THE ART OF TAX DODGING
As Beijing steps up battle against corruption, art collectors who use Hong Kong as a base come under scrutiny.
With fighting corruption on top of the agenda on the mainland, the techniques used by art collectors to avoid China’s heavy taxes — often using Hong Kong — are increasingly coming under scrutiny in Beijing. Andy Hei, the director of the Hong Kongbased arts fair Fine Art Asia, says after a decade his event is continuing to grow, despite increased scrutiny of the art industry from Beijing in recent years. “We keep expanding 5% every year,” Hei says. In October, Hei is expecting to host about 100 galleries from around the world. Last year, HK$2.8 billion (US$360 million) worth of art was on display.
Another major art fair, Art Basel Hong Kong, drew to a close last week after welcoming tens of thousands of visitors.
But as Chinese President Xi Jinping ups the ante with a high-profile anti-corruption drive, the lucrative art industry is attracting the attention of the authorities.
The leadership of the Communist Party has sent a message “declaring war on corruption in art circles”, said an editorial in the official Xinhua News Agency in January, referring to the art world as a possible “blind spot” in the anti-graft drive.
Hong Kong is an obvious target. The Chinese territory is enjoying the benefits of being a tax-free hub on the edge of the world’s biggest art market.
“Hong Kong has now become the global market hub for the exchange of Chinese artworks,” lead author Claire McAndrew wrote in the latest report by Artnet and The China Association of Auctioneers on the Chinese art auction market.
The global market for Chinese art alone totalled US$8.5 billion in 2013, the report said.
In the same year, the largest mainland auction houses, Poly International and China Guardian, sold 21% and 10% of their art by value in Hong Kong respectively, the report said.
Up until a decade ago the enforcement of art import and export laws was extremely lax, but Hei says Chinese authorities have stepped up import and export checks on art shipments.
Because Hong Kong has no sales, import or export taxes on art, some collectors choose to “store” their works in the territory instead of sending them on to China
He admitted, however, that “we’ve not seen much impact at the fair.” This may be partly because of the illegal ways that artworks can enter and leave the territory.
Buyers or middlemen still carry artworks through customs in their luggage to avoid Chinese taxes, Hei says.
“Antiques are very small. You can carry them with you,” he says, adding that transport was a matter for his clients.
The advantages of evading the taxman are considerable. The Chinese mainland levies taxes which can run up to nearly 30% of the value of the artwork.
Meanwhile, Hong Kong offers freedom from any sales, import or export taxes on art, so some collectors are choosing to “store” their works in the city instead of sending them on to China. New art storage centres have opened up in Hong Kong, notably in the New Territories, Aberdeen and Chai Wan districts, said Hei.
Another common way to avoid the Chinese levies is to ship from Hong Kong to the mainland through traditional routes, but give a lower value on the customs forms than an artwork sold for, say gallery employees.
“The price of art is subjective,” said a longtime gallery manager who declined to be named. If the works are by lesser known artists, it is easier to put a lower sum, he said.
“There are ways to get around it [paying customs taxes],” another gallery manager said. “We just carry the works with us in luggage, or have someone bring it in with them.”
Non-profit private museums provide another way for Chinese art collectors to avoid taxes legally.
Shanghai-based collector Liu Yiqian stirred up controversy last year when he sent a US$36.3-million Ming-dynasty tea cup he had bought at a Hong Kong auction to West Bund, a bonded warehouse in Shanghai where he did not have to pay any duties.
He then “borrowed” the cup from the warehouse for six months at a time through his private museum in Shanghai’s Pudong district, and avoided paying $6.2 million in value-added taxes.
“In the [art] trade world, they always have solutions to get around it,” says Hei.