Tax regime a factor in HK success

PUBLISHED : Tuesday, 08 August, 1995, 12:00am
UPDATED : Tuesday, 08 August, 1995, 12:00am

THE silence following the headline article in Business Post on Monday, July 31, effectively lambasting the Hong Kong taxation system as it affects banks, needs to be broken with a resounding crash.

Hong Kong has a very liberal and easy to understand system of taxation.

That liberality and certainty over taxation has been very attractive and has undoubtedly helped Hong Kong to become an economic success story.

While it is true that Hong Kong has no network of double-taxation treaties (apart from a limited treaty with the United States on shipping profits), this has not disadvantaged businesses investing money here.

In particular, investment into Hong Kong has been made in a tax-efficient manner as dividends, interest and royalties paid out of Hong Kong are free of withholding tax.

The flow of funds is usually out from Hong Kong, and not into [the territory]. And where funds, such as loan interest, flow into Hong Kong, it is usually possible to structure the Hong Kong business as a branch of a company based in a suitable jurisdiction to minimise withholding taxes, as the taxation treaty network of the parent company will apply.

Hence the majority of US banks operate in Hong Kong as branches of US companies, and obtain a tax credit in the US for the 16.5 per cent profits tax paid here.

It is unfair to imply, as the article did, that banks operating in a particular jurisdiction with a treaty network such as Singapore are better off than in Hong Kong.

It will depend on the facts in each case.

That is, is the location of the ultimate parent company and the type of business involved, as to the optimum structure? Indeed, few banks would set up in Hong Kong, or elsewhere, without taking proper advice as to taxation and structural issues.

In particular, the Singapore taxation authorities, while giving certain tax concessions for certain types of business, maintain a very vigilant stance over the actual activities of that business which, in practice, is a major deterrent.

In fact, the article quoted Singapore as a very suitable centre for banks, but banks have operated in Hong Kong with equal ease, and, as with Singapore, can be tax free on business which is genuinely conducted offshore..

For example, profits can be remitted to Germany from Hong Kong, albeit indirectly, with the same tax consequences at the parent company level as if remitted from Singapore.

It still, unfortunately, remains true that no Far Eastern jurisdiction has a taxation regime which is suitable for setting up a 'regional headquarters' company in all respects.

Singapore has tried hard, but the necessary activity and annual expenditures needed to satisfy their requirements each year has meant few companies have set up true 'operational headquarter companies' in Singapore.

Labuan, in Malaysia, has also tried, but whether its treaty network is sufficiently robust remains a big question.

The Chinese holding company is a very new animal and is not really a taxation vehicle but a practical one.

The truth is that many European jurisdictions remain the favourite legal route for transferring profits out of the Far East to the ultimate parent company, especially if it is based in a tax-jurisdiction.

In the meantime, Hong Kong remains a very easy-going, and low-tax-based jurisdiction, in which to conduct business.

DEBBIE ANNELLS Ernst & Young International Taxation Services