I. Introduction

1. Overview

With the current slow down of the Euro­pean and the American economies, many com­panies (not only the big players) are con­sidering whether to set up a legal entity in Asia to specifically act as their business hub in the region. Such companies usually al­ready have some experience in dealing with Asia, since they purchase and source from or sell their prod­ucts to the Asian mar­kets.

 

Asia does not consist of a single big market (as many foreigners still think), rather Asia con­sists of many individual markets which all have dif­fer­ent advantages and drawbacks. Be­ing suc­cessful in Thailand does not auto­mati­cally mean that a company will have the same success in the Vietnamese or Chi­nese market. When taking a closer look at the region, we see that China is by far the largest mar­ket in Asia; however, other coun­tries like Viet­nam or even Cambodia are start­ing to compete with China in some ar­eas, such as production costs.

 

Nevertheless, it can be highly beneficial for a company to have one main central of­fice (hub office) for their Asian business that can control and guide the activities in the re­gion and that func­tions as a con­tact point for the Euro­pean head­quarters (“HQ”). This news­letter is designed to give an over­view of why such a hub in Asia is impor­tant and which func­tions it could carry out. The best loca­tion for such hub shall also be elabo­rated upon.

 

2. Tasks to be considered

• Finance: Offering finance facilities and cash pooling;
• Human Resources (“HR”): Finding and organising high po­tential employees and providing training for them in vari­ous locations;
• Intellectual Property (“IP”) Rights: Generating and licens­ing the company’s IP-rights, which would gen­erate addi­tional reve­nue al­most tax free;
• Logistics: Signing master logistic agree­ments with major logistic providers and by doing so, obtaining better rates;
• Insurance: Organising master um­brella insurance policies to cover certain risks, and by do­ing so obtaining better rates;
• Marketing: Organising marketing strate­gies and liaising with ma­jor interna­tional Asia-wide marketing agen­cies;
• Tax and Auditing: Central organisa­tion of an­nual audit work and appoint­ment of one auditing firm for all Asian au­dit­ing requirements;
• IT-Structures: Organising centralised servers and centralised support, not only for SAP;
• Buying and/or Selling Ac­tivities: Cen­tralizing buying and selling activities and by doing so keeping every­thing un­der the Hong Kong offshore tax regime.

 

II. Functions of an Asian Hub

 

When setting up a hub in Asia, the company should consider transferring the follow­ing tasks and issues from the European HQ:

 

1. Finance

The Asian hub could manage some of the company’s fi­nancial issues. This could in­clude taking loans from the mother com­pany in Europe and distributing them as loans to subsidiaries in differ­ent countries. Furthermore, the re­gional hub could apply for loans directly from the bank(s) and then use them for the purposes of the Asian sub­sidiaries.

 

The hub office could also be used for cash pooling for the Asian subsidiaries. For exam­ple a profit transfer agreement could be executed between the respective subsidi­ary (e.g. in Vietnam, Thai­land, Korea, etc.) and the hub office, whereby the subsidiary would transfer the remaining money in their ac­count to the hub office’s bank account, from where it would then be sent to the HQ’s account in Europe via a profit trans­fer agreement between the HQ and the hub of­fice.

 

The advantage of this system is that the hub office (and therefore the HQ) would al­ways have an overview of the cash situa­tion of the Asian subsidiaries and could dis­tribute the necessary cash to the respective country subsidiaries as and when needed. Further­more, after se­curely trans­ferring the money to the European HQ, via the Asian hub, the HQ could use the money for overnight in­vestments and then send it back to the Asian hub at the start of the next business day, where it could be fur­ther dis­tributed to the lo­cal subsidiaries in accor­dance with their daily financial needs.

 

2. HR

The Asian hub could assist with HR mat­ters. Instead of the subsidiaries only search­ing and screening their own local mar­ket for high po­tential candi­dates, the Asian hub of­fice could organize the talent search Asia-wide, so that high potentials could be trans­ferred be­tween countries and the re­spective subsidi­aries. The transfer of em­ployees would be accompanied by the trans­fer of knowledge.

 

For instance it would be possi­ble to transfer an executive employee who success­fully set up the office in Thai­land to Viet­nam to set up the operation there. Further­more, experi­enced employees who have worked for the company for several years could be trans­ferred to work in the hub of­fice to coor­di­nate functions in the subsidiaries. For exam­ple, a person who suc­cessfully built up an ac­counting department in two or three subsidi­aries could be trans­ferred to the hub office to oversee accounting for the entire Asian operation since this employee would not only know the accounting procedures of the com­pany in general, but would also be familiar with the different accounting procedures in the re­spec­tive countries.

 

Another possibility of centralising HR in the hub office would be to pro­vide training ses­sions to local employ­ees, focusing on the com­pany’s standard procedures. This can en­sure that the dif­ferent subsidiaries in the different Asian countries are applying the same high stan­dards devel­oped by the hub office or HQ. This may lead to cost savings, since everybody would use and fol­low the same procedures, and in­forma­tion could be transferred from the bot­tom to the top quickly and efficiently.

 

3. IP-Rights

The company’s IP rights could be assigned to the Asian hub office, from where they could be fur­ther assigned to the respective country subsidiary that has need of them. With such a struc­ture the hub office would basi­cally be in con­trol of the IP rights of the company’s whole Asian operations, instead of the far off HQ. Since IP rights in Asia are a very sensitive topic, espe­cially when it comes to China, it is ad­vis­able that the con­trol of IP rights takes place as close as possi­ble to the different country subsidiaries in­stead of far away in the US or Europe, where the responsible people have only lim­ited experi­ence of how to deal with IP rights in Asia.

 

Furthermore, additional revenue could be gen­erated by licensing the IP rights from the Asian hub to the different Asian subsidiar­ies. These subsidiaries would need to pay roy­alties for the IP rights and these royalty payments could be structured in a way that they are received by the Asian hub almost tax free.

 

4. Logistics

With respect to logistics, the Asian hub could sign master logistics agreements with one or more major logistics providers in or­der to receive better offers and rates. One in­ternational logistics pro­vider would then meet all or at least most logistics require­ments for all the subsidiaries. The subsidiar­ies would also conclude individual lo­cal agree­ments with the logistics pro­vider. With the master agree­ment in place, the subsidiar­ies would get better rates and kick-backs for these individual agreements. Furthermore, since all the subsidiaries would be relying on one lo­gistics pro­vider, it would be much easier for them to organ­ize transport and ship­ping. There would be only one logis­tics pro­vider with one single system, to which the subsidiaries needed to adapt. This would make life easier for the subsidiaries and the entire shipment process could be over­seen by one master ship­ping de­part­ment in the Asian hub of­fice.

 

5. Insurance

The Asian hub could conclude a master um­brella insurance policy which would then cover all of the Asian subsidiaries. Such mas­ter insurance could range from health and accident insurance for em­ploy­ees to of­fice insur­ance against fire, theft, busi­ness inter­rup­tion, or any other kind of insurance.

 

As with the master logistics agreement, such an umbrella system could lead to better rates and kick-backs. Further­more, all the neces­sary insurance policies could be central­ised in the Asian hub office where a single central depart­ment would take care of all insurance matters instead of hav­ing a different insur­ance department in every subsidiary. The cen­tral insurance de­partment would be re­spon­sible for conclud­ing and managing the umbrella (or master) insurance con­tract. They could also periodically review which in­surances are really necessary and take care of policy renewals etc. This would save man­power and stream­line the management of the company’s in­surance needs.

 

6. Marketing

A centralised market­ing strategy en­sures that the marketing all over Asia will be uni­fied. This is especially important when the group is pre­senting its products under one brand or logo. In such cases it is cru­cial to en­sure that all the subsidiaries are follow­ing the same strategy.

 

Furthermore, it can be advisable to organise and structure an advertisement campaign in Asia-wide newspapers or TV stations. Consum­ers who travel between different coun­tries or watch TV programs from other countries would recognize the adver­tise­ment. This would ensure a high rec­ognition value and would make the campaign more effi­cient.

 

Even if the campaign is not organized Asia-wide, a central marketing or merchandising office would enable a cam­paign that was launched successfully in one country to be transferred and re-launched in another coun­try.

 

As with logistics and insurance, if the Asia hub contracts with major interna­tional mar­keting agencies it could also get better rates compared to if each subsidiary instructed its own small domes­tic market­ing agency. World­wide or at least Asia-wide marketing agencies have a much better reputation and better con­cepts due to their experience in many differ­ent mar­kets. Thus the Asian hub office could combine in­ternational experi­enced agencies with rela­tively reasonable rates, in order to secure a uni­form market­ing of their brand Asia-wide.

 

7. Tax and Auditing

The an­nual audit work for the different sub­sidiar­ies could be centralised in the Asian hub. This would make it possible to cre­ate a sin­gle database of the respective in­formation which is required by the auditor for the dif­ferent subsidiaries. One central department would be responsible for ensuring that all sub­sidiaries keep their books up to date and submit the relevant data on time to the Asian hub office where it would then be proc­essed in preparation for the annual au­dit. There could be one system (for instance SAP) used all across Asia so that the subsidi­aries would all do their booking in the same way and all the forwarded information could be used in the cen­tral department without be­ing re-formatted.

 

Furthermore, one auditing firm would be re­sponsible for the entire Asia audit­ing so that better rates could be achieved.

 

8. IT- Structure

The entire IT structure for Asia could be organ­ised via centralised servers in the Asian hub office. There would be one major IT department in the hub office that would take care of the central server which would then be connected to the different offices in Asia. All offices in Asia would store and back up their data in the central server, and each office would have access to all the data stored on the server. This would minimize the manpower and HR costs as it would no longer be necessary to have a separate IT team for every subsidi­ary. Instead it would be sufficient to have one or two employees in the respective coun­tries that are familiar with the com­puter system and able to fix smaller com­puter problems (such as connec­tion errors) by them­selves. Any other bigger system er­ror could be referred to the central IT team in the hub office, which could connect to the problematic com­puter(s) remotely.

 

Also, centralized purchasing of IT hard- and software can contribute to cost reductions. For in­stance, when the company plans to pur­chase new com­puters or to install a new or up­graded operating sys­tem, this could be man­aged centrally and then be rolled out   through­out Asia.

 

One good example is the use of SAP for ac­counting. Assuming that all the subsidiaries are using SAP, this could be centralised via the Asia hub. Since all the offices are using SAP their accounting details can be sent to the hub office and can be used immedi­ately, with­out having to convert them into an­other for­mat. This makes the accounting effi­cient and saves costs.

 

9. Centralised Buying and/or Selling Ac­tivities

It can be very advantageous for the Asian hub office to be in charge of all the buying and selling activities for entire Asia. The idea is that all selling and purchasing con­tracts would be structured via the Asian hub, which means that the different subsidiaries would be selling their goods to the Asian hub of­fice, from where they would then be sold to third parties in the US or Europe. On the other hand, the Asian hub would pur­chase all the requisite raw materi­als from various suppli­ers and then sell/distribute the materials, via pur­chase con­tracts, to the subsidiaries. This structure can be tax efficient, when using Hong Kong as the location for the Asian hub be­cause of Hong Kong’s tax system.

 

Profits which are (purely) generated outside of Hong Kong are generally tax free in Hong Kong. Furthermore, as there is no dividend tax in Hong Kong, if an ac­tive Hong Kong company generates off­shore profits, then these tax free profits can be transferred as tax free dividends to Europe.

 

However, it is essential to observe the arms length’s principle when concluding con­tracts between affiliated compa­nies. Under this principle all intercompany agree­ments must apply the same rules (and prices!) to in­tra-company transactions as those which are applied to third party transactions. Other­wise tax authorities might challenge these con­tracts as violating the principles of transfer pricing.

 

Example:

Certain spare parts or ingredients for the sub­sidiaries could be purchased (or sold) via the Asian hub of­fice. Even though transfer pricing regulations need to be observed, a profit margin of 5% or 10% could still be pos­sible.

 

III. Where to set up

 

In general, Hong Kong and Singapore are the most appropriate locations for an Asian hub office. Both places are known for their reliable legal system and the fast and effi­cient administration. Setting up a company in either jurisdiction takes approx. 7 to 10 working days and the applica­tion procedure is not very compli­cated. In both jurisdic­tions, company administra­tion is not too com­plex and can be handled quite easily. How­ever, there are some differences be­tween the two coun­tries that need to be con­sidered.

 

1. Singapore

In Singapore employee costs are higher than in Hong Kong, due to the higher so­cial secu­rity con­tributions. Furthermore, nearly all prof­its of a Sin­gapore com­pany are taxable in Singa­pore. This is a signifi­cant disadvan­tage, as struc­turing the regional sales and pur­chase contracts via Singa­pore could trig­ger tax re­sponsi­bilities.

 

2. Hong Kong

Hong Kong offers a tax free offshore profit regime. This means that profits are only taxable in Hong Kong if they “arise in or were derived from Hong Kong.” There­fore, it is possi­ble for all the regional sales and pur­chase contracts to be administered via Hong Kong without incurring any tax li­ability. So long as the contracts are negoti­ated, con­cluded and executed outside of Hong Kong, the profits from such contracts are not sub­ject to taxation in Hong Kong. Whether such profits will be taxable in an­other country depends on the national tax laws of the respective countries, but it is basi­cally possible to shift the profits from the subsidiary to the Hong Kong hub and then benefit from the Hong Kong offshore tax regime.

 

Another factor is the proximity of Hong Kong to Mainland China. China with its population of 1.3 billion (increasingly rich) peo­ple is creating a huge de­mand for prod­ucts and high-end technology. Furthermore, by holding the biggest foreign currency reserves in the world China has become a very im­por­tant investor in the West; and almost all investment is channelled via Hong Kong.  There is no question that China is one of the major sales areas in the world as well and the advantages of Hong Kong’s geo­graphical and political proximity to the mainland are obvious. Thus Hong Kong is the hub and the “en­trance door” into China.

China can be reached from Hong Kong within 45 min­utes by bus or train. Just across the border is Shenzhen, which is now one of China’s rich­est cities. Within the last 20 years Shenzhen has grown from a small fishing vil­lage with less than 200,000 people to a bus­tling city with around 15 million in­habitants. Hong Kong also offers many daily direct flights to major Chinese cities, e.g. Shanghai, Beijing, Chengdu can all be reached within less than 3 hours.

 

Furthermore, in order to foster international trade, the Chi­nese government is turning Hong Kong into an RMB trading hub. This means that it is relatively easy for Hong Kong offices to make payments into China and re­ceive payments from China in RMB with­out converting them into foreign cur­rency first. Once the money has been depos­ited into a Hong Kong bank account, it can be freely converted into any of the ma­jor currencies (USD, EUR, AUD, HKD, GBP, CHF) and then, without limita­tion, sent to any other account in the world.

 

3. Hong Kong vs. Singapore

Singapore has the ad­van­tage of offering an easier and more Euro­pean lifestyle with slightly better edu­cated and more multi-lin­gual staff. However, the advantage of Hong Kong is the proximity to China and its size (Hong Kong has approx. 8 million in­habi­tants, Singapore 4 million). Please be aware that China has three times more inhabitants than the rest of Asia put together (India ex­cluded). Even taking into account that for ex­pats Hong Kong is one of the most ex­pensive cities in the world, the mas­sive in­vestment in- and outbound, from/to China, makes Hong Kong probably the better place for an Asian hub for most European and US companies.

 

Finally, considering the size of the Asian econ­omy in the present and future, the cost and tax incentives between Hong Kong and Singapore are in most cases not relevant.

 

IV. Summary

 

By creating an Asian hub office that cen­tral­ises the activities of the HQ’s Asian subsidiar­ies, it is possible to create syner­gies. However, setting up an Asian hub of­fice can be time-consuming and involves certain costs, regardless of the location. Almost every interna­tionally operating company would benefit from setting up an Asian hub in order to concentrate, central­ize and organ­ize certain supra regional func­tions to generate important synergy effects and to ef­fectively ex­change ideas, assets, people, knowl­edge and experience.