Global treasurers considering where to locate treasury centres in Asia now have options that go beyond the ‘usual suspects’ of Hong Kong and Singapore. However, the events of the last year have shown the need for treasurers to have certainty in a crisis and has pushed them towards the familiar options.
As a result of the COVID-19 pandemic, treasurers needed greater access to liquidity and so established financial centres have remained the go-to locations for regional treasury centres. “Liquidity requirements went up massively last year,” says Anton Ruddenklau, Head of Financial Services at KPMG in Singapore. “Liquidity rules – the cost of funds is not the issue, it’s just making sure there is access to cash,” he adds. In this environment it is critical for a corporate’s regional treasury centre to be located where there is access to liquidity and banking services.
Varoon Mandhana, Head of APAC Solutions, Wholesale Payments at J.P. Morgan, explains that the overall financial ecosystem is important to locating a treasury centre. Given the key function of the treasury is to manage cash, funding and handle multiple currencies, it needs to be able access deep and liquid financial markets. In this respect, locations like Hong Kong and Singapore offer a more holistic environment, he says.
Access to financial services is just one of the factors that influences a group treasurer’s decision about where to locate their regional treasury centre. There are also other elements that come into play, points out David Blair, Managing Director at Acarate Consulting. “Treasurers need to locate treasury centres in places that are open, tax effective, and have deep talent pools. This does not leave much choice in Asia – and benefits Singapore enormously,” he says.
For multinationals, whose operations in Asia have reached the point where it is worthwhile to have a treasury centre in the region, the major decision still remains Hong Kong or Singapore – a situation that has not changed greatly in recent years. However, there are now newer options that are emerging to rival the dominance of the ‘usual suspects’ of these financial centres.
Prem Thakur, General Manager, Finance and Treasury at Sopra Steria, a consulting, digital services and software firm, comments on the alternatives: “Other potential regional treasury centre locations are emerging, including Kuala Lumpur, Bangkok and various cities in India,” Thakur tells Treasury Today Asia. He adds that India, the Philippines, Thailand and Malaysia are often attractive locations for financial shared service centres – including payment and collection factories – general ledger reconciliations, foreign exchange settlement and back office confirmations.
The newer locations for treasury centres are fast emerging, says Sandip Patil, Asia Pacific Head of Liquidity Management Services and Head of Sales for Financial Institutions, Treasury and Trade Solutions, Citi. “One such example is Shanghai, driven by a number of factors – China’s scale, particularly in an Asian context; increasingly favourable policies introduced by Chinese regulators; sound financial infrastructure; and the availability of talent.”
China has been making efforts to lure multinationals to Shanghai. Blair gives the example of how China, in the context of internationalising the renminbi, has introduced regulatory facilitation to attract treasury activities like inter-company funding and foreign exchange risk management to Shanghai. The jury is still out, however, on whether Shanghai can be a serious contender to the likes of Singapore and Hong Kong for regional treasury centres in the near term. Some observers comment that the liberalisation of the economy has somewhat stalled, and although there has been a push for renminbi internationalisation, free trade zones, and tax benefits, it is too early for treasury centres in Shanghai to be supporting the whole region.
Another location that has emerged as an alternative location is Thailand. Mandhana at J.P. Morgan notes that a number of Japanese and Korean corporations have manufacturing bases in Thailand and in recent years the country has created incentives – such as tax reductions and the simplification of reporting processes – to encourage them to set up treasury centres. As of February 22nd 2021, 38 companies had treasury centre licenses in Thailand, he notes.
For companies that have a larger presence elsewhere in Asia, however, a treasury centre in Thailand is unlikely to meet all their requirements around regional cash consolidation and multi-currency management, says Mandhana. “In such situations, we have often seen corporates adopt a two-pronged strategy of linking the treasury centre in Thailand to their regional or global treasury centre over a common banking infrastructure ie a hub and spoke model,” Mandhana explains.
Malaysia is also on the radar of corporate treasurers, with some considering treasury centres in Kuala Lumpur. Like Thailand, Malaysia has been offering incentives to corporates, but one observer comments that the intention is really to prevent their domestic companies going to Singapore, rather than seriously attracting treasury operations away from Hong Kong or Singapore.
With the alternative locations, there are also other drawbacks. Blair at Acarate Consulting says, “China, Thailand and Malaysia are all controlled countries with regulatory barriers that make them unattractive for treasury centres. They tend to be used for domestic and cross-border ex-country activities rather than true regional treasury.” Thailand and Malaysia, he notes, have been more focused on their local multinational corporations.
Ruddenklau comments that Thailand and Malaysia are attractive secondary locations for treasury centres, but they are not that developed yet – for example, in terms of talent. This issue of access to the right talent is a serious consideration and plays a major role in the distinction between what is needed for a treasury centre as opposed to a shared service centre (SSC). Blair notes that with shared service centres – where treasury processes are effected for legal entities elsewhere – the requirements are lower for corporate treasurers. Whereas treasury centres require open markets and reasonable taxation, and a more highly-educated workforce (as can be found in Hong Kong and Singapore), SSCs use cheaper, English-speaking clerical labour. “Philippines and Malaysia are enjoying some success for SSCs and processing, but they are very difficult places from regulatory and tax perspectives,” Blair tells Treasury Today Asia.
Another location that has been keen to encourage multinationals to set up regional treasury centres is India. Thakur at Sopra Steria says, however, that it is still early days. There are many reasons why India would be an attractive location, Thakur explains. These include its highly-educated English-speaking workforce, cheap labour and resources, and a pool of skilled treasurers. Also, looking to the future of corporate treasury, India also has skills in robotics, machine learning, artificial intelligence, and blockchain, which hold potential for treasury’s transformation in the future.
A shift toward digitisation is also having an impact on corporate treasuries are organised. As more processes are automated, there will be less need for shared service centres, for example. Automation will remove the manual labour that is often associated with such centres – where there has often been a lot of rekeying of data, for example – and headcount will likely disappear from offshore locations. Ruddenklau comments that having a shared service centre in Malaysia, for example, is no longer a badge of honour for multinational corporations. “It is an indication of poor process and poor levels of automation,” he says.
If the main motivation for having a regional treasury centre in Asia is for the cost savings, this benefit may now be eroding. This is not just in the headcount savings that come with increased automation, but also the tax benefits that have traditionally been associated with treasury centre locations.
Alan Lau, Partner, Head of Financial Services, Tax at KPMG in Singapore explains that recent developments regarding tax could be a factor in the deciding where to locate a treasury centre. Hong Kong and Singapore’s corporate taxation rates have been in line with a global trend of declining rates. Their headline corporate tax rates, for example – of 17% for Singapore and 16.5% for Hong Kong – are similar to the UK’s 19%, for example. In this context, Hong Kong and Singapore went one step further and cut these rates further to incentivise multinationals to set up treasury centres there – to 8% in Singapore and 8.25% in Hong Kong.
However, these tax incentives could be eroded by developments elsewhere, points out Lau. For example, the Organisation of Economic Cooperation and Development (OECD) has an action plan on base erosion and profit sharing (BEPS), which targets multinationals that exploit loopholes in tax regimes and ultimately avoid paying tax. Under the OECD’s action plan, there was a move to eradicate ‘harmful tax practices’, which could have had serious implications for the treasury centres in Singapore, for example, if the tax incentives were deemed to be too low and harmful. Lau explains that Singapore – where he is based – was very cooperative and provided documentation to the OECD that explained why the low corporate rate is justified. The good news, he says, is that the low corporate tax rate is not considered ‘harmful’.
However, since then, there has been a move to smooth the differences between tax rates in various jurisdictions. Under BEPS 2.0, explains Lau, there could be a global minimum tax rate that could be higher than the rates for treasury centre locations like Singapore. Lau illustrates with a hypothetical example of a UK multinational corporation that sets up a finance and treasury centre in Singapore. Conceptually, if the proposed global minimum tax rate were set at 12%, and the Singapore rate is 8% – ie below the global minimum rate – then the UK multinational would have to make up the difference between the two rates and pay the top-up tax in their home country. In this scenario, Lau says, “You effectively do not get any benefit from the incentive of setting up the treasury centre in a low-tax location.”
If this global minimum tax rate is realised, a group treasurer may decide it does not make sense to locate a treasury centre in Singapore or Hong Kong purely for tax reasons because they would have to top up the global minimum in their home country anyway. “It is still in limbo,” says Lau of the decision on the global rate. “They have not come out to explicitly say what the magic number will be.” Also, the details of how it would be administered, or what exceptions there will be, have yet to be revealed. “It remains to be seen how it will play out,” Lau tells Treasury Today Asia. And added to this move by the OECD is the news that the Biden administration in the United States is planning to push for a global tax rate that would be even higher. Such as move could erode how meaningful it is to have a treasury centre in Singapore or Hong Kong, especially if the main motivation for setting one up is for the tax benefits.
When looking at the tax benefits of where to locate a treasury centre, Lau comments that it is important to look beyond the main corporation tax rate. “Some group treasurers who do not have a deep understanding of taxation codes get fixated on the headline tax rate,” Lau tells Treasury Today Asia. He explains that it is the withholding tax rates that can have more effect. For example, if a company is paying US$100 cross-border to Malaysia and the withholding tax is 10%, it holds back US$10 and pays the net US$90 to Malaysia. For a location to be effective as a treasury centre, it needs to have a low corporate tax rate, and also lower rates for when the treasurer pays out cross-border – otherwise this withholding tax can overwhelm the benefit of the headline tax incentive.
Mandhana at J.P. Morgan comments that many treasury centres are operating as cost centres – and therefore not generating profits on which tax would need to be paid. The bigger consideration is the inter-company positions and the withholding tax treatment they have, and the double taxation treaties the location has. “Hong Kong and Singapore are well-placed on that aspect,” says Mandhana.
Singapore and Hong Kong continue to be the obvious choices for a number of reasons, aside from the tax benefits. For US and European multinational corporations with sizable operations in China, Hong Kong has been the natural choice for a regional treasury centre. Meanwhile for corporates with a presence in South East Asia, Singapore has been the gateway to those markets.
For some larger multinationals, it may not be a case of either Singapore or Hong Kong – they could a regional treasury centre in both locations. They may use Hong Kong for their mainland business and onshore and offshore renminbi, and Singapore for the South East Asian currencies. Also, having two centres can help with business continuity planning and each can act as the other’s back up in the same time zone.
Patil at Citi comments that aside from the considerations that typically drove decision-making about treasury centres – legal and markets infrastructure, tax policies and so on – there are now broader considerations. These considerations, he says, are expanding in scope to support a company’s growth and the client experience. “This expanded scope includes consideration for e-commerce business model needs, supply chain and manufacturing shifts, digital infrastructure and real time connectivity, as well as aspirations of digital treasury,” he says.
Patil continues, “On one hand, these increased considerations are leading companies to converge the scope of regional treasury centres with shared services centres. On the other hand, we are also seeing treasury centres that are more specialised and focused on specific geographies, including North Asia, ASEAN [Association of South East Asian Nation countries] and South Asia. By operating in this manner, these centres can better connect with their businesses on the ground and more effectively manage disruptions in supply chains while benefiting from the continued growth of the digital economy and eventually, Covid recovery,” he says.
Blair at Acarate Consulting comments on another trend, “The other macro change we see cycling approximately every decade is for multinational corporations to centralise everything to head office – enabled by technology – then realise they need local or at least regional knowledge so they come back to Singapore.”
For now, however, Singapore and Hong Kong remain the dominant choices for treasury centre locations. And while there are other alternatives available, they have yet to be serious contenders to match the attractiveness of these ‘usual suspects’.