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Audit | Tax | Advisory | Financial Advice

This activity has received funding from Austrade as part of the

Free Trade Agreement Training Provider Grant Program.

The views expressed within the activities are not necessarily the

views of the Commonwealth of Australia, and the

Commonwealth does not accept responsibility for any

information or advice contained herein.


Crowe Horwath Australia 13 October 2017

Korea-Australia Free Trade Agreement (KAFTA)


Agenda

3

Introduction

Utilizing KAFTA

Tariff Classification Identification

Tariff Treatment of Goods Under KAFTA

Rules of Origin Requirements

Preparation of Origin Documentation

Government Schemes – Exporters

Tax Structuring – The Starting Point

Tax Structuring – Options

Tax Matters for Exporters


Introduction – Korea-Australia Free Trade Agreement (KAFTA)

4

Korea is Australia’s fourth-largest trading partner, and third-largest export

market.

Historically Australia food exporters have not been highly active in the Korean

market – hence there is a lack of consumer awareness of Australian products.

Australia is positioned across Asian markets as a high-quality, safe food

producer – overall visibility to Korean consumers and currently low, however.

KAFTA eliminates or reduces barriers to trade in goods between Korea and

Australia.


Steps to Utilizing KAFTA

5

(1)

WHAT Nature of goods being

imported or exported.

(Tariff Classification)

Treatment of goods

under KAFTA.

(Tariff Treatment)

(2)

HOW

(3)

WHERE Country of

production of goods.

(Rules of Origin)

(4)

CERTIFY Verification of the

origin of goods.

(Documentation)


Tariff Classification Identification

Classification

Treatment of a particular good depends on the correct Harmonized System (HS)

tariff identification

Access to tariff schedules:

Importers into Australia – Schedule 3 of the Customs Tariff Act 1995

Exporters to Korea – Korea Customs Service Tariff Database Inquiry

Advance rulings

6


Tariff Treatment of Goods Under KAFTA

7

Both Korea and Australia have set out their commitments to reduce duty rates on

goods in lists, called tariff schedules.

Both countries’ tariff schedules can be found in Ch. 2, Trade in Goods: Schedule of

Tariff Commitments, of the Agreement..

Exporters

Staging categories – 0-20.

Special categories – B, S, and E.

Importers

Vital to check Australia’s tariff schedule


Rules of Origin Requirements

8

Rules prevent goods from a

third party being transhipped

through either Korea or

Australia to take advantage of

the FTA.

A good qualify as

‘originating’ under

KAFTA if it…

Meets Product Specific Rules

(PSRs)

Is produced entirely in

Korea, Australia, or both, from ‘originating’ materials

Is wholly obtained or produced entirely in

Korea, Australia, or

both


Other Important Rules of Origin

Understanding PSRs:

Change in tariff classification (CTC)

Regional Value Content (QVC)

10% (de minimis) rule

Transit through a third-party

Packaging materials, containers and packing

Non-qualifying processes

Accumulation

Fungible goods and materials

Indirect materials

Accessories, spare parts and tools

9


Visual Guide to using Rules of Origin under KAFTA

10

Use an alternate

CTC/RVC rule if

possible

Do non-originating materials constitute

less than 10% of the goods’ value?

YES NO

YES NO

Is the good wholly obtained?

Is the good produced exclusively

from originating materials?

Does the good meet the relevant PSR?

Have the non-originating materials

undergone the required CTC?

Is there an additional RVC rule?

Does the product contain the required

Regional Value Content?

It is unlikely the good is originating

for the purposes of JAEPA

Provided you have complied with all other

ROOs, it is likely the product is of Australian

or Korean origin for the purposes of KAFTA

NO

NO

NO YES

NO YES

YES

YES

Are the

goods

(including

all inputs)

wholly

obtained or

produced?

Do the non-

originating

materials

used in

producing

the good

comply with

the relevant

PSR?

Can the

goods benefit

from the de

minimis rule?


Preparation of Origin Documentation

Certificates of Origin (COO)

Self-certified OR obtained from an authorized body

Valid for at least two years

Can apply to single shipment, or multiple importations of goods of the same description,

whilst the COO remains valid

All records must be maintained for five years from date of signing

Waiver of origin documentation

Where total customs value is less than AUD1,000 (for Australia) or USD1,000 (for Korea)

11


Government Schemes – Exporters

Government grants and trade initiative schemes

In order to overcome non-tariff barrier challenges of international trade, or to assist with

entrance into new markets, the government has a number of trade-related initiatives

which further complement FTAs and assist with companies competitiveness in existing

and new Export markets, such as:

The Australian Trusted Trader Program (ATTP)

Export Market Development Grants (EMDG)

Efic Small Business Export Loan

State based – eg Export Skills Development QLD

Research & Development incentives

12


Tax structuring – the starting point

What do you want to do/achieve?

Commercial/business considerations must be the starting point

Where is your product/service is on the business life cycle

What is needed to make sales in Korea

How much is it going to cost to set up and operate

Legal requirements both for the business and in Korea

What is the medium-longer term goal – keep or exit

Other considerations

13


Tax structuring – the starting point

What do you want to do/achieve? cont

But don’t forget about the tax issues

Expect any foreign tax paid to be a “cost”

Different structures have different tax implications

Must understand Korean local tax laws and obligations

Double tax agreement between Australia and Korea

Do you need a full blown presence from day one?

Different structures have different set up and operating costs

No “one size fits all” – so recommend specialist advice before proceeding

Caution – changing structures is likely to have tax implications

How the business is to be funded – eg equity and/or debt, local or foreign …

Exit strategies

14


Tax structuring – options

Typical Australian outbound investment structures

Export directly from Australia

with no physical overseas presence

with Representative Office

use an independent agent/distributor

Branch/Permanent Establishment (Australian entity = legal entity)

Separate legal entity – eg set up a subsidiary company in foreign country

Other structures may be suitable – eg trusts, limited partnerships – but care needed!

15



1. Export directly from Australia – no physical presence overseas

Cost efficient – no/limited overseas costs, no foreign tax

Tax compliance generally limited to Australia and typically simple

Future development of cross-border tax rules may increase tax compliance complexity

Big question – is this possible? Answer generally “NO”

16



2. Export directly from Australia – with Representative Office

Aim – not to create a “Permanent Establishment”

Thus restricted from direct profit making activities

conduct marketing and other non-transactional operations - “preparatory or auxiliary”

cannot conclude contracts

Not a separate legal entity (Australian entity = legal entity)

Generally inexpensive option as limited activities and no foreign tax

but will have obligations for employees / dependent agents

17



3. Export directly from Australia – use independent agent / distributor

Aim – not to create a “Permanent Establishment”

Cost efficient – don’t need own foreign entities/registrations, no foreign tax

Distribution agreements with independent agent / distributor

Pay commissions/fees to independent agent / distributor

Care to ensure not “dependent agent” (if so, will create Permanent Establishment)

Tax compliance generally limited to Australia and typically simple

Future development of cross-border tax rules may increase tax compliance complexity

Independent agent / distributor – carries on business of providing such services,

provided such activities are not devoted wholly or almost wholly to one client/enterprise

Dependent agent – a person, other than an independent agent, who often has the

authority to conclude contracts on behalf of the enterprise (includes employees)

18



4. Branch / Permanent Establishment

Not a separate legal entity (Australian entity = legal entity)

Requires registration as a foreign entity

Subject to tax in foreign country tax costs and compliance obligations

If active business generally not assessable in Australia and therefore no franking credits

on such profits

Requires allocation of income and expenses to branch – broadly mirroring transfer pricing

methodology of arm’s length principles

Caution – exposure of Australian entity’s profits to tax in Korea

19



20

5. Local company / entity incorporated in foreign country

Requires set-up of new entity and registrations – recommend specialist advice

Often invest direct – eg Korea and Japan

Could consider an interposed entity – eg via Hong Kong for China

Subject to tax in foreign country tax costs and compliance obligations

Ring-fences foreign subsidiary’s operations from Australian holding company

Generally commercially better accepted in local country

Increased flexibility raising equity or local financing

Care needed to keep “residency” in foreign country – “effective management”

Care needed if Australian employees in foreign country

Sale of shares potentially tax-free

NOTE: the after-tax return to shareholders will often broadly be the same as under a

branch/permanent establishment if foreign company dividends profits to shareholders –

however, always best to get professional advice up-front!


Tax Matters for Exporters

Australian tax considerations

Thin capitalisation

Controlled foreign companies (CFC) rules

Could tax on accruals basis (as opposed to NANE)

No franking credits for foreign taxes = unfranked dividends for shareholders

Transfer pricing / Branch attribution

Exit strategies including availability of CGT relief for certain foreign subsidiary companies

FBT issues from foreign benefits to Australian tax resident employees

Korean tax considerations

Understand domestic tax laws and obligations including:

Registration requirements / obligations

Various taxes that may apply

Lodgement and payment dates

Korea/Aus Double Tax Agreement – how modify domestic tax laws

Repatriation of profits – procedures and withholding taxes

Exit issues – tax on disposal

21


Tax Matters for Exporters – summary

Foreign taxes – expect to be a “cost”

Structure – no one size fits all

Design for commercial reasons, tweak for tax efficiencies

Different structures have different costs and tax obligations

Understand the structure implemented and limits/restrictions

Making changes to the structure will have tax implications

Tax registrations and on-going compliance obligations

Domestic law and DTA modifications

Understand the regulatory obligations for foreign investors

Overseas activities will have Australian tax implications

Be careful in sending Australian employees overseas for extended periods

Due to the complexities involved, get professional advice

– getting it wrong or not complying can be expensive and painful!

22


Jane Liang – Consultant

Customs & International Trade – Sydney

Tel +61 2 9619 1804

Mobile +61 403 637 138

[email protected]

Jane specialises in data analysis and in-depth research of client products. She is an expert in finding areas of saving and refunds in

the Customs Compliance space. Her extensive experience in freelance writing combined with her passion for brand architecture

has allowed her to develop significant insights into client relationships with Customs.

Drawing upon her university background, she also has comprehensive knowledge of the South Korean socio-political environment,

and hence has broad insights into the impact of KAFTA on both Korean and Australian manufacturers and exporters.

Key Areas of Expertise

Extensive marketing background – brand strategisation and market research.

Identifying refund opportunities for clients through efficient and rigorous analysis of big data surrounding their imports.


Trevor Pascall – Senior Partner

Tax Advisory – Brisbane

Tel +61 7 3233 3507

Mobile +61 409 124 105

[email protected]

Trevor is a Senior Partner, Tax Advisory, Crowe Horwath Brisbane with lead tax responsibilities for Queensland, Northern Territory and

northern NSW and a member of the Crowe Horwath National Tax Leadership Team. He is a senior tax professional with over 30 years

taxation experience.

Trevor brings a complete range of tax advisory services to all clients, large and small. As a highly respected tax advisory specialist, Trevor

has significant, extensive knowledge in cross-border and international tax issues for both outbound and inbound clients.

Professional Affiliations

Fellow – CPA Australia

Chartered Tax Adviser – The Tax Institute

Registered Tax Agent

Education

Bachelor of Commerce (University of New South Wales)

Masters of Tax (ATAX, University of New South Wales)


Andrew Curdie – Associate Partner – Licensed Broker


Tel +61 2 9619 1608

Mobile +61 434 622 715

[email protected]

"I bring to Crowe Horwath a wealth of knowledge from working in all parts of Customs and International Trade with an extremely broad

range of clients.“

Andrew’s specialty is Customs and International Trade. He brings to this position over 35 years experience in the customs industry,

managing leading customs brokerages where he consulted with clients on all levels including Tariff, Quarantine and GST matters.

Andrew has extensive experience managing customs risk and obtaining substantial savings across a wide range of industries including:

electronics; textiles, clothing and footwear; food; manufacturing; raw materials; medical; cosmetics; and automotive; as well as experience

in 3PL warehouse and distribution.


Minimising duty exposure through preparation and lodgement of Tariff Concession Orders, Tariff Advices, and Valuation Advices

Unbundling of Customs Value – delivering subsequent duty reduction

Transfer Pricing methodology of overseas pricing, in line with Customs Valuation legislation

Customs Compliance – utilising our Three-Staged “Global Trade Optimiser” approach

Trusted Trader – assisting clients to become accredited with the Australian Government initiative

Supporting Importers in all areas of logistics including purchasing, stock control, international freight options & monitoring supply chain

activities creating net value

Professional Background

Licensed Customs Broker

Department of Agriculture (Quarantine) accredited Broker

Member of the Customs Brokers and Forwarders Council of Australia (CBFCA)


Richard Nutt – Associate Partner


Tel +61 2 9619 1607

Mobile +61 409 906 302

[email protected]

“The Tax Advisory group’s Customs and International Trade experts aim to reduce the incidence of customs duty in a client’s business, producing instant

cash savings and real margin improvement for the future of the business.”

Richard brings to his clients his extensive prior experience working as an Industrial Engineer and Customs Broker for FedEx in organising supply chain &

logistics industry in various countries including Australia, New Zealand, Ireland and United Kingdom, and more recently at Crowe Horwath as a consultant

specialising in Customs & International Trade.

Clients and Expertise

Richard has experience of working with Australian and New Zealand regulatory bodies (Customs and Quarantine) as well as working with clients within

automotive, perfume & cosmetics, electronics and retail industry. Using his experience as an Industrial Engineer and Customs Broker, he is able to add

significant value to Department of Immigration and Border Protection (DIBP) industry advisory groups relating to trade facilitation initiatives. His industry

experience and commercial skills has also enabled him to achieve outstanding outcomes for his clients, most significantly helping reduce costs and risk

within the supply chain operations via operational improvements or reducing amount of customs duty paid on imported goods.


Customs Duty Reduction via:

Unbundling of Customs Value

Recall and Warranty parts re-engineering to ensure compliance with bylaws that enables Duty Free Imports

Tariff Concession Order Scheme

Transfer Pricing in relation to Customs Valuation

Customs Compliance – via our Global Trade Optimiser (GTO) service offering

Trusted Trader Program – Government backed initiative aimed to improve trade facilitation

Operational Planning and Labour Resource Management

Process Improvements within Customs Clearance or Warehouse and Supply Chain Operation

Design, Development, Implementation including EDI interfacing of software with Customs in Australia, New Zealand and Asia


Our service offering

Disclaimer

Crowe Horwath (Aust) Pty Ltd is a member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath is a separate and

independent legal entity. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of

financial services licensees) in each State or Territory other than Tasmania. ABN 84 006 466 351.

Findex Advice Services Pty Ltd trading as Crowe Horwath Financial Advice is not a member of Crowe Horwath International.

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