Evolution of Corporate Treasury Corporate treasury has transformed from a mechanicalprocessing unit of a company, to a data provider that aidsfinancial reporting and risk management, and increasinglyinto an internal advisor to the business, contributing tocorporate strategic planning. In its earliest form, corporatetreasury functioned in a decentralized manner wherecompanies engaged in cross-border business. Typically they established local treasury teams inthe countries they operate. Manyprocesses such as settlements wereperformedmanually, and treasurycommunication with headquarters was often delayed and inadequate.

With the collapse of the Bretton Woodssystem in the 1970s where countries nolonger linked their currencies to gold,exchange rates and the global financialmarkets became more volatile. Meanwhile,advances in treasury technology, improvedbanking infrastructure, and rise of networkcomputing rendered the processing,recording, and reporting of financial dataand transactions more transparent, andefficient. Treasury centralization became a possibility ascorporates expanded their businesses globally. Treasury’sscope also broadened to include financial risk management,which requires enhanced dialogue between treasury andvarious internal and external stakeholders. The treasurer’sinfluence to a company elevated as treasury became closerto everyday business operations.

The Global Financial Crisis of 2007 – 2009 saw treasuryevolve from a support function into a trusted advisor to thecompany. Rising risks due to financial market turbulence andsupply chain instability compelled corporates to increasefocus from earnings growth to cost saving, from pursuingacquisitions to strengthening internal controls, and fromrelying on external funding to mobilizing internal sources

of liquidity. The Crisis heightened theprominence of treasury as a provider ofreal-time data analytics – not just acollector of historical financials – forforward-looking strategic planning by topmanagement. To provide useful analytics,treasury needed to gather timely andaccurate information on the flow of fundsand financial data across the company.Centralization was the enabler.

Treasury Centralization as a JourneyThe first functions a company typicallycentralizes are netting of foreign exchangetransactions, interest rate management,and long term funding arrangements. As atreasury center evolves, it tends to become

an intermediary between internal and external counterpartiessuch as subsidiaries and banks. It involves taking charge ofbank relationship management, bank account rationalization,intercompany funding (taking deposits from cash-surplusentities and lending to entities that require funding), andcash pooling. The most sophisticated form of treasury centeris the In-House Bank which accepts deposits from and lends

Transaction Services Asia Pacific

Evolution of Corporate Treasury Centers and Location Considerations for Asia PacificINSIGHTS | Corporate Clients

“Corporate treasury hastransformed from a mechanicalprocessing unit of a company,to a data provider that aidsfinancial reporting and riskmanagement, and increasinglyinto an internal advisor tothe business, contributingto corporate strategicplanning.”

funds to group entities via virtual accounts. The In-HouseBank acts as the company’s single contact point with externalbanks and thus reducing bank fees on currency exchangeand other financial transactions.

Along the journey of centralization comes the decision ofwhere to locate treasury. Traditionally, treasury centers ofmultinational companies resided in the same country as theircorporate headquarters for proximity to senior management.As companies expanded geographically, it became difficultfor a single treasury center to manage fund flows and supportgroup entities in locations with little to no overlap in time-zone.Operations were further complicated by heterogeneity inlocal languages, regulations, business customs, and financialmarket practices. To address these issues, corporates beganto establish regional treasury centers.

Regional treasury centers facilitated global expansion of USmultinationals. They later became popular with Europeancorporates as well, especially following Euro’s introduction, to reap economies of scale in consolidating Euro-denominatedfunds. In Asia, treasury centralization remains a challengedue to marked differences in country regulations andlanguages in the region. However, the emergence of Asianmultinational companies and expansion of their westerncounterparts into the region have led to an increase in thenumber of treasury centers in Asia.

Treasury Center Location ConsiderationsThe decision of where to set up a treasury center is usually a tax-driven decision, although non-tax factors are alsoequally important.

To facilitate efficient cash pooling and intercompany lending,treasury centers should ideally be located in low-taxjurisdictions. Countries with low corporate income tax andwide tax treaty networks are favorable treasury centerlocations, given benefits such as reduced or exemptedwithholding taxes on interest between treasury and othergroup entities. Governments may also offer additional taxbenefits in the form of incentive programs to attractcorporate treasury centers to their respective countries.

A company’s legal entity structure has significant taximplications. For foreign affiliates, their identity as a branchor subsidiary of the parent company and status as residentor non-resident of the local jurisdiction affect the amountand nature of taxes levied. When cash is physicallyconcentrated or notionally pooled, interest income allocationfrom the header entity to individual pool participants shouldbe done on arms-length basis. Aside from permanentestablishment and transfer pricing issues, controlled foreigncompany (CFC) and thin capitalization rules – measures bytax authorities to prevent companies from shifting profitsand therefore tax revenues to other (often lower-tax)jurisdictions – also need to be considered where applicable.Thus, it is crucial for multinational companies to consult in-house as well as external legal and tax advisors beforeimplementing treasury centers.

Non-tax treasury center location considerations includefinancial costs (bank transaction fees, treasury staff salary,office rental), central bank and other regulatory reportingrequirements, access to financial markets, degree ofcurrency restrictions, availability of skilled employees, time-zone compatibility with respect to business operations undercoverage, quality of physical and IT infrastructure, politicalstability, sophistication of banking system, and reputation ofthe location being a financial hub. By adding up weightedscores of the above tax and non-tax criteria, companies canidentify the optimal country for treasury center establishment.

Popular Locations for Treasury CenterEstablishment – Asia Hong Kong and Singapore are the two most popular locationsin Asia for treasury centers. Other countries considered byCiti’s corporate clients are Malaysia and Thailand, both ofwhich offer tax incentives with financial and commercial flow benefits.

Hong Kong – While tax incentives for treasury centers arenot offered and double tax treaty network is limited, companiesare attracted to Hong Kong’s territorial taxation regimecharacterized by a low corporate income tax rate, waiver oftax on interest income, and lack of withholding tax on interestpayment. Hong Kong is also favored as a treasury centerlocation due to its dynamic financial sector and superiorphysical and technological infrastructure. Hong Kong’s statusas an offshore RMB hub and close proximity to China make itan ideal location for companies that have or are planning toestablish business operations in the mainland.

Singapore – Tax incentives are available to companies thatuse Singapore as a regional base, global headquarter, or acenter from which to conduct Research and Development orhigher value-added activities. In particular, the Finance &Treasury Center (FTC) Incentive administered by the EconomicDevelopment Board (EDB) is most relevant to companieswishing to establish a treasury center in Singapore. Companieswith FTC status enjoy income tax concession and withholdingtax exemption for a period of 5 to 10 years. Singapore’s widedouble tax treaty network, low corporate income tax rate,and sophisticated banking sector also make the Garden Citya choice location for treasury operations – so long as corporatesare comfortable with the higher costs in Singapore relativeto its South-East Asian neighbours.

Malaysia – Unveiled in Malaysia’s 2012 Budget is the TreasuryManagement Center (TMC) incentive. Under this schemeoffered by the Malaysian Investment Development Authority(MIDA), companies that establish TMC in Malaysia providingfinancial and fund management services to related companieswill benefit from income tax reduction and withholding taxexemption for five years. A broad double tax treaty networkand relatively low cost environment also render Malaysia atreasury center location of choice. Compared to Singaporeand Hong Kong, however, Malaysia’s banking infrastructure isstill at a developing phase, and there may be fewer tax andlegal professionals with regional expertise.

Thailand – In 2010, the Thai government substantiallyimproved incentives under the Regional OperatingHeadquarters (ROH) scheme to boost Thailand’scompetitiveness as Asia’s operating hub. Foreign companieslocating their ROH in Thailand can now enjoy a 15-year taxbreak on foreign-sourced income and tax concession onincome earned in Thailand, although withholding tax oninterest payment is not waived. Expatriate ROH staff can also benefit from reduced personal income tax for 8 years.

Thailand shares similar issues with Malaysia on bankinginfrastructure and availability of tax and legal professionals.The country also has fewer fluent English speakers thanMalaysia, Singapore and Hong Kong, which might impact theefficiency of communication between company headquarters,subsidiaries, and the treasury center. Despite thesechallenges, Thailand's low-cost environment and efficientlabor market have made the country an emergingdestination for corporate treasury management.

Creating Value from Within Cash has become a crucial corporate asset in today’s volatileexternal operating environment, marked with concerns overglobal economic uncertainties, currency and commodityprice fluctuations, and increased regulatory scrutiny, inaddition to heightened industry competition. Faced withthese hurdles, multinational companies are realizing thenecessity to drive shareholder value from within. Meanwhile,globalization and digitalization have narrowed the gapsbetween time zones and geographies, allowing moreconvenient extraction, processing, and communication ofdata. By adopting the right policies and technologies,treasury activities can be centralized, and treasurers caneffectively manage fund flows and related risks from variousphysical locations without having to be based at companyheadquarters. This location flexibility opens up opportunitiesfor corporates to re-think their treasury strategies.

As Citi has observed from its multinational clients, more andmore companies are looking to set up treasury centers incountries with a favorable tax regime or which offer taxincentive programs. Though the choice of treasury centerlocation varies between companies, treasury centralizationhas indeed become a corporate priority as companiesincreasingly seek to reap the benefits of well-managedfinancial flows.

Gourang Shah

Head of Treasury Advisory, Asia PacificTreasury and Trade SolutionsCiti Transaction Services

Cindy Yung

Analyst, Treasury Advisory Group, Asia Pacific Treasury and Trade SolutionsCiti Transaction Services

For more information about Citi Transaction Services, please visitwww.transactionservices.citi.com.

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