Partners at consultancy EY have supported the widespread view that the Asia Region Funds Passport (ARFP) is likely to be ultimately the most effective of all the cross-border fund sale schemes being developed in the region.
Doubts remain over whether and how a level playing field can be created on tax treatment of funds and investors, but a new EY report suggests that enough of a compromise can be reached to ensure the scheme gains traction.
Recent polling, including a survey conducted by AsianInvestor in April, shows that industry participants have confidence in ARFP as a framework to facilitate the cross-border distribution of funds across Asia.
So far representatives from Australia, Japan, Korea, New Zealand and Thailand have signed the Memorandum of Cooperation (MoC) for ARFP. The agreement sets out the internationally agreed rules and cooperation mechanisms underpinning the passport, but omits any proposals on tax harmonisation.
The issue of tax neutrality is possibly the biggest roadblock to a successful cross-border initiative, said EY in the report it issued yesterday. If a level playing field is to be achieved for cross-border fund marketing, domestic and foreign funds offered to investors in the same jurisdiction must be subject to similar tax treatment without any major discrimination in this respect.
“Given the diverse local tax regulations in participating economies, achieving alignment on an agreed tax framework is likely to be a challenge,” said EY. Indeed, Singapore has already pulled back from signing the MoC because of such concerns.
To assess the scale of the problem and what progress needs to be made, EY has analysed the potential tax issues based on a comparison of domestic fund vehicles against foreign funds that might be marketed under the ARFP.
In Australia, for example, any non-resident investor in a domestic fund would be subject to withholding tax on Australia-sourced income and capital gains tax on certain Australian property assets. Non-Australia-sourced income would not be taxed. The country's treatment is fairly consistent across foreign funds, depending on the process of ‘flow through’ – whereby the fund manager passes the tax liability onto the investor to avoid double taxation – and provided the investor does not have a permanent establishment (PE) in Australia.
EY’s analysis suggests there is consensus that without a PE, the investor's tax position would be relatively easy to establish. The complication arises in clarifying what constitutes a PE in each individual case.
In Japan, meanwhile, income from domestic listed trusts and mutual funds are subject to withholding tax and to treaty relief, while foreign fund distributions are not subject to withholding tax. Capital gains across the board are generally exempt from tax.
Taking the present country participants into consideration, EY said it was not practical to expect alignment of tax treatment of funds in different economies under the ARFP. Instead, a reasonable target could be alignment within each country of the tax treatment of domestic versus passported funds.
EY's assessment of ARFP as a workable platform for regional fund promoters tallies with the findings of AsianInvestor’s own annual asset management survey, conducted in association with Clifford Chance. This suggested that the ARFP was seen as the passport scheme likely to provide the best platform for growth.
Meanwhile, confidence in some of Asia’s other fund passport and cross-border trading schemes has weakened. For one thing, the long-awaited China-Hong Kong mutual recognition of funds (MRF) scheme has not been as successful as was hoped, while the Asean collective investment scheme has gained limited traction despite its first-mover advantage.
As reported, Thailand signed up to the ARFP in June, and the Philippines has also expressed its intention to sign the MoC, but faces an obstacle. Under the MoC, there is a requirement to share bank account information, including records that identify the beneficial owner and controller of an account. However, the Philippines has a law prohibiting the disclosure of, or inquiry into, deposits with any banking institution.