For Part 1, click here
Withholding Taxes
Withholding taxes are a tax collection mechanism where tax offices would otherwise have difficulty in collecting tax. The payer is required to withhold a tax component from payment and pass it on to the Revenue Authority, that is, it effectively shifts the burden of taxation collection to the business community. The most recognized form of withholding tax is one that applies to non-residents who are deemed to derive a certain source of income from the payer country.
Hong Kong
Hong Kong does not impose any withholding tax on interest, dividends or management fees nor does it impose any withholding taxes on payment of expenses to non-resident corporations unless the expense is classified as a royalty in which case an effective rate of tax of 1.6% of gross is levied.
Singapore
Interest
Interest payments to Singapore non-residents are generally subject to withholding tax at 15% of the gross payment. The rate may be reduced if the payment is made to a country with which Singapore has a double tax treaty. The rate is usually reduced to 10% in most cases but there are some treaties that reduce the withholding tax to 0%.
There are also specific exemptions such as: no withholding tax on interest payment on inter-bank or inter-branch transactions by an approved bank and no withholding tax on interest paid by an approved bank to non-resident individuals/companies.
Swap payments
Singapore does not impose any withholding tax on any interest rate or currency swap payments provided the payments are made by an approved bank and are not denominated in Singapore dollars. Otherwise a withholding tax of 15% will apply.
Dividends
Singapore does not have any withholding tax on dividends in addition to tax on profits out of which the dividends are paid. Dividends are franked with the 25.5% tax paid by corporations. If any corporation has not paid sufficient tax to cover the total tax deemed deducted from dividends; it must pay the balance to tax authorities. This payment can be set-off against future tax payments of the corporation.
Guarantee Fees
Singapore has an administrative concession whereby any payment for services performed outside of Singapore by a non-re swill not be subject to Singapore taxation. Payment of guarantee payments will not be subject to withholding tax if the service provided (i.e. the provision of the guarantee) is outside of Singapore. Otherwise there will be a withholding tax of 15%.
Transaction taxes
Hong Kong
Stamp duty will be payable on the acquisition of Hong Kong shares. The instrument of transfer is subject to a fixed rate of stamp duty at HK$5 per document, and the contract notes for both the purchase and the sale are each subject to ad valorem stamp duty at 0.1125% of the amount of consideration or value. This results in a rate of 0.225% for a complete transaction (purchase and sale) but borne by the vendor and the purchaser in equal shares.
Singapore
Singapore imposes stamp duty on the transfer of shares (other than shares of companies listed on the Singapore Exchange) at 0.2% of the transfer consideration or open market value, whichever is higher.
Indirect taxes
Hong Kong does not have any indirect taxation such as GST or VAT. Singapore has a 3% GST however this does not apply to financial transactions.
Tax Treaties
Hong Kong only has only one full scope tax treaty that being with the PRC whilst Singapore has an extensive treaty network. I’ll explain – German taxpayers may prefer Singapore because Singapore branches of German taxpayers are not subject to tax on the profits in Germany (Article 23 of the German/Singapore tax treaty). Other multinationals such as US, Swedish, British, Australian or New Zealand based multinationals however would be subject to tax in their home jurisdiction on the profits arising from their Singapore and Hong Kong branches.
Another advantage is if there are interest, dividend or management fee flows back to Hong Kong from regional countries the withholding tax cost can be prohibitive. Tax treaties also allow for reduced rates of withholding tax depending on the country to which payment is being made. Whilst rate are typically reduced under treaties the rates for interest and dividend flows are rarely below 10%.
Even though Hong Kong does not have an extensive treaty network, Hong Kong operations could be structured as a branch of say the Netherlands, which has extensive tax treaties, to gain treaty protection. By structuring the operations in this way it would ensure that any income flows into Hong Kong that were subject to withholding tax in the paying country would only be subject to withholding tax rates that apply under the Netherlands/ payer country tax treaty, that is, at a lower rate than if they were paid directly to a Hong Kong company. The profits of a Hong Kong branch of a Dutch taxpayer will be exempt from tax in the Netherlands provided the Hong Kong profits are subject to or deemed to be subject to Hong Kong income tax.
The end result in many occasions is that it is not possible to generalize there is not a lot of difference between the two jurisdictions if you consider the effective tax rate after taking into consideration Singapore’s tax concessions. The ideal jurisdiction for tax purposes for a regional finance centre/treasury office will invariably depend on the nature of the transactions contemplated and the jurisdiction in which those transactions take place.
The good news is that you can decide to locate your operations based on where your customers or where your more significant Asia Pacific operations are located. If your major markets are Korea, China, Taiwan, Japan and the Philippines, then Hong Kong would be a more convenient location. If your major markets are Malaysia and Indonesia, then Singapore would be a more convenient location.
Stephen Bruce is a senior tax consultant in the Financial Services Division at PricewaterhouseCoopers. email: [email protected]
