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Standard Chartered last year paid an extra US$108.6 million in tax to support a group structure that leaves a small, loss-making London office in control of the worldwide banking group and relegates its biggest profit contributor in Hong Kong to branch status.

However, the chief financial officer in Hong Kong, Julian Fong Loong Choon, yesterday defended the policy, saying the group was not run on purely tax efficiency grounds and that its present structure provided the best flexibility.

'We feel we get the best bank for the buck,' he said.

Last year, Standard Chartered paid US$378 million in tax on its global pre-tax earnings of US$1.14 billion, or an effective tax rate of 32.9 per cent.

The Hong Kong contribution came to US$522 million, or 45.5 per cent of the group's worldwide pre-tax earnings and was duly taxed at the rate of 32.9 per cent by the British tax man - for a total tax bill of US$171.74 million.

Had those pre-tax earnings been retained in a locally incorporated Hong Kong subsidiary - therefore escaping a 'top-up' tax levied in Britain to bring offshore remittances into line with British rates - they would have been taxed in Hong Kong only.

While the flat rate of corporate tax in Hong Kong is 16 per cent, Hang Seng Bank, one of the closest competitors to the Standard Chartered Hong Kong operation, paid an effective tax rate last year of just 12.2 per cent.

Apply this rate of tax to the Hong Kong earnings of Standard Chartered Bank and the tax bill would have worked out at US$63.68 million. That would have amounted to a saving of US$108.06 million, or HK$840.7 million.

On a consolidated basis, that adjusted contribution from Hong Kong would have lifted the group's bottom-line profit from US$699 million to US$807.06 million  - an increase of 15.5 per cent  - and helped boost the group's return on equity, presently languishing at 12.3 per cent.

By contrast with the Hong Kong pre-tax profit contribution of US$522 million, the group's head office in London - along with the remaining British operations and contributions from the Americas - last year reported a pre-tax loss of US$26 million.

A dividend pay-out ratio to shareholders of about 67 per cent means the bank could not maintain its dividend without a contribution from its cash cow in Hong Kong.

But why does the bank not incorporate its Hong Kong operations locally and keep some, if not all, of the Hong Kong profit in the SAR accounts?

Mr Fong yesterday said the group ran a 'fairly complex banking structure', which was constantly reviewed in terms of branch or subsidiary status.

'Right now, even though Hong Kong is a big part of group profits, it fluctuates from 25 to 40 per cent,' he said.

Retaining a branch structure in Hong Kong provided the 'best flexibility' and meant that all regulatory capital was held centrally in London to support balance sheets of the emerging market bank's operations around the world. 'It becomes difficult if we have to designate capital separately,' he said.

Such a move might lead to some tax savings, he said.  'But we don't run the bank purely on tax efficiency, and notwithstanding the fact that Hong Kong earnings now are around 40 per cent, two or three years ago it was 30 per cent.'

Hong Kong & Shanghai Banking Corp is separately incorporated in Hong Kong and the parent company allocates capital on a regional basis to support its operations.



Chartered structure adds US$108m to tax