Hong Kong move un­likely to slash HSBC tax bill

The Pak Banker - - FRONT PAGE -

HSBC's pos­si­ble re­lo­ca­tion to Hong Kong is un­likely to save the Bri­tish bank much tax - one of its rea­sons for maybe mov­ing abroad - and could ac­tu­ally in­crease its bill, a anal­y­sis of the com­pany's fil­ings shows. HSBC said last year that it was con­sid­er­ing a pos­si­ble shift over­seas from Lon­don, cit­ing higher taxes and tighter regulation in Bri­tain and a de­sire to be closer to faster-grow­ing Asian mar­kets. An­a­lysts said HSBC's for­mer home Hong Kong, with a cor­po­rate tax rate of 16.5 per­cent against a Bri­tish rate set to rise to 26 per­cent, was the most likely desti­na­tion.

Some in­vestors have said weak­en­ing growth in Asia and a re­duc­tion in a Bri­tish levy on banks' as­set bases an­nounced last year, ar­gues for HSBC to stay put. But some an­a­lysts say Asia's bet­ter long-term growth op­por­tu­ni­ties and Hong Kong's lower tax rate may yet hold at­trac­tions for the bank. An ex­am­i­na­tion of cor­po­rate fil­ings shows that Hong Kong may of­fer HSBC fewer tax ad­van­tages than many be­lieve.

That's be­cause HSBC will strug­gle to move enough profit to Hong Kong to ben­e­fit from its lower tax rate. In­deed, it may have to re­port more in­come in Bri­tain if it moves, since many of the over­head and bor­row­ing costs now booked in Bri­tain may in fu­ture be off­set against more lightly taxed Hong Kong prof­its.

Also, Hong Kong's less gen­er­ous treat­ment of share bonuses may cost HSBC mil­lions of dol­lars in tax de­duc­tions each year. Craw­ford Spence, Pro­fes­sor of Ac­count­ing at War­wick Busi­ness School, who has stud­ied in­ter­na­tional groups' tax plan­ning, said the Reuters anal­y­sis showed the "com­mon­sense un­der­stand­ing" that HSBC would re­ceive a big tax ben­e­fit was too sim­plis­tic.

"They may not be sav­ing much money at all on this par­tic­u­lar as­pect," he said. HSBC de­clined to an­swer ques­tions on pos­si­ble changes in its struc­ture and their tax im­pact. "The Board is con­sid­er­ing at least eleven cri­te­ria for long term share­holder value, one of which in­cludes the tax sys­tem which needs to be trans­par­ent, fair and com­pet­i­tive," a spokes­woman said in a state­ment. HSBC moved to Lon­don from Hong Kong in 1993 af­ter it bought Mid­land Bank. How­ever the cli­mate for banks in the city has be­come in­creas­ingly hos­tile since the 2008 cri­sis with reg­u­la­tors bring­ing in tougher rules on cap­i­tal and bankers' pay as well as im­pos­ing heavy fines for a litany of mis­deeds that has scarred the in­dus­try.

While reg­u­la­tors in Asia have fol­lowed suit with tighter rules on bank cap­i­tal and liq­uid­ity, the re­gion's rel­a­tively strong show­ing in the 2008 cri­sis means lenders there have faced less of the pub­lic and political back­lash seen in Europe.

HSBC's abil­ity to cut its tax bill by mov­ing from Bri­tain is con­strained by the fact that it doesn't de­clare much tax­able profit in Bri­tain. Bri­tain is a lu­cra­tive mar­ket for HSBC, gen­er­at­ing over $15 bil­lion in net in­ter­est in­come and fees in 2014, the most re­cent full year for which data is avail­able. How­ever, the bank re­ported an ac­count­ing loss in Bri­tain in 2014 and had a tax charge of $69 mil­lion for the year. This is de­spite the fact its Bri­tish retail bank, which has tens of thou­sands of staff, pro­duces what Chief Ex­ec­u­tive Stu­art Gul­liver said last Au­gust were "ex­cel­lent re­turns".

HSBC's in­vest­ment bank, which

is head­quar­tered in Lon­don, had prof­its of $8 bil­lion in 2014, while its com­mer­cial bank, which also has a sig­nif­i­cant Bri­tish pres­ence, had prof­its of $9 bil­lion.

A key rea­son for the mod­est Bri­tish tax­able re­sult is that much of the group's over­head costs are booked in Bri­tain, such as top man­age­ment salaries and cen­tral sup­port func­tions. Also, since HSBC bor­rows most of its debt via Bri­tish-reg­is­tered com­pa­nies, its an­nual re­port shows, it is also en­ti­tled to Bri­tish tax de­duc­tions on bond coupons and other in­ter­est costs.

HSBC's ac­counts show group over­head ex­penses of around $9 bil­lion a year. Hong Kong, which does not bear the same share of group over­head costs as Lon­don, gen­er­ated over $8 bil­lion in profit on al­most $13 bil­lion of rev­enue in 2014, fil­ings show. The bank de­clined to say how much of its group costs would be booked in Hong Kong as part of any over­seas move.

How­ever, an­a­lysts said the change could be sig­nif­i­cant. Chris Wheeler, banks an­a­lyst at At­lantic Se­cu­ri­ties, said reg­u­la­tory rules mean that if HSBC moved its main hold­ing com­pany to Hong Kong, it would have to raise more debt there, rather than in Bri­tain.

"It would have to be in Hong Kong. It would have to be in the hold­ing com­pany," he said. If th­ese costs were no longer booked against UK in­come, the UK prof­its would rise and face UK tax. Of course, book­ing costs in Hong Kong would de­press tax­able prof­its there, re­duc­ing the tax bill there. How­ever, that's not the kind of tax ar­bi­trage com­pa­nies usu­ally tar­get. "You're bet­ter is­su­ing (debt) out of a higher tax ju­ris­dic­tion than a lower tax ju­ris­dic­tion," said Gary Green­wood, an an­a­lyst at Shore Cap­i­tal who cov­ers HSBC.

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