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By Dezan Shira & Associates
Editor: Vasundhara Rastogi

On November 12, 2017, the Association of Southeast Asian Nations (ASEAN) and Hong Kong Special Administrative Region (SAR) of China signed a free trade and investment pact to strengthen economic cooperation between the two regions and stimulate economic development. The two agreements, the ASEAN-Hong Kong, China Free Trade Agreement (AHKFTA) and the ASEAN-Hong Kong Investment Agreement (AHKIA), were signed at the 31st ASEAN Summit in Manila and will come into force on January 1, 2019.

The agreements cover all aspects of trade in goods, such as tariffs; rules of origin; non-tariff measures; customs procedures and trade facilitation; trade remedies; technical barriers to trade; and sanitary and phytosanitary measures. They also include elements related to trade in services; investment; economic and technical co-operation; dispute settlement mechanism; and other areas of interests to be mutually agreed upon by the two parties. Chris Devonshire-Ellis of Dezan Shira & Associates comments: “This FTA brings Hong Kong into parity with mainland China which has had an FTA with ASEAN for several years. Hong Kong’s unique mix of China and Asian focused financial services and regional service support are a great mix with ASEAN’s overall reach and this agreement provides a much needed boost to Hong Kong’s overall attractiveness as an investment destination for Asia.”

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Strong trade links between Hong Kong and ASEAN

Hong Kong holds a distinct advantage across the Asia-pacific region in terms of its unique location and strong links to the international markets as well as Mainland China. While Hong Kong is part of China, it conducts its economic and trade relations separately from the mainland and serves as a bridge connecting the Chinese mainland and Southeast Asia.

With the increasingly close economic and trade ties between China and Southeast Asia, Hong Kong plays an important role as a trade link between the two. For instance, through its Closer Economic Partnership Arrangement (CEPA) with Mainland China, Hong Kong provides preferential market access to Hong Kong service suppliers as well as tariff-free treatment for products of Hong Kong origin in China. This has therefore created a strong nexus connecting foreign businesses (mostly businesses from ASEAN) to China through Hong Kong.

Since 2012, the re-exports of goods of ASEAN origin through Hong Kong to China have risen at the rate of 6.4 percent annually on average. In 2016, 12 percent of trade between ASEAN and Mainland China, with a value of over US$54 billion, was routed through Hong Kong.

Further, in the last ten years, the value of bilateral commodity trade between Hong Kong and members of the ASEAN has increased by 72 percent. ASEAN is Hong Kong’s second largest partner in commodity trade. In 2016, the commodity trade between ASEAN and Hong Kong reached US$107 billion (HK$833 billion), whereas trade in services stood at US$15.4 billion (HK$121 billion) in 2015.

Among the individual member states, Singapore, Thailand, and Vietnam are Hong Kong’s leading trading partners, representing 38.8 percent, 15.7 percent and 15.2 percent of Hong Kong’s total merchandise trade with the region respectively.

In terms of investment, at the end of 2015, the ASEAN ranked sixth among Hong Kong’s destinations for outward direct investment, at US$ 28 billion (HK$218 billion), and also sixth among Hong Kong’s sources of inward direct investment, at US$ 71 billion (HK$555 billion).

Opportunities arising from the Hong Kong – ASEAN Free Trade Agreement

Hong Kong is among the world’s freest and most open economies. However, the customs duties imposed by ASEAN on Hong Kong goods put  Hong Kong at a great disadvantage in terms of its trade relationship with South East Asian countries. The newly signed AHKFTA is set to change this.

The FTA will reduce the customs duties imposed by ASEAN and improve Hong Kong’s overall competitiveness in the international market. The AHKFTA together with the China-ASEAN FTA and the Mainland China-Hong Kong CEPA will broaden Hong Kong’s position as a hub for international trade and services.

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In terms of business benefits, the agreement will offer four key advantages to stakeholders in the region, namely tariff reduction fortrade in goods; better and fairer investment protection; fewer restrictions for trade in services; and a longer stay for business travelers.

Previously, only seven of the ten ASEAN countries allowed business travelers from Hong Kong to stay in the country without a visa for up to 14 – 30 days. The free trade deal will allow Hong Kong business travelers to stay in any ASEAN country for up to 90 days, without requiring a business visa.

With regards to trade restrictions, both Hong Kong and ASEAN countries will remove barriers on foreign capital participation and the number of foreign workers employed. Foreign businesses can benefit significantly from AHKFTA as the agreement will extend Hong Kong’s network to cover all major economies in South East Asia. As all ASEAN member states are also economies along China’s Belt and Road Initiative (BRI), the closer ties established between Hong Kong and ASEAN will help foreign enterprises tap business opportunities offered by the BRI.

The content of this article is for general information purposes only and cannot be used as a substitute for obtaining professional advice where specific circumstances warrant. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the Machica Group.  For comments or inquiries, kindly email us at mail@machicagroup.com.

By Harry Handley

Under the Foreign Investment Act, 1991, which was amended in 2015, a vast majority of industries in the Philippines are completely open to overseas investment, allowing 100 percent foreign ownership in most cases. The country managed to attract over US$ 7 billion of FDI in 2016, 25 percent more than the previous year. The UNCTAD World Investment Prospects survey positions the Philippines as the 11^th most promising host country for investment over the period 2016-18. In order to best leverage the advantageous conditions, such as widely spoken English and access to the ASEAN Economic Community, the most effective market entry model must be chosen by entrants.

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Entry Models

There are a range of entry modes to choose from when investing in the Philippines. Each one is governed by different rules and, as such, each is suitable for different functions and business models. Below, the four main methods of entry are outlined.

Corporations

Companies can enter the Philippines by establishing as a corporation. This means registering a new legal entity with the Securities and Exchange Commission (SEC) in the Philippines. The structure of a corporation is such that the individual assets of the owners are legally separate from those of the company. Corporations come in two forms:

• Filipino corporation – minimum of 60 percent Filipino equity ownership;
• Foreign-owned domestic corporation – greater than 40 percent foreign equity ownership

The distinction between the two alternatives is important when it comes to land ownership and tax-incentive programs. Corporations can operate all functions of a business, and are typically profit-oriented enterprises. According to the World Bank’s Doing Business guide, setting up a corporation is a complex and long-winded process taking at least 28 days, four days longer than the Asia Pacific average.

Foreign-owned domestic corporations serving the Filipino market require a minimum of five shareholders and at least US$200,000 of paid in capital. The paid in capital can be reduced to US$100,000 if the corporation is involved in advanced technology or employs 50 direct employees. If the corporation is an ‘export market enterprise’ – defined as exporting at least 60 percent of its goods or services – the required capital is reduced significantly to P5000 (US$ 100).

Foreign-owned domestic corporations face the same tax conditions as local corporations: 30 percent corporate income tax and 12 percent VAT on local sales. Foreign corporations can register for numerous tax incentive with the Philippine Economic Zone Authority.

Branch Office

A branch office is a profit-oriented subsidiary of a foreign enterprise that engages in the activities of its parent company in the Philippines. This is the typical structure for business process outsourcing, such as call centers or back offices for multinational firms, which located in the Philippines due to low local wages as well as the large number of fluent English speakers. The establishment of a branch office typically takes three to four weeks from the time of filing with the SEC.

Similar to corporations, the capital requirements are US$200,000 for domestic market serving enterprises and P5000 (US$ 100) for export-oriented companies. The taxation of branch offices is also similar, with 30 percent corporate income tax and 12 percent VAT on local sales. However, branch offices also have to pay a 15 percent profit remittance tax on repatriation of profits to the parent company.

Representative Office

A representative office differs from a branch office in that it is not legally allowed to derive income. The key function of a representative office is to act as a liaison between the parent company and clients or partners in the Philippines. The minimum paid in capital for a representative office is a US$30,000 remittance from the parent company, which must be used for operational expenses. The average set up time for a representative office is similar to a branch office, three to four weeks from the date of application.

Regional HQ

There are two distinct types of regional headquarters: Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ). The graphic below shows what operations are legally allowed for both RHQs and ROHQs.

Regional or Area Headquarters (RHQ) are non-income generating offices of a foreign corporation. RAHQs are not allowed to participate in any management, marketing, or sales activities on behalf of branch offices in the Philippines or the mother company. Similar to representative offices, the main purpose of RHQs is to be a coordination and communication hub for subsidiaries, affiliates, and branches in the Asia Pacific region. The minimum paid in capital is US$50,000, to be used for the running of the office. Managerial and technical expatriate staff members will be taxed at 15 percent of gross compensation, rather than using the tiered income tax system.

On the other hand, a Regional Operating Headquarters (ROHQ) is an office of a multinational typically used for back-office functions. ROHQs are allowed to derive income only from affiliates of the parent company. ROHQs are afforded a special corporate income tax rate of 10 percent on taxable net income, as opposed to 30 percent for corporations and branch offices. In addition, 12 percent VAT is payable on local sales and 15 percent profit remittance tax on repatriation of profit. Similar to RAHQs, a 15 percent final withholding tax on the income of managerial and technical employees is payable rather than the standard income tax system. The minimum paid in capital for ROHQs is US$200,000.

Choosing an Effective Entry Model for Vietnam Investments

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