New tax rules may help Hong Kong close gap with Singapore as destination for company headquarters

With many mainland Chinese firms starting to move overseas, Hong Kong has a chance to become the location of choice for their corporate treasury operations, analysts say

PUBLISHED : Thursday, 09 June, 2016, 8:21pm
UPDATED : Friday, 10 June, 2016, 10:20am

New tax rules coming into effect could give a boost to Hong Kong’s efforts to attract more multinational companies and Chinese enterprises to set up headquarters and treasury functions in the city, an area where it has been losing ground to Singapore for years.

Bankers warned however that it could be some time before Hong Kong sees the benefits.

Effective last Friday, qualified companies would receive a 50 per cent cut to profits tax, from 16.5 to 8.25 per cent and see all their interest expenses items become tax deductible this financial year, if they choose to set up a corporate treasury centre in Hong Kong.

The two advantages of the city are in renminbi liquidity and the proximity to Chinese corporates
Howard Yang, country head of Hong Kong for Citi’s Treasury and Trade Solutions

The change eliminates an unfavourable tax regime on interest payments that had seen many big companies decamp to a more friendly Singapore, taking with them the foreign exchange, derivatives trading, risk management and funding operations as well as accounting, legal and financial and banking businesses they might bring.

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Between 2005 and 2015, the number of headquarters of global companies in Singapore jumped from 3,600 to 12,600, according to Monetary Authority of Singapore and industry survey figures.

The new rules could help Hong Kong reverse such a trend, as is well timed as many mainland Chinese companies prepare to expand internationally.

“Hong Kong needs to forge its position,” said Howard Yang, country head of Hong Kong for Citi’s Treasury and Trade Solutions.

“The two advantages of the city are in renminbi liquidity and the proximity to Chinese corporates. For most Chinese corporates on the path of internationalisation, Hong Kong will be their first choice as a destination. Hong Kong can capture these opportunities. With multinationals too, you can imagine they have a lot of yuan receivables from China.”

But Singapore’s early starter advantage means that it could take three to five years before Hong Kong catches up, Yang said.

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“In the early stages of corporate treasury centre developments, the Singapore government was a lot more proactive in pushing for encouraging policies. In tax, staffing, policy stability matters, the overall competitiveness of Hong Kong was otherwise similar to Singapore. Most corporates at that point chose Singapore.”

Yang noted that some 100 company clients of Citi were looking to set up centralised operations for risk and cash management and local banking relationships, to improve efficiency in managing funding and interest costs. Half of them had chosen Hong Kong for their base.

Earlier, Norman Chan, chief executive of the Hong Kong Monetary Authority, who had led the lobbying for the tax changes over the past two years, expressed his optimism that the tax change would spur Hong Kong’s development as a place for a “headquarters economy”, and create great businesses and demand for banking, financing, risk management, taxation and legal advisory services.”

But Yang said another hurdle stood in Hong Kong’s way, the fact that Singapore has signed double taxation waiver agreements with some 70 countries around the world, while Hong Kong has only 32.

“These treaties have great implications on withholding tax: corporate loans and credit exposures would incur local tax. If I have a bilateral tax treaty with the place that I do business with, [withholding tax} could be waived.”

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