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) [1]. 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 rules
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 [2]) 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.
Notes
1 IRD Practice Note Announcement
2
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)
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Definition of a Corporate Treasury Centre
A Corporate Treasury Centre (CTC) is defined as follows:
A CTC is an in-house bank within a multinational corporation focusing on the optimal procurement and usage of capital for the operations of the entire group. Typical CTCs perform the functions of:
- Intra-group financing;
- Optimising multi-currency cash management and liquidity management;
- Cash pooling;
- Central or regional processing of payments to vendors or suppliers for the corporate group;
- Conducting transactions for financial or treasury-related risk management; and
- Supporting the raising of capital by the group.
Eligibility for a Qualifying CTC
A Qualifying CTC (QCTC) needs to satisfy:
1) central management and control and
2) substantial activity requirements and
3) one of the following criteria:
a. it is a dedicated CTC which has carried out in Hong Kong one or more corporate treasury activities (i.e., carrying on an intra-group financing business, providing a corporate treasury service or entering into a corporate treasury transaction) and has not carried out in Hong Kong any activity other than a corporate treasury activity; b. it is a CTC which has satisfied the one-year safe harbour rule or the multiple-year safe harbour rule if it has carried out in Hong Kong activities other than a corporate treasury activity; or c. it is a CTC which the Commissioner has exercised his discretion to determine that it is a QCTC though it satisfies neither of the conditions in (a) and (b) above’.
“The Hong Kong Monetary Authority, the Inland Revenue Department and the Financial Services and the Treasury Bureau have been working very hard in developing the policy. As Chairman of the International Association of CFOs and Corporate Treasurers (China), I engaged treasurers to provide our feedback. I would say the policy represents a breakthrough.”
Peter Wong, Consulting Director, PwC Hong Kong and Member of the HKMA/TMA Working Group of Corporate Treasury Development [3]
Why should you establish an in-house bank?
An in-house bank reduces:
- hedging costs by netting the hedging requirement (exposure) within the group;
- P&L volatility arising from market risk under the new IFRS 9 for hedge accounting effective 2018;
- funding cost and dependence on bank debt by more effectively using intra-group financing (inter-company loan structure);
- bank fees by using a payment factory to aggregate in-country payment and minimise cross-border payment;
- fraud, operational, settlement and compliance risk by creating a sound control environment with the right system support and Center of Excellence talent pool;
- tax costs by obtaining the half-rate concession (8.25% instead of 16.5% corporate income tax) for the CTC qualified service and transactions; and
- operating cost as it demands standardised work flow process across the group and it is managed using a single treasury management system platform replacing spreadsheets and manual system interfaces.
. .. and improves:
- investment returns by aggregating cash (via cash pooling) and investing centrally;
- utilisation of trapped cash; and
- corporation structure to become more sustainable and tax-efficient e.g., setting the right transfer pricing as part of Base Erosion and Profit Shifting (BEPS) rules. Another is the exemption from US FATCA rules.
Our point of view
The new Corporate Treasury Centre policy provides corporations the opportunity to improve their competitiveness by adopting a professionally managed CTC platform and achieve sustainable tax savings that will support their global business development.
The design of the new tax rules has taken into consideration the need to remove tax asymmetry which in the past was unfavourable to corporations genuinely performing intra-group financing, as well as the need to forestall aggressive tax avoidance schemes. The new tax rules requires, inter alia, commercial substance in Hong Kong which is important to avoid giving the impression that Hong Kong is becoming a tax haven.
Notes
3 HKICPA interview article on CTC:
This article is an edited version of a PwC newsletter.
To read the full paper please visit http://pwchk.com/home/eng/ctc_policy_sep2016.html
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A treasury transformation roadmap
Corporations have subsidiaries which are at different stages of their development life cycle. Intra-group financing allows them to mobilise internal cash flows more effectively and reduce dependence on external debt. Many MNCs undertaking global sourcing, distribution and downstream sales face challenges in supply chain finance, cash flow seasonality, multiple bank account relationships as well as foreign exchange transaction and economic risk. The visibility of such risk and access to sufficient counterparty for hedging through a CTC are essential.
Asset intensive businesses, like real estate and infrastructure, require significant long-term funding which may be best centrally arranged and negotiated. They may also need balance sheet hedging. All of these illustrate the need for corporations to establish a treasury transformation roadmap to fully understand a) any gap between current and future state needs and b) treasury and tax implications of different CTC designs both against the Government policy and industry best practice.
Oversight by the board
In 2016 the Hong Kong Listing Rules have been revised to require the board to be accountable for risk management with dedicated responsibility through either the existing Audit Committee or a newly created Risk Committee. The intent is of course to elevate the importance that risk should be properly managed and supervised. Treasury risks (as defined by the CTC rules above), if not properly managed, will become key risks to corporations. CTC should help corporations to reduce the treasury risk profile and be more vigilant to respond to financial shock. Therefore the board is encouraged to mandate the performance of a Treasury Risk Health Check/Diagnosis both as a one-time and ongoing (at least annually) risk statement disclosure to investors, creditors and other stakeholders. A treasury risk dashboard should also be presented at the regular board meetings.
Peter Wong Peter is the Director of PwC responsible for Corporate Treasury Advisory in Hong Kong and Mainland China. His recent engagements include the design of the global treasury for a leading SOE, end-to-end review of the treasury and investment management of a global institutional investor and the migration of the treasury system of a quasi-government entity to a cloud based solution. He had 14 years as Regional Director &Treasurer of AIA/AIG (covering four business units – life insurance, general insurance, asset management and financial services) and six years as Treasurer/Director of Finance for the international business of APL. In 2012 Peter was appointed to a Working Group advising the HKMA on policies to develop Hong Kong as the hub of Corporate Treasury Centre (CTC). The new CTC Policy became law in May 2016. Since 2006, he has been appointed as the Executive Board Member of the Treasury Markets Association in his capacity as the Founding Chairman of the International Association of CFOs and Corporate Treasurers (China) and the Convenor of the Hong Kong Association of Corporate Treasurers. He graduated from the University of Hong Kong with a Bachelors degree (major in Economics) and MBA degree. He is a CPA, a CFA charter-holder, a fellow member of the UK Association of Corporate Treasurers and Past President of the Chartered Institute of Management Accountants Hong Kong Division. |
