Asia's Rail Revolution

Two new railways are coming to Asia. Mishcon de Reya advises on truck makers cartel claim. Linklaters acts on Linklaters advises on record Hong Kong IPO.

Today's read (8 minutes):

• Asia's Rail Revolution
• The UK import tax problem
• Ireland invests in Wind Energy
• Case: Truck makers hit with cartel claim
• Deal: Linklaters advises on record Hong Kong IPO

plus answers to your questions!

Asia's Rail Revolution.

The Shanghai Cooperation Organisation is schedule to take place in Samarkand on September 15th-16th. Here, a group of Asian states including Russia, China, and Uzbekistan will meet to discuss crucial economic and political issues.

Among the topics to be discussed are two new railways which could become essential in central Asia's bid to improve connectivity and transport.

The first new line would open a route from China to Europe through Turkmenistan, Iran and Turkey, shortening the journey by 900km and eight days. More importantly, it would avoid the need to go through Russia, which has become tricky to move goods across due to sanctions imposed after the invasion of Ukraine.

The second line to be discussed aims to connect Uzbekistan to Pakistan via Afghanistan. A short one already runs from the Uzbek border to Mazar-i-Sharif in northern Afghanistan. The new one would stretch 573km, via Kabul, to Peshawar in Pakistan.

How does this impact law firms' clients?

• The two new railways could boost commerce between Asia, and Europe and create huge opportunities for clients.

The new railways could facilitate trade between Asia and Europe, thus boosting the amounts of cargo that can travel between the continents. This is huge news for clients operating in sectors such as commerce, transport, as they can expect an uptick in trade.

The uncertainty and tragedy of the war in Ukraine, has led many European businesses to switch to a slower, pricier rail-and-sea route, crossing the Caspian by ship to bypass Russia.

The new line would provide a quicker and cheaper non-Russian rail-only route alternative between China and Europe.

The second railway would allow landlocked Uzbekistan and Afghanistan to get faster and cheaper access to the sea via Pakistan’s ports. Supporters of the project estimate that it would cut the time it takes goods to travel from Uzbekistan to Pakistan from 35 days to around four. Pakistan and Afghanistan would earn transit fees.

How does this impact law firms?

• The two new railways are bound to generate demand for lawyers to advise on matters ranging from construction, funding of the projects, and transportation contracts.
• Top Departments: Commercial, Construction, Transport.

We can expect the two projects to create a broad range of work for law firms, starting with funding. Indeed, the fate of both railways will depend on whether they can attract funding from sources besides China. This could come both in the form of direct government investment, or also through public-private partnerships.

To this point, law firms will be asked to advise on drafting investment and funding agreements, and structuring loans and facility agreements. These will be crucial to ensuring the funding is received and used for railway construction.

Once the funding is secured, law firms will be asked to draft the construction contracts. This will involve a varied number of practice areas, from securing the necessary land to build on (via real estate departments), to drafting the commercial contracts for the parties investing in the projects, and the employment contracts for the developers and workers.

A large (and continuous) chunk of work for law firms will come once the railways are set up. China’s railway trade with Europe, which grew from $8bn of goods in 2016 to about $75bn in 2021. Having a new line which bypasses Russia, and afford greater security to its European counterparts will only enhance this. Therefore, we can expect clients to reach out to law firms for advise on trade and transportation agreements along this new route.

Meanwhile, the second railways plays into China’s plans to turn Pakistan’s Gwadar port into a shipping hub. It would also gain an export route for a copper mine near Kabul in which it has an interest. Once again, this railway will generate opportunities for clients operating in Pakistan, Uzbekistan and Afghanistan. However, it will be crucial for law firms to draft contract which take into account the political uncertainty of Afghanistan, and provide effective clauses to deal with any change in leadership or force majeure events.

The UK import tax problem

HMRC suspects that UK businesses are underpaying more than £25.3 million in import taxes between 5 April 2021 and 5 April 2022. This figure is up from just £620,000 in the previous financial year.

The rise comes after the government introduced a new ‘rules of origin’ regime.

The change means that any goods imported into the UK from the EU that do not wholly or largely originate from the EU will attract customs duties when they enter the country. For example, UK businesses importing car engines manufactured in Spain, now face import taxes if the engines contain components made in China.

Importantly, the amount of tax HMRC believes big businesses are underpaying so far on EU imports might grow following the introduction of stricter ‘rules of origin’ requirements on 1 January 2022.

How does this impact law firms' clients?

• The new regime will make trade harder, increase costs, and tax risks for clients.

This is not an ideal situation for UK businesses that have been used to seamless trading within the EU’s single market. The rule of origin system makes this harder. It creates more costs for client, and consumes time on administrative tasks to managing the imports' proof of origin.

In fact, after a one-year grace period, UK businesses must now be able to prove exactly where goods imported from the EU to the UK have come from.

Given the significant volume of goods that arrive in the UK from the EU, HMRC clearly sees this as an emerging area of tax risk.

How does this impact law firms?

• Law firms will be asked to advise on the requirements for complying with the rule of origin regime, and tax reporting.
• Top Departments: Tax, Corporate and Litigation.

Clients will be looking for legal advice on complying with the rule of origin regime, and tax reporting requirements.

Tax lawyers advise will be crucial for clients. Businesses that cannot prove the origin of the goods they import are liable to pay the full rate of customs duty and could face significant penalties. The goods could also be rejected at the border.

Proving the origin of goods to HMRC may be particularly difficult for businesses with long and complex supply chains. Accurate record-keeping is now critical to avoid having to pay the full rate of import duties. Businesses could rely on innovative technologies such as Blockchain to facilitate this process, by attributing specific hash IDs to each products in the supply chain, and record each movement on the blockchain.

Big businesses can expect to deal with the Large Business Directorate. The directorate works with most businesses in the UK who have an annual turnover of more than £200 million. The process usually involves initial investigations but can move to large-scale investigations and litigation if required. This could generate additional work for corporate lawyers (in assisting on the investigation responses), and for litigation lawyers to advise on any disputes arising from them.

Something that caught my eye...

Last year 31% of Ireland’s electricity came from wind turbines, according to Wind Europe, an industry group. The share was higher only in Denmark, which managed 44%. Already this year Ireland’s figure has risen to 36%. The Irish government wants to push its renewables share up to 80% by 2030; it beat this target briefly during one especially stormy weekend in February this year. The hope is that improvements in energy storage, and a new electricity interconnector with France which is due to come online in 2026, will allow Ireland to sell surplus wind power to European countries that are struggling to decarbonise their own energy supplies.

Top Court Case:

Asda, Waitrose, John Lewis and other retailers have brought a claim against several truck makers for damages over the higher prices they paid to buy and lease trucks as a result of manufacturer price-fixing that breached EU competition law.

The claim stems from a fine of €2.93 billion issued by the European Commission in 2016 against five major truck makers, including Volvo and DAF, for colluding on prices and sticking customers with the costs of complying with emissions rules. The retailers say they were affected by the cartel activity between 1997 to least 2011. They are seeking unspecified damages in their claim.

The claimants are represented by Jon Turner KC, Anneli Howard KC and Ciar McAndrew of Monckton Chambers, instructed by Mishcon de Reya.

Top Deal:

Linklaters have advised China Tourism Group on Hong Kong’s largest IPO of 2022. The company owns and operates the world’s largest tax-exempt retail network, and became Hong Kong’s largest issuer this year with 24.6% share of the global travel retail industry. They are a pioneer in the duty-free retail industry, now owning almost ¼ of the world’s market share in the travel retail industry. Freshfields Bruckhaus Deringer and Jia Yuan Law Offices are also advising the underwriters.

As the issuer counsel, Linklaters assisted China Tourism Group in navigating the complex regulatory environment and obtaining important waivers. This highlights the firm’s expertise in helping Chinese issuers to raise capital in the international capital markets. It also showcases the firm’s prominence in the Hong Kong IPO market.

The China Tourism Group had initially planned to raise $5 billion in Hong Kong in the final quarter of 2021. However, they shelved their plans due to the fall in Shanghai’s stock prices and the Chinese government’s new restrictions on offshore listings. This equated to a plummet in share prices for many offshore-listed Chinese companies.

IPO fundraising within Hong Kong was initially down by 90% in the first half of 2022. As of last week, companies have raised just $5bn this year from Hong Kong IPOs, compared to $35bn last year. As such, the deal is particularly important in reaffirming the financing capabilities of Hong Kong as an international financial centre. The deal is an important milestone in China Tourism Group’s duty-free entry into the international capital market, providing them with a solid foundation for future international development.

Answering your questions!

Q: What does the growth of the global second-hand apparel market mean for the global apparel/fashion market? - Anonymous (London, UK)

Ludo: Between 2021 and 2031, the sales of second-hand apparel is forecast to rise at a compound annual growth rate (CAGR) of 11.2%. This growth is mainly due to the fact that consumers have become increasingly interested in eco-friendly clothing options.

On the one hand, this could mean that an increasing number of consumers will prefer to buy second hand, rather than new clothes. This is supported by research from Boston Consulting Group, which states that second-hand clothes are projected to make up 27% of customers’ wardrobes by 2023. Therefore, we could make an argument that this could damage retail store sales, and harm their profits.

On the flip side, retail stores could see this consumer mindset shift as an opportunity to grab market share. For example, H&M launched its sustainable line called "Conscious" in a bid to provide a sustainable alternative to its customers. This is both a risk management solution, to avoid the risk of losing customers, and an innovative way to capitalise on this trend by delivering what customers are looking for.

I think the impact of the second-hand market on fashion brands will be dependant on how they approach it. Choosing to ignore it, and continue as if nothing changed could be greatly detrimental to fashion stores. However, investing in it provides brands with a powerful opportunity to boost their image through strong sustainability credentials. For luxury brands it could be a great way to further show that their high-end craftmanship allows their products to endure the test of time, and ensure resale value season after season.

Want to ask a question? You can reply to this email and write in (it goes straight to my inbox) or fill out this form.