Challenges and opportunities for US corporates in Southeast Asia

HSBC recently sought the views of some of Asia’s most senior business leaders on how these changes might impact US businesses. The group participated in a virtual roundtable in July 2021 consisting of two separate panel discussions. The panellists included CEOs and experts from global companies and government, across sectors as diverse as finance, tax and professional services. The paper below captures the highlights of their discussion.

Opening Remarks: Wyatt Crowell; Head of Commercial Banking, HSBC USA

Panel 1: Analysing the effects of evolving US policy changes

• Adam Schwarz, CEO, Asia Group Advisors
• Jeremy Litton, Tax Partner and Principal, Ernst & Young
• Amarjeet Singh, EY Asean Tax Leader and Malaysia Tax Managing Partner, Ernst & Young Tax Consultants Sdn Bhd
• Christopher Rosello, Head of Public Policy, HSBC USA

Panel 2: The rise of the sustainability agenda

• Jeffrey Baker, US Department of Treasury Representative to Southeast Asia
• Nicholas Gandolfo, Director, Sustainable Finance Solutions, APAC, Sustainalytics
• Diana Tang, Director, Sustainable Finance, HSBC Singapore.
• Debra Lodge, Managing Director, Corporate International Solutions, HSBC USA

Closing Remarks: Kee Joo Wong, CEO, HSBC Singapore

Wyatt Crowell, Head of Commercial Banking, HSBC USA welcomed participants and opened the discussion with a summary of HSBC’s key strengths when it comes to supporting US subsidiaries in the region. As he said, HSBC has a long history of drawing on its well-established global network and deep local expertise to help international organisations take advantage of opportunities in Asia.

He also pointed out that despite the pandemic, HSBC sees US corporates continue to invest heavily in the region, with Singapore becoming an increasingly important base for businesses seeking to grow in Southeast Asia. As he put it, some 4,200 American subsidiaries across a wide spectrum of industries, from technology and commodities to logistics and more are already taking advantage of the country’s stable tax, legal and regulatory systems and business-friendly environment to set up their regional headquarters there.

Panel 1 began with an analysis of recent negotiations to reform the global tax system. As the participants noted, the Biden administration has been seeking international backing for its plan and the Organisation for Economic Co-operation and Development’s (OECD) framework to ensure that large multinational corporations (MNCs) pay their fair share of taxes.

That push saw some success in July 2021, when 130 countries and jurisdictions under the umbrella of the OECD agreed to support a minimum global level of corporate tax of at least 15 per cent for MNCs that meet certain criteria, including a yet-to-be-confirmed revenue threshold.

This follows a similar deal reached by the Group of Seven (G7) in June 2021 to close cross-border tax loopholes used by some MNCs.

Jeremy Litton, Tax Partner and Principal, Ernst & Young described the two pillars of the OECD’s proposed framework on what it refers to as base erosion tax and profit shifting (BEPS). Under the first, countries would gain a new right of taxation over a share of profits generated in their jurisdiction by an MNC headquartered overseas. This would mean they could tax the source of a company’s revenue, such as sales of digital services, regardless of where they were headquartered.

Under the deal’s second pillar, countries would impose a minimum corporate tax rate on the overseas profits of MNCs headquartered in their jurisdiction. The tax would be paid to the country where the parent company of the MNC was based.

Litton stressed that while these are potentially landmark reforms, many political and technical elements of disagreement among countries will need to be resolved before consensus emerges. These include the proposal that certain industries such as international shipping and financial services, among others, are excluded from the new rules.

The panellists considered the tax concessions and fiscal incentives that countries such as Singapore currently use to attract foreign investment, and whether the proposed reforms might limit their effectiveness.

As they pointed out, if companies were paying low rates in a foreign country, their home government could decide to ‘top up’ their local corporate tax to an amount that represented the difference between the foreign country’s rate and the global minimum rate. That would undercut any advantage gained from channelling revenues through low-tax jurisdictions.

But as Amarjeet Singh, EY Asean Tax Leader and Malaysia Tax Managing Partner, Ernst & Young Tax Consultants Sdn Bhd said, this development might also spur the emergence of other benefits for US companies in Asia. Traditionally low-tax jurisdictions would shift to offering different kinds of non-fiscal incentives – matching grants relating to job creation or research and development spending, for instance – to arrest any potential trend of reshoring back to home markets.

Other panellists questioned the implications of the tax reforms for regionalisation more broadly, where a company sets up a regional hub so it can be closer to consumers and suppliers in surrounding markets. As Christopher Rosello, Head of Public Policy, HSBC USA asked, would a global minimum tax rate put regionalisation in Asia on life support?

There was consensus from the panellists that while the proposed tax reforms may result in some MNCs moving certain functions currently performed in hubs like Singapore back home or to another location, that would likely be a worst-case scenario. As they noted, many US companies view Singapore as Asia’s premier hub location due to other advantages, including the country’s strategic geographical location, global connectivity, political stability, pro-business environment and diverse talent pool.

Whilst geopolitical changes are a playing a role in supply chain shifts, change has been underway for a number of years, with tariffs, new technologies and the impact of changes in labour costs leading to reconfiguration of supply chains from China.

Supply chain shifts have also been spurred on by the acute disruptions caused by the COVID-19 pandemic. COVID-19 – like other global supply and demand shocks before it – highlights the dangers of highly concentrated and opaque supply chains. Tackling this requires firms to map their supply chains and identify high-risk concentrations right down to component level to ensure no single point of failure.

Adam Schwarz, CEO, Asia Group Advisors, made the point that Southeast Asia has been an early beneficiary of this push to diversify, with businesses pivoting to include Southeast Asian sourcing alternatives, particularly in countries such as Vietnam.

Yet it’s unlikely there will be a complete shift in supply changes – rather diversification to ensure companies are better geared to maintaining efficiency, adding diversified sources that can be flexed.

ASEAN economic bloc in particular will remain highly attractive.

During the discussion that followed, Kee Joo Wong, CEO, HSBC Singapore expanded on this point, commenting that US direct investment in ASEAN increased by an average annual rate of 10 per cent in the last decade, making ASEAN the largest destination for US direct investment into the Indo-Pacific.

And although FDI in the region shrunk by 31 per cent to US$107 billion in 2020, this was not as high as the 45 per cent drop in FDI that was seen globally during the year.

Wong added that HSBC is uniquely placed to help American corporates leverage growth opportunities, thanks to its significant expertise in and wide presence across the region. It also has deep experience in supporting US clients set up their regional headquarters in Singapore and helping them grow in ASEAN’s varied markets.

The second panel focused on what President Biden’s commitment to addressing climate change – at home and globally – might mean for US corporates in Asia.

Debra Lodge, Managing Director, Corporate International Solutions, HSBC USA, opened the discussion by highlighting that Asia as a region is especially vulnerable to extreme weather hazards including drought, flooding and severe typhoons, as well as conditions of rising sea levels, heat and humidity. In response, HSBC is seeing a growing number of large corporations and investors focus on their sustainability agendas and put their weight behind the fight against climate change.

Jeffrey Baker, US Department of Treasury Representative to Southeast Asia expanded on this point, explaining that the Biden-Harris administration is highly focused on mobilising both public and private sector finance to help it reach net-zero emissions and build a more resilient future. For example, it has committed to doubling U.S. public climate finance to developing countries by 2024, amounting to about US$6 billion per year.

In Southeast Asia, that funding will be made available through mechanisms such as the U.S. International Development Finance Corporation, multilateral development banks and environmental funds such as the Green Climate Fund, in a way that increases the supply of bankable projects that can then attract private investment.

Among many other initiatives, the administration is also looking to strengthen existing financial reporting and disclosure initiatives that require listed companies and large asset owners to be transparent about their emissions and the risk that climate change poses to them. And it is making expertise and resources available for taxonomy work, helping financial players and companies develop better classification systems to determine which activities qualify as sustainable and which types of financial products can count as green.

The panellists agreed that the Biden administration’s focus on promoting sustainable finance and investment will almost certainly accelerate sustainability trends in Southeast Asia. One way that might take shape is by governments in the region following the US’ lead and strengthening reporting regulations for large companies. As the panel pointed out, such a move would help the market more accurately price climate risk, but it would also require companies to take action to reshape their risk mitigation and resilience strategies to ensure they remain compliant with any increased disclosure requirements.

At the same time, it may provide a boost for the relatively small but fast-growing environmental, social and governance (ESG) market in Asia. As Diana Tang, Director, Sustainable Finance, HSBC Singapore pointed out, key performance indicator (KPI)-linked structures are increasingly gaining prominence with the split of green and sustainability-linked loans in Asia at 50/50 in 2020. This aligns with global trends where 80% of global supply is KPI-linked.

Whilst Singapore had largest market share of 29% in the Asian green and sustainability-linked loan space in 2020, and Hong Kong, Australia and Japan the next three largest markets, other Asian countries are developing their sustainable finance capabilities with volumes comprising 38% of market share last year vis-à-vis 12% in 2019.

Today, the market for sustainable finance, along with that for instruments such as green bonds and transition bonds, looks ripe for further expansion as demand rises and investors across the region become increasingly aware of the risks of climate change.

Tang highlighted that in Singapore, HSBC has been at the forefront of a number of market-leading sustainability-backed transactions and launched innovative sustainability-linked financial solutions. It has also worked within the industry to develop Singapore as a hub for sustainable finance.

Nicholas Gandolfo, Director, Sustainable Finance Solutions, APAC, Sustainalytics, added that in his view, some of the world’s most interesting projects arising from climate action were being developed in Southeast Asia. This innovation was being fuelled by large companies in sectors such as manufacturing and technology partnering with governments that are keen to mitigate the economic transition risks associated with climate change.

Such partnerships are resulting in the development of innovative sustainability and circular economy solutions such as carbon capture, utilisation and storage, low-carbon hydrogen and energy-efficient materials, among others.

Gandolfo also described how many of these partnerships are anchoring their research and development activities in Singapore, using it as a source of expertise in different sustainability domains and as an advanced ‘test bed’ for novel solutions.

While it may be too early to gauge the precise impact of President Biden’s new priorities on Southeast Asia, this is undoubtedly a particularly exciting time for international companies in the region who wish to take advantage of investment opportunities that align with their environmental ambitions.