KPMG Trading Hub Report 2010

7/30/2019 KPMG Trading Hub Report 2010

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An insight into the trends and factors affecting

offshore/international trade in commodities and the

competitiveness of selected trading hubs

SINGAPORE

Offshore/International Commodity Trading RecentTrends & Developments and Competitiveness of KeyTrading Hubs

Study of key factors that

influence the relative

competitiveness of a trading hub

This report studies the importance

of the following key factors in

influencing the relative

competitiveness of a location in

facilitating international or off-shore

trade across four (4) commodity

segments (oil & oil products, metals

& minerals, agricultural products

and rubber) :

Market access and supporting

infrastructure

This relates to the proximity of

a location to the supply and

demand markets, access to

major trade/transport routes,

critical mass, talent pool, and

supporting physical

infrastructure.

Tax environment and

government policies

This pertains to the locations

tax regime and administration,incentives, tax treaties, and

government policies on

trading activities.

Financial and risk

management infrastructure

This looks at access to capital

and financing, and commodity

exchanges to support trade

operations.

In addition to secondary research,

interviews were conducted with 25

companies with trading activities in

at least one of the following hubs :

Shanghai

Dubai

Singapore

Switzerland

London

This report summarises the key

insights on the broad

offshore/international trade trends

and developments, and the

comparative analysis of the above

five (5) trading hubs in relation to

the key factors.

All information in this report is

based on information available as at30 November 2009.


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Increased trading activity for

inter & intra Asia-pacific region

Despite the economic slowdown

in 2009, Asias export to the world

has still been higher than the

global average. The growth in

Asian trade has been fuelled by

continued demand by the Chinese

and Indian economies, especially

for metals, agricultural

commodities and rubber. While

Europe largely derives its trade

through intra-regional trade (74%),

Asian trade is balanced in terms of

trade within (50%) and outside

(50%) the region.

World trade with regard to key

commodities such as Oil & Gas,

Metals & Minerals and Agricultural

Commodities has seen significant

but uneven growth especially dueto weather anomalies and political

factors. Global demand is

expected to be slow until 2010

but would recover gradually during

2011 owing to stronger growth

consumption expected from China

and United States.

Given the potential for increased

offshore/international trade in Asia,

key Asian trading hubs such as

Singapore, Hong Kong and

Shanghai have put in place

strategies to develop a

competitive trade infrastructure to

position themselves as the leading

Asian trade hubs.

Offshore Vs Onshore Trade

and related trade

Infrastructure requirements

With the establishment of

marketing, sales and

procurement offices across the

globe by commodity trading

companies, offshore trade,

where the goods do not have to

pass through the borders of the

country from where the order is

booked, has grown significantly.

This has led trading hubs across

the globe to eye this burgeoning

market by devising strategies to

attract offshore trading

companies into their locations.

As offshore trading activities

depend largely on the availability

of efficient financial, legal and

business infrastructure, andfriendly tax regimes, trade hubs

have begun to focus on

enhancing their offerings in

these aspects to compete more

effectively. On the other hand,

onshore trade continues to be

important for companies

engaged directly in managing the

commodity supply chain and/or

in value-added activities. Trading

hubs with vast land and strong

inter-modal networks are able to

compete more effectively by

focusing on upgrading their

physical infrastructure such as

transportation networks and

storage, refining and/or

manufacturing capacities, thus

continuing to enjoy a competitive

advantage in this regard.

Specific activities by key trading

hubs

Trading hubs around the world

continue to invest significant

amounts in upgrading their

capabilities in order to compete for

their share of offshore/international

trade. Upcoming trading hubs such

as Dubai, Shanghai and South

Korea have plans to further

enhance their physical and financial

infrastructure (access to trade

financing), thereby focusing on

onshore trade. The onshore trade

is largely driven by demand and

supply of commodities by their

domestic/regional consumers.

Other trading hubs such as

Singapore and Hong Kong, due to

limitations on physical capacity,

have focused on strengtheningtheir financial and business

infrastructure in a bid to capture the

offshore trade market. Similarly,

leading trading hubs in the US and

Europe, such as Houston and

Netherlands have focused their

energies on developing strong

physical infrastructure, and cities

such as New York, Switzerland and

London have focused on their

financial and business infrastructure

to facilitate offshore trade.

Increasing regional competition

Offshore and onshore trading

operations still remain closely tied

to proximity and access of

commodity companies to suppliers

and consumers, who are dispersed

across the globe.

Offshore/International Trade Developments


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What this indicates is that it is more

practical for trade hubs to position

themselves as a regional leading

hub and it would be difficult for any

trading hub to emerge as the sole

global leader. Hence competition

for offshore/international trade is

likely to take on a regional tone as

opposed to a hub versus hub model.

Network of hubs model allows

trading hubs to compete more

effectively by leveraging on one

anothers strengths

Hubs within a country tend to

leverage upon each others

Offshore/International Trade Developments (continued)

capabilities, such as New York,

Chicago and Houston.

However, there appears to be a

network of hubs across countries

as observed in Europe. While

Switzerland provides necessary

infrastructure for offshore trading

companies such as tax incentives

and government policies and

market access and connectivity, the

physical infrastructure is provided

by Netherlands, whilst London

offers the advantage of a strong

legal and financial infrastructure.

Trading companies located in this

region hence tap into the different

strengths offered by these trade

centres to enjoy the full spectrum

of trading benefits.

Presently, such network of hubs is

not apparent within Asia-Pacific. A

collaboration of this nature will help

Asian trading hubs to mitigate their

individual weaknesses by

leveraging off one-anothers

strengths in drawing trade into the

region.

Market Access and Supporting Infrastructure

Market access is an important

factor for both offshore and

onshore trading. In this regard,

trade hubs in advantageous

locations will retain a natural

advantage over those who are not

located as strategically. Within

Asia, hubs such as Singapore,

Dubai, Shanghai and Hong Kong

have traditionally benefited from

their strategic locations. These

hubs then seek to differentiate

themselves by enhancing their

trade infrastructure, which

includes having access to skilled

traders, presence of leading

trading companies that create a

critical mass to support the trading

community, a robust legal and

procedural framework, as well as

efficient physical infrastructure.

It is noted that Singapore and

Hong Kong continue to lead in this

regard.

Need for China to develop its

manpower capabilities to

support trading activities

Most trading hubs such as

Singapore, Switzerland, Houston,

New York, and London reported

no specific issues with regard to

availability of skilled manpower for

trading activities.

At other hubs, such as Dubai,

where local talent is not easily

available, survey participants

reported no challenges in hiring

foreign talent. Shanghai, however,

still poses challenges in terms

of making available skilled

manpower for the trading sector.

Participants in the survey have

indicated that despite a large pool

of potential local employees, they

face challenges in recruiting

locals. Hiring of foreign talent also

has its challenges due to language

barriers as the market is still

largely domestic.

Leverage on the physical

storage capabilities within the

region

Proximity to physical infrastructure

such as transportation, logistic

capabilities and storage does not

seem to have much relevance for

offshore trading companies.


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Market Access and Supporting Infrastructure (continued)

However, it has been observed

that companies may also engage

in serving the local markets as

well as acting as a transhipment

hub. In these instances, physical

infrastructure becomes particularly

significant to trading companies.

For trading hubs that also offer

refining (E.g. Oil) or processing

(E.g. Metals) capabilities, physical

infrastructure again becomes

relevant and hence hubs catering

to these segments need to

upgrade their facilities. Most

interviewees that are engaged in

trade of Oil and Metals have

quoted physical infrastructure to

be important.

factor to Londons prominence as

a global legal and arbitrationcentre is also due to the presence

of trade associations (E.g.

agricultural commodities based)

that mandate settlement of

disputes in London.

Several participants commented

that they would like to have legal

disputes resolved within the

respective trading hubs territory

as it allows for easy execution of

rulings and decisions. Therefore,

availability of legal and arbitration

facilities and expertise are

important factors that need to be

considered by trading hubs that

aim to increase their

competitiveness in this regard.

Trading hubs that lack domestic

market or space for storage

expansion would therefore need

to work towards leveraging on

other neighbouring hubs.

London as the model for

development of legal and

arbitration capabilities for

matters related to trading

Apart from its financial

infrastructure, London has also

been reported to have strong legal

and arbitration facilities. Most

survey participants cited London

as one of the centres used by

their companies for legal and

related matters. A contributing

SingaporeDubaiShanghai Switzerland

Transportation

& Logistics

London

Proximity to

buyers, sellers

& trade routes

Less competitive More competitive

Note: The analysis is based on interviews conducted with 25 companies engaged in trade of selected

commodities. For factors such as Critical Mass and Physical Security, interview participants reported no

concern in any of the identified trading hubs

1 In terms of absolute numbers of arbitration cases processed, Shanghai exceeds London, primarily on accountof Chinas market size. However, in terms of reputation, London supersedes Shanghai as the preferred

destination for arbitration cases.

Arb itr ati on

Centers

Efficiency of

legal framework

Procedural

Framework

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Tax Trends & Developments

Tax is an important factor for

offshore trading activities, and there

is evidence of significant offshore

trading activities being based in

countries with more favourable tax

regimes. However, recent global

tax trends may have an impact on

offshore trading activities.

With the recovery of the global

economy in sight, countries are

now placing focus on raising

revenue to pay for the economic

stimulus packages that were rolled

out in the past year. The tools that

tax authorities employ to raise

revenues include:

More effective exchange of tax

information mechanisms

Greater scrutiny on transfer

pricing transactions

Nationalising overseas profitsby making these subject to home

country taxation

Effective exchange of tax

information mechanisms

Recent moves by the Organisation

for Economic Co-operation and

Development (OECD) and the G20

Group of Countries has seen a

flurry of exchange of information

agreements being signed between

countries, partly in response to the

threat of sanctions being imposed

on countries that fail to establish

effective exchange of information

mechanisms. Sanctions, if

imposed, could adversely affect the

operations of offshore trading

companies.

What this may mean is that global

business activities may gravitate

towards operating in countries of

substance, rather than operating in

tax favoured jurisdictions that offer

little by way of substance, if indeed,

the threat of sanctions materialise.

Greater scrutiny on transfer

pricing transactions

Even before the economic crisis,

there has been strong evidence of

tax authorities stepping up focus on

cross-border inter-company

transactions.

Now countries need to build up

their fiscal position to pay for the

economic stimulus measures, and

may see tax authorities taking a

more aggressive approach in

questioning inter-companytransactions to protect the

domestic tax base.

Not only must trading companies

ensure that they design transfer

pricing policies and documentation

that suit the various requirements

of tax authorities, but they must

also ensure that the country they

operate in has an adequate network

of avoidance of double taxation

agreements (or tax treaties).

Tax treaties provide important

avenues to prevent double taxation

in instances of transfer pricing

adjustments by countries.

Nationalising overseas profits

by making these subject to home

country taxation

Countries focus on revenue

protection can eliminate advantages

of operating in a favourable tax

jurisdiction, or introduce pressure

on countries offering tax incentives.

Such pressures can be expected to

increase in the light of the current

situation. For example, renewed

discussion around worldwide rather

than territorial scope of tax, such as

the Obama Green Book

proposals to reduce tax deferral

advantages, could affect companies

operating in jurisdictions with

favourable tax regimes.

It is important for offshore trading

companies to monitordevelopments in these areas and

evaluate how these developments

will affect their operations.

Tax competition for offshore

trading activity

Most of the companies surveyed

have indicated that a favourable tax

regime is important for the conduct

of offshore trading activity. The

table below compares the

corporate tax rates of some trading

hubs. A number of governments

have recognised that tax factors

can influence location decisions,

and have introduced various tax

incentives to promote offshore

trading activity. This includes

jurisdictions such as Singapore,

Switzerland and Dubai. As a result,


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Tax Trends & Developments (continued)

it is possible to achieve low

effective corporate tax rates in

these jurisdictions.

In Singapore, the Global Trader

Programme tax incentive offers a

tax rate of 5% to 10%. In

Switzerland, effective tax rates of

between 5.5% and 11% could be

achieved under the tax concessions

available at the cantonal and/or

federal level. In Dubai, corporate

taxes are not generally enforced,

and companies operating in the

Free Trade Zones in Dubai may be

assured of tax holidays of up to 50

years. In China, financial subsidies

may be available from the local

government to offset corporate and

personal income taxes.

But beyond corporate tax rates and

tax incentives, companies alsoregard the network of tax treaties,

personal tax regime and the tax

administration to be important

considerations as well.

London, China, Singapore and

Switzerland have strong tax treaty

networks. Tax treaty networks

provide avenues for companies to

defend against transfer pricing

adjustments. Respondents from

companies in Singapore also

indicated Singapores tax treaty

network has aided offshore trading

companies to undertake regional

financing and logistical operations

from Singapore.

Personal tax rates are also

considered important, because

personal tax circumstances canaffect the availability of traders, and

to some extent, may influence key

decision-makers in deciding where

to base their offshore trading

activities.

Singapore and Switzerland are

regarded as having good quality tax

administrations. Survey

respondents indicated that the co-

operative attitude of the Swiss

authorities is one of Switzerlands

competitive strengths. On the

other hand, some survey

respondents reported facing

challenges in Shanghai with regard

to the local tax administration, and

this introduced uncertainty into the

tax system.

Overall, the Singapore and Swiss

tax regimes are regarded by

respondents as being more

conducive for offshore trading

activities. Dubais tax-free

environment as well as supportive

government policies are its major

advantages, but its network of tax

treaties is not wide. Despite

Chinas wide network of tax

treaties and local government

financial subsidies, there are

concerns about the local tax

administration and foreign

exchange rules. London, on the

other hand, has comparatively

higher corporate and personal

taxes.

Comparison of Corporate Income Tax Rates

Source: KPMGs Corporate and Indirect Tax Rate Survey 2009, except for the tax rate for Singapore, which is

applicable for Year of Assessment 2010 onwards.

25

1721.17

28

0

5

10

15

20

25

30

Shanghai

Dubai

Singapore

Switzerland

London

Countries

RateofTax(%)

0


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Tax Trends & Developments (continued)

35.5

15.2

25.6

35.13.5

5.4

2.8

0

5

10

15

20

25

30

35

40

Shanghai

Dubai

Singapore

Switzerland

London

Countries

RateofTax(%)

Effective Employee Social

Security Rate

Effective Income Tax Rate

20 13 17 18 19

66

29 43

70

94

0

20

40

60

80

100

120

Shanghai

Dubai

Singapore

Switzerland

London

Countries

NumberofTaxTreaties

Tax Treaties (Others)

Tax Treaties (Top 20 Countries by GDP)

86

42

60

88

113

Data on the tax treaties has been sourced from the public domain

(as of 30 November 2009). Where information on the nature of the

treaties is available, we have included only comprehensive tax

treaties which are in force in our analysis. Due to current andexisting negotiations between the authorities of the relevant

countries, the number of tax treaties in the table may vary.

The Tax Treaties: Top 20 Countries by Gross Domestic Product

(GDP)represents the number of tax treaties each jurisdiction has

with the top 20 countries in terms of GDP. Tax Treaties: Others

represents the number of tax treaties each of these jurisdictions has

with countries that are not the top 20 countries in terms of GDP .

Source: KPMGs Individual Income Tax and Social Security Rate Survey 2009

Comparison of tax treaty network

Comparison of personal taxes

(based on married individual with no children on USD300,000 of income)

0.8

0.0


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Financing and Risk Management Infrastructure

Financial Infrastructure is

important for trading companies

due to the need for frequent trade

financing and credit insurance

facilities. The ability to raise capital

is also necessary especially for

companies with fairly independent

operations resulting from the

regionalisation effort.

Despite being a significant factor

that can determine the

competitiveness of the trading

hub, it does not provide a

substantial advantage as most

hubs either have developed

financial facilities or have

ambitions to develop them. Most

trading hubs have a well

developed financial industry setup

such as New York, London, Hong

Kong or Singapore. Also,

upcoming regional trading hubs

such as Shanghai and Dubai have

announced plans to develop their

capabilities as global financial

centres.

Need for well developed

exchanged based commodity

trading facilities within the

Asia-Pacific region

Commodity exchanges are critical

for companies that engage in

international trading especially for

the purpose of setting prices and

managing risks through hedging.

Leading financial centres such as

New York and London offer a well

developed platform for trading

commodities by offering an

elaborate selection of hedging

products.

Reporting some of the highest

trading volumes, these hubs

experience high levels of liquidity

with transactions recorded from

all over the world.

A significant number of

companies with offices based in

the Asia-Pacific region are

currently hedging their risks in

these developed exchanges due

to relative weaknesses in the

Asian commodity exchanges,

largely related to a lack of liquidity,

or controls over foreign

companies. However it has been

observed that if Asian trading

hubs were to strengthen their

commodity exchanges, this would

reduce the advantage New York

or London hold over them as

companies would prefer to obtain

risk instruments from within theregion. Commodity trading

platforms in Asia are still in their

nascent stages of development.

Trading hubs such as Singapore,

Hong Kong and Dubai have

recently commenced commodity

exchange operations on a small

scale. Shanghai on the other hand

is the only trading centre with a

large and liquid exchange-based

commodity trading market. In

recent times, Shanghai has been

reporting trading volumes that are

comparable to New York and

London. The market, however,

places restrictions on international

players which has limited its

growth. Shanghai has expressed

ambitions to become a global

financial player and it may become

a formidable player in theelectronic trading space.

Strong financial and risk

management centres are

necessary for hubs with limited

domestic market

London has been a strong trading

hub for companies worldwide due

to its financial and electronic

trading capabilities. The hub,

however, offers a less conducive

environment for trading

companies as it lacks the financial

incentives and ease of doing

business.

There have been recent instances

of companies moving out of

London to other destinations

within Europe such as

Switzerland, for its conducive

trading environment or to

Netherlands, for its massive

physical infrastructure andconnectivity.

Despite all these challenges,

London continues to be an

important centre for performing

higher order financial transactions

and electronic risk management

for companies based in Europe.

So while leading trading

companies have setup their

offices in Switzerland to take

advantage of the incentives, they

remain connected to London.

Within Asia, leading trading

destinations such as Singapore or

Hong Kong may have to adopt a

strategy similar to London by

developing a strong financial and

risk management centre.

Singapore for instance, shouldretain its current advantages such


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Financing and Risk Management Infrastructure (continued)

as of ease of doing overall

business while offering

companies within and around the

region a strong financial and risk

management centre. This may

help to circumvent any existing or

future challenges pertaining to its

physical constraints.

SingaporeDubaiShanghai Switzerland

Commodity

Exchange Trading

London

Financial

Infrastructure

Less competitive More competitive

Note: The analysis is based on interviews conducted with 25 companies engaged in trade of selected commodities

1 Despite high trading volumes, trading activity is not open to foreign trading companies unless they are engaged in

joint ventures with local firms

2 Despite being a pricing centre for commodities such as Oil (Asia) and Rubber, Singapore scores low on volume,

liquidity and range of hedging tools

3Though Switzerland offers a commodity exchange, its proximity to London allows trading firms to easily hedge their

risk on the London exchange as the preferred approach.4The assessment of Dubais financial infrastructure was completed prior to its financial crisis. Therefore, the

competitiveness of its financial infrastructure may have to be reviewed in terms of its ability to correct the structural

weaknesses highlighted by the crisis, in terms of debt/credit management.

21 3

4

Contact Us

Chiu Wu Hong

Executive Director, Tax

KPMG Tax Services

Tel: +65 6213 2569

Fax: +65 6227 1297

[email protected]

Lim Yen Suan

Executive DirectorBusiness Performance Services

KPMG LLP

Tel: +65 6411 8333

[email protected]

2010 KPMG Tax Services Pte Ltd (Registration No:

200003956G), a Singapore incorporated company and a

member firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative (KPMG

International), a Swiss entity. All rights reserved. Printed in

Singapore.

2010 KPMG Advisory Services Pte Ltd (Registration No:

198301769C), a Singapore incorporated company and a

member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (KPMG

International), a Swiss entity. All rights reserved. Printed in

Singapore.

The information contained herein is of a general nature and is not intended to address the circumstances of

any particular individual or entity. Although we endeavour to provide accurate and timely information, there

can be no guarantee that such information is accurate as of the date it is received or that it will continue to

be accurate in the future. No one should act upon such information without appropriate professional advice

after a thorough examination of the particular situation.

KPMG Trading Hub Report 2010

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