FTA The Exchange Magazine #4

FTA

EXCHANGE

FINANCE AND TREASURY ASSOCIATION // ISSUE 4 SEPTEMBER 2017

DIGITAL KNOWLEDGE LIBRARY Catch up on past presentations in your own time. www.financetreasury.com.au

CONTENTS 6

EVOLUTION OF THE AUSTRALIAN DOLLAR BOND MARKET The AUD bond market is not just one market. It’s, at last count– at least six markets with their own features, documentation and target investors.

8

2017 GLOBAL CORPORATE TREASURY SURVEY Deloitte is pleased to release its biennial Global Corporate Treasury Survey.

27

FTA THOUGHT LEADERSHIP: XVA

28

TRACKING THE GRAY SWAN IN 2017

33

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN GROWTH

XVA stands for “X-Value Adjustment” and is an umbrella term for different valuation adjustments to derivative contracts. Banks’ balance sheets have been impacted by these adjustments to fair value measurement and pricing in their trading books.

The strength of a CFO is no longer judged solely on centralised processing prowess. Today’s CFOs must be futurists who can operate in a complex world.

Successfully negotiating Free Trade Agreements (FTAs) is tough going for governments, but the deals are only of commercial value if businesses know how to get access to the concessions gained, and take action.

74

TECHNICAL COMMITTEE MEETING UPDATE Discussion was around three key themes: energy prices, benchmarks; and cyber security.

4. A NOTE FROM OUR PRESIDENT 30. CORPORATE TREASURER INSIGHT 76. PARTNER DIRECTORY FTA Exchange Magazine is published by the Finance and Treasury Association. All material in FTA Exchange Magazine is copyright.

Reproduction in whole or part is not allowed without express permission from the publisher

ADVERTISING AND EDITORIAL Nadia Kentera nadia@financetreasury.com.au +613 9820 1113

4 // WELCOME

A MESSAGE FROM OUR PRESIDENT MIKE CHRISTENSEN FFTP - FTA PRESIDENT Career lessons I’ve learnt This message is usually an opportunity to share with you how the FTA is going, what’s new, what’s coming up. This month, instead of a window on the association, I’m opening a window on my career journey (the pinnacle so far is of course, being FTA president!) and what I’ve learnt. There have been many ups, several downs, some excellent times with quality colleagues and a significant amount of hard slog.

your direction. The difference? Instead of being buffeted about helplessly by life, you’re making an attempt to steer. It’s the difference between being proactive and reactive.

How? It could be as small as speaking up more in meetings, or taking the lead on a project. You could go for a promotion (one you really want but are worried you won’t get), accept a speaking invitation or take the biggest leap of all and start your own business.

Looking back, here are the three most valuable lessons I’ve learnt during my career journey.

3. Learn leadership: practice self-awareness, lead by example.

1. Broaden: your skill base, your outlook, your network, your experiences.

Why? Your value as a corporate (and world) citizen increases when you are fully accountable, can lead change, and have the power to influence outcomes and other people (without shouting down everyone in the room).

Why? Whether you choose to take a course, open your mind to new possibilities, go to an industry event or take your career in an unexpected direction, you will be following a path you’ve not taken before, pushing yourself into a zone where you’re forced to extend yourself. You’ll likely make new contacts along the way so you’re increasing your ability to add value and connect people in the future (and expect nothing in return for doing so).

How? You could join a professional association and attend learning events where you can connect with others, volunteer within your community, or do a course (related to your career or not – as long as it has the potential to broaden your knowledge).

2. Extend: go outside your comfort zone; take chances and opportunities that stretch you; back yourself.

Why? Navigating your next career move can be confronting, but if you can feel the fear and do it anyway, you’ll end up with increased resilience, more confidence, and some knowledge and experience under your belt. Making mistakes is a natural part of being human, and you need to accept you are likely to make them at some point. If you approach this challenge head on instead of ducking and weaving, you’re taking control of

How? This is certainly a skill that comes with experience.

Increase your knowledge and leadership skills by taking leadership courses, finding a mentor and then, further down the track, being a mentor, and actively seeking leadership roles e.g. project sponsor. If you stick to your career and your ambitions, there will come a time when you will be the most experienced person in a meeting, or the one who knows the most about a topic. Once you’re there, it’s time to generously share that information and experience with those following you.

In summary, my advice to anyone new to treasury or finance or anyone keen to progress their career, no matter where they are now is to broaden your horizons, embrace new opportunities, and practice leadership as early and as often as you can.

If you would like to broaden your horizons by attending educational and networking events, you could always begin with the FTA Conference in November. Join the best and brightest minds at the Gold Coast for a couple of days in November and give yourself a knowledge and networking boost.

Broaden your horizons, embrace new opportunities, and practice leadership as early and as often as you can.

CELEBRATING 30 YEARS

ANNUAL CONFERENCE

SHERATON GRAND MIRAGE - GOLD COAST 15 - 17 NOVEMBER 2017

REGISTER NOW ftaconference.com.au

EVOLUTION OF THE AUSTRALIAN DOLLAR BOND MARKET

BY NAB CORPORATE FINANCE The AUD bond market is not just one market. It’s, at last count – at least six markets with their own features, documentation and target investors. Some investors can straddle a number of the formats while others are more constrained due to other factors like restricted mandates or regulatory drivers.

Bond Formats The main AUD bond formats are: • AUD Onshore Wholesale: This comprises our domestic and Kangaroo borrowers, with bonds usually settled through Austraclear initially and subsequently bridged to Clearstream/Euroclear.

Documentation is generally under Australian law however recently we have seen some offshore law creeping in.

• AUD Onshore Retail: These bonds are usually ASX listed and settled through CHESS, with subordinated bank hybrid deals dominating volumes. This is a well-established market with a very different execution process and targeted non-institutional investor base.

• AUD EMTN (Reg S): These bonds are usually documented under a European jurisdiction (predominantly under UK law) with the programme also listing in Europe. AUD Eurobonds started to proliferate once the AUD became a ‘floating’ currency in 1983,

however, appetite has expanded beyond the original European retail arena with the emergence of Asian investors who buy AUD structured notes and vanilla private placements in this format. AUD EMTN subordinated (Tier 2) public deals have started to proliferate in recent years with issuers favouring this format over the Kangaroo which is more costly and takes longer to establish. The EMTN transactions are usually more modestly sized, often starting with just A$100 million as an initial volume target.

• AUD SEC Registered Global: As the name suggests, these bonds can be sold in most of the large markets including the US. The format has grown dramatically in recent years, partly as a result of increased regulation of the global systemically important banks (G-SIBs). This market is discussed in more detail below.

• AUD Local market bonds like Uridashi and Formosa bonds use the EMTN format as a base. Uridashi notes overlay a Japanese ‘shelf’ to enable distribution to Japanese retail investors. Technically, they are notes issued outside of Japan and are sold in secondary trade (one day or more later) to Japanese retail investors. Formosa bonds are issued by non-Taiwanese borrowers and are listed on the Taipei Exchange, thereby effectively becoming a ‘domestic’ issuer. This allows Taiwanese life companies to participate as investors without breaching holding restrictions on offshore names.

BONDS MARKET // 7

• AUD denominated US Private Placement (USPP) deals: These bonds are occasionally added to a USD USPP if it does not suit an issuer to either receive US funding, or if they do not wish to swap USD note proceeds to AUD. Some USPP investors can accommodate this.

What’s so special about the AUD global?

How has this market muscled in on the action over the last few years?

The format has always been around for non-USD deals. However due to higher legal costs and more viable alternatives the Global format had only been occasionally used. Five years ago, there was a flurry of AUD and NZD fixed rate US-bank names tapping this market and aiming directly at large US based funds. The deals received some demand from Asia, however as the target comprised US onshore investors, the deals were launched and priced in New York time. There was close to no participation from Australian accounts.

Then nothing much happened for three years. As rates dropped globally, AUD yields followed, as a result, fixed rate bonds in AUD became less popular for financials. Just one AUD Global was printed by a US bank in each of the years 2013, 2014 and 2015.

However, a turning point seems to have occurred with the Citigroup trade in July 2015. Firstly, it wasn’t driven by the attractiveness of a fixed rate issue. Rather, the focus was a floating rate note (FRN).

The FRN tranche was ultimately four times larger than the fixed tranche. Secondly, the deal was launched and priced in the AsiaPacific time zone rather than the US. In this case, the target for this trade was the pool of stickier AUD funds and commercial banks based in Asia rather than the US based funds previously targeted by the market. Demand onshore in Australia was considered to be a bonus, attracting a very healthy 37% from a small number of Australian buyers.

But why was the Global format chosen in the first place?

The real driver links to one of our key identified trends around financial system change, that is, a trend of increased regulation. The proposed introduction of the total loss-absorbing capacity (TLAC) rules has removed the Kangaroo option for US based G-SIBs. The Australian law governed Kangaroo bond does not have the US home market jurisdiction required to achieve the bail-in status required under TLAC. The proposed TLAC regulation has been constructed on the premise that US home market jurisdiction of the issuance will make it easier to enforce the bail-in laws. One way US

bank issuers can issue AUD and have home jurisdiction on their transactions is to use their existing SEC Global programme instead of using the Kangaroo.

Since that Citigroup trade, we have witnessed four bank deals in 2016 raising circa A$2.95 billion. Citigroup returned to the AUD Global market twice in 2016, raising A$1.30 billion in 5 and 10 year maturities. Wells Fargo (A$1.65 billion across three tranches) and Bank of America (A$750 million across two tranches) also printed very successful deals in 2016. Wells Fargo successfully returned

CONFERENCE 2016 - PRINCIPAL PA

again to the AUD Global market this year. What is pleasing is that the Australian domestic participation continued to broaden as the format became more familiar to investors.

Building on a proud 1 The ongoing use of the format has increased familiarity of it with unique footprint. With Australian based investors. Over the past 12 months, the Ford Motor Australia, the largest b Company has used US Global documentation to print two AUD deals globally on the Dow Jo thewas world.

We provide rather than setting up a Kangaroo alternative. The format used 9 million institutional c in Q1 2017 by Sumitomo Mitsui Financial Group (SMFG) on their inaugural deal in the currency. SMFG was the first Japanese HoldCo We are committed to www.anz.com communities in 3 issuer in AUD and the first non-US domiciled issuerand to use the format in AUD. The Australian participation rate on thethroughout A$1 billion Asia and t aims to be the best ba deal was a little over than 30% which is a clear endorsement flows. of Wethe provide uniq format by Australian based investors.

Asian markets and 12

Other Issuers have chosen another path. Goldman Sachs re-wrote their documentation so now they can choose either NSW law or New York law on their AUD (and NZD) onshore MTN. The NY law option Commonwealth B was selected recently for the Goldmans AUD 7-year The transaction of more than $A755 b (NAB Joint-Bookrunner). That deal settled through thebank Australian in the world by m system and has an Australian Issuing and Paying Agent.one of the largest com

Through a disciplined

Whilst we don’t expect the Global format will replace the broader maintains a AA- credit appeal of the Kangaroo for offshore issuers, we believeInstitutional this format Banking a and use transactional ban is now a proven option for issuers who either cannot the Kangaroo format and for those who prefer the simplicity of using Capabilities in market one Global programme. income products. The www.commbank.com.au/institutional

from industry experts

long-lasting NAB has been fortunate to be involved as a Bookrunner on almost relationsh every US bank AUD Global in recent years and was a Bookrunner on the SMFG A$ deal.

For more than 150 ye With more than 35,00 locations across Austr difference by being a

www.nab.com.au

As Australia’s largest b businesses to help the most important infras

2017 Global Corporate Treasury Survey Continuing the evolution from operational to strategic

2017 GLOBAL CORPORATE TREASURY SURVEY // 9

Contents

2017 Global Corporate Treasury Survey Executive summary

10

Survey demographics

11

CFO mandates

12

Strategic challenges for treasury organisations

13

Future state treasury operating models – 2017 vs. 2015

14

Execution of treasury responsibilities

15

Perceived advantages of execution models

16

Risk monitoring

17

Potential impacts of banking and tax regulatory reforms

18

Payment and cyber fraud

20

Treasury technology

21

Benefits of Blockchain

24

Deloitte Advisory and Deloitte Touche Tohmatsu Limited (DTTL) member firm global treasury contacts

25

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

10 // 2017 GLOBAL CORPORATE TREASURY SURVEY

Executive summary

Deloitte is pleased to release its biennial Global Corporate Treasury Survey In preparing the survey this year, our colleagues contemplated the following: • What challenges are Treasurers facing?

• Do CFO mandates reflect current market volatility?

• How is Treasury evolving into a strategic function?

• Are tax and banking regulations already impacting treasury teams?

From operational to strategic Validating the results from the 2015 survey, Treasurers are being further challenged by their Board and Executive Committee to add value to group operations rather than operate as an individual team. Collaboration with tax, risk, and finance teams is critical for Treasury to continue as a strategic advisor to the business.

Key challenges persist Over 50% of Treasurers noted that FX volatility is a challenge, an issue exacerbated by political turmoil and the imminent changes due to Brexit. Other key challenges are visibility into global operations, cash repatriation, emerging markets operations, and liquidity management.

Analytical capability is lagging 75% of respondents are not actively monitoring key risks using “at risk” measures, despite FX volatility being flagged as the biggest challenge faced by Treasurers. This creates a major opportunity for Treasurers to invest in technology to deliver more sophisticated real-time analytics.

Technology has not cured all ills While an increased percentage of survey participants have indicated system usage for typical treasury responsibilities, systems are not being fully leveraged to support the whole of Treasury function.

The challenge of visibility into global operations increased to 43%, while 30% cited insufficient technology infrastructure to support their department.

Tax and regulatory reform starting to bite Ongoing changes to both local and global tax and banking regulations are having far reaching impacts on Treasury teams, requiring many companies to rethink financial instrument usage and intercompany loan & liquidity management, issues which we expect to evolve as regulations are finalised.

The Treasury of the future Treasury teams must continually re-evaluate their roles as Catalyst, Strategist, Steward and Operator in order to balance their priorities and challenges.

The evolution of the Treasury function from operational to strategic, combined with increased market regulation and volatility, provides opportunities for Treasury to leverage whole of company skills to manage risks. Partnering with tax, finance and risk teams, coupled with greater use of available technologies, will set the course for Treasury as a key stakeholder with a permanent seat at the table.

Want to engage Deloitte and DTTL are one of world’s largest professional services treasury practices, offering expertise across all areas of treasury transformation, strategy, M&A, and technology strategy, selection and implementation. If this survey resonates with any issues that your company is facing, please contact us. Our international contacts are listed on page 18.

Thank you To all the companies who participated in our survey, we thank you for your time and insights. Please contact your local Deloitte Treasury contact for additional details on how your company compares to your regional or industry peers.

We would also like to thank the following Deloitte professionals for their contribution to this publication: Rebecca Dawson, Tom Jarvis-Lemm, and Joan Cheney.

Sincerely,

Leading working capital initiatives There is an increasing trend for Treasurers to lead working capital improvement initiatives. Working capital management, once a Finance responsibility, is evolving into collaboration with Finance to manage day-to-day funding for whole of company.

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

Melissa Cameron Principal Deloitte & Touche LLP Global Treasury Leader

Steven Cunico Partner Deloitte Touche Tohmatsu Australian Treasury Leader

2017 GLOBAL CORPORATE TREASURY SURVEY // 11

Survey demographics

Respondents to this year’s survey come from all corners of the global Treasury community – Deloitte is grateful to the over 200 companies across all industries and revenue groups for helping to shape the future of the function.

Annual revenue

Geographic location

24%

7%

61%

United States

EMEA

38%

55%

13% <$10bn

2%

$10–$50bn

APAC

>$50bn *All $ values throughout are USD equivalent

Other Americas

Number of Treasury FTEs

Industries

Consumer & Industrial Products

32%

39%

Technology, Media & Telecommunication Energy & Resources Life Sciences & Health Care

4%

69%

16% 0-10

11-20

7% 21-40

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

8% >40

5% 6%

14%

Financial Services (non-bank) Other

12 // 2017 GLOBAL CORPORATE TREASURY SURVEY

CFO mandates

While Treasury continues to be viewed as a risk management function, there is an increasing trend towards supporting business strategy and delivering greater cash efficiencies through capital management. Interestingly, 15% of respondents, distributed across all industries and revenue brackets, highlighted their mandate to become a profit centre – a shift from traditional Treasury as a cost centre of past years.

2% 1%

Liquidity risk management

97%

Steward for risk management for the company

90%

Access to capital markets to finance growth

80%

Strategic advisor to the business

80%

Value-add partner to the CFO (e.g., support or drive M&A activity)

77%

Low cost, efficient provider of services

76%

Creation of scalable treasury organization to support company growth

71%

20%

9%

Leading, governing and driving working capital improvement initiatives

71%

20%

8%

Enhanced governance and control over domestic and overseas operations

73%

2% 8% 2% 10%

8% 1%

13%

6% 1%

14%

8% 4%

20%

1%

2%

a profit center proprietary (e.g., performing and Becoming a profit Becoming center (e.g., performing tradingproprietary and abilitytrading to directly ability improve bottom line) to directly improve bottom line)

15%

0%

Important

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

Neutral

19%

18% 20%

Not Important

62% 40%

N/A

60%

6%

5% 80%

100%

2017 GLOBAL CORPORATE TREASURY SURVEY // 13

Strategic challenges for treasury organisations

Continuing to challenge Treasurers are FX volatility, visibility of and access to group cash, operations and exposures, and working in restricted markets, with 75% of respondents identifying 3 or more concerns for their company. A key concern around technology is the speed with which the market is moving and being able to identify ‘which train to jump on’, and the impact of banking and tax reforms is an emerging challenge.

52%

43% 40%

39%

31%

30% 24%

22%

12%

FX volatility

Visibility into global operations, cash, and financial risk exposures

Cash repatriation

Liquidity

Entering/ managing within restricted markets

Inadequate treasury systems infrastructure

Global tax reform impacts

Leverage

Other

12%

Treasury operation cost

10%

Lack of understanding

by Board/ Exec Management

9%

Ability to respond to the board/ ad hoc requests

* Multiple selections possible

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

14 // 2017 GLOBAL CORPORATE TREASURY SURVEY

Future state treasury operating models – 2017 vs. 2015

When comparing expected execution responsibility to the 2015 survey results, there is an interesting contrast across company revenue groups – the largest companies are shifting towards greater use of shared services models, while smaller companies are trending towards centralisation in corporate / regional treasury centres.

2017 - Future State Functional Execution (by revenue) Over $50bn

64%

$10-$50bn

15% 73%

Under $10bn

7% 10%

71%

10%

10% 9%

6%

Corporate Treasury

Regional Treasury/In-house Bank (IHB)

Decentralized (generally performed in countries)

Shared Service Center (SSC)

4%

5% 3% 9%

4%

Outsourced to third party (bank or service provider)

2015 - Future State Functional Execution (by revenue) Over $50bn

68%

$10-$50bn

64%

Under $10bn

67%

19% 11% 8%

10% 11%

Corporate Treasury

Regional Treasury/In-house Bank (IHB)

Decentralized (generally performed in countries)

Shared Service Center (SSC)

5% 3% 5% 11% 8%

4% 6%

Outsourced to third party (bank or service provider)

* $ USD equivalent

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

2017 GLOBAL CORPORATE TREASURY SURVEY // 15

Execution of treasury responsibilities

Many respondents indicated that, while execution of key risk functions will take place in Corporate Treasury over the next 2-3 years, corporations are choosing to manage cash and operations through other channels including both internal and external managed service solutions.

1% Cash management

16%

8%

20%

55%

2% Foreign exchange risk management

7% 4%

8%

79%

1% Debt and interest rate risk management

5% 4%

90%

1% Short-term investments and debt management

5% 6%

10%

78%

2% Long-term investments

4%4%

4%

86%

2% International treasury support

Retirement plans management

3%

45%

Other

20%

63%

Corporate Treasury Regional Treasury/In-house Bank (IHB) Decentralized (generally performed in countries) Shared Service Center (SSC) Outsourced to third party (bank or service provider)

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

28%

4%

12%

11%

7%

14%

66%

6%

15%

4%

16 // 2017 GLOBAL CORPORATE TREASURY SURVEY

Perceived advantages of execution models outside HQ Treasury

Over 70% of respondents indicated they see value in execution models outside central treasury.

Treasurers are taking advantage of the control & liquidity centralisation benefits of regional Treasury functions and the expertise & scalability for growth delivered by third party providers.

Both cost efficiency and standardization benefits are identified in shared service centers, providing for a satisfactory compromise for many.

58%

56%

55%

55%

48% 46% 43%

42%

43%

35%

34%

27% 22%

22%

22%

28%

23%

17% 14% 7% 4%

Standardization

Cost-efficiency

Scalability to support growth

Regional Treasury/ In-house Bank (IHB)

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

Control

Shared Service Center (SSC)

In-depth subject matter expertise

Lower transaction costs with banking/external counterparties

Centralized liquidity management structure for entire organization

Outsourcing to third party (bank or service provider)

2017 GLOBAL CORPORATE TREASURY SURVEY // 17

Risk monitoring

Surprisingly, 75% of respondents are not actively monitoring key risks using ’at risk’ measures, and fewer than 50% actively undertake sensitivity analysis despite wide availability of systems and models. Given that FX volatility is the major concern for Treasurers, there is significant opportunity for Treasurers to invest in technology to deliver more sophisticated real-time analytics. CFO’s and Boards should expect more dialogue in these areas.

Risk Analytics

Stress testing target financial ratios

32%

Sensitivity analysis on individual risk factors (FX, interest rate)

At risk measures such as VaR, CFaR, or EaR?

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

41%

49%

25%

5%

36%

26%

4%

22%

4% 11%

45%

Actively Monitoring

Adhoc, manual monitoring

Would like to but no ability

Not monitoring

18 // 2017 GLOBAL CORPORATE TREASURY SURVEY

Potential impacts of banking regulatory reforms

52% of respondents are already seeing an impact on their Treasury due to banking regulatory reforms, including increased funding and hedging costs, higher demand for transactional deposits from banks, and reduced demand and lower pricing for investment deposits. These impacts are resulting in Treasurers considering alternative solutions including moving towards the use of CSA’s (collateralisation with banks for OTC trades) and seeking out alternate funding sources.

27%

21% 20%

17%

17%

11% 9% 7% 5%

Revisiting short Using or term investment considering policies alternate funding sources

Using different Considering Noticed an Notice reduced financial collaterisation increase in access to or hedging costs increased cost of with banks for instruments such as options, OTC trades or funding rather than using cleared forwards/swaps products.

Other

We have yet to determine this

None

* Multiple selections possible

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

2017 GLOBAL CORPORATE TREASURY SURVEY // 19

Potential operating model impacts of tax reforms

When considering the impacts of BEPS and IRC s.385 tax reforms, a high proportion of respondents indicated they have not yet determined possible impacts, while others nominated multiple impacts they are already experiencing. Given the potential for significant and far reaching effects across a global corporation, Treasury should be actively engaging with their tax team.

35%

31%

22% 20% 18% 15%

7%

6%

1% Loan Arms length Structure of documentation credit analysis cash pools and requirements in-house banks

Cash repatriation approaches

Treasury Effective tax operating rate model changes

Use of hybrid instruments

2% Other

We have yet to determine this

None

* Multiple selections possible

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

20 // 2017 GLOBAL CORPORATE TREASURY SURVEY

Payment and cyber fraud

40% of participating companies indicated that their Treasury team has been recently affected by fraud, with most indicating that more than one remedial program has been required to stem the issue. The results do not include known attempts at committing fraud.

Leading companies are leveraging detective controls in addition to implementing preventative technology enabled controls to reduce their risk.

Has your company been affected by fraud?

How have you responded?

88%

40%

51% 37%

60% 17%

Yes

No

Implemented or Improved Treasury Management Systems and STP Reviewed/upgraded internal security Reviewed/upgraded internal controls and governance Implemented Regular Trainings * Multiple selections possible

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

2017 GLOBAL CORPORATE TREASURY SURVEY // 21

Treasury technology – overview

While investment in Treasury Management Systems (TMS) has increased, over 20% of each functional area is still being managed in spreadsheets, leaving the company open to both operational and fraud risks. Of the companies using a TMS, implementation of cloud and managed services solutions has increased to nearly 50% – a trend expected to increase as vendors transition to cloud only offerings and treasury teams seek to shift the burden of IT support to vendors.

Functional usage by system type

TMS Deployment Model

14%

16% 28%

32%

32%

29%

4%

8% 52%

14% 16%

16% 19%

14%

12%

20%

24%

5%

10%

Locally managed and maintained Managed Services

20%

Cloud/SaaS

6%

Locally managed systems by revenue

8%

63%

50% 32%

5%

7%

21%

28%

19% Investments FX and interest Commodity Bank Cash and debt rate risk price risk management administration management management management and and treasury relationship accounting management

76%

<$10bn

$10-$50bn

>$50bn

Dedicated TMS

ERP

Other

Homegrown Solution

No System * $ USD equivalent

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

22 // 2017 GLOBAL CORPORATE TREASURY SURVEY

Treasury technology – TMS functional usage

Treasury teams are seeking to leverage maximum functionality of their TMS, implementing cash management, investment and debt management, and FX capabilities where possible, and many solutions are integrated with trading and bank portals, confirmation platforms, and custom reporting tools.

15%

10%

5%

0%

Cash management and Bank administration and Investments and debt treasury accounting relationship management management

FX and interest rate risk management

Commodity price risk management

WallStreet Suite

SAP Treasury

FIS Quantum

FIS Integrity

Visual Risk

IT2

CitiFinancials

Kyriba

Reval

Oracle/Peoplesoft

Home-grown technology solution

Other systems in use include bank systems, Bellin TM5, CGI Twin, Globe$, Openlink and XRT for cash and bank account management, Aladdin, CGI Twin and Clearwater for debt and investment management, 360T, Bellin TM5, Bloomberg and CGI Twin for FX and IR management, and Allegro, ATAQ, Bellin TM5 and Calypso for commodity price risk management.

Despite the increasing trend of treasury transformation and deployment of TMS, many systems are supported or augmented with the use of homegrown solutions which may pose greater cyber and operational risks.

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

2017 GLOBAL CORPORATE TREASURY SURVEY // 23

Treasury technology – system use by company revenue

When viewed by company revenue size, TMS usage varies based on complexity of system – smaller and mid-size companies are more likely to deploy off the shelf systems whereas the larger corporations are using a mix of complex commercial and custom built internal systems.

Revenue <$10bn Commodity price risk management FX and interest rate risk management Investments and debt management Bank administration and relationship management Cash management and treasury accounting WallStreet Suite IT2

SAP Treasury CitiFinancials

FIS Quantum Kyriba

FIS Integrity Reval

Visual Risk Oracle/Peoplesoft

Revenue $10bn - $50bn Commodity price risk management FX and interest rate risk management Investments and debt management Bank administration and relationship management Cash management and treasury accounting WallStreet Suite IT2

SAP Treasury CitiFinancials

FIS Quantum Kyriba

FIS Integrity Reval

Revenue > $50bn Commodity price risk management FX and interest rate risk management Investments and debt management Bank administration and relationship management Cash management and treasury accounting WallStreet Suite

SAP Treasury

FIS Quantum

Reval

Home-grown solution

Other

No system/spreadsheets

* $ USD equivalent

© 2017 Deloitte Touche Tohmatsu. All rights reserved.

24 // 2017 GLOBAL CORPORATE TREASURY SURVEY

Blockchain

Most Treasurers are still firmly in the education phase when it comes to understanding Blockchain and how it will work for them. This need for a better understanding is reflected in the large number of recipients that ‘don’t see a benefit’ to their organisation - Treasury is a function that can immediately benefit from Blockchain technology.

It is encouraging to see that respondents who do see a value recognise cost reduction, operational efficiency and security as being high on the list of potential benefits. Risk mitigation is another potential benefit, however the lower recognition could be due to the need for further education on the topic.

Blockchain Understanding

Blockchain Benefits

2% 17%

7%

17% 31%

9%

37% 37%

3% 7%

20% 13%

Well versed in blockchain technology and can communicate with specialists

Cost reduction (e.g. disintermediation)

Decent understanding of the blockchain technology and the potential applications

Risk mitigation

General understanding of blockchain and bitcoin Still trying to get a better understanding on what blockchain is I am not sure what blockchain is

Improve operational efficiency Enhance security Stay ahead in the competitive landscape Other I don’t see a direct benefit to my organization * Multiple selections possible

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2017 GLOBAL CORPORATE TREASURY SURVEY // 25

Contact us

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FTA THOUGHT LEADERSHIP // 27

TRACKING THE GRAY SWAN IN 2017 The strength of a CFO is no longer judged solely on centralised processing prowess. Today’s CFOs must be futurists who can operate in a complex world. Those who sit at the top of commodity-intensive businesses know that a gray area exists between the “white swan” world of well-planned and meticulously executed corporate strategies, and the unpredictable devastation that comes with a “black swan” event.

Unforeseen and potentially devastating events can occur at any time and, as anyone who works in a commodity-reliant industry can attest, there is no such thing as a non-volatile year. Somewhere amid the calm and the catastrophe are the “gray swans,” those disruptive events that progressive CFOs can anticipate occurring in the near future.

Black swans are wildly improbable events such as the September 11, 2001 terrorist attacks, the 2008 financial market crash, or the negative impact of the decoupling of the Swiss Franc in 2015, which business leaders couldn’t reasonably have foreseen.

There are other events, however, that, while still unpredictable, are easier to prepare for. Today’s CFOs need to be on the lookout for these highly probable “gray swans” as risk management becomes an integral part of everyday operations. Here’s a look at the top five “gray swan” events that are likely to happen in 2017:

Geopolitical risk The recent geopolitical landscape has the potential to unravel globalization. A territoriality aggressive China, North Korea’s nuclear hostility and a chaotic White House under President Trump are key factors that could derail Asia’s steady economic growth. Additionally, with Brexit, a Trump win and upcoming elections across Europe, there has been a populist move towards protectionism. This has been roiling corporates with currency shocks that have impacted their quarterly earnings to risks faced around potential trade tariffs, regulation and tax. Now more recently, there is the threat of a nuclear action with North Korea creating tensions in Asia but also the rest of the world.

OPEC cuts drive an increase in oil prices Coupled with regional energy deregulations and rising tensions with Iran, the potential effects are unpredictable. Companies exposed to oil price changes, particularly oil-reliant manufacturers and airlines, need to stress test the likelihood of an uptick in oil prices and create effective hedging strategies to mitigate the risk.

Changes in US position on international trade A retreat from globalisation by the US would likely lead to reciprocal actions from other countries, and reinforce the latest shift towards de-globalisation. The imposition of tariffs could lead

to grave geopolitical tensions. Companies should be assessing what their exposure to China is, and how potential trade tariffs might affect their business. The Trump administration is threatening a 20% tariff on imported steel from China. This is particularly true for foreign companies who ship raw materials to China in order to have them manufactured and then sent back to EMEA/US. Tariffs will surely affect their supply chains, and they must be prepared to reevaluate their procedures and come up with alternative plans.

Uncertainty in US Policy – Fiscal and Monetary - Effects on Asia What happens with the US dollar and US interest rates is the most important influence within global markets, as it is the global reserve currency and impacts liquidity conditions everywhere. So when uncertainty is higher, risk sentiment is often negatively impacted, and when that happens, emerging markets in general can suffer. If it results in outflows from the region, that would clearly have an impact on bond markets, either from rising credit spreads, rising interest rates or weaker currencies.

Currency devaluations strengthen the U.S. Dollar History has shown that corporates were caught flat-footed after Brexit and the Trump win when it came to hedging FX. This is of particular concern to Corporates who have an outsized reliance on revenue in a foreign currency. How are they managing this volatility? Do they have visibility into embedded currency risk in their supply chain in order to effectively hedge? This year alone we have seen strong volatility across most currency pairs that have impacted earnings.

Anything can happen in a commodity-producing country. Economic or weather-related downturns are bound to happen and to have repercussions for bottom lines. Forecasting the cost of events fits into a trend of treasury operations moving from “transactional” to “strategic.” As treasury departments start to take a more strategic role within organizations, their remits are expanding beyond just cash management and cash forecasting. They now look at enterprise risk, multi-asset hedging, investments, pensions and more. In the case of commodity-intensive corporations this necessitates having more visibility of commodities exposure and being able to effectively manage related risks.

CFOs don’t stand alone in spotting risk. It’s a responsibility that is shared between commodities procurement, finance and treasury.

Both need full transparency around their total net exposure to prevent working in silos, which makes effective hedging difficult.

CFOs are taking a more active role in enterprise risk management working alongside the finance teams. They’ve shifted from reactive to proactive risk reporting. By looking for “gray swans,” they can break down the barrier between commodities procurement and treasury, giving companies a competitive edge by managing risk to improve margins and reduce costs.

Mark O’Toole Vice President of Commodities and Treasury Solutions OpenLink

30 // CORPORATE TREASURE INSIGHT: 10 MINUTES WITH...

10 MINUTES WITH

PAUL BYRNE GROUP TREASURER - QBE Please tell us a little about yourself: I am the Group Treasurer of QBE, I assumed this role upon arrival in Australia in late September 2015. I am married to Catherine and we have two sons, Enda who is about to start his HSC and Seanan (pronounced Senin) who is half way through year 10.

Immediately prior to being approached by QBE I was Group Treasurer of an Irish Bank, which had just failed the European Central Bank’s stress test and I was brought in to re-ipo the bank, which I successfully did in May 2015.

Prior to that I have held a number of Group Treasurer and Treasurer roles over the last 20 years. I am an accountant by qualification (FCCA) but have not traded as an accountant since I was introduced to Treasury all those years ago.

What is the size of your team and what is the one thing you do well collectively?

As QBE is a global insurer with a direct presence in over 35 countries, Treasury is a global function supporting the business in each one of those locations, to facilitate this I have structured the team into a number of key functions: Capital Markets, Ratings, Operations, Systems, FX and Back Office.

Within Operations function I have four regional treasurers who along with their respective teams look after all of the day-to-day operational aspects of treasury for their regions. Today we have 30 members directly within the team operating out of Sydney, London, New York and Hong Kong, and a further 15 extended team members based in our treasury back office and systems teams at our global shared services centre based in the Philippines.

As a team, we do many things well, but probably the most important two for me, that we consistently do well, are communication and teamwork. As a global function it’s absolutely critical to our collective success to work well as a team and a key component of that is effective communication.

In your career, what are the major changes that you have seen within Treasury in the past five years?

I have been a treasury professional for twenty years, spending most of that time within the financial institution space, either in investment banks or global insurers. I had the privilege to be the treasurer of Merrill Lynch’s banks both going into and coming out of the GFC. When I think of all the major changes I have seen over the last five years, the keys drivers behind all of them flowed from the emotional and financial scar tissue left behind from the GFC, whether it was: • The changes in the regulatory / supervisory landscape, where the pendulum swung from one extreme to the other, giving us Basel III with its increased capital buffers, LCR & NSFR. • Recovery & Resolution Planning, structural subordination, the need for TopCo to be a Holdco.

• TLAC / ALAC & MREL, and PoNV (in Australia).

• The death of wholesale money markets, value of corp cash to banks, due to B3 prescriptive changes in relation to what “sticky” liquidity is or can be.

• Technological advances which make the job of risk management more about evaluation and interpretation and less about collation and aggregation.

What are the challenges and opportunities facing Treasurers both now and into the future?

Given the complexities of operating in an increasing regulated global marketplace, the challenge for treasurers is to remain strategic, relevant and abreast of the changing environment. To create and retain strong relationships with debt investors and markets and to be a trusted advisor to the CFO, CEO and Board.

Roles are evolving and technology is challenging our way of working. Do you agree and how are you adapting to the change?

Yes, I would concur with that. Within QBE Treasury we are harnessing technology to facilitate faster decision making, transaction execution and general efficiency. In our own case, we are in the final stages of implementing a new TMS which gives us all the functionality that you would expect, but it is also allowing us to realise efficiencies by having one global 24/5 backoffice rather than three in region BO’s. Also, as our banking partners continue to invest in technology this allows us to optimise both our banking footprint and also what we pay for that footprint.

Why did you go into Treasury?

After qualifying as an accountant, I quickly realised it wasn’t something that I was particularly interested in doing for the rest of my career. At that time, I was working for Citi and I gravitated towards the dealing room, and I became much more interested in making my P&L and less about debits and credits, and I was hooked from that point.

I think I have been fortunate to have worked for the likes of Citi, SEB, Merrill Lynch, AIG, PTSB and now QBE, as I have always had the opportunity initially to work on individual

transactions (be it debt deals, equity raising, deleveraging or M&A) which over time became a body of work / experience that has allowed me to continue to do what I love!

What are the three major skills that make a successful Treasurer?

That’s a hard question, to narrow it down to three. So here goes: • A strategic approach combined with a can-do attitude; • Building a good team around you; and, • Knowing when to take advice and when to disregard it.

On both a personal and professional level, what are you passionate about?

On a personal level, I would say spending time with my wife and two sons, rowing (both participating and supporting my sons when they row for their school), running (I try to run 5000 km’s per year), watching rugby (Ireland, Leinster and my sons) and reading.

On the professional level, I would say being the best I can be on a daily basis, delivering the best outcomes for QBE in all circumstances, creating opportunities for my team to grow and develop and continuing to enjoy it.

Developing tomorrowâ&#x20AC;&#x2122;s finance leaders

Access Asia Leveraging Free Trade Agreements for Australian Trade Growth

kpmg.com.au

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 KPMG, an Australian partnership and a member fir All rights reserved.The KPMG name and logo are registere

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 35

Contents Introduction

5

FTAs are important for Australian bilateral and export trade

6

FTAs are underutilised in Australia

10

How much trade are we missing?

11

Why is this happening?

15

So how do companies actually access FTAs?

17

FTAs are no substitute for developing and executing the right strategy

18

Six critical elements for Asian trade success

20

E-commerce – the bilateral trade super highway

24

Alibaba Group: New markets for Australian exporters. A case study

26

Asia bound – How do you navigate transfer pricing and other evolving tax laws in the region?

28

Summary

33

© 2016 KPMG, an Australian partnership and a member firm m of the KPMG network of independent member fiirrms affiilliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

All rights reserved.The KPMG name and logo are registered d trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Former Australian Trade Minister Andrew Robb and his Korean counterpart, HE Yoon Sang-jick, Korea Minister of Trade, Industry and Energy, at the conclusion of negotiations for a Free Trade Agreement (FTA) with the Republic of Korea.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. AAP Image/DFAT All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 37

Introduction Successfully negotiating Free Trade Agreements (FTAs) is tough going for governments, but the deals are only of commercial value if businesses know how to get access to the concessions gained, and take action.

International exports of goods and services are critically important to Australia, together contributing 41 percent of nominal GDP1. Eleven of Australia’s top 15 bilateral trading partners are Asian.

Ten of our top 15 trading partners are covered under Free Trade Agreements with Australia (Indonesia and Vietnam under AANZFTA).

Economic modelling reveals that benefits from our recent North Asian agreements (China, Japan and Korea) could increase exports by more than 11 percent, and generate a cumulative Gross Domestic Profit (GDP) increase of more than AUD 24 billion in present value terms between 2016 and 20352.

On the flipside, KPMG’s modelling highlights that Australian merchandise exporters who underutilise FTAs will miss out on at least AUD 14 billion of potential export trade revenue over the next five years. This is a conservative view as it does not include underutilisation of opportunities for trade in services or foregone productivity gains – which is huge!

1

Australian Bureau of Statistics, Balance of Payments and International Investment Position, Australia December 2015, Cat. No. 5302.0. 1 March 2016.

Figure is for the December 2015 quarter.

2

The Centre for International Economics. (2015).

Economic benefits of Australia's North Asian FTAs. Canberra: Prepared for Department of Foreign Affairs and Trade.

Many companies we’ve spoken to as part of our research say they are having difficulties in utilising these complex trade mechanisms. They are struggling with market entry strategies, local Asian partners, distribution models, branding and intellectual property (IP) protection, reputational and legal risks and other non-tariff barriers.

This report discusses the current underutilisation of FTAs and reasons for this. It seeks to assist Australian companies exporting to and importing from Asian markets with favourable FTA agreements in place to make the most of the opportunities.

Our report provides practical insights and experienced advice to assist clients across many sectors and countries on market entry strategies, supply chain solutions, customs, and tax and grant incentives and other key considerations.

While numerous FTA deals have been done and media announcements made, a lot of work is required to capture and maximise the benefits.

The Turnbull Government is pursuing an ambitious trade agenda, with agreements under negotiation including India, Indonesia, Regional Comprehensive Economic Partnership members and several other countries.

These can be expected to create more opportunities for Australian businesses to grow their exports, strengthen their import supply chains, and ultimately drive much needed economic growth and create more Australian jobs.

There is great interest from Australian companies in growing trade relationships with these exciting and developing markets in Asia. There is clearly scope for existing Australian exporters to up-scale and move into multiple markets as well as a significantly increase the overall number of Australian companies exporting.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

38 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

FTAs are important for Australian bilateral and export trade Australian Governments have actively pursued bilateral free trade agreements with Asian markets, with considerable success. (Table 1 below).

Table 1: Australia’s trade in goods and services by top 15 partners 2015 Bilateral trade ranking by country

Share of bilateral trade (%)

% Growth 2014-2015

155,447

23.2

1.9

28.9

2. United States

70,195

10.5

15.8

7.0

3. Japan

64,950

9.7

-7.4

13.4

4. Republic of Korea

35,805

5.4

2.8

6.3

5. Singapore

25,683

3.8

-13.1

3.5

6. New Zealand

24,021

3.6

2.2

4.0

7. United Kingdom

23,021

3.5

10.0

2.8

8. Thailand

20,767

3.1

9.5

1.7

9. India

19,826

3.0

25.8

4.2

10. Malaysia

19,164

2.9

-7.4

2.5

11. Germany

18,570

2.8

6.2

0

12. Indonesia

15,064

2.3

-4.0

2.2

13. Taiwan

12,462

1.9

-1.7

2.4

14. Vietnam

10,065

1.5

0.3

1.5

9,819

1.5

13.4

1.8

1. China

15. Hong Kong SAR

2015 Bilateral Trade (AUD million)

Share of Exports (%)

FTA status

FTAs in place FTAs in negotiation No FTA Source: Australia’s trade in goods and services 2015 (Department of Foreign Affairs and Trade, 2016).

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 39

Current stocktake of Australia’s FTAs FTAs currently available for Australian companies are: 1983

Australia-New Zealand CEA (ANZCERTA)

2003

Singapore-Australia FTA (SAFTA)

2005 2005 2009 2010 2013 2014 2015 2015

Thailand-Australia FTA (TAFTA) Australia-United States FTA (AUSFTA) Australia-Chile FTA (ACl-FTA) ASEAN-Australia-New Zealand FTA (AANZFTA) Malaysia-Australia FTA (MAFTA) Korea-Australia FTA (KAFTA) Japan-Australia Economic Partnership Agreement (JAEPA) China-Australia FTA (ChAFTA)

Former Australian Prime Minister Tony Abbott (centre) looks on as Chinese Minister of Commerce Dr Gao Hucheng (left) and former Australian Minister for Trade Andrew Robb sign the Free Trade Agreement (FTA) between the two countries in Canberra, Wednesday, June 17, 2015. © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a SA wA isPs e ntaitgye . /Lukas Coch Im All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

7

Access Asia Leveraging Free Trade Agreements for Australian Trade Growth

South Korean President Park Geun-hye (fourth from left) and Former Prime Minister Tony Abbott (third from left) look on as trade ministers of South Korea and Australia sign a bilateral free trade agreement at the presidential office, Cheong Wa Dae, in Seoul, South Korea, Tuesday, April 8, 2014.

The Asian trifecta of FTAs – a huge win and opportunity for Australian exporters The Department of Foreign Affairs and Trade (DFAT) estimates the benefits from Australia’s recent “Trifecta of FTAs” with China, Japan and Korea to be substantial.

On commencement, in excess of 80 percent of Australian exports should receive preferential duty treatment for China and South Korea (Japan not stated) and upon full implementation, in excess of 99 percent of Australian exports should receive either free or preferential duty rates under the three FTAs3.

The initial feedback from Australian companies that KPMG spoke to after the Trifecta of FTAs with Japan, Korea and China was very positive.

A senior executive from a major Australian dairy exporter told us that the ChAFTA was particularly exciting as industry was involved in consultation and announcements.

The same executive felt the ChAFTA represented an acceptance by the Chinese Government that China can’t meet its dairy requirements and is genuinely committed to implementing the terms of the agreement.

The future pipeline of FTAs and the rise and rise of the mega FTA The Government is focused on progressing both bilateral and multi-lateral “mega” FTAs. These FTAs currently in development or awaiting enactment include: • Trans-Pacific Partnership (TPP) • Regional Comprehensive Economic Partnership (RCEP) • Pacific Agreement on Closer Economic Relations (PACER), the update to the South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA) • India-Australia FTA • Indonesia-Australia CEPA

3

http://dfat.gov.au/trade/agreements/pages/tradeagreements.aspx (benefits at a glance).

In addition to important FTAs being negotiated with India, Indonesia and Pacific Islands, there are two megaFTAs currently under development or awaiting formal approval:

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Access Asia Leveraging Free Trade Agreements for Australian Trade Growth

AAP Image/Yonhap

• Trans-Pacific Partnership (TPP) where negotiations have been concluded. The TPP parties are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore, the United States and Vietnam and represent 25.6 percent of total world trade4; and • Regional Comprehensive Economic Partnership (RCEP) which has concluded its 15th round of negotiations. RCEP parties are China, Japan, South Korea, New Zealand, Australia, Singapore, Thailand, Malaysia, Philippines, Brunei Darussalam, Vietnam, Laos, Cambodia, Myanmar, Indonesia and India, representing almost 60 percent of Australia’s two way trade5.

4

http://dfat.gov.au/trade/agreements/tpp/pages/transpacific-partnership-agreement-tpp.aspx

5

http://dfat.gov.au/trade/agreements/rcep/pages/ regional-comprehensive-economicpartnership.aspx

Whilst some would question the value of negotiating more FTAs that include multiple parties and countries with which Australia already has an FTA, there are definite benefits to megaagreements such as with ASEAN, the TPP and RCEP. Regional agreements, provided they offer the same or greater benefits than their bilateral counterparts, reduce the administration in assessing hundreds (if not thousands) of rules of origin under multiple bilateral FTAs.

We live in a world of global supply chains and those supply chains can be leveraged and influenced by regional FTAs as they allow for the concept of accumulation to apply to goods. Accumulation creates an FTA zone which allows multiple parties’ inputs, in multiple FTA party countries, to obtain preferential duty benefits for completed goods.

This allows parties to build on the strength of manufacturing capabilities in the region and recognises the fact that most products are not manufactured from inputs that are wholly produced in one country.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

42 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

FTAs are underutilised in Australia A survey conducted by The Economist Intelligence Unit (EIU) in 2014 identified that FTA usage rates are low, with Australia’s particularly low usage rate at 19 percent6 (see Figure 1 below).

This means that only 19 percent of exporting businesses surveyed are using an FTA. Australia’s least used FTA was with Chile (7 percent), and most used was with New Zealand (30 percent). The average FTA usage rates of Asia-Pacific countries surveyed was 26 percent.

However, of the Australian companies that did use an FTA for exporting, 59 percent reported a moderate increase and 16 percent reported a significant increase in exports. They are therefore very helpful when used properly.

A Joint Select Committee Report on Business Utilisation of Australia’s FTAs was tabled in the Australian Parliament on 15 October 20157.

This report identified issues around the complexity of FTAs and costs of compliance with many new terms.

The Export Council reports between 43 percent and 52 percent of exporting Australian businesses don’t know how and whether an FTA would apply to their business; and between 9 percent and 18 percent don’t know the FTA exists at all.

There are also significant start-up costs for identifying and connecting to new export markets. In its submission to the Inquiry, the Export Council of Australia referred to the Australian International Business Survey (AIBS). The AIBS had 1,237 respondents across a range of sectors and identified behaviours in engaging in international trade, including utilisation of FTAs8.

It’s clear that action is needed to engage businesses to make the most of new opportunities and improve their market access.

Figure 1: Use of FTAs signed by countries in 2015 (% respondents) 100

80

65%

63% 60

51%

48% 40% 40

26% 19%

43%

42%

30% 33%

20

39%

23%

37%

27% 16%

21%

0 Total Average

Australia

China

Hong Kong

India

Indonesia

Malaysia

Singapore

Vietnam

Most used

Source: Economist Intelligence Unit (The Economist, 2014).

6

10

The Economist. (2014). FTAs: fantastic, fine or futile?

London:The Economist Intelligence Unit Limited.

7

Joint Select Committee on Trade and Investment Growth. (2015). Report on the Inquiry into Business Utilisation of Australia’s Free Trade Agreements.

Canberra: Commonwealth of Australia.

8

Australia’s International Business Survey. (2015).

Summary Report. Canberra: AIBS.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 43

How much trade are we missing?

Australian merchandise exporters who underutilise FTAs will miss out on at least AUD 14 billion of potential export trade revenue over the next five years, according to KPMG analysis. This represents a conservative view as it does not include underutilisation of opportunities for trade in services or foregone productivity gains.

How can we understand the potential trade lost from underutilisation of FTAs currently in force with Australia’s trading partners? To be honest, it’s very difficult, subjective and requires key assumption-based economic modelling.

KPMG has considered the current underutilisation of the bilateral Australian FTAs that have recently come into force with China, Japan and Korea – and projected the 2015 results against global export growth projections for 2016 to 2020.

Applying KPMG’s global trade model9 allows an assessment of the economy-wide impacts associated with changes in export demand and productivity and quantification of the loss in GDP, employment and other industry-specific outputs.

As depicted by the left-hand side panel of Figure 2 we need first to estimate the direct economic effects of the underutilisation of FTAs in Australia. These are of two kinds: trade flows effect and productivity effect. Once they have been estimated, they can be applied to KPMG’s global trade model, represented by the middle panel of Figure 2. The model is then able to simulate the economy-wide impacts of lost economic activities on different economic indicators, such as GDP and employment at the industry level, as shown on the right-hand side panel of Figure 2.

Figure 2: Schematic representation of direct and indirect effects in an economy-wide modelling framework Direct Economic Effects Slower growth in trade volume

Consumption Indirect Effects Lower income for households lowering consumption demand for other goods

Slower productivity growth

Production Indirect Effects Backward linkages: less inputs needed Forward linkages: less goods produced

Economy-wide Impacts Overall impacts of direct effects on industry employment and activity as well as on macroeconomic indicators (e.g. GDP) amplified by indirect linkages effects

Source: KPMG Economics

9

KPMG’s global trade model is dynamic and is based on the latest version of the Global AnalysisTrade Project (GTAP) database.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

44 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

Figure 3: Use of FTAs by Internationally Active Australian Businesses in 2015 Malaysia-AU FTA Thailand-AU FTA Singapore-AU FTA AU-US FTA AU-NZ Closer Economic Relations ASEAN-AU-NZ FTA (AANZFTA) AU-Chile FTA

0%

20%

40%

60%

80%

100%

Yes – Found FTA helpful for accessing this market

No – Don't know FTA exists

Uncertain about how and whether the FTA would apply to my business

No – Exported to this market but chose not to use FTA

Source: Export Council of Australia citing AIBS (Department of Foreign Affairs and Trade, 2016).

Estimating the direct effects Direct economic effects of underutilisation of FTAs in Australia are of two different types. The first and probably most obvious effect is the lost volume of trade with Australia’s FTA partners. The second direct effect is related to foregone productivity gains as a result of missing out on lower trade costs.

Trade flows effect The Australia’s International Business Survey (AIBS) identifies a proportion of businesses that found the FTA useful for accessing a market, represented by the first entry legend in dark blue in Figure 3.

It also identifies groups who either did not know about the FTA, or do not know how to use it, represented by the second entry legend in teal and by the third entry legend in purple, respectively.

Tariff reductions from FTAs primarily affect trade in merchandise goods, since the flow of physical goods is easier to apply duties to as they enter or leave a country. Based on the AIBS data at the industry level, it is possible to estimate the proportion of Australian businesses across agriculture, mining and manufactured exports sectors that could increase

utilisation of FTAs in the future. These estimates are reported in Table 2 and vary between trading partners and industries.

The missed potential merchandise export revenue from Australia’s trade agreements in 2015 can be estimated using the share of exporters that could potentially utilise FTAs in the future applied to bilateral trade revenue between Australia and its FTA partners, and an estimate of the increase in export volume as Australian businesses using FTAs become more competitive.

Assuming an annual export growth projection of 2.5 percent, as published in the International Monetary Fund Global Outlook, the cumulative loss from 2016 to 2020 is extrapolated to be at least AUD 14 billion.

Table 2: Share of Australian exporters potentially utilising FTAs in the future Agricultural Mining exports % exports %

Manufactured exports %

AU-Chile FTA ASEAN-AU-NZ FTA (AANZFTA)

15.1 28.7

17.7 45.0

41.0 35.4

AU-US FTA

38.5

10.8

36.7

Malaysia-AU FTA

23.1

0.0

33.2

Korea-AU

33.1

11.3

34.3

Japan-AU

33.1

11.3

34.3

China-AU

33.1

11.3

34.3

Source: KPMG Economics analysis using AIBS data (Export Council of Australia, 2015).

Note that averages of Asia FTA partners were used for China, Korea and Japan, since AIBS data were not available.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 45

Figure 4: Estimated lost export revenue with Australia’s FTA partners from 2016 to 2020

Export revenue (AUD million)

5000

36% 29%

4000

25% 3000

26%

26%

26%

Korea

Japan

China

19%

2000

1000

0

Chile

ASEAN

Agriculture, forestry and fishing

United States Mining

Manufacturing

Malaysia

Percentage of business not using FTAs

Source: KPMG Economics analysis using AIBS (Export Council of Australia, 2015), GTAP data (Aguiar, Narayanan & McDougall, 2016) and AB data (ABS, 2016).

Figure 4 shows the distribution of this estimated lost export revenue across Australia’s FTA partners.

A clear finding is that the bulk of lost export revenue is concentrated among countries with recently concluded agreements – China, Japan and South Korea. A second major finding is that almost all lost export revenue across Australia’s FTA partners relates to manufactured exports, suggesting a need to focus efforts on better engaging Australian manufacturing businesses.

Although several assumptions are used to determine these impacts, they represent a conservative view since they only consider businesses that currently export goods. Many non-exporting companies may also benefit from understanding and using FTAs. Ultimately, this lost revenue is due to limited knowledge on how to access the market opportunities that Australia’s FTAs provide.

The loss is ‘at least’ AUD 14 billion because it doesn’t take into account lost revenues in the services sector and lost productivity opportunities.

FTAs often contain provisions for trade in services, such as trade facilitation measures, reductions in barriers to investment, as well as mutual recognition of products and qualifications. These modalities are much less homogeneous across agreements and much more difficult to measure. They represent nontariff barriers which FTAs seek to address but are not modelled in KPMG estimates.

Productivity effect In addition to lost international trade due to underutilisation of FTAs, there are associated productivity impacts that Australian businesses are likely missing. Openness of trade is known to drive competition, and transfer knowledge such as technological advances and best practices for firms. This results in a productivity increase since it improves the output of Australia’s capital and labour force.

One example is research conducted

by Austrade in 2015, which surveyed exporting businesses using the Export Market Development Grant Scheme (EMDG).

Austrade’s results indicate an average labour productivity benefit of 16.1 percent10. This means an Australia business could produce 16.1 percent more output for the same labour cost.

Another example of exportproductivity linkage is associated with the shifting of resources from less efficient to more efficient plants. Based on a panel data set covering approximately 60,000 individual manufacturing plants in the US for the years 1983 to 1992, it was estimated that firms in the exporting sector are 8 percent more productive than firms that never export11. This highlights the importance of better engaging Australian businesses in trade, and maximising the opportunities they have with our trade partners.

10 Austrade. (2015). Certainty and Confidence—Exports and jobs for a changing global economy: Review of the Export Market Development Grants scheme.

Canberra: Austrade.

11 Itakura, K., Hertel,T. W., & Reimer, J. (2003).The Contribution of Productivity Linkages to the General Equilibrium Analysis of FreeTrade Agreements. GTAP Working Paper, No. 23. West Lafayette: Center for Global Trade Analysis.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 47

Why is this happening?

Our qualitative research has identified nine key barriers to maximising FTA utilisation, namely:

Lack of awareness of FTA benefits

Complex rules of origin for each FTA

Opaque trade regulations in Asian markets

IT infrastructure challenges

Market access difficulties and non-tariff barriers

Multi-jurisdictional supply chain challenges

Internal capability limitations (SMEs)

Increasing services export to Asia (not products)

Lack of comprehensive, affordable FTA advisory services

Source: KPMG Access Asia 2016

Lack of awareness of FTA benefits has been identified as the largest obstacle for many small and medium sized companies.

This can and will eventually be reduced through education and awareness programs.

However, KPMG is also observing widespread confusion around the technical understanding of FTAs both in Australia and foreign markets and serious challenges with the implementation of strategies from many Australian companies.

Rules, Rules, Rules…

Our FTAs are normally underpinned by years of very detailed negotiations on product-specific rules of origin which lead to confusion by both importers and exporters in the post FTA implementation phases.

Clearly, when governments have difficulty negotiating and summarising the minute detail of FTAs, it’s no surprise that companies, especially Small Medium Enterprises (SMEs) which lack internal resources, have great difficulty in understanding and then implementing processes to access FTA benefits.

For Australian importers to access preferential duty rates for all 10 of the FTAs to which we are a party, there are an estimated: • 42 specific acts, regulations and schedules in Australian law; • 76 general rules of origin; and

Australian exporters wishing to gain FTA duty benefits in each of our FTA partner's markets face the mammoth task of navigating hundreds of in-country customs laws across Asia (in foreign languages and cultural practices) that enact the FTA and depending on the number of products they manufacture, an innumerable number of product-specific rules.

In addition to product specific rules, FTAs have rules of consignment which only allow shipping via third countries under strict conditions.

Certificates of origin are required under many FTAs (mostly those with our Asian neighbours).

• In excess of 26,000 product specific rules.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

48 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

Businesses must understand these rules to access FTAs and also have the ability to assess which FTA provides the best outcome where Australia has multiple FTAs covering a single market (e.g. Thailand, Singapore and Malaysia are countries with which Australia has a bilateral FTA and are also covered by the ASEAN-Australia New Zealand FTA).

There are also plenty of strange and unexpected outcomes noted from the new FTAs, including: • KAFTA: certificates of origin being issued for goods with accompanying European Union certificates of origin for the exact same goods;

An FTA is just one part of the international trade puzzle. Companies need to navigate the customs export and import laws, have a solid market access plan and have the technical resources (in house or by using specialist advisors) to make the most of our FTAs.

• ChAFTA: original consignment rules denied FTA entitlement to goods shipped through Hong Kong (a major distribution hub) as it is a duty-free port with no customs bonded zone. © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 49

So how do companies actually access FTAs? Unfortunately, there is no one-stop shop for FTA trade facilitation.

Both the federal and state governments recognise that Australian companies need practical and cost effective assistance to access and leverage the FTAs. Through Austrade, the federal government has been developing useful information resources, providing FTA outreach programs and building teams to help provide practical advice and facilitation.

The Department of Foreign Affairs and Trade has developed Trade IT support systems.

However, any IT infrastructure that will quickly and effectively assess all product types in all markets would be extremely complex and there is a limit to what government bodies can provide given the complexity of product rules from global supply chains to multiple export markets cutting across many FTA jurisdictions.

In addition, due to the number of state and federal support programs, it is difficult for exporters to accurately assess which programs will provide them with the assistance.

In order to accurately assess FTA entitlements, Australian companies need specialist advice: • to interpret the FTA specific legislation; • to better understand global supply chains and the origins of all inputs of the goods they are exporting; • to develop the internal resources, processes and IT systems to accurately classify goods in the customs tariffs; • to navigate both Australian export laws and the relevant import laws (which in Asia can be extremely complicated and paper driven).

It is important also for exporters to be aware of the tariff classification of the product in the importing country, as it is not uncommon for jurisdictions to interpret rules differently, leading to a denial of access to the FTA and preferential duty rates.

Services Australia’s FTAs do not just deal with preferential duty for trade in goods.

In 2015, Australia’s services exports were worth an estimated AUD 57.4 billion12 and are continuing to grow.

Our FTAs contain a component which facilitates greater access to foreign markets in the services sector. For example, China is Australia’s largest services export market and the ChAFTA includes improved market access for Australian banks, aged care, health, legal and education and telecommunications services Taking advantage of the trade in services components of Australian FTAs can provide a competitive advantage to Australian business in those FTA countries, including preferential market access and mutual recognition of qualifications.

FTAs do not remove non-tariff barriers such as phytosanitary (quarantine) requirements, antidumping duties and other regulatory requirements such as labelling.

Often, non-tariff barriers mean that Australian exporters simply can’t access the markets covered by our FTAs which makes seeking specialist advice critical at the time of preparing export market strategies.

12 https://www.efic.gov.au/news-events/latestnews/2015/march/services-exports-to-asia-on-the-rise/

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

50 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

FTAs are no substitute for developing and executing the right strategy Taking a step back from the practical challenges of implementing FTA related initiatives, it’s important for Australian companies to revisit their strategy for Asian market export growth, supply chain solutions and outbound investment.

Based on the 2016 Australia International Business Survey (AIBS), 18 percent of respondents targeted the United States as their first priority overseas market. China was the second most popular choice for a first export market.

AIBS respondents indicated that the toughest overseas markets to operate in were India, China and Indonesia. However, these are the markets that offer the greatest growth though.

Where to focus in future?

Is it all about China?

Based on our observations, the focus for many Australian companies has been China and how to take advantage of the ChAFTA within a 12-18 month window – ahead of companies from other countries who have yet to establish similar trade access agreements with China.

Historically, China was the prime market within the Asia Pacific region for many Australian businesses to establish offshore operations to directly manufacture and source goods and industrial products at a very low cost. But today, the primary reason that these same businesses maintain operations in China is primarily to serve the China market.

As regional economies integrate, so too do supply chains, as investors seek innovative and cost-effective inputs into regional or global production. Over the post war period, as economies develop and production and manufacturing costs rise, there has been a continual shift within the region – from the Asian tiger economies of the 1980s and 1990s (Japan, Korea, Hong Kong, Taiwan and Singapore), to China which became Asia’s low-cost manufacturing supply chain hub.

Now we are seeing the shift from China to ASEAN countries, so we encourage companies to look to the future – ASEAN and more specifically Indonesia, where regional FTAs are in place and bilateral FTAs are being negotiated.

The ASEAN Economic Community (AEC)?

Australian companies should be increasingly focused on the growth opportunities closest to home – ASEAN – with the 10 countries that are embracing a regional focus to compete with larger markets such as Japan, China and India.

According to McKinsey13, the ASEAN region represents the seventh largest economy in the world with a combined GDP of USD 2.4 trillion and expected to become the world’s fourth largest economy by 2050.

It has a combined population of over 600 million people, half of which will be under the age of 30 by 2020 and represents the third-largest labour force in the world which is great for manufacturing and consumer services.

13

http://www.mckinsey.com/industries/public-sector/ our-insights/understanding-asean-seven-things-youneed-to-know

Australian Trade and Investment Minister Steven Ciobo, in interviews conducted with ANZ recently in Laos,14 talked about Australia having a 42 year relationship with ASEAN which is founded upon collective interests and one that should go from strength to strength. He said: “The opportunities throughout ASEAN are quite significant. There is tremendous potential among the 10 ASEAN members and Aussie businesses should be at the forefront of that. Many are, but frankly a lot more should be.”

or more specifically: Indonesia!

Despite being Australia’s nearest geographic neighbour, Indonesia ranks outside the 10 largest trade and investment markets for Australia. In 2014, bilateral trade with Indonesia was AUD 16 billion, merely 10 percent of China-Australia trade flows. There are many reasons for this; including low Indonesian consumer incomes and the fact Indonesia is also a major natural resource and primary industry exporter and hasn’t, until quite recently, been an exporter of high-value manufactured goods.

However, with a young middle class population of 45 million that is growing at 11 percent per annum and expectations that Indonesia will become a major world economy in next 15 years, there is increasing interest from Australian companies.

This was evidenced by approximately 360 Australian business leaders across eight industry sectors attending the inaugural Indonesia Australia Business Week (IABW) in Jakarta in late 2015.

14 ANZ Blue Notes 12 October 2016.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 51

Figure 5: ASEAN – an Emerging Regional Power

At a glance ASEAN is a diverse region with multiple challenges and opportunites.

USD 5,869 GDP per capita (2013)

If the 10 ASEAN members were a single country it would be the seventh largest in the world.

617 million

Population (2013)

Across ASEAN, policies have evolved in isolation, preventing consistency and certainly required by investors.

USD 2.3 trillion

Total GDP (2013)

190 million

Middle class in 2010 400 million by 2020

It is a very diverse region – with countries right across the development spectrum.

Despite regional coordination through the ASEAN Economic Community (AEC), issues are generally on a market-by-market basis.

Source: Statistics from ASEAN Economic Community Chart book 201315.

Indonesia’s President Widodo is often referred to as a “business first” president committed to reforming Indonesia and strengthening the bureaucracy, policies and processes so that foreign capital will invest to help Indonesia grow.

There is a need for Australian project planning, structuring and management services, stateowned enterprises (SOE) asset privatisation/capital recycling programs and the start of a national superannuation and pension system for long-term capital.

to varying degrees, with ANZ the largest. They all tend to concentrate on cross border trade, investment and high net worth flows as well as rolling out branchless banking services. Within Indonesia there is also an opportunity in insurance and re-insurance.

Central to Indonesia’s development is investment in infrastructure and the development of financial services – both areas for Australian interest to help finance and jointly deliver these projects. New infrastructure worth AUD 450 billion – including 24 new sea ports, 15 new airports, 49 new mega dams, 39 megawatts of additional power and extensive road, rail and public transport infrastructure – is in the planning stage. Around 40-50 percent of this will require Public Private Partnership (PPP) solutions.

Despite 170 competing domestic banks, Indonesia’s financial services industry is nascent and only accounts for 3.3 percent of GDP (compared to 8.7 percent in Australia and 15.9 percent in Hong Kong).

Around 70 percent of Indonesians have only one to two banking products. Of a total population of 260 million there is less than one million who invest in managed funds and there is almost no insurance industry with only 400 insurance agents nationally. All of the big four Australian banks are represented

Other than infrastructure and finance the greatest opportunities for Australian companies appear to be in food and agribusiness (live cattle, animal feed, feedlots, aquaculture, and cold chain logistics) and education and vocational training – particularly in financial services and healthcare.

The opportunities for Australian business in Indonesia are certainly there, but the investment and operating landscape remains very challenging and the lead time to invest and build relationships is long.

15 http://asean.org/resource/statistics/ © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

AP via AAP/ Xu congjun

Six critical elements for Asian trade success Turning an Asian investment into a profitable business venture takes careful planning and a disciplined approach.

Despite the numerous challenges of operating in Asia, we have seen foreign brands achieve amazing results (such as Starbucks, KFC and Louis Vuitton). They have been successful because they’ve been able to truly understand local consumer trends, align their brand for Asian consumers and navigate the numerous regulatory challenges.

Asia is tough and complex. The ability to grasp the entirety of a large number of challenges and conjure effective solutions takes time and experience. Frequent travellers to Asia consistently miss the opportunity to get to the bottom of such operational complexities and therefore, the majority of “fly in, fly out” executives are inadequately equipped to manage the challenges of doing business in Asia.

Based on our experience and interviews conducted with senior executives from Australian companies succeeding in Asia, we have identified six critical elements that Australian businesses need to consider to execute a successful Asian market entry or expansion strategy.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 53

01

Selling into or sourcing from Asia’s many markets is not easy. It's best to view China, Indonesia and India as comprising a number of unique markets within each country.

Plan how to interact with each market separately, tailoring product specifications and delivery mechanisms that meet the needs of local customers within each distinct market.

02

03

Practical suggestion: Good people are hard to find and keep For a major Australia wine exporter, hiring and retaining people, developing new product categories and developing unique marketing ideas have been their greatest challenges.

For a major Australian dairy exporter the greatest challenges have been in having senior executives to lead with an in-depth understanding of how ‘Asia works’, with relevant industry experience and the ability to manage local client and staff relationships. They described the ideal person as “more than a sponsor, an active proponent of their (local Asian office) needs and requirements”.

A high proportion of the Asian population will be classified as middle income earners by 2025 as regional economic growth seeds prosperity and the future of Asia’s market will be driven by these people with a propensity to spend. Australian businesses must be ready to compete in a dynamic and fast-paced environment and interact with new consumers through various channels.

Practical example: Locally attractive products are vital

Think about the successful marriage and exit options upfront, not just the honeymoon. Plan an approach that aligns to your long-term objectives.

Practical example: JV partners

Businesses expecting to set-up as they have back in their home market and achieve overnight success have usually departed Asia quicker than they arrived.

With a significant rise in the demand for personal and household consumer items in China, it is not surprising that two of the largest global Consumer Product Multi-national Corporations (MNCs) have both invested in local operations within China. Over recent years, both organisations have also established large scale innovation hubs in China, in response to the changing demands of the local consumers who seek high quality foreign branded goods but with more local ingredients and taste. These innovation hubs aim to refine everything, from product specifications and materials, packaging and size of product to align with local Chinese consumer requirements, who will no longer accept imported products that do not cater to their specific tastes.

It is important that Australian business can successfully identify a JV partner that can leverage its local presence, without exposing it to additional operational risks. Several Australian companies interviewed cited the challenge of finding the right local partners. There are a huge number of unsolicited Chinese parties who present themselves as potential local partners.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

54 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

04

05 06

Whether it be future customers, suppliers or service providers, finding and incentivising the right trading partners is critical. You must really understand who you are dealing with and what motivates them to achieve the outcomes that you both desire.

Practical example: Distribution partners A global animal health care products group which was the leader in more than 140 separate markets around the world and had been operating in China for more than 8 years was unable to achieve a market share in China of more than 1 percent. Analysis of the China market revealed that the company had locked itself into an agreement with a distributor which only had access to 2 percent of the total China market, had limited sales capability and was not motivated to focus its efforts on this company’s products. Despite the extremely high demand for products within this market segment (exceeding more than 50 billion units of product per year), this MNC had not established the right distribution network (nor partner support) within China to access the customer base, or provided a value proposition with a unique service or cost advantage over its competitors and subsequently failed to attract Chinese demand despite being the market leader in every other market.

Practical example: Non-tariff barriers

Understand the non-trade barriers relating to your product, supply chain and chosen markets so that you can navigate the many different local customs and unique country regulations effectively.

Have a thorough stakeholder communication strategy. Be prepared on how and whom to communicate with should your business/supply chain/ products experience a critical incident.

Several Australian companies interviewed felt non-tariff barriers were not well addressed in ChAFTA, including preferential tax treatment for local competitors, difficulties around foreign executive work visas, provincial and local product registration processes and IP laws that remain inconsistent with international norms.

Practical example: Board support Several Australian companies interviewed confirmed the importance of having a board that is supportive of the long-term strategy and committed to investment, delivery and implementation.

A number also stressed the importance of the headquarters to have a local Asian mindset and “can’t apply local Australian internal processes”.

This requires internal education and consideration of local Asian issues before jumping to a decision, an action or implementation stage.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

56 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

E-commerce – the bilateral trade super highway Traditional exports and sales processes are being disrupted by e-commerce and China is no doubt the best and most important market to look at for understanding the impact of e-commerce on trade.

The total e-commerce market in China already surpassed that of the US in 2013 (see Figure 6). China’s e-commerce market (including but not limited to luxury) was worth around USD 426 million in 2014.

According to several sources and analysts, it may grow to USD 1 trillion by 2018 or 201916.

Online shopping for products or services is fast becoming normal practice for both Business to Consumer (B2C) and Business to Business (B2B). Reuters reports that since 2012, more than 2,000 firms have registered in China as cross-border e-commerce businesses. Based on KPMG China’s 2015 survey report China’s Connected Consumer, the top reason consumers are buying online remains pricing and gaining a better deal than traditional store based shopping. Consumers are increasingly being driven by the appeal of accessing, comparing and buying a global smorgasbord of luxury branded items from the USA and Europe in particular. Online shopping also remains less time consuming and easier.

Furthermore, respondents in the 2015 survey indicated that the maximum amount they felt comfortable paying online for a single item was RMB 4,200. This is far higher than the amount of RMB 1,900 that consumers were comfortable spending in 2014 – an increase of 121 percent. All of these trends indicate that online luxury shopping is set to grow as Chinese consumers are growing increasingly more comfortable with online purchasing.

Figure 6:Total e-commerce sales growth and value in China 80 70

1000

Growth %

60 50

47%

40

800

35%

32%

30

600

27%

22% 16%

20

200

10 0

400

2013

2014

2015

2016

2017

2018

E-Commerce value (USD bln)

1200

0

Source: eMarketer, http://www.emarketer.com/Article/Retail-Sales-Worldwide-Will-Top-22-Trillion-This-Year/1011765

16 http://www.reuters.com/article/china-retail-internetidUSL5N0VM0RT20150225

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 57

AAP Image/Lisa Martin

The Kaola.com website from NetEase, a Chinese tech firm, as seen on a computer in Hangzhou, China, Tuesday, Oct. 11, 2016.

Australia is set to cash in big time from China's misspelling of koala as the world's most populous country experiences an online shopping boom. There are tens of thousands of products and more than 100 brands from Australia sold through Kaola so far.

Based on the 2015 KPMG China survey findings17: • Online confidence is booming! 45 percent of luxury online shoppers now buy over half of their luxury goods online. We expect 50 percent of China’s domestic luxury consumption will be generated online by 2020.

• Import duties reductions combined with brands’ recent moves to realign prices between overseas and China will boost China domestic full-price e-commerce, and challenge overseas websites.

• From reviewing social media content, we noticed the emergence of retailer generated content alongside key opinion leaders’ and user-generated content. Brands need to adapt and publish more relevant and consumer-centric digital content or risk seeing their brand image diluted.

17 Source: KPMG China’s Connected Consumers: When 10,000 Chinese shop… Insights from a 2015 survey, KPMG, 2015

• Although they remain valuedriven, Chinese consumers – especially younger generations – are less price obsessed. This opens new opportunities for full price e-commerce for premium and luxury brands.

• Alibaba recorded nearly four times more sales on Singles’ Day than 4,200 retailers did in the US on Black Friday (the traditional post-thanks giving day retail sales event).

• The smartphone is the most commonly used device for daily retail visits across Chinese luxury online shoppers.

• Online luxury services are booming – while luxury product sales are also growing the Chinese online luxury consumer now is also looking for luxurious services and experiences.

What does all this mean for Australian companies?

Based on AIBS 2016, 47 percent of Australian exporting respondents already use e-commerce18.

Cross-border shopping is now more accessible through smart technology and e-commerce. The overseas e-commerce spend is growing rapidly, especially throughout China and the rest of Asia. Consumers are becoming very discerning and focused on best in the world quality and value. This means transparency is high and competition is incredibly tough. Australian exporters can’t just expect their product to sell online without ensuring their product is world class and marketed in a manner that meets Chinese consumers' taste and expectations.

• The older generation is still lagging behind in its purchase of luxury products online – despite their ability to afford luxury.

18 Australia’s International Business Survey. (2015).

Summary Report. Canberra: AIBS.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Alibaba Group: New markets for Australian exporters.

A case study Alibaba Group has been at the forefront of assisting Australian exporters in accessing new markets.

Research shows the value of China’s e-commerce market exceeded USD 600 billion in 2015. Of this amount, Alibaba alone contributed around USD 485 billion in sales in e-commerce, making Alibaba Group the world’s largest retailer.

Australian products are increasingly popular on Chinese e-commerce channels. Alibaba sees strong and growing demand for a range of products such as dairy, premium foods, healthcare, skincare, and mother and baby products.

Each year, Alibaba runs the largest shopping festival in the world, the Double 11 Shopping Festival, on 11 November. In 2015, Australia ranked 5th among 41 countries globally on Tmall Global, the platform for international branded goods, with Chemist Warehouse hitting RMB10 million in the first 46 minutes of the shopping festival.

Alibaba Group has plans to open an office in Australia to better support its Australian clients, and to help more Australian companies access the Chinese market. Currently, there are over 1,300 Australian companies on Tmall and Tmall Global, with over 80 percent of them accessing China for the first time via Alibaba’s platforms. There are also more than 2.7 million Australian Alibaba.com accounts providing Australians with new opportunities to buy and sell products.

The momentum is likely to continue with the staged implementation of ChAFTA. While Australian products are already high on the wish list of Chinese consumers due to the premium and quality reputation of products made in Australia, ChAFTA will further reduce tariffs and increase the competitiveness of Australian produce.

Alibaba Group has also forged a strategic partnership with Australia Post. Australia Post’s Tmall store provides a solution for exporters, particularly small and medium enterprises, to access some of the 420 million Chinese consumers active on Alibaba Group’s platforms.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Access Asia

© 2016 KPMG, an Australian partnership and a member firm All rights reserved.The KPMG name and logo are registered

Leveraging Free Trade Agreements for Australian Trade Growth

Currently, there are over 1,300 Australian companies on Tmall and Tmall Global, with over 80 percent of them accessing China for the first time via Alibaba’s platforms.

Success through Alibaba’s B2B channels

Banaban Coconut Oil Banaban is currently involved with two major research projects here in Australia and Canada in medical fields related to pre-term infants and the development of healthy supplements for the elderly.

Banaban is Australia’s leading coconut oil brand marketed as Banaban Virgin Coconut Oil. The family owned business started in the parent’s garage on the Gold Coast in 2004 and with the help of Alibaba.com the brand is taking on the world and achieving exceptional growth.

The Banaban brand started as a mission to tell the world of the Banaban story through traditional foods used by the Banaban Islanders for centuries.

With the help of Alibaba.com, Banaban is becoming more world renowned for its business innovation, and it comes in many forms such as the development of outside the square world first ideas, an incredible state of the art HACCP and organic facility and partnerships with leading Australian and international universities into research programs to scientifically prove the benefits of Banaban products.

Banaban is currently involved with two major research projects here in Australia and Canada in medical fields related to pre-term infants and the development of healthy supplements for the elderly.

The company’s strategy for the last three years, and moving forward, has been implementing a mini website within Alibaba.com as a B2B platform to on sell our unique range of Banaban coconut products to the world. Over the last three years the company has seen new clients and orders from other regions including Europe and Asia.

Over this time using Alibaba.com the company secured eight new distribution channels worldwide and each day Banaban is receiving 10-15 international enquiries.

The company’s recent success with Alibaba.com has been setting up a new distribution network within supermarkets in Spain with their first order valued at over AUD 100,000.

Banaban has also secured distribution through Alibaba.com to countries such as Germany, Poland, Malta, Hungary, Mongolia, Hong Kong, Taiwan and soon to be South Korea.

Since the late 2000’s Banaban has been using Alibaba.com as a B2B platform.

Banaban first started selling bulk virgin coconut oil on Alibaba.com and in particular to countries such as Brazil and Canada.

Jessica’s Suitcase Jessica’s Suitcase is a cross-border e-commerce business, connecting premium Australian brands with China’s online shopping community through Alibaba’s Tmall Global platform.

People are fascinated by China’s economic success. The population of some Chinese cities exceeds the entire population of Australia and, for many, China has a magnetic energy. This was the case for Jessica Rudd, a lawyer, PR consultant, author of novels Campaign Ruby and Ruby Blues and daughter of former Australian Prime Minister Kevin Rudd.

Rudd lived in Beijing for five years, but in early 2014 the family decided to return to Australia. Although she left China, Jessica wanted to remain connected to her experiences there. When Chinese friends from her mothers’ group regularly asked her to bring back Australian products like Blackmores and Swisse vitamins and synthetic-chemical based toothpaste; she knew there was a real grassroots level of demand for Australian goods.

Jessica's Suitcase is a cross-border e-commerce business, connecting premium Australian brands with China's online shopping community through Alibaba's Tmall Global platform.

The Chinese cross-border e-commerce market is large and complex and Jessica's Suitcase aims to facilitate access to this space for Australian SMEs, which otherwise may not have the resources or the market knowledge to be able to do it on their own.

Since launching in June last year, the store has grown to house 15 brands with several others in the pipeline, of which almost half are on exclusive arrangements. Based on her success as a trusted brand and image in China, Jessica Rudd was recently signed as Australia and New Zealand Lifestyle Ambassador for Alibaba, the first appointment of its kind.

Given Jessica's unique position in China, she has been able to bring several coveted media and promotional opportunities to the brands, including being featured on Tmall live broadcasts and a web series hosted on Youku – China's YouTube equivalent with over 500 million active monthly users.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

60 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

Asia bound – How do you navigate transfer pricing and other evolving tax laws in the region?

What companies need to know about tax in Asia Expanding operations into Asia creates exciting opportunities.

Many Australian companies have specific strategies to exploit the breadth of offerings and richness of Asia through extending their market reach or leveraging potential procurement opportunities. Many will have noticed however, an increased focus on transfer pricing and international tax issues in recent years globally and in the region which needs to be considered for cross border expansion into Asia.

Most topically, many will have observed the focus by the G20 (the 20 major global economies) the Organisation for Economic Co-operation and Development (OECD) on the Base Erosion and Profit Shifting (BEPS) project. Under this project, the OECD divided its focus in to a 15 point action plan releasing findings reports and recommendations under each area since 2014 and covering topics ranging from debt deductibility and hybrid structures, Controlled Foreign Company (CFC) taxation, treaty abuse, taxation of permanent establishments, to transfer pricing and transparency.

As a region, Asia has been quick to enter the BEPS debate and has generally been an early adopter of many of the OECD recommendations but the level of acceptance and pace of adoption differs between individual countries in the region.

Specifically, the transparency measures recommended under OECD BEPS Action 13 provide an example of fast and broad adoption across the region. Action 13 proposes increased transparency for revenue authorities based on a three tiered structure made up of a multinational group master file, local files and completion of a Country By Country (CbC) reporting data matrix. These materials are generally required of multinational groups with group turnover greater than AUD 1 billion, and once prepared typically have to be submitted to one or more revenue authorities in the region (or shared between them based on automatic information exchange agreements).

Action 13 reporting discloses significant data about the group’s operations, countries of operation and organisation structure, types of transactions, transfer pricing policies, revenue, profit and taxes paid.

To date, many countries in Asia have adopted the recommendations, legislated their own versions or signalled intentions to do so with application from early income years commencing after 1 January 201619.

For those Australian companies expanding into Asia or thinking about doing so, watching the developments under the BEPS 15 Point Action plan is important as the rules can differ when adopted in countries across the region.

Whilst many countries in Asia continue to offer economic incentives to attract trade and commerce, understanding the specific transfer pricing and tax laws including the BEPS developments in each country is also important to successful expansion into the region.

19 To date, countries in the region who have adopted these measures or have signalled the intention to do so, include Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Singapore, South Korea,Taiwan and Vietnam Specific thresholds and reporting requirements differ between specific countries. Further information in respect of Action 13 adoption in Asia and around the globe can be accessed from the KPMG global summary, kpmg. com/action13updates.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Access Asia Leveraging Free Trade Agreements for Australian Trade Growth

The ATO’s increased focus on cross border business Australia has recently strengthened its domestic transfer pricing and international tax rules increasing the focus on cross border activity, which is relevant to any Australian company considering its options to expand into Asia. Key considerations under the international tax provisions should include the CFC rules, Capital Gains Tax, Thin Capitalisation, Foreign Tax Credit, participation exemption, deductibility of interest and foreign hybrid provisions.

As a key part of its international tax focus, the Australian government has also recently modernised its transfer pricing rules, passing new legislation in September 2012 (applying to arrangements covered by double tax treaties with retrospective application back to 1 July 2004)20 and March 2013 (with application to all arrangements for income years beginning on or after 1 July 2013)21.

20 Subdivision 815-A of the Income Tax Assessment Act 1997 (ITAA 1997).

21 Subdivisions 815-B to 815-E, ITAA 1997.

The new rules contain reconstruction powers and extend the focus beyond transactional pricing, additionally requiring Australian taxpayers to consider if third parties acting independently would have structured the related party arrangements in the same way. As part of this inquiry, Australian taxpayers are expected to consider if any functions, assets or risks have been transferred overseas and whether a third party (in the shoes of the Australian taxpayer) would have agreed to the transfer and/or would have expected to be compensated for the transfer. These new laws are particularly relevant to operations expanding into Asia to the extent Australian companies look to migrate key group activities or intangibles into Asia.

In addition to updating its transfer pricing rules, the Australian government recently introduced tougher anti-avoidance measures via the Multinational Anti-Avoidance Law (MAAL)22 which sharpen the focus under the Part IVA

General Anti-Avoidance provisions specifically in respect of sales made by principal entities resident offshore directly to Australian customers. More anti-avoidance legislation has also been proposed in the May 2016 Federal budget, in the form of a Diverted Profits Tax (DPT) which looks to apply punitive taxes to cross border arrangements which ‘divert’ profits from Australia and lack economic substance.

In working with the new law, the Australian Taxation Office (ATO) has also increased its focus on cross border activity. In 2013, the ATO introduced the International Structuring and Profit Shifting (ISAPS) field review program which looks specifically at cross border arrangements in light of updated domestic Australian law and the issues emerging from the OECD BEPS project. More recently, the government has announced an additional AUD 680 million in funding for the ATO over four years to establish a new Tax Avoidance Taskforce.

22 Section 177DA of the Income Tax Assessment Act 1936.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

62 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

Whilst some of these laws require rule based stepped analysis (such as the Capital Gains Taxation (CGT), Withholding Tax or CFC provisions), some require consideration of what third parties acting independently would do (i.e. the transfer pricing provisions), whether under an objective test, there is a purpose to avoid Australian tax (i.e. Australia’s General Anti-Avoidance provisions) or whether irrespective of third party behaviour and purpose, the arrangements lack economic substance or are deemed to lack substance (i.e. the proposed DPT)23.

In addition to considering the local tax laws of countries in Asia, keeping up to date with Australia’s tax law and policy changes is therefore important to successfully managing the local tax obligations in expanding offshore.

What are common considerations in expanding into Asia?

For most companies expanding their operations beyond the Australian shores, questions of what to place overseas and where commonly come up as well as how to fund offshore operations. Broadly speaking, transfer pricing and international tax rules look at, how much income offshore activities should derive and on what basis.

Transfer pricing and international tax rules also govern the deductibility and taxability of financing arrangements.

23 Under the current DPT proposal, a lack of economic substance can be deemed to the extent that a tax differential between that paid offshore and that which would paid if the income was derived in Australia is greater than commercial benefits derived from offshore structures.

Figure 7: Expected returns of different economic models

Full Risk Entrepreneur

Licensee with exploititative rights

Expected returns

The taskforce will consist of 1,300 people, including 390 new specialist officers who will focus on compliance activities of multinationals, large public and private groups and high wealth individuals and is expected to raise AUD 3.7 billion in tax over the four year period.

Limited Risk Distributor/ Procurer

Simple Buy/Sell Logistics Company

Service Company

Intensity of functions, assets and risks Source: KPMG Access Asia 2016.

What to place overseas and where?

Applying generally accepted principals, transfer pricing typically examines any functions performed, assets utilised and risks borne by entities in cross border arrangements. As the above diagram illustrates (Figure 7), general economic theory would suggest that as the intensity or value of the functions, assets or risks increase, the expected return also increases.

Given the trend toward establishing offshore marketing and procurement hubs, the ATO recently released a discussion paper in respect of offshore hubs and some proposed practical compliance guidelines to assess transfer pricing risk arising from hubs used by multinational companies in Australia to centralise business activities such as procurement, marketing, sales and distribution functions24.

Unsurprisingly, given the increased appetite of Australian companies to move into Asia, the ATO has become very focused on determining appropriate returns for offshore entities within Australian multinational groups.

24 http://lets-talk.ato.gov.au/offshorehubs

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 63

How to fund offshore expansion?

The other question that often arises in offshore expansion into Asia, tends to be how to fund the offshore operations. Broadly speaking, Australian companies might choose between equity and debt funding. Equity requires compliance to formal corporation law requirements and depending on the country, any dividends repatriated may be subject to withholding tax. Due to its ability to match specific needs, debt is often considered to provide more flexibility but the structuring of the debt and interest deductibility should be considered under general deductibility, local transfer pricing, thin capitalisation and antihybrid rules (also like dividends, withholding tax also typically applies to interest payments in the region).

Furthermore, in 2015, the Federal Court handed down a decision in the Chevron case which is the first substantive decision delivered under Australia’s new transfer rules and was made with regard to cross border debt arrangements. The case involved a question in respect of the pricing of an inbound loan from a related party US subsidiary to the Australian taxpayer of approximately USD 2.45 billion. Whilst still waiting appeal, the decision raised a number of issues relating to the onus of proof, use of evidence, comparability and expert witnesses, but affirmed the power of the Australian transfer pricing law to reprice arrangements based on what might be expected at arm’s length.

What emerges from this brief discussion of two common key considerations in expanding abroad to Asia, is that Australian companies should consider their proposed cross border structures, arrangements and transactions based on the particular tax laws in relevant jurisdictions and what third parties might be expected to agree at arm’s length. This might require some analysis of any existing arrangements with independent third parties, and/or a more detailed examination of other arm’s length arrangements and transactions sourced externally.

Where should companies start?

Whilst it is often easy to feel overwhelmed by an apparently long list of tax considerations, particularly when first venturing abroad, the key to successfully navigating the compliance requirements across Asia often begins with thinking simply.

The starting point for many Australian companies expanding into Asia is typically to identify and articulate well the commercial purpose and operational objectives behind the emerging strategies, as well as the level of investment desired for expansion. Whilst it might seem obvious, understanding the commercial purpose and operational objectives needs to be at the core of any strategic decision to expand into Asia as the relevant tax considerations are determined by the underlying operational needs and strategies of the business.

The starting point for many Australian companies expanding into Asia is typically to identify and articulate well the commercial purpose and operational objectives behind the emerging strategies, as well as the level of investment desired for expansion.

Shareholder interests often play an important part in articulating the commercial purpose and strategies of the company. A desire for growth, profits and/or dividends can influence how you might expand into Asia and in what way. The selection of any operating models applied (and the economic consequences of those models) and the timeframe in which the business might progress through different stages of expansion needs to work operationally for the business and may evolve over time.

The business’ ability to handle change and locate key and strategic decision making/risk management abroad can also affect the selection of operating models. Differences can emerge between the business’ desire to locate certain functions and decision making and/or key assets such as intangibles, close to suppliers or customers to optimise opportunities abroad, and the business’ ability to locate those functions and decision making remotely in offshore locations and/ or separate to the historic centre of control in Australia.

The different operating models available and the commercial drivers for those models have different tax considerations and implications.

Equally, changing the model once implemented can have important tax implications, so aligning the model and growth path to the needs of the business is important to manage the success of expansion and operational evolution. Companies might not necessarily have to create the end state model from the first day of expansion and so defining the growth path is important to managing the investment into Asia and the tax compliance that comes with that level of investment.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 KPMG, an Australian partnership and a member firm All rights reserved.The KPMG name and logo are registered

Summary • Successfully negotiating Free Trade Agreements (FTAs) is tough going for governments, but the deals are only of commercial value if businesses know how to get access to the concessions gained, and take action.

• Eleven of Australia’s top 15 bilateral trading partners are Asian. And ten of our top 15 trading partners are covered under FTAs with Australia.

• Australia’s FTA usage is particularly low by world standards, at just 19 percent25. Between 43 percent and 52 percent of exporting Australian businesses don’t know how and whether an FTA would apply to their business; and between 9 percent and 18 percent don’t know the FTA exists at all.

• Economic modelling show that benefits from our recent North Asian agreements (China, Japan and South Korea) could increase exports by more than 11 percent, and generate a cumulative Gross Domestic Profit (GDP) increase of more than AUD 24 billion in present value terms between 2016 and 203526.

KPMG economic modelling has revealed three major findings: 1. Australian merchandise exporters who underutilise FTAs will miss out on at least AUD 14 billion of potential export trade revenue over the next five years. (This represents a conservative view as it does not include underutilisation of opportunities for trade in services or foregone productivity gains.)

2. The bulk of lost export revenue for Australia is concentrated among countries with recently concluded agreements – China, Japan and Korea.

3. Almost all lost export revenue across Australia’s FTA partners relates to manufactured exports, suggesting a need to focus efforts on better engaging Australian manufacturing businesses.

KPMG finds the top two reasons for lack of FTA uptake are: 1. A lack of awareness of FTA benefits, particularly by many small and medium sized companies; 2. widespread confusion around the technical understanding of FTAs, both in Australia and foreign markets and serious challenges with the implementation of strategies from many Australian companies.

It’s clear that action is needed to engage businesses to make the most of new opportunities and improve their market access. This report suggests a range of ideas for doing so.

25 The Economist. (2014). FTAs: fantastic, fine or futile? London:The Economist Intelligence Unit Limited.

26 The Centre for International Economics. (2015). Economic benefits of Australia's North Asian FTAs. Canberra: Prepared for Department of Foreign Affairs and Trade.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member fiirrms affiilliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Access Asia Leveraging Free Trade Agreements for Australian Trade Growth

Asia & international market entry Supply chain

KPMG Access Asia

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Access Asia Leveraging Free Trade Agreements for Australian Trade Growth

KPMG can assist companies to access Asia

Trade, Customs, Tax

Incentives & grants

Economic modelling & analysis

Government relations

Regulatory risk & compliance

KPMG is answering the call from our clients: the Australian large corporate and SME sector, industry representative groups and government bodies to lead the way by providing assistance for those battling with the challenges of market entry and trade growth across Asia and international markets.

Access Asia is an integrated KPMG initiative comprising teams of dedicated specialists combining skills and experience to create a comprehensive client service offering for Australian companies accessing Asia. Our team has been assembled to help our clients who are interfacing with Asia by providing a full range of services including:

KPMG has developed a new service offering known as Access Asia that integrates several key services to assist our clients to fully access and leverage the Asian FTAs.

• market entry strategy,

Access Asia is KPMG Australia’s strategic response to the increasing regional trade opportunities arising from the FTAs recently introduced.

Our services are aimed at Australian companies and clients exporting and importing goods and services internationally.

• transfer pricing,

Many Australian private sector companies are championing market access opportunities and we are proud to work with many of them.

Together, with their experience and our skills, we can provide others with insights and open doors so they can begin their journey prepared, with knowledge and support.

• Asian regulatory and operational risk management,

• supply chain and procurement, • customs and excise tax efficiencies,

• incentives from local and international governments, • trade and economic policy, • economic modelling and analysis, • government relations,

• co-ordinated help on the ground in Asia.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

68 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

KPMG Access Asia team leaders Asian & International Markets

Market Entry Strategy & Supply Chain Consulting

Trade & Customs

Doug Ferguson

Peter Liddell

Leonie Ferretter

Partner in Charge, Asia & International Markets Partner, Deal Advisory Sydney

Partner in Charge, Asian Supply Chain Consulting Partner, Management Consulting Melbourne

+61 2 9335 7140 dougferguson@kpmg.com.au

KPMG Australia maintains a dedicated Asian Markets coverage team to support inbound Asian investors from Japan, China, India, South Korea and ASEAN as well as Australian companies trading and investing in the Asian region.

Over the past five years we have co-ordinated assistance both locally and offshore for Australian companies across most sectors including food and consumer brands, industrial manufacturing, financial and health services and real estate. Our experience extends to strategic briefings to C suite executives and boards, preparing research and commercial analysis, due diligence planning, translating Asian language documents and providing Asian cultural context to counterparty communications and corporate affairs.

We have also been engaged by State Governments to assist with trade and investment strategies with key countries in the Asian region. Our overriding objective and purpose is to provide clients with quick and valued access to the strengths of KPMG both in Australia and in the region.

+61 3 9288 5693 pliddell@kpmg.com.au KPMG has a strong and experienced National Supply Chain & Operations Advisory team, supported by our Asia based Supply Chain specialists. Together we support multi-national clients in the development of their China/Asia market entry strategies and to help them realign their global and regional supply chains.

The Australian KPMG team is skilled in assisting with the development of Asian market entry strategies, where we not only help you to determine the best way in which to enter and compete successfully in Asia, but also structure and adapt your business model such that it aligns with local regulatory and operational requirements. Laying the groundwork for a smooth entry and transition into Asia is what our team does best.

Director,Trade & Customs Sydney +61 2 9455 9330 lferretter@kpmg.com.au

The KPMG Customs and Excise team have a long history of providing our clients with practical advice on accessing FTAs and dealing with international trade and customs agreements. We are passionate about trade and assisting our clients gain the benefits of our FTAs. By understanding the specifics of free trade and the challenges associated with incountry duties, taxes and non-tariff barriers of products and export markets, our clients are more enabled to make informed and intelligent decisions, supported by an experienced and committed team. To assist, we work closely with our clients to make the international trade journey easier, to maximise the benefits of FTAs and importantly to provide solutions to interpreting complex technical international trade rules. Our team is global and we can partner with our Asian Member Firms to deliver on the ground assistance as required.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH // 69

International Tax Advisory

Economic Modelling & Analysis

Government Relations, Trade & Economic Policy

Jeremy Capes

Laurent Cretegny

Warwick Ryan

Partner, InternationalTax Advisory Sydney

Director, Economics Canberra

Director,Trade & Economic Policy Canberra

+61 2 9335 7665 jeremycapes@kpmg.com.au

+61 2 6248 1454 lcretegny@kpmg.com.au

+61 2 6248 1124 wryan@kpmg.com.au

Our International Tax Advisory practice helps organisations navigate international tax and transfer pricing challenges and manage international compliance obligations. Moving across border into Asia requires a good understanding of local country tax requirements, regional trends and differences. Governments and their revenue authorities are responding to the globalisation of business operations by strengthening legislation, increasing documentation and transparency requirements and imposing higher penalties for non-compliance.

In this increasingly globalised world, understanding the full value chain of multinational groups has become an important lens for international tax compliance and transfer pricing analysis.

KPMG Economics can assist you with pursuing and formulating more effective policy. With world’s best practice economic modelling and economic advisory services, our goal is to enhance your ability to make optimal decisions at all stages of the policy and decision-making cycle, from design and evaluation to implementation and economic forecasting. FTAs are complex both in terms of negotiations and utilisation as they typically cover most of the sectors in the economy, which have interactions with one another. Initiated with the Uruguay Round in 1986, Computable General Equilibrium (CGE) modelling has been the framework predominantly used for trade policy analysis for 30 years now.

KPMG’s International Tax Advisory Services practice is an international team of tax and transfer pricing practitioners, economists, and analysts helping clients navigate key tax considerations and compliance obligations across the region and reduce the risk of challenge from revenue authorities.

KPMG’s global CGE model has the ability to handle inter-sectoral linkages within countries together with bilateral trade flows among 140 countries. It allows governments and businesses to clarify potential trade-offs between many intricate trade policy options and thus to formulate optimal policies based on sound evidence.

Our dedicated team is committed to building trusted and enduring partnerships with you that combine cutting edge analytical techniques, highly experienced and credentialed professionals.

The KPMG Government Relations team can assist small and big business to develop and execute stakeholder engagement strategies aimed at actively shaping the trade regulatory framework, including achieving optimal tariff and non-tariff barriers reductions in trade negotiations, removing discriminatory treatment against their products and services, and, more broadly, facilitate strategic market access gains. This engagement can include stakeholders located both in Australia and internationally. ‘Traditional’ targeted stakeholders include Government trade negotiators and decision-makers, Intergovernmental Organisations (e.g. World Trade Organization (WTO) committees), International industry representatives, as well as global diplomatic networks.

We advise Australian corporations and funds, and foreign multinational groups on the tax implications and considerations of their regional activities and operational planning. This includes corporate structuring, investments and disposals, and structuring and pricing cross border arrangements and dealings. Our multidisciplinary approach and global mind set enables us to cover a broad range of issues and work collaboratively with our clients to find solutions to complex cross border challenges.

Our team works to provide business with access to trade negotiators to provide informed input into future FTA negotiations, as well as reviews and updates of existing FTAs, in order to influence trade policy design and outcomes. This is achieved, inter alia, by drafting technical submissions to DFAT in order to achieve specific commitments in Australia’s FTAs and providing policy, economic and legal expertise across areas of trade policy, including goods, services, technical barriers to trade, sanitary and phytosanitary measures, trade remedies (subsidies and anti-dumping), investment, intellectual property as well as dispute settlement mechanisms.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

70 // ACCESS ASIA: LEVERAGING FREE TRADE AGREEMENTS FOR AUSTRALIAN TRADE GROWTH

Risk Consulting

Government Incentives

Access Asia Trade Solutions

Michael Hill

Philip Doyle

Amelia Hartney

National Partner in Charge, Governance and Risk Melbourne

Director, Government Incentives Melbourne

Access Asia Program Leader Melbourne

+61 3 9288 6859 pdoyle2@kpmg.com.au

+61 3 9288 5089 ahartney@kpmg.com.au

Our National team of Research & Development (R&D) and Government Incentives experts help businesses access Australian and Global funding opportunities. Accessing government grants can be challenging. The availability of programs can change rapidly and the identification of opportunities that are strategically important to business can be difficult.

New exporters will find a wide range of government support is available and can accelerate their journey if they navigate the opportunities provided by both State and Federal government agencies, including the grants and in-country support.

Access Asia is KPMG Australia¹s strategic response to the increasing regional trade opportunities arising from the recently introduced FTAs. Access Asia is an integrated KPMG initiative comprising teams of dedicated specialists combining skills and experience to create a comprehensive client service offering for Australian clients exporting and importing goods and services internationally and with a particular focus on the Asian region.

+61 3 9288 5589 mwhill@kpmg.com.au KPMG has a strong and experienced national Governance and Risk team, supported by our global Governance and Risk team, who focus on assisting our clients in identifying and understanding the risks and compliance obligations created with exporting and/or setting up offshore offices in Asia. The Governance and Risk team has worked with clients across the Retail, Manufacturing and Financial Services industries.

The Governance and Risk team assists clients in performing a dynamic risk assessment which uses three dimensional network theory and leverages data analytics to identify, connect and visualise risks. Dynamic risk assessment identifies critical risk clusters and interconnectedness and the contagion effects of these risks within the organisation. In addition, we support our clients in developing potential risk mitigation strategies.

In addition, our team can work with you to identify and understand the new compliance and regulatory obligations and reporting requirements in the offshore location. We can assess your existing compliance and regulatory reporting framework to assess how effective, efficient and sustainable your compliance framework is to absorb changes to the business to ensure that it will align with future local regulatory and operational requirements.

Governments have long assisted innovation and business growth through grant funding and tax benefits. Each year, hundreds of government grant programs worth billions of dollars are made available to businesses in Australia and internationally.

However, accessing these funding opportunities can be challenging, as both availability and eligibility criteria change frequently. Our Incentives services range from reviewing previous grant and R&D incentive applications to managing the entire claim process, including registration with appropriate government bodies, claim preparation and assistance with audits. By accessing funding opportunities to support growth into Asian and other global markets, our clients gain a competitive edge and can accelerate their international journey.

Our team draws on existing service lines and has been assembled to help our clients who are interfacing with Asia by providing a full range of services including market entry strategy, supply chain and procurement, customs and excise tax and Free Trade Agreement reviews.

KPMG is proud to have worked with many Australian companies who are championing market access opportunities internationally. Together with their experience and our skills, we can provide other clients with insights and open doors so they can begin their journey prepared, with knowledge and ongoing practical support.

For more information about Access Asia, please contact Amelia Hartney.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

kpmg.com.au

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise). © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

October 2016. NSW N14695ASIA

TECHNICAL COMMITTEE MEETING UPDATE // 73

TECHNICAL COMMITTEE MEETING UPDATE We were fortunate to be at the August Technical meeting in Sydney; gale force winds closed most of the Barangaroo precinct! Nevertheless, we managed to meet and discussion was around three key themes: Energy Prices, Benchmarks; and Cyber security On the first topic, we were fortunate to have representatives from CBA run through issues with Energy prices and how to manage the emerging risks. Key points to emerge from the discussion included: Price risk is emerging as an issue for many consumers of energy as coal-fired power stations are shutdown removing supply, while international LNG prices are dragging domestic gas prices up. (see this article for example) Renewables are emerging as a low cost alternative, albeit not suitable for firm supply to replace more traditional supply; batteries will be required, In a similar fashion to fuel prices last decade, energy costs are a function of oil prices, though the basis risk can be significant.

One possibility to hedge the risk is to join with other consumers to form purchasing partnerships to negotiate longer term deals with energy suppliers. Longer term deals could even fund new power generation projects.

This is a growing issue and the Finkel Review is the best bipartisan solution offered so far. So far 49/50 recommendations have been adopted. We are still waiting for the federal and state governments to agree what incentive scheme (i.e. the final, but crucial recommendation) to adopt to encourage renewables over the long term.

Definitely one to keep an eye on, and a good topic for future PD. We discussed ASIC’s Benchmark Consultation (CP292) and resolved to provide feedback to ASIC on the need for quality benchmarks, particularly BBSW, which are transparent and realistic. Members also raised the absence of the WMR AUD FX Benchmark (previously known as HSRA) from the list of systemic benchmarks. We look forward to hearing from ASIC in the near future.

Cyber security is an issue which continues to be discussed, and one where we feel some guidance would be helpful. Back in July there was a seminar on the National Cyber Security Strategy. Since the technical committee meeting there has been even more published and discussed (at the recent FIS Summit and at Risk Australia). To assist, we will be publishing an article with some pointers on this emerging issue to join the current crop of guidance on the FTA website.

We also discussed the program for the FTA Conference coming up in November. This is promising to be another great event and we look forward to experiencing the final product on the Gold Coast in November.

Our next meeting will discuss the vexed issue of tax and transfer pricing. Stay tuned!

Lindesay Brine FFTP Chair of Technical Committee Head of Assurance, FICC, Product and Markets National Australia Bank Limited

74 // PARTNER DIRECTORY

CONFERENCE 2016 - PRINCIPAL PARTNERS

Building on a proud 180-year banking heritage, ANZ is an international bank with a unique footprint. With headquarters located in Melbourne, ANZ is a top 4 bank in Australia, the largest banking group in New Zealand and the Pacific, a leading bank globally on the Dow Jones Sustainability Index (DJSI), and among the top 25 banks in the world. We provide a range of banking and financial products and services to over 9 million institutional clients and retail customers. www.anz.com

We are committed to building lasting partnerships with our customers, shareholders and communities in 34 markets worldwide, with offices in Australia, New Zealand, throughout Asia and the Pacific, and in the Middle East, Europe and America. ANZ aims to be the best bank in the world for clients driven by regional trade and capital flows. We provide unique access and insights through on-the-ground presence in 15 Asian markets and 12 Pacific countries.

The Commonwealth Bank is Australia’s leading financial institution, with total assets of more than $A755 billion (as at 30 June 2015). The Group is ranked the 10th largest bank in the world by market capitalisation (Bloomberg, as at 12 February 2016) and is one of the largest companies on the Australian Securities Exchange.

Through a disciplined approach to credit and market risk management, the Bank maintains a AA- credit rating (Standard & Poor’s, as at 12 January 2016). Our Institutional Banking and Markets division provides capital raisings, risk management and transactional banking solutions to the Group’s institutional clients.

www.commbank.com.au/institutional

Capabilities in markets include foreign exchange, interest rate, commodity and fixed income products. The division’s approach is underpinned by rich analytics, insights from industry experts, innovative technology and a deep commitment to building long-lasting relationships.

For more than 150 years NAB has been helping customers with their money.

With more than 35,000 employees, serving 10 million customers at more than 800 locations across Australia, New Zealand and around the world, NAB aims to make a difference by being a responsible, inclusive and socially innovative bank.

www.nab.com.au

As Australia’s largest business bank, NAB works with small, medium and large businesses to help them start, run and grow. NAB also funds some of Australia’s most important infrastructure projects including schools, hospitals and roads.

Westpac Institutional Bank (WIB) delivers a broad range of financial services to Commercial, Corporate, Institutional and Public Sector customers with connections to the Australian, New Zealand, Asian, European and US markets.

WIB operates through dedicated industry relationship and specialist product teams, with expert knowledge in transactional banking, financial and debt capital markets, specialised capital, public private partnerships, broking and alternative investment solutions.

www.westpac.com.au/corporate-banking

We combine market and industry insights with a deep understanding of our customers to provide solutions that maximise efficiency, provide transparency and free up working capital whilst mitigating risk. Our experienced team take a supply chain perspective of our customer’s business, providing innovative risk and financing solutions designed to add value to our customers and their strategic trade counterparts business.

PARTNER DIRECTORY // 75

CONFERENCE 2016 - SUPPORTING PARTNERS

www.moodys.com

Moody’s Investors Service is a leading provider of credit ratings, research, and risk analysis. Moody’s commitment and expertise contributes to transparent and integrated financial markets, and the firm’s ratings and analysis track debt covering approximately 120 sovereign nations, 11,000 corporate issuers, 21,000 public finance issuers, and 72,000 structured finance obligations.

Bloomberg, the global business and financial information and news leader, gives influential decision makers a critical edge by connecting them to a dynamic network of information, people and ideas. www.bloomberg.com

www.thomsonreuters.com

The company’s strength – delivering data, news and analytics through innovative technology, quickly and accurately – is at the core of the Bloomberg Professional service. Bloomberg’s enterprise solutions build on the company’s core strength: leveraging technology to allow customers to access, integrate, distribute and manage data and information across organizations more efficiently and effectively.

Our unique combination of custom content, easy connectivity and robust community is why over 440,000 professionals in 150 countries do business with us every day.

Move from insight to action - Through our market-leading Thomson Reuters Eikon, Elektron and Risk Management solutions, we help our customers generate superior returns, improve risk and compliance management, increase access to liquidity, and create efficient, reliable infrastructure. Wiith our open and innovative platform, we support the world’s most complex financial services firms in dealing with their top business challenges.

Establishing trust. Delivering satisfaction.

Energy companies, investment firms, brokerage houses, industrial conglomerates, global corporations, and the largest global banks all trust us to support and enable their most crucial financial decisions. Our mission is to drive customer growth and innovation with our trusted unified platform – enabling the industry to discover, transact, and manage risk. We anticipate market shifts and evolve to meet them.

S&P Global Ratings, a division of S&P Global Inc. (NYSE: SPGI), is the world’s leading provider of independent credit risk research. We have more than 1 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities.

www.spglobal.com

With approximately 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

76 // PARTNER DIRECTORY

CONFERENCE 2016 - EXHIBITORS Visual Risk is a leading treasury and software vendor for corporates and financial institutions. Combining deep treasury expertise with innovative technology, we deliver a distinctive brand of forward-looking risk analytics, asset liability management, hedge accounting and treasury & cash management software. This enables treasuries and management to improve efficiencies and simplify their risk and compliance complexities. www.visualrisk.com

www.deloitte.com.au

The Visual Risk system is a unique suite of treasury modules which can be implemented individually and integrated with existing third-party systems, or as a fully integrated front-to-back office treasury system. Deployed via the Cloud or locally, we can deliver a system best suited to your organisation.

Deloitte is the brand under which thousands of professionals collaborate across a network of offices in Australia to provide audit, economics, financial advisory, human capital, tax and technology services. Deloitte Australia is committed to growth, client service and its people, and the company continues to invest in innovative new services, products and people, while expanding its business through acquisitions, alliances and organic growth.

Deloitte ranked number one employer for accounting and financial management graduates, and leads the Big Four, in Top 100 Graduate Employers 2016, a survey undertaken by The Australian and GradAustralia.

ETOS Limited provides middle and back office treasury support to a wide range of Australian and New Zealand organisations.

A team of experienced treasury professionals ensures ETOS clients maintain a best practice framework of controls and procedures to manage their treasury risk and compliance. ETOS’ strength comes from its flexibility to tailor services to meet the clients specific needs. No two ETOS clients are the same! ETOS addresses many challenges faced by Treasurers and Finance teams:

www.etos.co.nz

• Lack of in-house experience • Key person risk • Segregation of duties • Business continuity • Cost Efficiencies • Regulatory compliance Veda Credit Ratings is an Australian Credit Rating Agency that specialises in providing corporate credit ratings and counterparty risk intelligence. As a leading provider of credit ratings on mid-market corporates to support critical business decisions across the finance, insurance, corporate and public sectors (including project and infrastructure finance), corporates are increasingly using Veda’s issuer-based ratings to strengthen market perceptions and to support funding and finance activities.

www.veda.com.au

Whether you are looking for an issuer or counterparty rating, and/or a public or private assessment, Veda Credit Ratings provides highly credible, comprehensive and authoritative reports that stand up to public and political scrutiny.

SWIFT is a global member-owned co-operative and the world’s leading provider of secure financial messaging services. We provide our community with a platform for messaging and standards for communicating, and we offer products and services to facilitate access and integration, identification, analysis and financial crime compliance Our messaging platform, products and services connect more than 11,000 banking and securities organisations, market infrastructures and corporate customers in more than 200 countries and territories enabling them to communicate securely and exchange standardised messages in a reliable way.

www.swift.com

As their trusted provider, we facilitate global and local financial flows, support trade and commerce all around the world; we relentlessly pursue operational excellence and continually seek ways to lower costs, reduce risks and eliminate operational inefficiencies. Headquartered in Belgium, SWIFT’S international governance and oversight reinforces the neutral, global character of it’s cooperative structure.

SWIFT’S global office network ensures an active presence in all the major financial centres.

PARTNER DIRECTORY // 77

CONFERENCE 2016 - EXHIBITORS

www.fisglobal.com

FIS offers a leading liquidity and risk management solution for corporations, insurance companies and the public sector. The solution suite includes credit risk modeling, collections management, treasury risk analysis, cash management, payments system integration, and payments execution delivered directly to corporations or via banking partners. The solutions help consolidate data from multiple in-house systems, drive workflow and provide connectivity to a broad range of trading partners including banks, SWIFT, credit data providers, FX platforms, money markets, and market data. The technology is supported by a full range of services delivered by domain experts, including managed cloud services, treasury operations management, SWIFT administration, managed bank connectivity, bank onboarding, and vendor enrollment.

Marsh is a global leader in insurance broking and risk management. www.marsh.com.au

Marsh helps clients succeed by defining, designing, and delivering innovative industry-specific solutions that help them effectively manage risk.

Curve Securities currently assists over 400 institutions to place more than $5.5bn in funds. Our clients have access to rates from over 60 banking institutions and a wide range of fixed interest securities and benefit from the “specials” we negotiate on their behalf. www.curvesecurities.com.au

www.fitchratings.com

Thanks to our personalised service and cutting edge Portfolio Management Platform, we save our clients countless hours every year.

Fitch Ratings is a leading provider of credit ratings, commentary and research.

Dedicated to providing value beyond the rating through independent and prospective credit opinions, Fitch Ratings offers global perspectives shaped by strong local market experience and credit market expertise.

The additional context, perspective and insights we provide has helped investors fund a century of growth and make important credit judgments with confidence.

Reval is the leading, global provider of a scalable cloud platform for Treasury and Risk Management (TRM). Our cloud-based offerings enable enterprises to better manage cash, liquidity and financial risk, and to account for and report on complex financial instruments and hedging activities. www.reval.com

The scope and timeliness of the data and analytics we provide allow chief financial officers, treasurers and finance managers to operate more confidently in an increasingly complex and volatile global business environment. With offerings built on the Reval Cloud Platform companies can optimize treasury and risk management activities across the enterprise for greater operational efficiency, security, control and compliance. Founded in 1999, Reval is headquartered in New York with regional centres across North America, EMEA and Asia Pacific.

OpenLink is the global leader in Transaction Lifecycle Management software for the commodity, energy and financial services industries. OpenLink’s products address portfolio management, corporate treasury, trading, risk management, and operations processing for both financial and physical assets.

www.openlink.com

OpenLink is a global business that has grown both organically and through strategic acquisitions, to achieve revenues in excess of $300 million. It serves over 500 clients, including 12 of the world’s largest commodity and energy companies, 9 of the largest financial institutions, and 13 of the largest central banks. OpenLink has 1,200 employees in 14 global offices on five continents.