Access Asia: Leveraging free trade agreements for Australian … · 2020-02-27 · Former...

Access AsiaLeveraging Free Trade Agreements for Australian Trade Growth

kpmg.com.au

October 2016

http://www.kpmg.com.au

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.


ContentsIntroduction 5

FTAs are important for Australian bilateral and export trade 6

FTAs are underutilised in Australia 10

How much trade are we missing? 11

Why is this happening? 15

So how do companies actually access FTAs? 17

FTAs are no substitute for developing and executing the right strategy 18

Six critical elements for Asian trade success 20

E-commerce – the bilateral trade super highway 24

Alibaba Group: New markets for Australian exporters. A case study 26

Asia bound – How do you navigate transfer pricing and other evolving tax laws in the region? 28

Summary 33


Former Australian Trade Minister Andrew Robb and his Korean counterpart, HE Yoon Sang-jick, Korea Minister of Trade,

Industry and Energy, at the conclusion of negotiations for a Free Trade Agreement (FTA)

with the Republic of Korea.

AAP Image/DFAT© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

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Leveraging Free Trade Agreements for Australian Trade Growth


Introduction Successfully negotiating Free Trade Agreements (FTAs) is tough going for governments, but the deals are only of commercial value if businesses know how to get access to the concessions gained, and take action.

International exports of goods and services are critically important to Australia, together contributing 41 percent of nominal GDP1. Eleven of Australia’s top 15 bilateral trading partners are Asian.

Ten of our top 15 trading partners are covered under Free Trade Agreements with Australia (Indonesia and Vietnam under AANZFTA).

Economic modelling reveals that benefits from our recent North Asian agreements (China, Japan and Korea) could increase exports by more than 11 percent, and generate a cumulative Gross Domestic Profit (GDP) increase of more than AUD 24 billion in present value terms between 2016 and 20352.

On the flipside, KPMG’s modelling highlights that Australian merchandise exporters who underutilise FTAs will miss out on at least AUD 14 billion of potential export trade revenue over the next five years. This is a conservative view as it does not include underutilisation of opportunities for trade in services or foregone productivity gains – which is huge!

1 Australian Bureau of Statistics, Balance of Payments and International Investment Position, Australia December 2015, Cat. No. 5302.0. 1 March 2016. Figure is for the December 2015 quarter.

2 The Centre for International Economics. (2015). Economic benefits of Australia's North Asian FTAs. Canberra: Prepared for Department of Foreign Affairs and Trade.

Many companies we’ve spoken to as part of our research say they are having difficulties in utilising these complex trade mechanisms. They are struggling with market entry strategies, local Asian partners, distribution models, branding and intellectual property (IP) protection, reputational and legal risks and other non-tariff barriers.

Our report provides practical insights and experienced advice to assist clients across many sectors and countries on market entry strategies, supply chain solutions, customs, and tax and grant incentives and other key considerations.

The Turnbull Government is pursuing an ambitious trade agenda, with agreements under negotiation including India, Indonesia, Regional Comprehensive Economic Partnership members and several other countries. These can be expected to create more opportunities for Australian businesses to grow their exports, strengthen their import supply chains, and ultimately drive much needed economic growth and create more Australian jobs.

There is great interest from Australian companies in growing trade relationships with these exciting and developing markets in Asia. There is clearly scope for existing Australian exporters to up-scale and move into multiple markets as well as a significantly increase the overall number of Australian companies exporting.

This report discusses the current underutilisation of FTAs and reasons for this. It seeks to assist Australian companies exporting to and importing from Asian markets with favourable FTA agreements in place to make the most of the opportunities.

While numerous FTA deals have been done and media announcements made, a lot of work is required to capture and maximise the benefits.

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FTAs are important for Australian bilateral and export tradeAustralian Governments have actively pursued bilateral free trade agreements with Asian markets, with considerable success. (Table 1 below).

Table 1: Australia’s trade in goods and services by top 15 partners 2015

Bilateral trade ranking by country

2015 Bilateral Trade (AUD

million)

Share of bilateral trade (%)

% Growth 2014-2015

Share of Exports (%)

FTA status

1. China 155,447 23.2 1.9 28.9

2. United States 70,195 10.5 15.8 7.0

3. Japan 64,950 9.7 -7.4 13.4

4. Republic of Korea 35,805 5.4 2.8 6.3

5. Singapore 25,683 3.8 -13.1 3.5

6. New Zealand 24,021 3.6 2.2 4.0

7. United Kingdom 23,021 3.5 10.0 2.8

8. Thailand 20,767 3.1 9.5 1.7

9. India 19,826 3.0 25.8 4.2

10. Malaysia 19,164 2.9 -7.4 2.5

11. Germany 18,570 2.8 6.2 0

12. Indonesia 15,064 2.3 -4.0 2.2

13. Taiwan 12,462 1.9 -1.7 2.4

14. Vietnam 10,065 1.5 0.3 1.5

15. Hong Kong SAR 9,819 1.5 13.4 1.8

Source: Australia’s trade in goods and services 2015 (Department of Foreign Affairs and Trade, 2016).

FTAs in place

FTAs in negotiation

No FTA

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Current stocktake of Australia’s FTAsFTAs currently available for Australian companies are:

1983 Australia-New Zealand CEA (ANZCERTA)

2003 Singapore-Australia FTA (SAFTA)

2005 Thailand-Australia FTA (TAFTA)

2005 Australia-United States FTA (AUSFTA)

2009 Australia-Chile FTA (ACl-FTA)

2010 ASEAN-Australia-New Zealand FTA (AANZFTA)

2013 Malaysia-Australia FTA (MAFTA)

2014 Korea-Australia FTA (KAFTA)

2015 Japan-Australia Economic Partnership Agreement (JAEPA)

2015 China-Australia FTA (ChAFTA)

Former Australian Prime Minister Tony Abbott (centre) looks on as Chinese Minister of Commerce Dr Gao Hucheng (left) and former Australian Minister for Trade Andrew Robb sign the Free Trade Agreement (FTA) between the two countries in Canberra, Wednesday, June 17, 2015.

AAP Image/Lukas Coch© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

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The Asian trifecta of FTAs – a huge win and opportunity for Australian exportersThe Department of Foreign Affairs and Trade (DFAT) estimates the benefits from Australia’s recent “Trifecta of FTAs” with China, Japan and Korea to be substantial. On commencement, in excess of 80 percent of Australian exports should receive preferential duty treatment for China and South Korea (Japan not stated) and upon full implementation, in excess of 99 percent of Australian exports should receive either free or preferential duty rates under the three FTAs3.

3 http://dfat.gov.au/trade/agreements/pages/trade-agreements.aspx (benefits at a glance).

The initial feedback from Australian companies that KPMG spoke to after the Trifecta of FTAs with Japan, Korea and China was very positive.

A senior executive from a major Australian dairy exporter told us that the ChAFTA was particularly exciting as industry was involved in consultation and announcements. The same executive felt the ChAFTA represented an acceptance by the Chinese Government that China can’t meet its dairy requirements and is genuinely committed to implementing the terms of the agreement.

The future pipeline of FTAs and the rise and rise of the mega FTA The Government is focused on progressing both bilateral and multi-lateral “mega” FTAs.

These FTAs currently in development or awaiting enactment include:

• Trans-Pacific Partnership (TPP)

• Regional Comprehensive Economic Partnership (RCEP)

• Pacific Agreement on Closer Economic Relations (PACER), the update to the South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA)

• India-Australia FTA

• Indonesia-Australia CEPA

In addition to important FTAs being negotiated with India, Indonesia and Pacific Islands, there are two mega-FTAs currently under development or awaiting formal approval:

South Korean President Park Geun-hye (fourth from left) and Former Prime Minister Tony Abbott (third from left) look on as trade ministers of South Korea and Australia sign a bilateral free trade agreement at the presidential office, Cheong Wa Dae, in Seoul, South Korea, Tuesday, April 8, 2014.

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• Trans-Pacific Partnership (TPP) where negotiations have been concluded. The TPP parties are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore, the United States and Vietnam and represent 25.6 percent of total world trade4; and

• Regional Comprehensive Economic Partnership (RCEP) which has concluded its 15th round of negotiations. RCEP parties are China, Japan, South Korea, New Zealand, Australia, Singapore, Thailand, Malaysia, Philippines, Brunei Darussalam, Vietnam, Laos, Cambodia, Myanmar, Indonesia and India, representing almost 60 percent of Australia’s two way trade5.

4 http://dfat.gov.au/trade/agreements/tpp/pages/trans-pacific-partnership-agreement-tpp.aspx

5 http://dfat.gov.au/trade/agreements/rcep/pages/regional-comprehensive-economic-partnership.aspx

Whilst some would question the value of negotiating more FTAs that include multiple parties and countries with which Australia already has an FTA, there are definite benefits to mega-agreements such as with ASEAN, the TPP and RCEP.

Regional agreements, provided they offer the same or greater benefits than their bilateral counterparts, reduce the administration in assessing hundreds (if not thousands) of rules of origin under multiple bilateral FTAs.

We live in a world of global supply chains and those supply chains can be leveraged and influenced by regional FTAs as they allow for the concept of accumulation to apply to goods. Accumulation creates an FTA zone which allows multiple parties’ inputs, in multiple FTA party countries, to obtain preferential duty benefits for completed goods. This allows parties to build on the strength of manufacturing capabilities in the region and recognises the fact that most products are not manufactured from inputs that are wholly produced in one country.

AAP Image/Yonhap

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FTAs are underutilised in AustraliaA survey conducted by The Economist Intelligence Unit (EIU) in 2014 identified that FTA usage rates are low, with Australia’s particularly low usage rate at 19 percent6 (see Figure 1 below). This means that only 19 percent of exporting businesses surveyed are using an FTA. Australia’s least used FTA was with Chile (7 percent), and most used was with New Zealand (30 percent). The average FTA usage rates of Asia-Pacific countries surveyed was 26 percent.

However, of the Australian companies that did use an FTA for exporting, 59 percent reported a moderate increase and 16 percent reported a significant increase in exports. They are therefore very helpful when used properly.

6 The Economist. (2014). FTAs: fantastic, fine or futile? London: The Economist Intelligence Unit Limited.

A Joint Select Committee Report on Business Utilisation of Australia’s FTAs was tabled in the Australian Parliament on 15 October 20157.This report identified issues around the complexity of FTAs and costs of compliance with many new terms.

There are also significant start-up costs for identifying and connecting to new export markets. In its submission to the Inquiry, the Export Council of Australia referred to the Australian International Business Survey (AIBS). The AIBS had 1,237 respondents across a range of sectors and identified behaviours in engaging in international trade, including utilisation of FTAs8.

7 Joint Select Committee on Trade and Investment Growth. (2015). Report on the Inquiry into Business Utilisation of Australia’s Free Trade Agreements. Canberra: Commonwealth of Australia.

8 Australia’s International Business Survey. (2015). Summary Report. Canberra: AIBS.

The Export Council reports between 43 percent and 52 percent of exporting Australian businesses don’t know how and whether an FTA would apply to their business; and between 9 percent and 18 percent don’t know the FTA exists at all.

It’s clear that action is needed to engage businesses to make the most of new opportunities and improve their market access.

0

20

40

60

80

100

VietnamSingaporeMalaysiaIndonesiaIndiaHong KongChinaAustraliaTotal

Average Most used

30%

26%19%

23%

33%27%

42%

16%21%

37%

48%

63%

40%

51%

39%43%

65%

Figure 1: Use of FTAs signed by countries in 2015 (% respondents)

Source: Economist Intelligence Unit (The Economist, 2014).

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How much trade are we missing?Australian merchandise exporters who underutilise FTAs will miss out on at least AUD 14 billion of potential export trade revenue over the next five years, according to KPMG analysis. This represents a conservative view as it does not include underutilisation of opportunities for trade in services or foregone productivity gains.

How can we understand the potential trade lost from underutilisation of FTAs currently in force with Australia’s trading partners? To be honest, it’s very difficult, subjective and requires key assumption-based economic modelling.

KPMG has considered the current underutilisation of the bilateral Australian FTAs that have recently come into force with China, Japan and Korea – and projected the 2015 results against global export growth projections for 2016 to 2020.

Applying KPMG’s global trade model9 allows an assessment of the economy-wide impacts associated with changes in export demand and productivity and quantification of the loss in GDP, employment and other industry-specific outputs.

9 KPMG’s global trade model is dynamic and is based on the latest version of the Global Analysis Trade Project (GTAP) database.

As depicted by the left-hand side panel of Figure 2 we need first to estimate the direct economic effects of the underutilisation of FTAs in Australia. These are of two kinds: trade flows effect and productivity effect. Once they have been estimated, they can be applied to KPMG’s global trade model, represented by the middle panel of Figure 2. The model is then able to simulate the economy-wide impacts of lost economic activities on different economic indicators, such as GDP and employment at the industry level, as shown on the right-hand side panel of Figure 2.

Figure 2: Schematic representation of direct and indirect effects in an economy-wide modelling framework

Direct Economic EffectsSlower growth in trade volume

Slower productivitygrowth

Economy-wide ImpactsOverall impacts of direct effects on industry employment and activity as well as on macroeconomic indicators (e.g. GDP) amplified by indirect linkages effects

Consumption Indirect EffectsLower income for households lowering consumption demand for other goods

Production Indirect EffectsBackward linkages: less inputs neededForward linkages: less goods produced

Source: KPMG Economics

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Estimating the direct effectsDirect economic effects of underutilisation of FTAs in Australia are of two different types. The first and probably most obvious effect is the lost volume of trade with Australia’s FTA partners. The second direct effect is related to foregone productivity gains as a result of missing out on lower trade costs.

Trade flows effect

The Australia’s International Business Survey (AIBS) identifies a proportion of businesses that found the FTA useful for accessing a market, represented by the first entry legend in dark blue in Figure 3. It also identifies groups who either did not know about the FTA, or do not know how to use it, represented by the second entry legend in teal and by the third entry legend in purple, respectively.

Tariff reductions from FTAs primarily affect trade in merchandise goods, since the flow of physical goods is easier to apply duties to as they enter or leave a country. Based on the AIBS data at the industry level, it is possible to estimate the proportion of Australian businesses across agriculture, mining and manufactured exports sectors that could increase

utilisation of FTAs in the future. These estimates are reported in Table 2 and vary between trading partners and industries.

The missed potential merchandise export revenue from Australia’s trade agreements in 2015 can be estimated using the share of exporters that could potentially utilise FTAs in the future applied to bilateral trade revenue between Australia and its FTA partners, and an estimate of the increase in export volume as Australian businesses using FTAs become more competitive.

Assuming an annual export growth projection of 2.5 percent, as published in the International Monetary Fund Global Outlook, the cumulative loss from 2016 to 2020 is extrapolated to be at least AUD 14 billion.

Figure 3: Use of FTAs by Internationally Active Australian Businesses in 2015

0% 20% 40% 60% 80% 100%

AU-Chile FTA

ASEAN-AU-NZ FTA (AANZFTA)

AU-NZ Closer Economic Relations

AU-US FTA

Singapore-AU FTA

Thailand-AU FTA

Malaysia-AU FTA

Yes – Found FTA helpful for accessing this market No – Don't know FTA exists

No – Exported to this market but chose not to use FTAUncertain about how and whether the FTA would apply to my business

Source: Export Council of Australia citing AIBS (Department of Foreign Affairs and Trade, 2016).

Table 2: Share of Australian exporters potentially utilising FTAs in the future

Agricultural exports %

Mining exports %

Manufactured exports %

AU-Chile FTA 15.1 17.7 41.0

ASEAN-AU-NZ FTA (AANZFTA) 28.7 45.0 35.4

AU-US FTA 38.5 10.8 36.7

Malaysia-AU FTA 23.1 0.0 33.2

Korea-AU 33.1 11.3 34.3

Japan-AU 33.1 11.3 34.3

China-AU 33.1 11.3 34.3

Source: KPMG Economics analysis using AIBS data (Export Council of Australia, 2015). Note that averages of Asia FTA partners were used for China, Korea and Japan, since AIBS data were not available.

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Figure 4 shows the distribution of this estimated lost export revenue across Australia’s FTA partners. A clear finding is that the bulk of lost export revenue is concentrated among countries with recently concluded agreements – China, Japan and South Korea. A second major finding is that almost all lost export revenue across Australia’s FTA partners relates to manufactured exports, suggesting a need to focus efforts on better engaging Australian manufacturing businesses.

Although several assumptions are used to determine these impacts, they represent a conservative view since they only consider businesses that currently export goods. Many non-exporting companies may also benefit from understanding and using FTAs. Ultimately, this lost revenue is due to limited knowledge on how to access the market opportunities that Australia’s FTAs provide.

The loss is ‘at least’ AUD 14 billion because it doesn’t take into account lost revenues in the services sector and lost productivity opportunities.

FTAs often contain provisions for trade in services, such as trade facilitation measures, reductions in barriers to investment, as well as mutual recognition of products and qualifications. These modalities are much less homogeneous across agreements and much more difficult to measure. They represent non-tariff barriers which FTAs seek to address but are not modelled in KPMG estimates.

Productivity effect

In addition to lost international trade due to underutilisation of FTAs, there are associated productivity impacts that Australian businesses are likely missing. Openness of trade is known to drive competition, and transfer knowledge such as technological advances and best practices for firms. This results in a productivity increase since it improves the output of Australia’s capital and labour force.

One example is research conducted by Austrade in 2015, which surveyed exporting businesses using the Export Market Development Grant Scheme (EMDG).

Austrade’s results indicate an average labour productivity benefit of 16.1 percent10. This means an Australia business could produce 16.1 percent more output for the same labour cost.

Another example of export-productivity linkage is associated with the shifting of resources from less efficient to more efficient plants. Based on a panel data set covering approximately 60,000 individual manufacturing plants in the US for the years 1983 to 1992, it was estimated that firms in the exporting sector are 8 percent more productive than firms that never export11. This highlights the importance of better engaging Australian businesses in trade, and maximising the opportunities they have with our trade partners.

10 Austrade. (2015). Certainty and Confidence—Exports and jobs for a changing global economy: Review of the Export Market Development Grants scheme. Canberra: Austrade.

11 Itakura, K., Hertel, T. W., & Reimer, J. (2003). The Contribution of Productivity Linkages to the General Equilibrium Analysis of Free Trade Agreements. GTAP Working Paper, No. 23. West Lafayette: Center for Global Trade Analysis.

Source: KPMG Economics analysis using AIBS (Export Council of Australia, 2015), GTAP data (Aguiar, Narayanan & McDougall, 2016) and AB data (ABS, 2016).

Figure 4: Estimated lost export revenue with Australia’s FTA partners from 2016 to 2020

0

1000

2000

3000

4000

5000

Manufacturing

Exp

ort

rev

enu

e (A

UD

mill

ion

)

MiningAgriculture, forestry and fishing

ChinaJapanKoreaMalaysiaUnited StatesASEANChile

Percentage of business not using FTAs

25%

36%

29%

19%

26% 26% 26%

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Why is this happening?Our qualitative research has identified nine key barriers to maximising FTA utilisation, namely:

Lack of awareness of FTA benefits has been identified as the largest obstacle for many small and medium sized companies. This can and will eventually be reduced through education and awareness programs.

However, KPMG is also observing widespread confusion around the technical understanding of FTAs both in Australia and foreign markets and serious challenges with the implementation of strategies from many Australian companies.

Rules, Rules, Rules…Our FTAs are normally underpinned by years of very detailed negotiations on product-specific rules of origin which lead to confusion by both importers and exporters in the post FTA implementation phases.

Clearly, when governments have difficulty negotiating and summarising the minute detail of FTAs, it’s no surprise that companies, especially Small Medium Enterprises (SMEs) which lack internal resources, have great difficulty in understanding and then implementing processes to access FTA benefits.

For Australian importers to access preferential duty rates for all 10 of the FTAs to which we are a party, there are an estimated:

• 42 specific acts, regulations and schedules in Australian law;

• 76 general rules of origin; and

• In excess of 26,000 product specific rules.

Australian exporters wishing to gain FTA duty benefits in each of our FTA partner's markets face the mammoth task of navigating hundreds of in-country customs laws across Asia (in foreign languages and cultural practices) that enact the FTA and depending on the number of products they manufacture, an innumerable number of product-specific rules.

In addition to product specific rules, FTAs have rules of consignment which only allow shipping via third countries under strict conditions. Certificates of origin are required under many FTAs (mostly those with our Asian neighbours).

Lack of awareness of FTA benefits

IT infrastructure challenges

Internal capability limitations (SMEs)

Complex rules of origin for each FTA

Opaque trade regulations in Asian

markets

Multi-jurisdictional supply chain challenges

Market access difficulties and

non-tariff barriers

Increasing services export to Asia (not products)

Lack of comprehensive, affordable FTA advisory

services

Source: KPMG Access Asia 2016

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Businesses must understand these rules to access FTAs and also have the ability to assess which FTA provides the best outcome where Australia has multiple FTAs covering a single market (e.g. Thailand, Singapore and Malaysia are countries with which Australia has a bilateral FTA and are also covered by the ASEAN-Australia New Zealand FTA).

There are also plenty of strange and unexpected outcomes noted from the new FTAs, including:

• KAFTA: certificates of origin being issued for goods with accompanying European Union certificates of origin for the exact same goods;

• ChAFTA: original consignment rules denied FTA entitlement to goods shipped through Hong Kong (a major distribution hub) as it is a duty-free port with no customs bonded zone.

An FTA is just one part of the international trade puzzle. Companies need to navigate the customs export and import laws, have a solid market access plan and have the technical resources (in house or by using specialist advisors) to make the most of our FTAs.

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So how do companies actually access FTAs?Unfortunately, there is no one-stop shop for FTA trade facilitation.

Both the federal and state governments recognise that Australian companies need practical and cost effective assistance to access and leverage the FTAs. Through Austrade, the federal government has been developing useful information resources, providing FTA outreach programs and building teams to help provide practical advice and facilitation. The Department of Foreign Affairs and Trade has developed Trade IT support systems.

However, any IT infrastructure that will quickly and effectively assess all product types in all markets would be extremely complex and there is a limit to what government bodies can provide given the complexity of product rules from global supply chains to multiple export markets cutting across many FTA jurisdictions.

In addition, due to the number of state and federal support programs, it is difficult for exporters to accurately assess which programs will provide them with the assistance.

In order to accurately assess FTA entitlements, Australian companies need specialist advice:

• to interpret the FTA specific legislation;

• to better understand global supply chains and the origins of all inputs of the goods they are exporting;

• to develop the internal resources, processes and IT systems to accurately classify goods in the customs tariffs;

• to navigate both Australian export laws and the relevant import laws (which in Asia can be extremely complicated and paper driven).

It is important also for exporters to be aware of the tariff classification of the product in the importing country, as it is not uncommon for jurisdictions to interpret rules differently, leading to a denial of access to the FTA and preferential duty rates.

FTAs do not remove non-tariff barriers such as phytosanitary (quarantine) requirements, anti-dumping duties and other regulatory requirements such as labelling. Often, non-tariff barriers mean that Australian exporters simply can’t access the markets covered by our FTAs which makes seeking specialist advice critical at the time of preparing export market strategies.

ServicesAustralia’s FTAs do not just deal with preferential duty for trade in goods. In 2015, Australia’s services exports were worth an estimated AUD 57.4 billion12 and are continuing to grow.

Our FTAs contain a component which facilitates greater access to foreign markets in the services sector. For example, China is Australia’s largest services export market and the ChAFTA includes improved market access for Australian banks, aged care, health, legal and education and telecommunications services

Taking advantage of the trade in services components of Australian FTAs can provide a competitive advantage to Australian business in those FTA countries, including preferential market access and mutual recognition of qualifications.

12 https://www.efic.gov.au/news-events/latest-news/2015/march/services-exports-to-asia-on-the-rise/

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FTAs are no substitute for developing and executing the right strategyTaking a step back from the practical challenges of implementing FTA related initiatives, it’s important for Australian companies to revisit their strategy for Asian market export growth, supply chain solutions and outbound investment.

Based on the 2016 Australia International Business Survey (AIBS), 18 percent of respondents targeted the United States as their first priority overseas market. China was the second most popular choice for a first export market. AIBS respondents indicated that the toughest overseas markets to operate in were India, China and Indonesia. However, these are the markets that offer the greatest growth though.

Where to focus in future? Is it all about China?Based on our observations, the focus for many Australian companies has been China and how to take advantage of the ChAFTA within a 12-18 month window – ahead of companies from other countries who have yet to establish similar trade access agreements with China.

Historically, China was the prime market within the Asia Pacific region for many Australian businesses to establish offshore operations to directly manufacture and source goods and industrial products at a very low cost. But today, the primary reason that these same businesses maintain operations in China is primarily to serve the China market.

As regional economies integrate, so too do supply chains, as investors seek innovative and cost-effective inputs into regional or global production. Over the post war period, as economies develop and production and manufacturing costs rise, there has been a continual shift within the region – from the Asian tiger economies of the 1980s and 1990s (Japan, Korea, Hong Kong, Taiwan and Singapore), to China which became Asia’s low-cost manufacturing supply chain hub.

Now we are seeing the shift from China to ASEAN countries, so we encourage companies to look to the future – ASEAN and more specifically Indonesia, where regional FTAs are in place and bilateral FTAs are being negotiated.

The ASEAN Economic Community (AEC)? Australian companies should be increasingly focused on the growth opportunities closest to home – ASEAN – with the 10 countries that are embracing a regional focus to compete with larger markets such as Japan, China and India.

According to McKinsey13, the ASEAN region represents the seventh largest economy in the world with a combined GDP of USD 2.4 trillion and expected to become the world’s fourth largest economy by 2050. It has a combined population of over 600 million people, half of which will be under the age of 30 by 2020 and represents the third-largest labour force in the world which is great for manufacturing and consumer services.

13 http://www.mckinsey.com/industries/public-sector/our-insights/understanding-asean-seven-things-you-need-to-know

Australian Trade and Investment Minister Steven Ciobo, in interviews conducted with ANZ recently in Laos,14 talked about Australia having a 42 year relationship with ASEAN which is founded upon collective interests and one that should go from strength to strength. He said: “The opportunities throughout ASEAN are quite significant. There is tremendous potential among the 10 ASEAN members and Aussie businesses should be at the forefront of that. Many are, but frankly a lot more should be.”

or more specifically: Indonesia!

Despite being Australia’s nearest geographic neighbour, Indonesia ranks outside the 10 largest trade and investment markets for Australia. In 2014, bilateral trade with Indonesia was AUD 16 billion, merely 10 percent of China-Australia trade flows. There are many reasons for this; including low Indonesian consumer incomes and the fact Indonesia is also a major natural resource and primary industry exporter and hasn’t, until quite recently, been an exporter of high-value manufactured goods.

However, with a young middle class population of 45 million that is growing at 11 percent per annum and expectations that Indonesia will become a major world economy in next 15 years, there is increasing interest from Australian companies. This was evidenced by approximately 360 Australian business leaders across eight industry sectors attending the inaugural Indonesia Australia Business Week (IABW) in Jakarta in late 2015.

14 ANZ Blue Notes 12 October 2016.

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Source: Statistics from ASEAN Economic Community Chart book 201315.

15 http://asean.org/resource/statistics/

Indonesia’s President Widodo is often referred to as a “business first” president committed to reforming Indonesia and strengthening the bureaucracy, policies and processes so that foreign capital will invest to help Indonesia grow.

Central to Indonesia’s development is investment in infrastructure and the development of financial services – both areas for Australian interest to help finance and jointly deliver these projects. New infrastructure worth AUD 450 billion – including 24 new sea ports, 15 new airports, 49 new mega dams, 39 megawatts of additional power and extensive road, rail and public transport infrastructure – is in the planning stage. Around 40-50 percent of this will require Public Private Partnership (PPP) solutions.

There is a need for Australian project planning, structuring and management services, state-owned enterprises (SOE) asset privatisation/capital recycling programs and the start of a national superannuation and pension system for long-term capital.

Despite 170 competing domestic banks, Indonesia’s financial services industry is nascent and only accounts for 3.3 percent of GDP (compared to 8.7 percent in Australia and 15.9 percent in Hong Kong). Around 70 percent of Indonesians have only one to two banking products. Of a total population of 260 million there is less than one million who invest in managed funds and there is almost no insurance industry with only 400 insurance agents nationally. All of the big four Australian banks are represented

to varying degrees, with ANZ the largest. They all tend to concentrate on cross border trade, investment and high net worth flows as well as rolling out branchless banking services. Within Indonesia there is also an opportunity in insurance and re-insurance.

Other than infrastructure and finance the greatest opportunities for Australian companies appear to be in food and agribusiness (live cattle, animal feed, feedlots, aquaculture, and cold chain logistics) and education and vocational training – particularly in financial services and healthcare.

The opportunities for Australian business in Indonesia are certainly there, but the investment and operating landscape remains very challenging and the lead time to invest and build relationships is long.

617 millionPopulation (2013)

190 millionMiddle class in 2010400 million by 2020

USD 5,869GDP per capita

(2013)

USD 2.3 trillion

Total GDP (2013)

At a glance

ASEAN is a diverse region with multiple challenges and opportunites.

If the 10 ASEAN members were a single country it would be the seventh largest in the world.

Across ASEAN, policies have evolved in isolation, preventing consistency and certainly required by investors.

It is a very diverse region – with countries right across the development spectrum.

Despite regional coordination through the ASEAN Economic Community (AEC), issues are generally on a market-by-market basis.

Figure 5: ASEAN – an Emerging Regional Power

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Access Asia



Six critical elements for Asian trade success Turning an Asian investment into a profitable business venture takes careful planning and a disciplined approach.

Despite the numerous challenges of operating in Asia, we have seen foreign brands achieve amazing results (such as Starbucks, KFC and Louis Vuitton). They have been successful because they’ve been able to truly understand local consumer trends, align their brand for Asian consumers and navigate the numerous regulatory challenges.

Asia is tough and complex. The ability to grasp the entirety of a large number of challenges and conjure effective solutions takes time and experience. Frequent travellers to Asia consistently miss the opportunity to get to the bottom of such operational complexities and therefore, the majority of “fly in, fly out” executives are inadequately equipped to manage the challenges of doing business in Asia.

Based on our experience and interviews conducted with senior executives from Australian companies succeeding in Asia, we have identified six critical elements that Australian businesses need to consider to execute a successful Asian market entry or expansion strategy.

AP via AAP/ Xu congjun

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A high proportion of the Asian population will be classified as middle income earners by 2025 as regional economic growth seeds prosperity and the future of Asia’s market will be driven by these people with a propensity to spend. Australian businesses must be ready to compete in a dynamic and fast-paced environment and interact with new consumers through various channels.

Practical example: Locally attractive products are vital

With a significant rise in the demand for personal and household consumer items in China, it is not surprising that two of the largest global Consumer Product Multi-national Corporations (MNCs) have both invested in local operations within China. Over recent years, both organisations have also established large scale innovation hubs in China, in response to the changing demands of the local consumers who seek high quality foreign branded goods but with more local ingredients and taste. These innovation hubs aim to refine everything, from product specifications and materials, packaging and size of product to align with local Chinese consumer requirements, who will no longer accept imported products that do not cater to their specific tastes.

02

Think about the successful marriage and exit options upfront, not just the honeymoon. Plan an approach that aligns to your long-term objectives.

Businesses expecting to set-up as they have back in their home market and achieve overnight success have usually departed Asia quicker than they arrived.

Practical example: JV partners

It is important that Australian business can successfully identify a JV partner that can leverage its local presence, without exposing it to additional operational risks. Several Australian companies interviewed cited the challenge of finding the right local partners. There are a huge number of unsolicited Chinese parties who present themselves as potential local partners.

03

Selling into or sourcing from Asia’s many markets is not easy. It's best to view China, Indonesia and India as comprising a number of unique markets within each country.

Plan how to interact with each market separately, tailoring product specifications and delivery mechanisms that meet the needs of local customers within each distinct market.

Practical suggestion: Good people are hard to find and keep

For a major Australia wine exporter, hiring and retaining people, developing new product categories and developing unique marketing ideas have been their greatest challenges.

For a major Australian dairy exporter the greatest challenges have been in having senior executives to lead with an in-depth understanding of how ‘Asia works’, with relevant industry experience and the ability to manage local client and staff relationships. They described the ideal person as “more than a sponsor, an active proponent of their (local Asian office) needs and requirements”.

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Whether it be future customers, suppliers or service providers, finding and incentivising the right trading partners is critical. You must really understand who you are dealing with and what motivates them to achieve the outcomes that you both desire.

Practical example: Distribution partners

A global animal health care products group which was the leader in more than 140 separate markets around the world and had been operating in China for more than 8 years was unable to achieve a market share in China of more than 1 percent. Analysis of the China market revealed that the company had locked itself into an agreement with a distributor which only had access to 2 percent of the total China market, had limited sales capability and was not motivated to focus its efforts on this company’s products. Despite the extremely high demand for products within this market segment (exceeding more than 50 billion units of product per year), this MNC had not established the right distribution network (nor partner support) within China to access the customer base, or provided a value proposition with a unique service or cost advantage over its competitors and subsequently failed to attract Chinese demand despite being the market leader in every other market.

04

Understand the non-trade barriers relating to your product, supply chain and chosen markets so that you can navigate the many different local customs and unique country regulations effectively.

Practical example: Non-tariff barriers

Several Australian companies interviewed felt non-tariff barriers were not well addressed in ChAFTA, including preferential tax treatment for local competitors, difficulties around foreign executive work visas, provincial and local product registration processes and IP laws that remain inconsistent with international norms.

05

Have a thorough stakeholder communication strategy. Be prepared on how and whom to communicate with should your business/supply chain/products experience a critical incident.

Practical example: Board support

Several Australian companies interviewed confirmed the importance of having a board that is supportive of the long-term strategy and committed to investment, delivery and implementation.

A number also stressed the importance of the headquarters to have a local Asian mindset and “can’t apply local Australian internal processes”. This requires internal education and consideration of local Asian issues before jumping to a decision, an action or implementation stage.

06

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E-commerce – the bilateral trade super highwayTraditional exports and sales processes are being disrupted by e-commerce and China is no doubt the best and most important market to look at for understanding the impact of e-commerce on trade.

The total e-commerce market in China already surpassed that of the US in 2013 (see Figure 6). China’s e-commerce market (including but not limited to luxury) was worth around USD 426 million in 2014. According to several sources and analysts, it may grow to USD 1 trillion by 2018 or 201916.

16 http://www.reuters.com/article/china-retail-internet-idUSL5N0VM0RT20150225

Online shopping for products or services is fast becoming normal practice for both Business to Consumer (B2C) and Business to Business (B2B). Reuters reports that since 2012, more than 2,000 firms have registered in China as cross-border e-commerce businesses. Based on KPMG China’s 2015 survey report China’s Connected Consumer, the top reason consumers are buying online remains pricing and gaining a better deal than traditional store based shopping. Consumers are increasingly being driven by the appeal of accessing, comparing and buying a global smorgasbord of luxury branded items from the USA and Europe in particular. Online shopping also remains less time consuming and easier.

Furthermore, respondents in the 2015 survey indicated that the maximum amount they felt comfortable paying online for a single item was RMB 4,200. This is far higher than the amount of RMB 1,900 that consumers were comfortable spending in 2014 – an increase of 121 percent. All of these trends indicate that online luxury shopping is set to grow as Chinese consumers are growing increasingly more comfortable with online purchasing.

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Source: eMarketer, http://www.emarketer.com/Article/Retail-Sales-Worldwide-Will-Top-22-Trillion-This-Year/1011765

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Based on the 2015 KPMG China survey findings17:

• Online confidence is booming! 45 percent of luxury online shoppers now buy over half of their luxury goods online. We expect 50 percent of China’s domestic luxury consumption will be generated online by 2020.

• Import duties reductions combined with brands’ recent moves to realign prices between overseas and China will boost China domestic full-price e-commerce, and challenge overseas websites.

• From reviewing social media content, we noticed the emergence of retailer generated content alongside key opinion leaders’ and user-generated content. Brands need to adapt and publish more relevant and consumer-centric digital content or risk seeing their brand image diluted.

17 Source: KPMG China’s Connected Consumers: When 10,000 Chinese shop… Insights from a 2015 survey, KPMG, 2015

• Although they remain value-driven, Chinese consumers – especially younger generations – are less price obsessed. This opens new opportunities for full price e-commerce for premium and luxury brands.

• Alibaba recorded nearly four times more sales on Singles’ Day than 4,200 retailers did in the US on Black Friday (the traditional post-thanks giving day retail sales event).

• The smartphone is the most commonly used device for daily retail visits across Chinese luxury online shoppers.

• Online luxury services are booming – while luxury product sales are also growing the Chinese online luxury consumer now is also looking for luxurious services and experiences.

• The older generation is still lagging behind in its purchase of luxury products online – despite their ability to afford luxury.

What does all this mean for Australian companies? Based on AIBS 2016, 47 percent of Australian exporting respondents already use e-commerce18.

Cross-border shopping is now more accessible through smart technology and e-commerce. The overseas e-commerce spend is growing rapidly, especially throughout China and the rest of Asia. Consumers are becoming very discerning and focused on best in the world quality and value. This means transparency is high and competition is incredibly tough. Australian exporters can’t just expect their product to sell online without ensuring their product is world class and marketed in a manner that meets Chinese consumers' taste and expectations.

18 Australia’s International Business Survey. (2015). Summary Report. Canberra: AIBS.

The Kaola.com website from NetEase, a Chinese tech firm, as seen on a computer in Hangzhou, China, Tuesday, Oct. 11, 2016. Australia is set to cash in big time from China's misspelling of koala as the world's most populous country experiences an online shopping boom. There are tens of thousands of products and more than 100 brands from Australia sold through Kaola so far.

AAP Image/Lisa Martin


Alibaba Group: New markets for Australian exporters. A case studyAlibaba Group has been at the forefront of assisting Australian exporters in accessing new markets.

Research shows the value of China’s e-commerce market exceeded USD 600 billion in 2015. Of this amount, Alibaba alone contributed around USD 485 billion in sales in e-commerce, making Alibaba Group the world’s largest retailer.

Australian products are increasingly popular on Chinese e-commerce channels. Alibaba sees strong and growing demand for a range of products such as dairy, premium foods, healthcare, skincare, and mother and baby products.

Each year, Alibaba runs the largest shopping festival in the world, the Double 11 Shopping Festival, on 11 November. In 2015, Australia ranked 5th among 41 countries globally on Tmall Global, the platform for international branded goods, with Chemist Warehouse hitting RMB10 million in the first 46 minutes of the shopping festival.

Alibaba Group has also forged a strategic partnership with Australia Post. Australia Post’s Tmall store provides a solution for exporters, particularly small and medium enterprises, to access some of the 420 million Chinese consumers active on Alibaba Group’s platforms.

Alibaba Group has plans to open an office in Australia to better support its Australian clients, and to help more Australian companies access the Chinese market. Currently, there are over 1,300 Australian companies on Tmall and Tmall Global, with over 80 percent of them accessing China for the first time via Alibaba’s platforms. There are also more than 2.7 million Australian Alibaba.com accounts providing Australians with new opportunities to buy and sell products.

The momentum is likely to continue with the staged implementation of ChAFTA. While Australian products are already high on the wish list of Chinese consumers due to the premium and quality reputation of products made in Australia, ChAFTA will further reduce tariffs and increase the competitiveness of Australian produce.

Access Asia


26© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Access Asia



People are fascinated by China’s economic success. The population of some Chinese cities exceeds the entire population of Australia and, for many, China has a magnetic energy. This was the case for Jessica Rudd, a lawyer, PR consultant, author of novels Campaign Ruby and Ruby Blues and daughter of former Australian Prime Minister Kevin Rudd.

Rudd lived in Beijing for five years, but in early 2014 the family decided to return to Australia. Although she left China, Jessica wanted to remain connected to her experiences there. When Chinese friends from her mothers’ group regularly asked her to bring back Australian products like Blackmores and Swisse vitamins and synthetic-chemical based toothpaste; she knew there was a real grassroots level of demand for Australian goods.

Jessica's Suitcase is a cross-border e-commerce business, connecting premium Australian brands with China's online shopping community through Alibaba's Tmall Global platform.

The Chinese cross-border e-commerce market is large and complex and Jessica's Suitcase aims to facilitate access to this space for Australian SMEs, which otherwise may not have the resources or the market knowledge to be able to do it on their own.

Since launching in June last year, the store has grown to house 15 brands with several others in the pipeline, of which almost half are on exclusive arrangements. Based on her success as a trusted brand and image in China, Jessica Rudd was recently signed as Australia and New Zealand Lifestyle Ambassador for Alibaba, the first appointment of its kind.

Given Jessica's unique position in China, she has been able to bring several coveted media and promotional opportunities to the brands, including being featured on Tmall live broadcasts and a web series hosted on Youku – China's YouTube equivalent with over 500 million active monthly users.

Banaban is Australia’s leading coconut oil brand marketed as Banaban Virgin Coconut Oil. The family owned business started in the parent’s garage on the Gold Coast in 2004 and with the help of Alibaba.com the brand is taking on the world and achieving exceptional growth.

The Banaban brand started as a mission to tell the world of the Banaban story through traditional foods used by the Banaban Islanders for centuries.

With the help of Alibaba.com, Banaban is becoming more world renowned for its business innovation, and it comes in many forms such as the development of outside the square world first ideas, an incredible state of the art HACCP and organic facility and partnerships with leading Australian and international universities into research programs to scientifically prove the benefits of Banaban products.

Banaban is currently involved with two major research projects here in Australia and Canada in medical fields related to pre-term infants and the development of healthy supplements for the elderly.

Since the late 2000’s Banaban has been using Alibaba.com as a B2B platform. Banaban first started selling bulk virgin coconut oil on Alibaba.com and in particular to countries such as Brazil and Canada.

The company’s strategy for the last three years, and moving forward, has been implementing a mini website within Alibaba.com as a B2B platform to on sell our unique range of Banaban coconut products to the world. Over the last three years the company has seen new clients and orders from other regions including Europe and Asia.

Over this time using Alibaba.com the company secured eight new distribution channels worldwide and each day Banaban is receiving 10-15 international enquiries.

The company’s recent success with Alibaba.com has been setting up a new distribution network within supermarkets in Spain with their first order valued at over AUD 100,000.

Banaban has also secured distribution through Alibaba.com to countries such as Germany, Poland, Malta, Hungary, Mongolia, Hong Kong, Taiwan and soon to be South Korea.

Banaban Coconut Oil Banaban is currently involved with two major research projects here in Australia and Canada in medical fields related to pre-term infants and the development of healthy supplements for the elderly.

Jessica’s SuitcaseJessica’s Suitcase is a cross-border e-commerce business, connecting premium Australian brands with China’s online shopping community through Alibaba’s Tmall Global platform.

Success through Alibaba’s B2B channels

Currently, there are over 1,300 Australian companies on Tmall and Tmall Global, with over 80 percent of them accessing China for the first time via Alibaba’s platforms.

27© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

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Asia bound – How do you navigate transfer pricing and other evolving tax laws in the region?What companies need to know about tax in Asia

Expanding operations into Asia creates exciting opportunities. Many Australian companies have specific strategies to exploit the breadth of offerings and richness of Asia through extending their market reach or leveraging potential procurement opportunities. Many will have noticed however, an increased focus on transfer pricing and international tax issues in recent years globally and in the region which needs to be considered for cross border expansion into Asia.

Most topically, many will have observed the focus by the G20 (the 20 major global economies) the Organisation for Economic Co-operation and Development (OECD) on the Base Erosion and Profit Shifting (BEPS) project. Under this project, the OECD divided its focus in to a 15 point action plan releasing findings reports and recommendations under each area since 2014 and covering topics ranging from debt deductibility and hybrid structures, Controlled Foreign Company (CFC) taxation, treaty abuse, taxation of permanent establishments, to transfer pricing and transparency.

As a region, Asia has been quick to enter the BEPS debate and has generally been an early adopter of many of the OECD recommendations but the level of acceptance and pace of adoption differs between individual countries in the region.

Specifically, the transparency measures recommended under OECD BEPS Action 13 provide an example of fast and broad adoption across the region. Action 13 proposes increased transparency for revenue authorities based on a three tiered structure made up of a multinational group master file, local files and completion of a Country By Country (CbC) reporting data matrix. These materials are generally required of multinational groups with group turnover greater than AUD 1 billion, and once prepared typically have to be submitted to one or more revenue authorities in the region (or shared between them based on automatic information exchange agreements). Action 13 reporting discloses significant data about the group’s operations, countries of operation and organisation structure, types of transactions, transfer pricing policies, revenue, profit and taxes paid.

To date, many countries in Asia have adopted the recommendations, legislated their own versions or signalled intentions to do so with application from early income years commencing after 1 January 201619.

For those Australian companies expanding into Asia or thinking about doing so, watching the developments under the BEPS 15 Point Action plan is important as the rules can differ when adopted in countries across the region.

Whilst many countries in Asia continue to offer economic incentives to attract trade and commerce, understanding the specific transfer pricing and tax laws including the BEPS developments in each country is also important to successful expansion into the region.

19 To date, countries in the region who have adopted these measures or have signalled the intention to do so, include Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Singapore, South Korea, Taiwan and Vietnam Specific thresholds and reporting requirements differ between specific countries. Further information in respect of Action 13 adoption in Asia and around the globe can be accessed from the KPMG global summary, kpmg.com/action13updates.

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The ATO’s increased focus on cross border businessAustralia has recently strengthened its domestic transfer pricing and international tax rules increasing the focus on cross border activity, which is relevant to any Australian company considering its options to expand into Asia. Key considerations under the international tax provisions should include the CFC rules, Capital Gains Tax, Thin Capitalisation, Foreign Tax Credit, participation exemption, deductibility of interest and foreign hybrid provisions.

As a key part of its international tax focus, the Australian government has also recently modernised its transfer pricing rules, passing new legislation in September 2012 (applying to arrangements covered by double tax treaties with retrospective application back to 1 July 2004)20 and March 2013 (with application to all arrangements for income years beginning on or after 1 July 2013)21.

20 Subdivision 815-A of the Income Tax Assessment Act 1997 (ITAA 1997).

21 Subdivisions 815-B to 815-E, ITAA 1997.

The new rules contain reconstruction powers and extend the focus beyond transactional pricing, additionally requiring Australian taxpayers to consider if third parties acting independently would have structured the related party arrangements in the same way. As part of this inquiry, Australian taxpayers are expected to consider if any functions, assets or risks have been transferred overseas and whether a third party (in the shoes of the Australian taxpayer) would have agreed to the transfer and/or would have expected to be compensated for the transfer. These new laws are particularly relevant to operations expanding into Asia to the extent Australian companies look to migrate key group activities or intangibles into Asia.

In addition to updating its transfer pricing rules, the Australian government recently introduced tougher anti-avoidance measures via the Multinational Anti-Avoidance Law (MAAL)22 which sharpen the focus under the Part IVA

22 Section 177DA of the Income Tax Assessment Act 1936.

General Anti-Avoidance provisions specifically in respect of sales made by principal entities resident offshore directly to Australian customers. More anti-avoidance legislation has also been proposed in the May 2016 Federal budget, in the form of a Diverted Profits Tax (DPT) which looks to apply punitive taxes to cross border arrangements which ‘divert’ profits from Australia and lack economic substance.

In working with the new law, the Australian Taxation Office (ATO) has also increased its focus on cross border activity. In 2013, the ATO introduced the International Structuring and Profit Shifting (ISAPS) field review program which looks specifically at cross border arrangements in light of updated domestic Australian law and the issues emerging from the OECD BEPS project. More recently, the government has announced an additional AUD 680 million in funding for the ATO over four years to establish a new Tax Avoidance Taskforce.

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The taskforce will consist of 1,300 people, including 390 new specialist officers who will focus on compliance activities of multinationals, large public and private groups and high wealth individuals and is expected to raise AUD 3.7 billion in tax over the four year period.

Whilst some of these laws require rule based stepped analysis (such as the Capital Gains Taxation (CGT), Withholding Tax or CFC provisions), some require consideration of what third parties acting independently would do (i.e. the transfer pricing provisions), whether under an objective test, there is a purpose to avoid Australian tax (i.e. Australia’s General Anti-Avoidance provisions) or whether irrespective of third party behaviour and purpose, the arrangements lack economic substance or are deemed to lack substance (i.e. the proposed DPT)23. In addition to considering the local tax laws of countries in Asia, keeping up to date with Australia’s tax law and policy changes is therefore important to successfully managing the local tax obligations in expanding offshore.

What are common considerations in expanding into Asia?For most companies expanding their operations beyond the Australian shores, questions of what to place overseas and where commonly come up as well as how to fund offshore operations. Broadly speaking, transfer pricing and international tax rules look at, how much income offshore activities should derive and on what basis. Transfer pricing and international tax rules also govern the deductibility and taxability of financing arrangements.

23 Under the current DPT proposal, a lack of economic substance can be deemed to the extent that a tax differential between that paid offshore and that which would paid if the income was derived in Australia is greater than commercial benefits derived from offshore structures.

What to place overseas and where?Applying generally accepted principals, transfer pricing typically examines any functions performed, assets utilised and risks borne by entities in cross border arrangements. As the above diagram illustrates (Figure 7), general economic theory would suggest that as the intensity or value of the functions, assets or risks increase, the expected return also increases.

Unsurprisingly, given the increased appetite of Australian companies to move into Asia, the ATO has become very focused on determining appropriate returns for offshore entities within Australian multinational groups.

Given the trend toward establishing offshore marketing and procurement hubs, the ATO recently released a discussion paper in respect of offshore hubs and some proposed practical compliance guidelines to assess transfer pricing risk arising from hubs used by multinational companies in Australia to centralise business activities such as procurement, marketing, sales and distribution functions24.

24 http://lets-talk.ato.gov.au/offshorehubs

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Figure 7: Expected returns of different economic models

Source: KPMG Access Asia 2016.

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How to fund offshore expansion?

The other question that often arises in offshore expansion into Asia, tends to be how to fund the offshore operations. Broadly speaking, Australian companies might choose between equity and debt funding. Equity requires compliance to formal corporation law requirements and depending on the country, any dividends repatriated may be subject to withholding tax. Due to its ability to match specific needs, debt is often considered to provide more flexibility but the structuring of the debt and interest deductibility should be considered under general deductibility, local transfer pricing, thin capitalisation and anti-hybrid rules (also like dividends, withholding tax also typically applies to interest payments in the region).

Furthermore, in 2015, the Federal Court handed down a decision in the Chevron case which is the first substantive decision delivered under Australia’s new transfer rules and was made with regard to cross border debt arrangements. The case involved a question in respect of the pricing of an inbound loan from a related party US subsidiary to the Australian taxpayer of approximately USD 2.45 billion. Whilst still waiting appeal, the decision raised a number of issues relating to the onus of proof, use of evidence, comparability and expert witnesses, but affirmed the power of the Australian transfer pricing law to reprice arrangements based on what might be expected at arm’s length.

What emerges from this brief discussion of two common key considerations in expanding abroad to Asia, is that Australian companies should consider their proposed cross border structures, arrangements and transactions based on the particular tax laws in relevant jurisdictions and what third parties might be expected to agree at arm’s length. This might require some analysis of any existing arrangements with independent third parties, and/or a more detailed examination of other arm’s length arrangements and transactions sourced externally.

Where should companies start?Whilst it is often easy to feel overwhelmed by an apparently long list of tax considerations, particularly when first venturing abroad, the key to successfully navigating the compliance requirements across Asia often begins with thinking simply.

The starting point for many Australian companies expanding into Asia is typically to identify and articulate well the commercial purpose and operational objectives behind the emerging strategies, as well as the level of investment desired for expansion. Whilst it might seem obvious, understanding the commercial purpose and operational objectives needs to be at the core of any strategic decision to expand into Asia as the relevant tax considerations are determined by the underlying operational needs and strategies of the business.

Shareholder interests often play an important part in articulating the commercial purpose and strategies of the company. A desire for growth, profits and/or dividends can influence how you might expand into Asia and in what way. The selection of any operating models applied (and the economic consequences of those models) and the timeframe in which the business might progress through different stages of expansion needs to work operationally for the business and may evolve over time.

The business’ ability to handle change and locate key and strategic decision making/risk management abroad can also affect the selection of operating models. Differences can emerge between the business’ desire to locate certain functions and decision making and/or key assets such as intangibles, close to suppliers or customers to optimise opportunities abroad, and the business’ ability to locate those functions and decision making remotely in offshore locations and/or separate to the historic centre of control in Australia.

The different operating models available and the commercial drivers for those models have different tax considerations and implications. Equally, changing the model once implemented can have important tax implications, so aligning the model and growth path to the needs of the business is important to manage the success of expansion and operational evolution. Companies might not necessarily have to create the end state model from the first day of expansion and so defining the growth path is important to managing the investment into Asia and the tax compliance that comes with that level of investment.

The starting point for many Australian companies expanding into Asia is typically to identify and articulate well the commercial purpose and operational objectives behind the emerging strategies, as well as the level of investment desired for expansion.


Access Asia

Leveraging the Free Trade Agreements for Australian Trade Growth


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Summary• Successfully negotiating Free Trade Agreements (FTAs) is tough going for

governments, but the deals are only of commercial value if businesses know how to get access to the concessions gained, and take action.

• Eleven of Australia’s top 15 bilateral trading partners are Asian. And ten of our top 15 trading partners are covered under FTAs with Australia.

• Australia’s FTA usage is particularly low by world standards, at just 19 percent25. Between 43 percent and 52 percent of exporting Australian businesses don’t know how and whether an FTA would apply to their business; and between 9 percent and 18 percent don’t know the FTA exists at all.

• Economic modelling show that benefits from our recent North Asian agreements (China, Japan and South Korea) could increase exports by more than 11 percent, and generate a cumulative Gross Domestic Profit (GDP) increase of more than AUD 24 billion in present value terms between 2016 and 203526.

KPMG economic modelling has revealed three major findings:1. Australian merchandise exporters who underutilise FTAs will miss

out on at least AUD 14 billion of potential export trade revenue over the next five years. (This represents a conservative view as it does not include underutilisation of opportunities for trade in services or foregone productivity gains.)

2. The bulk of lost export revenue for Australia is concentrated among countries with recently concluded agreements – China, Japan and Korea.

3. Almost all lost export revenue across Australia’s FTA partners relates to manufactured exports, suggesting a need to focus efforts on better engaging Australian manufacturing businesses.

KPMG finds the top two reasons for lack of FTA uptake are:1. A lack of awareness of FTA benefits, particularly by many small and

medium sized companies;

2. widespread confusion around the technical understanding of FTAs, both in Australia and foreign markets and serious challenges with the implementation of strategies from many Australian companies.

It’s clear that action is needed to engage businesses to make the most of new opportunities and improve their market access. This report suggests a range of ideas for doing so.

25 The Economist. (2014). FTAs: fantastic, fine or futile? London: The Economist Intelligence Unit Limited.

26 The Centre for International Economics. (2015). Economic benefits of Australia's North Asian FTAs. Canberra: Prepared for Department of Foreign Affairs and Trade.


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© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Trade, Customs,

Tax

Supply chain

Incentives & grants

Economic modelling &

analysis

Government relations

Regulatory risk &

compliance

Asia & international

market entry

KPMGAccess Asia

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Access Asia



KPMG can assist companies to access AsiaKPMG is answering the call from our clients: the Australian large corporate and SME sector, industry representative groups and government bodies to lead the way by providing assistance for those battling with the challenges of market entry and trade growth across Asia and international markets.

KPMG has developed a new service offering known as Access Asia that integrates several key services to assist our clients to fully access and leverage the Asian FTAs.

Access Asia is KPMG Australia’s strategic response to the increasing regional trade opportunities arising from the FTAs recently introduced. Our services are aimed at Australian companies and clients exporting and importing goods and services internationally.

Many Australian private sector companies are championing market access opportunities and we are proud to work with many of them. Together, with their experience and our skills, we can provide others with insights and open doors so they can begin their journey prepared, with knowledge and support.

Access Asia is an integrated KPMG initiative comprising teams of dedicated specialists combining skills and experience to create a comprehensive client service offering for Australian companies accessing Asia. Our team has been assembled to help our clients who are interfacing with Asia by providing a full range of services including:

• market entry strategy,

• supply chain and procurement,

• customs and excise tax efficiencies,

• transfer pricing,

• incentives from local and international governments,

• trade and economic policy,

• economic modelling and analysis,

• government relations,

• Asian regulatory and operational risk management,

• co-ordinated help on the ground in Asia.


Trade, Customs,

Tax

Supply chain

Incentives & grants

Economic modelling &

analysis

Government relations

Regulatory risk &

compliance

Asia & international

market entry

KPMGAccess Asia

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KPMG Access Asia team leaders

Asian & International Markets

Doug FergusonPartner in Charge, Asia & International Markets Partner, Deal Advisory Sydney

+61 2 9335 7140 [email protected]

Market Entry Strategy & Supply Chain Consulting

Peter LiddellPartner in Charge, Asian Supply Chain ConsultingPartner, Management Consulting Melbourne


Trade & Customs

Leonie Ferretter

Director, Trade & Customs Sydney


KPMG Australia maintains a dedicated Asian Markets coverage team to support inbound Asian investors from Japan, China, India, South Korea and ASEAN as well as Australian companies trading and investing in the Asian region.

Over the past five years we have co-ordinated assistance both locally and offshore for Australian companies across most sectors including food and consumer brands, industrial manufacturing, financial and health services and real estate. Our experience extends to strategic briefings to C suite executives and boards, preparing research and commercial analysis, due diligence planning, translating Asian language documents and providing Asian cultural context to counterparty communications and corporate affairs.

We have also been engaged by State Governments to assist with trade and investment strategies with key countries in the Asian region. Our overriding objective and purpose is to provide clients with quick and valued access to the strengths of KPMG both in Australia and in the region.

KPMG has a strong and experienced National Supply Chain & Operations Advisory team, supported by our Asia based Supply Chain specialists. Together we support multi-national clients in the development of their China/Asia market entry strategies and to help them realign their global and regional supply chains.

The Australian KPMG team is skilled in assisting with the development of Asian market entry strategies, where we not only help you to determine the best way in which to enter and compete successfully in Asia, but also structure and adapt your business model such that it aligns with local regulatory and operational requirements. Laying the groundwork for a smooth entry and transition into Asia is what our team does best.

The KPMG Customs and Excise team have a long history of providing our clients with practical advice on accessing FTAs and dealing with international trade and customs agreements. We are passionate about trade and assisting our clients gain the benefits of our FTAs.

By understanding the specifics of free trade and the challenges associated with in-country duties, taxes and non-tariff barriers of products and export markets, our clients are more enabled to make informed and intelligent decisions, supported by an experienced and committed team. To assist, we work closely with our clients to make the international trade journey easier, to maximise the benefits of FTAs and importantly to provide solutions to interpreting complex technical international trade rules. Our team is global and we can partner with our Asian Member Firms to deliver on the ground assistance as required.

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Access Asia



International Tax Advisory

Jeremy CapesPartner, International Tax Advisory Sydney


Economic Modelling & Analysis

Laurent CretegnyDirector, Economics Canberra


Government Relations, Trade & Economic Policy

Warwick RyanDirector, Trade & Economic Policy Canberra


Our International Tax Advisory practice helps organisations navigate international tax and transfer pricing challenges and manage international compliance obligations. Moving across border into Asia requires a good understanding of local country tax requirements, regional trends and differences. Governments and their revenue authorities are responding to the globalisation of business operations by strengthening legislation, increasing documentation and transparency requirements and imposing higher penalties for non-compliance. In this increasingly globalised world, understanding the full value chain of multinational groups has become an important lens for international tax compliance and transfer pricing analysis.

KPMG’s International Tax Advisory Services practice is an international team of tax and transfer pricing practitioners, economists, and analysts helping clients navigate key tax considerations and compliance obligations across the region and reduce the risk of challenge from revenue authorities.

We advise Australian corporations and funds, and foreign multinational groups on the tax implications and considerations of their regional activities and operational planning. This includes corporate structuring, investments and disposals, and structuring and pricing cross border arrangements and dealings. Our multi-disciplinary approach and global mind set enables us to cover a broad range of issues and work collaboratively with our clients to find solutions to complex cross border challenges.

KPMG Economics can assist you with pursuing and formulating more effective policy. With world’s best practice economic modelling and economic advisory services, our goal is to enhance your ability to make optimal decisions at all stages of the policy and decision-making cycle, from design and evaluation to implementation and economic forecasting. FTAs are complex both in terms of negotiations and utilisation as they typically cover most of the sectors in the economy, which have interactions with one another. Initiated with the Uruguay Round in 1986, Computable General Equilibrium (CGE) modelling has been the framework predominantly used for trade policy analysis for 30 years now.

KPMG’s global CGE model has the ability to handle inter-sectoral linkages within countries together with bilateral trade flows among 140 countries. It allows governments and businesses to clarify potential trade-offs between many intricate trade policy options and thus to formulate optimal policies based on sound evidence. Our dedicated team is committed to building trusted and enduring partnerships with you that combine cutting edge analytical techniques, highly experienced and credentialed professionals.

The KPMG Government Relations team can assist small and big business to develop and execute stakeholder engagement strategies aimed at actively shaping the trade regulatory framework, including achieving optimal tariff and non-tariff barriers reductions in trade negotiations, removing discriminatory treatment against their products and services, and, more broadly, facilitate strategic market access gains. This engagement can include stakeholders located both in Australia and internationally. ‘Traditional’ targeted stakeholders include Government trade negotiators and decision-makers, Intergovernmental Organisations (e.g. World Trade Organization (WTO) committees), International industry representatives, as well as global diplomatic networks.

Our team works to provide business with access to trade negotiators to provide informed input into future FTA negotiations, as well as reviews and updates of existing FTAs, in order to influence trade policy design and outcomes. This is achieved, inter alia, by drafting technical submissions to DFAT in order to achieve specific commitments in Australia’s FTAs and providing policy, economic and legal expertise across areas of trade policy, including goods, services, technical barriers to trade, sanitary and phytosanitary measures, trade remedies (subsidies and anti-dumping), investment, intellectual property as well as dispute settlement mechanisms.

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Access Asia



Government Incentives

Philip DoyleDirector, Government Incentives Melbourne


Access Asia Trade Solutions

Amelia HartneyAccess Asia Program Leader Melbourne


Risk Consulting

Michael HillNational Partner in Charge, Governance and Risk Melbourne

+61 3 9288 5589

[email protected]

KPMG has a strong and experienced national Governance and Risk team, supported by our global Governance and Risk team, who focus on assisting our clients in identifying and understanding the risks and compliance obligations created with exporting and/or setting up offshore offices in Asia. The Governance and Risk team has worked with clients across the Retail, Manufacturing and Financial Services industries.

The Governance and Risk team assists clients in performing a dynamic risk assessment which uses three dimensional network theory and leverages data analytics to identify, connect and visualise risks. Dynamic risk assessment identifies critical risk clusters and interconnectedness and the contagion effects of these risks within the organisation. In addition, we support our clients in developing potential risk mitigation strategies.

In addition, our team can work with you to identify and understand the new compliance and regulatory obligations and reporting requirements in the offshore location. We can assess your existing compliance and regulatory reporting framework to assess how effective, efficient and sustainable your compliance framework is to absorb changes to the business to ensure that it will align with future local regulatory and operational requirements.

Our National team of Research & Development (R&D) and Government Incentives experts help businesses access Australian and Global funding opportunities. Accessing government grants can be challenging. The availability of programs can change rapidly and the identification of opportunities that are strategically important to business can be difficult. New exporters will find a wide range of government support is available and can accelerate their journey if they navigate the opportunities provided by both State and Federal government agencies, including the grants and in-country support.

Governments have long assisted innovation and business growth through grant funding and tax benefits. Each year, hundreds of government grant programs worth billions of dollars are made available to businesses in Australia and internationally. However, accessing these funding opportunities can be challenging, as both availability and eligibility criteria change frequently. Our Incentives services range from reviewing previous grant and R&D incentive applications to managing the entire claim process, including registration with appropriate government bodies, claim preparation and assistance with audits. By accessing funding opportunities to support growth into Asian and other global markets, our clients gain a competitive edge and can accelerate their international journey.

Access Asia is KPMG Australia¹s strategic response to the increasing regional trade opportunities arising from the recently introduced FTAs. Access Asia is an integrated KPMG initiative comprising teams of dedicated specialists combining skills and experience to create a comprehensive client service offering for Australian clients exporting and importing goods and services internationally and with a particular focus on the Asian region.

Our team draws on existing service lines and has been assembled to help our clients who are interfacing with Asia by providing a full range of services including market entry strategy, supply chain and procurement, customs and excise tax and Free Trade Agreement reviews.

KPMG is proud to have worked with many Australian companies who are championing market access opportunities internationally. Together with their experience and our skills, we can provide other clients with insights and open doors so they can begin their journey prepared, with knowledge and ongoing practical support.

For more information about Access Asia, please contact Amelia Hartney.

kpmg.com.aukpmg.com.au

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

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