The Struggle for Supremacy in Asian Asset Management

8/3/2019 The Struggle for Supremacy in Asian Asset Management

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ViewpointThe struggle for supremacy

in Asian asset management

April 2011


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This paper explores the battle for ascendancy

in Asian asset management not between

companies, but between countries. It

assesses the high-level features of current

and anticipated tax environments in

Singapore, Hong Kong and Australia anddraws out some contrasts and parallels. While

acknowledging that tax is only one factor

among many, it aims to show how seriously

governments in the region take the challenge

of remaining competitive.


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1Viewpoint The struggle for supremacy in Asian asset management

Asia is emerging as the fastest-growing and

most hotly contested region in global asset

management

Rapid economic growth, an emerging middle class, huge savings

reserves and increasing interest from investors in other parts of the

world are expected to drive rapid long-term growth in Asian asset

management. In recent years, this argument has proved irresistibleto international asset management groups, especially those facing

slower growth in their home markets. Many rms based in the

developed markets have decided that they simply cannot afford to

ignore the Asia Pacic asset management market.

In practice, the reality of competing in Asia often proves to be

tougher than this simple view implies. Foreign rms entering

markets in the Asia Pacic region sometimes struggle to access

local distribution networks. Regulation at times favors established

domestic players over new entrants, and overseas managers have

sometimes failed to appreciate the importance of local attitudes

and customer preferences. Incumbent national and regional

players have also shown themselves more than ready for a ght,and some are themselves looking to expand their distribution

reach in the developed markets of Europe and North America.

Governments in the Asia Pacic region are

keen to maximize their exposure to

the industry

Just as asset management rms are competing for a slice of the

growing asset management market in Asia, governments across the

region are competing to attract asset management activity to their

shores. The rapid growth of the alternative investment managementindustry is making the tax environment for hedge fund and private

equity fund management an area of particular focus.

The speed with which capital ows can change direction, and the

industrys history of clustering around regional hubs, means that

the potential prize in terms of economic activity is considerable.

At the same time, preliminary moves to develop mutual regulatory

recognition across the region could change the current picture,

although it remains to be seen whether this would clarify or blur

differences between national tax regimes.

With this in mind, this paper takes a high-level look at the tax

environment in three very different asset management centers

in Asia: Singapore, Hong Kong and Australia. We review each in

turn, summarizing the key changes currently taking place and their

potential effect on the future asset management environment in

the Asia Pacic region.


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2 Viewpoint The struggle for supremacy in Asian asset management

Singapore has successfully used offshore

fund exemptions to attract asset managers

to its shores

Singapore may not have the asset management history

of Australia, Japan or Hong Kong but it has emerged as a

leading Asian investment center in recent years. Assets under

management (AuM) have grown exponentially over the pastdecade and were valued at SGD1.2t (USD0.9t) at the end of

2009.1 The industry benets from an afuent local population,

but the key to Singapores success has been its role as an Asia

Pacic investment hub. According to the Monetary Authority

of Singapore, more than 80% of AuM at the end of 2009 were

sourced overseas, with 61% of the total invested in Asia Pacic.

Even if it is not the biggest asset management center in the region,

Singapore is increasingly seen as setting the pace.

How has this remarkable success been achieved? Clearly there

are a number of factors at work, including Singapores top-quality

public infrastructure, strong legal system and high standards

of professional support. Even so, there is no question thatSingapores attractive tax regime has played a crucial role. At its

heart is the offshore fund exemption.

Broadly speaking, offshore status is available to any fund that

is not resident in Singapore and is not fully benecially owned

by Singapore investors. Offshore status is open to a range of

structures, including trusts, companies, mutual funds and limited

partnerships, and permits a wide variety of traditional and

alternative investment strategies.

Offshore funds that are exempt from Singapore tax are subject to

some reporting requirements, with a particular focus on the rule

that no Singapore investor (other than an individual) together with

its associates should own more than the prescribed investment

threshold of any qualifying fund. Where an investor breaches this

rule it may be liable for a nancial penalty on its share of income

the fund and its other investors are not adversely impacted. The

fund may, however, be able to apply for another incentive status

that eliminates this rule.

Another feature of Singapores offshore fund exemption is that

it permits ownership of private companies. This is in contrast to

the corresponding rules in Hong Kong and goes a long way to

explaining the recent growth in private equity and real estate funds

in Singapore.

1 2009 Singapore Asset Management Industry Survey, Monetary Authority of Singapore,July 2010.

Singapore boasts a number of other

attractive tax features

Beyond the offshore fund exemption, two other notable tax

incentives have encouraged the development of Singapores asset

management industry. One is a special low 10% tax rate on fund

managers qualifying fee income that, together with the tax-free

status of company dividends, makes Singapore a highly attractive

place for asset managers to locate themselves. The other is the

Singapore resident fund scheme, introduced in 2006. Although it

carries some additional conditions intended to ensure such funds

have economic substance in Singapore, this allows Singapore-

domiciled funds to claim similar exemptions to those enjoyed by

qualifying offshore funds. Singapore-domiciled funds also have

the advantage of being eligible for the benets under Singapores

extensive tax treaty network.

All in all, Singapores tax regime has clearly been instrumental

in the rapid growth of asset management activity in the territory

in recent years. Singapore has also been particularly effective in

developing a harmonized approach to the regulation and taxationof investment funds and asset managers. We have no doubt that

the Singapore authorities will continue to listen to the industrys

concerns and to ne-tune their tax incentives. Anti-avoidance rules

in other jurisdictions which are major investment destinations,

such as India, are only likely to stimulate further demand for

Singapore-domiciled funds.


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Hong Kong has used tax incentives to

strengthen its position as a leading offshore

fund center

Hong Kong is a well-established Asian asset management center,

with AuM of HKD8.5t (USD1.1t) at the end of 2009. 2 Hong Kong

benets from a larger domestic market than Singapore, with

36% of AuM sourced from local investors. In the medium to longterm, the Mandatory Provident Fund should help to underpin this

domestic demand for asset management services.

Hong Kong has also long been a regional leader in terms of

international business, and enjoys a high concentration of asset

management expertise. For international investors today, one

of Hong Kongs leading attractions is its status as a gateway

for capital entering and leaving the rest of China. The 2009-

2010 Annual Report of the Hong Kong Securities and Futures

Commission (SFC) notes that asset management and fund

administration business connected with mainland China increased

by 70% during 2009.

In general terms, Hong Kongs tax environment is an attractive one

for asset management. Only domestically sourced income is liable

for tax, and there are wide-ranging exemptions for individuals

investment income and for individual and corporate capital gains.

In general, authorized or bona de widely held funds enjoy tax

exemption in Hong Kong. In addition, 2006 saw the introduction of

new rules exempting funds managed and controlled outside Hong

Kong from tax.

To qualify for the offshore exemption, funds must be non-resident,

must only carry out certain specied transactions and need to

avoid any other prot-generating activity in Hong Kong, except

where this is incidental to the specied permitted transactions.

The test of non-residency depends on where the funds central

management and control takes place. This typically means the

location where board meetings are held, and is not a barrier to

Hong Kong-based managers making decisions about the funds

investments. The denition of specied transactions is also

very broad and includes investments in equities, debt, warrants,

futures, options, foreign currencies and derivatives.

2 2009-2010 Annual Report, Hong Kong Securities and Futures Commission, June 2010.

The introduction of the offshore fund exemption was an explicit

attempt to attract asset management activity to Hong Kong,

particularly in light of Singapores growing success and a

perception that uncertainty about the tax status of offshore funds

managed in Hong Kong was a barrier to regional competitiveness.

For this reason, the exemption incorporated 10 years of

retroactivity, eliminating any outstanding questions over historic

tax liabilities.

The offshore fund regime includes anti-avoidance measures. As

in Singapore, Hong Kong investors holding more than 30% of

an offshore fund will be liable for tax on their share of the funds

income, even if the fund itself remains exempt from Hong Kong tax.

Hong Kong continues to monitor its

competitive position. Industry bodies are

hoping for further changes

Moving forward to the present, we believe that the Hong Kong

authorities continue to monitor the progress of Singapore and

other regional centers, and that they are committed to remainingcompetitive from a tax standpoint. For example, Hong Kong

continues to develop its tax treaty network, which now includes

19 tax treaties with negotiations under way to conclude around

another 10.

With this in mind, industry leaders in Hong Kong are lobbying for

an extension to the denition of specied transactions permitted

under the offshore fund exemption. These currently exclude

securities issued by private companies, making Hong Kong less

attractive to private equity fund managers than Singapore.

Another area where Hong Kong appears to be at a disadvantage

is the rate of tax applicable to fund management fee income.

As already discussed, this enjoys a reduced 10% tax rate in

Singapore. In contrast, asset managers in Hong Kong are liable for

corporation tax at the standard rate of 16.5%.

Maintaining the attractiveness of Hong Kong as a location for

asset management activity is a stated priority of the territorys

government. Of course, tax is only one part of Hong Kongs

appeal, and it remains to be seen what steps Hong Kongs Financial

Services and Treasury Bureau may take to boost competitiveness

in the years ahead.


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4 Viewpoint The struggle for supremacy in Asian asset management

Australias asset managers see local

tax treatments as a potential barrier

to expansion

Asset management in Australia has a long pedigree. The domestic

industry is large in relation to Australias population and economic

output, reecting the countrys compulsory superannuation

scheme. As of early 2010, AuM stood at AUD1.7t (USD1.6t),3 andthe prospect of growing superannuation contributions means that

this gure is likely to increase rapidly. According to the Australian

Treasury, the total scale of the industry could increase by several

orders of magnitude over the coming 25 years.4 Australia is also

an innovative market for asset management, having pioneered

infrastructure funds and become a leading hedge fund base in

Asia, as well as the worlds second largest Real Estate Investment

Trust (REIT) market.

In addition to its strong domestic investment industry, Australia

has seen increasing inward investment in recent years, attracted

by its resilient economic growth and expanding resources sector.

At the same time, domestic investors are in growing need ofoverseas diversication and Australian asset managers are

becoming keener to leverage their expertise across the Asia

Pacic region.

However, the Australian tax treatment of investment funds

has remained a throwback to an era of family trusts and has

increasingly been seen as a barrier to Australias development

as an Asian asset management hub. Most Australian investment

vehicles are structured as unit trusts, which can be exempted

from tax if they demonstrate that all unit holders are presently

entitled to their shares of the trusts income. This means that

100% of all income (for example, interest, dividends and capital

gains) must be distributed to unit holders not an easy task.Concessional rates or an exemption from Australia tax can also

apply to non-residents investing in trusts that qualify as Managed

Investment Trusts (MITs). To receive authorization as MITs, funds

need to satisfy widely held tests that trusts should have at least

25 members for wholesale funds and 50 members for retail funds,

and that the 10 largest investors should own less than 75%.

3 Data Alert, Austrade, March 2010.4 Super System Review: Final Report, Commonwealth of Australia, July 2010.

A program to boost the efciency and

competitiveness of Australias investment

industry is under way

In response to this perceived weakness, current and previous

Federal Governments have set out a program of changes designed

to improve the efciency and competitiveness of the Australian

investment market. Two changes to the tax treatment of MITs havealready been enacted. One was intended to clear up a persistent

source of uncertainty by allowing funds to elect capital gains

tax treatment, avoiding the threat of revenue treatment for the

disposal of certain types of client assets. The other change has

been to cut withholding tax on payments from Australian MITs to

non-resident investors from the previous 30% to a more regionally

competitive 7.5% rate, as long as the non-resident is based in a

jurisdiction that is considered responsive to information requests.

This is clearly an improvement, but it does not match Singapore

or Hong Kong, where funds do not withhold tax on payments to

foreign residents.

Looking forward, a raft of further changes to the Australian taxand regulatory environment is planned, each of which could

potentially have an impact on the countrys competitiveness as

an Asian asset management center. Of these, three in particular

relate to the taxation of investment funds.

The rst is a set of additional changes to the tax treatment of MITs.

Details are yet to be nalized, but the main aims are to simplify

the attribution of taxable income to unit holders, to introduce a

de minimis rule to the requirement for a trust to distribute 100%

of its income on an annual basis, to reduce the potential for

double taxation and to make other improvements to certainty

and efciency.

The second proposed change is the introduction of an Investment

Manager Regime that would exempt non-resident funds managed

by an Australian asset manager from tax on non-Australian

income. The third anticipated change is that non-resident funds

will not be liable for previous prots made from trading Australian

securities. Other possible developments include some form

of tax exemption for sovereign wealth funds; a review of the

competitiveness of Australian collective investment vehicles; and

plans to introduce a level playing eld regarding the tax treatment

of Islamic nance products.


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Although long overdue, it is probably true to say that the planned

reforms are more about catching up with Australias regional

rivals than about opening up a lead in the competitiveness stakes.

There are some doubts over the current Governments ability

to implement the planned measures in full, despite bipartisan

support for reform. The Australian Tax Ofces recent high-prole

skirmishes with the private equity industry also risk sending out

mixed messages.

Nonetheless, if all the planned and proposed changes to Australias

tax system are introduced, the country will have taken a huge

step toward expanding its role as an asset management hub in the

Asia Pacic region. A clearer and more competitive tax regime,

combined with the growth dynamics of superannuation and

Australias established expertise and supporting infrastructure,

could have very benecial long-term effects.

This paper sets out to compare the current and anticipated tax

environments in three major Asian centers for asset management

activity. In a short document, this can only ever be an overview

exercise, but we feel that a comparison of the tax regimes in

Singapore, Hong Kong and Australia reveals some interesting

observations.

In terms of the simplicity of its approach and the extent of its

tax incentives, Singapore is probably the most attractive of the

three jurisdictions, a conclusion supported by the rapid growthin AuM it has achieved over the past decade. Hong Kongs tax

environment is broadly comparable, although marginally less

competitive in some aspects, particularly in its appeal to private

equity fund managers. Looking forward, we expect to see further

incremental changes in both territories tax regimes. Meanwhile,

Australia is starting from a very different place and is in the middle

of a complicated process of reform that may yet be affected by

domestic politics. The Australian asset management industry is,

however, determined to see the proposed reforms delivered.

Even though we have not attempted to make meaningful

comparisons of other factors that could determine each territorys

competitiveness, we stress that tax can only ever be part of a

broader picture. Australia and Hong Kong enjoy particularly

deep pools of skilled staff. Singapore and Hong Kong have their

own geographic and cultural advantages. Australia benets

from its large and growing domestic asset base. It is also worth

remembering that possible future cooperation could subtly alter

the tax dynamics of the region.

Lastly, we should not overlook the potential emergence of other

asset management hubs within the region. There is a huge

domestic asset management industry in South Korea; growingIslamic-specialized activity in Malaysia and Indonesia; and an

emerging renminbi fund industry in China. Nor can a revival in

Japans fortunes be ruled out.

In conclusion, we want to stress that despite the speed of

international capital ows, encouraging the development of asset

management activity in a particular location is very much a long-

term project. Tax is a very important factor, but tax incentives

need to be aligned with other crucial elements if they are to be

effective. Success will not come overnight, but will depend on clear

and consistent policies that attract business over a period of many

years. Governments across the Asia Pacic region clearly believe

that this is a prize worth ghting for.

Conclusion: tax is crucial in attracting asset management

business, but it is only part of the equation


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Rowan MacdonaldAsia Pacic Tax Leader

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Antoinette Elias

Tax Leader, Australia

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Florence ChanTax Leader, Greater China

Direct: +852 2849 9228


Chong Lee SiangTax Leader, Singapore

Direct: +65 6309 8202


Contributors

Kathy KunNational Tax Center, Hong Kong

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Desmond TeoFinancial Services Tax/International Tax, Singapore

Direct: +65 6309 6111Email: [email protected]

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The Struggle for Supremacy in Asian Asset Management