KPMG’s proposal for a Regional Headquarter tax incentive

AustCham Platinum Patrons KPMG proposed the introduction of a regional headquarter (RHQ) tax incentive in Hong Kong in its report titled ‘The Case for a Hong Kong RHQ tax incentive’ that was recently released.

The Report highlights the key locations in the Asia Pacific region that have been successful in attracting multinational corporations (“MNCs”) to establish RHQs and the factors that have led to their success.

One of the key factors contributing to the decision on where to set up an RHQ is tax. Although Hong Kong has a large number of MNCs with their RHQs established in the city, it does not have a specific tax incentive to encourage MNCs to consider Hong Kong as a location for their RHQs. Singapore on the other hand has considerably more RHQs than Hong Kong on the back of their RHQ tax incentive regime that is targeted at MNCs.            

Some key aspects of the Report:

- Whilst Hong Kong is a leading international financial centre and regional business hub, Singapore has historically been the clear leader in the Asia Pacific region as an RHQ hub.

- Having a greater number of RHQs set up in Hong Kong would contribute to the growth and development of Hong Kong’s economy due to the resulting increased demand for goods and services and employment of local personnel.

- Unlike Singapore, Hong Kong does not have an RHQ tax incentive. Accordingly, the profits of a Hong Kong RHQ would generally be subject to profits tax at 16.5%; which is highly uncompetitive when compared to the RHQ tax incentive tax rate applicable in Singapore (typically 5% - 10%) on qualifying RHQ profits.

- Tax has been identified as the most important consideration for MNCs in determining whether to establish an RHQ in Hong Kong. Consequently, KPMG proposes that Hong Kong should introduce an RHQ tax incentive to attract RHQ establishment by addressing a key MNC need. Additionally, an RHQ tax incentive would complement Hong Kong’s corporate treasury centre regime, given an MNC’s regional treasury and RHQ function are typically undertaken at the same location.

- KPMG proposes that the RHQ tax incentive provide a 50% profits tax rate reduction (8.25%) for qualifying RHQ profits, in line with the corporate treasury centre regime. The key requirements for RHQs to qualify are that they must:
à Earn arm’s length profits from performing regional management and coordination services to related group companies;
à Undertake a certain level of expenditure and investment into Hong Kong with respect to the RHQ activities; and;
à Employ suitably qualified local professionals to perform the RHQ’s core functions.

- The conditions required for the RHQ tax incentive to apply, along with the many commercial reasons/drivers for situating an RHQ in Hong Kong (i.e. leading international financial centre and business hub), would ensure that the RHQ tax incentive is BEPS compliant.

Darren Bowdern, Partner and Head of Financial Services Tax KPMG Hong Kong, talks of the need for Hong Kong to increase its competitiveness as a regional RHQ location: “Taxation is an important consideration for MNCs in considering the establishment of RHQs in the Asia Pacific region. Singapore has clearly been successful as an RHQ hub through the use of an incentive framework. Hong Kong needs to replicate Singapore’s success and implement an RHQ tax incentive to complement its strengths as a leading international financial centre and business hub. An RHQ tax incentive in Hong Kong would attract more MNCs to use Hong Kong as an RHQ hub and thereby increase Hong Kong’s status as an international business hub in the Asia Pacific region.”

Tax efficiency and simplicity are key parts of the decision making process of an MNC when it is deciding on where to establish its RHQ. Introducing an RHQ tax incentive in Hong Kong is a necessary step to ensure that Hong Kong retains its position as a leading financial services hub and as an attractive RHQ location. As such, in order for Hong Kong to be competitive and a viable alternative to other locations with longstanding RHQ tax incentives, Hong Kong needs to introduce its own version of an RHQ tax incentive in order to encourage MNCs to establish RHQs in Hong Kong.

The full version of the proposal can be downloaded at: https://home.kpmg.com/cn/en/home/insights/2017/10/the-case-for-a-hong-kong-rhq-tax-incentive.html

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