Regional treasury centre (RTC) location has always sparked lively debate within treasury circles. First, there is the basic decision – centralise or not? This has always seemed a rather crude distinction and arguably the decision must be taken at a more granular level. For example, it might make sense to centralise foreign exchange (FX) dealing for internal control and scale economy reasons. Likewise, funding from banks and markets – although options like umbrella facilities may reduce the need for some corporates. On the other hand, many companies will prefer to keep collection management in-country, because they value customer proximity for that function.
This granularity also brings up the important distinction between RTCs and share service centres (SSCs). Most would agree that RTCs should handle funding (loans) and investment (deposits et al), which means centralising corporate interactions with money and debt markets. Most would also include FX dealing; likewise the related derivatives. On the other hand, core SSC activities typically include high-volume commercial (as opposed to treasury) transactions – receivables, payables, accounting, reporting, payroll, fixed assets and others.
Things get more interesting at the borderline, with in-house banks (IHBs), multilateral payment netting (netting) and payment factories (PFs). IHBs in particular normally include elements of intercompany funding as well as commercial payment processing. Often, elements of RTC and SSC are housed under the same roof. The objective here is not to recommend organisational design, but rather to make the distinction between relatively low-volume treasury transactions in money market (MM) and FX, as opposed to relatively high-volume commercial flows like accounts receivable and payable (AR/AP). For the purposes of this article, references to RTCs means those handling the low volume – and often high value – treasury transactions.
Two Kinds of IHB
Analogous to the distinction between RTC and SSC, it is important to be clear about the distinction between two very different understandings of IHB.
One understanding is that an RTC is also an IHB; in that an RTC acts as a bank towards subsidiaries with respect to treasury transaction such as loans, deposits and FX. An RTC takes intercompany deposits from and extends intercompany loans to subsidiaries and covers the net position with banks – in a similar way to banks, which take deposits and make loans and cover their net interbank, except that RTCs exclusively serve related group companies – hence the “in house” bit. Such treasury as opposed to commercial transactions tend to be relatively low-volume.
In the other understanding, an IHB provides bank-like payment and account holding services. It makes payments and collections on behalf of subsidiaries and debits and credits the proceeds to subsidiaries’ intercompany current accounts with the IHB. These are mainly commercial payments and collections, and therefore tend to be high volume.
The end state for this current account-style IHB is to eliminate subsidiary – external or real, as opposed to IHB – bank accounts altogether. The IHB handles all payments and collections on behalf of (POBO/COBO) the subsidiary through IHB-owned external bank accounts, so the subsidiary no longer needs an external bank account in its own name. Many companies have achieved this in many countries, moving towards one external bank account per currency for the whole group.
Of course, the two kinds of IHB can work together and may co-locate organisationally and/or geographically.
In summary, the loan and deposit IHB is like an RTC, with similar location requirements; whereas the current account IHB is like an SSC and needs low costs and scale efficiencies.
Fashions change, so the tides of centralisation and decentralisation ebb and flow. Centralise to cut costs and regain control; decentralise to localise and grow market intimacy. To some extent this is common across industries, but often each corporate seems to follow its own rhythm.
More and more corporates are finding that granularity is key – identify which activities yield scale economies and benefit from centralised control, and which are better localised. There is no right answer, as it will depend on the market, corporate culture, systems and other factors.
Many corporates, outside a few heavily-regulated industries, have concluded that treasury transactions (MM and FX) benefit from centralisation. They want tight control over high-value transactions, and that control is hard to localise. Segregation of duties alone implies serious headcount, which is unlikely to be cost-effective when localised in each country.
Over the years, Asia has seen successive waves of RTCs come and go – happily for the profession as a whole they are normally not synchronised. There is also the global – regional – local dimension. Corporates often set up RTCs for Asia, then hit bad times and – aided by improving technology – centralise all treasury back to head office. If they do not get the regional knowledge part of the equation right, they sometimes come back with new RTCs at a later date.
Recently the author was surprised to meet the local treasurer of a previous employer, who a few years earlier had closed regional treasury and pulled back to head office to cut costs. The cycle has turned and they now feel the need for ‘local feet on the ground’, even though more processes remain centralised to head office.
Hong Kong vs Singapore
Asia’s prime RTC locations have traditionally been Hong Kong and Singapore; both free-developed, well-connected cities with deep financial markets and relatively deep talent pools. High costs are acceptable for generally small-staffed RTCs, but make them unsuitable for the large teams at SSCs.
Kuala Lumpur and Manila have had some success for SSC activities, because each has relatively cheap, English-speaking labour pools. However, both locations are currency controlled and not at all financially-free, with shallow and purely local financial markets, so they not at all suitable for RTCs.
Traditionally, Hong Kong has been preferred by corporates focused on China for its proximity to China. Singapore has a better coverage for Asia Pacific as whole. Hong Kong, with China in its back yard sucking in as much money as it could, traditionally had deeper capital markets. Singapore has deeper more liquid FX markets.
Corporates chose their RTC location based on their specific priorities. Often regional headquarters’ location, presumably reflecting those priorities, was and continues to be a deciding factor.
What Does Hong Kong Offer?
The first thing to make clear is that Hong Kong’s proposal is just that. As of the second quarter of 2015, they are in consultation regarding changes to the tax code which may take place in the 2015-16 fiscal year (the Hong Kong fiscal year April 1 to March 31).
Certain anti-avoidance provisions in the current Hong Kong tax code are designed to eliminate tax reduction on onshore activities and result in intercompany loan interest being taxed at the full rate of 16.5%. Hong Kong proposes to carve out qualifying treasury centre intercompany loan interest. The new law, currently under consultation, will spell out the qualification criteria. There is no analogous issue in Singapore.
Hong Kong further proposes a 50% reduction in the income tax rate on qualifying treasury activities to 8.25%, compared to Singapore’s 10%. Again, the new law will have to spell out what constitutes qualifying activities.
These changes would make Hong Kong broadly fiscally competitive with Singapore. In summary:
- Treasury activities attract 10% tax in Singapore, 8.25% in Hong Kong.
- Withholding tax on interest is waived in Singapore and does not exist in Hong Kong.
Tax is not the only issue, and here are some common factors:
- Tax is broadly similar (see above).
- Costs are broadly similar.
- Quality of life is subjective, Hong Kong’s pollution making Singapore more attractive for families.
- Both locations have deep talent pools, with Singapore having better English language skills and deeper corporate treasury talent simply from having been the predominant treasury location for decades.
- Multinational corporation (MNC) populations: Hong Kong has some 8,000 MNCs, including mainland companies operating in the territory. Singapore has 12,000, probably reflecting its broader Asia Pacific focus.
- Telecommunications are excellent in both locations.
- Air Transport: Hong Kong saw 63m passengers and Singapore 54m in 2014. Hong Kong serves 180 cities, Singapore 300. Hong Kong’s passenger volumes reflect its status as an international hub for mainland China, whereas Singapore is a true international gateway
Additionally of course there are many company-specific factors such as being China-focused or Asia Pacific-focused, the regional headquarters location, and more.
China has stated that it wants Shanghai to be an international financial centre (IFC) by 2020. This, and the country’s increasing – China now being the world’s biggest economy by purchasing power parity (PPP) – has encouraged corporates to move their regional headquarters (RHQs) to Shanghai and in some cases to other Chinese cities.
This, together with regulatory moves from the State Administration for Foreign Exchange (SAFE) and People’s Bank of China (PBOC) to make treasury management easier in China, might drive interest in setting up RTCs, or even SSCs, in China. On the other hand, past efforts have foundered on weak language skills in mainland China.
Despite rapid recent improvement, China remains complicated from both tax and regulatory perspectives, and this will be a challenge for RTC operations going forward. On the SSC side, Chinese companies (and western manufacturers) are already heading inland in search of lower costs and to escape the tight talent markets in the more developed coastal cities.
On the one hand, Shanghai 2020 poses a real challenge to Hong Kong as a treasury location – if a corporation wants to base a treasury centre in Greater China, why not go all the way and locate in Shanghai? This will help relations with the Chinese government.
On the other hand, Shanghai suffers from high costs, high turnover, and weak language skills, which can be significant constraints for regional operations. So perhaps Hong Kong still has the overall advantage over Shanghai.
However, where the corporation has a more regional and less mainland China focus then Singapore will likely be the more attractive choice. This threatens to leave Hong Kong caught in the middle – between Shanghai becoming pre-eminent for China-focused operations, and Singapore covering more regionally-focused operations. In fact, it is likely that the Hong Kong Monetary Authority (HKMA) reached a similar conclusion, prompting them to launch such an aggressive campaign to lure treasurers to Hong Kong.
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