HK Report Suggests Tax Incentives For Booking Centers
Hong Kong’s Financial Services Development Council (FSDC) has released a report setting out recommendations on policies, including tax measures, to enhance the city’s role as a regional and global financial booking center.
Financial institutions utilize such centers to enter into contracts for financial products, undertake primary obligations for delivery or payment with respect to financial products, or open and maintain accounts for their clients or counterparties.
The FSDC notes that boosting Hong Kong’s role as a preferred booking center would, by increasing asset allocation, liquidity and the volume of transactions, “facilitate the long-term development of Hong Kong’s financial services industry and help to further promote its position and reputation as an international financial center.”
In the report, while emphasizing that a balance should be struck between deepening Hong Kong’s financial markets and maintaining its regulatory strength, it recommends that “Hong Kong at the very least must encourage booking of transactions with a Hong Kong nexus or connection, especially with respect to China-related transactions.”
To that end, apart from reviewing its capital requirements and regulatory structure, the FSDC suggests that “there is scope for tax reform in Hong Kong to introduce incentive programs to encourage the establishment of booking entities in Hong Kong, such as introducing an offshore banking unit regime which provides a concessional tax rate to encourage genuine offshore banking activity with overseas clients in Hong Kong.”
Other suggestions in the report include modifications to the current interest deduction rules for booking entities that are not considered to be financial institutions in Hong Kong (e.g. Securities and Futures Commission-licensed corporations which are not regulated by the Hong Kong Monetary Authority).
Interest expenses of such Hong Kong booking entities are generally not deductible if the interest is paid to individuals, overseas group companies and overseas clients that are not financial institutions. It is pointed out that “this significantly affects the tax costs of a Hong Kong booking entity undertaking certain financial transactions in Hong Kong, and also limits the choice of funding of the Hong Kong booking entity if it is to avoid the additional tax burden.”
In addition, the FSDC comments that, “while the Hong Kong double taxation agreement (DTA) network has expanded in recent years, the number of jurisdictions with which Hong Kong has concluded a DTA remains less than those of the other major financial centers (e.g. the UK, US, Singapore and Japan).”
Considering that “a DTA may provide a reduced rate of withholding tax on certain types of income (e.g. interest and capital gain) derived by a booking entity from its global clients, … the attractiveness of Hong Kong as a booking location can be enhanced if Hong Kong can further expand its DTA network.”
