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Jean-Claude Trichet: Interview with Le Point



Jean-Claude Trichet:  Interview with Le Point 3

Jean-Claude Trichet, President of the ECB,
English translation of the full interview given to Patrick Bonazza, Le Point, on 22 July 2011

Has the euro been saved, then, after last week’s summit in Brussels?
The euro itself, that is the currency, has never been under threat. The risk was not to the stability of the single currency, but rather to the financial stability of the euro area owing to the fiscal problems in Greece. The euro is not in question: it is solid, strong and credible. The euro has kept its value for over 12 years. The European Central Bank (ECB) is an anchor of stability and confidence, which is very important, particularly in turbulent and difficult periods.

Yes, but aren’t the struggling countries in the euro area putting the single currency at risk?Jean-Claude Trichet:  Interview with Le Point 4
The pressure observed on sovereign risks is not solely a European problem, it is also a global problem. The United States and Japan also have major fiscal problems, as you well know. The paradox is that, from a global perspective, the euro area is in a far better situation, with a consolidated fiscal deficit of around 4.5% of GDP this year, compared with approximately 10% of GDP for these other two countries. On the other hand, individual countries in Europe, in particular Greece, are in a much more difficult situation. All the decisions taken in Brussels by the Heads of State or Government are important for the financial stability of the euro area.

What part did the ECB play in the decisions taken in Brussels on 21 July?
In such circumstances, it is necessary to take a close look at the role of the central bank. We are responsible for ensuring that the currency, savings and purchasing power of 331 million citizens across 17 countries remain sound and stable. As you know, inflation hits hard on the poorest and most vulnerable among us. Our democracies entrusted us with this responsibility and we are living up it! Since the launch of the euro 12 years ago, we have achieved an average annual inflation rate of 1.97%, which is in line with our definition of price stability, i.e. below, but close to, 2%. Moreover, by being in charge of a single currency for 17 countries and 331 million citizens, the Central Bank has an overall view that enables it to convey messages to those taking government decisions, knowing of course, that they are in full control of their own decisions.

Was your participation in the meeting between Sarkozy and Merkel on 20 July in Berlin planned?
Angela Merkel and Nicolas Sarkozy invited me to join them at the Chancellery in Berlin. The Governing Council of the ECB advised me, in real time, that it would be useful if I accepted this invitation so that I could put across the views of the ECB.

Another €109 billion for Greece, after €110 billion last year. Do you believe that Europe is going to be able to raise such large sums of money for a single country just like that?
What matters above everything else – and it is absolutely essential – is that Greece regains control of its economic balances, that Greece itself implements the measures for restoring its budget, government accounts and competitiveness as quickly and as rigorously as possible. What matters is that it implements rigorous structural reforms and resolves to embark on a privatisation programme.

Last year, France raised €4 billion and after the summit in Brussels it is going to borrow an additional €15 billion between now and 2014 to the benefit of Greece. Are you sure that the French, who have their own problems, will accept this indefinitely?
Greece is committed to doing everything, and will do everything – under the strict surveillance of Europe, which is something we have always called for – to restore confidence, regain stability and pay back its loans from Europe. The Europeans are not subsidising Greece to never see their money again. They are investing in its recovery. Of course, they need to monitor their investment closely.

The 17 euro area countries have bought Greece some time, but that’s no guarantee that the country is going to accept the austerity measures being imposed on it.
We are not imposing “austerity” on Greece. Greece itself is correcting its years of mismanagement. Throughout the years in the run-up to the crisis, Greece continued to spend more than was coming in. Sound governance is the only way to once again achieve growth and job creation based on a newfound competitiveness.

Do you think that Greece’s membership of the euro area is partly to blame for its downfall? Despite the level of inflation in the country, Greece has been able to borrow at very low rates, thanks to the ECB. This gave rise to a credit bubble.
No, I don’t think so, because the euro area has only been in existence for just under 13 years, and prior to that, other countries, everywhere in the world, had experienced similar problems to those that Greece is experiencing today. Moreover, we are seeing today, unfortunately, that the issue of poor fiscal discipline is arising more often in developed countries, whereas before it was only an issue in developing countries – in Asia, Latin America or the Near East. Greece is a symbolic example of this turnaround.

And what is the reason for this turnaround?
The fact is that the monitoring of economic and fiscal policies in the euro area was not as good as it should have been. The ECB and the Banque de France – Christian Noyer and myself – have always said with regard to Europe that the Stability and Growth Pact was not an artificial creation conveying an ultra-orthodox view of the economy coming from across the Rhine. It was a fiscal framework that was absolutely necessary for a monetary union that had neither a federal government nor a federal budget. On behalf of the Governing Council, I publicly denounced the liberties that in 2004-05 Germany, France and other major countries wanted to take, and indeed took, in the form of a Stability and Growth Pact that was weakened both in letter and in spirit. We have constantly called for closer monitoring, not only of fiscal policies, but also of indicators of competitiveness and internal imbalances.
Today, in the light of the crisis, everyone can see that we were right.

And that you have a better chance of being listened to…
I sincerely hope so.

Over the last few weeks, you have fought against the idea of asking the private sector (banks, insurance companies, funds, etc.) to incur losses to help Greece. It would seem that the Heads of State did not listen to you?

Once again, we have always said publicly that it is not the Central Bank that takes the decisions, but the governments themselves. With regard to private sector involvement and Greece, we have had three very clear messages. First, we said that any participation had to be voluntary. As far as this is concerned, our advice has been followed. Second, we said that it was necessary to avoid a “credit event”, and at the moment, it looks as though we have done so. Lastly, our third message was that a “selective default” should be avoided. However, in the event of such a default, governments would have to recapitalise the banks and provide credit enhancement for the collateral accepted by the ECB for its refinancing operations. We secured this guarantee which was essential to protecting the integrity of the ECB in the event of a “selective default”. It was essential for the ECB, and all the Eurosystem central banks in order to maintain stability and confidence in Europe. The protection of the integrity of the central bank is non-negotiable.

Following the summit in Brussels, the European Financial Stability Facility (EFSF) is to provide cheaper loans to programme countries and will also be able to purchase bonds and recapitalise struggling banks. With this, are we not getting sucked into in a costly and vicious circle?
We have advised governments to incorporate more leeway and flexibility into the EFSF – taking into account that we are experiencing exceptional circumstances since the onset of the worst crisis since the Second World War. A more versatile and flexible EFSF will be a more efficient tool for helping to ensure the financial stability of the euro area as a whole.

With regard to private sector involvement, the Heads of State have affirmed that these solutions would only be applied to Greece. Why the special treatment?
The credit worthiness of a country is absolutely essential. Whether you are a household, a company or a country, you will be granted loans on good terms if the lender is confident that he will be paid back. That’s why confidence is so important. The Heads of State or Government wanted to remove all ambiguity, and in their own words they said: “All other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature. The euro area Heads of State or Government fully support this determination, as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole”. I could not have put it better myself.

Did you look into the possibility of Greece leaving the euro?
Not for a minute did anyone consider that option.

But what do you have to say to the many people who don’t believe that Greece will pull through unless its debt is drastically reduced?
The problem that Greece has is that it needs to return to a path of sound governance as quickly as possible, i.e. it needs to restore its budget to health, implement a rigorous privatization programme and carry out essential structural reforms. The proposals from the private sector and the decisions of the European governments, i.e. lowering interest rates and extending the duration of the loans, will ease Greece’s debt service burden considerably. Furthermore, the outstanding debt will decrease through bond swaps and debt buybacks. But what is important is that Greece carries out the adjustment itself, helped by this very important decrease of the yearly service of the debt.

After Brussels, will countries like Spain or Italy avoid the Greek contagion?
Without exception, every country is aware that it is experiencing an exceptional crisis. For example, the Italian government has just adopted a fiscal programme that will reduce its deficit to less than 3% from 2012. How many major developed countries, outside Europe, can say that? Spain has started to carry out ambitious reforms, as noted at the meeting on 21 July. The European Central Bank has called for all countries to strictly adhere to the letter and spirit of the Stability and Growth Pact, to strengthen competitiveness and, in particular, to monitor production costs and carry out the necessary structural reforms. That is the path to sustainable growth and job creation.
The crisis has been enlightening. Within the euro area, those countries that have been very attentive to their budget and their competitiveness, such as Germany or Austria, have succeeded in creating jobs and reducing unemployment, even during the crisis. The same applies to countries outside the euro area, for example Sweden, which has had much better results than any other country outside the euro area.

With each crisis, the usual suspects call for greater federalism in order to prevent the next crisis. This time, they want euro bonds and greater sharing of the debt burden. Is this a responsible and helpful response? And can we take steps towards federalism without asking the people for their opinion?
As you know, the summit in Brussels was not convened at all with the aim of causing institutional upheaval. That said, the view that Europeans need to reflect on their long-term vision of how they want European institutions to evolve is, for me, a valid one. The construction of Europe really started 60 years ago. Evidently, it has not yet been completed, and it is also very clear that it is up to our democracies to take the decisions and thus, ultimately, to the people of Europe to say what they want. Speaking as a European citizen, and not as the President of the ECB, I think that the Europeans will go on to invent in a long term prospective an entirely new type of confederation of sovereign states, which would not be a carbon copy of the United States of America.

We were sold the euro area as an area of prosperity and stability and instead we get austerity. Go figure!
Since the introduction of the single currency, the euro area has seen a growth rate per capita that, at around 1% a year, is comparable to that in the United States, and has created even more jobs: 14 million compared with 8 million in the USA. Not enough people know these facts and they do not receive sufficient attention. In addition, it was never claimed that the euro would do away with the need for good public finance management; indeed, we said precisely the opposite. The euro area is redressing its public finances, just as the United States and Japan must do, and as the United Kingdom has also started to do. Two things are certain. First, everywhere in the world, whenever budgets are managed carefully, the costs of production are controlled and the social partners act with prudence, the reward is growth and job creation, even after the worse crisis since 1945. Second, the euro area as a whole is faced with fewer problems than the United States or Japan, but it must take tremendous steps to strengthen its governance.

Is speculation the big bad wolf that will devour the euro?
The euro itself is not in question. The euro is a very credible currency that has done a remarkable job of ensuring price stability. Also, it is issued in an economic area for which the overall results are sound compared with other ones. As far as government or corporate bonds are concerned, the financial markets are complex and very sophisticated. Some investors have confidence (or not) and invest (or not), and others can forward buy or sell and speculate up or down. Market participants are thus motivated by varying degrees of confidence, as well as by fear and greed. When serious crises arise, such as the one that we have been in since 2007-08, they expose weaknesses as sure as x-rays show up the skeleton inside the body. A good way of not letting speculation take hold is to identify ones own weaknesses upfront and to correct them. In the years that preceded the crisis, countries in particular, had a false sense of security. Unfortunately, this sentiment was not only shared by some Europeans, but also by the whole of the international community, not to mention many economists. Once again, the lesson that we Europeans must draw from this is to strengthen the governance and monitoring of economic and fiscal policies. That does not mean to say that the functioning of the financial markets does not need to be substantially improved. At the moment, the key word for all industrialised countries is “confidence”.

Yes, but it is possible to speculate on whether Greece will default.
Such a speculation would be a sure-fire way of losing money given the decisions taken last Thursday. And let me say again, the euro, as a currency, is sound and credible, and is not affected by the pressures on sovereign risks.

Don’t the rating agencies play the speculation game?
I think that this is an important issue for financial stability at the global level. Here we see a very small number of institutions having an enormous international influence. The patently oligopolistic way in which the rating agencies work is certainly not optimal in terms of market organisation. This configuration is structurally “pro-cyclical”, in other words it fuels the creation of bubbles during cyclical upturns and exacerbates the busts during cyclical downturns. These failings must be addressed. This is easily said, and more difficult to do…

You will be relinquishing your duties this coming November. What does this mean for you?
My professional life has been shaped by both the pursuit of long-term or very long-term strategies such as the construction of Europe and by a series of crises. When I started my career as a civil servant I had to deal with the first oil price shock in 1973-74, which was an enormous blow to the whole of the industrialised world. Unfortunately, because we responded poorly, particularly in Europe, this shock was the start of mass unemployment. I have also lived through the sovereign debt crises in Latin America, Africa, the crisis in the Soviet Union, the crises of the Exchange Rate Mechanism of the European Monetary System in 1992 and 1993, and of course the Asian crisis, the bursting of the bubble and the ongoing crisis that started in 2007-08. The truth is, I have always been living through crises. This has led me to conclude that, in a world that is undergoing extremely rapid transformation thanks to science and technology, the global spread of the market economy and the fantastic progress made by China and India, it is necessary to be constantly on one’s guard and in a state of alert. I first elaborated on this view in a speech I gave in 2005 at Jackson Hole in Wyoming, where central bankers from all around the world meet every year on an informal basis. Back then, I explained that one of the conditions for boosting long-term confidence was to remain visibly and constantly in a state of alert. The experience of the most serious crisis since the Second World War has only strengthened this conviction. More than ever, the benefit that the European Central Bank brings to Europeans is to be an anchor of stability and confidence in a turbulent and demanding period.

Copyright © for the entire content of this website: European Central Bank, Frankfurt am Main, Germany.

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Lockdown 2.0 – Here’s how to be the best-looking person in the virtual room



Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 5

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 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.

  1. 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.”

  1. 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.

Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 6

Low camera placement from a MacBook

  1. 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.” 

Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 7Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 8

Backlit against a window Facing natural light

  1. 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.

  1. 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.”

  1. 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

  1. 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.”

  1. 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.”

  1. 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.”

  1. 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.

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Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation



Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation 9

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.

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What to Know Before You Expand Across Borders



What to Know Before You Expand Across Borders 10

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.

Permanent establishment

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.

Check-the-box planning

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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Latest Articles

86% of UK businesses face barriers developing digital skills in procurement 11 86% of UK businesses face barriers developing digital skills in procurement 12
Technology11 hours ago

86% of UK businesses face barriers developing digital skills in procurement

A shortage of digitally savvy talent, and a lack of training for technical and soft skills, hinder digital procurement initiative...

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ISO 20022 migration: full speed ahead despite recent delays, says new Deutsche Bank paper

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