In terms of wealth management, Hong Kong has always been a honey-pot for wealthy investors. With its low level of taxation - taken even lower by a decision to abolish estate duties a few months ago - it has been the traditional destination point for investors and companies looking for a favourable tax environment in Asia.
But lately Singapore has been encroaching upon Hong Kong's established reputation as the wealth management powerhouse in the region.
That's certainly the view of Baker & McKenzie partner Michael Olesnicky. "Singapore is shooting ahead in leaps and bounds," he says. "Unfortunately, Hong Kong has been slow to react."
Although the Hong Kong Stock Exchange continues to be preferred over Singapore, observers and participants in the sector point out that if Hong Kong is to compete against Singapore in private banking, trust services and wealth management, it needs to look carefully at the reasons why Singapore is now out in front. These include a proactive and responsive regulator, as well as a better tax regime and double taxation agreement network for international investors using Singapore trusts and companies.
Hong Kong's decision to abolish estate duties several months ago, an initiative Financial Secretary Henry Tang Ying-yen hopes will attract international investors and encourage Hong Kong's development as a major financial centre, was met with a degree of scepticism from local tax and trust specialists.
When Olesnicky spoke with ALB at the time, he wondered what the government's motivation was. "Do they just want this tax to disappear or are they looking to promote Hong Kong as the place to invest in Asia?" he asked. "Because if they are, they'll need to reform Hong Kong's tax, trusts and company laws as well."
Craig Murphy, Equity Trust's regional director - Asia Pacific, wonders if Singapore's potent combination of a pro-active professional community and a responsive Monetary Authority makes Hong Kong's abolition of estate duties a case of too little, too late.
"Hong Kong needs to combine the abolition of estate duty with updated trust and other laws if it's to compete effectively against Singapore," Murphy says. "And it needs to do so quickly."
Singapore - the Switzerland of Asia?
The Society of Trust and Estate Practitioners (STEP) - which has 11,000 members worldwide - recently described Singapore as the 'Switzerland of Asia', a moniker Olesnicky says is, from a private client perspective, a "fair description".
Singapore has worked hard over recent years to position itself as a proactive jurisdiction, actively developing its appeal as a destination for wealth management and private banking. In 2004, for example, Singapore exempted foreign earned income being remitted back into the country by its residents. Previously, they were subjected to tax on their offshore funds.
The trust business has also been flourishing in Singapore. Singapore has updated its trust law and is on the point of introducing a new law regulating its trust industry. Murphy observes that both have been well received inside and outside Singapore, and look to further accelerate Singapore's development as the Asian trust jurisdiction of choice.
"The draft circulated for comments seems to strike the right balance between prudent regulation and allowing the continued rapid development of the trust industry and, following objections from trust companies, exemption from regulation for law firm partners acting as trustees has been removed from the latest draft," he says.
The upshot of this new trust regime is that investors, particularly those clients domiciled in Europe and North America, have begun to dispatch their money to Singapore instead of Hong Kong.
"Singapore is doing a great job," reiterates Olesnicky. "The rate of growth in Singapore should encourage Hong Kong to have a better look at itself."
The European Savings Tax Directive
However, while Singapore may have the lead, changes afoot on the global scale will have a significant impact on its wealth management standing.
Governments and tax authorities around the world are responding to globalisation, economic uncertainty and the threat of terrorism by imposing tighter trading rules and pursuing tax revenues with growing determination.
The European Savings Tax Directive (ESD) requirements came into force on 1 July 2005 in response to European Union (EU) concerns about the inevitable flight of capital to Asia and other offshore jurisdictions as a reaction to the recent disclosure rules in Europe.
The ESD is an agreement between the Member States of the EU to automatically exchange information with each other about customers who earn savings income in one EU Member State, but reside in another.
While its legal scope does not extend outside the EU, its implementation will affect the UK Crown Dependencies and Overseas Territories, as well as other countries that have voluntarily agreed to apply the same or equivalent measures to those contained in the ESD.
The ESD resulted in the movement of significant amounts of cash deposits to Singapore, with many clients choosing to establish holding vehicles at the same time. Some experts believe the bulk of the impact of the ESD may have already been felt, however, Murphy notes that Switzerland in particular will be hoping that the EU does not expand the law to look through accounts held by companies and trusts to beneficial owners living in the EU. This would result in a further net outflow of funds from Switzerland and other dependant territories.
The ESD is currently negotiating with Hong Kong and Singapore about each jurisdiction's respective tax and trust rules.
It will be some time before what impact the outcome of those discussions will have is clear, however, it is likely that when any changes begin to take effect Singapore will be in a worse position than Hong Kong.
Singapore will not fare as well as Hong Kong under this sort of scrutiny because Singapore allows more practices that would be considered objectionable under statutory confidentiality rules, or the Bankers Secrecy Law. Hong Kong doesn't have a law like this, so it would be fair to assume in this context that bodies such as the ESD and the OECD will be keeping a much closer eye on Singapore than Hong Kong. Additionally, Olesnicky says: "Singapore does special deals with taxpayers. Hong Kong does not."
While it is not possible to accurately predict how much of an impact the ESD will have in Asia over time, Olesnicky makes the point that "they put pressure on Switzerland, which has now caved in. If the Swiss have caved, Hong Kong and Singapore should be quite worried".
Increased regulation
The ESD scrutiny is a sign of increasing regulation of tax and trusts. The OECD Committee on Fiscal Affairs was set up to, amongst other things, work on the issue of tax avoidance. The Committee is putting pressure on any jurisdictions that have even a sniff of 'tax haven' about them. As part of an overarching review process with a view to encouraging global (as far as practical) investment destinations to behave to a minimum set of standards, the OECD is also reviewing tax and trust regimes in Hong Kong and Singapore.
"The main thrust of what the OECD is insisting on is disclosure of ownership," explains Olesnicky. "Both Hong Kong and Singapore now operate under the KYC - 'Know Your Customer' - Rules, whereby banks now need proof of who you are and where you live." Consequently, a task such as setting up a bank account is now a "real chore".
"In Europe and North America, everything is open and transparent. This is not the case in Latin America and Asia, but the reality is the current situation in these jurisdictions is not sustainable," he says.
"The reality is confidentiality is dying. Everything is becoming more transparent." The message that visionary tax and trust specialists should be conveying to their clients, according to Olesnicky, is that the focus should not be to 'hide' assets, but to put clients into situations that stand up to scrutiny and comply.
It seems that change is inevitable. How far away? "Well, if we look at the changes that have taken place in Hong Kong and Singapore, the past decade has been amazing," says Olesnicky. "So, extrapolating, it's not inconceivable that these jurisdictions could require the same degree of compliance as Europe and North America with regard to tax and trusts in 10 years from now."
Asian tax and trust specialists and their clients take note. With major international bodies now looking more closely at the rules and regimes in Hong Kong and Singapore, the current situation may not continue for as long as some people might hope.
China's changing tax regime
While Singapore and Hong Kong have both been working hard to attract foreign investment, China's approach has been a bit more haphazard.
Despite recent announcements that the Chinese government will, as part of its current tax reform considerations, repeal preferential corporate tax rates available to foreign business doing business in China, Daniel Chan, partner in charge of DLA Piper Rudnick Gray Cary's tax practice, says "it shouldn't be taken too seriously just yet".
Chan makes the point that the Chinese government has been talking about tax repeal and looking at how tax is levied in China ever since China joined the World Trade Organisation in 2001.
As far as actioning any initiatives, Chan says to "take the reports with a grain of salt. It's going to happen, but before anything is in final form there will be lots more discussion".
In China, there is currently a qualified amount required to invest in different industries. At the moment, for example, there is a focus on technology. This impacts not only incoming investment, but also domestic enterprise.
With regard to preferential tax treatment, the trend is to focus on adopting an equal tax platform with an industry focus. However, opportunities are not open to wholly foreign owned entities; a co-op is still required.
Edward Lehman at Lehman Lee & Xu describes the current uneven playing field in terms of foreign investment as "discriminatory", and anticipates the Chinese government will do away with tax incentives for foreign direct investment "probably in 2007".