How jurisdictions in Asia-Pacific invite businesses from around the world

Overview

Like Asia-Pacific as a whole, East Asia is a hugely complex area. Anyone considering investing in the region, which comprises mainland China, Hong Kong, Japan, Macau, Mongolia, North Korea, South Korea and Taiwan, will need to be aware of major cultural differences among its jurisdictions. These will help shape investment decisions, as will bubbling geopolitical tensions – between the US and China, for example, or between Japan and Korea.

Still, it’s not hard to understand the appeal. Taiwan and South Korea offer world-leading expertise in high-end electronics research and development (R&D) and manufacturing. Hong Kong is a major global financial hub, thanks to its simple, favorable tax system and lack of foreign exchange controls. Japan, meanwhile, is one of the world’s largest countries in terms of GDP and local purchasing power – and a world leader in patent registration and R&D.

Yet you can’t consider East Asia without looking at mainland China, which remains of major interest to a broad range of companies. “Any consumer-facing business will be drawn by the size of China’s market, while manufacturers will be lured in by China’s superior infrastructure and supply chain,” says Derrick Chen, Tax Partner, Ernst & Young (Shanghai) Certified Tax Agency Company Limited. “With years of endeavor to remove the burden of red tape on foreign investments, and experiments in free-trade zones in Shanghai and Hainan boosting global trade and lifting foreign exchange controls, building a presence in mainland China is now becoming much easier.”

What the region offers

Incentives overview

East Asian discretionary incentives tend to be offered at a local authority level. Within mainland China, for example, the various local governments may compete fiercely for foreign investment using subsidy programs. Different regions do, however, tend to prefer different sectors.

“While the Shenzhen area, for example, is chasing digital and IT-related businesses, Shanghai leans more towards life sciences, advanced manufacturing, automotive and other high-tech industries” says Chen. “And across mainland China as a whole, greenfield projects tend to attract the most discretionary subsidy programs.”

This sense of locality plays out across East Asia. In Taiwan, municipal governments are pushing reductions in property tax, payroll and rent, and low-interest financing.

In Japan, meanwhile, incentives are statutory but generally require pre-approval, and prefecture-level incentives tend to provide more significant cash benefits compared to national government incentives. Individual prefectures offer cash grants subsidizing office rent, job creation and investment, which in some cases could offset up to 25% of capital investment. They also offer corporate tax credits or special depreciation for investments. This may even apply for the expansion of existing operations in addition to new investment.

South Korea also offers generous cash grants at national and municipal levels. “In South Korea, high-tech manufacturers making new investments, including expansions, can receive discretionary cash grants, generally ranging between 5% and 10%, but the percentage could be much higher depending upon the industry and project parameters,” says Weinstein. “At the local level, local tax reductions and customs duty exemptions are available, largely through the country’s dedicated foreign investment zones, free trade zones and free economic zones.”

R&D incentives

R&D incentives in East Asia often take the form of tax super-deductions. In mainland China, the figure sits at 50%, meaning $100 of R&D expense is treated as $150 from a tax perspective. The figure was temporarily uplifted to 75% starting from 2018 and was due to expire at the end of 2020, but the government has recently announced an extension of the 75% rate, and a further increase to 100% for manufacturing sectors. Another Chinese R&D incentive is the High and New Technology Enterprise (HNTE). This offers a reduced income tax rate of 15% instead of 25%, but only applies to companies holding IP registered in mainland China.

Hong Kong introduced its R&D super-deduction in 2018. Companies will be able to enjoy tax deduction for expenditures incurred on domestic R&D in Hong Kong, subject to certain conditions. The first HKD 2 million spent on qualifying R&D activity will enjoy a 300% deduction and expenditure beyond that will enjoy a 200% deduction. There is no cap on the amount of enhanced tax deduction.

Japan’s R&D tax credit regime, meanwhile, allows for a reduction of 6%-14% of a company’s corporate tax. The equivalent scheme in Taiwan is aimed largely at companies investing in smart manufacturing, 5G, biotech and new pharma. Companies targeting Taiwan’s existing electronics-centered manufacturing base can claim subsidies equivalent to 50% of total R&D spend, while avoiding import duties on machinery and equipment too.

Sustainability incentives

Unlike Europe, which has more established climate change policies, sustainability is an area that East Asia has yet to fully explore. Hong Kong, for example, offers limited sustainability incentives on a regional level. Mainland China, meanwhile, lacks a substantial nationwide tax incentive focusing on sustainability, instead offering merely a scattered network of local subsidy programs to encourage investment in green technology.

Overview

The Association of Southeast Asian Nations (ASEAN) was established in 1967 in Bangkok, with the aim of accelerating the economic growth, social progress and cultural development of the region. It now comprises Malaysia, Indonesia, the Philippines, Singapore, Thailand and Vietnam, as well as Brunei, Myanmar, Cambodia and Laos.

These days, many businesses see ASEAN as a hub from which to access the broader Asian market – as well as an increasingly important market in its own right. For example, ASEAN is the EU’s third-largest trading partner, after the US and China.² Its total population exceeds 600 million,³ and the region benefits from strong free-trade agreements among its members.

The region also boasts a strong offering across the full spectrum of manufacturing. “Indonesia, Vietnam and Thailand offer inexpensive labor for low-cost production, notably in food, electronics and automotive respectively,” says Amarjeet Singh, EY ASEAN Tax Leader. “But modern high-margin manufacturers will look to Singapore and Malaysia for their expertise in IP and technology.” Singh notes Hyundai’s recent decision to produce electric vehicles in Singapore, and the presence there of top pharma groups such as GSK and Pfizer.

ASEAN’s appeal as an alternative manufacturing base continues to grow – not least since the rise in tensions between China and the US. “We’ve even seen Chinese companies setting up in ASEAN, in order to tap into the lucrative US market more easily,” says Singh. Other strong ASEAN sectors include shared services, in which the Philippines, with its cheap but skilled English-speaking workforce, has become one of the world’s most attractive countries.

What the region offers

Incentives overview

ASEAN has long been known for its generous incentives, which tend to come in the form of tax incentives rather than cash grants. This may involve a corporate tax exemption and/or a concessionary rate. If the underlying rate in an ASEAN country is 20%-24%, for example, the concessionary rate may be 5%-10%.

A second form of tax incentive – enhanced capital allowance, or tax depreciation – is common to the Philippines, Vietnam, Thailand, Singapore and Malaysia. Here, for every dollar the investor spends on capital expenditure – investing in, say, building a factory – the country may give an additional allowance to the tax depreciation that’s already embedded in tax law. So for every dollar spent, it may receive another $1.50 as a tax allowance.

ASEAN countries also offer certain incentives aimed at attracting companies from particular sectors. “This may be a full or partial tax exemption for the services sector, for example,” says Weinstein. “That’s an incentive common to Malaysia, Singapore, Thailand and the Philippines. These countries also offer dedicated incentives to encourage businesses to set up in specific regions.”

R&D incentives

ASEAN countries offer a range of cash grant incentives for R&D. In Malaysia, for example, for every dollar the company spends on R&D, the government will give a further 50 cents as a subsidy.

These jurisdictions also offer tax super-deductions on R&D expenses. In the Philippines, for example, companies may soon be able to claim up to 200% based upon a currently proposed bill that is in the final stages of legislation; in Singapore, it’s 250%; in Malaysia it could be as high as 400%. But even that may not be the most enticing option. “In practice, companies may choose to use their proposed R&D spend as a negotiation tool to secure a full or partial tax exemption, rather than get the tax super-deduction, as it may prove more lucrative,” says Singh.

Sustainability incentives

Sustainability is starting to appear high on the priority list for ASEAN nations, many of which are particularly vulnerable to the impacts of climate change – from urban pollution and heatwaves to flash floods and rising sea levels.

Various incentives are now starting to appear in the region, for companies installing solar panels on buildings, for example, or setting up green data centers. “In the Philippines, the Green Jobs Act offers an additional 50% deduction for training expenses and R&D for Climate Change Commission-certified projects that help preserve or restore the quality of the environment,” says Cheryl Edeline C Ong, Tax Partner, SyCip Gorres Velayo & Co. (also known as SGV & Co. or EY Philippines). 

ASEAN countries offer various incentives to encourage investment in other energy-efficient equipment, or for companies providing green-related services. Malaysia, for example, offers incentives for companies undertaking renewable or biomass energy initiatives, such as using palm oil waste to generate electricity.

Overview

Oceania is a vast continent comprising Australia, Papua New Guinea and New Zealand, as well as 11 other countries with populations of under one million, from Fiji to Micronesia and the Marshall Islands.⁴

While Papua New Guinea has a strong offering in mining and petroleum, a lack of infrastructure, poor level of local education and high cost of security make it a challenging place in which to operate. The country currently ranks at 120 on the World Bank’s Ease of Doing Business list.⁵

Australia and New Zealand, meanwhile, are a dramatically different matter. While not without issues of their own – the distance from major markets, for example, and the trouble of coordinating time zones with the US and EMEIA – they offer much to entice the curious multinational: safe and familiar business structures, the use of English, world-beating education and research institutions, solid infrastructure and a lifestyle that’s attractive for talent.

Hence, for many Western companies – especially in the wake of geopolitical tensions surrounding China – Australia and New Zealand represent a safe and familiar haven from which to do business with the Asia-Pacific region.

But it’s not just about familiarity. Australia and New Zealand also boast excellent reputations for agriculture and resource extraction, as well as a growing renown for high-end manufacturing, research and innovation.

“In the wake of COVID-19, which highlighted the vulnerabilities of its supply chain, Australia is investing $1.3 billion in its Modern Manufacturing Strategy,” says Christine Reizner, Senior Manager, Global Investment, Innovation and Location Services, Ernst & Young Australia. “This offers grant funding to companies operating in the areas it sees as key – resources, technology, medical products, critical minerals, clean energy and recycling, food and beverage, defense and space.”

What the region offers

Incentives overview

If you need proof of Australia’s appetite for foreign investment, just look at what the government offers to attract and draw that money into the country. “Australia currently provides $233 billion-worth of incentives, across 4,500 different programs,” says Reizner. “These schemes are designed to encourage innovation and the development or expansion of infrastructure projects that support job creation, particularly in the country’s less well-served regions.”

Most incentives in Australia are obtained by competitive grant funding programs or by directly engaging state governments, which determine the amounts available on a case-by-case basis. Cash grants, the most common type of incentive, don’t tend to exceed 50% of the project cost. 

In New Zealand, discretionary incentives are quite common, and tend to be aimed at particular industries, such as technology, agriculture and high-level, sophisticated manufacturing, while again aiming to encourage business towards specific regions.

R&D incentives

Australia’s flagship R&D tax incentive program, which dates back to 1986, was one of the first of its kind globally. Its focus is R&D and the commercialization of novel products, processes or services. There are around 13,000 claimants to Australia’s R&D incentives every year.6

New Zealand recently introduced a new R&D tax incentive, which already offers world-class benefits, aimed at retaining and attracting investment and jobs in science and other technology. The new program covers a broad range of industries including pharmaceutical, IT and high-tech manufacturing and uses a globally recognized definition of R&D.

Sustainability incentives

Australia has two flagship sustainability programs: the Australian Renewable Energy Agency (ARENA), which provides cash grants for new and emerging technologies; and the Clean Energy Finance Corporation, which offers concessional loans for the deployment of wind and solar farms, and carbon capture and storage.

New Zealand is similarly focused on green and sustainable technologies. The Energy Efficiency and Conservation Authority (EECA) offers funding for various projects from emerging technologies to industry decarbonizations.

Physical location is one of the most important, yet most complex areas a business will ever have to consider. There’s a huge amount that the C-suite has to be confident about before making what is an undeniably a consequential commitment.

The Asia-Pacific region is as complex as any, and every country within it holds its own particular quirks. Companies considering Malaysia, for example, should be aware that local policy limits foreign labor to 20% of total headcount. Additionally, companies considering the Philippines should be familiar with the high energy costs in the country. Finally, Australia suffers a relatively high cost of employment and electricity, and shortages of water.

It’s also important to note that costs aren’t static. “When China first emerged as a manufacturing hub, US clients said the cost of manufacturing there was 20% of the cost of the same job in Malaysia,” says Singh. “Now, thanks to its aging population and rising middle class, it may be cheaper to locate manufacturing in Malaysia.”

Even the benign world of incentives masks hidden challenges. While readily available and easy to access – foreign investment is a key performance indicator for any promotional agency, so it’s in the country’s interest to attract business – that doesn’t make the process simple. As stated above, Australia alone boasts 4,500 different funding programs, a maze no company is going to be comfortable navigating alone.

Many incentives come with prescribed qualifying criteria – a company that falls outside the lines may have to work harder to convince the authorities of its eligibility. And while those authorities may administer the incentives, that may be the end of their contribution.

“It’s not their role to find the incentive that will best maximize a particular company’s return on investment,” says  Johanes Candra, Director, EY Corporate Advisors Pte Ltd. “The right incentive is one that’s right for the company’s long-term business outlook and investment profile. And finding that will take work.”

While it is possible to access the plethora of incentives being offered in Asia-Pacific alone, the complexity of the region, the scope of the provision, and the critical nature of getting every detail correct, suggest a clear role for an experienced partner who understands the nuances of what can be a very challenging field.

A third party can help clients by identifying the right locations; leveraging existing connections with government authorities to negotiate the best incentives for the long-term; and developing comprehensive cost models that take into account the various taxes and potentially hidden costs.

By approaching these incentives carefully, with an understanding of the offering and its potential impact on the company’s long-term needs, an expansion or consolidation in Asia-Pacific stands considerably more chance of success.