By Marc Israel, partner and Kate Kelliher an associate at global law firm White & Case
In the wake of the coronavirus outbreak, governments across the world have seen the pandemic as a reason to review, and in many cases strengthen, the circumstances in which they will intervene in instances where ‘foreign’ entities are seeking to invest in critical domestic industries. Countries across Europe have tightened up their rules, as have many other jurisdictions including Australia and India. The European Commission has urged Member States “in a time of public health crisis and related economic vulnerability” to carefully assess foreign investment to protect the EU’s critical assets and technologies from potential hostile takeovers. The cited aim is to “preserve EU companies and critical assets, notably in areas such as health, medical research, biotechnology and infrastructures that are essential for our security and public order”.
Coronavirus-critical companies in the UK
In the United Kingdom, the government has expanded the existing regime that gives it the option to intervene in mergers that are important for public interest considerations. Pre-pandemic, the Enterprise Act 2002 already allowed the UK government to review mergers based on certain “public interest” considerations, namely national security, media plurality and financial stability. In recognition, however, that the COVID-19 outbreak has left many companies in a vulnerable position, the UK government added a fourth category to this list – the ability to combat and mitigate a public health emergency.
This amendment allows the UK government to intervene in foreign (or domestic) investments being made into businesses that are directly involved in the coronavirus response. This expansion of the circumstances in which the UK government can intervene in deals is to allay concerns that resources that may be pivotal to responding to the pandemic could find their output diverted to mitigation strategies outside the UK, or to action by entities linked to hostile states to undermine the UK’s response to the outbreak. Examples include vaccine research and development or production, personal protective equipment manufacturing, or food supply chain. The need for these new powers to protect the national interest concerning coronavirus-critical companies is two-fold. First, a recognition that liquidity shortages arising from the economic impacts of the virus have made a myriad of companies vulnerable to potential takeover. Secondly, a recognition that such companies are critical to responding to the pandemic and helping to spur economic recovery.
When one of the four public interest considerations is invoked, the UK government has the final word on whether the deal can go ahead, and if so, whether any conditions are needed (e.g. to keep manufacturing or R&D facilities in the UK).
Commenting on the new measures Secretary of State for Business, Alok Sharma said:
“These measures will strike the right balance between the UK’s national security and resilience while maintaining our world-leading position as an attractive place to invest – the UK is open for investment, but not for exploitation.
These powers will send an important signal to those seeking to take advantage of those struggling as a result of the pandemic that the UK government is prepared to act where necessary to protect our national security.”
Introducing new “public interest” measures in response to a crisis is not new. In fact, the addition of financial stability as a relevant public interest was introduced as a result of the global financial crisis in 2008 and was the basis on which the UK government approved the takeover of HBOS by Lloyds (despite the UK’s Competition and Markets Authority finding that the transaction would be harmful to competition).
New national security measures
COVID-19 has also exposed some geo-political fault lines, heightening awareness of potential vulnerabilities in supply chains and technological dependencies. As the world becomes more polarised, (see, for example, the UK’s recent actions to reverse the decision to allow Huawei to supply parts of the UK’s 5G network and comments about Russian influence in Britain), the UK Government has also proposed expanding the scope of activities that can be subject to intervention in mergers on national security grounds.
Therefore, as well as expanding the scope of the public interest considerations to include the protection of public health, the UK government is also proposing to expand the list of activities that may be considered to present national security concerns. This follows changes in June 2018, under which the thresholds for intervention in mergers on national security grounds were lowered for target companies active in the development or production of military or dual use goods, the design and maintenance of computing hardware, and the development or production of quantum technology.
The new changes propose to expand this list of activities to which the lower thresholds apply to include artificial intelligence, advanced materials and cryptographic authentication. Under these lower thresholds, the government is able to intervene in cases where the target is active in these specific activities if the target had UK turnover of only £1 million in its last financial year (instead of £70 million), or alone accounts for over 25% share of supply of any goods or services in the UK (instead of both parties having to overlap and have a combined share of supply of 25%). These rules allow the government to intervene more easily in cases that it considers most likely to raise concerns and notable for their heavy technology focus.
The latest proposed changes to the Enterprise Act 2002 are only interim changes ahead of the adoption of the new National Security and Investment Bill (“NSIB”), due to be presented before Parliament later this summer. These proposals were first mooted in 2017 but have not been progressed (partly as the government had more pressing issues to address such as Brexit), but are expected to introduce a comprehensive new foreign direct investment (“FDI”) control regime in the UK. Whereas the Enterprise Act’s powers rely on turnover and market share thresholds (as described above) and apply only if a transaction is caught under the UK merger control rules, the NSIB is expected to create a standalone FDI review regime based on a target’s business activities or the purchaser’s identity without reference to the merger control regime.
Once in force, the government is expected to use these powers much more often than has been the case to date. Even though the existing powers are already quite extensive, they have only been used on average less than once a year. In fact, since the Enterprise Act came into force in 2003, the government has only intervened in mergers on national security grounds twelve times (three in the last year) and no transaction has ever been blocked, although conditions have been imposed in some cases.
However, under the new legislative proposals the government has said that it expects to conduct around 100 detailed reviews each year, of which around half may be expected to result in some sort of remedy (or possibly even prohibition). This suggests that transactions will be subject to greater scrutiny and that parties (especially acquirers from jurisdictions perceived as hostile to the UK) will need to plan for a possible FDI assessment, especially if the target is active in a sector covered by the new public health protection category, or the technology fields covered by the recent (and proposed) additions to the national security activities of interest. Similarly, financial sponsors of targets in these areas will need to be aware of the potential implications when investing and thinking ahead to identifying possible counterparties when they consider future exits.
Strengthening FDI: a global trend
These new measures are part of a general trend towards stricter foreign direct investment scrutiny around the world. This has escalated in the wake of the COVID-19 outbreak to ensure that governments can protect key industries and ensure that the debilitating impact of the virus on business operations does not enable foreign investors to ‘snap up’ companies weakened by the pandemic.
Other jurisdictions that have expanded their foreign direct investment review powers to tackle the impacts of COVID-19 include France, Germany, Hungary, Italy, and Poland amongst others. In the EU, it is notable, if not surprising, that national security issues remain under the jurisdiction of Member States and not the European Commission. Therefore, to try and ensure a more consistent and holistic approach to FDI assessments, a new FDI Screening Regulation comes into effect in October 2020.
Under this Regulation, Member States have to coordinate their FDI assessments more closely and notify each other and the European Commission when they are conducting an FDI assessment. The Regulation also allows the European Commission to issue opinions when an investment poses a threat to the security or public order, and whilst the ultimate decision will rest with the Member State(s) concerned, they will need to give “due consideration” to the European Commission’s opinion. In practice therefore, Member States are likely to need good reasons to reach a decision which is not consistent with the European Commission’s opinion.
In this publication, White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This publication is prepared for the general information of our clients and other interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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.
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