Hong Kong and Singapore are often made out in the popular press as two long time sparring partners looking to go up a division, each trying to wrest the title as the undisputed regional financial centre in Asia/Pacific. Both jurisdictions have made claims for the title in the past and hold impressive lists of awards and achievements.
Hong Kong and Singapore are currently ranked equal first by the Economic Freedom Network as having the freest economies on the planet and both jurisdictions have held titles for being the most competitive and the most preferred place to do business in the region at some time in the past, if not currently. This is in addition all the other titles such as busiest shipping port (Hong Kong, Singapore Shipping Times, 28 March 2000), best telecommunications hub (Singapore, Straits Times, Singapore, 19 January 1999) - the list goes on.
Both governments can also reel off impressive figures supporting their jurisdictions' claim to being the regional financial centre of choice. Visit the Hong Kong Government web site and you will be informed that there were 840 regional headquarters in Hong Kong in 1999. In addition, some 1,650 companies use Hong Kong as a regional office. Visit the Economic Development Board of Singapore site and you will be informed that a total of 26 headquarters from diverse industries were established in Singapore in 1998. Of these, nine were Fortune Global 500 companies.
Similar statistics are posted by the respective jurisdictions' Monetary Authorities, for example Hong Kong boasts 163 licensed banks with 76 of the world's top 100 banks having established a business in Hong Kong. Similarly, Singapore notes that 136 commercial banks have a presence in Singapore. Other comparisons include foreign exchange market turnover: Singapore 4th, Hong Kong 7th.
Hong Kong and Singapore are certainly the lead contenders for the best financial centre in the region so if you still cannot decide the best place for your regional headquarters after considering all of the above, how else can we separate the two? Well what about taxation?
This article will highlight the different tax treatment of some common revenue flows and transaction costs in each of the jurisdictions and provide a brief outline of the tax regime in each jurisdiction and how they compare to each other. This can be summarized in the table below:
| Hong Kong | Singapore | |
| Income tax | 16% | 0% - 25.5% |
| Interest dividends from bank deposits | 0% | |
| Dividends | 0% | 0% - 25.5%, but imputation credit avail for dividends from local companies. |
| Foreign tax deduction / credit | Limited | Yes |
| Foreign-sourced income | 0% | 0% - 15% |
| Withholding tax on interest payments | 0% | 0% - 15% |
| Withholding tax on swap payments | 0% | 0% - 15% |
| Withholding tax on guarantee fees | 0% | 0% - 15% |
| Withholding tax on dividends | 0% | 0% |
| Transaction taxes | .1125% | 0.2% |
| Indirect taxes (GST/VAT) | None | 0% - 3% |
Income tax
Hong Kong
Hong Kong's corporate tax rate of 16% is significantly lower than most jurisdictions in the region. In addition, a Hong Kong profits tax liability only arises where a company carries on business in Hong Kong and derives Hong Kong sourced profits.
Dividends and interest income received from offshore are usually not taxable and dividends received from companies subject to Hong Kong tax are exempt from tax (unless the recipient is a trader in the underlying instrument i.e. a financial institution). Interest derived from a deposit placed in Hong Kong with a financial institution is also generally exempt from taxation.
Singapore
Singapore taxes income derived from or accrued in Singapore in addition to any offshore income that is remitted into Singapore. Whilst Singapore has a corporate tax rate of 25.5% the Singapore government has introduced a raft of business incentives in the form of concessional tax rates. Accordingly, depending on several factors such as the industry of the taxpayer and the capital commitment by the taxpayer to the Singapore economy, the effective tax rate may be as low as 0%. The incentives are typically offered for a five-year period and are generally extendible. There are also generous investment allowances available for capital expenditure.
| Service | Tax incentive |
| Asian currency units | Financial institutions pay tax at a reduced rate of 10% on the net income derived by their ACUs from qualifying offshore transactions. Their increased profits may qualify for a further reduced rate of 5%. |
| Syndicated offshore loans, guarantees, performance bonds, and offshore underwriting facilities | The income derived by an ACU of a financial institution or an ASC (approved securities company) from syndicated offshore activities where the syndication work is carried out in Singapore is exempt from Singapore tax. |
| Offshore fund management - ACUs and AFMs (approved fund managers) | Pay tax at a reduced rate of 10% on the fees derived from providing fund management services, including advisory services in respect of non-resident funds. All fees exempt from tax for five to 10 years if funds managed are S$5 billion ($2.85 billion) or more. |
| Managing initial public offerings of and trading in foreign currency denominated securities | ACUs and ASCs are exempted from tax on income derived from transactions in foreign currency denominated securities listed on the Stock Exchange of Singapore and issued by qualifying companies. |
| Finance and treasury centre (FTC) | Income derived by an FTC from approved finance and treasury centre activities, such as regional and international treasury and fund management, corporate finance and advisory services, economic and investment research and analysis is taxed at a reduced rate of 10%. |
| Debt securities | Approved traders pay a reduced rate of tax of 10% on interest income from debt securities arranged and income from trading in debt securities. Fee income from arranging debt securities in Singapore is exempt. |
Foreign tax deduction / credit
Hong Kong only allows a deduction for foreign tax paid on interest and gains from bills of exchange which were earned overseas but liable to Hong Kong profits tax as deemed trading receipts. Hong Kong only allows a foreign tax credit where income is subject to tax both in the PRC and Hong Kong as per the PRC/Hong Kong double tax agreement.
Singapore does not allow a deduction for foreign tax but does have a number of foreign tax credit provisions including a tax-sparing regime with certain countries. Therefore, no further Singapore income tax is payable provided foreign taxes paid or deemed to be paid exceed the Singapore corporate tax rate.
Part 2 will, which appear next week, follows with a more in depth review of withholding and indirect taxes in addition to the effect of tax treaties.
Stephen Bruce is a senior tax consultant in the Financial Services Division at PricewaterhouseCoopers. email: [email protected]
