THE TRANS PACIFIC PARTNERSHIP What to Expect and How to Prepare

2

THE TPP: WHAT TO EXPECT AND HOW TO PREPARETHE TPP: WHAT TO EXPECT AND HOW TO PREPARE

With 12 nations that make up nearly 40 percent of global GDP and about one-third of all world trade as its core, the Trans-Pacific Partnership (TPP) Agreement is set to become the largest free trade agreement (FTA) in the world. The TPP is a free trade agreement unlike any other. It will reduce tariffs and improve cross-border trade among members, as most FTAs aim to do, but it will also go much further. The agreement facilitates foreign ownership of businesses, creates opportunities to tap into government procurement, provides for more efficient trade in services and facilitates investment through greater intellectual property (IP) protection and labor standards. It is impossible to say with absolute certainty what the ultimate impact of the TPP will be but the chances are good that, once ratified and implemented, this single but complex agreement will create new patterns of trade and herald a new era of economic openness.

Following the completion of the deal on October 5, 2015, the participating governments now need to ratify it. Smart companies will take this time, which is expected to last up to two years, to determine how to best position themselves upon entry into force.

To help companies make sense of the TPP and navigate the opportunities and challenges it presents, Thomson Reuters and KPMG in Singapore jointly organized a seminar entitled “The TPP – What to Expect and How to Prepare” on November 25, 2015, in Singapore, a global trading hub and regional headquarters for many multinationals. Speakers from business and government discussed the challenges and opportunities that the agreement presents. The TPP is, undoubtedly, one agreement that companies, regardless of where they are located, cannot afford to ignore.

“The TPP will have an enormous impact on how multinational corporations operate within and outside the TPP region,” said JaeSon Kim, Vice President, Tax and Accounting, Asia, Thomson Reuters. “It will be critical for companies to carefully evaluate their global strategies.”

BackgroundWith the passage of The TPP, trade professionals are faced with the challenge of evaluating the benefits and compliance requirements of The TPP. The agreement as it stands today accounts for about one-third of all world trade, spanning 12 markets at nearly 40 percent of the global GDP.

The final version of the TPP that was completed on October 6, 2015, is the end result of a complex evolution that started with negotiations among four original economies – Singapore, New Zealand, Chile and Brunei – that wanted to improve trade within the Asia-Pacific Economic Cooperation (APEC) umbrella. Those negotiations attracted the attention of the United States, which joined in September 2008 and took the process to a whole new level. A rush for expansion followed that led to the inclusion of Australia, Peru, Vietnam and, later, Malaysia, Canada, Mexico and Japan to form the group of 12 countries that are now part of the largest trade agreement in the world. Other economies, including South Korea, Hong Kong, Mainland China, Taiwan, the Philippines, Colombia, Costa Rica, and Panama may soon join The TPP.

“One of the more interesting and innovative parts of the TPP was its stakeholder process,” said Dr. Deborah Elms, Executive Director of the Asian Trade Centre and an expert on the TPP. Through rounds six to 18 of the negotiations, stakeholders ranging from businesses to trade associations and non-governmental organizations were welcomed to contribute to the negotiations. This is unusual. The Regional Comprehensive Economic Partnership (RCEP), for example, is virtually a government-to-government negotiation.

3

THE TPP: WHAT TO EXPECT AND HOW TO PREPARE

The TPP is not the only mega deal being negotiated at the moment. RCEP, for example, is in the works. The aim of RCEP is to harmonize existing FTAs that the Association of Southeast Asian Nations (ASEAN) – a grouping of 10 nations – has with India, China, South Korea, Japan, Australia and New Zealand. RCEP would create an economic bloc with a population of 3.4 billion and account for about 30% of world trade. China, which is not a participant of The TPP, has been a key driver of RCEP.

The TPP is a massive agreement spanning more than 6,000 pages across 30 chapters and schedules. It covers all goods, services, investment, government procurement and e-commerce. It also includes new rules for intellectual property, food and food safety, standards, the environment, labor, competition and customs to name a few. Just as significantly, the commitments apply to all members – although the time frames for implementation vary for some members. Tariffs will drop to zero on 90% of goods traded among members when the agreement goes live and more reductions will be phased in. Eventually, 98% of goods will incur zero tariffs although in some goods that could take as long as 25 years. With the negotiations completed, the next step forward is for members to ratify the TPP deal within two years.

In the results of a joint survey conducted with corporate trade specialists in 11 countries spanning Asia, Latin America and the US released on November 6, 2015, Thomson Reuters and KPMG International found that 70% of companies are not fully utilizing FTAs. This means they are likely paying more than necessary in tariffs and duties which is counter-intuitive. By leveraging existing agreements and paving the way now for the implementation of the TPP, companies could optimize their operations, lower costs and tap into new markets.

Unique ConsiderationsThe companies most likely to benefit from the TPP are those that start preparing now. The TPP is particularly important at a time of much greater regional integration of supply chains. Companies increasingly source products and raw materials from a greater number of locations and also distribute products in more numerous markets. The TPP opens up new markets, provides for more expansive rules of origin and also deals with new areas of business such as e-commerce. It also harmonizes IP rules, providing greater certainty for businesses investing in the TPP region, and goes beyond most existing FTAs in terms of access and rules of origin, allowing for regional cumulation of origin so that products can be sourced from any TPP country. New rules on cross-border investment are also stronger than most existing agreements, covering basic rights, expropriation rules and legal recourse.

There are concerns over how rules of origin are applied under the agreement. The rules allow for cumulation but are not always uniform across products, said Dr. Elms. Among other benefits, the TPP allows for self-certification of origin, which should streamline processes for business – with the caveat that the paperwork should always be in order.

“It is definitely going to affect the decision making process of companies in terms of how they source raw materials for manufacturing, where to set up their manufacturing and distribution locations and how their goods are shipped,” said Angelia Chew, Partner for Indirect Tax and Asia Pacific Trade and Customs Leader at KPMG in Singapore.

4

THE TPP: WHAT TO EXPECT AND HOW TO PREPARE

According to Ms. Chew, what follows are some of the unique features of the TPP:

• Eliminates 90% of duties from the moment it becomes effective, unlike most free trade agreements with more gradual tariff elimination schedules.

• Allows for voluntary customs disclosures, which is relatively new in Asia.

• Makes cumulation of origin possible as well as permits transit and trans-shipment. Re-manufacturing which is rarely addressed in FTAs has been addressed in The TPP.

• Allows for self certification of origin and direct verification.

• Waives duties for goods that are returned after repair.• Allows for advance customs rulings. • Removes technical trade barriers for certain

industries.

Even before the TPP takes effect, companies should be able to leverage existing FTAs to lower costs and facilitate the creation of global supply chains and global distribution networks.

“Every single FTA has its own rules,” said Ms. Chew but “the use of FTAs is a necessity. Manufacturers and distributors that do not leverage trade agreements are likely to be sidelined by companies looking for lower costs and greater market access.”

For some members, most notably Singapore, there was little choice but to participate in FTAs in general and the TPP in particular. As of the end of 2015, the city-state is part of 21 FTAs in force and is a member of the Association of Southeast Asian Nations (ASEAN). The TPP, when it takes effect, will only increase the use of FTAs by multi-national corporations in Singapore. TPP participants account for about 30% of Singapore’s trade and a similar percentage of foreign direct investment (FDI) into Singapore as well as 20% of Singapore’s outgoing FDI.

Beyond trade in goods, the TPP is unique in its wide provisions for services, which level the playing field for members. These provisions do away with many esoteric rules that currently exist in many economies and in many trade deals. Additionally, the TPP opens up participating economies for investment in all sectors with exceptions based only on negative investment lists drafted by individual countries1.

Reality Check and PreparationTrade deals are complex documents driven by political necessity as much as by economic or business realities. As a result, they are often difficult to navigate and not always practical. “One approach to maximize the benefits of The TPP and existing FTAs is to automate analysis and compliance in real time”, said Nicholas Stipp, Director of Asia Operations, ONESOURCE Global Trade, Thomson Reuters. Trying to get all the information necessary to optimize supply chains and stay compliant can be extremely complex. Data gathering can take months and be out of date once it is completed. Technology solutions such as ONESOURCE can do this on a real time basis for individual products while tracking individual shipments and suppliers, all the while offering up options to optimize supply chains.

ONESOURCE also considers whether products qualify for lower duties under various trade agreements. The aim of the system is to both facilitate compliance but also monitor and report on tracking processes and minimize landed costs for products. For companies, keeping track of the hundreds of FTAs and determining which one is most beneficial for the trade of a particular good or service can be overwhelming. Rules of origin and tariff reduction schedules are complicated and the overlapping of agreements adds to the confusion. Just complying with customs regulations can be a herculean task. “Evaluation against all these different rules can be a challenge and, of course, there are different rules for every single product,” said Mr. Stipp.

1 Details of these negative lists are available on schedules to the agreement that are available through all TPP member websites.

5

THE TPP: WHAT TO EXPECT AND HOW TO PREPARE

The simple reality is that the TPP may not always be more beneficial for specific companies than existing agreements. For example, the existing North American Free Trade Agreement (NAFTA) is more comprehensive than the TPP while the Singapore-U.S. agreement covers virtually all tariff lines, more than the TPP.

“If you are producing something all in Singapore and trying to get it into the U.S., there could be a number of products that you could ship duty free under that agreement that you couldn’t under The TPP,” said Mr. Stipp. “It is important to know where you stand vs. the agreements that are in place right now.”

“FTA benefits can be realized using other existing bilateral and multi-lateral FTAs,” said Ms. Chew. “The key here is for companies to ensure robust compliance with FTA rules for sustained use.”

In all cases, however, compliance can be complex and authorities are increasingly aggressive in enforcing rules of origin, often in inverted relation to the level of custom duties. Many customs authorities derive income from duties and have to find an alternative source of revenue – fines – when tariffs drop to zero or near zero. The TPP allows for self-certification of origin. This should eliminate some of the bureaucracy for companies but also puts the onus on them to be compliant at all times with significant penalties for non-compliance for companies and individuals.

ConclusionsThe TPP has yet to be ratified and implemented. The linchpin in this process is the U.S. Ratification from the U.S. will all but guarantee approval from Japan and other members, said Dr. Elms. The agreement only comes into effect if the U.S., Japan and at least four other countries ratify it within two years.

It is clear that The TPP will be a game changer for participants and countries that do not participate will be left out in the cold. High on this list in Asia are likely to be Thailand and Taiwan which may find businesses moving operations elsewhere with access to TPP economies.

“There are not as many losers as you might think, domestically, in TPP countries but I do think there are implications from the TPP and especially implications on non members,” said Dr. Elms. “If you are not a member – and it depends on which country and which sector and on what you do – but for some non-members in some sectors there will be implications from the TPP going into force.”

When it goes into force, it will give rise to a lot of opportunities by opening the door for companies to benefit from preferential duties in more markets. Market access is also much greater throughout the TPP area for service companies, with the agreement minimizing discrimination for specific areas of trade.

THOMSON REUTERS CONTACT

ASEAN – Edwin Cheoke: onesource.asia@thomsonreuters.comp: +65 6870 3275 http://thomsonreuters.com.sg

TIMELINE:

Sept. 2008: US joins negotiations

March 2010: US-led negotiations start

Oct. 6, 2015: The TPP agreement signed.

Feb. 2016: Agreement to be signed in New Zealand. Starts two-year clock for ratification.

2016-2017: Each TPP party to ratify agreement based on domestic processes.

2017-2018: Agreement enters into force after at least six parties with 85% of the total GDP of the group ratify the agreement.

THE TPP BY THE NUMBERS:

12 countries

Almost 40% of global GDP

1/3 of global trade

2,707 pages

5,000+ pages of schedules

30 chapters

48 annexes

56 related instruments

KPMG CONTACT

Angelia ChewPartner, Indirect TaxAsia Pacific Trade and Customs LeaderKPMG in Singaporee: angeliachew@kpmg.com.sgp: +65 6213 3768

Copyright © 2016 Thomson Reuters. All rights reserved.

THE TPP: WHAT TO EXPECT AND HOW TO PREPARE