Standard Chartered Is Tax-Inefficient, Says Newspaper

by Mary Swire, Tax-News.com, Hong Kong

11 April 2002

According to Hong Kong newspaper South China Morning Post, Standard Chartered bank is costing itself (and it shareholders) large amounts of tax by maintaining its global headquarters in the UK, with its highly profitable Hong Kong operation treated as a branch.

The result last year was that Standard Chartered paid US$378 million in tax on its global pre-tax earnings of US$1.14 billion, or an effective tax rate of 32.9%. The Hong Kong contribution to profits came to US$522 million, or 45.5% of the group's worldwide pre-tax earnings and was duly taxed at the rate of 32.9% by the UK Inland Revenue - for a total tax bill of US$171.74 million.

Other banks do it differently: while the flat rate of corporate tax in Hong Kong is 16%, Hang Seng Bank, one of the closest competitors to the Standard Chartered Hong Kong operation, and with its headquarters in the SAR, paid an effective tax rate last year of just 12.2%. Hong Kong & Shanghai Banking Corp is also separately incorporated in Hong Kong.

To the extent that Standard Chartered's pre-tax earnings had been retained in a locally incorporated Hong Kong subsidiary - therefore escaping a "top-up" tax levied in Britain to bring the composite rate of tax on offshore remittances into line with British rates - they would have been taxed in Hong Kong only. This would have saved US$108.6m in tax, and the SCMP asked the bank why it paid the extra tax to support a group structure that leaves a small, loss-making London office in control of the worldwide banking group and relegates its biggest profit contributor in Hong Kong to branch status.

In reply, the bank's chief financial officer in Hong Kong, Julian Fong Loong Choon, defended the policy, saying: "We feel we get the best bank for the buck." Retaining a branch structure in Hong Kong provided the "best flexibility" and meant that all regulatory capital was held centrally in London to support balance sheets of the emerging market bank's operations around the world. "It becomes difficult if we have to designate capital separately," he said.

But why does the bank not incorporate its Hong Kong operations locally and keep some, if not all, of the Hong Kong profit in the SAR accounts? Mr Fong said the group ran a "fairly complex banking structure", which was constantly reviewed in terms of branch or subsidiary status.

Not constantly enough, by the sound of it! Or perhaps senior UK staff are making sure of their K's?

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