Tax reforms seen not enough to boost HK appeal as treasury hub
Law changes allowing deduction of interest expense and halving profits tax for corporate activities may not give edge over Singapore
Proposed tax changes will raise Hong Kong's appeal as a regional treasury centre for multinationals but will hardly tip the balance in the competition with Singapore, say banking and treasury experts.
The Hong Kong government is drafting amendments to the Inland Revenue Ordinance to allow deduction of interest expenses from profits tax and halve the profits tax rate to 8.25 per cent for qualified corporate treasury activities. The changes are aimed at removing hurdles that have deterred international and large mainland firms from setting up treasury centres in the city.
"If the reforms go through, it will make the tax environment in Hong Kong similar to that in Singapore, making Hong Kong attractive to companies hunting for a treasury centre, especially mainland Chinese firms," said Muhammad Aurangzeb, the Asia-Pacific chief executive of the global corporate bank unit at JP Morgan. "But it remains to be seen how many companies will actually close their regional treasury centres in Singapore and come to Hong Kong."
For a multinational, a regional treasury centre is a centralised set-up in addition to headquarters that handles cash and liquidity management, foreign exchange hedging, processing of external payments, fundraising as well as monitoring regulatory and market conditions.
While chief executives strike deals and expand companies' footprint across the globe, Aurangzeb said financial officers and treasurers were often left with the challenges to optimise companies' cash and funding propositions and control foreign currency risks, hence seeking centralised treasury services in one prime location.
In its ideal form, a regional treasury centre functions as an in-house bank. Cost savings could amount to 15 to 20 per cent a year in the third to fifth year, said Aurangzeb, who leads a team of 100 bankers serving large local and international corporations in the region.
At present, corporate treasury centres in Hong Kong that borrow from overseas group companies are not allowed to deduct interest expenses while interest earned from lending to overseas subsidiaries are chargeable to profits tax.
In addition, the city has no tax concessions for corporate treasury activities, which are subject to a 16.5 per cent tax, compared with a preferential 10 per cent rate in Singapore.
The Hong Kong government aims to introduce the bill by year-end.
David Blair, an independent consultant, said granting tax incentives was a step in the right direction, but it would not be a game changer as there were factors beyond tax that required attention.
"The depth of the local talent pool, the amount of interactions with other corporate treasurers and bankers are where Singapore possesses advantages," he said.
Even mainland firms tended to choose Singapore to establish a treasury centre, Blair said.
"Singapore has a head start, with hundreds of corporate treasury centres up and running," Aurangzeb said. "Can Hong Kong catch up? Time will tell. But for the time being, Singapore continues to have an edge."