On 12 August 2015, the Productivity Commission - the Government’s independent research and advisory body on a range of economic, social and environmental issues - released a draft report on Barriers to Growth in Australian Service Exports, following an issues paper released on 2 April this year.
Submissions on the Draft Report are due by 18 September 2015 and it is expected that the final report will be provided to the Government in December this year and published by the Commission shortly afterwards.
The Draft Report examines the policy related barriers to growth of Australia’s export services, which account for approximately 70% of the Australian economy, but only represent approximately 20 per cent of Australia’s total exports.
The Draft Report is more than 300 pages long and assesses the barriers to growth of export services for six services sectors including financial services, education, health services, tourism, professional services and information technology.
Financial services - managed investment schemes
The Draft Report identifies the provision of financial services as Australia’s largest service sector in 2013-14, contributing $135 billion (gross value added) to the Australian economy, and the report includes a full chapter on financial services (Chapter 6).
For the purpose of this article, our focus is on managed investment schemes due to the mature banking and insurance export services markets where the restrictions to trade are relatively low.
The financial services chapter of the Draft Report discusses the opportunities to grow Australia’s financial services exports and the recommended policy changes, including some already underway, that could facilitate growth in financial exports.
This article examines some of the barriers that are being addressed and the proposed initiatives for reducing other barriers to exports of managed investment schemes, including:
- Current initiatives:
- mutual recognition agreements; and
- the Asia Region Funds Passport; and
- Proposed initiatives:
- structuring of managed investment schemes; and
- taxation of managed investment schemes.
Current initiatives addressing restrictions to cross-border exports
Current initiatives that are underway, addressing restrictions to cross-border marketing of managed investment schemes, are considered in the Draft Report and include:
- two mutual recognition agreements (MRAs) facilitating cross-border marketing of managed investment schemes negotiated between Australia and Hong Kong (which has not been used due to the costs associated with meeting investment requirements that are more restrictive than Australian requirements); and Australia and New Zealand (which has been heavily used and does not result in significantly increased costs); and
- the Asia Region Funds Passport (ARFP) being negotiated between Australia, New Zealand, Singapore and South Korea (who signed a statement of intent) and the Philippines and Thailand (who are part of the working group), which is due to commence in 2016. The ARFP will allow fund managers to market retail managed investment schemes that meet the passport rules (as regulated by their home regulator) in other passport countries.
The Commission supports the introduction of the ARFP, even though the FSC has noted that the taxation regimes in Australia and overseas are complex and a challenge to the success of the ARFP and the increased financial integration generally, and recommends that the Government continue to progress the ARFP and encourage other jurisdictions to participate in the ARFP.
Proposed initiatives addressing restrictions to cross-border exports
Structure of managed investment schemes
The Draft Report identifies the opportunities for Australian fund managers in Asia because of the growing levels of wealth in the region. However, it recognises that Australian fund managers are competing with providers of Undertakings for Collective Investments in Transferable Securities (UCITs) domiciled in Luxembourg and Ireland (that are substantially more popular, well understood and accepted in Asia), exchange-traded funds (ETFs) and funds set up as open-ended investment vehicles (OEICs).
However, the Commission does not think that the single responsible entity structure is particularly restrictive due to the ability for responsible managers to delegate, including delegating asset management.
Taxation arrangements for financial services
The Commission considers that taxation policy can act as a barrier to service exports and the Draft Report identifies taxation issues that have implications for international investment in managed investment schemes.
The Draft Report includes a number of draft recommendations relating to taxation arrangements for financial services, including recommendations that the Government should simplify Australia’s regime of withholding taxes on foreign investment (i.e. taxes on income earned in Australia by foreign investors) and continue to facilitate the development of a range of collective investment vehicles as part of the Tax White Paper process.
In our experience, having followed the development of the Undertakings for Collective Investments in Transferable Securities (UCITs) regime in Europe since inception, the lack of harmonisation of taxation policy between jurisdictions due to political and commercial drivers has caused fund managers to find suitable ways of successfully marketing their UCITs in different jurisdictions, notwithstanding the different tax regimes.
Consequently, we consider that Australian fund managers should be aware that harmonisation of taxation between Australia and other jurisdictions is unlikely to occur (particularly in the short to medium term) due to political and commercial drivers.