HSBC share price: Hong Kong relocation unlikely to bring significant reduction to tax bill

HSBC Holdings Plc’s (LON:HSBA) possible relocation to Hong Kong is unlikely to bring significant tax benefits to the UK bank, a recent analysis by Reuters has suggested.

Europe’s largest lender is currently reviewing whether it needs to move its headquarters away from the UK, where it faces an increasing tax burden and regulatory scrutiny. Hong Kong is viewed as one of the most likely candidates to host HSBC should it decide to relocate, because of the bank’s focus on Asia and the lower taxes the city offers compared to Britain. Corporate tax in Hong Kong is 16.5 percent, whereas in the UK it is set to rise to 26 percent. However, a Reuters analysis published today suggested that a move to Hong Kong might offer HSBC fewer tax advantages than many believe.

Tom Bergin, the author of the piece, pointed out that HSBC would struggle to move enough profit to Hong Kong to benefit from the city’s lower tax rate. In fact, HSBC might have to report more profit in Britain following a relocation, since many of the overhead and borrowing costs now booked in the country might in future be offset against more lightly taxed Hong Kong profits, Bergin added. He also highlighted Hong Kong’s “less generous treatment” of share bonuses, which could potentially bump up the bank’s tax bill by millions of dollars per year.
A look into HSBC’s financial results shows that the bank does not report much taxable profit in Britain. In 2014, for example, the company posted an accounted loss in the country and had a tax charge of $69 million, even though CEO Stuart Gulliver has admitted that the group’s British retail bank has produced “excellent returns” that year.
One of the main reasons for HSBC’s relatively low taxable result in the UK is the fact that much of the bank’s overhead costs are booked in Britain, such as top management salaries and central support functions. In addition, HSBC borrows the majority of its debt via British-registered companies, and as a result benefits from British tax deductions on bond coupons and other interest costs.
Hong Kong on the other hand bears a significantly smaller share of the group’s overhead costs than London, which means that the unit can generate much higher profit. In 2014 the local division reported over $8 billion in profit on almost $13 billion of revenue, according to company filings. But if the bank moves its main holding company to Hong Kong, it would have to raise more debt there, rather than in Britain, according to Chris Wheeler, banks analyst at Atlantic Securities.
“It would have to be in Hong Kong. It would have to be in the holding company,” Reuters quoted Wheeler as saying.
Such a change would mean that HSBC’s UK profits would rise and face the higher UK tax rate.
In today’s trading, HSBC shares were down 0.8 percent at 475.65p, as of 12:41 GMT. The stock has fallen 11.2 percent since the start of the year and the company’s market capitalisation currently stands at just over £93 billion.
As of January 23, 2016, the consensus forecast amongst 26 polled investment analysts covering HSBC had it that the company will outperform the market. The same consensus estimate has been maintained since September 09, 2015, when the sentiment of investment analysts improved from “hold”.
As of 15:02 GMT, Monday, 25 January, HSBC Holdings plc share price is 473.18p.