Industry figures have welcomed a move by the Monetary Authority of Singapore (MAS) to go public with the reasons it declined to sign up to the ARFP fund passport scheme, arguing that it could force change.
Last week AsianInvestor received an email from Singapore’s financial regulatory authority explaining why it deferred from signing a statement of understanding (SOU) to join the Asia Region Funds Passport (ARFP) at an Apec meeting in Cebu earlier this month, as reported.
The MAS noted that taxation arrangements, which had been committed to previously, had not been included in the SOU. As such it said it was unable to sign up. “Doing so when there continues to be unequal tax treatment would not benefit fund managers in Singapore,” the MAS spokesperson wrote.
Singapore had been among the original group of four Asian nations – along with Australia, New Zealand and South Korea – to sign a statement of intent on ARFP when the scheme was first announced at an Apec meeting in Bali in September 2013, as reported.
The scheme, scheduled for launch next year, is designed to allow funds registered in one jurisdiction to be sold cross-border in other signatory nations. But a stumbling block to the scheme's adoption is that tax treatments remain different across the participants.
In South Korea, residents are subject to a 15.4% withholding tax on income derived from investing in foreign funds, while in Australia, residents investing in foreign funds are subject to various taxes depending on the classification of the funds. Substantial investments may also be taxed separately under controlled company rules.
Yet Singapore does not impose tax on residents investing in offshore funds nor on non-residents investing in domestic funds.
“The fact MAS has gone so public about the tax issue is really good, it highlights exactly what needs to be done,” said Stewart Aldcroft, managing director at Citi Securities and Fund Services.
“The neutral tax issue has been referred to by many people and in many consultation papers. If MAS is taking a stance at this point, which appears to be the case, that’s good. It will push Australia and Korea into the corner.”
He argued that Singapore’s participation in ARFP was important because it had greater experience in cross-border fund distribution than the other participating nations. “If Singapore is in, maybe it will bring Malaysia in too,” said Aldcroft.
It has been suggested the Australian Tax Office might have been reluctant to relax taxation rules because of loss of revenue for the nation’s metals, mining and minerals industries. The Bloomberg Commodities Index has fallen 26% over the past year amid a decline in demand, intensified by China’s economic slowdown.
“Well, they won’t need to correct the [ARFP] tax issue because no one will be using these products [as things stand],” said Aldcroft.
Data from PwC shows that Australia has eight Luxembourg-domiciled funds and 11 Dublin-domiciled funds authorised for distribution onshore.
“This shows Australia is open for offshore business, given that it is such a big funds market,” said Aldcroft. “But the fact is no one will buy these products while Australia has these tax initiatives in place.”
Justin Ong, Asia head of asset management practice at PwC, agreed that tax was the elephant in the room for ARFP. PwC produced a white paper outlining tax issues surrounding Asia’s three passport schemes in June this year.
But Ong said: “There are now deeper issues emerging, it would seem, and there is also a lot of confusion in the market and between the regulators around what works and what doesn’t."
He added that PwC was now looking to compile a tax summary to identify where the gaps were and what needed to be fixed for ARFP to work. It is understood PwC will be sharing its report with MAS.