Singapore’s central bank and financial regulatory authority, MAS, has explained to AsianInvestor why it declined to sign up to the pending Asia Region Funds Passport (ARFP) scheme.

Officials from the city-state surprised market commentators when they opted not to sign a statement of understanding (SOU) at the Apec finance ministers meeting in Cebu, the Philippines, on September 11. Six nations did sign up including Japan, as reported.

Singapore had been part of the original group of four Asian nations – alongside 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 ARFP scheme is scheduled to be launched next year.

The city-state has participated in the drafting of the ARFP regulatory framework since the first working group meeting was held in 2013. That explains why its latest non-participation shocked the market.

In response to AsianInvestor questions, an MAS spokesperson offered an official explanation, pointing out that taxation arrangements that had been committed to previously had not been included in the SOU. As such, it felt unable to sign up.

“When we signed the Statement of Intent in 2013, the signatories explicitly committed to reduce the potential impact of taxation arrangements which would otherwise impede the success of ARFP,” the spokesperson told AsianInvestor.

“This was consistent with the feedback that the industry gave, where for the ARFP to be successful there needs to be a level playing field. This means that foreign funds offered to investors in a jurisdiction should be subject to similar tax treatments as funds managed locally.

“The Statement of Understanding does not address the issue and does not provide any commitment to addressing the impediment of unequal tax treatment. Singapore is therefore unable to sign the SOU at this point in time. Doing so when there continues to be unequal tax treatment would not benefit fund managers in Singapore.”

Nevertheless, the MAS spokesperson stressed that Singapore remained committed to a successful ARFP scheme. “We are open to participating in ARFP when there is commitment to resolving the tax impediment. We will continue to develop and finalise the arrangements for ARFP, including drafting of the regulatory framework.”

AsianInvestor highlighted potential problems surrounding higher taxes in some of the participating jurisdictions in March this year, as reported.

The draft memorandum of understanding released on February 27 had not attempted to provide clarity on tax issues, and market commentators had highlighted impediments based on tax rules in Australia and Korea.

“Until there is neutral tax treatment, which means tax on offshore funds will be treated the same as onshore funds, there will never be a proper passporting arrangement; it can’t work,” Stewart Aldcroft, managing director at Citi Securities and Fund Services, had told AsianInvestor.

Tax on foreign funds in Australia can be as high as 45%, but as Aldcroft pointed out, that might 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 already have paid the tax.

“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 to their market? It is the same situation in Korea. They have to neutralise the tax treatment or [ARFP] is dead in the water.”

In advance of MAS’ clarification, AsianInvestor had reached out for market comment on Singapore’s non-participation. 

Justin Ong, Asia head of asset management practice at PwC, said: “In some respects, yes, we were a little surprised [about Singapore’s non-participation], but in other respects it was a possible scenario.”

He pointed out that unless the potential tax arbitrage within each participating nation was eliminated, some countries would not find it commercially viable to participate.

“If Singapore were to sign on by 2016, it would have first-mover advantage simply by virtue of being the jurisdiction with the most familiarity in dealing with offshore fund distribution,” said Ong.

At the same time, because Singapore was the most accessible of all participating nations, unless taxation issues could be addressed appropriately, its inclusion would result in a competitive disadvantage for Singapore-based funds, he added.

“Frankly Singapore’s participation is very critical,” Ong argued, “and its non-participation will be a significant challenge to the success of ARFP.”