DOUBLE taxation treaties are not necessarily the answer to problems encountered by some foreign businesses when they remit profits to their home bases, according to Price Waterhouse. Volker Stoeckel, senior vice-president and general manager of the Hong Kong branch of Bayerische Landesbank, said that even China had a better tax regime than Hong Kong. He said a German company remitting profits to Germany from Hong Kong still had to pay German taxes although it could offset the 16.5 per cent profits tax it had paid in the territory. In contrast, the same company remitting profits to Germany from Singapore did not have to pay tax in Germany. He said Hong Kong's lack of double taxation agreements meant some German banks were switching to bases such as Singapore. He cited the Dresdner Bank, Deutsche Bank, WestLB and Commerzbank as examples. Hong Kong is not a party to any income tax treaties, apart from a limited agreement with the United States concerning shipping income. In contrast, Singapore has a wide network of income tax treaties - although not with the US. The treaties generally cut the rate of withholding tax to 10 per cent for interest arising in Singapore which is received by a resident of the treaty partner. But Price Waterhouse's Kaushal Tikku, who specialises in international taxation, said double taxation treaties were not necessarily the answer. One of the reasons Hong Kong did not have double taxation treaties was its liberal tax system; Hong Kong companies were not taxed on income generated outside the territory, he said. 'We don't care what you do or where you do it,' he said. 'We'll only tax you on income generated in Hong Kong.' Part of the problem was Germany's high-tax regime, Mr Tikku said. The German Government could resolve the difference in treatment meted out to Singapore and Hong Kong without resorting to a formal treaty, if it wished to do so. 'Germany is choosing to exempt income from Singapore and choosing not to exempt income repatriated from Hong Kong,' Mr Tikku said. He believed that 'Germany could very easily change its laws to recognise that Hong Kong is not a tax haven'. He said people in situations such as that faced by Bayerische Landesbank should really take the matter up with the government in their home country. Mr Tikku said double taxation agreements could offer sound advantages but in this case a treaty - or the lack of one - was not at the root of the problem. Last week, Financial Services Secretary Michael Cartland said Hong Kong's tax rate was already low and its economy robust. He told a conference that financial services were a vital component of the Hong Kong economy, accounting for about 10 per cent of gross domestic product [GDP]. The tax environment was one of the 'key factors' contributing to Hong Kong's economic success. Hong Kong's tax system is relatively simple; corporate profits tax is 16.5 per cent and only profits arising in Hong Kong are subject to tax. Interest payable by a corporate taxpayer in Hong Kong is deductible under certain conditions, including if the loan on which the interest is paid is used in the production of assessable profits in the territory. The Inland Revenue Department is wary of potential loopholes opening up in the system if it attempts to relieve corporates of unnecessary tax burdens. One of its fears is that corporates would engage in 'round-tripping' - taking out a loan or debt so that they can offset it against earnings in Hong Kong. One example of a possible round-tripping involves company A, a 70 per cent-owned subsidiary of company B, issuing debt securities offshore. Company A issues US$500 million in bonds in Europe, and its parent, company B takes up a big part of the bond issue. As a result, company A pays its parent interest, while being able to offset the interest payment against tax because the proceeds of the debt are to produce assessable profits in Hong Kong. Effectively, in this transaction, Hong Kong taxpayers are helping subsidise or cut company A's borrowing costs. Meanwhile, elsewhere in Asia, would-be financial centres are seeking to lure major financial institutions. At least 35 banks, have set up on the Malaysian island of Labuan, in the South China Sea. Labuan offers tax-free deposits and foreign currency project financing.