LONDON HSBC's (HSBA.L) 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 Reuters 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.
A Reuters 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.
LOW UK PROFITS
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.
In the area of executive pay, HSBC could find itself losing UK tax deductions without any corresponding saving in Hong Kong.
In response pressure from investors and regulators, banks are increasingly paying senior bank executives their bonuses – often worth millions a year – in shares. Britain allows companies to take tax deductions in relation to newly issued shares paid to employees, even though this does not represent a cost to the company itself. Hong Kong does not, according to its Inland Revenue Department.
All this means that HSBC will have to shift much more UK profit than costs to Hong Kong in the coming years or face an increase in its tax bill.
That could be a hard task to manage.
That's because HSBC's average annual British tax bill of $100 million in the past three years suggests an annual taxable profit of just $440 million, based on prevailing tax rates.
One area where HSBC won't make any tax saving by moving to Hong Kong is on the bank levy. Following extensive lobbying, the British finance minister, George Osborne, said in July that he would halve the levy and, crucially for HSBC, no longer apply it to the overseas assets of British banks.
HSBC's levy charge was $1.1 billion in 2014 and previously planned increases in the rate were set to lift this to around $1.5 billion a year. Gulliver said last year that half the levy charge related to non-British assets. That meant an overseas move might have shaved $750 million a year off HSBC's levy. The fact non-British assets will in future be exempt means this part of the charge will no longer apply.
(Editing by Giles Elgood)