By Eduardo Brunstein, General Manager, Standard Commerce Bank
Despite recent seismic changes, the European Union is decidedly not in danger of complete collapse.
However, it is unclear what the future of the EU will hold for its member states. The state of collective uncertainty has raised questions among citizens and experts alike.
Yogi Berra famously said “The future ain’t what it used to be”. Plans to build a collective of 30 countries with just one border and one currency, without internal trade tariffs and in which everyone is employed, mobile and happy are no longer feasible. Recent developments changed visions of the EU’s future dramatically.
The fact of the matter is no one could possibly be 100% certain of the future of the EU, as it is currently quite fluid.
There are, however, reliable experts with well-informed insights on the macro trends that are shaping the Union as it moves forward.
As we all know, the dramatic upset in the European Union’s structure is Brexit, the United Kingdom’s exit from several -but not all -of the EU’s agreements.
The UK voted on the formal exit in June 2016. It is programmed to execute at 11pm UK time on Friday 29 March 2019. According to the BBC, “The UK and EU have provisionally agreed on the three “divorce” issues: of how much the UK owes the EU, what happens to the Northern Ireland border and what happens to UK citizens living elsewhere in the EU and EU citizens living in the UK”.
Britain’s exit fee will be steep: Investopedia estimates that the UK may owe the EU up to 100 billion Euros. The economic outlook is now rather bleak, to say the least. Bankers are already fleeing in droves, courted by Dublin and Frankfurt, even Paris; traditional finance is suffering, as well as up and coming Fintech companies.
Shortly after the vote, Uri Friedman made a compelling case in The Atlantic that the decision process itself was badly engineered from the start. He pointed out that (a) having a one-step process to decide such an important issue is wrong; (b) Britain, being a parliamentary democracy should at least give some weight to Parliament’s opinion, and (c) that perhaps the people weren’t at all prepared to take a stance on the issue.
Friedman’s claims are evident, growing numbers of British citizens and politicians alike are calling for a referendum vote.
Before dissecting the potential referendum vote, it’s important to understand why British citizens voted out. Some of the reasons that led the UK to leave are leading other nations to rethink their stance on the Union as well. The graph below shows the results of a poll taken by the BBC among those who voted “yes” on Brexit.
Reasoning behind the vote was somewhat divided and arguably a bit ill-informed. The given reasons are issues that could have been managed, controlled, or negotiated within the realm of the EU without an abrupt exit.
Immigration control was the most popular priority among voters and taking law-making control away from the EU took a close second. The age-old complaint that the UK contributes a disproportionate amount of financial assistance to the EU is ever present. The least popular reason was, at best, a childish attempt to send a message to politicians. None of these issues are new,all have com up occasionally in public policy debates over the years, but they’ve never been demonstrated -even collectively – to justify such a radical move.
Despite the looming doubt and a degree of voter’s remorse, citizens in other parts of Europe share the concerns that led British citizens to vote “yes” on Brexit.
Consequently 9 different countries,not including the UK, are considering (in various degrees) leaving the European Union. A poll done by the Washington Post revealed this wave of discontentment:
In all but 1 of the countries listed, the majority of those polled believe that some lawmaking capabilities should be restored to individual countries’ governments, rather than the EU. Even in Poland, the proportion of the populace that believes the current division of power should remain only outnumbers those who want to seize power back from the Union by 1%.
Concerns about the EU’s effect on member states are surprisingly consistent across borders,but perhaps the shock of Brexit will encourage other politicians across Europe to treat the decision of whether to remain in the Union a bit more delicately. If the issue is put to a popular vote, it should ideally be complemented by a parliamentary vote. Regardless, it may be wise to require atwo-thirds majority.
Another consequence of Brexit is that even though some believe that the EU should continue as it is and potentially get more involved in member states’ economies, the Union’s progress is undoubtedly slowing down. Some advocate a “multi-speed” approach to the EU in which new members are incorporated at a fast pace and older members can reevaluate their stance.
In a September 2017 interview with Financial Times, President Andrzej Duda of Poland warned that a multi-speed bloc would undermine the fundamental idea of the EU as a “union of equals” and ultimately lead to the collapse of the union. “If the EU formally becomes a union of different speeds it would in effect be formally divided into better and worse members and it would to a large extent lose its attractiveness for those countries that were deemed second class,” he said.
During a debate with the presidents of Georgia and Macedonia at an economic conference in southern Poland, President Duda argued that “thanks to our membership we have become a fully-fledged member of the political union of the west … If now we were going to go back and find ourselves in ‘category B’, for Poles that would mean a reduction in the attractiveness of the EU,” he said. “In addition the EU would become less attractive for those aspiring to join… It would mean one would have to go through many stages to get to the center where some countries stick together and think that they are better.” Macedonian President Gjorge Ivanov echoed Duda’s concerns and said that a two-speed Europe did not make sense “even as a metaphor”, pointing out that it was not possible for a train to move at two speeds simultaneously.
The below graph indicates the results of an ongoing poll The Economist published in March 2017:
In 5 of the 6 countries polled, public opinion of EU membership has diminished over time. The only country whose opinion has improved is Poland, which had more to gain from joining the Union than most.
In December 2017, The World Economic Forum (“WEF”) published a blog indicating that the same stance guides investors and analysts today, regarding the European Union’s future: “investors have recognized that Europe is doing well, they are putting their money where their mouth is -and they want to know what’s next for the Euro area”.
The WEF has also listed 5 challenges currently facing Europe. Successfully managing these challenges will benefit the EU and, ultimately, the world economy as a whole:
- Moving toward a human-centered economy: “Europe can boost economic growth through digitization and automation, while also ensuring the benefits are shared equitably across society.”
- Management of immigration and borders: “Europe’s next generation aspires to convert migration into the foundation of a strong society where migrants and their integration are regarded as drivers of economic prosperity and a flourishing and dynamic cultural lifestyle”.
- Leading global sustainability: “European governments, businesses, and citizens have recognized that that economic growth and sustainable energy policy can go hand-in-hand. Unaddressed climate change would increase global instability with a direct impact on some parts of Europe, while increasing geopolitical uncertainty that may limit European access to energy and resources. European citizens, especially young people, want a stronger action agenda to address climate change.”
- Dealing with threats to public safety: “With increasing collaboration or integration in defense and security among countries, Europe is well positioned to take on a greater global role in security and defense and there is a currently a strong effort underway to strengthen Europe wide collaboration on defense and security and ideas such as the establishment of a “European DARPA” can help in that direction.”
- Working to be relevant, responsive, and trustworthy: “Europe can benefit from the Fourth Industrial Revolution if we ensure the technological advancements are used to help public sector institutions more effectively deliver services and identify citizen needs. We need to recognize the different needs of countries while also ensuring mutual benefits and progress for all members of this union.”
Soon after sharing these challenges, the WEF also published the following 5 crucial elements they believe will pave the way for a stronger European Union:
1) Complete the Banking Union by supporting the Single Resolution Fund (SRF) –this is a fund designed to reinin problematic banking practices. Having a fund like the European Stability Mechanism backing it would prepare the fund for any eventuality, thus enhancing confidence in the markets as a whole.
2) Establish common deposit insurance for the Banking Union: There are currently 19 different potential plans to protect depositors. If the EU can come up with just one comprehensive scheme, it will be a great leap.
3) Europe needs to further harmonize its financial markets to simplify investments between countries:“…at the moment, bankruptcy laws, for instance, vary massively between European countries. The same differences exist in corporate law, and in tax law. If it took less time to figure out the laws in the country you wanted to invest in, it would open up investments abroad, helping venture capital and the private equity market. That’s good news for companies, who would have a new financing channel. Pushing the Capital Markets Union in Europe forward is, therefore, a must.”
4) A limited fiscal facility: a stabilizing fund or entity that will absorb potential future economic emergencies, funded gradually through member states. This doesn’t mean more centralization –a higher concentration of resources could be achieved by re-routing some of the EU’s existing funding.
5) Establish a European Monetary Fund: the International Monetary Fund (IMF)has recently scaled back its involvement in Europe. It also has its own conditions attached to each accord (recent examples include Portugal, Greece and Spain) which often don’t coincide with the interests of the EU, its methods or even its long-term vision. As a result, the EU needs its own monetary fund to fill the void left by the IMF.
The European Union’s future is complex and subject to numerous factors. Worldwide, experts and politicians are heatedly debating the possibilities, as the eventual outcome will affect the entire world, not just EU member states.
The European Union’s current leadership role will probably only increase in relevance and depth, largely because its attempt to lead by example is somehow lost on other nations, thus creating a trust or moral discrepancy. While other nations are entrenching themselves in endless debates about minutia, Europe is regaining its role as the torch bearer of individual rights, humanism and careful planning for the future.
However imperfect, however limited the EU’s future will be, leaders cannot simply wait to see what the it will hold without getting involved. Europe is doing just that, and the rest of the world should follow suit.
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.
Pandemic risks eclipse treasury priorities as businesses diversify investments to mitigate impact
The Covid-19 pandemic has shunted aside existing challenges to sit atop treasurers’ priority lists, according to “The resilient treasury: Optimising strategy in the face of covid-19”, a survey run by the Economist Intelligence Unit (EIU) and sponsored by Deutsche Bank.
The results show that treasurers are looking to diversify their investments in a bid to mitigate the pandemic impacts, including heightened liquidity, foreign-exchange and interest-rate risk. As many as 55% plan to increase investments in long-term instruments, with 48% increasing investments in bank deposits, another 48% in local investment products, and 47% in money-market funds.
“The Covid-19 pandemic has drastically altered business plans in 2020. It has placed a certain level of strain on treasury processes, but the challenge it presents has been managed by traditional treasury skills. It is clear that pandemic risk will be on the treasury checklist for years to come, but it is one of many risks the department faces and will continue to manage,” says Melanie Noronha, the EIU editor of the report.
Despite Covid-19 looming large, other challenges wait in the wings. Notably, the replacement of the London Interbank Offered Rate was identified by 38% of respondents as the main challenge of their function.
Technology, meanwhile, continues to be a pressing issue, with treasury teams becoming increasingly reliant on IT solutions. Here, data quality is rising up the list of concerns. Already highlighted as very or somewhat concerning in 2019 by 69% of respondents, the figure rose to 78% in 2020. Acquiring the necessary skill sets to realise the full benefits of this data and technology is also a continuing priority – with some progress registered from last year. In 2020, 30% of respondents say they have all the skills they need to manage technological change, up from 22% in 2018.
“Treasury’s focus on technology is not only helping teams operate more efficiently in a remote-working environment, it has long played – and continues to play – a key role in realising their long-term priorities,” notes Ole Matthiessen, Head of Cash Management, Corporate Bank, Deutsche Bank. The survey shows that
Release 1 | 2 managing relationships with banks and suppliers (highlighted by 32% of respondents) and collaborating with other functions of the business (also 32%) remain top of the agenda – and seamless digital systems will help give treasurers the bandwidth and insight to be more effective partners for both internal and external stakeholders.
Based on a global survey of 300 treasury executives, conducted between April and May, the survey explores stakeholders’ attitudes among corporate treasurers towards the drivers of strategic change in the treasury function – from the pandemic through to regulation and technology – and their priorities for the next five years.
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