Regional review – Asia-Pacific
How the Asia-Pacific region looks in 2024
The Asia-Pacific, the region with the highest population, is a region of almost unstoppable growth. From the developed and stable economies of Australia and Japan, to the emerging territories in South-East Asia and the giants of China and India, the region is of paramount global importance.
Ahead of the Global Leadership Conference, Elaine Chow, Tax Partner at Forvis Mazars, Singapore shares updates on tax in Singapore, while Mark Calvetti, Head of Corporate Finance at William Buck Australia shares his views on the Australian market in the next year and its impact on business. SW International has provided updates on China from Managing Director Marco Carlei, India from Kunal Mehra, Managing Partner of SW India and Hong Kong from Roy Lo, Managing Partner, SW Hong Kong.
Praxity member firms in the region are acutely aware of the impact of the Asia-Pacific on global trade, with jurisdictions in the area often leading global trends and providing important test cases for the rest of the world. From legislative changes to growth forecasts and paradigm shifts, firms must be ever agile and ready to manoeuvre.
Elaine Chow
Tax Partner, Forvis Mazars, Singapore
As of 1 January 2024, gains received in Singapore from the sale of foreign assets by non-exempt Singapore entities of certain multijurisdictional groups will be subject to tax if the entities lack adequate economic substance in Singapore.
Since the introduction of Section 10L, numerous inquiries have been made seeking clarity as to how to apply these rules practically. This piece delves into the Singapore Section 10L economic substance requirements, aiming to illuminate these complexities.
The practical application of Section 10L
The Inland Revenue Authority of Singapore (IRAS) distinguishes between “pure equity holding companies” and” non-pure equity holding companies”, each facing a distinct set of criteria to demonstrate economic substance in Singapore:
Pure equity holding entities
These entities, primarily involved in holding shares or other equity interests, where income is generated solely from dividends, gains from selling shares, or income related to shareholding activities, are assessed under a less stringent economic substance test. To meet this requirement, they must:
- Submit all required statutory returns, statements, accounts and filings to the relevant government authorities
- Manage and perform their operations in Singapore, either directly or through outsourcing to third parties
- Possess adequate human resources and office premises in Singapore to carry out their operations
In essence, these entities must demonstrate that their core economic activities are performed in Singapore by employees employed and working within the country. In some instances, the economic substance test can also be applied at the holding company level of special purpose vehicles.
Non-pure equity-holding entities
Entities not considered a pure equity holding entity will be classified as a non-pure equity-holding entity and be subjected to a more rigorous economic substance test. All factors will be considered in determining if the economic substance requirement has been satisfied in the basis period in which the sale of the foreign asset occurs:
- The entities’ operations being managed and performed in Singapore
- The number of full-time employees with relevant qualifications and experience in Singapore
- The amount of business expenditure incurred in Singapore
- Whether key business decisions are made in Singapore
While the IRAS has provided some guidance, it has yet to establish a minimum threshold or definitive targets (e.g. how much business expenditure is required to constitute economic substance). IRAS will consider all factors to assess if in-scope entities deriving a gain from disposal of foreign assets and remitting the foreign sourced gain into Singapore will be caught under Section 10L.
Therefore, inscope entities contemplating the sale of foreign assets should consider delaying the remittance of foreign sourced gains until clearer guidance is issued or proactively seek a ruling from the IRAS for greater certainty on the adequacy of economic substance. Such a ruling, if granted, would provide tax certainty for up to five years of assessment. It is important to note that the ruling application should be made if the proposed sale or disposal of the foreign asset is expected to occur within one year from the date of the ruling application. The ruling, if issued, will be valid up to 5 years of assessment.
Mark Calvetti
Head of Corporate Finance, William Buck, Australia
Dealmaking activity across Australia has declined, but the mid-market outlook is positive.
Australia has experienced a decline in dealmaking activity in H1 2024 across various markets, according to the Dealmaking Insights Report 2024 half-yearly update by William Buck. The slowdown is attributed to heightened volatility and market uncertainty, as well as four major themes that emerged from our research:
Higher interest rates, for longer
While inflation in Australia has come down from its high of 6.8% in December 2022, it remains above the Reserve Bank of Australia’s (RBA) long term CPI target of 2-3% p.a. Consequently, the cash rate has remained at 4.35% since November 2023. The higher interest rates have continued to lower investor risk appetites while simultaneously placing downward pressure on the profitability of most businesses. Businesses have continued to experience cost inflation, albeit at lower levels than during and after the pandemic.
Longer, more complex deals
In the Australian market, deals are taking longer and are driven by slower, more comprehensive due diligence processes, ESG considerations, and differing views on value between buyer and seller.
While William Buck has observed owners becoming more realistic about their company’s valuation, there remains a valuation gap between buyers and sellers in Australia. As such, buyers are increasingly opting to use earn-outs and deferred compensation to reduce their down-side risk, along with their up-front investment and keep the owners in the business to ultimately ‘bridge the gap’ in valuation and see through the sale of the business.
Geopolitical uncertainty
This year represents the most significant election year in modern history, with more than 60 elections held or expected to be held globally, with market attention being fixed on the outcomes of the US, UK, EU and Indian elections and uncertainty around the policy responses of these elected officials to cost of living pressures, civil unrest, climate change and international conflicts.
The first half of 2024 has also represented a period of increased escalation in global conflicts, with heightened geopolitical tensions in the Middle East and Ukraine. These tensions have had material effects on the global supply chain and forced major powers to respond despite an increasing number of domestic issues at home. They’ve also caused investors to favour more stable and defensive industries than in prior periods.
Flourishing sectors
William Buck’s Dealmaking analysis demonstrates that the Consumer, Technology, and Materials sectors continue to dominate mid-market transactions in Australia, accounting for 51% of total mid-market deals. These findings highlight the durability of consumer-centric businesses across all stages of the economic cycle and the ongoing role that mining and manufacturing play in the Australian economy.
Looking forward, accounting and advisory anticipates accelerated growth in specialised manufacturing as Australia increases its independence, fuelled by ‘Made in Australia’ tailwinds in an increasingly de-globalised world. Professional services firms remain attractive and ripe for acquisition, given their low-capex requirement in a high-interest rate environment. William Buck also observed an uplift in the number of doctor-owned healthcare roll-ups and new-site developments, with a focus on improved and expedient patient care.
Outlook for H2 2024 and ongoing
For the remainder of the year, William Buck expects increased interest in getting deals done, albeit at a more cautious pace, with increased due diligence hurdles and greater buyer scrutiny. Earn-outs will remain a persistent feature of deals going forward to bridge the valuation gap and reduce risk on the buy-side while providing sellers opportunities for greater value creation.
In the absence of major domestic and/or global geopolitical disruptions, the firm anticipates deal volume increasing after a prolonged period of deal stagnation and fence-sitting.
While cautious investment across the M&A market will continue, M&A will remain a key avenue for companies seeking scale efficiencies, technological integration, enhancements and improved reliability of supply chains through strategic acquisitions that offer vertical integration opportunities.
To understand the Australian market and take a deeper dive into William Buck’s outlook for H2 2024 and beyond, read the firm’s Dealmaking Insights Report 2024 half-yearly update here.
Marco Carlei
Managing Director, SW International
China in Spotlight
The Asia Pacific region is experiencing a profound transformation, catalysed by a convergence of technological advancements and economic development, particularly influenced by major players such as China, India and Hong Kong. As these territories navigate through post-pandemic recovery phases, the economic resurgence is evident, with many of the region's economies not only rebounding but also exceeding global growth averages. Each of these economies is experiencing unique trends that collectively shape the broader regional landscape.
Yet, the growth in the Asia Pacific region is intertwined with pressing challenges, covering a wider range of issues like geopolitical tensions, global climate issues, labour and productivity concerns, inflation management and cybersecurity. With appropriate policies in place by authorities, the Asia Pacific region is still well-positioned to continue contributing as a key driver of global economy.
A leading hub for manufacturing and global trade
As China continues to assert its dominance on the global stage, it remains a prominent force as the “the world’s factory” and global supply chain. China accounts for around 28.7% of global manufacturing output, with abundant labour force drawn from a population exceeding 1.4 billion, extensive logistics infrastructure and efficient production and distribution processes.
Meanwhile, China is also one of the world’s largest trading countries, as a significant source of intermediate goods and a major exporter of finished products. The Belt and Road Initiative (BRI), which aims to connect China with Europe, Asia, Africa, and Latin America through infrastructure projects, have further expanded its trade influence globally.
Innovation and technology advancement
To sustain its supremacy, China is now strategically focusing more on high-tech and advanced manufacturing sectors. In 2024, the government pledged to allocate 370.8 billion yuan for science and technology, boosting innovation and strengthening capacities in high-tech industries such as information technology, biotechnology, renewable energy technology and aerospace.
The rise of tech giants in China like Tencent, Alibaba, Huawei, Xiaomi and BYD Auto exemplifies its shift from a manufacturing hub to a leader in technological innovation. The government has also been making substantial investments in establishing 5G networks and AI research hubs across major urban centres. This infrastructural overhaul is part of a broader strategy to create an ecosystem that supports continuous innovation and secures China's position as a global technology leader.
Predictions for the future
China’s GDP is expected to grow continuously, with a growth rate record of 5.2% in 2023 surpassing the market expectations, leveraging its market advantages brought by industrial production, manufacturing investment and trade. However, the growth may stabilize at lower rates compared to previous decades, influenced by factors such as ongoing geopolitical tensions and an aging population, which may hinder overall economic output in the coming years. This will lead to China’s transition towards a more sustainable and high-quality economic model. This trend is becoming more apparent, as the Chinese authority is increasingly prioritising green economic practices to address environmental concerns, embracing digitalisation to enhance productivity and supporting emerging industries to foster economic resilience.
Kunal Mehra
Managing Partner & Co-Founder, SW India
India in Spotlight
India’s Evolution into a Developed Country
India, one of the world's fastest-growing economies, has witnessed significant developments across various sectors in recent years. These developments are reshaping India's role on the global stage, driving progress in areas such as digital innovation, green energy and economic sustainability. India is projected to be the third largest economy behind US and China by 2031, as per present estimates.
India’s vision by 2047
India's vision for 2047 is shaped by its aspirations to become a global power by the time it marks its 100th year of independence, which is a deadline for its ambitious vision of “Viksit Bharat” meaning “Developed India”. From present per capital income of USD $2,500, India is targeting to achieve a per capita income of USD $20,000 by 2047, in order to achieve the status of a developed country. India is implementing the “Atmanirbhar Bharat” initiative, Production-Linked Incentive (PLI) schemes, infrastructure development, digital transformation, education and skill enhancement, and sustainable energy projects to achieve goals by 2047.
The Indian stock market
India had a total market capitalization of USD $5.5 trillion in July 2024 — the fourth largest globally (behind US, China and Japan). India’s market cap is projected to grow to USD $40 trillion in the next two decades with significant investments in manufacturing, technology and infrastructure.
The National Stock Exchange (NSE), one of the major stock exchanges in India, has demonstrated a robust performance, achieving a compounded annual growth rate (CAGR) of 20.66% over the past five years and 18% over the past decade.
India has shown a remarkable 240% increase in unique investors on NSE over the last five years, with the number of investors rising from 27 million in FY 2019 to 92 million in FY 2024. This surge is largely driven by the country's demographic advantage, as a significant portion of these new retail investors are young, tech-savvy individuals with a higher risk appetite.
Ease of doing business
India has launched many initiatives namely “Make in India” & “Atmanirbhar Bharat” during the last 10 years, which have boosted the manufacturing sector and attracted foreign direct investment (FDI), supporting the market’s growth. India has emerged as one of the most attractive destinations not only for investments but also for doing business. The Indian government implements lots of digital initiatives, a stable tax regime, improvement in its legal framework, and a business-friendly approach in bureaucracy, which has helped improve the country’s ranking from 142 to 63 as per World Bank’s Doing Business Report (DBR).
Since 2017, Apple has been assembling smartphones in India through contract manufacturers, with the country currently accounting for 14% of their total iPhone production. This production includes both local supply and exports. Apple plans to increase this share of production from India to 24-25% from the present 14% over the next 3-4 years.
Adoption of new technology
Many initiatives such as Digital India, MeghRaj, and IndiaAI Mission are propelling digital adoption across the country, positioning India as a hub of innovation and opportunity. India has the 3rd largest startup ecosystem in the world and is expected to witness YoY growth of 10-12% as per present estimates, primarily led by technology led startups.
In 2016, when India introduced the Unified Payments Interface (UPI) online mode of payment ecosystem, 96% of transactions in the country were still conducted using banknotes. Since then, UPI has experienced a dramatic surge in usage, with transaction volumes increasing tenfold over the past four years, representing 80% of all digital payment volumes in the country.
New direct tax code
The current Indian Income Tax law came into force on April 01, 1962. In recent budget, the government has announced to revamp present direct tax laws and come up with new direct tax code in next six months. New direct tax code is expected to further simplify and clarify tax regulations. New direct tax code expected to streamline the tax structure, align with international standards, and foster a more favourable environment for investment and economic growth.
Predictions for the future
As India continues to advance across various sectors, from digital transformation and renewable energy to infrastructure and economic reforms, it is poised to play an even more significant role on the global stage. While challenges such as income inequality, climate change and governance remain, India's progress demonstrates its capacity to adapt and grow in a rapidly changing world. With continued investment in its people, technology, and sustainable practices, India's future holds immense promise, setting the stage for further transformative developments in the years to come.
Roy Lo
Managing Partner, SW Hong Kong
Hong Kong in Spotlight
Bridging between East and West
Located at the heart of Asia, Hong Kong holds a unique status as a global financial hub and strategic intersection of East-West trade and finance, thriving on close financial integration with Mainland China, extensive networks with the world, a sound legal system, a simple and competitive tax regime and the free flow of capital.
It is worth mentioning the Hong Kong capital market as one of the attractive IPO destinations for investors and issuers, raising funds reaching HK$2.29 trillion between 2014 and 2023.
Some notable trends in the Hong Kong market:
Regulatory enhancements
The Hong Kong government has established a Task Force on Enhancing Stock Market Liquidity to enhance the listing regime and improve transaction mechanisms.
Stock connect and cross-border investment
The Stock Connect program, connecting the stock markets of China and Hong Kong, allows international investors to trade shares in each other's markets. The program has considerably increased cross-border investment and trading volumes, with the market capitalisation of Hong Kong stocks held by mainland funds growing from RMB 74 billion in 2018 to RMB 542 billion as of Q2 2023.
Increased cross-border listings
The Hong Kong Stock Exchange is strengthening its cooperation with mainland regulators to streamline the process for Chinese firms looking to list in Hong Kong as a secondary market to complement their primary listings in mainland China, promoting opportunities to tap into a broader investor base.
Focus on technology and new economy sectors
The introduction of the new Chapter 18C listing regime, designed to facilitate the listing of high-growth technology companies, is a key part of Hong Kong's overarching strategy to lead as an international financial center, akin to the Nasdaq in the United States.
Predictions for the future
Hong Kong is expected to strengthen its core capabilities in financial services, with a significant push towards becoming a leader in green finance and exploring the potentials of central bank digital currencies. The region's strategic plan includes enhancing its appeal as a gateway for international businesses entering Asia and for Asian businesses stepping onto the global stage.