Hong Kong has announced major tax measures aimed at making it a more attractive centre in Asia for global corporations to trade foreign exchange (FX).
The move is regarded as a bid to rival Singapore as an attractive location for regional treasury centres. While Hong Kong has established itself as Asia’s location of choice for company headquarters, many multinational corporations have opted for Singapore when managing foreign exchange (FX) operations – thanks to the city state’s low tax base and pro-business policies.
Hong Kong will respond by tabling a bill to remove hurdles that deter companies from locating their treasury functions in Hong Kong, said financial secretary John Tsang. A principal component of the proposed tax changes would be to make all inter-company interest tax deductible for corporate treasury centres, thereby bringing Hong Kong into line with Singapore.
The government also wants to reduce the headline tax rate on profits arising from specific treasury activities to 8.25% half the current rate and undercutting Singapore’s 10% rate.
“Singapore has been offering tax incentives for finance and treasury centres since 2004 and in that time has really built up its corporate FX and treasury capability,” James Badenach, financial services tax partner at EY in Hong Kong, told Reuters and other news agencies.
“With the liberalisation of the renminbi (RMB), Hong Kong has a significant opportunity to close the gap with Singapore, but to capture its share of corporate FX flow it needs to attract more corporate treasury centres.”
Hong Kong’s average daily FX turnover as of April 2013 was US$275bn, ranking it third in Asia but well behind Singapore and Japan, and fifth globally, according to Bank of International Settlements (BIS) data.
More than 12,000 European and US companies have operations in Singapore, many of which use the city as regional headquarters according to European Union (EU) and US data.
Until now, interest income earned by a corporate treasury centre on inter-group transactions, such as a loan to an overseas group company, was taxable in Hong Kong. Interest expense paid on the loan was not tax deductible.
According to Badenach, Hong Kong is the only major Asian financial centre that has been adopting this tax treatment on treasury functions.
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