Impact of ASEAN Economic Community (AEC)

Asia is undoubtedly driving the global economy and ASEAN is the buzz word among international businesses and investors. The significance of the Association of Southeast Asian Nations (ASEAN) as an economic bloc will amplify when the ASEAN Economic Community (AEC) becomes a reality by the end of next year.

The AEC will create a unified market and production base facilitating free movement of goods, services, investments, capital and skilled manpower. The ten member countries have identified twelve sectors for prioritized integration. The integrated efforts and developmental plans will ensure equitable economic development for member states in different stages of economic development. More importantly the development of a competitive economic region will integrate ASEAN members in the global supply chain networks by harmonizing free trade commitments with their trading partners and embracing global standards and best practices. In anticipation of big payoff business investors are weighing up the potential impact of AEC. When ASEAN’s position in the global supply chain gets reinforced with the AEC, businesses will have to synchronize themselves for the new opportunities and intensified competition.

Redesigning operations for a seamless production base

Each member state of the economic union has its own competitive advantage, which the manufacturing businesses can capitalize on to achieve the best outcomes. The near zero tariff on almost all goods and the diminishing non-tariff barriers will transform the region into a seamless production base for international manufacturers. With its world-class infrastructure and ports Singapore is an ideal hub for R&D and logistics, whilst countries like Myanmar or Indonesia who benefit from natural resources and labour can be the manufacturing base. Such strategic redesign of the operations would result in better design, enhanced IP protection, cheaper manufacturing and efficient distribution of their goods.

Change the game plan for an expanded unified market

Singapore businesses that were stifled by the small local market will now have access to a huge consumer base of over 600 million. A significant segment of the consumer base bears similar demographics and belongs to the consumerist middle class. While large companies will be able to adapt themselves quickly to the bigger market, SMEs have to plan their business structures for expansion. They have to explore the alternatives on hand such as direct subsidiaries, franchising and licensing or mergers and acquisitions for quick expansion and consolidation of consumer base. Simultaneously they have to strategically plan their resources, operations and procedures to tap in to the growth opportunity. Building strong brands and creating distinct value is crucial to drive sales beyond their traditional markets.

Brace up for the intensified competition

A larger market also brings with it new and increased competition. Companies must brace themselves for the change. In order to tackle or overtake their competitors, product manufacturers and service providers must adapt their services and products to the bigger market and equip themselves in terms of capacity, logistics, distribution and CRM. They must strategize their game plans by factoring in the direct and indirect competitors from the economic bloc. They must fortify their inherent strengths by protecting their business identities, innovations and technological knowhow through trademarks and IP registrations. Instead of a direct faceoff with competition smaller companies must look for means of reaping synergies through alliances and partnerships.

Corporate governance to tap on enhanced access to capital

Besides free flow of goods and services the economic integration will also facilitate free flow of investments. It is believed that ASEAN has already evolved into a single investment destination, with the work underway for capital market integration; this will drive the growth of ASEAN focused funds and attract international investors. It will also stimulate more retail investor participation in the region. The integration will pave the way for cross listing and easier access to capital. However businesses must adhere to high standards of governance and compliance in order to attract investors and retain confidence. Singapore has played a key role in capital formation for ASEAN businesses as evident from the listings in the local stock exchange.

Corporate structuring and Tax considerations

AEC will create preferential market access within the economic bloc for goods and services originating in ASEAN and also facilitate preferential access to the rest of the Asia Pacific region. In order to leverage the access businesses must pay close attention to corporate structuring. Holding company and supply chain structures have to be properly organized in order to enjoy this privilege.

Singapore has the lowest corporate tax among all ASEAN member states; as a result companies may attempt to shift their profits to Singapore. This may result in tax revenue loss for other counterparts in the economic union. It must be noted that Singapore has measures, in the form of Transfer Pricing (TP) guidelines, in place to counter such evasive practices. Accordingly companies must follow the arm’s-length principle that requires related parties to transact as if they are unrelated parties. Recently Singapore proposed an update to its TP guidelines requiring companies to prepare and maintain contemporaneous documents relating to all TP transactions. Again businesses must pay close attention to corporate structuring and provisions of Double Taxation Agreements (DTA’s) with trading partners.

Workforce Matters

One important element of the AEC is the free Movement of Natural Persons (MNP); however this is limited to skilled labour. MNPs cover business visitors who engage in business without seeking employment, traders and investors, intra-corporate transferees who are employees of MNCs that move their staff across borders, and professionals. The Mutual Recognition Arrangement (MRA) will set the grounds for recognition of professional accreditation of one member state to be recognized across all other member states. It must be noted that the MNP clauses will not override the immigration or employment laws of the member state.

In the context of Singapore where there is a tight labour market with the onset of strict regulations to protect the employment interest of the locals, the AEC will bring little respite. While Singapore has always remained opened to skilled labour in order to meet the needs of its rapid economic growth against stunted population growth, it has recently unrolled strict immigration and employment laws to prevent foreign competition for the local workforce on account of lower wages. Only intra-company transfers will be facilitated through the AEC provisions.

Intra-corporate transferees include employees at the level of managers, executives and specialists of companies that provide services within Singapore through a branch, subsidiary, or affiliate established in Singapore. In order to qualify the transferees must have worked in their firms outside Singapore for at least one year. Entry for these intra-corporate transferees is limited to a two-year period and this may be extended for up to three additional years each time for a total term not exceeding eight years. These intra-corporate transferees will still be subject to Singapore’s prevailing Employment Pass (EP) regime, which requires applicants to earn at least S$3,300, and possess relevant qualification, experience and skills.

Although AEC will not match up initially with its European counterpart we believe it will be a constant work in progress and evolve into a strong union with significant economic, social, negotiating prowess.

Image Source: Wikimedia user Gunawan Kartapranata, used under a creative commons license.

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