Promoting Hong Kong as a hub for Corporate Treasury: Issues and Solutions

A nice speech from Normal TL Chan, CEO of the Hong Kong Monetary Authority.

He points how HKMA found out that taxation prevented Corporates to set up Treasuries in HK. Then they urged the govt to rectify the same:

When faced with this possible deal breaker in our effort to promote Hong Kong as the CTC hub, what did we do?  Rule number two in marketing: you cannot do good marketing if the product is not a good one.  You can only fool some people some of the time but not for long.  So one has to make good a product if it is found defective or inferior.  Thanks to the help from the TMA, we formed a working group to study the problem and make recommendations to remove the obstacles undermining Hong Kong’s development as a CTC hub.  We made a report to the Financial Secretary and obtained his support to change this tax anomaly.  With the support of the Financial Services and the Treasury Bureau (FSTB) and the Inland Revenue Department (IRD), and in consultation with the industry, we managed to pass the legislative amendments to remove the tax asymmetry in May 2016.  In addition, the Government has gone one step further by providing additional tax incentive by halving the profits tax rate payable on specified CTC activities in Hong Kong from 16.5% to 8.25%.  Ladies and gentlemen, as an illustration of the keen competition between financial centres in the region, two months before our tax proposals were approved by the Legislative Council in Hong Kong, Singapore, you know what, announced the lowering of its concessionary tax rate for eligible treasury activities from 10% to 8%.

5. Our story did not end there.  As a member of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting, commonly known as BEPS, Hong Kong is committed to implementing the BEPS standards.  The relevant OECD Forum on tax practices has recently studied over 100 tax regimes worldwide and taken a view that our newly enacted CTC tax regime has a ring-fencing feature in that only corporate treasury activities relating to non-Hong Kong associated corporations are entitled to the concessionary profit tax rate of 8.25%.  This ring-fencing feature is of concern to the OECD.  In view of this, Hong Kong has been in close dialogue with the OECD Forum and has come up with a solution to address OECD’s concern.  So we are planning to extend the concessionary profits tax rate for specified CTC activities to onshore entities subject to some appropriate anti-abuse safeguards.  The HKMA is now working with the IRD and FSTB, in consultation with the stakeholders, to work out the details for implementing this solution.

6. Our efforts and dedication have yielded good results lately.  The responses from the corporates have been very encouraging.  More than 30 Mainland and multinational conglomerates have told us that they are actively considering establishing or expanding their CTC operations in Hong Kong.  These include many household names in energy, electricity generation and power grids, infrastructure operators, consumer goods and financiers.  This is exciting news for Hong Kong’s treasury sector and its practitioners.  We should expect increased treasury activities taking place here, bigger demand for a wide array of financial products, and importantly more promising career prospects for the treasury practitioners including our younger, aspiring professionals.  If we succeed in attracting big corporates to use Hong Kong for their CTC functions, which I am confident that they will, it should also make it easier to convince them to locate their regional headquarters’ management activities in Hong Kong too. 

How taxes are eventually the villain for most things..

He then points how culture and ethics are central to all these debates:

Now that I am talking about ‘brand’, it should be no surprise to you if I now return to the theme of my first choice, “culture and ethics”.  Just like any luxury goods, a brand in the context of IFC entails quality and credibility.  Quality requires technical competence in a wide range of financial services, such as FX, interest rate, credit, hedging, derivatives, ECM, DCM, asset management, private equity, etc.  I think Hong Kong is in a good position in all these markets.  We have done rather well in all these markets and should be able to further deepen and broaden them given the exceptional opportunities emerging from the internationalisation of RMB and the latest Belt and Road Initiative.  However, I am less sanguine when it comes to the credibility component, which boils down to trust.  Trust has to be earned over a long period of time, and can be lost overnight.  For Hong Kong to excel, it is not enough for our financial institutions and practitioners to be technically competent only.  They must also uphold high ethical standards in order to gain the trust and respect of customers. 

10. In the past few years, a number of misdeeds by some financial institutions and practitioners have come to light.  For example, the rigging of LIBOR had led to international reform of interest rate benchmarks, a process which is still ongoing.  There were also cases of front running and other irregularities in FX and gold trading that had led to investigation into some banks and senior bankers.  All these point to the weakness of the tradition of “self-discipline” amongst financial practitioners.  It is now considered that more comprehensive and possibly more prescriptive guidelines on ethical standards and conduct are needed to strengthen the system.  The latest FX Global Code is the outcome of one of such reforms.  The Code was developed over the past two years by 16 central banks, including the HKMA, together with private-sector institutions from both the buy and sell sides.  It is a comprehensive set of global principles on good practice in the FX market, and it is intended to promote a robust, fair, liquid, open, and transparent market.  The TMA has already incorporated the Code into its own code of conduct.  So I would urge all treasury market practitioners to study the Code carefully and ensure that they and their firms fully comply with its provisions. 

11. As I have said many times before, no external policing or enforcement is a substitute for good corporate culture that supports high ethical standards and values.  If one asks any of the financial firms, they will without hesitation say that their corporate culture is to place customers’ interest before their own.  However, when you probe further, you will find out that not all of the financial firms have promulgated an explicit corporate culture statement.  For those that have such statements, not many of them have a systematic way of ensuring that the values and ethics stipulated therein can filter down different levels of the firms and be understood by the staff and their supervisors.  For those that have made some efforts to promote good corporate culture, many have not done enough to ensure that their incentive system, such as pay, bonuses, promotion etc, is aligned with the values that the firms seek to promote. 


It also takes me to this point which I am noticing more and more these days. On one hand the global financial centre policymakers talk about culture whereas most debates in India are around global finance nature..


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