Following the signing of the memorandum of cooperation (MoC) for the Asia Region Funds Passport yesterday, there have been renewed calls for participating jurisdictions to address the unequal tax treatment of cross-border funds.

Australia, Korea, Japan and New Zealand have so far signed the 146-page MoC, which is due to come into effect on June 30 to facilitate the sale of cross-border funds between participating markets.

The MoC had been expected to be signed this quarter, but what came as a surprise to some was the absence of the Philippines and Thailand from the signatory countries. Both are part of the working group and both had signed a statement of understanding (SoU) on the scheme on September 11 last year.

“We hope in the next few days to get reaction from the non-signing economies to understand why they have not signed,” said Armin Choksey, Singapore-based director in the asset management division at consultancy PwC. “If it’s on the grounds of the tax issue, then it will only accentuate the point further that it needs to be fixed.”

However, the provisions of all six economies in the working group are mentioned in the MoC, so it may be only be a matter of time before they sign up, he told AsianInvestor.

The “tax issue” – the unequal tax treatment of foreign and local funds across different jurisdictions – is the reason why Singapore declined to sign the SoU, despite having signed the Statement of Intent when the scheme was first announced in September 2013.

The Monetary Authority argues that there needs to be a level playing field in respect of tax treatment of local and foreign funds if it is to participate.

Choksey agrees that the issues must be addressed. “It will be up to the regulatory authorities of each participating economy to get the attention of their revenue authority to get it fixed,” he said. “If it isn’t [fixed], then regardless of Singapore or other economies signing up or not, this passport scheme will fail.”

Investment industry trade body ICI Global applauded the MoC signing as a positive development but also saw tax treatment as a key issue.

"Without a level playing field for funds using the passport to enter a country's market, the benefits of cross-border diversification are reduced," an ICI spokeswoman told AsianInvestor. "Unequal tax treatment of funds could limit investor choices and reduce their returns. Resolving tax concerns will be critical to the ARFP as it moves forward."

Separately, a first look at the rules suggests MoC is “one up” on the Asean CIS by allowing securities lending, repurchase agreements and performance fees, said Choksey. The investment eligibility and diversification rules are also similar to Europe’s current Ucits rules, he added. “So all in all, this is a positive sign.”

Meanwhile, some were less surprised than Choksey by the absence of the Philppines and Thailand from the signing.

The Philippines is still some way behind and is not ready to participate in the scheme, said Stewart Aldcroft, senior adviser at Citi Securities & Fund Services. “Countries like Philippines and Thailand do not see themselves as exporting funds; they can only see themselves as importing funds,” he added, and so they are in no hurry to join.

Moreover, Thailand is already in the Asean Collective Investment Scheme (another passporting framework) with Singapore and Malaysia, he added, so why should they join another one?

In any case, said Aldcroft, many fund managers in Thailand lack enthusiasm for fund passporting. “They don’t see how it fits into their business strategy.” Their expertise – selling products offering Thai exposure – is a very narrow market, he noted.

Ultimately, the big opportunity provided by ARFP is Japan, which presents the prospect of a trillion-dollar market, said Aldcroft. “You can imagine the Australians finding it a very mouthwatering prospect.”

As for Singapore’s lack of participation, it is a disappointment for the scheme because the city-state could bring in tremendous education and knowledge, said Aldcroft. 

Still, the Lion City remains committed to a successful ARFP and is open to participating if taxation issues would not impede the competitiveness of the scheme, an MAS spokesperson told AsianInvestor. Singapore is awaiting the final tax report from the Asia-Pacific Financial Forum as well as industry feedback on it, before deciding whether to sign the MoC, he added.

In the meantime, any other eligible economy that signs the memorandum before June 30 will be an original participant in the passport. The MoC also ensures that any other eligible Asia-Pacific Economic Cooperation (Apec) economies are able to participate in the passport even after it comes into effect.

Participating economies have up to 18 months from June 30 to implement domestic arrangements, said an Apec statement. Activation of the passport will occur as soon as any two participating economies implement the arrangements under the MoC.

Other regional passporting frameworks include the Hong Kong-China mutual recognition of funds scheme and the Asean Collective Investment Scheme.