International trade and foreign investment in ASEAN
May 2019 | TALKINGPOINT | GLOBAL TRADE
Financier Worldwide Magazine
May 2019 Issue
FW moderates a discussion on international trade and foreign investment in ASEAN between Yeo Eng Ping, Adrian Ball and Tan Bin Eng at EY.
FW: To what extent is the international trade environment becoming increasingly complex? What factors are creating risks and opportunities for businesses?
Ball: The international trade environment is becoming vastly complex, with increasing prevalence of anti-globalisation agendas such as the current China-US trade actions, alongside other countries’ countermeasures. The ever-growing number of both bilateral and regional free trade agreements (FTAs) also increases the complexity for companies looking to reduce duty costs. In recent years, we have seen authorities in Asia increasingly focus on enforcement of cross-border tax and customs regulations. The heightened frequency of audits and aggressiveness of these authorities are creating challenges for businesses. This is compounded by authorities utilising digital technology and data to identify target companies and review for non-compliance. On the other hand, there are trade liberalisation measures such as FTA signings which create opportunities for businesses. For example, Indonesia and Australia signed a bilateral FTA in March this year. It allows the reduction or elimination of import tariffs on 99 percent of Australia’s exports to Indonesia, by value, and elimination of import tariffs on 100 percent of Indonesia’s exports to Australia. However, conditions apply and require careful management. With the implementation of the World Trade Organisation (WTO) Trade Facilitation Agreement (TFA) in many countries, businesses can also look forward to increased simplification and harmonisation of export and import processes. All Association of Southeast Asian Nations (ASEAN) countries have already ratified the TFA. However, progress on implementing commitments differs. For example, Malaysia’s current rate of implementation is about 94 percent, while Vietnam’s current rate is about 26 percent. Among others, there are provisions for expediting the clearance of goods and the issuance of advance rulings which businesses can take advantage of to create trade certainty for their operations. Businesses can also tap into the rapid development of digital technology, such as trade data analytics and robotic process automation technologies, to identify and address both trade opportunities and inefficiencies.
“Deep local knowledge is crucial for businesses to successfully navigate the practices ‘on the ground’.”
FW: Given escalating trade tensions, which countries are likely to be the winners and losers emerging from a changing trade environment?
Yeo: ASEAN is a high-growth region, given the growing economic affluence and rapidly rising middle class over the last decade. It appears many companies from various industries, including clothing, furniture and electronics, are shifting their operations to lower-cost ASEAN countries such as Vietnam and Thailand, which have adequate production facilities and a good network of FTAs in place. With escalating trade tensions, this trend of companies shifting sourcing or export production to ASEAN could accelerate. This can potentially drive greater growth and job creation in ASEAN. When one country in ASEAN is chosen as the investment destination, we see that as not just a win for that country, but a win for ASEAN overall, as that investment will likely create opportunities for other ASEAN locations as well, due to their economic interconnectivity and proximity.
FW: In your experience, how important is deep knowledge of the local landscape when deciding on which ASEAN country, or countries, to invest in and how to achieve cost efficiencies? What aspects need to be considered?
Tan: Each ASEAN country is unique with varied strengths and challenges, with differences in terms of business environment, corporate tax regime, availability of investment incentives, skilled resources, infrastructure, operating costs and supply chain capacity, which businesses should consider prior to investing in ASEAN. Importantly, while ASEAN governments have worked together and achieved some level of success in trade integration in the region, each ASEAN country still has different systems and laws. This is further complicated by the fact that local practices may be inconsistent with the law. For example, we have seen instances where government authorities denied the provision of investment incentives and tax refunds without providing reasons, even though legislative requirements appear to have been met. Deep local knowledge is crucial for businesses to successfully navigate the practices ‘on the ground’. It also allows businesses to assess which countries best meet their specific investment needs and whether the local risks or uncertainties are manageable.
“We have seen companies successfully create more certainty in their supply chain by proactively engaging with regulators in ASEAN.”
FW: How is the fast-changing trade environment affecting the way multinational companies manage their supply chain? What steps should they take in response to current trends?
Ball: The fast-changing trade environment requires companies to proactively manage their supply chain to avoid missing out on opportunities or being late in discovering disadvantages. Companies should explore supply chain restructuring options and build in elements of resiliency to their supply chain. The goal is for production and distribution to be accomplished at low cost, while meeting customer needs and managing risks. This requires planning for the long term with the big picture in mind. For example, instead of making significant physical supply chain changes, companies can initially consider financial supply chain business-driven changes to reduce duty and tax cost. Companies should also reduce vulnerability to trade environment changes by actively de-risking. For example, negotiating robust supplier contracts and sourcing from multiple locations, even within ASEAN, can help companies build resiliency within their supply chain. In addition to regularly monitoring the impacts of changes in the trade environment, companies should also determine how they engage with regulators to influence trade policy. We have seen companies successfully create more certainty in their supply chain by proactively engaging with regulators in ASEAN.
FW: With the number of free trade agreements (FTAs) across the world increasing, what potential advantages do they offer to ASEAN countries and for market access in general?
Ball: There are nearly 300 regional trade agreements and numerous bilateral trade agreements in force around the world. It is a challenging task in its own right to keep track of all the agreements, let alone have a deep understanding of all the rules and obligations. However, while the increasing number of FTAs brings complexity, it also brings huge potential benefits. Key benefits are the elimination and reduction of tariffs and increased connectivity, which grant greater market access to companies. Most ASEAN countries have eliminated intra-ASEAN import duties on over 99 percent of their tariff lines under the ASEAN Trade in Goods Agreement (ATIGA). This gives companies manufacturing within ASEAN and with goods that meet the rules of origin market access to over 650 million people. Some ASEAN countries have also signed an increasing number of FTAs with countries outside of ASEAN. One example is the signing of the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). It brings together 11 countries from both sides of the Pacific, representing about 14 percent of the global economy. The agreement has entered into force for seven of the countries. Under the CPTPP, sourcing and manufacturing in certain ASEAN countries – Singapore, Vietnam, Brunei and Malaysia – can provide companies with market access into Australia, Canada, Japan, Mexico and New Zealand. These ASEAN countries can be used as a cost-effective base for export of goods to other parts of the world.
“As a region, ASEAN has in the last decade been enjoying strong foreign direct investment (FDI)-driven economic growth. This strong FDI inflow is by no means accidental.”
FW: What advice would you offer to companies on evaluating the complex, seemingly impenetrable web of FTAs? In your opinion, are FTAs too important to ignore?
Ball: FTAs bring massive advantages which companies cannot afford to ignore. They enhance competitiveness and help mitigate the negative impact of trade tensions. The difference between most-favoured nation (MFN) rates and FTA rates can be sizeable. Increasingly, companies that do not avail of the benefits may find themselves uncompetitive. We have seen companies refusing to purchase from suppliers if they are unable to provide them with supporting documents, such as certificates of origin, to import under preferential duty rates. However, FTAs are conditional trade, with each having its own rules. The rules are highly technical and difficult to interpret. Customs authorities utilising the same FTA could have a different interpretation, resulting in controversy. Companies need to understand both the legislation and local practices to successfully utilise FTAs. On evaluating FTAs, companies should explore whether the rules of origin can be met and consider alternate solutions to meet the rules. Compliance costs, such as establishing controls and maintaining records, should also be considered. Many companies avoid utilising FTAs as they see them as particularly risky. However, there is nothing to worry about for companies with adequate knowledge and FTA management measures in place. The potential benefits can be a huge game changer for companies.
FW: What kinds of investment incentives are ASEAN countries offering to attract foreign investment? How should companies looking to invest in the region asses the eligibility and availability of these incentives?
Yeo: As a region, ASEAN has in the last decade been enjoying strong foreign direct investment (FDI)-driven economic growth. This strong FDI inflow is by no means accidental. ASEAN governments have long been proactive in using fiscal policy tools such as tax incentives to attract FDI. Every ASEAN country has established numerous incentive schemes, which provide a wide range of options for foreign investors investing in respective countries. These schemes have been implemented through, among other ways, the setting up of special or designated economic zones, granting additional tax allowances and credits to investments, providing tax exemptions and concessionary tax rates, personal tax reductions, as well as indirect tax and customs incentives.
Tan: The incentives have worked well in attracting investments from various industries to ASEAN. For example, Thailand is a big location for consumer products companies, as well as automotive companies. Malaysia is attracting many petrochemicals companies as well as aerospace companies. Vietnam is attracting a wide range of industries, including textiles and huge electronics companies. Interestingly, we are also seeing big Chinese enterprises that are keen to invest in ASEAN, and not just flood the market from afar. The myriad incentives available, and the regular refinements being made to those incentives, such as eligibility criteria or the scope of coverage to respond to economic changes in the global environment, means that while opportunities remain, reaping these benefits will require deep understanding and monitoring of the incentives.
FW: What are your predictions for international trade and foreign investment in ASEAN countries? Do you believe there is a bright future ahead?
Yeo: ASEAN governments will no doubt continue to press ahead with economic integration in the region, strengthening cooperation both across the traditional and digital economies, in line with the blueprint of the ASEAN Economic Community (AEC). With that, we can expect the elimination of more intra-regional tariffs, the simplification of cross-border trading processes and greater mobility of skilled labour. The hope is that the commitments made by the AEC will be fulfilled speedily. The ASEAN investment story is now stronger than ever, and with economic integration and transformation, we expect the region to become even more compelling for investors.
Yeo Eng Ping is the EY ASEAN tax leader. She is responsible for the EY tax practice in markets including Singapore, Malaysia, Indonesia, Thailand, Vietnam, Philippines, Myanmar, Cambodia, Laos, Sri Lanka and Guam. Ms Yeo has extensive experience serving a wide range of clients in domestic and cross-border tax advisory and transactions. She specialises in tax advisory and planning for mergers and acquisitions, tax structuring and advises on Malaysian inbound and outbound investments. She can be contacted on +60 374 958 288 or by email: eng-ping.yeo@my.ey.com.
Adrian Ball is currently the indirect tax leader for Asia Pacific. Previously, he was the ASEAN tax managing partner for EY. He has lived and worked in Asia Pacific as a tax adviser for over 25 years, addressing international trade issues. Mr Ball has advised companies on issues related to market access as well as on trade controversy. He has also represented the private sector at government forums throughout Asia and is a regular speaker at conferences. He can be contacted on +65 6309 8787 or by email: adrian.r.ball@sg.ey.com.
Tan Bin Eng currently leads the Business Incentives Advisory service and is the tax leader for the government and public sector for EY ASEAN. Prior to joining EY, Ms Tan had over 12 years of experience in the Singapore Civil Service dealing in areas relating to taxation and was a veteran in incentives policy making within the public sector. She also previously worked for the Singapore Economic Development Board and the Ministry of Finance. She can be contacted on +65 6309 8738 or by email: bin-eng.tan@sg.ey.com.
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