Speech by Jean-Claude Trichet, President of the ECB
on receiving the Karlspreis 2011
Each generation needs to affirm its commitment to Europe.
For the generation that lived through the Second World War, Europe was essential to prevent a return to the depression and the horrors of that war.
For the generation after, Europe was the cornerstone of building prosperity through economic freedom and open markets.
For the current generation, these achievements are taken for granted. Citizens have new concerns.
They want to be told why European unity is more important than ever in the present globalised world to ensure peace and security; why the European Union is vital to ensure and promote the interests of the European nations; why the European economies and societies are much more interdependent today than immediately after World War II; and how these interests and this interdependence should be best governed.
In all domains this calls for continuing to strengthen Europe’s institutional framework. In the economic and financial fields it demands to reinforce in a decisive way the institutions of the economic and monetary union.
By institutions, I do not mean technocrats making complex decisions remote from citizens.
I mean the rules and organisations that preserve our core values and guide our actions towards the common good.
Institutions that build trust between peoples and nations in Europe.
Institutions that foster cooperation for mutual benefit.
Institutions that manage our interdependence by preparing collective decisions.
As Jean Monnet put it, “Nothing is possible without men and women, but nothing is lasting without institutions.”
We are privileged in Europe to have institutions that contribute to binding together our continent, that embody the values of the European project and carry it further.
The European Commission, led by Mr. Barroso, is at the heart of this process. The European Council, led by Mr. Van Rompuy, gives it direction and momentum from the highest level. In the domain of Economic and Monetary Union, the Eurogroup, led by Mr. Juncker, drives forward its agenda and confronts its challenges.
In keeping with the vision of the Karlspreis, I will focus my remarks today on how developing further our common institutions is the key to the next stage of European economic and financial integration.
My main message is that the achievements of economic and monetary union (EMU) to date have been made possible by the ECB and the Eurosystem, the strong institutions of monetary union – the M in EMU. In the same vein, confronting the challenges of the future requires strengthening the institutions of economic union – the E in EMU.
Economic and Monetary Union
EMU is the area where Europe has progressed furthest.
It is a union where sovereign nations share a single market, a single economy and a single currency. Where they bind their actions through common laws and institutions. Where they remain unified and diverse at the same time.
This unique arrangement fulfils the visions of centuries of great European thinkers.
… of Erasmus in the 16th century, who spelled out the moral limitations of a strict concept of nationhood
… of William Penn in the 17th century, who recognised that European nations could mutually benefit by creating common institutions
… of Immanuel Kant in the 18th century, who understood that the authority of such institutions had to rest on common laws
… of Victor Hugo in the 19th century, who realised that democratic participation was necessary to provide these laws with legitimacy
… and of Robert Schuman in the 20th century, who saw that the foundation of all of the above would be economic integration.
It is important to keep in mind this historical perspective, seeing beyond the current challenges in the euro area. EMU is itself an unprecedented achievement in the history of sovereign nations – a goal to which generations of Europeans have aspired.
EMU is a historical process designed to bring real economic benefits for Europe’s citizens. We should not overlook what has been achieved in this area.
EMU has brought growth. Over the first decade of the euro, GDP growth per person has been of the same order of magnitude as in the United States.
EMU has fostered trade. Not only inside the Euro area (+50% increase in trade volumes over the first years of the euro), but even more so with the European Union as a whole and the rest of the world (+80% over the same period). EMU is not a closed shop. On the contrary, it is the most open of the large economies in the world.
EMU has brought employment. Employment has increased by 14 million since the creation of the euro, compared with a rise of about 8 million in the United States.
EMU has brought price stability. The average yearly inflation rate in the euro area during its first 12 years was 1.97%. That is fully in line with our definition of price stability at the European Central Bank (ECB): an inflation rate below but close to 2% over the medium term.
And EMU has brought monetary stability. The euro is a solid and credible currency, trusted by our fellow citizens, investors and savers.
There is no “crisis of the euro”.
The ECB and the euro
In 2002, the Karlspreis Foundation awarded the prize to the euro. The Foundation stressed how the euro was the logical step to maximise the benefits of the single market for sustainable growth and job creation.
On the evidence accumulated in the first twelve and a half years, the ECB has delivered on this promise.
The Treaty has mandated the ECB to keep safe the money of Europe’s citizens. And it has given the ECB the capability and the full independence to perform this task effectively.
These two aspects are akin to Max Weber’s ethics of conviction and responsibility. Our mandate gives us our conviction. Determined action reflects our responsibility.
In the difficult circumstances afflicting all the advanced economies since the start of the crisis in 2007, the ECB Governing Council demonstrated both conviction and responsibility.
We have shown conviction in steadfast commitment to price stability. Before and during the crisis, all our decisions on interest rates – we call them “standard decisions” – have been designed in order to give our fellow citizens price stability over the medium term.
And, as I just said, over the first twelve years we have delivered average yearly inflation at the level of less than 2%: it is a better result than the previous national currencies over the last 50 years, including the Deutsche Mark. Here in Aachen, I can say, the promise “stark wie die Mark” has been fully respected.
Since the crisis we also had to cope with financial turbulences, abnormal functioning of markets and disruption of certain segments of markets.
We showed our responsibility in taking monetary policy measures – we call them “non standard” decisions, strictly separated from the “standard” decisions, and aimed at restoring a better transmission of our monetary policy in these abnormal market conditions.
All these “non standard” measures – whether exceptional refinancing with full allotment and longer duration, or the interventions in private or public securities markets – have been designed to be commensurate to the tensions observed on these markets and allow a better transmission of our interest rates decisions.
In demonstrating both conviction and responsibility, the ECB has been, during the last four years, a reliable and solid anchor of stability to the service of our fellow citizens in the worst economic and financial circumstances since World War II.
Had we not been able to present a solid anchor of stability and confidence, the recovery the euro area has experienced since May 2010 would probably have been very different. The increase in GDP of over 2.5% in the past 12 months would not have happened. The increase in employment by 350,000 jobs since then might not have been there.
In deciding on all our measures, standard and non-standard, we have the needle in the compass on our primary objective: price stability for the 331 million fellow citizens of the euro area.
I wish to underline that achievements of the last 12 years have only been possible thanks to the remarkable dedication and expertise of the ECB Executive Board and Governing Council, to whom Europe today, through the Karspreis, is expressing its gratitude.
The same gratitude goes to the 1,400 staff members at the ECB in Frankfurt. They come from all 27 countries of the EU. They are a shining example of professionalism and team spirit, of what it means to work together for Europe.
Current challenges for governance
Just as the success of the euro as a currency is due to well-designed institutions, addressing EMU’s difficulties requires a major strengthening of the rules and organisations that govern fiscal and economic policies.
Looking at the euro area today, we see clearly that countries that abide by the rules of the single currency can thrive and prosper. Sound policies and a healthy economy are strongly correlated.
But we also see the opposite. Countries that have not lived up to the letter or the spirit of the rules have experienced difficulties. Via contagion, these difficulties have affected other countries in EMU.
Strengthening the rules to prevent unsound policies is therefore an urgent priority. It is the means to allow all countries to reap the full benefits of the single currency. And it prohibits individual countries from pursuing policies that harm themselves and the euro area as a whole.
For this reason, I have called, in the name of the Governing Council, on the Commission, the Council and the European Parliament to be very ambitious in reinforcing economic governance in the euro area. We have called for a “quantum leap” in governance now, to draw all the immediate lessons from the first years of Economic union and from the weaknesses revealed by the global crisis.
I count particularly on the European Parliament to reinforce the draft secondary legislation that is presently examined in the “trialogue” between the Parliament, the Commission and the Council.
Which possible changes of governance could be envisaged in the medium term?
In the aftermath of the global financial crisis, we face the challenge of supporting countries that experience financial difficulties.
Arrangements are currently in place, involving financial assistance under strict conditions, fully in line with the IMF policy. I am aware that some observers have concerns about where this leads. The line between regional solidarity and individual responsibility could become blurred if the conditionality is not rigorously complied with.
In my view, it could be appropriate to foresee for the medium term two stages for countries in difficulty. This would naturally demand a change of the Treaty.
As a first stage, it is justified to provide financial assistance in the context of a strong adjustment programme. It is appropriate to give countries an opportunity to put the situation right themselves and to restore stability.
At the same time, such assistance is in the interests of the euro area as a whole, as it prevents crises spreading in a way that could cause harm to other countries.
It is of paramount importance that adjustment occurs; that countries – governments and opposition – unite behind the effort; and that contributing countries survey with great care the implementation of the programme.
But if a country is still not delivering, I think all would agree that the second stage has to be different.
Would it go too far if we envisaged, at this second stage, giving euro area authorities a much deeper and authoritative say in the formation of the country’s economic policies if these go harmfully astray? A direct influence, well over and above the reinforced surveillance that is presently envisaged?
The rationale for this approach would be to find a balance between the independence of countries and the interdependence of their actions, especially in exceptional circumstances.
We can see before our eyes that membership of the EU, and even more so of EMU, introduces a new understanding in the way sovereignty is exerted. Interdependence means that countries de facto do not have complete internal authority. They can experience crises caused entirely by the unsound economic policies of others.
With a new concept of a second stage, we would change drastically the present governance based upon the dialectics of surveillance, recommendations and sanctions.
In the present concept, all the decisions remain in the hands of the country concerned, even if the recommendations are not applied, and even if this attitude triggers major difficulties for other member countries.
In the new concept, it would be not only possible, but in some cases compulsory, in a second stage for the European authorities – namely the Council on the basis of a proposal by the Commission, in liaison with the ECB – to take themselves decisions applicable in the economy concerned.
One way this could be imagined is for European authorities to have the right to veto some national economic policy decisions. The remit could include in particular major fiscal spending items and elements essential for the country’s competitiveness.
Which possible changes of governance in the historical long term?
Looking much further ahead, we should wonder what will be the future political institutional framework of Europe.
Immanuel Kant argued that, where countries are interdependent, institutions will continue to develop between them until a stable equilibrium is reached. In his words, “a state of affairs… that can maintain itself automatically.”
And Jean Monnet in his memoirs 35 years ago wrote: “Nobody can say today what will be the institutional framework of Europe tomorrow because the future changes, which will be fostered by today’s changes, are unpredictable.”
In a long term historical perspective, Europe – which has invented the concept and the word of democracy – is called to complete the design of what it already calls a “Union”.
The future political institutional framework of the Europeans will not be the simple imitation of existing models. On a personal basis, as a European citizen, I think that, like at the very moment of the birth of the concept of democracy, the Europeans will not be imitators but rather setting examples, with a Union that will be a confederation of sovereign states of an entirely new type. This naturally will call for a very important change of the Treaty and will have consequences in all the Union’s responsibilities.
In this Union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the Union?
Not necessarily a ministry of finance that administers a large federal budget. But a ministry of finance that would exert direct responsibilities in at least three domains: first, the surveillance of both fiscal policies and competitiveness policies, as well as the direct responsibilities mentioned earlier as regards countries in a “second stage” inside the euro area; second, all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services; and third, the representation of the union confederation in international financial institutions.
Which institution of this confederation of sovereign states of a new type will exert these responsibilities, will be decided by the people of Europe, as Jean Monnet suggested. I am sure that the President of the European Council, the President of the Commission, the President of the Eurogroup and the German Minister of Finance – who are all present here – have their own sentiment on this question.
Let me come to a conclusion, and don’t be surprised that a central banker shares with you some thoughts on the subject of culture. It is often suggested that Jean Monnet said “if I had to do it again, I would start first through culture.” The cultural unity of Europe is at the root of the European endeavour, including economic and monetary union.
Let me give you two complementary readings of Europe’s cultural unity.
The first is the vision of Husserl in his famous Vienna lecture of May 1935. He sees the origin of the spiritual form of Europe in its philosophical roots. I am quoting: “One can see that it is the starting point of a new kind of community, one which extends beyond nations. It is now no longer a number of different nations living alongside each other and only influencing each other through commercial competition or power struggles, but it is: a new spirit – stemming from philosophy and the sciences based on it – a spirit of free criticism, providing norms for infinite tasks, and it dominates mankind creating new, infinite ideals”.
The second is the vision of Paul Valéry. He stresses the spiritual character of Europe in his essay “l’Européen”. In 1924 he wrote: “Wherever the names Caesar, Gaius, Trajan and Virgil, wherever the names Moises and St. Paul, wherever the names Aristotle, Plato and Euclid have a significance and carry weight, that is where Europe is”. Here in Aachen, I would say wherever the name of Charlemagne carries weight, that is where Europe is.
Particularly in these times of global challenges, of stress, of crisis, such a return to the “spiritual form of Europe” is enlightening.
Husserl concluded his lecture in a visionary way: “Europe’s existential crisis can end in only one of two ways: in its demise (…) lapsing into a hatred of the spirit and into barbarism ; or in its rebirth from the spirit of philosophy, through a heroism of reason (…)”.
I think that [eventually] a confederation of sovereign states of a new type, with new institutions to manage the interdependence of today and tomorrow, would be fully in line with such a heroism of reason.
* * *
The city of Aachen has a special significance for Europe as a whole and also for the peoples of France and Germany.
Nearly 60 years later, I too have the honour of receiving the Karlspreis as President of the ECB, being also a ‘Frenchman on German soil’.
As a French citizen on German soil, I do not forget the start of the European endeavour, with the speech of Robert Schuman. This endeavour was founded, in particular, on the ties between our two countries, put to the service of all other nations and of Europe as a whole, the deepening integration of our economies and currencies, and ultimately the common bond of the euro. It has been a great privilege that the path of my career has allowed me to participate in this historical endeavour.
In the almost eight years I have lived in Germany, I have developed a strong admiration for the country, its culture and its history.
Germany combines local, regional and national identities with a strong European identity, each mutually reinforcing.
This is unity in diversity – a strong whole with equally strong parts.
Europe is progressing along this path. But to go further, the European nations must continue to lead the way. It is vital that all nations engage fully in the European historical endeavour and look with confidence to the future.
There are many grounds to be confident in our long-term future.
Europe is in the vanguard of nations working peacefully together.
We have replaced confrontation and conflict with cooperation and consensus.
We have combined political freedom with economic freedom and social peace.
We have proved that our single currency is stable and credible, preserving price stability over time.
Let us carry this noble endeavour further by giving Europe now and for the longer term the institutions it deserves.
Thank you for your attention.
Copyright © for the entire content of this website: European Central Bank, Frankfurt am Main, Germany.
Lockdown 2.0 – Here’s how to be the best-looking person in the virtual room
suggests “the product you’re creating is not the camera, the lens or a webcam’s clever industrial design. It’s the subject, you, which is just on e part of the entire image they see. You want that image to convey quality, not convenience.”
Technology experts at Reincubate saw an opportunity in the rise of remote-working video calls and developed the app, Camo, to improve the video quality of our webcam calls. As part of this, they consulted the digital photography expert and author, Jeff Carlson, to reveal how we can look our best online.
It’s clear by now that COVID-19 has normalised remote working, but as part of this the importance of video calls has risen exponentially. While we’re all used to seeing the more casual sides of our colleagues (t-shirt and shorts, anyone?), poor webcam quality is slightly less forgivable.
But how can we improve how we look on video? We consulted Jeff Carlson for some top tips– here is what he had to say.
- Improve the picture quality of your call
The better your camera, the higher quality your webcam calls will be. Most webcams (as well as currently being hard to get hold of and expensive), are subpar. A DSLR setup will give you the best picture, but will cost $1,500+. You can also use your iPhone’s amazing camera as a webcam, using the new app from Reincubate, Camo.
Jeff’s comments “The iPhone’s camera system features dedicated coprocessors for evaluating and adjusting the image in real time. Apple has put a tremendous amount of work into its imaging software as a way to compensate for the necessarily small camera sensors. Although it all works in service of creating stills and video, you get the same benefits when using the iPhone as a webcam.”
Aidan Fitzpatrick, CEO of Reincubate explains why the team created Camo, “Earlier this year our team moved to working remotely, and in video calls everyone looked pretty bad, irrespective of whether they were on built-in Mac webcams or third-party ones. Thus began my journey to build Camo: an iPhone has one of the world’s best cameras in it, so could we make it work as a webcam? Category-leading webcams are noticeably worse than an iPhone 7. This makes sense: six weeks of Apple’s R&D spend tops Logitech’s annual gross revenue.”
- Place your camera at eye level
A video call will never quite be the same as a face-to-face conversation, but bringing your camera up to eye level is a good place to start. That can involve putting your laptop on a stand or pile of books, mounting a webcam to the top of your display screen, or even using a tripod to get the perfect position.
Jeff points out, “If the camera is looking down on you, you’ll appear minimized in the frame; if it’s looking up, you’re inviting people to focus on your chin, neck, or nostrils. Most important, positioning the camera off your eye level is a distraction. Look them in the eye, even if they’re miles or continents away.”
Low camera placement from a MacBook
- Make the most of natural lighting
Be aware of the lighting in the room and move yourself to face natural lighting if you can. Positioning the camera so any natural light is behind you takes the light away from your face, which can make it harder to see and read expressions on a call.
Jeff Carlson’s top tip: “If the light from outside is too harsh, diffuse it and create softer shadows by tacking up a white sheet or a stand-alone diffuser over the window.”
Backlit against a window Facing natural light
- Use supplementary lighting like ring lights
The downside to natural lighting is that you’re at the mercy of the elements: if it’s too bright you’ll have the sun in your eyes, if it’s too dark you won’t be well lit.
Jeff recommends adding supplementary lighting if you’re looking to really enhance your video calls. After all, it looks like remote working will be carrying on for quite some time.
“The light can be just as easy as a household or inexpensive work light. Angle the light so it’s bouncing off a wall or the ceiling, depending on your work area, which, again, diffuses the light and makes it more flattering.
Or, for a little money, use a softbox or a shoot-through umbrella with daylight bulbs (5500K temperature), or if space is tight, LED panels. Larger lights are better for distributing illumination– don’t be afraid to get them in close to you. Placement depends on the look you’re going after; start by positioning one at a 45-degree angle in front and to the side of you, which lights most of your face while retaining nice shadow detail.”
In some cases, a ring light may work best. LEDs are arranged in a circle, with space in the middle to put the camera’s lens and get direct illumination from the direction of the camera.
- Centre yourself in the frame
Make sure you’re getting the right angle and that you’re using the frame effectively.
“You should aim for people to see your head and part of your torso, not all the space between your hair and the ceiling. Leave a little space above your head so it’s not cut off, but not enough that someone’s eyes are going to drift there.”
- Be mindful of your backdrop
It’s not always easy to get the quiet space needed for video calls when working from home, but try as best you can to remove anything too distracting from your background.
“Get rid of clutter or anything that’s distracting or unprofessional, because you can bet that will be the second thing the viewers notice after they see you. (The Twitter account @RateMySkypeRoom is an amusing ongoing commentary on the environments people on television are connecting from.)”
A busy background as seen by a webcam
- Make the most of virtual backgrounds
If you’re really struggling with finding a background that looks professional, try using a virtual background.
Jeff suggests: “Some apps can identify your presence in the scene and create a live mask that enables you to use an entirely different image to cover the background. While it’s a fun feature, the quality of the masking is still rudimentary, even with a green screen background that makes this sort of keying more accurate.”
- Be aware of your audio settings
Our laptop webcams, cameras, and mobile phones all include microphones, but if it’s at all possible, use a separate microphone instead.
“That can be an inexpensive lavalier mic, a USB microphone, or a set of iPhone earbuds. You can also get wireless lavalier models if you’re moving around during a call, such as presenting at a whiteboard in the camera’s field of view.
The idea is to get the microphone closer to your mouth so it’s recording what you say, not other sounds or echoes in the room. If you type during meetings, mount the mic on an arm instead of resting it on the same surface as your keyboard.”
- Be wary of video app add-ons
Video apps like Zoom include a ‘Touch up your appearance’ option in the Video settings. This applies a skin-smoothing filter to your face, but more often than not, the end result looks artificially blurry instead of smooth.
“Zoom also includes settings for suppressing persistent and intermittent background noise, and echo cancellation. They’re all set to Auto by default, but you can choose how aggressive or not the feature is.”
- Be the best looking person in the virtual room
What’s important to remember about video calls at this point in time is that most people are new to what is, really, personal broadcasting. That means you can easily get an edge, just by adopting a few suggestions in this article. When your video and audio quality improves, people will take notice.
Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation
By Keith Phillips, CEO of TISATech
If just six or seven months ago someone had told you that in a matter of weeks people around the world would be locked down in their homes, trying to navigate modern work systems from a prehistoric laptop, bickering with family over who’s hogging the Wi-Fi, migrating online to manage all financial services digitally, all while washing their hands every five minutes in fear of a global pandemic… You’d think they had lost their mind. But this very quickly became the reality for huge swathes of the world and we’re about to go through that all over again as the UK government has asked that those who can work from home should.
Unsurprisingly, statistics show that lockdown restrictions introduced by the UK government in March, led to a sharp increase in people adopting digital services. Banks encouraged its customers to log onto online banking, as they limited (and eventually halted) services at branches. This forced many customers online as their primary means of managing personal finances for the first time.
If anyone had doubts before, the Covid-19 pandemic proved to us the importance of well-functioning, effective digital financial services platforms, for both financial institutions and the people using them.
But with this sudden mass online migration, it’s become clear that traditional banks have struggled to keep up with servicing clients virtually. Legacy banking systems have always stilted the digitisation of financial services, but the pandemic thrust this issue into the limelight. Fintech firms, which focus intently on digital and mobile services, knew it was only a matter of time before financial institutions’ reliance was to increase at an unprecedented rate.
For years, fintechs have been called upon by traditional players to find solutions to problems borne from those clunky legacy systems, like manual completion of account changes and money transfers. Now it is the demand for these services to be online coupled with the need for financial services firms to cut costs, since Covid-19 hit the economy.
Covid-19 has catalysed the urgent need to bring digital transformation to a wider pool of financial services businesses. Customers now have even higher expectations of larger institutions, demanding that they keep up with what the younger and more nimble challengers have to offer. Industry leaders realise that they must transform their businesses as soon as possible, by streamlining and digitising operations to compete and, ultimately, improve services for their customers.
The race for digital acceleration began far before the recent pandemic – in fact, following the 2008 financial crisis is likely more accurate. Since the credit crunch, there has been a wave of new fintech firms, full of young, bright techies looking to be the next big thing. Fintechs have marketed themselves hard at big conferences and expos or by hosting ‘hackathons’, trying to prove themselves as the fastest, most innovative or the most vital to the future of the industry.
However, even during this period where accelerating innovation in online financial services and legacy systems is crucial, the conditions brought about by the pandemic have not been conducive to this much-needed transformation.
The second issue, which again was clear far before the pandemic, is that fact that no matter how nimble or clever the fintechs’ solutions are, it is still hard to implement the solutions seamlessly, as the sector is highly fragmented with banks using extremely outdated systems populated with vast amounts of data.
With the significance of the pandemic becoming more and more clear, and the need for better digital products and services becoming more crucial to financial services firms and consumers by the day, the industry has finally come together to provide a solution.
The TISAtech project was launched last month by The Investing and Saving Alliance (TISA), a membership organisation in the UK with more than 200 leading financial institutions as members. TISA asked The Disruption House, a specialist benchmarking and data analytics business, to create a clearing house platform for the industry to help it more effectively integrate new financial technology. The project aims to enhance products and services while reducing friction and ultimately lowering costs which are passed on to the customers.
With nearly 4,000 fintechs from around the world participating, it will be the world’s largest marketplace dedicated to Open Finance, Savings, and Investment.
Not only will it provide a ‘matchmaking’ service between financial institutions an fintechs, it will also host a sandbox environment. Financial institutions can pose real problems with real data and the fintechs are given the space to race to the bottom – to find the most constructive, cost-effective solution.
Yes, there are other marketplaces, but they all seem to struggle to achieve a return on investment. There is a genuine need for the ‘Trivago’ of financial technology – a one stop shop, run by an independent body, which can do more than just matchmaking. It needs to go above and beyond to encompass the sandboxing, assessments, profiling of fintechs to separate the wheat from the chaff, and provide a space for true collaboration.
The pandemic has taught us that we are more effective if we work together. We need mass support and collaboration to find solutions to problems. Businesses and industries are no different. If fintechs and financial institutions can work together, there is a real chance that we can start to lessen the economic hit for many businesses and consumers by lowering costs and streamlining better services and products. And even if it is just making it that little bit easier to manage personal finances from home when fighting with your children for the Wi-Fi, we are making a difference.
What to Know Before You Expand Across Borders
By Sean King, Director of International Tax at McGuire Sponsel
The American retail giant, Target Corporation, has a market cap of $64 billion and access to seemingly limitless resources and advisors. So, when the company engaged in its first global expansion, how could anything possibly go wrong?
Less than two years after opening its first Canadian store in 2013, Target shut down all133 Canadian locations and terminated more than 17,000 Canadian employees.
Expansion of an operation to another country can create unique challenges that may impact the financial viability of the entire enterprise. If Target Corporation can colossally fail in its expansion to Canada, how might Mom ‘N’ Pop LLC fare when expanding into Switzerland, Singapore, or Australia?
Successful global expansion requires an understanding of multilayered taxes, regulatory hurdles, employment laws, and cultural nuances. Fortunately, with the right guidance, global expansion can be both possible and profitable for businesses of any size.
Any company with global ambitions must first consider whether the company’s expansion outside of the U.S. will give rise to a taxable presence in the local country. In the cross-border context, a “permanent establishment” can be created in a local country when the enterprise reaches a certain level of activity, which is problematic because it exposes the U.S. multinational to taxation in the foreign country.
Foreign entity incorporation
To avoid permanent establishment risk, many U.S. multinationals choose to operate overseas through a formal corporate subsidiary, which reduces the company’s foreign income tax exposure, though it may result in an additional level of foreign income tax on the subsidiary’s earnings. In most jurisdictions, multinationals can operate their business in the foreign country as a branch, a pass through (e.g., partnership,) or a corporation.
As a branch, the U.S. multinational does not create a subsidiary in the foreign country. It holds assets, employees, and bank accounts under its own name. With a pass through, the U.S. multinational creates a separate entity in the foreign country that is treated as a partnership under the tax law of the foreign country but not necessarily as a partnership under U.S. tax law.
U.S. multinationals can also create corporate subsidiaries in the foreign country treated as corporations under the tax law of both the foreign country and the U.S., with possibly two levels of income taxation in the foreign country plus U.S. income taxation of earnings repatriated to the U.S. as dividends.
Under U.S. entity classification rules, certain types of entities can “check the box” to elect their classification to be taxed as a corporation with two levels of tax, a partnership with pass-through taxation, or even be disregarded for U.S. federal income tax purposes. The check the box election allows U.S. multinationals to engage in more effective global tax planning.
Toll charges, transfer pricing and treaties
When establishing a foreign corporate subsidiary, the U.S. multinational will likely need to transfer certain assets to the new entity to make it fully operational. However, in many cases, the U.S. multinational cannot perform the transfer without recognizing taxable income. In the international context, the IRS imposes certain outbound “toll charges” on the transfer of appreciated property to a foreign entity, which are usually provided for in IRC Section 367 and subject to various exceptions and nuances.
Instead, the U.S. multinational may prefer to license intellectual property to the foreign subsidiary for a fee rather than transfer the property outright. However, licensing requires the company and foreign subsidiary to adhere to transfer pricing rules, as dictated by IRC Section 482. The U.S. multinational and the foreign subsidiary must interact in an arms-length manner regarding pricing and economic terms. Furthermore, any such arrangement may attract withholding taxes when royalties are paid across a border.
Are you GILTI?
Certain U.S. multinationals opt to focus on deferring the income recognition at the U.S. level. In doing so, they simply leave overseas profits overseas and delay repatriating any of the earnings to the U.S.
Despite the general merits of this form of planning, U.S. multinationals will be subject to certain IRS anti-deferral mechanisms, commonly known as “Subpart F” and GILTI. Essentially, U.S. shareholders of certain foreign corporations are forced to recognize their pro rata share of certain types of income generated by these foreign entities at the time the income is earned instead of waiting until the foreign entity formally repatriates the income to the U.S.
The end goal
Essentially, all effective international tax planning boils down to treasury management. Effective and early tax planning can properly allow a company to better achieve its initial goal: profitability.
If global expansion is on the horizon for your company, consult a licensed professional for advice concerning your specific situation.
The importance of app-based commerce to hospitality in the new normal
By Jeremy Nicholds CEO, Judopay As society adapts to the rapidly changing “new normal” of working and socialising, many businesses...
The Psychology Behind a Strong Security Culture in the Financial Sector
By Javvad Malik, Security Awareness Advocate at KnowBe4 Banks and financial industries are quite literally where the money is, positioning...
How open banking can drive innovation and growth in a post-COVID world
By Billel Ridelle, CEO at Sweep Times are pretty tough for businesses right now. For SMEs in particular, a global financial...
How to use data to protect and power your business
By Dave Parker, Group Head of Data Governance, Arrow Global Employees need to access data to do their jobs. But...
How business leaders can find the right balance between human and bot when investing in AI
By Andrew White is the ANZ Country Manager of business transformation solutions provider, Signavio The digital world moves quickly. From...
Has lockdown marked the end of cash as we know it?
By James Booth, VP of Payment Partnerships EMEA, PPRO Since the start of the pandemic, businesses around the world have...
Lockdown 2.0 – Here’s how to be the best-looking person in the virtual room
By Jeff Carlson, author of The Photographer’s Guide to Luminar 4 and Take Control of Your Digital Photos suggests “the product you’re creating is...
Banks take note: Customers want to pay with points
By Len Covello, Chief Technology Officer of Engage People ‘Pay with Points’ – that is, integrating the ability to pay...
Are you a fighter or a freezer? The 4 “F’s” of Surviving Danger
By Dr.Roger Firestien, Author of Create In a Flash. The fight, flight, freeze survival response – or FFF for short...
Why the FemTech sector might be the sustainability saviour we have been waiting for
By Kristy Chong, CEO & Founder Modibodi ® Taking single use plastics out of circulation is no easy feat, but...