As the importance of Asia Pacific (APAC) increases for western multinationals, and as Asian-domiciled corporates continue to spread their footprint outside of their home markets, the creation of a treasury centre in APAC becomes a key requirement. To date, the most popular location for treasury centres in the region has been Singapore. However, proposals announced in the 2015/2016 budget look set to make Hong Kong a more attractive proposition by removing a number of barriers that have traditionally caused many corporates to look elsewhere.
The headline announcement for corporate treasurers is the proposed round of amendments to the tax regime which, as an unintended consequence of the anti-avoidance rule, at present punishes companies receiving intercompany loans. As Rex Ho, Financial Services Tax Leader at PwC Hong Kong explains: “Currently, if a Hong Kong based treasury centre borrows from a group company based in Singapore, that is not a bank nor subject to Hong Kong tax, then there is no tax deduction on the interest expense it pays back to the Singaporean company. The corporate will therefore be taxed on the full income, at a rate of 16.5%, meaning that the tax payment is usually larger than any interest profit earned.” For a treasury centre, that will likely be making and receiving lots of intercompany loans, this is a big consideration when looking at locations in APAC. “There are no such issues in Singapore and this is one of the reasons that many corporates decide to establish their treasury centres there,” adds Ho.
The new proposals seek to remove this imbalance in taxation and make it cheaper for a corporation to operate a treasury centre in Hong Kong, subject to certain considerations, that are likely to be based around the Hong Kong company proving that it is a treasury centre. “The Hong Kong government is moving in the right direction with these proposals, bringing the territory’s tax regime for a treasury centre in line with Singapore,” says Ho.
Hong Kong has also looked to compete with Singapore in regard to the overall tax rate applied to profits made by corporate treasury centres. Currently, Hong Kong applies a rate of 16.5%, slightly more than the 10% rate offered by Singapore under the Finance and Treasury Centre (FTC) incentive. The new proposals from Hong Kong however, look to offer specified treasury activities a rate of 8.25% subject to certain conditions, as yet to be outlined. “This is certainly a good incentive,” says James Badenach, Financial Services Tax Partner for Asia Pacific at EY. “But the economic impact is not as significant as the removal of the imbalance in taxation because the profits from treasury centres are usually quite low. However, together they do add up to an appealing package.”
Capturing the business
Of course, the tax regime is just one consideration that corporates must make when looking at locations to establish a treasury centre. The fixed income market, the bond market, the cash management facilities and the infrastructure are just some of the other areas that must be considered. Arguably these are areas where Singapore currently holds the advantage over Hong Kong, yet a spokesperson from the Hong Kong Monetary Authority told Treasury Today Asia that it hopes by implementing these new proposals and attracting more treasury centres that it “would not only benefit the financial and business sectors, but also deepen our capital markets, including the offshore RMB market.”
For PwC’s Ho this is an important point. “If more treasury centres come to Hong Kong then all other industries that interact with it will also improve. Through demand, the bond market will deepen, best-in-class cash management products will become more readily available and the infrastructure will have to be improved.”
Too little too late?
So while these developments are certainly a positive for Hong Kong and give corporates more to consider when looking at where they should establish their treasury centres, is too little too late? Marc Vandiepenbeeck, APAC Corporate Treasurer at Johnson Controls a company that currently has a treasury centre in Hong Kong thinks that it the case. “I am very happy that they have done it because I am a big advocate of Hong Kong as a treasury centre but it is something I would have hoped they would have done a long time ago.”
If the proposed changes are implemented into law can we expect treasurers in Singapore to pack up and flock to Hong Kong? “I think that if a corporate was entering the region and looking to establish a treasury centre then, with these proposed changes, would certainly view Hong Kong more favourably. There are certain other factors that need to improve as well to have a significant impact e.g. living environment, availability of treasury talent, etc., which need to be suitably addressed by Hong Kong in the longer term, ” says EY’s Badenach.
For Vandiepenbeeck, the move comes too late because other locations in the region already have a competitive advantage. “Hong Kong is stuck in the middle between Singapore and Shanghai. Singapore has been offering a competitive advantage for decades and has a very sticky market. Shanghai on the other hand is positioning itself to become a global financial centre by 2020 so I believe that it will replicate what Hong Kong is doing pretty quickly and chop off any competitive advantage that once existed.”
The road forward
But these are only proposals and there still remains a lot to be done before they are passed into law. A spokesperson from the HKMA told Treasury Today Asia that the next step will see the industry consulted on the detailed legislative proposal later this year, with a view to introducing an amendment bill to the Inland Revenue Ordinance in the 2015/16 tax year. The HKMA also said that, if passed into law, the proposed measures will apply to both new treasury centres established in the region and those already in existence.
For a more detailed look at the debate between selecting Singapore, Hong Kong and Shanghai as a treasury centre location, watch out for the May/June edition of Treasury Today Asia.
