Establishing an In-House Bank under Hong Kong’s Corporate Treasury Centre Policy
by Peter Wong, Consulting Director, PwC Hong Kong and Member of the HKMA/TMA Working Group of Corporate Treasury Development
On 9 September 2016, the Hong Kong Government Inland Revenue Department (IRD) announced the detailed rules of the new Corporate Treasury Centre (CTC) Policy in the form of Practice Notes (PN) . This is a very positive and important step towards establishing Hong Kong as a corporate treasury hub and an official recognition of the importance of professional treasury management.
Hong Kong is the number one offshore RMB centre in the world, depositing over 70% of China’s offshore currency. The city is the most vibrant international financial centre in Asia with a broad and deep capital and treasury market offered to global investors around the world, including China itself.
Since 2014, offshore direct investment (ODI) has exceeded foreign direct investment (FDI) into China. Under the 13th Five Year Plan, many SOEs embarked on a progressive reform plan to develop into world class MNCs and as a result, many Chinese MNCs are now in the Fortune Global 500 and the number is set to grow.
In 2015, the Central Government launched the One Belt One Road Initiative which will involve significant infrastructure investment in over 60 countries in the next decade along the land and sea route of the medieval silk road. Setting up a CTC overseas has become a priority for investing companies in order to professionally manage liquidity cash pools, offshore financing, foreign exchange and other key treasury risks.
At the same time, global and regional MNCs are expanding their footprint in Asia, in particular in Greater China. As veteran Asia treasurers will attest, managing the treasury operations in this part of the world is no easy task, with many issues to be faced such as trapped cash and fragmented banking arrangements.
The IRD Departmental Interpretation and Practice Notes No. 52: Taxation of Corporate Treasury Activity, is a 61-page document with 99 paragraphs and extensive coverage and illustration (22 examples) providing operational details of the relevant CTC provisions. This includes the allowance of interest deductions with respect to borrowings from non-Hong Kong associated corporations and reduction of profits tax for specified treasury activities of CTCs by 50%.
The Practice Note serves to provide clarity in the CTC rules (such as the ‘entity approach’, ‘safe harbour’ and central management and control requirements).
In this latest edition of our CTC newsletter (PwC have been publishing a series of newsletters, organising roadshow seminars and one-on-one client meetings to update and enable clients to track this important development ) we will highlight key points including the definition of a CTC, the eligibility criteria and the in-scope treasury services and transactions. We will delve into the implications of these rules, how CTC services and transactions are important to corporations and how the design of a CTC is thus effected.
1 IRD Practice Note Announcement
PwC Consulting CTC brochure (August 2015)
PwC Consulting CTC brochure (March 2016)
PwC Tax bulletin on CTC (November 2015)
PwC Tax bulletin on CTC (December 2015)
PwC Tax bulletin on CTC (May 2016)