The Bottom Line:
In this Asia-Pacific business Insight, we talk about doing business in China and explore Chinese markets with Laurent Timmermans, an entrepreneur, consultant, and educator, Founder and Managing Director of the Hong Kong-based Athenasia Consulting.
As an expert in Hong Kong company formation and structuration, Laurent discusses business in two main ways. First, he explains the strategic role of the city when it comes to Asia and China trade, and he provides his views on how Hong Kong competes with Singapore and other places out there. Second, he elaborates on the increasing importance of regional technology, blockchain, and digitalization developments in terms of business management. His perspective can be summarized in the following terms: the nature of trade in the region is changing, and digitalization means that we need to re-think business workflows.
Laurent Timmermans: “digitalization means re-thinking business workflows”.
Hi Laurent, could you please start with a brief summary of the business environment you evolve in, here in Hong Kong?
Laurent Timmermans: ATHENASIA Consulting has a particular expertise in company formation and structuration, so our client portfolio is very diverse. Overall, nonetheless, we can reasonably say that our clientele is largely made of international businesses based in Hong Kong or working as digital nomads. Ninety-five percent of the business owners are foreigners, either Europeans, Australians, New Zealanders or even South Africans. Their fields of expertise range from consulting to trading and e-commerce. Most of them are SMEs, mainly on the Small side of things. Many of them clearly involved in China trade.
What does that tell you in terms of regional business trends these days?
LT: This is a good question because although many people say that business is slowing down these days in Hong Kong, from our experience the city remains a dynamic and business-friendly place in the region, whether your focus is China trade, regional trade or even international operations.
How would you explain this? Is this a matter of tax?
LT: In part, yes. Hong Kong always had a business-friendly reputation and it works hard on preserving it so businesses keep coming. From a legal and fiscal perspective, the applicable rules are a real incentive. You won’t see many stable regulatory regimes with no VAT, a two-tiered corporate tax system with an 8.25 percent tax on your first two million HKD in profit and a 16.5 percent on the remaining amount. At the same time, Hong Kong is considered a low-tax place but it is not blacklisted as a tax haven, which reinforces its business-friendly image.
In addition, Hong Kong is a reputed financial place at par with London and New York. It is undeniably a business place. In the Caiman islands, Seychelles, BVI, in contrast, the tax is interesting but the possibilities of doing actual business are far more limited so Hong Kong presence has many interests, really.
Hong Kong is also demonstrating its willingness to get closer to the OECD by becoming a good trade partner. Concretely Hong Kong signed the Common Reporting Standard of OECD and is truly committed to making its banking system more transparent. Hong Kong is also playing its part to tackle the issues of money laundering and financing of terrorism.
LT: Another important aspect plays in favor of Hong Kong: China is a complex country when it comes to doing business. You need to have the right advisors and supports. You need to have the correct mindset and the necessary cash. More importantly, you need to make sure that you understand the regulatory system. Hong Kong with its transparency, rule of law, simple administration and agreements with China makes it a key gateway to trade with mainland China.
Hong Kong always competes with Singapore from a financial innovation policy perspective, how does that translate into business?
LT: The difference between Hong Kong and Singapore is significant from a business perspective because the target markets are different. Doing business in Singapore is usually about getting closer to Malaysia, Indonesia, or other south-east Asian countries. Hong Kong is rather a financial gateway to Mainland China and to Asia more generally. Therefore Hong Kong has the attention of most China trade specialists.
Nevertheless, for the reasons I just mentioned earlier, the city is also a great place to do business worldwide Regarding the race between the two cities, the trend is that the regulators on both sides tend to align with each other’s moves. Although Hong Kong tends to be always slightly more aggressive than Singapore for example when tax rate in Singapore is 17%, Hong Kong is 16.5%. Another benefit of HK structure compared to Singapore is that Hong Kong doesn’t require a local director. Therefore, foreigners can fully own and control their business without incurring unnecessary extra fees.
Any thoughts on how Hong Kong works compared to other parts of Asia?
Laurent Timmermans: The interesting thing is that although Hong Kong might not always be the best place in terms of business opportunities, it remains the best place to organize the way you do business in the region.
A lot of business is moving away from China nowadays because the suppliers are becoming less competitive than it used to be and some new economies like The Philippines, Vietnam, Indonesia, Myanmar are emerging. Still, organizing your business over there remains difficult. Still, many clients realized that it would be easier to maintain a business base in Hong Kong to avoid regulatory complexity (or lack of clear regulations) of these emerging economies.
LT: More concretely, these places are great to source virtual assistants, developers, marketing teams or factories. But structuring the business over there always involves having a holding and headquarters in Hong Kong or Singapore.
How do you see the future business relationship between Hong Kong and Mainland China?
LT: Well, the interaction between Hong Kong and Mainland China is often considered from a purely financial and governance perspective, but the from my understanding the Hong Kong – China trade relationship is extremely important.
In my opinion, the obvious example is that Hong Kong is currently and will become increasingly relevant as a host for e-commerce businesses, because on the one hand, China is the main supplier for e-sellers in EU and US. They come to the canton fair to find the products they will resell on Amazon or on their own websites.
On the other hand, China is currently opening its internal market thus enabling foreign companies to sell in China. China is now becoming not only the world factory but an enormous market. This opening is done through cross-border transactions where e-sellers are required to store their goods in bounded warehouse and pay tax when the goods leave the warehouse. Companies interested to sell in China using this method pass through platforms such as T-mall. Often these companies’ setup Hong Kong structures to carry out these activities.
As the regulatory and fiscal framework in Mainland China is more constraining than the one in Hong Kong so the foreigners who do e-commerce business with Mainland China (Canton fair, logistics, etc.) tend to settle in Hong Kong to benefit from the whole package. Furthermore, the Mainlanders are also known to create companies in Hong Kong to manage their World-China trade activities and circumvent the capital control trends which penalize them otherwise. This might not last forever with the introduction of the automatic exchange of information starting in 2018 and the announcement of global income taxation in China.
Does Hong Kong’s Fintech policy help?
Laurent Timmermans: Difficult to say, because Hong Kong’s success on the Fintech side of things is often presented as a joke… but for sure a pro-fintech attitude also sends a pro-business message because it suggests that money will flows faster, with more capital available and faster transactions. Remember that doing trade with China is expensive, so the financial attractivity of the city is important
Talking about financial technologies, your consulting company is known for being highly technology driven. Would you have any thought on what the technologies of the future could be in terms of business management?
LT: The question of technology in business management and accounting process is clearly of paramount importance for ATHENASIA. We use cloud computing text recognition, integrations of applications through API’s. Furthermore, machine learning is doing tremendous progress and threatening the job of bookkeepers who will most likely become obsolete within maximum 5 years’ time. On the management side, accounting and company secretarial jobs requires to keep track of tight deadlines and the use of workflow management is of crucial importance for scaling operations.
Besides, something more exciting is coming. Events in Hong Kong are being organized every day to discuss new technology and the impact it will have on tomorrow’s business, but most people just don’t have a clue of how it will be deployed and used (including me). There is a bit of a pre-2000 “.com” effect where it just sounds good to have it in the company for valuation purpose. In reality, I believe, these new technologies will completely disrupt the way we do business. In my sector, I’m sure it will dramatically change the way accounting and audit are done and maybe destroy the industry altogether.
You must be referring to the Blockchain here…
LT: Yes. The Blockchain is a sensitive issue these days because it is one of the flagships of the digital transformation trend. Many people talk about it for sure because the topic is trendy. But the complexity is to identify what is relevant or not in terms of business development.
The point is not to just do something because it relates to the Blockchain. The point is to figure out what the technology is really going to change from a business management perspective in a close to medium future. Several people told me that I should use blockchain in my practice. Yes, for sure, but to do what?
What is your take on this, then?
LT: Chances are that Blockchain technologies will increase transparency, data quality, security and reliability. And together with Artificial Intelligence, they will become more and more important without a doubt. As a result, business management methods such as reporting, accounting and auditing will probably change.
However, nothing revolutionary will happen in a close future. Blockchain together with artificial intelligence has the potential to completely destroy accounting and audit industry. I clearly envision a world where apps are connected in a cloud computing system and machine learning does the accounting automatically. It’s already happening but extremely buggy.
The role of the accountant nowadays is evolving from bookkeeper to configurator, apps integrator, human verifier and advisor. When everything we buy is bought on a blockchain auditor will be the next to review their role because all the transactions will be already accurate as recorded in immutable blockchain ledgers. But this is not for tomorrow. It will take time, not because of technology but because people will need time to adapt and, more importantly, to adopt the technology.
Awareness is still very low at this stage and people hardly realize what the Blockchain could do to help them both in terms of daily personal life application and to run their business.
Unless large actors communicate very clearly as to how the blockchain has the potential to change people’s daily business routine, the concept will just remain a concept with scattered implementation and time will flow until Blockchain technologies effectively become something people use. Nevertheless, one day it will be part of our daily life.
The immediate reality is that Cloud computing is developing rapidly. More and more software and tools are connected to each other. Data flows from a data center to another and remains stored in the Cloud. E-commerce platforms such as Amazon or Shopify can be easily connected to reporting tools and thus provide business people with very reactive insights. Business is also optimized to the extent that keeping tracks of a large number of transaction is easier thanks to automation and, again artificial intelligence. This is happening now and businesses can already enjoy these benefits.
So digitalization is a big trend in your line of business, then.
LT: Yes, digitalization is a big trend, and this has two important consequences.
One is that we – as company secretaries and accountants – increasingly have an opportunity to discuss strategy with our clients because we can see things that used to be much more difficult to spot.
The other is that digitalization means that the whole process of business workflow management needs to be re-thought, somehow. Of course, automation and machine learning mean that we can simplify the accounting and auditing process dramatically. But we still need a human eye to make sure that things were done properly in the end.
What does that mean for you and your clients?
Laurent Timmermans: This means that technology developments will force us to reinvent the company structuration and bookkeeping process.
Again, I am not saying that managing a business will be all automatic or on auto-pilot. Following and benchmarking business transactions and progress is a real job, whatever the technological help we can get. But accountants and business managers will need to be much more familiar with new technologies. Our role will also increasingly change from pure bookkeeping to an advisory role. Investing in client-relationship will become very important in reality.
For instance, manual data inputs can already be replaced by software automation and thus cut costs vary significantly when the technology is mastered properly. Hence, we will increasingly be able to provide insights to our clients by connecting APIs to one another and establish a much bigger picture on their businesses. More financial insights, more inventory management insights. A better level of compliance with the Company Registry and with the Inland Revenues services… That’s definitely a win for business managers. They will get access to a big picture they would not be able to draw on their own. And they will have more time to focus on their job. Which is to do business,
What timeframe do you have in mind for those changes to operate?
LT: Well, again, automation is already making progress. Lots of transactions can already be assigned automatically so data consolidation will be increasingly facilitated and reliable. For that, a five-year timeframe would seem reasonable.
Having said that, the reality is that as of today most accountants simply don’t use the technology that is available. We have invested in understanding it and that gives us an edge on top of competitivity gains. But in many cases, the adaptation could take much longer.
We usually ask our contributors about the mistakes people usually do when doing business in the region. What would be your advice?
LT: I would say that many businesses see Hong Kong as an alternative to tax haven islands, and ignore local compliance, which is an enormous mistake.
Hong Kong is a genuine business place and after incorporation, businesses have to comply with local rules. Some entrepreneurs don’t consider the simple fact that they must renew their Business Registration, submit their annual return, do their accounting and get it audited by a practicing CPA. As a result, they end up with fines and sometimes a collection of summons to court.
Others, just look at Hong Kong as a tax haven providing the possibility to open “Offshore company that pay no tax”. First, there is no “offshore companies” in Hong Kong but Limited Companies that ask for an offshore tax exemption due to the territorial base principle for taxation of Hong Kong. Getting the exemption is not as simple as they may think and the implication on their international tax planning should be carefully considered. Second, I believe Hong Kong has much more to offer for entrepreneurs interested in running genuine businesses.
Laurent Timmermans | Entrepreneur, Founder & Managing Director, Athenasia Consulting.
Laurent Timmermans is an entrepreneur, consultant, and educator. He is also the Founder and Managing Director of ATHENASIA Consulting, a Business Planning, Company Setup & Maintenance, accounting/audit/Tax specialist in Hong Kong.
Laurent has worked for more than 10 years in management consulting previously with Dale Carnegie Training and a local advisory firm that was a contractor of Hong Kong MTR. In his quest to support entrepreneurship, he has also developed online courses delivered in 187 countries around the world by more than 35,000 students. He is also going back and forth in academia, taking guest lecturer positions on the topic of international business, principles of economics, management and, organization behavior.
Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.
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