Maximising the benefits of FTAs in Asia Asia Pacific Tax Centre November 2012.

Maximising the benefits of FTAs in AsiaAsia Pacific Tax Centre

November 2012

Maximising the benefits of FTAs in AsiaPage 2

Agenda

► Recap on FTAs & key features► New Zealand’s FTA coverage + insight on CN & ASEAN► Progressive FTA benefits► Optimising value from FTAs

► Identifying benefits and “quick wins”► Progressive benefits - interaction with supply chain optimisation

► Supply chain impact: examples► Lessons learned

► Strategic sourcing, realignment of substance


Focus of today’s session

► Key aims:► Evaluate how FTA benefits can be claimed► Explain the impact of FTAs through the supply chain► Evaluate opportunities to maximise FTA benefits► Examine opportunities to add incremental benefits

► Key learning:► How reviewing FTA claims in conjunction with supply chain

planning can drive optimal value


Key features of FTAs in general

► General features of FTAs include:

Feature Summary considerations Impact

Rules of Origin

►ROO must be met to claim preferential duty rates – in general:►“Wholly obtained” (resources) or “substantial transformation” (manufactures) ►“Substantial transformation” if transformed into new good by manufacturer – ►(1) Value Added Rule (2) Change in Tariff Classification (3) Process Rule►Accumulation principle important in multi-stage value chain

High

Admin issues

►Significant – main requirement often is obtaining certificate of origin (COO)►COO is issued by authority of exporter but benefits borne by importer ►Generally, must prove compliance with ROO to obtain

High

Direct shipment

►Generally, delivery must be direct between member countries to obtain benefit►Transit allowed in some cases

Med

Third country invoicing

►Goods shipped between two Members, but invoiced through a third country►Most FTAs do not prohibit this, but “silence” risks prevention of FTA benefits

Med


Summary of key New Zealand FTAsAnd a comparison between ASEAN-China

► Key features of New Zealand’s key FTAs are as follows:

ANZ-ASEAN NZ-China ASEAN-China

ROO (differs per product)

►Accumulation principle►Co-equal approach (tariff

change or value add w. 40% FOB threshold)

►Reduced red tape►Transit allowed

►Accumulation principle►Tariff change or value add

w. 40% FOB threshold►Reduced red tape►Transit allowed

►Accumulation principle►Tariff change or value add

w. 40% FOB threshold►Reduced red tape►Transit allowed

Admin ►COO, simplified procedure ►COO (but not on CN import)

►COO

Benefits ►Accumulation principle►Eliminates 90% of tariffs►Liberalised trade / access►Investor protection►Facilitate goods movement

►Eliminates 96% of tariffs to 2019, inc. key exports

►Increased cooperation►Investor protection►Liberalised trade/access

►“Normal” vs. “sensitive”►Normal duties almost

eliminated►Liberalised services trade►Greater investor protection

Overall ►High benefit ►Medium/High benefit ►Medium benefit


Optimising FTA benefits through the supply chain – three tiers

Map FTA benefits with current flows

to claim FTA benefits

Map potential FTA benefit with

strategic sourcing opportunities

Restructure supply chain to optimise

FTA, tax and operational

benefits

1 2 3Claim FTA benefits Strategic sourcingSupply chain optimisation

Complexity and implementation challenges

Benefit

2/3. Supply chain restructuring1. Quick wins


1. Quick wins - claiming existing benefitsMapping supply chain flows and claiming FTA benefits

► 5-point process to evaluate, apply and obtain strategic FTA benefits:1. Identify FTA coverage based on current supply chain product flows

2. Ascertain overlaps between FTAs for these flows

3. Evaluate the respective benefits of the FTAs, including overlaps (see table below)► Including duty, market access, relaxed ROO / qualification, reduced admin (may conflict)

4. Make application

5. Ongoing management/administration of the process

► AANZ: ASEAN: Australia & New Zealand FTA► TPP: Trans Pacific Partnership► BL / SP: Bilateral

SG TH MY Bru. ID PH VN CM LA MM AU US CN Peru Chile

AANZ AANZ AANZ AANZ AANZ AANZ AANZ AANZ AANZ AANZ AANZ

TPP TPP TPP TPP TPP TPP TPP TPP

BL BL BL BL BL

Bilateral only for CN

Multilateral and bilateral agreements with ASEAN


1. Quick wins – other concerns

► Examples in evaluating the benefit include:

► But challenges remain:► Complexity of ROO requirements, admin process and duration for COO► Full awareness of benefits available

Question Summary considerations

If multiple FTAs, which to claim?

1. Differs based on type of product, service or investment flow

2. E.g. bilateral tariffs may be lower than ASEAN-ANZ for NZ exports to ASEAN

3. Not only the tariff is important: must evaluate whole package

Concerns outside of duty rates

1. Variance of ROO between parties, self-declaration

2. Special measures for certain products (e.g. textiles, clothing, agriculture)

3. The existence or removal under the FTA for non-tariff barriers

Services or investment flows

1. “Negative list” under the TPP – beneficial for services

2. …but no investment chapter in TPP

Other provisions?

• Competition policy, IP considerations – NZ FTAs affirm multilateral obligations in this area


2. Opportunities through supply chain restructuring

► Assuming claims are both possible and feasible:1. Could the product flow or supply chain footprint be changed to maximise FTA

benefits?

2. How may FTA benefits be enhanced by operational and tax savings?

► Two major opportunities to enhance existing potential FTA benefits

1. Strategic sourcing 2. TESCM planning

Concept 1. Evaluate alternative raw material supplies to maximise FTA benefits

1. Full supply chain restructuring including FTA benefit optimisation

Applies 1. All NZ importers / exporters 1. All companies – discrete or full scale

Process 1. Spend and FTA analysis, full cost / benefit evaluation and implementation

1. 5-stage process: opportunity assessment, feasibility, design, implementation, sustain

Example 1. NZ importer of raw materials

2. Sources currently from Europe at 10%

3. Changes to MY, claims treaty benefits

4. Reduces duty to 0% for this product

1. NZ domestic value chain, goods exporter

2. Sets up MY manufacturing, procurement

3. FTA benefits claimable on purchase/sale

4. Tax/operational benefits added


2. Strategic sourcing process

Project enablers

Analysis Definition Transition

Realise savings

Recommend ways toRealise savings

Strategicsourcing

Identify savings opportunities1.Undertake full spend analysis2.Identify quick wins3.Select priorities4.Benchmarking5.Blueprint

Full evaluation6.Supplier selection7.Final analysis

Realise savings8.Negotiate per blueprint9.Claim FTA benefits

Examples where strategic sourcing may apply:

A. Import of raw materials to NZ manufacturing siteB. NZ co with ASEAN or CN manufacturing presence, buy/sell from regionC. NZ co with ASEAN or CN manufacturing presence, buy/sell from NZ (NZ materials export)


2. Option A – changing the source of imported materials

1. Goods for import currently sourced from EU

2. Evaluation of potential suppliers undertaken

1. Product characteristics / quality

2. Benchmark costs

3. FTA benefits mapped indicate overall cost advantages,

1. Net of quality and FTA benefits

2. Full costs included in review

New flow

Existing Flow

11. NZ co with domestic

manufacturing, source overseas & import to NZ

EU

Key Plants R&D Distribution Sales HQ


2. Option B – changing the source of imported materials to overseas location


2. Similar to A, evaluation of potential suppliers undertaken

1. Product characteristics / quality

2. Benchmark costs

3. FTA benefits potential

3. Net cost benefits, as before1. Differing FTA arrangements

2. Origin rules on further manufacturing & supply key

Future flow

Existing flow Key Plants R&D Distribution Sales HQ

21. NZ co with ASEAN or CN

manufacturing presence, buy/sell from region

EU


2. Option C – increased export opportunities for NZ companies


2. Opportunities for NZ exporters to maximise access to ASEAN

1. Importer can also benefit from reduced duty, accumulation rule

3. Net cost benefits, as before1. Note admin requirements for NZ

exporter, but benefit in importer

2. Main benefit to exporter is increased scale through access

Future flow

Existing flow Key Plants R&D Distribution Sales HQ

31. Independent co with

ASEAN manufacturing, buy/sell from NZ

EU


3. Case study (1/3): incremental benefits through supply chain planning

► Supply chain planning can drive incremental benefits on FTAs► Operational benefits through more effective

operating model► Tax benefits through incentives, substance

► Fact pattern:► Procurement operations converted to

centralised model (in Singapore)► Manufacturing in MY converted to contract► Entails functional shift to SG site

► Demand aggregation► Supplier identification► Negotiation, potentially contracting► Supplier management► Supply chain planning, manufacturing strategy► Inventory ownership, management

1.NZ co with MY manufacturing presence, SG buy/sell procurement in a “Supply Chain Principal”

Sourcing

Sale to manufacturer

Sale to customers


2. Case study (2/3): key features and benefits

1. FTA benefits claimable on import of raw materials to manufacturer – 0% duty

2. Accumulation benefit on sale of processed goods from MY

► Export still qualifies for ANZ-ASEAN FTA preference – 0% duty

3. Goods to not enter SG, but 3rd country invoicing allowed

4. Tax incentives on centralised procurement in SG and manufacturing functions in MY

5. Further operational benefits

►Must carefully review differences in ROO / accumulation of benefits

►Careful planning essential: switch sale/trade may be insufficient to claim ROO in other examples

Hig

hL

ow

Ben

efit

Low HighBusiness impact

Supply chain management

company

Service company

Full Principalwith intellectual

property

Sourcing company

Med

ium

Sales and marketingPrincipal

► Supplier identif ication► Demand aggregation► Negotiation► Contracting and

f ramework agreements► Supplier management

and development Plus► Logistics management► Import and export

processing► Freight forwarding

Plus► Supply chain planning► Inventory ownership

and management► Manufacturing strategy► Research and

development strategyPlus► Sales and

marketing strategy► Pricing policies

Plus► Brand management

Import and export

company


Case study (3/3): tax incentives – further adding to the potential benefits

► Centralised procurement and manufacturing operations in ASEAN country (Singapore in this example)

► Incremental tax benefits, adding to FTA and operational benefits, through tax incentives

► Including Singapore, example incentives include:

Singapore Thailand Malaysia

Incentive type►IHQ or RHQ (DEI incentive)

►Global Trader Program

►Board of Investment (BOI) inc.

►International Procurement centre

►Pioneer status

►Investment tax allowance ITA

Typical benefits

►Tax rate potentially to below 5%

►Up to 10 years (5 + 5)

►Potential tax exemptions (BOI)

►15% tax rate (IPC)

►200% R&D deductions

►Partial or full tax exemption (Pioneer)

►Enhanced tax allowance (ITA)

►Up to 10 years

Conditions►Spend, headcount,

functions, product, industry, etc

►Location, spend, turnover, and other criteria

►Product, industry, spend, technology


Key lessons learned

► FTA benefits can be extensive, if claimed

► These benefits can be enhanced by tax and operationally effective supply chain planning

► Strategic sourcing in a centralised procurement entity is one example of this:► There are several others

► Care should be taken to analyse ROO, admin requirements and other key factors:► Common experience is that admin burden is extensive and the rules are

complex


Questions

Thank you

Maximising the benefits of FTAs in Asia Asia Pacific Tax Centre November 2012.

Documents

benefits of ftas

optimising fta benefits

key features of ftas

tiers map fta benefits

impact of ftas

potential fta benefit

supply chain planning

optimal value slide