 17 Taiwan's Ministry of Finance held a ceremony announcing the start of a three-stage trial program implementing an electronic, paperless invoicing system nationwide. This will be tied into the ministry’s computer system for tax purposes, making tax evasion far more difficult. The first stage started on December 18, and runs through February 28, 2011, before expansion. Initially, three chain stores in 30 locations throughout the island will use the system. The second and third stages will be implemented from March through May. I believe that with the exception of the mom and pop shops and stalls, all invoicing is going to become paperless and tied into the tax system of Taiwan quite fast.

Focus Taiwan News Channel reported on January 8 that the legislature passed an income tax law amendment eliminating the income tax exemption for military personnel and for some categories of teachers. Both military and teaching salaries will be increased to compensate for their prior tax-free privilege. What I simply love is one of the sentences within this announcement: "Most teachers of junior high and elementary schools have said they would be pleased to pay taxes because they will no longer be carrying the 'sin of the privileged."

All that money from China appears to be coming to Taiwan as well. While nothing substantial has been announced, it is being reported from several sources that the government, in order to discourage short-term real estate investment, intends to impose a new property tax on real estate that is sold within one year after purchase. It would be imposed on real estate treated as marketable commodities, not for property owners who actually live in their houses. What happens to those who buy it to live in but sell within less than a year of ownership? Only time will tell: First they have to enact a law, then we can analyze it and attempt to shoot holes in it.

Call 888.916.7070 or email info@trustmakers.com

By Laurence E. Lipsher

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