Asian IFCs: More Than a Tax Play

By Stephen Banfield, Withers Singapore LLP (01/03/2015)


It is difficult to open the newspaper these days without reading an editorial about a multinational ‘avoiding’ tax through a shifting of profits.  Seldom has a debate about taxation permeated into the public consciousness than the current discussion about the structures used by the likes of Starbucks, Google and Amazon. 

Caught up in this discussion about complex tax structuring are international financial centres (IFCs).  These invariably feature as the destination for profits that have been structured out of a comparatively higher taxing jurisdiction.  IFCs are therefore seen as part of the problem, which needs to be addressed.  This includes Asian IFCs like Singapore and Hong Kong. 

The issues at play are complex - and beyond the scope of this short paper.  The current discussion around base erosion and profit shifting (BEPS) is constructed by reference to a normative tax system, which can not be universally applied.  It also overlooks the increasing role of Asian IFCs in offering an end-to-end commercial solution as regional holding platforms.  There is argument that far from being criticised, Asian IFCs should be celebrated for facilitating the efficient deployment of capital within the region.

The Current Debate

The current discussion about multinational tax planning is based on a series of assumptions about what the correct tax system should look like.  It is against this framework that Asian IFCs like Singapore and Hong Kong are criticised - both countries are renowned for having a narrowly defined tax base and low rates; 17 per cent and 16.5 per cent respectively.

The ability of Singapore and Hong Kong to levy low rates of income tax is a direct result of a number of factors, including financial prudence. In contrast to many European countries, both jurisdictions have exercised restraint in the development of public sector funded health care and social security programmes.  This has avoided the heavy and recurrent funding burden that may countries now face.   The Government of Singapore has also invested prior year revenue through its sovereign wealth funds, which now provide recurrent financial returns.  As disclosed in the 2014 Budget papers, the ‘net investment returns contribution’ was estimated to be US$7.9 billion.  This is significant when compared to total operating revenue for FY2013 of US$57.15 billion (excluding the contribution).

The most nuanced analysis of the taxation impost of jurisdictions like Singapore and Hong would somehow factor in the impact on taxation revenues for related economic activity.  Even compared to other global financial centres, Singapore and Hong Kong can both be high cost jurisdictions. These costs are very often taxable income in the hands of a local service provider.  So, even in circumstances where a multinational may be subject to a very low or nil rate of tax, there will always be a tax charge imposed on net income introduced into the economy by virtue of the multinational’s activities.  This, together with other factors such as rates of indirect taxes, is downplayed in the BEPS discussion, which sees corporate income tax imposed at the entity level as a key basis of comparison.

The Non-Tax Benefits of Asian IFCs

Asian IFCs continue to play an important role in facilitating the movement and deployment of capital within the region. Singapore and Hong Kong share a number of key characteristics, unrelated to taxation, which make these compelling jurisdictions in which to operate a regional holding platform.  These include:

  1. Political stability
  2. Robust legal systems 
  3. Strong and effective government agencies
  4. Supervision of financial activities
  5. Mobility of capital, and in particular, no exchange control
  6. Educated workforce
  7. Pro-business environment
  8. Geographic proximity to developing markets
  9. Extensive transport links

It is the coming together of these factors that has enabled Asian IFCs to develop a critical mass of international enterprises.  This is a virtuous loop and increasingly a multinational enterprise can interact with both its customers and suppliers who may also be based in the region.   The establishment of active and dynamic markets within these Asian IFCs can also help to foster the growth of an enterprise.  These can efficiently facilitate significant corporate events such as capital raisings and restructurings. Asian IFCs can become a ‘one stop marketplace’: both for an operating business on a day-to-day basis, and for milestone corporate events such as a capital raising or divestment.

The transparency and ease within which business may be conducted in an Asian IFC is to be contrasted with the challenges of managing operations in emerging markets.  While emerging markets hold a vast opportunity for growth, conducting business can be notoriously difficult and expensive.  This is very often a combination of inadequate infrastructure, a lack of available local talent and an unpredictable administration of local laws.  Operations established in an Asian IFC can play an extremely important role in interfacing what would otherwise be a larger team based within the emerging market itself.  This can enable the aggregation of middle and back-office functions, and the centralisation of a regional capability which can be quickly deployed.  This hub and spoke model is common to many international enterprises using either Singapore or Hong Kong as a regional platform.

The Family Office Example

The ability of an Asian IFC to support the commercial and strategic needs of an enterprise is perhaps best illustrated by way of example.

Suppose that a high net wealth (HNW) individual based in the Asia Pacific region wishes to exit the business that they may have established over the course of many years.  If they choose a public offering, a listing on either the Singapore or Hong Kong exchanges may be a viable option.  These exchanges are both regarded as world class exchanges, having sound trading infrastructure and deep liquidity.  If on the other hand the HNW individual chooses a trade sale, then they will be able to approach the many international fund managers that have chosen Singapore or Hong Kong as their regional platform.   

This exit process can be co-ordinated by investment banks based within each of these financial centres - potentially the entire divestment transaction can be negotiated and executed within either one of these IFCs.   After realising the proceeds of the disposal of their business, the HNW may wish to manage their own wealth through the establishment of a family office.  Being based in either Singapore or Hong Kong, the family office should be part of the community of prospective investors who are introduced to new investment ideas and products within the confines of a regulated environment. 

All of the services are required for a family office to function efficiently are available within either of these jurisdictions.  This ranges from office space and basic services such as reliable internet connection, through to specialised financial services typically reserved for institutional fund managers such as prime brokerage, custodian, and fund administration. Entry level and experienced investment advisory staff can be sourced from within the local labour pool.  Singapore in particular is also well renowned as an international private banking hub.  This means that trustee services can also be sourced locally enabling the family office structure to be held in manner which may be efficient from an estate planning perspective.     

While the tax systems of both Asian IFCs may help to encourage the activities of the family office, the tax benefits in and of themselves would not be enough to justify choosing either of these jurisdictions.  The far more important consideration is the ability of the base of the family office to facilitate access to investment opportunities and service providers.

An increasingly important pull factor for the likes of Singapore and Hong Kong is that they are both very liveable jurisdictions.  And this is relevant as HNW individuals start to consider the implications of automatic exchange of information that is expected to come in as early as 2018.  Under the Common Reporting Standard, financial information will be automatically exchanged with the country of residence of the holder of an account.  This information will include information on accounts held in the name of the individual and also controlled entities such as passive investment companies, trusts and foundations.  The Common Reporting Standard is still a long way from implementation, and its final form will invariably be nuanced from jurisdiction to jurisdiction, however, HNW individuals are now considering afresh the robustness of their investment structures.  One option is to consider establishing tax residency in a jurisdiction with a lower tax effective tax rate on its residents, or with a tax base that does not attribute or tax foreign sourced income.   Both Singapore and Hong Kong potentially offer this solution as well as other jurisdictions in the Caribbean for example.  This may not necessarily be such a drastic step if a HNW has already established a family office or other investment platform in either jurisdiction.     


Much of the commentary around Asian IFCs has focussed heavily on the comparatively low rates of taxes offered in these jurisdictions.  This blinkered approach is based on an assumption about a corporate tax base which is not applicable to jurisdictions like Hong Kong and Singapore where the governments continue to exercise considerable fiscal restraint.  Lower rates of taxation are merely a result of a much lower public spending and alternative means of revenue raising. 

Much of the BEPS dialogue also fails to consider fully the intrinsic commercial appeal of establishing a presence in these jurisdictions.  Each offers a self-sustaining investment ecosystem of critical mass, and the ability to interface efficiently with emerging markets in particular.  Arguably, the BEPS debate is only superficially a jurisdictional comparison.  It is more fundamentally a dialogue about whether people or property create value, and how tax systems can respond to a perception that too much value is being placed on property these days.