A&M Tax Advisor Weekly

Will Hong Kong Continue to be a Main Hub for Global Business Spokes?

Marc Alms, Managing Director

malms@alvarezandmarsal.com

Charles Waite, Senior Director

cwaite@alvarezandmarsal.com

June 25, 2020 / Asia

Hong Kong serves as a regional hub for multinational enterprises (“MNEs”) of diverse industries, often in a sourcing or procurement capacity. Hong Kong has long been favoured by business leaders for its proximity to factories in mainland China, its sophisticated financial institutions, and local policies rooted in English common law. In response to the changing political environment, and potential application of new laws, MNEs might need to re-evaluate their operations in Hong Kong. With other regional players nipping at its heels and eager to attract additional investment, notably Singapore and Kuala Lumpur, it’s crucial for MNEs to contemplate the potential economic impact of Hong Kong’s semi-autonomous status on business operations and whether now is the time to consider a move.

How did we get here?
As of May 2020, China’s legislature reached a unanimous decision regarding the implementation of new national-security laws over Hong Kong. The resolution has partially disrupted Hong Kong’s semi-autonomous position by bypassing the city’s legislature. The vote authorizes Beijing to impose corresponding police agencies in Hong Kong that exist throughout mainland China. The national-security laws will be used to terminate the anti-Beijing protests that have challenged mainland Chinese leadership and the Communist Party. The disruption of Hong Kong’s autonomy has contributed to already rising tensions between the U.S. and China, jeopardizing the city’s preferential trading relationships and international business. The resolution went without providing any new details regarding when the national-security mechanisms will commence in Hong Kong, leaving global business with additional concerns to plan for at a time of broad economic vulnerability.

Uncertainty continues to loom over Hong Kong and its citizens as Beijing moves to undermine the city’s self-governance. U.S. Secretary of State Mike Pompeo informed Congress that Hong Kong will no longer be considered significantly autonomous from China, throwing the bilateral trading relationships into question. The resolution places the international commercial hub and its special trading status at risk. President Trump announced plans to strip Hong Kong of its special status as semiautonomous from Beijing, although concrete steps have not yet been taken. At this time, there have been no further announcements regarding how the new national-security laws will affect U.S. trade policies.

The Possible Effects of Hong Kong’s National-Security Laws
The effects of the new political environment are unknown, as well as the potential disruptions that might follow. As far as one can tell, the new regulations are likely to have a tremendous impact on Hong Kong’s citizens and its overseas relationships. Firstly, the new laws might limit the independence of the judiciary, which could result in negative implications on contract law, dispute resolution and IP / Technology protections. In addition, the new national-security laws might restrict individual freedoms, such as the freedom of speech, potentially limiting the talent pool from Hong Kong in the long term. Furthermore, the withdrawal of Hong Kong’s semi-autonomous status could alter trade relationships, resulting in potential tariffs and U.S. sanctions. In conclusion, the prospect of new national-security laws over Hong Kong are deeply unsettling, along with the potential repercussions expected to follow.

Potential Disruptions Related to Role and Location Changes
It comes as no surprise that MNEs currently located in Hong Kong may be keen to evaluate alternative jurisdictions to locate or co-locate regional hub operations. Global cities such a Singapore and Kuala Lumpur – already the seat of regional headquarters for many MNEs and each offering tax incentives for business investments – may represent logical alternatives. However, it is not lost that the overriding advantage of Hong Kong to MNE’s is the proximity to mainland China. Moving functionality into these alternative locations will increase travel times to the major cities in China (by approximately 2 hours). Nonetheless, it is worth noting that other global events are putting pressure on MNEs to diversify the geographic footprint, especially where their supply chains are concentrated in China. As such, over time the challenge around proximity may be short-term. (Special attention should be paid on the impact of increased travel times on sourcing activities)…

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