OECD urges MSAR to improve legal framework

Tax information exchange

Since the 2009 G-20 meeting that nearly labelled Macau as a tax haven had the Chinese government not intervened, the SAR Government has been making significant strides to improve the transparency of the system to demonstrate its willingness to cooperate with its tax treaty partners in combating tax avoidance or evasion.
In that same year, the government introduced new legislation to enable the exchange of banking information on request by another jurisdiction, as one main issue of tax evasion stems from accounts held in offshore financial institutions by foreign entities. 
The government’s efforts have finally paid off, as the Organisation for Economic Cooperation and Development (OECD) has upgraded the territory’s tax information exchange classification.
The organisation’s review panel members “unanimously agreed that Macau SAR had the relevant legal and regulatory framework in place that could ensure the effective implementation of tax information exchange, and that it complied with the internationally agreed standards.”
However, the picture is not all rosy. The MSAR will have to take more steps and enhance its legislation to adjust to international standards, says the peer review report published Wednesday by the OECD.
“Most elements are in place, but certain aspects of the legal implementation need improvement,” adds the report from the Global Forum on Transparency and Exchange of Information for Tax Purposes.
The Global Forum officially adopted the Phase I Peer Review Report for the territory in the OECD two-day meeting that took place in Paris, France.
This first phase mainly focussed on the legal and regulatory framework regarding information exchange and it covers areas in Commercial Code, Commercial Registry Code, Civil Code, Offshore Business Act, anti-money laundering regulations and guidelines, tax laws, Financial System Act as well as the Information Exchange Act.
There is a four-tier system based on compliance with an “internationally agreed tax standard” and Phase I is reserved for countries and territories “that have substantially implemented the standard”.

Foreign gap

While companies and partnerships formed under Macau’s Commercial Code are required to file identity and ownership information with the commercial register, the OECD panel doubts that ownership information is available to the authorities for all foreign companies.
A report released early this month said Macau still has much to do to dispel the secrecy that surrounds its offshore financial sector, pushing Macau to the 23rd position among the world’s tax havens.
The 2011 Financial Secrecy Index put together by the Tax Justice Network (TJN) – an independent organisation launched in the British Houses of Parliament – assessed the MSAR with 83 secrecy points out of a potential hundred, placing it towards the top end of the secrecy scale.
It stressed that the territory does not give details of trusts, foundations or company ownership and accounts available “on public record”.
But local authorities rejected the report conclusions, questioning the basis of the report.
“We have doubts about the accuracy of the findings since we have no idea on what information and methodology this assessment is based on,” a Financial Services Bureau (DSF) spokesperson told Macau Daily Times.

‘[The government] should ensure that ownership and identity information is kept with respect to all foreign companies with a sufficient nexus to Macau’

“In fact, Macau’s legal framework for corporate entities requires the registration of all forms of legal persons established pursuant to the Commercial Code, Commercial Registration Code or the Civil Code, including companies, partnerships and foundations,” the DSF replied.
In addition “trusts cannot be formed under the laws of Macau,” the bureau underlined.
“Companies under Macau’s Commercial Code are required to file identity and ownership information with the commercial register. Identity and ownership information is also kept by notaries, who are involved in the formation of such companies. Therefore, ownership and identity information for all relevant entities is available to their competent authorities,” it said.
In fact, local legislation spells out that foreign incorporated companies – including the branches licensed as offshore institutions – carrying on permanent activity in the territory are subject to the same registration requirements applying to domestic companies.
For tax purposes, foreign companies subject to registration and filing obligations are those carrying out an “industrial or commercial activity”. However, the OECD report points out, “there is no legal definition of the term ‘industrial or commercial activity’, nor are these concepts further specified in Macau’s practice”.
Thus, it adds, “It is not clear that these thresholds include all foreign companies with a sufficient nexus to Macau.”
“As a consequence, it cannot be determined whether ownership information is available to the authorities for all such companies.”
As such, the OECD report recommends that the government “should ensure that ownership and identity information is kept with respect to all foreign companies with a sufficient nexus to Macau”.

‘Macau should ensure that comprehensive, reliable accounting information is kept for all relevant entities, including foundations and foreign companies […] for a minimum of five years’

Five years minimum

Although Macau’s laws require accounting information and underlying documentation to be kept for a minimum of five years, there is an exception for foundations that are not persons of public interest and foreign companies which are not performing commercial or industrial activities.
According to OECD, “The exact scope of the underlying documentation requirements applicable to all entities and arrangements is unclear and should be further clarified.”
“Jurisdictions should ensure that reliable accounting records are kept for all relevant entities and arrangements,” the report says, calling for some improvements.
“Macau should ensure that comprehensive, reliable accounting information is kept for all relevant entities, including foundations and foreign companies with a sufficient nexus to Macau, for a minimum of five years,” it says.

‘The Macau delegation is confident that the suggested recommendations, which nonetheless do not constitute major issues, will be promptly implemented’

Bearer shares

Bearer shares are another issue that the SAR Government should tackle as soon as possible.
It is open to public companies to issue bearer shares, which lack the regulation and control of common shares because ownership is never recorded.
There are 72 active public companies in the territory which may currently issue bearer shares and some limited mechanisms are in place where the identities of persons holding bearer shares would have to be established.
“While such shares may not be in circulation currently, there are insufficient mechanisms in place to ensure the availability of ownership information in all circumstances,” reads the report.
“Macau should ensure that robust mechanisms are in place to identify the owners of bearer shares or should abolish bearer shares,” says the OECD.
“Necessary actions to address the issue of bearer shares as well as the improvement of legislation concerning foreign companies will proceed,” said the Macau Government in its response.
“Any improvements will be reported to the Global Forum on a timely basis,” it added.

In need of revision

Macau has so far concluded Tax Information Exchange Agreements (TIEA) or Double Taxation Conventions (DTC) with 13 different countries or regions.
Eight of these agreements were signed between April and July this year, involving Australia, Denmark – including the autonomous territories of Faroe Islands and Greenland – Iceland, Norway, Finland and Sweden.
There was also one DTC protocol signed with mainland China providing for exchange of information (EOI) to the international standard. Previously, the MSAR had already concluded a DTC with mainland China, as well as with Belgium, Cape Verde, Mozambique and Portugal.
Among the agreements that are currently in force or that have been concluded all but the one signed with Cape Verde provide for exchange of tax information to the international standard.

‘Macau’s authorities should commence negotiations to amend the agreement with Cape Verde’, which was signed in November last year, ‘to bring it to the standard,’ said the OECD

“One of Macau’s DTCs contains additional language which restricts the exchange of bank information,” highlights the report.
“Macau’s authorities should commence negotiations to amend the agreement with Cape Verde to bring it to the standard,” says the OECD.
These deals were one of the main reasons that led the OECD to upgrade the territory’s tax information exchange classification, especially after the 2009 meeting of the Group of Twenty.
In September 2009 there were calls – namely from French president Nicolas Sarkozy – for Macau and Hong Kong to be included as tax havens separate from China on the OECD blacklist list.
The two SARs were eventually left off the list altogether after Chinese government intervention and based on a promise to enact tighter regulations.

Deals to come

Since then, Macau has actively sought to expand its EOI network.
Local authorities have informed the Global Forum that they are in contact with about 10 other jurisdictions, including OECD members and Macau’s main trading partners, to conclude agreements to the internationally agreed standard on exchange of information.
Macau’s network of agreements covers most Portuguese-speaking jurisdictions and its main trading partner, mainland China.
But the OECD recommends that Macau “continue its efforts to establish agreements to the standard with all its relevant partners and bring them into force expeditiously”.
The Macau Government said in its response that it has “taken all necessary steps to bring these agreements into force”.
“In that regard, Macau already completed all its internal procedures to ratify all of the signed agreements that are not yet in force,” it said.
The agreement between Macau and Cape Verde was inked by the secretary for the Economy and Finance, Francis Tam Pak Yuen, and by the assistant secretary to the Cape Verdean Prime Minister, Humberto Brito, on November 15, 2010, but it hasn’t been enacted yet.
Meanwhile, over recent months, the SAR Government has initialled agreements with three other jurisdictions, Jamaica, Malta and India; the latter planned to be signed before the end of the year.
Negotiations are at a very advanced stage with one further G20 economy (Germany), as well as with other Global Forum members, namely Argentina, Ireland and New Zealand, it said. According to a source, Macau was also in talks to sign more treaties with Vietnam, Malaysia and Singapore.
The government has pledged to “follow up the suggestions for improvements made” by the review panel and to “continue its efforts to conclude more tax agreements with different countries and regions in order to fulfil its international obligation as the Forum’s member”.
“In general, the report reflects the entire situation of Macau in a true and fair manner and the Macau delegation is pleased to accept the recommendations as suggested in the report,” the government said in its reply.
“The Macau delegation is confident that the suggested recommendations, which nonetheless do not constitute major issues, will be promptly implemented,” it added.
The OECD says Macau’s response to the recommendations made in the recent report, as well as the application of the legal framework to the practices of its competent authority, will be considered in detail in the Phase 2 Review, which is scheduled for the first half of 2013.