Location of multinational crypto companies: a comparative analysis of taxation and regulation in Singapore and Hong Kong

Written by TaxDAO

This is the first in a series of articles on the location and operational strategies of multinational companies with crypto-assets as their main business, which compares the macro environment and tax policies of Singapore and Hong Kong.

As one of the most important financial hubs in Asia, Singapore and Hong Kong have a sound legal system, open market environment and low tax costs, which have attracted many multinational companies to set up headquarters or branches here. With the advent of the Web 3.0 era, crypto assets as an emerging form of financial assets have received attention from governments and regulators in both places. Both Singapore and Hong Kong have developed corresponding regulations and guidelines to regulate the development of the crypto asset market, and provide some supportive policies, such as tax incentives, financial innovation funds, etc.

However, there are also some differences between the two places in terms of fiscal and tax policies and support policies for the crypto industry. For example, in terms of fiscal and taxation policies, Singapore adopts the principle of territoriality tax collection and taxation of income paid abroad from or received in Singapore; Hong Kong, on the other hand, has a single-origin tax jurisdiction, which only taxes income sourced in Hong Kong. In terms of crypto industry policies, Singapore's Payment Services Act brings all institutions providing payment services, including virtual currency services, into the scope of regulation and establishes three different types of licenses; Hong Kong's Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill will introduce a new mandatory licensing regime for virtual asset exchanges.

TaxDAO now systematically compares and analyzes the advantages and disadvantages of the fiscal and tax policies of Singapore and Hong Kong, two crypto-asset-friendly financial centers, through a thematic approach, so as to discuss the location and operation strategies more suitable for crypto-asset multinational enterprises. This is the first in a series that provides an overview and comparison of the business environment and fiscal and tax policies of the two places. Subsequently, TaxDAO will specifically analyze how different types of enterprises in the crypto industry set up regional or global headquarters in two places, including but not limited to mining companies, exchanges, DeFi operators and other multinational companies; Welcome readers to pay attention!

1 Overview of the business environment in Singapore and Hong Kong

Overall, Hong Kong is more suitable for enterprises in the traditional financial industry, while Singapore is more suitable for innovative enterprises.

The Global Financial Centers Index (GFCI) can evaluate the competitiveness of financial cities, which covers five major indicators, including business environment, human capital, infrastructure, financial industry development, and reputation, and can reflect the competitiveness of financial centers more systematically. According to the latest 34th edition of the rankings, Singapore leads Hong Kong, China by 1 point, ranking third and fourth in the world and first and second in Asia, respectively.

In addition, the Global Asset Management Center Evaluation Index (AMCI) also has certain reference value for multinational companies to choose the location of the management institution. AMCI is an index that evaluates the development level and potential of global asset management centers, covering four dimensions: market size, market activity, market openness, and market innovation. According to the 2022 AMCI report, Singapore rose one place from 2021, squeezing Hong Kong to become the fourth in the world and the first in Asia.

The Global Innovation Index (GII) has certain reference value for the location of innovative enterprises, covering two major aspects of innovation input and innovation output, including seven sub-indicators such as institutional, human capital and research, infrastructure, market maturity, business maturity, knowledge and technology output, and creative output. In the 2022 GII report, Singapore ranked 7th globally and 1st in Asia, while Hong Kong, China, ranked 14th globally and 3rd in Asia.

From this point of view, although the macro business environment of Singapore and Hong Kong is slightly different, the difference between the two places is not large. As a traditional financial center, Hong Kong has been caught up by Singapore in innovative financial services in recent years, especially in the GII index, and there is a big gap between Hong Kong's score and Singapore's.

However, Hong Kong's advantages in traditional finance and services are still obvious. In addition to Hong Kong's GDP being higher than Singapore's, Hong Kong's traditional financial business volume is also larger than Singapore's. Hong Kong's stock market is much larger and more active than Singapore's, with the total market capitalisation of HKEX listed companies in the first half of 2022 being approximately 8 times that of SGX, and the average monthly trading volume being 17 times that of SGX. Hong Kong's bond market is also larger than Singapore's, with 1.7 times the size of Hong Kong's Asia International Bond offering in 2021. In addition, Hong Kong's banking and insurance sectors are more mature than Singapore's, with total banking assets and deposits 1.5 times that of Singapore in 2021, and total insurance premiums twice that of Singapore. Finally, Hong Kong is also the third largest foreign exchange trading center in the world when it comes to foreign exchange trading, after the United States and the United Kingdom.

In contrast, Singapore's strengths in innovative financial services are more prominent. As Hong Kong is an offshore financial center (that is, a country or region that provides low or no taxation, highly confidential and lightly regulated financial services to non-resident customers), Singapore has developed corresponding regulations and policy support facilities in the fields of digital currency payment services, digital assets, and DeFi. For example, in terms of payment services, Singapore introduced the Payment Services Act, which brings all institutions providing payment services, including virtual currency services, into the scope of regulation and establishes three different types of licenses; In terms of digital assets, Singapore's Securities and Futures Act defines and classifies digital tokens, classifying them into payment tokens, utility tokens and asset tokens, and determines whether they fall under the category of securities or futures contracts according to their nature and function; On the DeFi side, Singapore's Monetary Authority of Singapore Act empowers the Monetary Authority of Singapore (MAS) to regulate DeFi projects. The formulation of these regulations and policies has provided clear guidance and protection for Singapore in innovative financial services, and has also attracted many international financial institutions and technology companies to set up branches or partners in Singapore.

2 Comparative Study of Taxation between the Two Places

2.1 Corporate Income Tax

There is no tax called "income tax" in Hong Kong, but there is a "profits tax" similar in nature to income tax, and this article treats it together with the concept of corporate income tax. Unlike Singapore, Hong Kong's corporate income tax adopts a strict Territorial Source Concept, which only taxes income arising in or sourced in Hong Kong. This means that whether or not a Hong Kong tax resident has no effect on the taxation of profits tax, and any person who carries on profits arising from doing business in Hong Kong is subject to tax in Hong Kong on the profits arising from the income from the relevant profits; Profits sourced overseas are not subject to profits tax in Hong Kong.

In terms of tax rates, the Hong Kong Act provides for a flat profits tax rate of 16.5%. However, Hong Kong also offers a range of preferential policies and relief measures to reduce the effective effective tax rate of enterprises.

At the heart of Hong Kong's preferential tax system is the Profits Tax Level 2 system. Specifically, with effect from 1 April 2018, the profits tax rate for the first HK$2 million (approximately S$350,000) of a corporation is 8.25%, and the assessable profits after HK$2 million are taxed at the normal rate of 16.5%. For persons outside the corporation of sole proprietorship or partnership, the profits tax rates at the two levels are 7.5% and 15% respectively.

Hong Kong provides R&D expenditure deduction (R&D) for eligible R&D enterprises. Specifically, an enterprise is entitled to additional deduction for expenses incurred in conducting or commissioning eligible R&D activities in Hong Kong. The Hong Kong Government includes expenses related to basic research, applied research or experimental development into the scope of additional deductions, of which: Type 1 R&D expenditure (all of which occurs in Hong Kong) is entitled to a 300% deduction for the first HK$3 million and a 200% deduction for more than HK$3 million; Category 2 qualifying R&D expenses (i.e. other expenses that are not part of Category I but are still eligible) are eligible for a 100% full deduction. However, according to Deloitte H82/2018 Hong Kong Tax Review, the new policy does not address the tax issues faced by Hong Kong enterprises mentioned above, and R&D expenses of affiliates of Hong Kong enterprises are still generally not eligible for tax deduction.

2.1.3 Comparison of Corporate Income Tax Systems in Two Places

As financial centres, both Singapore and Hong Kong have comprehensive or limited bilateral or multilateral tax treaties with multiple countries. Therefore, whether a multinational company is headquartered in Hong Kong or Singapore, it generally does not face double taxation issues. Specifically, Singapore has 107 DTAs with about 100 countries and territories, including 97 Double Taxation Treaties (DTAs), 8 Limited Tax Treaties (Limit DTAs) and 2 Exchange of Information Arrangements (EOI Arrangement); Hong Kong has DTAs with 47 countries, as well as corresponding Limit DTA and EOI arrangements, for a total of 67 countries with DTA or EOI arrangements.

In terms of the breadth of bilateral tax treaties alone, Singapore is slightly better than Hong Kong; However, considering that the tax systems of Singapore and Hong Kong are different; Hong Kong only taxes profits sourced in Hong Kong, while Singapore taxes resident enterprises more broadly; Therefore, it is necessary for Singapore to sign more DTAs to reduce taxes and promote tax system simplicity.

On the other hand, the DTAs signed between the two places basically cover major countries and regions, and in addition to the main business layout in specific countries, multinational companies with a layout in major countries can often enjoy the tax incentives provided by the two places. Both places follow international practices and standards in the establishment of permanent institutions (PEs) and the exchange of information. Therefore, Singapore and Hong Kong are in similar terms with respect to tax treaties and avoidance of double taxation.

As the first part of the column, this paper systematically compares and analyzes the advantages and disadvantages of the tax systems and policies of the two crypto-asset-friendly financial centers of Singapore and Hong Kong, starting from the fiscal and tax policies and crypto industry policies of the two crypto-asset-friendly financial centers, so as to discuss the location and operation strategies that are more suitable for crypto-asset multinational enterprises. Overall, Singapore's policies are more open and inclusive, while Hong Kong's policies are more cautious and protective. Therefore, when choosing the location of its headquarters or branches, multinational enterprises need to comprehensively consider factors such as tax costs, regulatory requirements, market environment, innovation potential and other factors of the two places according to their own business type, target market, scale and development stage, so as to make the best decision. TaxDAO will introduce how different types of multinational enterprises design management agencies in two places.