Tax expert explains why territory is losing out to rival

HONG KONG has lost out to Singapore as a centre for foreign currency trading, offshore fund management and venture capital funds because of unclear tax policies, a tax expert says.

KPMG Peat Marwick senior partner Roderic Sage said yesterday: 'Singapore has won the game in certain areas. To date, Hong Kong has probably only lost fund management business and venture capital funds to Singapore as a direct result of tax incentives.

'But financial institutions have set up operating units in Singapore because of a perceived lower cost of doing business.' Theoretically, all offshore income was exempt from tax in Hong Kong, but vague definitions of such income could expose banks to different tax rates, sometimes to the full 16.5 per cent.

Singapore offers a preferential tax rate of 5 or 10 per cent.

Mr Sage cited as an example the Inland Revenue Department's practice notice number 21 issued in 1992, which defined offshore loans as those initiated, negotiated, approved and documented by parties outside Hong Kong.

While such definitions can be controversial in Hong Kong, Singapore has clearer guidelines.

These state that interest on loans in foreign currencies, made by and to be used by persons outside Singapore, (where interest on such loans is not borne directly or indirectly by anyone in Singapore,) is subjected to a tax rate of 10 per cent.