* HSBC considering possible move abroad
* Some investors think bank better off in London
* Analysts say Asia growth and lower tax favour Hong Kong
By Tom Bergin
LONDON, Jan 25 (Reuters) - HSBC's possiblerelocation to Hong Kong is unlikely to save the British bankmuch tax - one of its reasons for maybe moving abroad - andcould actually increase its bill, a Reuters analysis of thecompany's filings shows.
HSBC said last year that it was considering a possible shiftoverseas from London, citing higher taxes and tighter regulationin Britain and a desire to be closer to faster-growing Asianmarkets. Analysts said HSBC's former home Hong Kong, with acorporate tax rate of 16.5 percent against a British rate set torise to 26 percent, was the most likely destination.
Some investors have said weakening growth in Asia and areduction in a British levy on banks' asset bases announced lastyear, argues for HSBC to stay put. But some analysts say Asia'sbetter long-term growth opportunities and Hong Kong's lower taxrate may yet hold attractions for the bank.
A Reuters examination of corporate filings shows that HongKong may offer HSBC fewer tax advantages than many believe.
That's because HSBC will struggle to move enough profit toHong Kong to benefit from its lower tax rate. Indeed, it mayhave to report more income in Britain if it moves, since many ofthe overhead and borrowing costs now booked in Britain may infuture be offset against more lightly taxed Hong Kong profits.
Also, Hong Kong's less generous treatment of share bonusesmay cost HSBC millions of dollars in tax deductions each year.
Crawford Spence, Professor of Accounting at Warwick BusinessSchool, who has studied international groups' tax planning, saidthe Reuters analysis showed the "commonsense understanding" thatHSBC would receive a big tax benefit was too simplistic.
"They may not be saving much money at all on this particularaspect," he said.
HSBC declined to answer questions on possible changes in itsstructure and their tax impact.
"The Board is considering at least eleven criteria for longterm shareholder value, one of which includes the tax systemwhich needs to be transparent, fair and competitive," aspokeswoman said in a statement.
HSBC moved to London from Hong Kong in 1993 after it bought Midland Bank. However the climate for banks in the city hasbecome increasingly hostile since the 2008 crisis withregulators bringing in tougher rules on capital and bankers' payas well as imposing heavy fines for a litany of misdeeds thathas scarred the industry.
While regulators in Asia have followed suit with tighterrules on bank capital and liquidity, the region's relativelystrong showing in the 2008 crisis means lenders there have facedless of the public and political backlash seen in Europe.
LOW UK PROFITS
HSBC's ability to cut its tax bill by moving from Britain isconstrained by the fact that it doesn't declare much taxableprofit in Britain.
Britain is a lucrative market for HSBC, generating over $15billion in net interest income and fees in 2014, the most recentfull year for which data is available.
However, the bank reported an accounting loss in Britain in2014 and had a tax charge of $69 million for the year. This isdespite the fact its British retail bank, which has tens ofthousands of staff, produces what Chief Executive StuartGulliver said last August were "excellent returns".
HSBC's investment bank, which is headquartered in London,had profits of $8 billion in 2014, while its commercial bank,which also has a significant British presence, had profits of $9billion.
A key reason for the modest British taxable result is thatmuch of the group's overhead costs are booked in Britain, suchas top management salaries and central support functions.
Also, since HSBC borrows most of its debt viaBritish-registered companies, its annual report shows, it isalso entitled to British tax deductions on bond coupons andother interest costs.
HSBC's accounts show group overhead expenses of around $9billion a year.
Hong Kong, which does not bear the same share of groupoverhead costs as London, generated over $8 billion in profit onalmost $13 billion of revenue in 2014, filings show.
The bank declined to say how much of its group costs wouldbe booked in Hong Kong as part of any overseas move.
However, analysts said the change could be significant.
Chris Wheeler, banks analyst at Atlantic Securities, saidregulatory rules mean that if HSBC moved its main holdingcompany to Hong Kong, it would have to raise more debt there,rather than in Britain.
"It would have to be in Hong Kong. It would have to be inthe holding company," he said.
If these costs were no longer booked against UK income, theUK profits would rise and face UK tax.
Of course, booking costs in Hong Kong would depress taxableprofits there, reducing the tax bill there. However, that's notthe kind of tax arbitrage companies usually target.
"You're better issuing (debt) out of a higher taxjurisdiction than a lower tax jurisdiction," said GaryGreenwood, an analyst at Shore Capital who covers HSBC.
BANKER BONUSES
In the area of executive pay, HSBC could find itself losingUK tax deductions without any corresponding saving in Hong Kong.
In response pressure from investors and regulators, banksare increasingly paying senior bank executives their bonuses -often worth millions a year - in shares. Britain allowscompanies to take tax deductions in relation to newly issuedshares paid to employees, even though this does not represent acost to the company itself. Hong Kong does not, according to itsInland Revenue Department.
All this means that HSBC will have to shift much more UKprofit than costs to Hong Kong in the coming years or face anincrease in its tax bill.
That could be a hard task to manage.
That's because HSBC's average annual British tax bill of$100 million in the past three years suggests an annual taxableprofit of just $440 million, based on prevailing tax rates.
One area where HSBC won't make any tax saving by moving toHong Kong is on the bank levy. Following extensive lobbying, theBritish finance minister, George Osborne, said in July that hewould halve the levy and, crucially for HSBC, no longer apply itto the overseas assets of British banks.
HSBC's levy charge was $1.1 billion in 2014 and previouslyplanned increases in the rate were set to lift this to around$1.5 billion a year. Gulliver said last year that half the levycharge related to non-British assets. That meant an overseasmove might have shaved $750 million a year off HSBC's levy. Thefact non-British assets will in future be exempt means this partof the charge will no longer apply. (Editing by Giles Elgood)
HSBC Holdings (HSBA)