New Hong Kong legislation designed to provide a favourable climate for corporate treasury centres (CTCs) went into effect on 3 June, and has already been welcomed in the finance community.
However, there are concerns over whether the law – officially known as the Inland Revenue (Amendment) (No 4) Bill 2015 – will be enough to help the Special Administrative Region catch up with Singapore as CTC hub.
According to a global tax alert issued by auditor EY, “Under the new law, subject to satisfying certain specified conditions, interest paid by a corporation carrying on an intragroup financing business in Hong Kong to its overseas associated corporations will be tax-deductible.”
One key, qualifying condition, the alert explained, is that interest income received by an overseas associated corporation is subject to tax in a territory outside Hong Kong.
In other words, the law stipulates that overseas tax of a value similar to Hong Kong corporate income tax either has been, or will be, paid at no less than the applicable rates of either 8.25% or 16.5%.
The alert added that, according to the Hong Kong government, the ‘subject to tax’ condition “would not be regarded as satisfied if, for example, the overseas associated corporation incurred a substantial loss for a long period and has not paid any tax”.
As the bill took effect, Professor KC Chan – Hong Kong’s secretary for financial services and the Treasury – released a statement saying that the law “provides a conducive environment for attracting multinational and mainland corporations to centralise their treasury functions in Hong Kong… contributing to the development of a headquarters economy”.
He added: “[It] also facilitates banks’ issuance of relevant securities in compliance with international regulatory capital requirements, promoting the stability and resilience of the banking sector.”
Commenting on the new law in the 9 June edition of the South China Morning Post, Citi country head for treasury and trade solutions Howard Yang pointed out that Hong Kong’s main advantages are its renminbi liquidity and proximity to Chinese corporations.
“For most Chinese corporates on the path of internationalisation,” he said, “Hong Kong will be their first choice as a destination. Hong Kong can capture these opportunities [through the Amendment]. With multinationals, too, you can imagine they have a lot of yuan receivables from China.”
However, he added: “In the early stages of CTC developments, the Singapore government was a lot more proactive in pushing for encouraging policies.”
In particular, he stressed, Singapore has made itself especially fertile for CTCs by signing double-taxation waivers with 70 countries. While Hong Kong has struck up similar arrangements, they have been extended to just 32 countries – less than half of Singapore’s tally.
“These treaties have great implications on withholding tax,” Yang said. “Corporate loans and credit exposures would incur lo