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Regional Treasury Centers in Hong Kong: What Treasurers Should Know

  • By Ira Apfel
  • Published: 11/13/2018

As American companies expand overseas, many are opening regional treasury centres to support operations. One possible location is Hong Kong, which recently enacted new regulations to encourage RTC location there. Enoch Fung, Head of Market Development for the Hong Kong Monetary Authority, spoke to AFP about why American companies should establish regional treasury centres in Hong Kong.

As American companies expand overseas, many are opening regional treasury centres to support operations. One possible location is Hong Kong, which recently enacted new regulations to encourage RTC location there. Enoch Fung, Head of Market Development for the Hong Kong Monetary Authority, spoke to AFP about why American companies should establish regional treasury centres in Hong Kong.

AFP: What should companies know about the new rules for RTCs? What has changed about the rules, and why did the rules change?

Enoch Fung: Hong Kong has been an international financial centre (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.

For more insights, be sure to download AFP's new Executive Guide, Operating Regional Treasury Centers, underwritten by Thomson Reuters, here.

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 Centres (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 percent to 8.25 percent. 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 centres in HK but also the regional treasury centres.   

Corporates’ response to the regime has been positive. In the first year of introduction, there were already over 140 corporates benefiting from the above amendments.

AFP: What advice would you give to a company that wants to create a RTC in Hong Kong? What mistakes can they avoid?

Enoch Fung: 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 is 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.

What are some best practices for treasury departments that are considering opening a regional treasury center? Watch this video: Keys to Operating Regional Treasury Centers.

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 do not have any goods and services tax, value-added tax, estate duty or tax on capital gains. We also do not 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.

AFP: What are the economies of scale a typical company achieves by setting up a treasury function in Asia?

Enoch Fung: Multinational corporations (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 U.S. 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?

Enoch Fung: Hong Kong is the world’s largest offshore RMB centre. 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 percent 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 centres.

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.

AFP: If a company operates an in-house bank domiciled in Hong Kong, what areas do corporates need to consider (e.g. separate legal entity requirement, currency restriction and withholding tax on interest) in terms of doing notional pooling, cash pooling, intercompany netting, across various Asian countries—primarily APAC?

Enoch Fung: 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.

AFP: How can corporates leverage Hong Kong’s financing markets? How does the Hong Kong government attract corporates issuing bonds in Hong Kong?

Enoch Fung: Hong Kong has long been an ideal financing hub in Asia, leveraging our well-developed financial platform, good mix of investors and issuers coming from local and international markets, as well as availability of professional service providers. Hong Kong’s stock market ranked No. 1 globally in IPO fundraising in five out of last 10 years. Hong Kong is also a major banking hub in Asia, with total banking assets amounting to around US$3 trillion in 2017. G3 and local currency bond issuance in Hong Kong totalled US$467 billion, ranking third among countries/economies in Asia ex. Japan, just behind Mainland China and Korea.

To promote bond market development in Hong Kong, the government and the HKMA have been introducing various initiatives with a view to further developing the infrastructure and attracting issuers and investors to participate in the Hong Kong bond market. In terms of measures to attract new issuers, we have earlier rolled out the Pilot Bond Grant Scheme, which offers grant to first time issuer to cover half of their issuance expenses for conducting bond issuance in Hong Kong. To promote bond investment, we are also enhancing the Qualifying Debt Instrument Scheme, to expand the scope of bonds eligible for profits tax exemption in relation to interest and trading incomes. We encourage corporates, including those with presence or operations in Hong Kong, to make good use of Hong Kong's bond financing platform to raise funding for their business development.

AFP: It’s interesting that “green finance” is one of the focuses of the HKMA in market development. How can corporates benefit from this?

Enoch Fung: Hong Kong has a growing green bond market. In the first six months in 2018, at least 15 green bonds were issued in Hong Kong, with an aggregate size of nearly USD 8 billion, by notable issuers from multilateral development banks and private sectors from Hong Kong, Mainland China and abroad. The Hong Kong Government will launch a green bond issuance programme with a borrowing ceiling of $100 billion to create demonstrative effect to encourage more issuers to arrange financing for their green projects through Hong Kong capital markets.

Green bond offers an alternative financing channel for corporates. In particular, green bond issuers can benefit from the Green Bond Grant Scheme (GBGS), a subsidy from the government for obtaining certification under the Green Finance Certification Scheme (GFCS) established by the Hong Kong Quality Assurance Agency. Besides, the Pilot Bond Grant Scheme, which subsidises first-time bond issuance in Hong Kong, also covers green bonds. These supportive measures will reduce corporates’ costs in issuing green bonds in Hong Kong, thus implying lower financing costs for corporates.

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