Constraints upon future tax policies | Being Basic (Law) is good

Doing away with the outdated and increasingly minority offshore tax system can create problems with what the Basic Law says

‘The Macau Special Administrative Region shall, on its own, make policies on tourism and recreation in the light of its overall interests,’ states the Basic Law in Article 118.

Today, it is known that these policies in the area of tourism (and gambling) pass beyond the scope of the MSAR and are (also) decided in Beijing.

When Chinese university researchers Mingjie Shenga and Chaolin Gub openly write that “The Venetian successfully won the gaming licence by lobbying the Beijing Government’s top officers responsible for Macau affairs” (Economic Growth and Development in Macau (1999-2016): The role of the booming gaming industry, 2018) there is no longer any doubt that the spirit of the law is one thing but the reality is quite different [please see other text in these pages].

“The development of the gaming sector, and the gradual focus on the mass market, has made Macau increasingly reliant upon gambling tourists from Mainland China,” recognises Luis Pessanha, lecturer at the Faculty of Law, University of Macau.

Interviewed by Macau Business, Mr. Pessanha adds: “But such in itself does not imply an unavoidable weakening of the autonomy of Macau. Macau could well retain its own sphere of autonomy, and continue to manage and regulate the gaming industry as it sees fit. Arguably, that is exactly what the Basic Law intended to happen.”

A very concrete example on this subject, and very current: “One may consider the need to avoid continuing to overstate the importance of tax revenues generated by the gaming industry. They are, of course, extremely important and allow for the sustainability of local public finances,” explains Luis Pessanha.

The author of Gaming Taxation in Macau (2008) offers his own opinion: “Tax revenues are more than sufficient, and one can expect that they will continue to be more than sufficient in the foreseeable future. Hence, it may be time to allow for other considerations to receive greater attention; namely, the need to promote public policies that allow for high employment, sustainable growth, or aim to promote economic diversification, and overall improve the economic and social well being of the people of Macau.”

But can the Basic Law help Macau in this enormous desideratum which is precisely the need for economic diversification?

If, on the one hand, “the Basic Law in itself cannot solve the structural problems that the local economy has, and has long suffered, nor should we reasonably expect that it would.”

On the other hand, Pessanha says the Law “offers a fundamental economic framework, and sets certain standards and essential principles (private property, free trade, open market, rule of law, low taxation, etc.). I believe that, in setting out this framework, it offers the necessary conditions for sustainable economic growth and for the prosperity of the people of Macau.”

Another very sensitive area has to do with taxes.

Considering that the Basic law refers to ‘the policy of low taxation,’ could this be an obstacle to the end of the offshore system?

“The policy of low taxation in the Basic Law does impose a certain model of taxation, which implies a number of constraints upon the future tax policies to be adopted by the Macau SAR” – Luis Pessanha

This lecturer at the Faculty of Law recognises that “the policy of low taxation in the Basic Law does impose a certain model of taxation, which implies a number of constraints upon the future tax policies to be adopted by the Macau SAR,” but Mr. Pessanha understands that “it does not prevent lawmakers enacting non-essential changes to the tax system.”

In his view, “a potential closure of the existing offshore system should be understood as a non-essential change to the local tax system, which can retain its fundamental characteristics and continue to be a low tax jurisdiction without continuing to offer an offshore financial and trade centre to non-residents.”

Our interviewee is well aware that “the existing offshore system was the outcome of an earlier attempt at economic diversification, which was able to create a small number of well-paying financial jobs and attracted some foreign investment” but he did not fail to concede that “it is true, nevertheless, that the offshore system was always of residual importance to the local economy as a whole, and that it has been gradually losing significance in the last few decades.

“With the increased pressure to comply with international tax standards and transparency rules, it does make it difficult for the SAR to preserve its offshore system, and it may well be the case that its costs outweigh the benefits for the local economy.”

Gaming: marginalisation of the Legislative Assembly

Macau lost control of the big gambling decisions when it decided to liberalise the deal but there was another consequence: the marginalisation of the Legislative Assembly.

Local political scientist Eilo Yu says: “The legislature did not hold a formal session to discuss the gaming franchise extension” which allowed the doubling of the number of concessionaires.

The Associate Professor at the Department of Government and Public Administration (UMAC) explains that the then President of the Legislative Assembly, Susana Chou, “was critical of the unwillingness to bring the issue before the legislature,” quoting other legislators for whom “the government would not benefit from the gaming franchise extension” (from Gaming, Governance and Public Policy in Macao, 2011).