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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.
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Crowe Horwath Australia 13 October 2017
Korea-Australia Free Trade Agreement (KAFTA)
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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
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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.
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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)
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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
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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
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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
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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
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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?
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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
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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
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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
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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
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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
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Tax structuring – options
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
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Tax structuring – options
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
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Tax structuring – options
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
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Tax structuring – options
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
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Tax structuring – options
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!
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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
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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
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Jane Liang – Consultant
Customs & International Trade – Sydney
Tel +61 2 9619 1804
Mobile +61 403 637 138
jane.liang@crowehorwath.com.au
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.
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Trevor Pascall – Senior Partner
Tax Advisory – Brisbane
Tel +61 7 3233 3507
Mobile +61 409 124 105
trevor.pascall@crowehorwath.com.au
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)
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Andrew Curdie – Associate Partner – Licensed Broker
Customs & International Trade – Sydney
Tel +61 2 9619 1608
Mobile +61 434 622 715
andrew.curdie@crowehorwath.com.au
"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.
Key Areas of Expertise
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)
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Richard Nutt – Associate Partner
Customs & International Trade – Sydney
Tel +61 2 9619 1607
Mobile +61 409 906 302
richard.nutt@crowehorwath.com.au
“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.
Key Areas of Expertise
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
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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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