Editor’s Note: Companies from different parts of the world expand overseas and open regional treasury centers to support their operations. Hong Kong recently enacted new regulations to encourage RTC locations here. The Association for Financial Professionals spoke to Hong Kong Monetary Authority’s head of market development Enoch Fung about why foreign companies should establish regional treasury centers in Hong Kong.
AFP: What should companies know about the new rules for regional treasury centers? What has changed about the rules, and why did the rules change?
Enoch Fung: Hong Kong has been an international financial center (IFC). Many multinational corporations have set up their regional headquarters and offices to leverage on Hong Kong’s strengths as an IFC for their Asian business.
Corporates can also make use of Hong Kong’s low and simple tax regime, as well as our world-class financial platform including an extensive banking network, deep capital markets, robust financial infrastructure and effective professional services for their corporate treasury activities.
While corporates appreciate Hong Kong’s competitive financial services platform, there are also some feedback that some of our tax policies can be improved to make our overall package even more competitive.
Therefore, we have further enhanced our tax rules to facilitate more cost-effective cross-border intra-group financing for corporates.
In particular, the Hong Kong Government introduced a new tax rule in June 2016, which enabled Corporate Treasury Centers (CTCs) to deduct the interest expenses arisen from their intra-group financing from associated corporates under specified conditions.
To further promote the development, the government also provided a 50 percent profits tax concession for qualifying CTCs, i.e., profits tax rate reduced from 16.5% to 8.25%.
The types of activities eligible for this tax concession include profits arising from typical treasury functions such as financing, liquidity management, investment, and risk management. This CTC initiative covers not only corporates setting up the global treasury centers in HK but also the regional treasury centers.
Corporates’ response to the regime has been positive. In the first year of introduction, there were already more than 140 corporates benefiting from the above amendments.
Hong Kong doesn't have withholding taxes on interest and dividend payments, which save costs for CTCs with cross-border activities
AFP: What advice would you give to a company that wants to create a RTC in Hong Kong? What mistakes can they avoid?
EF: Financial management is an integral part of a corporate’s operations. Many multinational corporations are expanding their presence in Asia, on the back of the growing importance of Asian markets in their overall business.
As the scales and complexities of their businesses increase, corporates are advised to structure their CTCs carefully based on their own business requirements and stages of development.
Therefore, it is important for corporates to identify the right partners such as banks, accountants, legal advisors and consultants who could help tailor their CTC structures to their needs and are also familiar with the local market conditions.
It’s worth mentioning that Hong Kong has a deep pool of talents and experts who are well-experienced in assisting corporates to structure their CTCs for managing their treasury businesses in Asia.
When it comes to comparing the tax implications of setting up a CTC in different places, many corporates only look at the headline tax rate of the CTC tax regime, and do not take into account the various indirect taxes.
For example, Hong Kong only has three types of tax: profits tax, salary tax and property tax. We don’t have any goods and services tax, value-added tax, estate duty or tax on capital gains.
We also don’t have withholding taxes on interest and dividend payments, which save costs for CTCs with cross-border activities.
In fact, Hong Kong has a very competitive tax environment even without the CTC tax regime.
According to the study, “Paying Taxes 2018,” conducted by the World Bank and PwC, out of 190 economies in the world, Hong Kong is the third most tax-friendly economies, after Qatar and United Arab Emirates.
Corporates should examine a city’s CTC tax regime together with its overall tax environment to gain a more holistic view. Again, choosing a trusted and expert tax advisor is the key.
Hong Kong is one of the few jurisdictions in Asia which do not impose any control on capital flows or foreign exchange transactions
AFP: What are the economies of scale a typical company achieves by setting up a treasury function in Asia?
EF: Multinationals (MNCs) have been active in developing business operations in the Asia region.
Not only does Asia provide a promising market for business development given its huge population and rapid economic growth, it is also an important region in MNCs’ supply chain management as they set up their production facilities or source goods locally.
With the increasing complexity of their Asian business operations, corporates face greater challenges such as differences in time zones and diverging local practices, thus making management of treasury activities from remote headquarters less effective.
Having a regional CTC in Asia, ideally close to their regional headquarters, enables an operating structure more scalable to support business requirements in the region.
As a regional business hub for many MNCs, Hong Kong is an ideal location for their CTCs in Asia. As of June 2017, there were 283 regional headquarters and 443 regional offices set up by various US companies.
Newell Brands Inc., LyondellBasell Industries and WPP are some MNC examples that have already set up CTCs in Hong Kong. MNCs can also make use of Hong Kong to manage their business relationships with their peers in Asia.
Mainland China has more than 100 companies on the Fortune Global 500 list 2018, many of which have set up their international headquarters in Hong Kong.
AFP: As RMB grows in popularity, what are the benefits for corporates to use Hong Kong to manage their RMB positions?
EF: Hong Kong is the world’s largest offshore RMB center. It has the world’s largest offshore RMB liquidity pool, exceeding RMB 600 billion.
As the world’s largest hub for offshore RMB payments, it also processes over 70% of international RMB payments through SWIFT.
Hong Kong’s RMB Real Time Gross Settlement system has a turnover of around RMB 1 trillion per day. Meanwhile, Hong Kong’s RMB FX average daily trading volume reaches USD 77 billion, leading other international financial centers.
Corporate can use Hong Kong’s holistic platform to support their various offshore RMB transactional needs.
For example, many corporates have set up RMB cross-border two-way cash pooling channels within Hong Kong and Mainland China to facilitate working capital management flows.
Hong Kong has always been the testing ground for Mainland’s new opening policies. For example, the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect, and the Bond Connect were launched between 2014 and 2017 to enable mutual access of stock and bond markets between Mainland and Hong Kong.
Therefore, corporates in Hong Kong can also enjoy the first-mover advantage in the process of the Mainland’s continuous opening of its financial markets.
Hong Kong does not impose withholding tax on interests and dividends, which is an important advantage when it comes to cross-border cash pooling
AFP: If a company operates an in-house bank domiciled in Hong Kong, what areas do corporates need to consider (for instance, separate legal entity requirement, currency restriction and withholding tax on interest) in terms of doing notional pooling, cash pooling, inter-company netting, across various Asian countries—primarily APAC?
EF: Hong Kong provides a regulatory environment conducive to corporate treasury activities.
Corporate treasury activities listed in the question are considered ordinary commercial activities in Hong Kong.
There is no specific legal entity requirement to set up a CTC unless a corporate is considering specifically applying for the 50 percent profits tax concession for qualifying CTCs.
Hong Kong is also one of the few jurisdictions in Asia which do not impose any control on capital flows or foreign exchange transactions. There is no restriction for corporates in Hong Kong to make cross-border fund movements.
As mentioned before, Hong Kong does not impose withholding tax on interests and dividends, which is an important advantage when it comes to cross-border cash pooling.
Regarding the withholding tax charged by other jurisdictions, Hong Kong has so far signed Comprehensive Double Taxation Agreements (CDTAs) with 40 jurisdictions, with an aim to expanding the network to over 50 jurisdictions in the coming years.
These CDTAs can help corporates further alleviate their withholding tax costs. Many of these CDTAs also provide highly competitive withholding tax rates when compared to some other jurisdictions in the region.
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