Dominic Broom, member of the International Chamber of Commerce (ICC) Banking Commission’s Executive Committee, and Global Head of Trade Business Development at BNY Mellon, discusses the changes occurring across Asia, and how collaboration could be the key to success – a preview of a panel discussion to be held at the ICC Banking Commission’s Annual Meeting on 3-4 April
The economic power and potential of Asia is both great and varied. Global trade growth in recent years has been buoyed by trade activity in the region, despite relatively sluggish trade growth in China. Yet, as a fragmented region with a heavy reliance on China, commodities and manual labour, Asia is facing a period of significant change.Not only will Asia face the impact of the political and economic pressures present across the global trade landscape as a whole, it has its own economic shifts (to consumerism and digitization, for instance) to manage – tackling challenges and seizing opportunities. For a fragmented region to be able to adapt to change successfully, collaboration is crucial.
Asia and the superpower
Consider Asia’s relationship with the US. Looking at the figures alone, the relationship between Asia and the world’s economic superpower appears fairly sturdy. For example, 2016 figures demonstrating US imports from Southeast Asia – its fourth-largest export market – increased by 0.88% year-on-year in 2016, and the region as a whole has become a larger source for lower-value US imports in recent years. Looking specifically at goods exported to the US from ASEAN countries in 2016, these totalled over US$150 billion – with Vietnam, Thailand, Indonesia, Malaysia, and Singapore accounting for most of these exports. Figures on Indonesia’s (hosts of this year’s ICC Banking Commission annual meeting) exports to the US in 2016 indicated a growth by 8.8% compared to the previous month.
Looking at the whole picture, however, these strong trading relationships – on which many Asian businesses thrive – look less secure. A shift in the West towards protectionism raises concerns that, instead of creating trade relationships, governments around the world (including and perhaps even led by the US) will instead opt for trade barriers, jeopardising the potential growth and success of countless Asian companies.
Asia has already felt the first blow of protectionism, with the US pulling out of the Trans-Pacific Partnership (TPP). While the TPP may well go ahead without the US, the impact if it does not, could be significant. Vietnam, for example, which stands to benefit from an 11% rise in GDP by 2025 as a result of the TPP,could lose out on a significant opportunity.
Changes from China
The economic slowdown and shift in focus away from commodity consumption by China is also of concern. China needs to ensure that the growth of its consumer-driven economy is able to address the gap left by less skilled manufacturing moving to lower-cost locations such as Vietnam and Bangladesh. Further, it is feared that the reduced appetite for commodities will have a significant impact on Asian trade.
The reality of Asian trade, however, is far more positive, with the region as a whole – particularly ASEAN markets – proving to be relatively robust. In 2016 ASEAN markets observed an increase in GDP growth to 4.7% from 4.5% the previous year. And it is expected that the combined GDP of five of the ASEAN nations – Indonesia, Malaysia, the Philippines, Thailand, and Vietnam – could rise to US$3 trillion by 2020.
Part of this is that, while China has dropped its commodity demand, ASEAN markets have increased commodity consumption,creating robust levels of intra-regional trade. As ASEAN markets – particularly Indonesia, Malaysia, the Philippines, Thailand and Vietnam – grow their economies and populations (with populations predicted to reach 700 million by 2030), the need for infrastructure, and therefore commodities, grows in kind.
A region of opportunity
China does still play a role in supporting Asian economies. Economic relations between China and the ASEAN economies have been growing, with Chinese foreign direct investment (FDI)in the six largest economies of ASEAN expected to nearly double year-on-year to reach US$16 billion. Indonesia alone observed an increase in FDI from China by a staggering 291% (to US$1.5 billion) in 2016. As far as trade is concerned, ASEAN markets are ambitious: setting a target of US$1 trillion in trade flows with China by the end of 2020.
China is also keen to maintain its economic influence on the region. The China-led Regional Comprehensive Economic Partnership (RCEP) – a 16-member bloc that includes all 10 members of the ASEAN, as well as Australia, New Zealand, Japan, Korea, India, and China – will act to lower barriers to trade, and importantly, could provide an alternative to the TPP, should the latter come apart.
Furthermore, China’s One Belt, One Road project – representing the physical path from Hong Kong, through Europe, to Scandinavia; and the maritime Silk Road from Hong Kong to Venice – could cover 65% of the world’s population, a third of the world’s GDP, and approximately one quarter of all global goods and services, presenting significant opportunities for Asian markets.
Finally, opportunities exist across the whole of Asia in the form of digitization. The rise of fintechs, paperless trade, and the use of distributed ledger technology – such as blockchain – could significantly change the way Asian companies trade, making transactions faster, more efficient, more secure, and less expensive.
For a region facing such change – both challenging and exciting – a major question will be whether or not Asian companies are able to seize the opportunities available. Part of this comes down to the trade and business landscapes in which they operate.
This requires political stability – something that is currently relatively fragile following an election in the Philippines, leadership transition in Vietnam, and a cabinet reshuffle in Indonesia.
Secondly, it means adequate access to trade finance. The trade finance gap currently estimated at US$1.6 trillion globally – and US$692 billion in developing Asia alone – is leaving companies without the vital injections of capital they require for business sustainability and growth.
Finally, it means jettisoning inefficient and less secure manual trade processes, in favour of faster and safer digital systems – something trade finance has so far been slow to accept.
The solution is collaboration: between global and local banks, and also within the trade finance industry as a whole. Banks have a significant role to play in guiding companies through the coming changes in Asia. While certainly a challenge – in an increasingly complex trade, regulatory, political, and financial landscape – through collaboration, increased focus on digital techniques, and strong correspondent relationships, there is great potential for success.
This article provides a preview of one of the discussions that will take place at the ICC Banking Commission’s 2017 Annual Meeting – taking place on 3-4 April in Jakarta. Register now to catch this panel, and other key discussions reflecting on and influencing the global trade finance landscape. https://en.xing-events.com/JKT-ICCBCAM.html?page=1383394
The views expressed herein are those of the author only and do not reflect the views of BNY Mellon or any of its subsidiaries or affiliates. This does not constitute treasury services advice, or any other business or legal advice, and it should not be used or relied upon as such.
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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