Looking South Episode #9 – SMEs and Legal Issues Part 1

In this week’s installment of Looking South, Eric Gau chats with Grace Shao, the chair of the Taipei Bar Association, about common legal issues that SMEs encounter in Southeast Asia.

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Transcript below:

Eric Gau: Good morning. I’m Eric Gau, and welcome to Looking South on ICRT, our program looking at the effects and benefits of the Taiwan government’s New Southbound Policy. Today, we are joined by Grace Shao, the chair of the Taipei Bar Association, to tell us about some of the legal issues that small and medium sized enterprises face internationally. Ms. Shao, good morning, and welcome to the program.

Grace Shao: Thank you, hi, good morning everyone.

Eric: Ms. Shao, what are some of the most common legal issues that SMEs will encounter while trying to expand into the Southeast Asian market?

Grace: Well, as you probably know, international trade is in the gene of Taiwanese businessmen and women. As a lawyer assisting many international clients, I would say that it is very important for any business, particularly small and medium enterprises, to bear in mind potential legal issues when entering into other markets, like Southeast Asian market because they are less familiar in that environment. As to common legal issues I suggest small and medium sized enterprises may consider to include: business structure and contractual arrangement, because this would depend on the type of business they want to conduct and in which country. So a company needs to consider whether to set up a company or joint venture, or to cooperate with a distributor first, or simply work with sales agents. Secondly, they need to consider regulations and compliance issues. Are there any requirements on product registration or labeling? Any import license or special permit required? Product liability? Consumer protection issues? Privacy and data protection, IP protection and possible infringement issues? So I would like to like to emphasize that encouraging strict compliance with local regulations and globally enforced regulations like GDPR and the US Foreign Corrupt Practices Act are critical. As well, performing sufficient research on the regulatory regimes of target countries, and engaging a full-service international firm are all practical measures that Taiwanese small and medium-sized companies should be taking, that is very important.

Eric:  You mentioned that some SMEs will work with distributors to promote their products. What kind of problems are common when they do so in Southeast Asia?

Grace: I noticed a trend that many Taiwanese businesses would like to start their cooperation in those countries with distributors. I think they like to do that because it is cheaper and more efficient for them, more convenient for them. However, if they do it without proper arrangements in place, this can result in many problems and I have experiences assisting clients in handling such problem in Malaysia, and India.

For example, some clients would like to save costs and ask the distributor to apply and hold the product import license, or even apply for trademarks for them. Once the business operation is making profit and the company would like to terminate the distributor agreement, the client may not be able to sell their products if the distributor refuses to return the license back to them. Therefore, there must be a well-drafted distribution agreement to protect the party’s rights and obligations.

Eric: What about intellectual property and trade secrets? How do companies here in Taiwan make sure their IP is protected?

Grace: Well, that’s very simple. If you want to protect your IP, remember to register as soon as possible. I know it’s expensive, but it’s very important, because most ASEAN/Southeast Asian countries adopt a first to file system for trademarks. Also, I would like to remind about the language issue, because there are many different languages there. So sometimes, when you register your trademark without registering the local language version, then someone might take it and register, and you will be prevented from using your own trademark.

As to patents, I know that people think the patent systems in the ASEAN country are still not very consistent and mature. However, since 2009, there has been a regional patent working-sharing program among 9 participating member states: the ASEAN Patent Examination Co-operation. To file patent applications through ASPEC can be faster and more efficient. Strategically a company can file a patent in Taiwan first, or file in an ASPEC country, and then they can claim international priority in Singapore or other ASPEC countries within a certain period.

According to a survey conducted by BakerMcKenzie, protecting trade secrets has become a major concern for many companies. So trade secret must be clearly defined and reasonable measures taken to protect its secrecy. We noticed that sometimes the risk arrives because of the departure of ex-employees, so I would suggest that they employ the employment contracts and relevant agreements carefully.

Eric: Taxation is something that every company is sure to encounter. What are some of the key things they need to keep in mind when handling taxes in New Southbound Policy partner countries?

Grace: Tax planning is often a subject that requires tailor made advice based on the company’s shareholding and company structure, but what I cannot stress enough is that planning ahead is key. You need to understand corporate income tax rates, Value Added Tax (VAT) / Goods and Service Tax, property tax, withholding tax, especially their withholding obligations for royalties payments, personal income tax and stamp duties, they are all important in deciding where to setup a business. In addition, taxation may affect certain industries differently. For example, I am aware that Singapore maintains a preferential taxation scheme for new start-up companies and offers partial tax exemptions to incentivize FDI. In Malaysia, the government imposes a 38% corporate income tax rate on petroleum companies that operate there, so again, planning-ahead to understand the full scope of the tax situation is important.

Eric: What about certifications and credentials? Are the processes for getting certified for things like, say, halal or organic foods different in other countries?

Grace: Yes. Very different. For example, Indonesia has wide-ranging discretion in applying their Food Law and can change policy from time to time without public notice. Initiating from October 2019, all food and beverage products that enter and trade in Indonesia must be halal certified. This is just one example out of a handful that demonstrates that a one-size-fits-all approach cannot be applied to setting up shop in Southeast Asia. Different government agencies and ministries within different countries handle food, pharmaceutical, and manufacturing certifications differently. I know this keeps coming up but seeking the help of local counsel is not something you want to ignore.

Eric: If companies are having any legal problems, what services does the Taiwan government provide to help them overcome these programs?

Grace: Currently, the New Southbound Service Center within the Office of Trade Negotiation under the Executive Yuan may provide relevant investment advice and provide information and assistance to small and medium sized enterprises. Also, I notice that the Taiwan Intellectual Property Office did a very good job in preparing studies on IP system in Vietnam, Thailand, Indonesia, Philippines and Malaysia. They are also very willing to provide information, and there are helpful information on their website and Facebook.

Locally, people can find the government maintains Taipei Economic and Cultural Representative Offices in the ASEAN countries. They can assist Taiwanese citizens and companies to obtain legal assistance. They should be able to connect those who needs with suitable Chinese speaking lawyers in respective countries.

Also, I think the Ministry of Economic Affairs and Taiwan External Trade Development Council maintain a presence in key ASEAN countries. And as you know, the Taipei Bar Association, we have direct connection with other bar associations in ASEAN countries, and we would be willing to provide information and help if necessary.

Eric: We’ve been chatting with Chair Grace Shao of the Taipei Bar Association about some common legal problems faced by Taiwanese companies when they go abroad. Ms. Shao, thank you for taking the time to share with us this morning.

Grace: You’re welcome, thank you.

Eric: That’s it for this week’s episode of looking south. Ms. Shao will be back with us next week as we continue exploring the legal labyrinth of overseas business. Make sure you tune in then to catch the rest of the conversation. I’m Eric Gau, thank you for tuning in.

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