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Tuesday, June 28, 2016, 22:30

HK ups the ante in race for corporate treasury crown

By Oswald Chan
HK ups the ante in race for corporate treasury crown
A view of Central in Hong Kong. The city moves to become Asia’s hub for corporate treasury centers. When more multinational companies co-locate their corporate treasury functions to Hong Kong, it will boost their demand for various professional services in areas like corporate banking, financing, risk management, and tax and legal advisory services. (Anthony Kwan / Bloomberg)

There’s still ample room for Hong Kong to brush up in the race to become Asia’s hub for corporate treasury centers (CTCs), although the government had only recently enacted legislative changes to facilitate their development.

Under the changes, multinational companies planning to centralize their treasury operations and management in Hong Kong will be offered various tax benefits under specified conditions.

According to the Inland Revenue (Amendment) (No. 2) Ordinance 2016 gazetted on June 3 after the Legislative Council had passed the relevant legislation, the concessionary profits tax rate of 8.25 percent, instead of the current 16.5 percent, will be applied to relevant profits accrued on or after April 1 by qualified CTCs.

In addition, the new interest deduction rule will apply to interest expense in relation to an intra-group financing business on or after April 1.

“The legislative amendment provides a conducive environment for attracting multinational and mainland corporations to centralize their treasury functions in Hong Kong, thereby enhancing the competitiveness of our financial markets and contributing to the development of a headquarter economy,” says Secretary for Financial Services and the Treasury Ceajer Chan Ka-keung.

A CTC is effectively an in-house bank within a multinational corporation focused on the optimal usage of capital for the operations of the group.

More CTCs being established in Hong Kong will bring genuine benefits to the local economy. As more multinational companies co-locate their corporate treasury functions to Hong Kong, it will boost their demand for various professional services in areas like corporate banking, financing, risk management, and tax and legal advisory services.

“By attracting more CTCs here, we are also providing further impetus to the development of a headquarter economy in Hong Kong,” Hong Kong Monetary Authority (HKMA) Chief Executive Norman Chan Tak-lam said in an article in the HKMA’s InSight publication.

“This will induce more real money into Hong Kong. Unlike speculative hot money, the flow of real money is mainly driven by a corporation’s actual business needs and is less vulnerable to market fluctuations. This will be conducive to Hong Kong’s economy in the long run,” Chan reckoned.

Before the latest amendments, if a Hong Kong-based CTC borrowed money from its overseas associated corporations, the interest expense of the fund would be not be tax deductible. Moreover, interest income derived from the loans lent by a CTC to its overseas associated corporations was chargeable to profits tax in Hong Kong, creating an asymmetric tax treatment that was not favorable for CTCs conducting cross-border fund transfers in the city.

Despite recent legislative changes, the accounting profession says Hong Kong must not be complacent if it wants to cement itself as Asia’s premier CTC.

“The Inland Revenue Department should issue a practice note to give a more exact definition of intra-group financing business so that enterprises can know whether they will benefit from the 50-percent reduction in corporate profits tax or not,” Davy Yun Kwok-wai, a tax partner at global auditing firm Deloitte, tells China Daily.

“A clear definition of intra-group financing activities would also enable corporations to determine their tax obligations,” Yun warns. “Ultimately, enterprises will choose their CTCs based on their business needs. If their business focus is on the Chinese mainland, naturally, they will set up their CTCs in Hong Kong whereas businesses with a focus on India or Southeast Asia will pick Singapore as their CTCs.”

“Companies (when seeking locations) should take into account both tax considerations and non-tax factors, such as their own business needs and mode of operation, regulatory environment, the financial and capital markets as well as the availability of finance talents in different locations,” PricewaterhouseCoopers said in May.

“Multinationals usually have business operations in different locations and if Hong Kong can sign more double tax agreements (DTAs) with various economies, it can encourage more CTCs to be established here,” Paul Ho Yiu-po, Greater China divisional deputy president at professional tax body CPA Australia, tells China Daily.

Through the work of the Inland Revenue Department, Hong Kong’s comprehensive DTA network has expanded from just five in 2009 to 35 agreements at present. These DTAs are important to multinational corporations as they help reduce the withholding tax rate on the interest of cross-border loans.

Moreover, Ho says, a separate concessionary tax package for multinationals will also help. “Hong Kong also should mull granting a tax holiday covering 10 years, including 100-percent profits tax exemption for the first three years of companies planning to establish their regional headquarters in Hong Kong after the introduction of the exemption, followed by a reduced profits tax rate of 10 percent for seven years after the expiry of the 100-percent exemption.”

oswald@chinadailyhk.com

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