It’s been nearly five years since APEC finance ministers announced their support for the creation of a pilot Asia Region Funds Passport structure, and the forthcoming launch of the Asia Funds Passport should provide a launching pad for Australian fund managers who would like to distribute relatively simple retail products across the region.
However, the push to create a pan-Asian investment vehicle similar to Europe’s Undertakings for Collective Investments in Transferable Securities (UCITS) is not a panacea for Australian fund managers, and we recently heard from partners at Allen & Overy on the potential challenges – including taxation – that need to be worked out before the mid-2017 launch.
At Calastone’s recent and inaugural Connect Forum in Sydney in May we heard specialist insights from Allen & Overy Partner, Jason Denisenko and Special Counsel and Head of Tax, Ka-Sen Wong, about the opportunities for cross-border distribution and financial product innovation created by the latest passport scheme.
Since 2011, three models for the Asian equivalent of UCITS have emerged – the Asia Passport, of which Australia is a participant, the ASEAN Framework for Cross Border Offering of Funds, and the Chinese-Hong Kong Mutual Recognition Scheme.
In addition to Australia, Japan, Korea and New Zealand have also signed up to the Asia Funds Passport Memorandum of Co-Operation. The framework of the Asia Funds Passport is designed to allow other countries to join once operational, and there are hopes that Singapore, Thailand and the Philippines will join as well (all of whom signed the original statement of understanding).
Jason told us that the Passport requirements are “light touch, but not a total absence of compliance with laws”. To participate, fund managers must have US$500 million in funds or mandates, named officers, organisational arrangements and a track record and financial resources. In order to sell into markets across Asia, fund managers will have to use a local distributor who is licensed for that particular market.
According to Jason’s analysis, fairly straightforward Australian equities funds will meet the Asia Fund Passport’s requirements “quite easily”, with the idea that the regime will evolve into more sophisticated fund offerings.
But we know that taxation regimes can be significant barriers in the Asian region – and Ka-Sen noted that there are three main areas of tax impediments that must be minimised to facilitate successful uptake of the Asia Funds Passport regime – neutrality of treatment between funds, reduction of withholding taxes, and tax relief on transitioning.
Ka-Sen noted that differential access to Australian franking credits , and the role of withholding taxes were of particular concern, as they had the potential to impact tax neutrality, and Australia’s competitiveness.
Over the next 18 months until the launch of the passport, Australian fund managers have the opportunity to develop their strategy around which products to design or launch into the region. Managers will have to decide if they’ll use existing products, new ones, or enhance existing products to comply with the passporting requirements. There is also a need to establish service provider and back office arrangements such that any product that is intended to participate in the Passport regime is in full compliance with standards such as concentration limits, which start at 5%, and special rules regarding use of derivatives and securities lending. As always, having streamlined back office processing and efficient operational standards will greatly assist fund managers who wish to maximize opportunities that are created by these initiatives.