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• The growing importance of the Asian business market is encouraging multinational corporations to set up corporate treasury centres in the region. A corporate treasury centre is generally regarded as an in-house bank of a multinational corporation, providing treasury services for its group companies. The main activities of corporate treasury centres usually involve: (a) intra-group borrowing and lending; (b) cash and liquidity management; (c) processing of payments to vendors; (d) supporting capital raising; and (e) risk management. In addition, corporate treasury centres may also hold the control function on behalf of headquarters, and help monitor changes in local regulations and market conditions.
• From the perspective of multinational corporations, centralizing the treasury operations and management can help achieve the economies of scale, higher efficiency, and standardization of procedure and process. To attract multinational and Mainland corporations to establish corporate treasury centres in Hong Kong, the Government has proposed to introduce changes to the Inland Revenue Ordinance (Cap. 112) to provide certain tax benefits to corporate treasury centres under specified conditions. A briefing on the proposal was given to the Panel on Financial Affairs in June 2015. According to the Government, the relevant legislative proposal would be introduced into the Legislative Council during the 2015-2016 legislative session.
• Many Asian cities are keen on becoming a treasury hub in the region to benefit from the wide array of treasury activities. According to a survey on corporate treasury centres, Singapore tends to be the most popular choice of location in Asia, followed by Hong Kong. This issue of Essentials discusses the tax incentives available to corporate treasury centres in Singapore, the current and proposed tax arrangements in Hong Kong, and other non-tax factors that may affect multinational corporations' choice of location for their corporate treasury centres.

Tax incentives provided by Singapore

• Singapore has all along been offering tax incentives to attract multinational corporations to centralize and manage their regional treasury activities in Singapore. Under its "Finance and Treasury Centre Tax Incentive" scheme administered by the Economic Development Board, an approved corporate treasury centre is able to enjoy a concessionary corporate tax rate of 10% as opposed to the ordinary rate of 17%, and exemption of withholding tax.
• The concessionary tax rate applies to all relevant income: (a) fee income derived from the provision of qualifying activities and qualifying services to its subsidiaries and associated companies that are approved as "network companies" under the scheme; and (b) interest and dividend income as well as gains from qualifying financial transactions such as stocks and bonds, foreign exchange trading, etc.
• In Singapore, while interest expenses incurred in income production are generally tax-deductible, there are withholding taxes on interest expenses that are paid to non-resident persons.^{1Legend symbol denoting Under the withholding tax rules, the payer is obliged to withhold 15% of interests before making payment to a non-resident person. The tax withheld is then remitted to the Inland Revenue Authority.} To remove this barrier, withholding tax exemption is granted under the scheme on interest expenses that are paid by the corporate treasury centres to the approved network companies or overseas banks, so long as the funds raised are used for the qualifying treasury activities.
• There are certain criteria for becoming an approved corporate treasury centre. In order to be eligible, a corporate treasury centre has to (a) attain an annual business expenditure of S$750,000 (HK$4,162,500); (b) employ at least three professional staff in the centre; and (c) provide three qualifying treasury services to three or more approved network companies. The tax benefits are granted initially for a period of five to 10 years, subject to renewal.
• It is noted that the Singapore government has introduced a sunset clause for the scheme, which is set for 31 March 2016, after which no approval will be granted under the scheme. According to the Economic Development Board, the introduction of the sunset clause aimed to enable the government to review the scheme on a regular basis so as to ensure that it continues to be useful to the industry.

Current and proposed tax arrangements in Hong Kong

• In contrast to Singapore, Hong Kong has not introduced any tax benefits in this respect. At present, if a corporate treasury centre borrows from an overseas group company which is not subject to tax in Hong Kong, the corporate treasury centre will not generally be entitled to tax deduction on the interest expenses paid to the group company. On the other hand, interest income received by the corporate treasury centre from the group company, be it in Hong Kong or overseas, is chargeable to profits tax.
• The above differential tax treatment between interest income and interest expense is viewed as an obstacle to developing Hong Kong into a treasury hub, given that tax is a key factor of consideration. Therefore, under the proposed tax regime^{2Legend symbol denoting Information about the proposed tax regime is based on the briefing given by the Government to the Panel on Financial Affairs in June 2015. See Financial Services and the Treasury Bureau (2015).}, Hong Kong will offer qualified corporate treasury centres a concessionary tax rate, which is half of the ordinary profits tax rate (i.e. 1/2 x 16.5% = 8.25%), applicable to profits derived from qualifying corporate treasury transactions under specified conditions, and qualifying treasury services and loans made to group companies outside Hong Kong.
• On the part of interest expenses, the Government has proposed that a corporate treasury centre be allowed to deduct the interest expenses relating to its borrowing from the group companies outside Hong Kong under specified conditions. Based on the proposed regime, corporate treasury centres may be required to conduct their treasury activities via a standalone corporate entity. If this is the case, multinational corporations may have to alter their corporate structure in order to be eligible for the tax benefits. Yet according to the Government, it will further consult the industry on the details of the overall proposal before introducing legislative changes.

Other consideration factors

• The proposed tax rule changes are seen as a positive step to reinforcing Hong Kong's tax-friendly business environment. While the proposed concessionary tax rate of 8.25% appears more appealing than Singapore's 10%, there are an array of non-tax factors that may affect multinational corporations' choice of location for their corporate treasury centres. These factors include the cost of running business, stability of the financial system, and availability of expertise and technology. Furthermore, corporate treasury centres of multinational corporations tend to be located in a place where their regional headquarters reside, in order to gain better access to the central business operations and the management. Currently, Hong Kong is home to about 1 400 regional headquarters.
• In Singapore, there are about 4 000 regional headquarters. The large presence of regional headquarters in Singapore may be partly explained by the tax incentives given by the Singapore government. Under a tax incentive scheme known as the Headquarters Programme, regional headquarters are offered a concessionary tax rate on qualifying income from abroad.^{3Legend symbol denoting Under the Headquarters Programme, companies with regional headquarters meeting the prescribed conditions may pay a lower corporate tax rate of 15% for three years. If the companies can maintain all the minimum requirements during the three-year incentive period, they may enjoy the 15% concessionary tax rate on qualifying income for an additional two years.}
• Hong Kong may have the unique advantage of proximity to the Mainland and is the largest offshore Renminbi centre. As pointed out earlier by the Financial Secretary, the "One Belt One Road" initiative, together with the establishment of the Asian Infrastructure Investment Bank would be advantageous to Hong Kong developing into a treasury hub. Notwithstanding these favourable conditions, there are other company-specific factors that may affect multinational corporations' choice. Specifically, many of them like to co-locate their corporate treasury centres with their regional headquarters. Thus, promoting a headquarters economy in Hong Kong is certainly helpful to strengthen its attractiveness as a prime location of corporate treasury centres in the region.

Prepared by Tiffany NG
Research Office
Information Services Division
Legislative Council Secretariat
14 October 2015