The Asia Region Funds Passport (ARFP) scheme will not succeed unless issues around higher taxes in some of the member nations are resolved, according to fund industry experts.
It comes just days after the ARFP released draft rules and operational arrangements, which were meant to push the passporting scheme a step closer.
But the draft memorandum of understanding (MoU) released last Friday did not attempt to provide clarity on the tax issues, said Stewart Aldcroft, managing director at Citi Securities & Fund Services.
“The ARFP keeps moving further forward but I still have some serious concerns,” said Aldcroft. “The biggest of them being the tax issue in Australia and Korea, which is a major impediment.
“I have raised this issue many times. Until there is a neutral tax treatment, which means tax on offshore funds will be treated the same way as onshore funds, there will never be a proper passporting arrangement; it can’t work.”
Lawrence Au, head of Asia Pacific at BNP Paribas Securities Services, concurred that tax was the biggest concern, especially if it involved Australia.
“That is one of the biggest hurdles for Asian funds to be exported to Australia. That hits at your potential return and if there’s no serious attempt to minimise the tax burden on foreign products, it will hinder the success of the scheme,” Au noted.
The tax on foreign funds in Australia could be as high as 45%, but as Aldcroft pointed out, that may not be the actual tax due. “The tax is charged annually on notional gains. What if, at the time a sale occurs, the market is down a lot? There may be no gain applicable at the time, yet you would have already paid the tax.”
Australia has been leading the push for the completion of the ARFP scheme and yet it represents probably the biggest hurdle, prompting another industry veteran to comment that: “The Australian side has been happily saying how this [ARFP] is a great opportunity to export their funds, but for whom, if they won’t allow anybody to come in to their market?
“It’s the same situation in Korea. They have to neutralise the tax treatment or it is dead in the water.”
Au said there was a task force set up by the previous Australian government, which made recommendations to simplify tax policies. But those recommendations have yet to be implemented by the current government.
It is not just foreign fund managers, and investors, who would suffer. Australian media reports indicate the domestic funds industry’s exasperation at the delay in implementing the proposed liberalisation of Australia’s financial markets.
The Australian Financial Review quoted the author of the tax reform proposal, Mark Johnson, saying, “Our comparative advantage is eroding. Other countries, such as Singapore, where this is a matter of real policy priority, are getting ahead of us.”
Justin Ong, head of the asset management practice at consultancy PWC, told AsianInvestor there were changes in tax policy being mooted, to level the playing field somewhat in Australia, but the details were being kept under wraps for now.
“Korea’s tax position on offshore funds can also be seen as a bit discriminatory, so hopefully some changes are going to happen there too,” said Ong.
“We've always maintained that we don't believe it [tax issues] should be a showstopper,” he added.
The ARFP proposal kicked off with the signing of a statement of intent by finance ministers from Australia, Korea, New Zealand and Singapore at the Apec Finance Ministers’ Meeting in Bali in September 2013.
Public consultation will now take place jointly with government agencies from Korea, New Zealand, Singapore, Thailand and the Philippines.
Submissions close on April 10 this year.
"This is an ongoing discussion and clearly the objective is they want to go ahead,” noted Aldcroft.
“The target date is the middle of next year and it will go ahead if two or more countries sign up for it. Participating in the working group and actually signing the MoU are two different things."