Hong Kong, financial secretary John Tsang outlined tax reforms for treasurers, in a budget speech on February 25, saying, “To attract multinational and mainland enterprises to establish corporate treasury centres in Hong Kong to perform treasury services for their group companies, the financial secretary announced in the 2015-16 Budget that the government shall 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%.” 

Although interest deductions for profits tax were highlighted and other ideas are in development to ease treasury operations, the eligibility requirements could be onerous and other centres offer tax breaks. 

The Corporate Treasurer reported (see) that, “Hong Kong policy makers seem aware of the comparative disadvantage and opportunity presented. In a media release from the Hong Kong Monetary Authority following Tsang’s speech, the regulator specified: ”Under certain circumstances, interest expenses paid by a Hong Kong CTC [corporate treasury centre] on borrowing from associates outside Hong Kong may not be deductible, whereas interest income received by the Hong Kong CTC is generally subject to profits tax, resulting in a relatively less favourable taxation environment to conduct corporate treasury activities.” 

Concerns are overplayed

Indeed Ian Farrar, from PwC’s Hong Kong office, reports - in his excellent blog, see - that some corporate treasurers are concerned that “the benefits for new entrants will be negative for them.” However, he states that, “My personal view is that these concerns are overplayed. Even if the new rules do not benefit existing centres, based on their current strategy, they have the possibility of restructuring to benefit from a reduced tax rate – particularly if they have other business operations in Hong Kong.”

Beware taxation of overseas-sourced interest income

But, he continues:

1. “The one area where existing treasury centres perhaps should be concerned is regarding taxation of overseas-sourced interest income.  However, this is not a new phenomenon. Historically it has been deemed acceptable to treat interest income received from group operations overseas as non-taxable income. This is because Hong Kong’s tax regime is based on taxing only Hong Kong-sourced income. Treasury Centres have, in the past, been able to successfully argue that income from overseas group undertakings is sourced in the overseas location, and hence non-taxable.”
2. “However, times are a-changing. The IRD have been tightening the net on taxation of overseas sourced interest income, and typically will no longer endorse such treatment if asked for a ruling. Senior tax officials question why a treasury centre is different from a bank, which borrows and lends – the only difference being they are generally limited to transactions with other group businesses rather than unrelated third parties. In other words, treasury centres are in the business of borrowing and lending. Accordingly, if this business is carried out in Hong Kong it is Hong Kong sourced income and hence taxable.”

And concludes that, “Whether or not one accepts this income is sourced offshore or is Hong Kong-based, the risk to challenge on this point was ever-present. While the proposed change making offshore interest expenses deductible may increase the IRD’s focus on offshore interest income, it does at least remove a large part of the uncertainty and risk going forward. By making interest deductible, the only remaining exposure to existing treasury strategies relates to the spread that the treasury centre books on its lending/borrowings. Since spreads charged are often immaterial I, for one, would be willing to pay this small price for the tax certainty it brings.”

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CTMfile take: This is just another example of the one constant in cash and treasury management in Asia-Pacific: ‘local, on-the-ground’ knowledge and advice is essential.