How Russian & EAEU Businesses Can Access The US$25 Trillion RCEP Free Trade Market Access Via Existing & Pending Agreements

By Chris Devonshire-Ellis  

China has ratified the much-anticipated Regional Comprehensive Economic Partnership (RCEP) free trade agreement and said that it hopes other members will ratify the deal for it to take effect from January 1, 2022. That is just five months from now.

The RCEP free trade agreement includes China, Japan, South Korea, the ASEAN nations of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam together with Australia and New Zealand.

For Russian and Eurasian Economic Union (EAEU) based businesses and investors, the RCEP’s sheer size makes it significant. Participating economies account for 29% of global GDP and about 30% of the world’s population. This equates to a market value of close to US$25 trillion and a total consumer base of about 2.5 billion, of whom an estimated 1 billion are to middle class consumer standards.

The primary aim of the RCEP is to establish a comprehensive economic partnership – building on existing bilateral ASEAN agreements within the region with its FTA partners. It will be guided by a common set of rules and standards, including lowered trade barriers, streamlined processes, and improved market access. For investors, RCEP delivers substantial new trade and investment opportunities within the participating countries and forms Asia’s largest trade bloc to date.

The RCEP agreement includes 20 chapters covering many of the articles typically found in a free trade agreement. Notably, it makes significant strides by harmonizing the rules of origin and strengthening IP measures. We can examine some of the primary issues as follows:

Common Rules of Origin

One of the most significant aspects under RCEP is that the rules of origin will be unified for the entire bloc. This will mean that investors will only require one certificate of origin for trading in the region and can bypass the tedious processes of checking and adjusting to the specific rule of origin criteria in each country. When implemented, investors can expect lower costs, added flexibility, and regional supply chains streamlined.

Trade in Goods – Reduced Tariffs

Under RCEP, tariffs will be eliminated on around 92% of goods implemented progressively over the next 20 years, in accordance with each party’s Schedule of Tariff Commitments. This will allow participating countries to gain preferential market access with each other. However, some agricultural and sensitive goods will be excluded from these tariff reductions.

Trade in Goods – Simplified Customs Procedures

Simplified customs procedures and enhanced trade facilitation provisions will allow efficient administration of procedures and expeditious clearance of goods, including the release of express consignments and perishable goods within six hours of arrival.

Trade in Services

Under RCEP, at least 65% of the services sectors will be fully open to foreign investors, with commitments to raise the ceiling for foreign shareholding limits in various industries, such as professional services, telecommunications, financial services, computer services, and distribution and logistics services.

Not unlike the negative list system in China, RCEP will also take on a ‘negative-list’ approach where the market will be fully open to foreign service suppliers, unless it appears on the list. This ensures transparency of regulations and measures which will allow greater certainty for businesses.

Investment

RCEP eases the process required of investors entering, expanding, or operating in RCEP countries. It also prevents the adoption of further restrictive measures and includes a built-in investor-state dispute settlement mechanism that can be evoked by the member states.

Intellectual Protection

RCEP raises the standards of IP protection and enforcement in all participating countries. Aside from securing the protection rights for copyright, and trademark in the normal sense, it also goes further to protect non-traditional trademarks (sound marks, wider range of industrial designs) and forms of digital copyright.

E-commerce

The agreement covers areas, such as online consumer protection, online personal information protection, transparency, paperless trading, and acceptance of electronic signatures. It also includes commitments on cross border data flows. This provides a more conducive digital trade environment for businesses and provides for greater access to RCEP markets.

Government Procurement

Participating RCEP countries have committed to publish laws, regulations, and procedures regarding government procurement, as well as tender opportunities if available. This allows greater transparency for businesses to pursue government procurement market opportunities in the region. RCEP have also committed to a review aimed at improving this in future.

Although neither Russia nor any of the EAEU member states are signatories to the RCEP agreement, there are indirect ways in which such businesses can access this market, including China, through the back door. This is because Russia, and the Eurasian Economic Union have signed Free Trade Agreements with two of the member states of RCEP in Singapore and Vietnam, is negotiating free trade tariff terms with China, has negotiations underway with several other RCEP members and possesses double tax treaty agreements with nearly all the other members. We can examine the implications of these as follows:

The EAEU-Singapore Free Trade Agreement

Singapore signed a free trade agreement (FTA) with the Eurasian Economic Union (EAEU) in 2019, and is poised to provide a new, significant outlet for Russian and EAEU outbound investment into Asia.

Singapore has one of the most liberal tax and administrative regimes in the world and is technically advanced and efficient. Corporate establishment in Singapore is also relatively quick and easy, while dealing with regulatory authorities is precise and efficient.

The Singapore free trade area (FTA) with the EAEU has significantly reduced tariffs on products traded between EAEU nations and Singapore. With Russian exports to Singapore already in the US$3.5 billion bracket, the Singapore-EAEU FTA can be expected to have a major and positive impact as the world recovers from Covid. Russian businesses not already in the market should be seriously thinking about claiming their space in this expanding trade corridor.

Singapore has other major advantages too. It is a member of the ASEAN regional free trade bloc, and as such enjoys free trade on most goods and services between it and Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand, and Vietnam as well as the upcoming RCEP free trade area. It also has a Free Trade Agreement with non-RCEP member India.

Russian businesses looking at exporting to these markets might find it makes profitable sense to do so via a Singaporean subsidiary. It makes no difference if the shareholders are Russian – if the incorporation is based in Singapore, it is eligible for free trade in ASEAN and RCEP providing the Singaporean protocols with ASEAN and RCEP are met.

Singapore represents an especially wide tax-reducing structure when one considers that Russia itself has DTAs with many countries in Asia. Often these overlap with the DTAs that Singapore has, meaning Russia-Singapore-Asia tax efficiency mechanisms are relatively straightforward to use.

Russia also has a double tax treaty (DTA) with Singapore, which allows tax relief in certain trade and service areas and mitigates against the prospects of being taxed in both countries.

It also permits, substituting profits tax for withholding taxes, the ability to discount profits taxes by 5 to 10 percent through the charging of IP fees and so on (professional advise needs to be taken to arrange this with the Singaporean authorities). A copy of the Russia-Singapore DTA can be viewed from our firms Asiapedia website.

Singapore is especially useful as a regional hub as it possesses intra-RCEP banking facilities and other financial and logistics services that are not so easily accessible from Russia or the EAEU. Singapore is developing as a massive global e-commerce hub for these reasons. Establishing an EAEU E-commerce business in Singapore would provide access to the RCEP agreement that Singapore has signed.

Singapore enjoys a corporate income tax rate of 17 percent, with no taxes due on profits realized externally from Singapore. Singapore follows a progressive resident tax rate starting at 0 percent and ending at 22% above US$320,000. There is no capital gain or inheritance tax. Income earned by individuals while working overseas is not subject to taxation barring a few exceptions.

Dezan Shira & Associates have an office in Singapore and many of the RCEP member countries and can assist with planning a market entry access strategy. Please contact us at singapore@dezshira.com. Our Doing Business in Singapore guide can be downloaded for free here.

The EAEU-Vietnam Free Trade Agreement

The EAEU-Vietnam Free Trade Agreement was ratified in 2015 and has seen bilateral trade between Vietnam, the EAEU and especially Russia boom over the past five years. Annual bilateral trade between Russia and Vietnam has risen from a base of close to zero to over US$10 billion  since the treaty came into effect.  Of particular interest within the document are provisions for lower taxes among agricultural and automotive trade. A copy of the agreement can be found, in English, here.

The FTA has been expanded several times and has resulted in Russian investments in the Vietnamese auto-sector and significant imports of Vietnamese agriculture and aquaculture products  into Russia. Vietnamese seafood product exports to Russia rose 72% in 2020. Vietnam, in return, has been buying record volumes of Russian Pork and other meat products. The Russian auto-sector has made investments into Vietnam, with an eye on the ASEAN market – as well as the upcoming RCEP agreement.  Russia also has a Double Tax Treaty with Vietnam which helps keep investments financially productive by reducing profits taxes applicable in Vietnam. Vietnam is an emerging economy and offers different potential for EAEU businesses looking to access the RCEP markets. Vietnam is a suitable manufacturing and trading base from which to reach out to RCEP given its increasing productivity, worker skill set yet competitive labor market. EAEU businesses investing in Vietnam may find the country an excellent competitive base from which to reach out to RCEP.

Vietnam enjoys a Corporate Income Tax rate of 20%, and taxes personal income at rates starting at 0% and ending at 35%.

Dezan Shira & Associates have three offices in Vietnam and can assist with planning an entry access strategy to give access to RCEP. Please contact us at vietnam@dezshira.com. Our Doing Business In Vietnam guide can be downloaded for free here.

The EAEU-China Free Trade Agreement

The EAEU-China Free Trade Agreement was signed in 2018, however at present is non-preferential, meaning it has as yet no effect on reducing tariffs. The EAEU needs to pass certain reforms in order for this to occur, however this is being dealt with. Trade infrastructure is also being put into place at several key border crossings to ensure there are no bottlenecks when tariffs are agreed, as bilateral trade between Russia and China in particular can be expected to boom. Both Governments have agreed at the highest level to double bilateral trade to US$200 billion by 2024 – meaning finalization of the EAEU-China FTA could be expected sometime in 2022.

There are also specific policies favourable to Russian investors in China’s Hainan Island, which has liberalised certain trade aspects such as tourism and medical facilities as yet unavailable on the Chinese mainland. These include the duty-free importation of certain products.

Russia also has a Double Tax Treaty with Hong Kong as well as with China – the only EAEU member state to do so. This can also be advantageous for use as a holding base for Russian companies wishing to enter the China market as Hong Kong’s profits taxes are lower. Shanghai is also an important centre in China for Russian businesses – banking facilities can be easier to operate there than in other locations in China which are wary of US sanctions. We explained solutions to the Russian business bank account in China issue in this article.

China’s share in the foreign trade turnover of member-states of the Eurasian Economic Union (EAEU) increased to 20% in 2020, a trend that can be expected to continue.

We discussed the opportunities for Russian businesses to trade with China in this article here .

Operating a China subsidiary may also assist Russian businesses access higher value markets such as Australia, Japan, and South Korea when RCEP is ratified with these countries in the coming months. Russia has double tax treaties in place with each of these countries.

Dezan Shira & Associates has 12 mainland China offices and one in Hong Kong. Our China Briefing website may be accessed here, while enquiries may be made to china@dezshira.com. Our Guide to Doing Business in China may be downloaded here.

Other Pending EAEU Free Trade Agreements With RCEP Members

The EAEU has several pending FTA with RCEP nations, including with all of the ASEAN nations. We have discussed specific potential for Cambodia, Indonesia, and Thailand in the past. Given the scope of RCEP with both high value mature markets and emerging economies, certain RCEP members such as Cambodia and Laos may be good sources of inexpensive labour that can be used under the RCEP Rules of Origin to provide product finishing services such as for brand name garments.

Russian and EAEU businesses should keep abreast of these developments. Please subscribe to Russia Briefing where we publish such intelligence. This is available on a complimentary basis here.

Applicable EAEU-RCEP Double Tax Treaties

While the EAEU itself does not negotiate bilateral double tax treaties, member states do. Double Tax Treaties (DTA) do not deal directly with free trade but are useful in determining bilateral preferential tax treatments between countries. This is especially pertinent in the services industries. Professionally utilized DTA can reduce profits tax burdens on bilateral contracts by typically 10% when conducting trade overseas.

EAEU Members DTA with RCEP Nations

Armenia: China, Indonesia & Thailand.

Belarus: China, Indonesia, Japan, Malaysia, Singapore, South Korea, Thailand & Vietnam.

Kazakhstan: China, Japan, Malaysia, Singapore, South Korea & Vietnam.

Kyrgyzstan: China & Malaysia. 

Russia: Australia, China, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Thailand & Vietnam.

Please contact us at asia@dezshira.com for advisory services related to EAEU member tax treaties with any of the RCEP countries.

Understanding the strategic use of the various EAEU existing free trade, and double tax agreements with RCEP members requires professional advice. The EAEU FTA with Singapore and Vietnam should be studied, in conjunction with the applicable national DTA and analyzed to note where RCEP compatibility occurs. Dezan Shira & Associates has conducted extensive research into this issue and has professionals on the ground in our 28 offices throughout the Asian region in addition to liaison offices in Russia. For assistance with developing a Russian-EAEU-RCEP market access strategy, please contact us at asia@dezshira.com or visit us at www.dezshira.com  

Related Reading

• Trading Opportunities Available Under the RCEP
• Developing Your China Trade with Japan and South Korea Under RCEP
• The RCEP: Impacting ASEAN’s Supply Chains and Business Environment