3. General information on corporate bond markets in Asia
This chapter provides an overview of corporate bond markets, covering the procedures to issue a corporate bond, measures supporting access to these markets, the perceived barriers to the development of corporate bond markets and the tax treatment of corporate bonds. It derives insights from the OECD survey conducted among 19 regulators from 18 Asian jurisdictions and Australia.
While there are some common aspects the bond issuance process and, importantly, the procedures for growth companies to access corporate bond markets vary across jurisdictions in Asia. To better understand the current corporate bond market landscape, the OECD conducted a comprehensive survey targeted to regulators, the OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia (hereafter “OECD Survey”). Regulators from 18 Asian jurisdictions and Australia1 provided responses. Among other things, the OECD Survey examines issues such as the corporate bond issuance procedure, measures to support corporate access to corporate bond markets, tax treatment of corporate bonds, barriers to the development of corporate bond markets, marketplaces for issuing and trading corporate bonds, credit rating requirements and bondholder rights.
When analysing the main requirements for issuing corporate bonds, the OECD Survey shows that the three most common are the submission of a prospectus, the existence of historical financial statements, and the periodic and ongoing disclosure of key information (Figure 3.1).2 The prospectus is a vital information source for investors about the securities that companies are issuing and about the company itself. As discussed later in this chapter, in certain cases the issuance process for corporate bonds exempts companies from issuing a prospectus or permits the submission of a simplified prospectus. Historical financial statements are also highlighted as necessary documents for the issuance to take place as they normally provide outsiders critical information about the issuer’s financial position.
In 14 of the surveyed jurisdictions, the issuer needs to have a certain legal form to be able to issue a corporate bond. In Malaysia, the entities authorised to issue bonds primarily include listed companies, licensed banks and some public institutions. If an unlisted company wishes to issue corporate bonds, it must be guaranteed by another eligible entity (SC Malaysia, 2021[1]). Similarly, Lao PDR only permits corporate bond issuance by public companies and limited companies (Lao Securities Commission, 2014[2]). In Thailand, issuers of corporate bonds are not limited to listed companies, but the fast-track approval process is available for these companies only (ADB, 2021[3]).
Registration with the regulatory authority to issue a corporate bond is mandatory in 13 of the surveyed jurisdictions. Malaysia, for instance, requires an application letter which includes, among many other things, information on ultimate shareholders, profile of board members of the issuing company and sources of repayment (SC Malaysia, 2021[1]). Philippines requires the submission of a registration statement, which includes issuers information and brief descriptive information in the prospectus (ADB, 2017[4]). The Indonesian regulatory authority provides a template for registration. The template requires details to be provided about the activities of underwriters and selling agents at primary markets, and regional and ownership dispersion of the issuer (ADB, 2021[5]). Bangladesh, India, Malaysia and Sri Lanka do not require registration with the authority.
Approval by the regulatory authority to issue a corporate bond is mandatory in 12 jurisdictions. Obtaining approval is generally considered more stringent than registering with the authority, leading to a differentiated framework for corporate bond issuances based on their characteristics, including target investors. In Korea, the Financial Services Commission (FSC) requires its approval for corporate bonds offered to the public while debt securities traded on the stock exchange are exempt from this, provided that they meet listing requirements (ADB, 2018[6]). Despite the absence of registration with the regulatory authority, corporate bond issuers in Bangladesh and Malaysia still need to submit the relevant documents for approval by the authority (SC Malaysia, 2022[7]).
In seven jurisdictions (Cambodia, Chinese Taipei, Indonesia, Lao PDR, Mongolia, Pakistan, Philippines, Thailand and Viet Nam) both registration and approval are mandatory. In India, where corporate bonds are neither required to registered nor approved by the regulatory authority, issuers are required to list their bonds on the stock exchange, which therefore ensures that the assessment of the issuers’ eligibility is done by the stock exchange (SEBI, 2019[8]).
Nine jurisdictions impose quantitative requirements to issue corporate bonds such as a minimum amount of the corporate bond issuance or a limitation of the issuance. As an example of a minimum amount requirement of the issuance, Chinese Taipei requires issuers for overseas securities to issue at least USD 20 million. In Lao PDR, listing requirements when issuing bonds to the public include a minimum amount of at least LAK 3 billion (c. USD 145 000) (Lao Securities Exchange, 2011[9]). On the contrary, four jurisdictions (China, Chinese Taipei, Mongolia and Viet Nam) set limitations on corporate bond issuance. Chinese Taipei and Viet Nam impose limitations on bonds issued by foreign issuers while Mongolia does not allow the value of the debt instrument to surpass the company’s equity capital.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Credit ratings are required to issue a corporate bond in 11 jurisdictions. Credit ratings from domestic agencies are mentioned as one of the main requirements by 10 jurisdictions, followed by ratings from internationally recognised CRAs by 5 jurisdictions and regional CRAs by 3 jurisdictions. Cambodia, India and Lao PDR accept credit ratings from any type of credit rating agency. Interestingly, Lao PDR accepts credit ratings from alternative credit rating mechanisms (see details in Chapter 5).
Corporate bonds must be listed in nine jurisdictions (Bangladesh, Cambodia, China, Indonesia, Lao PDR, Mongolia, Pakistan, Philippines and Chinese Taipei). In terms of listing requirements, minimum issuance size requirements are set in Cambodia and Philippines, at KHR 1 billion and PHP 100 million respectively. Additional listing requirements include a minimum number of years in operation (Indonesia and Mongolia), a record of certain positive profits (Indonesia, Lao PDR, and Mongolia) and the submission of audited financial statements (Bangladesh, Indonesia, and Mongolia). Among these jurisdictions, Bangladesh, Indonesia and Philippines require credit ratings from a rating agency authorised by the stock exchange or the regulator. Specifically, the Indonesia Stock Exchange requires an investment grade rating for corporate bonds seeking listing. It should be noted that obtaining a credit rating is not a mandatory requirement for issuing bonds in all jurisdictions (ADB, 2017[10]; Cambodia Securities Exchange, 2017[11]; Dhaka Stock Exchange, 2015[12]; Lao Securities Exchange, 2023[13]; Mongolian Stock Exchange, 2018[14]).
Shareholders’ approval for issuing a corporate bond is required in eight jurisdictions and in certain jurisdictions (Korea, Malaysia, Mongolia, Sri Lanka and Chinese Taipei) corporate bonds can be issued only to qualified investors.
Six jurisdictions (Korea, Lao PDR, Mongolia, Pakistan, Thailand and Viet Nam) offer standardised templates for corporate bond contracts (Figure 3.2, Panel A). Providing a standardised template for corporate bond contracts, in particular for growth companies, could give companies clear guidance on the type of information needed to issue corporate bonds, therefore, facilitating the issuance procedure. These templates are provided by government authorities in Lao PDR, Thailand and Viet Nam, while Korea and Philippines have industry-led templates. In Pakistan and Malaysia there is no template for corporate bond contracts, however a template for trust deeds exists. Further, the Malaysian Securities Commission clarifies the minimum requirements to be included in the preamble and recitals of the trust deed, such as a brief description of the corporate bonds or sukuk (SC Malaysia, 2020[15]).
Two-thirds of jurisdictions set a time frame for the regulator’s approval process. Setting a timeframe for prospectus approval enables corporations to get a clearer outlook on their issuance schedule. In particular, Korea set the maximum time limit for prospectus approval of seven days for publicly offered corporate bonds. Similarly, Australia set an “exposure period” of seven days after the filing of the prospectus. Moreover, Bangladesh also has a comparatively shorter timeframe of 7 working days for private issuance, while for public issuance the regulator can take up to 17 working days to approve the prospectus. The Monetary Authority of Singapore (MAS) indicates a period of 7-21 days for the registration of the prospectus after the submission (MAS, 2020[16]). The regulator in Thailand can take up to 120 days for the approval. The average time for the regulator’s approval is around 40 days for the 12 jurisdictions who do set a time limit for the approval.3
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Sixteen jurisdictions have a streamlined process for recurrent corporate bond issuers. Usually, this practice aims to facilitate the issuance process for frequent issuers (Figure 3.3). These streamlined processes include allowing issuers to follow simplified procedures, to issue a simplified prospectus or a generic prospectus. Among those jurisdictions with specific provisions, 12 jurisdictions accept a generic prospectus. Frequent issuers can follow simplified procedures in 10 jurisdictions (Indonesia, Japan, Korea, Lao PDR, Mongolia, China, Philippines, Singapore, Chinese Taipei and Thailand), and can issue a simplified prospectus in six jurisdictions (Australia, India, Japan, Lao PDR, Malaysia and Singapore). The Securities and Exchange Commission of the Philippines is considering the implementation of a simplified prospectus procedure. Additionally, Japan, Lao PDR and Singapore accept a generic prospectus and a simplified prospectus, and also offer a simplified procedure for recurrent issuers. In contrast, Bangladesh, Cambodia and Sri Lanka do not have specific provisions for frequent issuers.
Note: Frequent corporate bond issuers also refer to issuers with bond issuances within a predefined programme. In Panel B, jurisdictions could have provisions regarding several options.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Issuances to the public are allowed in the regulatory framework of all jurisdictions and private placements are allowed in almost all jurisdictions. Restrictions apply to smaller companies. For example, SMEs in Indonesia, Philippines and Chinese Taipei are not permitted to publicly issue corporate bonds. Additionally, in Indonesia and Philippines, they are also restricted from raising capital through private placements. Panel A in Figure 3.4 summarises the types of the corporate bond offerings and investors allowed to participate in corporate bond markets in the surveyed jurisdictions. In the Philippines, while the regulatory framework does not use the term “private placements”, it allows a corporate bond to be issued to qualified investors, which in practice functions as private placements (ADB, 2017[4]). In countries like Indonesia, whether companies are allowed to issue via a private placement depends on the type of company. While large companies are allowed to issue to the public and private placements, SMEs are not allowed to publicly nor privately issue corporate bonds. For SMEs, Indonesia has established a crowdfunding platform where these companies can offer debt securities to investors with a simplified procedure.
Bond issuances to domestic qualified investors are allowed in all jurisdictions and domestic retail investors are permitted to invest in corporate bond markets in 17 jurisdictions, except in Korea and Viet Nam. Panel B of Figure 3.4 presents the type of investors allowed to participate in corporate bond markets.
While 18 of the jurisdictions allow bond issuances to foreign qualified investors and 15 jurisdictions to non-domestic retail investors, these investors face some restrictions to invest in bonds issued by smaller companies. A few markets are more restrictive when it comes to foreign investors, for example, Lao PDR does not allow corporate bond issuances to any foreign investor. China, Korea and Viet Nam allow non-domestic qualified investors to invest in their local corporate bond market, however, retail foreign investors are prevented from participating in these corporate bond markets. In the Philippines, smaller companies are not allowed to issue corporate bonds to foreign investors.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
The definition of growth companies in the regulatory framework differs across surveyed jurisdictions and is usually not used to target policies facilitating growth companies’ bond issuance process. In 17 jurisdictions there is a definition of growth companies or more generally SMEs (Figure 3.5, Panel A). Cambodia and Sri Lanka have no definition for these companies. The survey investigated different criteria used by jurisdictions to identify a growth company. Among the 17 jurisdictions with criteria defining growth companies, the number of employees is used in 12 jurisdictions and turnover volume by eight jurisdictions (Figure 3.5, Panel B). Total assets and the listing status are used to a lesser extent to define growth companies (see Annex A for details).
Seven jurisdictions have a definition using a criterion different from number of employees, total assets and/or listing status (Figure 3.5, Panel B). For example, Bangladesh, Japan, Pakistan and Chinese Taipei use paid-up capital to define growth companies. In India, companies are defined according to their level of investment in plant and machinery or equipment. Both Korea and Indonesia have criteria on ownership structure in the definition of growth companies. To be defined as a growth company, a company’s management has to be independent from other large companies. In addition, China, Hong Kong (China), Japan, Thailand and Viet Nam have different definitions depending on the industry where companies operate.
In the surveyed jurisdictions it is not common for the application of exemptions in the corporate bond issuance process to promote growth companies’ access to market-based financing (Figure 3.6). Only four jurisdictions (Australia, India, Indonesia and Singapore) waive certain requirements or procedures for growth companies. While not perceived as an exemption for smaller companies, Australia allows a simplified prospectus for ‘simple corporate bond’ issuances over AUD 50 million. This regime allows issuers to use a base prospectus and complement it with an ‘offer specific prospectus’. Additionally, corporate bonds must be quoted on an Australian market and the issuer generally must be a listed company that has continuously issued securities or be a wholly-owned subsidiary of a parent entity that has continuously listed securities (Government of Australia, 2001[17]). Another example is India, where there is an exemption for the submission of historical financial statements for newly established corporations. In addition, Indonesia permits growth companies to issue simplified prospectus and require a reduced number of historical financial statements. Singapore waives the submission of prospectus for certain corporate bond issuances, such as a small offer raising no more than 5 million Singaporean dollar within any period of 12 months or private placements offered to no more than 50 investors.
Note: Permission to issue a prospectus with reduced disclosure requirements is shown separately, as it was not pointed out by jurisdictions as an exemption.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Thirteen jurisdictions have at least one measure in place to promote access to corporate bond markets (Figure 3.7). As these measures generally aim to increase overall access to corporate bond markets, both large companies and growth companies can benefit from them. In particular, Malaysia introduced the Lodge and Launch framework in 2015 for offerings of unlisted capital markets products, including corporate bonds targeting qualified investors. The system aims to increase efficiency in the issuance process through an online system to submit the relevant information and documents. Additionally, there is an SME-targeted initiative in Korea, led by the Korea SMEs and Startups Agency (KOSME). KOSME supports SMEs that are unable to issue corporate bonds by packaging a large number of bonds issued by SMEs in the form of primary collateralised bond obligation (CBO). Additionally, Japan, Mongolia and Philippines have private initiatives to promote access to corporate bond markets.
Note: In Panel A, a jurisdiction can have in place measures for growth companies and for large companies at the same time, therefore both categories are not mutually exclusive.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Bank lending is the prominent source of financing for corporation in Asia as shown in Chapter 2. Despite the rapid development of corporate bond markets for growth companies, several barriers still impede the further development of corporate bond markets in Asia.
Potential barriers to the development of corporate bond markets include: weak regulatory frameworks, lack of market infrastructure and the presence of intermediaries, a small and unsustainable investor base, high costs and complexity of issuance of bonds compared to bank credit, legal and investor protection issues, corporate governance issues, undeveloped government bond markets, a small number of mature firms and weak disclosure standards (IOSCO, 2015[18]). A number of studies concluded that these barriers seem to be driven by economic size and the level of economic development (World Economic Forum, 2012[19]). For instance, economic size allows for a liquid government bond market, which in turn provides a benchmark yield curve to price corporate bonds. In addition, the larger the economy, the more likely that companies and their financing needs will grow. Larger financing needs are prompting larger bond issuances, which tend to reduce the relative cost of bond financing due to economies of scale. The level of economic development affects the ability of corporations to offer corporate bonds on a continuous basis. Also, weak business and legal environments could negatively affect investor protection and market confidence hindering the growth of corporate bond markets. In addition, the limited size of domestic pension funds, mutual funds and insurance corporations in developing economies may not provide a sufficient investor base limiting the development of corporate bond markets.
Seventeen jurisdictions identified the limited liquidity of corporate bonds as a main barrier (Figure 3.8). The limited liquidity of corporate bonds contributes to undermine the attractiveness of corporate bond investments for certain investors (Bessembinder et al., 2018[20]). Recent evidence suggests that corporate bond markets are less liquid than some other traded markets and the number of individual corporate debt securities that trade regularly is small at a global scale (IOSCO, 2022[21]). Nevertheless, it is challenging to assess whether corporate bond market liquidity is primarily undermined by the lack of liquidity supply by dealers, increased liquidity demand by investors, or a combination of both factors.
Assessment of the creditworthiness of companies has been identified by 14 jurisdictions as a main barrier to the development of corporate bond markets. Challenges in evaluating credit worthiness undermine investors’ ability to accurately evaluate risks and, therefore, it affects their willingness to invest in assets. As discussed in Chapter 5, domestic and regional CRAs are operating in all surveyed jurisdictions, and alternative credit systems have been developed in some jurisdictions. Nevertheless, these results suggest that more efforts are needed to better assess issuers’ credit risk to investors to effectively support corporate bond issuance in Asia.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
The lack of investors, aside from banks, was identified as the fourth most important barrier and echoes the lack of interest from investors to invest in corporate bonds. The possible lack of investors (aside from banks) could be mitigated by the contribution of institutional investors in many Asian jurisdictions. However, despite the significant size of Asian institutional investors they do not play a significant role in regional corporate bond markets. At the end of 2022, assets under management of the top 300 pension funds totalled USD 20.6 trillion globally and Asia-Pacific accounted for 26.4% of these assets (Thinking Ahead Institute and Pensions & Investments, 2023[22]). As a comparison, the United Stated and Europe represented 45.6% and 24.1% of world’s 300 largest pension funds’ assets, respectively. Similarly, the total assets of insurance companies in Asia accounted for 27% of world’s total in 2021, compared to 34% in the United States and 39% in Europe and Africa (International Association of Insurance Supervisors, 2022[23]).
Twelve jurisdictions identified the lack of financial knowledge and awareness of investors in the region as important barriers. Lack of awareness likely contributes to undermine investors’ ability to assess the benefits and risks of corporate bond investments, therefore potentially limiting the expansion of corporate bond markets in certain jurisdictions. Indeed, financial literacy deficiencies could limit investors’ interest in buying relatively risky and complex corporate bonds. As shown in Figure 3.9, in several jurisdictions, the share of the adult population assessed as financially literate was below the world average score of 33.
Note: This Figure shows the share of adults who are financially literate by country in 2014. Data are not available for India and Lao PDR. In the S&P Global FinLit Survey, the literacy questions measure the four fundamental concepts for financial decision making that include basic numeracy, interest compounding, inflation and risk diversification.
Source: (Klapper, Lusardi and Van Oudheusden, 2014[24]).
Other barriers such as the lack of digital tools and the lack of supportive market infrastructure have been identified as impediments in nine and eight jurisdictions, respectively. Asia is already a leader in digital innovation, and efforts towards economic readiness for digitalisation have been substantive in several jurisdictions, particularly in China and Japan (Figure 3.10). Nevertheless, further efforts to develop the array of digitalisation tools could enhance the involvement of a variety of market participants, notably in corporate bond markets. It is worth noting that the lack of supportive market infrastructure in terms of relevant technological or human resources (e.g. skilled accountants and lawyers at underwriting companies such as investment banks) could hinder the feasibility of issuance, the expansion of the market and subsequently market liquidity. Despite the prominence of bank loan financing in Asia, only eight of the jurisdictions surveyed have identified a preference for bank financing as a barrier to the development of corporate bond markets.
Corporate governance issues, including challenges from fear of public scrutiny, disclosure and compliance requirements and, to a lesser extent, investors’ concerns about bondholder rights were also identified as barriers.
Note: This Figure shows economic readiness index for digitalisation in selected jurisdictions. This index measures overall progress in macroeconomic readiness to foster digitalisation, scoring each country out of 100. Data are as of 2022.
Source: (Asia House, 2022[25]).
Finally, limits on foreign participations in the market have been identified as a barrier by five jurisdictions. As documented in this chapter, a number of jurisdictions allow the issuance of corporate bonds to foreign qualified investors, and also to non-domestic retail investors. Therefore, limits on foreign participation tend to be less of an obstacle to corporate bond issuance in a number of jurisdictions. Nevertheless, capital control measures implemented in certain jurisdictions could discourage foreign investors’ participation and limit the expansion of corporate bond markets in the region (World Bank, 2023[26]).
The tax treatment of corporate bonds, both from the perspective of issuers and investors, is an important component that could play a role in the development of corporate bond markets. While the specifics vary across jurisdictions, generally there are three taxing points for a corporate bond investor: when interest is earned on the bond; when there are capital gains or losses earned in the sale of the bond; and through an original issue discount (i.e. when the bond is issued for less than its face value). From the issuer perspective, in general the interest paid to bondholders can be deducted as expense against corporate income. Overall, the tax treatment for investors of corporate bonds is similar in structure in Asia and differs in terms of the rates and conditions applied.
The tax paid on the interest received by investors from holding corporate bonds is common across 17 jurisdictions. This tax is not applied in Lao PDR and only in certain circumstances in Hong Kong (China) and Mongolia (Table 3.1). When it comes to the different applications in these jurisdictions, for example, in India, the tax rate that applies to interest payments from holding corporate bonds depends on the marginal tax rate of the taxpayer (Government of India, 1961[27]). In Chinese Taipei, for companies investing in corporate bonds, the interest income is taxed at the company’s corporate income tax. In Korea, individuals and foreign investors pay the same tax rate on interest payments from holding corporate bonds. In Pakistan, the tax on interest payments received by investors varies depending on if the instrument is sukuk (10-25%) or debt including corporate bonds (15%), with the tax rate depending on the size of the return and whether the investor is an individual or a company (Goverment of Pakistan, 2001[28]). In Mongolia, a 5% tax on interest payments received by bondholders only applies to interest received in relation to publicly offered bonds. In Hong Kong (China), the interest income derived from certain debt instruments is exempt from profits tax for corporations (Hong Kong (China), 1947[29]).
Capital gains tax is applied to a lesser extent in only 14 jurisdictions. However, the rate applied in Korea and Singapore is 0% (Table 3.1). While the specifics vary across jurisdictions, when an investor sells the corporate bond before its maturity date, and the amount an investor receives is above the original purchase price of the bond, the difference can be considered to be a capital gain and this gain is taxed in some jurisdictions. However, the income derived may not necessarily be treated as capital gains but rather income.4 Hong Kong (China), Lao PDR, Malaysia and Chinese Taipei do not tax the gains derived from such transactions. For example, Chinese Taipei ceased to impose an income tax on gains derived from securities transactions since 1990. In Pakistan, for listed instruments, the capital gains tax rate is 5%-15% depending upon the holding period. For unlisted instruments the rate is 3.5% to 15% depending upon the gain (Part V 37, (Goverment of Pakistan, 2001[28]).
Ten jurisdictions (Australia, Japan, Korea, Mongolia, Philippines, Singapore, Sri Lanka, Chinese Taipei, Thailand and Viet Nam jurisdictions) apply a withholding tax to foreign resident investors in relation to any interest earned or on disposal of the bond. A common rationale for governments to apply withholding taxes on foreign resident investors is that if foreign investors are not taxed by the source country, then the investor would benefit from the infrastructure of the source country without contributing to it by paying other taxes. Further, this type of tax is relatively straightforward for the tax authority to administer because they already interact with the issuer companies, while they may not interact with the non-resident investors (Petkova, 2020[30]). Generally, the liability to withhold tax generally arises when the interest or gain made from holding the bond has been paid to the foreign resident. This tax must be withheld by the bond issuer and remitted by the bond issuer to the source jurisdiction taxation authority. For example, in the Philippines, a final withholding tax is withheld at every coupon payment date and remitted to the Bureau of Internal Revenue by the issuer (Philippines Bureau of Internal Revenue, 2023[31]).
However, the withholding tax for foreign investors may be waived whenever there a double taxation agreement, which is common in many countries (Table 3.1). Some jurisdictions have treaties to ensure that there is not double taxation on earnings by foreign investors. That is, when a jurisdiction applies a withholding tax on a foreign investor and the resident jurisdiction also taxes the same earnings, the double taxation agreement generally means that the source jurisdiction does not apply withholding tax on the income. For example, in Mongolia, the withholding tax of 20% for foreign investors applies only when there is no double taxation agreement in place with a foreign jurisdiction. Similarly, in Korea, the withholding tax rate of 15.4% for foreign investors may vary depending on their country’s tax treaty with Korea. Another example is in Japan, where the withholding tax rate depend on the existence of a tax treaty in effect between Japan and the country of residence of non-resident individual or the country where the foreign corporation is located.
Several jurisdictions have tax exemptions in place to help attracting investors and investment. In Thailand, the 15% withholding tax for individual foreign investors does not apply for zero coupon bonds. Additionally, in Bangladesh, the original issue discount5 that investors make on their investment in zero coupon bonds is tax exempt.6 There are specific exemptions from interest withholding tax for corporate bonds in Australia and Singapore. For instance, section 128F of the (Australian Parliament, 1936[32]) in Australia provides an exemption from interest withholding tax for offers of public placements of corporate bonds under AUD 100 million, if certain requirements are met. To qualify for the exemption, the borrower must satisfy one of five public offer tests, for example, the offer must be genuinely made to at least 10 unrelated investors or offered publicly in an electronic form. Similarly, in Singapore, for debt instruments under the Qualifying Debt Securities (QDS) scheme, the income derived by an entity operating in Singapore is subject to tax at a concessionary tax rate of 10%, and similarly to the Australian exemption, interest derived by non-residents is (Government of Singapore, 1947[33]; 2001[34]). Similarly, Hong Kong (China) also has Qualifying Debt Instrument concession and exemption scheme (Inland Revenue Department, Hong Kong (China), 2021[35]). In summary, typically, to access these exemption, public offers of the bonds must be made, and in some cases accepted by a certain number of investors, and the parties buying the bonds cannot be related to the issuing company to access these tax concession or exemptions.
Consistent with the general tax-deductibility of interest payments in tax frameworks, 16 jurisdictions allow for the tax deductibility of interest paid to bondholders by the issuer. In addition, only two jurisdictions (Australia and Thailand) provide corporate bond issuers with certain tax measures in relation to the costs they incur in raising debt (Figure 3.11). In Australia, borrowing costs (other than interest) that are incurred to produce assessable income are also generally deductible, such as the costs involved to issue corporate bonds (Sobeck, 2022[40]; Thomson Reuters, 2021[41]). Similarly, in Thailand, expenses incurred in the bond issuance process are allowed as a deduction (KPMG, 2018[42]). In Hong Kong (China), interest paid to bondholders by the issuer is tax deductible subject to certain conditions. In Malaysia, a special regime for sukuk was instituted to align the tax treatment of Islamic finance bonds to that of regular bonds. As such, there are various tax incentives available for sukuk, for example stamp duty exemptions for the issuance process and a tax deduction for the expenditure incurred by the issuer of a Sustainable and Responsible Investment (SRI) sukuk (SEC, 2023[43]).
Some jurisdictions have also implemented tax reductions for corporations who list their corporate bonds, to incentivise this type of activity. For example, in Lao PDR, companies that list their securities on the Lao Securities Exchange (LSX) can benefit from a 5% profit tax reduction for four years (ADB, 2017[44]).
In general, the application of taxes and the rate of these taxes varies across jurisdictions responding to the OECD Survey (Table 3.1). However, in Asia, there is not a difference in the tax treatment of smaller and larger companies in relation to holders of corporate bonds. An exception is Australia, where the capital gains tax rate paid by SMEs is a lower rate of 25%, while larger companies pay 30% (this simply reflects the different corporate tax rates that apply in this jurisdiction).
Aside from tax related exemptions and deductibility, jurisdictions also provide other measures to support the corporate bond markets. For instance, to promote the green bond market in Hong Kong (China), the Government Green Bond Programme was introduced in 2018 to help set a benchmark for green bond products in the market and provide good examples for potential green issuers. In addition, a three-year Green and Sustainable Finance Grant Scheme was announced in the 2021-22 budget to provide a subsidy for eligible bond issuers to cover their expenses for bond issuance and external review services. In the year following the launch of the scheme, almost 100 green and sustainable debt instruments were issued in Hong Kong (China) and were granted subsidies for the bond issuance costs or external review, with the total underlying issuance being around USD 30 billion (Hong Kong (China), 2021[45]; 2022[46]). Similarly, Indonesia reduced the registration fee for green bonds to be 75% lower than the normal rate for the public offering of bonds (ADB, 2021[5]).
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
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Notes
← 1. 19 jurisdictions responded to the survey namely Australia, Bangladesh, Cambodia, Hong Kong (China), India, Indonesia, Japan, Korea, Lao PDR, Malaysia, Mongolia, Pakistan, China, Philippines, Singapore, Sri Lanka, Chinese Taipei, Thailand and Viet Nam. The OECD survey was conducted in the first half of 2023.
← 2. 17 jurisdictions responded to the relevant question namely, Australia, Bangladesh, Cambodia, India, Indonesia, Korea, Lao PDR, Malaysia, Mongolia, Pakistan, China, Philippines, Singapore, Sri Lanka, Chinese Taipei, Thailand and Viet Nam.
← 3. 12 jurisdictions provided information on the number of days allowed for a prospectus approval: Australia, Bangladesh, Cambodia, China, Indonesia, Korea, Lao PDR, Mongolia, Philippines, Singapore, Chinese Taipei and Thailand.
← 4. For example, in Australia, a parliamentary inquiry noted: “Tax implications and consequences from proceeds (gains or losses) made from the disposal of corporate bonds may vary depending on individual circumstances and the type of investor… The profit from the redemption of corporate bonds is generally treated as ‘other income’ and not treated as concessionally taxed capital gains. Conversely, where there [is] a loss made on redemption, a ‘revenue’ deduction can be claimed and no capital loss recognised. (Australian Parliament, 2021[47])
← 5. The difference between the par value and initial price of the bond.
← 6. Except if the investor is a bank, non-bank financial institution or insurance company.