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Hong Kong seeks to rival Singapore as corporate FX hub

Skyscrapers at Hong Kong's central business district June 10, 2014. REUTERS/Bobby Yip

By Michelle Price and Saikat Chatterjee

HONG KONG (Reuters) - In a bid to rival Singapore, Hong Kong is introducing sweeping tax measures aimed at making it a more attractive centre in Asia for global corporations to trade foreign exchange.

Hong Kong is established as a regional centre for company headquarters. But multinationals have tended to choose Singapore to manage foreign exchange operations, drawn by a low-tax base and pro-business policies.

To counter that, Hong Kong will table a bill to remove hurdles that deter companies from locating their treasury functions in Hong Kong, Financial Secretary John Tsang said on Wednesday.

At the heart of the tax changes is a proposal to make all inter-company interest tax deductible for corporate treasury centres, which should bring Hong Kong into line with Singapore.

The government also wants to slash the headline tax rate on profits arising from specific treasury activities to 8.25 percent, half the current rate and below Singapore's 10 percent rate.

"Singapore has been offering tax incentives for finance and treasury centres since 2004 and in that time has really built up its corporate FX and treasury capability," said James Badenach, financial services tax partner at EY in Hong Kong.

"With the liberalisation of the RMB (yuan), Hong Kong has a significant opportunity to close the gap with Singapore, but to capture its share of corporate FX flow it needs to attract more corporate treasury centres."

Hong Kong's average daily FX turnover as of April 2013 was $275 billion, ranking it third in Asia, well behind Singapore and Japan, and fifth globally, data from the Bank of International Settlements shows.

Corporate treasury centres operate like a company's internal bank. They enter trades to hedge currency risk and commodity price swings, manage borrowing and lending, reinvest idle cash, and raise capital. Foreign exchange trades are a major part of these activities.

About half of the 7,585 foreign or mainland companies operating in Hong Kong are regional headquarters or central offices that carry out treasury functions, an October 2014 survey by InvestHK and the Census and Statistics Department shows.

More than 12,000 European and U.S. companies have operations in Singapore, many of which use the city as regional headquarters, according to European Union and U.S. figures.

Until now, interest income earned by a corporate treasury centre on inter-group transactions, such as a loan to an overseas group company, was taxable in Hong Kong. Interest expense paid on the loan was not tax deductible.

Badenach said Hong Kong is the only major Asian financial centre that has been adopting this tax treatment on treasury functions.

(Additional reporting by Michelle Chen and Saeed Azhar in SINGAPORE:; Editing by Neil Fullick)