Published: July 14, 2020
Businesses seeking the best location for a treasury hub have to weigh up many factors ranging from tax incentives to political risk. Here, David Blair offers an insight into the pros and cons of five Asian financial centres.
Asia has evolved rapidly this century, especially from a treasury perspective. From the internationalisation of Chinese yuan (CNY) to the roll-out of instant payments in India and beyond, the scope of treasury in Asia has been widening. The need for in-region treasury presence has followed, and countries from Hong Kong to Thailand have responded with incentives to draw treasury hubs to their shores. New alternatives have both enriched and complicated Asian treasury location decision-making.
A treasury centre (TC) is an entity comprising high-skilled treasury staff managing balances and flows and risks across a group of legal entities typically in different countries. Normally it is also a booking centre where money market and foreign exchange and other derivative transactions are recorded and taxed.
Therefore, treasury centres seek tax-efficient and open financial centres, since these tend to attract a deep talent pool with suitable experience, wide and liquid financial markets in which to trade, an open ecosystem that enables maximum coverage, and a tax regime that does not hinder treasury effectiveness.
A shared service centre (SSC) is an entity comprising large numbers of clerical staff processing high volumes of generally low-value transactions and maximising scale efficiencies. SSCs focus on cost reduction and thus seek low labour and other costs. SSCs tend to carry out transaction processing on behalf of operating entities, and therefore they are not in themselves booking centres, and are not tax sensitive. The main requirements for SSCs are a large pool of low-cost clerical and accounting competence, and language skills to work internationally.
It is true that shared services are increasingly taken over by digitisation and automation. In this case, there is no ‘centre’ per se – the work is dematerialised, normally onto the cloud.
From figure 1, it is apparent that the locations for TCs and SSCs will be very different. TCs seek tax-efficient financial centres. This is why, in Asia, they have tended to be in Singapore and Hong Kong. Of the other financial centres in Asia, Tokyo is neither international nor tax efficient and Shanghai remains too regulated despite improvements in recent decades.
SSCs seek large pools of clerical skills with the required language capabilities. They have tended to operate in countries such as India, Malaysia, and the Philippines, which have relatively large clerical talent pools with reasonable English skills. This article focuses on the needs of TCs.
Treasury centres are sometimes called in-house banks (IHBs) because they carry out wholesale banking transactions such as money market and foreign exchange and other derivative transactions with internal counterparties (and then trade away net positions with external banks and markets).
In the system and process context, IHB refers to a process of centralising payment and collections to an internal entity (which may be a treasury centre or other suitable entity) using on-behalf-of (OBO). The IHB executes payables-on-behalf-of operating entities (POBO), and collects receivables-on-behalf-of operating entities (ROBO or COBO).
Whereas TCs focus on financial transactions such as money market and foreign exchange and other derivative transactions, the IHB process intrinsically deals with commercial flows such as payables and receivables. This article focuses on the needs of treasury centres.
The two main treasury locations in Asia are Singapore and Hong Kong. Singapore has offered its Finance and Treasury Centre (FTC) incentive for three decades. Hong Kong traditionally competed with its low tax rate and zero withholding taxes. To rectify some disadvantages in its tax regime, Hong Kong introduced its Corporate Treasury Centre (CTC) legislation in 2016.
With increasing liberalisation of capital controls and the spread of better market infrastructures, other countries in Asia have started offering incentives to set up treasury, including Malaysia, Thailand and China.
China remains financially restricted and has in the past few years tightened controls on treasury activities, so it remains a challenging location for a treasury hub. Malaysia and Thailand have introduced appealing legislation for treasury and have substantially liberalised foreign currency activity, which is what matters for international treasury. Nonetheless, both Malaysia and Thailand have shallow financial markets, no real treasury talent pool, and limited language skills. This makes them both difficult locations in which to set up treasury hubs.
In addition to financial, fiscal, talent and ecosystem considerations, the choice of treasury location depends heavily on the company’s locus of operations. All else being equal, treasury will prefer to co-locate with regional or global headquarters to enhance business proximity. In this regard, Singapore’s popularity as a regional headquarters location has symbiotically helped the development of its treasury status. Hong Kong, in contrast, has traditionally been focused on Chinese business (which is also important, given that China is the largest economy in the region). According to a June 2019 study by Ernst & Young, Singapore was the location of 4,200 regional headquarters compared with 1,389 in Hong Kong (and 531 in Tokyo and 470 in Shanghai).
Approval is required from the Singapore Economic Development Board (EDB) to benefit from FTC incentives, and it is valid for between five and 10 years.
Qualifying activities currently benefit from an 8% income tax rate and an exemption from withholding tax. Singapore is a major international financial centre, a top-three FX trading centre, with a deeply experienced talent pool with very strong English skills.
It also has a deep and broad talent pool for treasury activities, benefiting from three decades as the pre-eminent treasury location in Asia. Singapore offers an excellent quality of life and a supportive ecosystem for both locals and foreigners, including a variety of good schools and accommodation. Singapore Changi Airport is both highly rated and has one of the widest route networks. Telecommunications and support services are world class, and the commercial legal system is strong and independent. Singapore’s geographic location between India and China has made it extremely popular as a regional headquarter and treasury location for Asia.
No approval is required to benefit from the CTC – tax benefits are claimed by classifying qualifying activities appropriately in the income tax return. Qualifying activities currently benefit from half the normal income tax rate of 16.5%, i.e. 8.25%. There is no withholding tax in Hong Kong. Hong Kong is an established international financial centre with strong capital markets expertise due to its proximity to China. But its English language skills lag behind those of Singapore. Hong Kong’s talent pool, which is strong in debt capital markets, is weaker in treasury because there has historically been less corporate treasury activity there. Quality of life is generally good, but air quality can be a problem due to the proximity of China’s industrial heartland in the Pearl River Delta. Hong Kong International Airport is world class although focused on its role as a gateway for China. Telecommunications and support services are strong. Recent moves by the Chinese Communist Party carry the risk of compromising Hong Kong’s previously independent judiciary, and this is a concern for many multinational corporations.
In the past decade China has made rapid progress in opening up financially to support its efforts to internationalise Chinese yuan (CNY). This included allowing cross-border intercompany loans in both foreign currencies and CNY. China introduced ‘FX Pool Header’ accounts in the China (Shanghai) Pilot Free Trade Zone (SHFTZ), located in Pudong New Area, to encourage businesses to run their cash pools from Shanghai.
Unfortunately, in 2017 treasurers were reminded that China remains a restricted market and that these openings remain fragile. This occurred when China sought to stop capital flight with so called ‘window guidance’ - ordering banks to restrict cross-border flows, without actually changing the legislation. China remains a difficult country for treasury and is thus an unlikely TC location. English skills are limited or expensive, and in general costs are rising fast in the more developed eastern and southern provinces and major cities.
Malaysia introduced its Treasury Management Centre (TMC) incentives in 2010. TMC requires approval from Malaysian Investment Development Authority (MIDA) and is valid for five years. Qualifying activities currently enjoy a 7.5% income tax rate and exemption from withholding tax. There is partial exemption from Malaysian exchange controls.
A major constraint is that qualifying banking must be carried out with on-shore banks – since Malaysian banks are far less competitive and sophisticated than international banks, this is a significant constraint. English skills and financial talent are a challenge in Malaysia, which is why TMC comes with concessions for expat work permits and personal income tax benefits. To date, TMC appeals mainly to Malaysian corporates.
The TC incentive in Thailand is an extension of the existing International Head Quarters (IHQ) scheme and qualifying treasury centres inherit most IHQ benefits. The TC status requires Bank of Thailand and Ministry of Finance approval and is valid for 15 years.
Qualifying cross-border activities are tax exempt and qualifying domestic currently enjoy a 10% income tax rate. Qualifying activities are exempt from withholding tax and most exchange controls, which means an approved TC can function much like a TC within the Singapore FTC, including transacting with banks in Singapore and other financial centres. However, Thailand remains challenging for English skills and financial talent.
The treasury environment has evolved positively for practitioners over the past decade on many levels including infrastructure, regulation, tax, and ecosystems. Nonetheless, Singapore remains the most popular treasury location for Asia, thanks to its long experience in treasury and to its agility in adapting to changing circumstances. Hong Kong remains popular with China-focused businesses, but on-going uncertainty as to its legal independence is a concern for many multinational corporations.
China, Thailand and Malaysia have all made great progress in facilitating cross-border treasury activities in their locations, but they remain challenging in many ways, so treasuries establishing themselves there will often have an overarching business imperative. The wider locus of the underlying business will always be a major factor in treasury location decisions.
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