Asia has gained increased importance on the world stage as international companies look to establish footprints in the region. In more recent times, Asian companies, in particular Chinese state-owned enterprises (SOEs) and privately-owned enterprises (POEs), have been expanding their businesses overseas. Mainland SOEs and POEs are particularly encouraged by the Chinese central government’s policies of “One Belt, One Road”, further liberalization of capital account, and internationalization of the RMB.
Corporate treasury plays an extremely important role to support these expansions. In particular, the use of a corporate treasury center (CTC), if designed and implemented properly, could bring great benefits to businesses. Hong Kong has been one of the premier locations for regional CTCs. While Hong Kong’s attractiveness in recent years has been hindered by certain unintended taxation consequences, there is good news on the way with the recent changes announced in the 2015/16 budget.
The good news
In the 2015-16 budget, the Financial Secretary announced that the Hong Kong government plans to amend the Inland Revenue Ordinance to:
- Allow, under specified conditions, interest deductions under profits tax for CTCs and
- Reduce profits tax for specified treasury activities by 50 percent (i.e. to 8.25 percent).
The first amendment essentially corrects for previously unintended tax consequences of asymmetrical taxation on intercompany interest. Under the proposed new rules, interest expenses related to intercompany borrowings will become deductible, under the conditions where interest income received by the corresponding intercompany is subject to tax of similar nature outside of Hong Kong at a rate that is not lower than Hong Kong’s profit tax rate. However, it should also be noted that this proposed change will also make it clear that interest income from intercompany lending will be deemed trading receipts chargeable to profit tax. This change may impact corporates which have been applying the “provision of credit” test in the past.
The second amendment is intended to be an incentive to encourage corporates to set up their treasury centers in Hong Kong. This is a positive move anticipated by many in the industry to put Hong Kong on equal or better footing from a tax perspective with other popular CTC destinations (e.g., Singapore) where tax incentive schemes have already been in place.
The coverage and definition of the qualifying treasury activities will be important. An initial draft of the amendment proposed to the Legislative Council in June defined qualifying corporate treasury services and transactions to include certain activities.
Qualifying corporate treasury services
(Applicable for services to associated corporations in or outside Hong Kong not being financial institutions)
- The management of the cash and liquidity position, including cash forecasting, of the corporate group, and the provision of related advice
- The processing of payments to vendors or suppliers of the corporate group
- The services in relation to the provision of guarantees, performance bonds, standby letters of credit and services relating to remittances to and on behalf of the corporate group
- Providing corporate finance advisory services, including activities supporting the raising of capital, either by way of debt or equity, or the provision of services in relation to the raising of capital, for and on behalf of the corporate group
- Providing advice and services in relation to the management of interest rate risk, foreign exchange risk, liquidity risk and credit risk
- Providing business planning and coordination including economic or investment research and analysis in connection with any of the above activity.
Qualifying corporate treasury transactions
(Applicable for transactions entered into on own account)
- Transactions in relation to the provision of guarantees, performance bonds, standby letters of credit or other similar credit risk instruments in respect of borrowing by associated corporations
- Investment in deposits, certificates of deposits and shares of surplus cash for liquidity management
- Transactions in the contracts for difference, foreign exchange contracts, futures contracts, options contracts for hedging interest rate risk, foreign exchange risk, liquidity risk or credit risk
- Factoring and forfaiting activities.
Initial feedback calls for potential expansion to the above list to include activities such as cash pooling, hedging commodity price risk, and investments in equity and bonds. These suggestions will be further discussed during the consultation period.
Another key area that will attract discussion in the initial proposal is around the requirement to file CTC profit through a separately formed legal entity. This setup may be different than existing organizational structure for many corporates where the treasury function is embedded within the legal structure of the corporate entity.
With the timetable for enactment of the proposed amendments coming as early as the beginning of 2016, corporates are encouraged to review suitability and applicability of the CTC changes to their own treasury functions now, provide comments and suggestions during the consultative period in Q3/Q4 2015, and prepare their own treasury function accordingly in order to take advantage of these amendments.
Peter Wong is executive board member, treasury markets association and director, PricewaterhouseCoopers Consulting. Article reprinted with permission.