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vincentvelour · 8 years ago

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Why You Need to Know the Basics of Border Adjustment Tax

3/22/2017

By Sarah Parneta, US Tax Manager, Radius

Although uncertainty surrounding the nature and timing of US corporate tax reform continues, there is a general consensus that some type of reform is likely. New US Treasury Secretary Steven Mnuchin told The Wall Street Journal last month that, as the Journal puts it, the Trump White House is “working with House and Senate Republicans to smooth over differences among them on tax policy, with the aim of passing major legislation before Congress leaves for its August recess.”

Trump and Mnuchin believe tax reforms could spur US economic growth to a rate of three percent or higher, which according to the Journal would be a substantial increase over the average rate of about two percent in the last decade.

Trump and Republican lawmakers are considering some type of tax on imports, although what form that tax will take is still unclear. The House GOP “Better Way for Tax Reform” plan (also known as the Blueprint or the Ryan Plan) calls for a complete replacement of the current US corporate income tax with a destination-based cash flow tax commonly referred to as a border adjustment tax (BAT). As the full text of the Blueprint explains, “border adjustments mean that it does not matter where a company is incorporated; sales to US customers are taxed and sales to foreign customers are exempt, regardless of whether the taxpayer is foreign or domestic.”

In the past, President Trump had made statements about imposing tariffs on specific countries and had rejected the idea of imposing a BAT. More recently, however, he has signaled that some form of BAT may be included in his tax plan. In an interview with Reuters last month, Trump said, “I certainly support a form of tax on the border because everybody else does. … we’re one of the very few countries, possibly the only country, that has no border tax.”

If House GOP leaders and Trump have their way, then, BAT could replace the existing US Federal corporate income tax code. So US corporate leaders need to familiarize themselves with the basics of BAT if they haven’t already.

A US border adjustment tax would likely work in the following way, broadly speaking:

The US corporate tax rate would be lowered from 35 to 20 percent.

Sales within the US would be taxable.

Sales made to countries outside the US would be exempt from the US BAT.

The cost of imported parts or finished goods for use or sale in the US would no longer be deductible for tax purposes.

Interest expense would be non-deductible, although interest deductions could be carried forward.

Capital expenditures would be immediately deductible (as opposed to depreciated).

If a BAT is implemented in the US, we would likely see the following effects:

Multinational companies will simplify their corporate structures.

The use of IP holding companies may become obsolete.

US domestic R&D will be encouraged.

Needless to say, there are opponents and proponents of implementing a border adjustment tax in the US. US manufacturers and exporters are of course supporters of border adjustment, since income on exports would not be taxable. A Wall Street Journal article on the subject notes that some profitable exporters under a BAT system could actually claim losses on their US corporate tax returns. While that would be welcome news for those exporters, the Journal adds that “the prospect of profitable companies paying no taxes poses a political problem for [BAT] proponents.”

US corporate leaders must know the basics of border adjustment tax.Tweet this

Other US industries — like retailers, who rely heavily on imported goods and related deductions — are against a possible move to a BAT system. A CNBC article explains that 95 percent of clothing and shoes sold in the US are manufactured in other countries. The article poses a scenario in which the proposed GOP plan would raise taxes on a $100 sweater from $1.75 under our current corporate tax system to $17 under a BAT system. It adds that economists are divided as to whether and how much the dollar would appreciate to offset that burden.

When it comes to BAT in particular and corporate tax reform more generally, US exporters, importers and consumers are left in an increasingly familiar situation. That is: uncertainty will continue, at least into the near future.

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vincentvelour · 8 years ago

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Global Glance: March 20, 2017

3/20/2017

A quick look at intriguing international stories

By John Bostwick, Managing Editor, Radius

Air Pollution Gives Rise to a New Global Market That’s Both Laughable and Disturbing

Back in 2014, Radius published a blog post by Ping Chen on air pollution in China, in particular its effects on the ability of foreign-owned businesses to place expatriate workers in Beijing. The post was written on the cusp of a Chinese government initiative that would invest the equivalent of about $8 billion to improve Beijing’s air quality by among other things reducing the number of coal-burning power plants and limiting passenger-vehicle traffic.

A 2017 article in The Economist explains that the initiative was part of a wider government plan known as the “war on pollution.” The effort achieved “some headway in improving [China’s] environment,” including making the country’s legendary smog “at least a bit lighter.” A graphic in the article shows a notable decline in air pollution (measured by particulate matter, or PM) from near the start of 2014 to late 2015, when PM numbers began to rise again. The culprit, The Economist notes, was (and continues to be) a recent “rebound in heavy industry” in China, including increased production of steel, iron and cement.

An article last week in The Guardian indicates that there’s another reason for China’s recent “extreme air pollution events,” or “airpocalypses.” The Guardian says that scientists at Georgia Tech have found global warming has precipitated Arctic ice-melting and unusually heavy snows in Siberia, both of which “are changing winter weather patterns over east China.” Basically, air masses are sitting over China like stalled traffic, “trapping pollution and leading to the buildup of extreme levels of toxic air.” The article adds grimly that air pollution is responsible for 1.4 million deaths in China annually. That number could grow given that Georgia Tech researchers “concluded that ‘extreme haze events in winter will likely occur at a higher frequency in China’ as climate change continues to heat up the Arctic.”

To see some photos of China’s air-pollution problem, check out this Business Insider article, which includes a particularly eerie shot of three couples dancing in a dark miasma. The dancers, and virtually every other subject in the photos, are wearing surgical masks as protection against smog. Wearing these masks is a cultural trend in China and other East Asian nations, as a 2014 Quartz article explains. Quartz confirms what most viewers of the Business Insider photo piece will have suspected: that “woven-cloth surgical masks provide minimal protection from environmental viruses” and (presumably) the ill effects of particulate pollution.

The Quartz article suggests that the popularity of surgical masks in East Asia may be rooted in “Taoism and the health precepts of Traditional Chinese Medicine, in which breath and breathing are seen as a central element in good health.” These precepts predate “the germ theory of disease, and [extend] into the very foundations of East Asian culture.” (Interestingly, the article notes that some studies have found masks now also function for some — especially women — as “social firewalls” intended to discourage human interaction and harassment.)

Peddling canned air is at once laughable, deplorable, understandable and terrifying.Tweet this

All of which brings us to a remarkable new global business trend: the canning and selling of “fresh” air. Reuters reported last Friday that amid government pledges to clean up China’s smog crisis, “a state-backed firm is doing brisk business selling 48 yuan ($6.95) cans of fresh air bottled in a forest in western China.” In other words, the Chinese state has found a way to cash in on its own air pollution. In a passage fit for a heavy-handed satirical novel, Reuters quotes a sales person for the Chinese air-canning company: “We set up a factory in Ningdong Forest Park in Shaanxi province and compress air directly into the bottle. … Consumers will feel like they are breathing in the forest.”

Not surprisingly, there has been according to Reuters “widespread criticism” of canned air on China’s social media platform Weibo. But critics apparently haven’t significantly reduced demand. Reuters says the “the first batch of Qinling Forest Oxygen-Enriched Air [has] sold out.”

For surreal photos of what appear to be members of the Chinese military inhaling the canned air, check out the incomparably titled article in SINA, “Air from Mount Qinling sells at 18 yuan per bottle, ‘smells like forest’.” One picture’s caption reads (verbatim): “Liu Changrong, head of local forestry bureau said that the idea of selling air first came to their mind about one year ago, when the smog in Xi’an was severe. After investigation, the bureau built an assembly line to produce bottled air with about 300,000 yuan ($44,117 USD).”

That “local forestry bureau” just may have come up with the idea to “sell air” to fellow Chinese citizens on its own, but I doubt it. CNN reported back in 2015 that a Canadian company called Vitality Airs shipped 500 canisters to China “filled with fresh air from the Rocky Mountain town of Banff” and the cans sold out in two weeks at a the equivalent of $14 to $20 a pop.

That article says Vitality Air’s cofounder Moses Lam “came up with the business idea [in 2014] after listing a bag of ziplocked air on eBay, which sold for 99 cents.” He’s quoted as saying, "We wanted to do something fun and disruptive so we decided to see if we could sell air." Lam says that Canadians buy canned air more or less as a gag, but adds, “"In North America, we take our fresh air for granted but in China the situation is very different."

An article published about Lam’s company and similar ventures was published in Mashable five months after the CNN piece. By then, Vitality Air was “scrambling to keep up with demand from China,” with a local representative quoted by CNN as saying: “Our Chinese website keeps crashing. We are getting orders from all over the country, not just from the wealthier cities. When the air is bad, we see spikes in sales.”

CNN rightly emphasizes that while the business of selling canned air in China is basically absurd, it is also part of a trend of China’s “growing upper and middle classes willing to spend on the finer things in life.” The demand for the canned air also springs from a deadly serious health crisis. The article quotes a director of the World Health Organization as saying, “Urban air pollution continues to rise at an alarming rate, wreaking havoc on human health.” One Canadian expat based in Beijing told Mashable that he first “received a can of air for Christmas as a joke from a friend from home” but now he is “addicted.” He spoke on condition of anonymity since he was embarrassed that he keeps a can of air at work to relieve stress.

Mashable points out that Vitality Air “is just one of a variety of companies” selling canned air in China. The New York Times published a story on the trend a few months later, in October of 2016, noting that “sales of bottled air from fresh-smelling places are taking off,” not only in China but in other “smog-choked [Asian] cities.” The Times says that one Australian company “plans to ship about 40,000 containers a month to China starting in December, and then expand to India, Malaysia, Chile and the Middle East.”

Peddling canned air, then, is a global business trend that’s at once laughable, deplorable, understandable and terrifying. Canning air in factories, and shipping those cans long distances, will only increase global warming and pollution, the very problems canned air tries to address, however fleetingly. The CNN article quotes a professor from a Hong Kong university, who makes the critical if obvious point that “buying bottles of air [is] not a practical solution to China's air pollution. … We need to filter out the particles, the invisible killers, from the air.”

It was at first easy to laugh off canned air from my desk in Boston — where skies outside my window were at the time clear and blue — and rest assured I laughed plenty when I first came across that Reuters article on Friday. But it’s not easy to laugh after reading about the problems that gave rise to the surreal canned-air market, or about the Beijing-based technology worker Pan Li, who told the Times that canned air made his “lungs feel clean,” and that in his polluted environment he’s “willing to try anything.”

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vincentvelour · 8 years ago

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2017: The Year of UK Pension Auto Enrolment for Small Businesses

3/15/2017

By Scott Biggart, Compensation and Benefits Consultant, Radius

The UK government’s pension automatic enrolment legislation continues to roll out on schedule. As we noted in a guide on the subject, auto enrolment is the biggest regulatory change to UK workplace pensions in a generation. It demands that all UK employers implement a pension plan that is compliant with the legislation by early 2018. (The rollout has been staggered based on employer size, and all larger UK employers have already reached their staging deadlines.) All compliant plans must automatically enroll employees, with mandatory minimum contributions from employers and employees.

My colleague Martin Irwin has already written an excellent post on automatic enrolment, and I won’t repeat here all the information and advice he covered. (Needless to say, I urge you to read that post and the automatic enrolment guide I mentioned if you haven’t already.) Given the importance of the subject, however, and the fact that the automatic enrolment law will affect nearly a million UK employers this calendar year, it’s worth reiterating some of the main points we’ve covered and adding a few more considerations.

First and perhaps most critically: Automatic enrolment is now officially a reality for most UK employers, not a distant obligation they can afford to plan for later. A UK Pensions Regulator forecast published six months ago shows that the overwhelming majority of UK employers will reach their respective staging deadlines starting in calendar year 2017.

2017 is, in short, the year when all small (5-49 staff) and micro (1-4 staff) UK employers will have to comply with automatic enrolment legislation. The Pensions Regulator forecasts that between January and December 2017, more than 800,000 employers will reach their staging dates; that’s more than double the number that reached their deadlines in 2016. It is the employer’s responsibility for ensuring they meet their legal duties regarding pensions, and any business missing its staging date will run the risk of being fined.

The UK's auto enrolment law will affect nearly a million UK employers in 2017.Tweet this

One fact that’s often lost on employers struggling to comply with the legislation is that they will need to deploy a communication strategy to explain the changes to their employees. Radius’ own automatic enrolment guide can be an excellent source of information when drafting your communications. Employers should also consult the UK Pensions Regulator website. That site includes a section called Communicating with Your Scheme Members, which lists key points to address in communications and has a useful guide on what kinds of conversations employers should expect to have with their staff about the new requirements. Once drafted and approved, an employer’s communication strategy should be implemented as soon as possible.

As well as briefing employees, companies also need to ensure that their payroll processes can support the new legislation and that new starters are enrolled in the pension scheme as soon as they join the business. With so many small businesses offering pension schemes for the first time through auto enrolment, 2017 is set to become a key year in the government's drive to modernize the way firms of this size manage payroll and accounts.

Given the increasing volume of UK employers implementing pension plans, plan providers are struggling to meet demand. It is already becoming apparent this year that financial advisers and pension providers are feeling the pressure, and many are pushing out turnaround times on their services and agreements. In lieu of finding a private provider, many UK businesses — particularly SMEs who won’t have the collective pension contributions to attract providers — will have to avail themselves of the government-backed National Employment Savings Trust (NEST) pension scheme.

Martin Irwin’s post on auto enrolment is particularly good on the NEST scheme and also highlights some of the pitfalls that many employers, large and small, encounter when using it. These pitfalls can be avoided if employers allow themselves plenty of time to plan and set up a scheme.

In short, UK businesses that haven’t reached their staging dates can no longer afford to put off planning. Developing and implementing an employee-communication strategy and engaging with a plan provider as soon as possible are absolutely critical to minimizing risks and reducing the stress and hassle that come from ignoring deadlines until the last minute.

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vincentvelour · 8 years ago

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What You Need to Consider in a Time of Tightening Global Immigration Controls

3/8/2017

By Mark Chong, Director, Global Immigration & Leader of Singapore Operations, Radius

After the Brexit referendum and Donald Trump’s inauguration, it didn’t take long for global businesses big and small to realize that immigration policy decisions can become a worrying threat to conducting cross-border business. Reports in the media about President Trump’s executive order banning travel to the United States from seven countries (now six, with the removal of Iraq) have brought frowns to business travelers from around the world who are unsure if other countries will be next on the list.

As Trump’s executive order made clear, changes to a country’s immigration policies can be made effective immediately and without prior warning. Those of us in the business of providing immigration advice have all heard horror stories of travelers being stopped by border control, questioned and sent back to their country of origin. Some unfortunate travelers may even be detained for several days before being deported, and may be sent home with a travel ban.

Amid the many media stories involving immigration — from those involving Brexit, a potential wall on the US-Mexico border, the recent US travel ban and more — it’s important to keep in mind that stringent checks on travelers by border control staff in virtually all jurisdictions are nothing new. Given this and changing immigration laws and enforcement practices, travelers should be prepared to face relentless questioning when making a trip to the US or any other country.

It’s also worth keeping in mind that virtually all countries seek to protect their borders to ensure visitors will not threaten security or overstay and eventually become a burden to the government. In other words, playing by the host’s rules is not a new concept.

Here is a list of items business travelers and workers going on expat assignments should consider before traveling to another country. Use it to minimize your travel risks in today’s increasingly strict immigration environment.

Provide Relevant Evidence Supporting Your Business Travel

Authorities often want to see information relevant to the people you are visiting, including their places of employment and how your visit relates to them. Supporting information may include business cards, email correspondence, support letters from the home location as well as an invitation letter from the host entity. A detailed agenda will often help convince authorities that your visit is primarily for business purposes.

Stringent checks on travelers by border control staff are nothing new.Tweet this

Showing return tickets and hotel reservations will also help assure authorities of your intentions to leave the host country promptly after your business is completed. That said, a few travel maps showing places of interest and expressing intentions to visit these locations can also help lighten conversations with the border officers, as it is normal for business travelers to seek some touristy fun after business is done.

Obtain the Relevant Visa and Complete Any Necessary Electronic Applications

Travelers must conduct research well in advance of travel to determine the correct visa type for the intended travel. Some countries — such as the US, with its Electronic System for Travel Authorization (ESTA) — also have electronic application requirements. In addition, you should keep abreast of government travel advisory notices, which are subject to change without notice at the discretion of relevant authorities.

One might think that with the necessary visa endorsed on a traveler’s passport, along with any completed electronic applications, entry into a country would be virtually guaranteed. Unfortunately, this isn’t the case.

A visa does not give a traveler an automatic right to enter a country; visas are still subject to border-officer approval when a traveler enters a country. It is in fact not uncommon for visitors with visas in place to be rejected at the border and turned away, either because the traveler is on the wrong type of visa, because he or she has failed to convince border officers as to the real purpose of the visit or for other reasons.

Choose “Business” over “Work” When on Business Travel

Choice of words can be important when entering a country on a short-term business trip. Border officers are wary creatures, always on the lookout for travelers who claim they are in the country to perform work but who don’t possess the relevant supporting documents.

In discussions with border officials, travelers should keep in mind that acceptable business trips generally entail nonpaid activities such as meetings, networking and fact-finding missions. When describing your trip, beware of using the word “work” or mentioning certain activities that could be associated with revenue generation and that could be carried out by local nationals. To say one is in a foreign country “to carry out work” will lead to further questions from border officials, possibly leading them to conclude you intend to enter the country to take jobs away from the local talent pool.

Do It Right to Remain Compliant

If you intend to enter a country to engage in long-term work, you’ll need to obtain prior approval from the relevant authorities. Typically, you’ll need to apply for a particular type of visa based on the duration of your stay and nature of your employment. In the US, for example, a traveler may need to obtain the common H1-B or L type category visa. In such cases, an individual will have to meet certain criteria and get official approval before being able to embark on his or her journey to the US to commence employment.

There can be serious consequences for breaking work-related or business-travel-related immigration rules. Failure to comply may mean future travel bans and/or fines for the traveler. The traveler’s company, moreover, may find its status and ability to do business in the host country compromised.

Businesses looking to send employees to the US, the UK or any other country should seek to understand the reasons behind the target-country government’s immigration policies, including the reasons behind any recent or proposed changes. Typically, and on a very basic level, local authorities are looking to protect their borders from security threats and ensure that local jobs remain available for local citizens.

President Trump’s administration’s ongoing changes to immigration laws are in fact part of a larger pattern of executives and lawmakers in developed countries tightening restrictions to ensure job security for their local citizens, including recent local graduates and older, more experienced job seekers.

In both developing and developed nations, there is usually a significant talent pool of hungry, well-educated local citizens. It is important to ensure these skilled individuals can play a part in contributing to their local economies. That importance goes a long ways towards justifying imposing tougher measures on visitation rights.

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vincentvelour · 8 years ago

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Global Glance: March 6, 2017

3/6/2017

A quick look at intriguing international stories

By John Bostwick, Managing Editor, Radius

Is Donald Trump Damaging the US Higher Ed Cash Cow?

Less than a week after US voters elected Donald Trump president, the Institute of International Education (IIE) published its annual Open Doors report, which collects information on international students in the United States. The report’s statistics show a growing international-student presence in the US higher-education system. Some professors, administrators and students worry, however, that a Trump White House is already reversing this trend.

Much of Trump’s rhetoric during and after his campaign has emphasized the importance tightening US immigration restrictions and, more generally, placing Americans’ interests above those of other citizens. The following passage from his inaugural address neatly captures his program: “Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families.”

The tone of that speech was bleak, with Trump citing (among other elements of what he called ongoing “American carnage”) that the US has “an education system, flush with cash, but which leaves our young and beautiful students deprived of knowledge.”

The IIE Open Doors report speaks, perhaps, to a different reality as regards the US education system. US higher education is in fact a highly successful, attractive and significant element of the country’s economy. The IIE study indicates that last year the number of international students enrolled in US higher ed institutions exceeded one million for the first time ever, and represented a 7 percent rise over the previous academic year.

Last year’s numbers aren’t aberrations. The IIE report says that the 2015/16 academic year is the tenth consecutive year of growth for international students in the US and that “there are now 85 percent more international students studying at US colleges and universities than were reported a decade ago.”

While those numbers are significant, it’s worth noting that even at over one million people, international students make up only about 5 percent of the total number of students enrolled in US colleges and universities. In other words, international students don’t take up a major portion of slots that might otherwise go to US citizens.

Institutions are of course aware of the need to achieve geographically and culturally balanced student bodies. I happened to take a tour of the University of Massachusetts at Amherst last month, and the guide there noted without prompting that although UMass has a large, growing and valued population of international students, the university has not decreased the number of domestic students it lets in. (Obviously, total enrollment has increased to allow for this.) For its part, the IIE report notes that in previous years there has been only “a small decline in the number of American students enrolled in US higher education.”

International students here generally pay full freight, helping subsidize the educations of many US students.Tweet this

Recruiting prospects from other countries for their varied intellectual talents and cultural perspectives is all good, but there’s another significant reason US higher-ed institutions are welcoming more and more international students: their money. The IIE report explains that “international students contributed more than $35 billion to the US economy in 2015, according to the US Department of Commerce — a large increase over the previous year’s total of $31 billion.” It adds that “about 75 percent of all international students receive the majority of their funds from sources outside of the United States.” In other words, international students generally pay full freight, in effect helping subsidize the educations of many US students who receive scholarships and financial aid.

Numerous articles in the run-up to last November’s election noted that Trump’s campaign rhetoric troubled international students inside the US and prospective students abroad. A US News article, for example, cited a survey of 7,000 prospective international students who were asked about studying in the US after a (then-hypothetical) Trump victory. While about a third of the respondents from China and Russia said they’d be “more likely to consider studying in the US after the election,” three times as many respondents from the Middle East “said they were less likely to study in the US than more likely to.”

President Trump took swift action on immigration once in office, issuing an executive order in January banning immigration from seven Muslim-majority countries. Less than a week after the order, USA Today reported that some international students had “already been detained from re-entering the US.” That article notes that, based on Department of Homeland Security stats related to F1 and M1 student visas, “there are 23,763 international students studying in the US affected by the travel ban.” Over half of that total — nearly 15,000 students — come from Iran. Based on the Homeland Security numbers, lost revenue (i.e., lost tuition, fees and other expenses) from the ban could top $700 million dollars.

Those lost revenues only represent the possible direct costs to US institutions that could result from Trump’s travel ban. The ban, Trump’s anti-immigrant rhetoric and other measures (such as the proposed wall along the Mexico-US border) could dissuade international students from non-banned countries from staying in or enrolling in US institutions.

Such a scenario would not just affect the bottom lines of higher-education institutions. A Bloomberg article explains that university presidents fear a significant loss of international students could “disrupt the talent pipeline” in the US workforce and “curb economic growth.” A Seton Hall professor of higher education is quoted in the article as saying, “These are very financially desirable students. … These tend to be people who earn quite a bit of money, come up with new innovations, and they tend to pay a lot of taxes.”

Last Wednesday, the White House revised the January 27 executive order, lifting the travel ban on citizens from one of the countries (Iraq). The dropping of one country — which happens to be a US ally in the fight against global terrorism — is presumably a step in the right direction as far as international students are concerned. But The Washington Post reports that “when it is signed … the order is still expected to include a host of significant changes,” further muddling the situation and presumably causing unease among the international-student community. Moreover, according to statistics from the USA Today article, students from Iraq make up less than 5 percent of the total students from the seven nations that appeared on the original executive order.

It would be a mistake to assume that prospective students outside the US are not paying attention to Trump’s policies and how they might affect their lives, not only as students but (perhaps more importantly) as potential US-based workers who will need visas. The Chicago Tribune interviewed Dayna Crabb, an international recruiter at a US junior college who visited Vietnam prior to the US election. Prospective students in the Asian nation grilled Crabb on which US candidate she supported. Crabb later told the Tribune: “That was alarming for us as recruitment professionals to see that it's impacting their decisions that much. ... These girls said they would race home after school to put on the news or watch what happened at the debates. I felt like these high school students in other countries probably were more in tune with what was going on than even our own local students.”

A Northwestern University student from China quoted by the Tribune confirms that “even the perception of being inhospitable to immigrants could make foreign applicants jittery.” According to IIE, China has over 300,000 citizens studying in US higher-ed institutions, by far the highest from any one nation, nearly twice as many as India, the next country on the list.

An article published in PRI.org last month quotes a former US Treasury official as saying, “There’s no question that higher education is one of the most important US exports to China.” Another expert quoted observes that, “If a real trade war did erupt, and things became very, very contentious, Chinese students could become a target of the Chinese government.” That article goes on to say that economists are predicting that “Trump’s trade rhetoric could convince foreign students to seek degrees in other English-speaking countries like Canada and Australia.”

Some experts quoted in the articles cited here are optimistic that the US higher education system will emerge more or less unscathed after Trump’s presidency. But there’s little doubt that the current White House has already started to diminish the global appeal of a highly profitable and respected sector of the US economy.

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vincentvelour · 8 years ago

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Key Points from India’s 2017 Budget Announcement

3/1/2017

By Prateek Dhingra, Consultant, Transfer Pricing, Radius

While the tax system in India undergoes an overhaul with the introduction of a goods and service tax, finance minister Arun Jaitley presented the government’s budget to the Indian Parliament. Jaitley made the announcement on February 1, 2017 for fiscal year 2017-2018, which starts April 1.

For businesses operating in India, the new budget’s messages are mostly positive. India’s corporate tax rate for smaller companies will be reduced to 25 percent by 2020. Not only will this bring welcome relief to existing businesses, it will likely further induce foreign companies to enter India’s large economy, which is currently growing at a robust rate of about seven percent.

Despite this trend, the area of speedy dispute resolution still needs improvement. The World Bank currently ranks India 130 out of 190 nations in ease of doing business, which is up 12 spots from 2015 but still not a great advertisement for prospective multinationals.

India’s market promise still far outweighs its bureaucratic challenges for many multinationals. Apple, for example, has reportedly struck a deal to manufacture phones in India. For those multinationals operating in or considering expanding into India, here is a summary of key points from its new budget.

Key Points for Businesses

Though there was an expectation in the corporate world that tax rates would be reduced across board, only smaller companies will get relief. Companies with a turnover of up to INR 500 million (about $7.4 million) will now be taxed at the corporate rate of 25 percent instead of the present rate of 30 percent. According to the government, such companies form 96 percent of the total companies filing returns.

The government has decided to abolish a body that examines large foreign investment proposals called the Foreign Investment Promotion Board (FIPB). This move should reduce red tape and make it easier for overseas investors to establish operations in India. It is proposed that FIPB will be phased out in FY2017-18. In addition, the Foreign Direct Investment Policy (FDI) will be liberalized.

India’s Minimum Alternate Tax (MAT) will likely continue. The budget notes that although “there is a strong demand for abolition of MAT … it is not practical to remove or reduce MAT at present.” Jaitley proposes that companies be allowed to “carry forward … MAT [credit] up to a period of 15 years instead of 10 years at present.”

In line with BEPS Action Plan 4 and the introduction of thin capitalization rules, interest deduction is proposed to be restricted to 30 percent of EBITDA in case of payment of interest to related parties or even unrelated parties (if the amount is guaranteed by an associated enterprise/related party). While debt funding in India has always been subject to limitations of an external commercial borrowing (ECB) framework, such disallowance will require multinational companies to rethink their funding plans for Indian operations.

Key Point for Startups

In order to promote startups in India, the condition of holding 51 percent shareholding has been done away with for eligible startups. This proposal to allow startups to carry forward losses should provide considerable relief.

Key Point Related to Transfer Pricing

In keeping with OECD guidelines on transfer pricing, the budget proposes that the assessee must make a “secondary adjustment where the primary adjustment to the transfer price has been made in certain cases.” Many countries already provide for secondary adjustments, which may apply to deemed dividends, equity contributions or loans.

Key Points for Individuals

The government has halved the tax rate on incomes of individuals between INR 250,000 and INR 500,000 to 5 percent.

To make up for the tax-revenue loss from the above cut, individuals with incomes between INR 5 million and INR 10 million will be levied a surcharge of 10 percent of tax payable.

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vincentvelour · 8 years ago

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A Summary of Singapore’s 2017 Budget

2/27/2017

By Wanying Zheng, Advisory Manager, Radius

On February 20, Singapore’s Finance Minister Heng Swee Keat announced the Singapore budget for the 2017 financial year. Since the text is over 50 pages long, we’re summarizing its most important points for foreign entities doing business in Singapore and for those considering expanding there.

Many changes around the globe in 2016 — notably in the US and the UK — have posed potential risks to Singapore, whose economy is heavily dependent on international trade. The budget announced last week echoes Singapore’s 2016 budget in that it emphasizes the need for: flexibility in the face of global economic and political change; a healthy, green Singapore economy; and continued innovation and increased productivity.

In order to better equip the Singapore economy for the ever-changing, digitalized global environment, the 2017 budget aims to continue to support small businesses and enterprises through a further increase in the corporate income tax rebate, additional initiatives such as the Go Digital Program and intellectual property development incentives. Heng points out that “enterprises are the heart of vibrant economies,” and places on record Singapore’s commitment to ensuring that enterprises operating in the country develop and strengthen, particularly by using digital technology and embracing innovation.

The budget also introduces a carbon tax and a vehicular emissions scheme, restructures diesel taxes and increases water prices, all to encourage a sustainable environment and spur economic growth. The introduction of the carbon tax (effective 2019), along with the diesel tax changes, implies a necessary modification of the Singapore tax structure and a gradual shift of Singapore’s tax base from direct tax to indirect tax.

Singapore’s budget introduces a carbon tax and an emissions scheme, changes diesel taxes and ups water prices.Tweet this

For individuals in Singapore, the budget proposes personal income tax reliefs at 20 percent capped at SGD$500 for income earned in 2016 and a marginal increase in the GST voucher. Heng acknowledges the importance of developing the capabilities of the workforce in Singapore. He proposes the Global Innovation Alliance for Singaporeans so that local citizens can gain experience overseas. He also proposes innovation programs, as well as the SkillsFuture Leadership Development Initiative to grow leaders and help businesses scale up and expand globally.

Overall, the budget is likely to have minimal immediate effects for most Singaporeans and most businesses operating in Singapore. However, the budget’s proposals will likely benefit smaller businesses and the Singaporean workforce in the near future.

Here is a summary of the 2017 budget’s key points.

Key Points for Businesses

The corporate income tax rebate remains at 50 percent for SMEs, but the cap will be increased from SGD$20,000 to $25,000 for YA2017.

The corporate income tax rebate is extended for another year at 20 percent, with a cap at $10,000.

The National Research Fund and the National Productivity Fund will both be increased.

Funds will be allocated to help Singapore-based companies scale up and internationalize.

Over $80 million of budget will be devoted to helping SMEs go digital under the SMEs Go Digital Program, including building an SME technology hub to provide specialized advice.

Intellectual property development incentives will be introduced to encourage research and development.

Investments will be made to improve productivity and innovation in the construction industry.

A carbon tax will be introduced in 2019, and there will be changes to diesel taxes.

A review of the goods and services tax on imported digitized services has been proposed.

Additional special employment credit will be extended for businesses to retain older members of the workforce.

Water prices will go up by 30 percent in two phases over the next two years.

There will be further funding for Singapore’s cyber security program.

Key Points for Individuals

A personal income tax rebate of 20 percent of tax payable will be made available, with a cap at SGD$500 for income earned in 2016.

The Global Innovation Alliance and SkillsFuture Leadership Development initiatives will be introduced to development Singapore’s workforce.

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vincentvelour · 8 years ago

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How BEPS Is Changing US Tax Regulations

2/22/2017

By Sonia Kanjee, US Corporate Tax Manager, Radius

Radius has published various informational pieces on the subject of base erosion and profit shifting (BEPS), from a 2013 Country Compliance Alert to a recent blog post on country-by-country reporting requirements. Until now, these resources have tended to focus on how the Organization for Economic Cooperation and Development’s BEPS recommendations have affected jurisdictions outside the US. This post addresses how OECD guidance is changing US corporate tax regulations.

Background

As the OECD website explains, “BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. … This undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level.” The OECD and G20 have developed 15 BEPS actions that can be used by governments to ensure “that profits are taxed where economic activities generating the profits are performed and where value is created.”

The BEPS framework encompasses many consensus-based tax rules designed to curb tax avoidance. The implementation of BEPS will take many different forms depending on each country’s current tax laws, and the enacting of new legislation may be staggered. But while each tax jurisdiction will implement BEPS guidelines differently and at its own pace, there is one certainty: multinationals everywhere are under increased scrutiny from tax authorities around the globe.

As a result, multinationals must be vigilant about the changing regulations in all the jurisdictions where they operate and be aware that there may be timing gaps in the application of the BEPS framework by country.

The Impact of BEPS on US Tax Rules

As for the US tax landscape as it relates to BEPS, multinationals should keep apprised of two critical areas:

The implementation of a country-by-country reporting requirement

Changes to income tax treaties between the US and non-US countries

Country-by-country reporting (CbCR) requirements have already begun to be implemented by US tax authorities. As of June 2016, final regulations were established detailing the new filing requirement for CbCR. The highlights are:

Form 8975 will need to be filed for entities with tax years beginning after June 30, 2016, with a voluntary filing possible for those with tax years beginning between January 1 and June 30, 2016. This form must be filed attached to the entity’s income tax return.

The filing requirement applies to US entities that are the ultimate parent of a multinational enterprise (MNE) group that collectively has revenue of at least $850 million.

Aggregate amounts must be reported by country for a number of informational items including revenue, profit, tax, capital, employees and assets.

Penalties will apply for noncompliance either in monetary form or in the reduction of potential foreign tax credits.

The US Treasury proposed changes to the US Model Income Tax Convention (referred to as the "US Model") in February 2016. A principal focus of the proposed changes is to limit the availability of treaty benefits in order to prevent the double non-taxation of cross-border transactions.

"Double non-taxation" refers to a taxpayer’s use of income tax treaties and preferential tax regimes to yield very low or zero tax liability.

Currently, there is opportunity for taxpayers to exploit provisions of income tax treaties between countries. The BEPS framework aims to prevent:

Treaty shopping

Shifting income to various countries in an effort to erode tax base in higher tax-rate countries

Creating permanent establishments in a low- or no-tax location

Double non-taxation by claiming deductions in one jurisdiction and preferential tax rates in another

The US Treasury’s discussion of exempt permanent establishment (PE) and special tax regimes are key items to note among the proposed changes to the US Model.

Exempt PE

In the proposed US Model, the Treasury aims to disallow treaty benefits with respect to income derived by a resident of a contracting state if that income is attributable to a PE situated outside of the residence state and either

The residence state or third jurisdiction is subject to very low or zero tax liability, or

The PE is situated in a country with which the US does not have a treaty in force and the income is excluded for the residence state’s tax base.

Special Tax Regime

Per the Treasury’s proposed changes, a “special tax regime” is defined as any legislation, regulation or administrative practice that provides a preferential effective rate of tax to income, including through reductions in the tax rate or the tax base, unless an exception applies. Treaty benefits will only be disallowed with respect to interest, royalties or other income if a special tax regime applies with respect to that class of income. This initiative is aimed at preventing related-party income from claiming a deduction in one country and taxing the income at a preferential rate in the other country.

BEPS is changing US corporate tax in two critical areas: CbCR and tax treaties.Tweet this

For companies operating in the US, then, now is the time to review your tax structures and your cross-border activities, including your transfer-pricing practices, documentation and intercompany agreements. Even if you do not meet the US’s current CbCR collective revenue requirement, your transfer-pricing activities could come under scrutiny by US authorities or the authorities from your other countries of operation.

Also, don’t assume that any former advice you may have received related to permanent establishment under an existing tax treaty is either still applicable or will be applicable for much longer. You should review your operations and cross-border activities in light of the proposed US Model Income Tax Convention. You should then be prepared to defend your deductions and to explain why your income is taxed in any particular jurisdiction.

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vincentvelour · 8 years ago

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Global Glance: February 21, 2017

2/21/2017

A quick look at intriguing international stories

By John Bostwick, Managing Editor, Radius

Switzerland Voters Deny Corporate Tax Reform In Another Surprise Referendum Result

Popular votes have made headlines recently for their unforeseen results and for reflecting a widespread dissatisfaction with political and economic elites. They’ve all occurred in the last year, but they now read like a familiar rollcall: Brexit … Italy’s “No” vote on constitutional reforms … the US’s election of Donald Trump.

The latest in the string occurred last week in Switzerland, where voters rejected legislation that would have reformed the country’s opaque and controversial corporate tax system. In keeping with another global voting trend, the polls that preceded the Swiss referendum proved misleading. Most articles indicate the polls had predicted a close race, but those opposing the reform won in a virtual landslide, casting nearly 60% of the ballots.

As its government’s website explains, Switzerland is a federalist state comprised of a single confederation, 26 cantons (i.e., states) and, at the lowest level, communes. The cantons and communes wield a considerable amount of political and economic power. Cantons in fact negotiate their own corporate tax rates with multinationals. This quirk mostly accounts for Switzerland’s unique corporate tax regime, which now finds itself at odds with the Organization for Economic Cooperation and Development and other organizations intent on making the global tax landscape more equitable by reducing base erosion and profit shifting.

A Bloomberg article explains that “the rates multinational companies are charged in Switzerland aren’t usually disclosed, but … those corporations pay on average … less than what they’d incur in the US, Japan, France, the UK and Germany.” Reuters says that some foreign companies “pay virtually no tax above an effective federal tax of 7.8 percent.” This corporate tax system has made Switzerland a haven for “24,000 multinationals looking to lower their tax bills.”

As Apple found last year when the European Commission ruled that it must pay Irish tax authorities €13 billion plus interest, the European Union prohibits giving tax breaks to individual corporations. Switzerland, of course, is not part of the EU, but the country is under serious pressure from Brussels and the OECD to reform its corporate tax laws. Reuters notes that Switzerland promised the OECD in 2014 that it would eliminate the special tax treatment it gives multinationals by 2019.

According to The Wall Street Journal, in order to fulfill this promise the Swiss government proposed to replace the country’s “current patchwork system” with “a corporate rate — lower in most cases — that would apply across firms in a particular canton.” Incentives would be extended for “patent-related revenue, research and development, and capital taxes” and the federal government “would give cantons more than one billion francs ($1 billion) to partially offset any drain on revenue.”

The Swiss parliament passed the proposal into law, so it’s natural to assume that the law would take effect. But Switzerland — which is half the size of South Carolina but has four national languages — is not like most countries. Here’s the government website again: After parliament passes a law, “if 50,000 signatures are collected from Swiss voters or eight cantons demand a referendum within 100 days, then a popular vote is held.” In the case of the proposed corporate tax reforms, the required signatures were obtained in time and the referendum took place.

Given that the proposed reforms were intended to reduce Switzerland’s corporate welfare program, the popular rejection of them may come as a surprise. In fact, opposition to the law came largely from the left. The Reuters article explains that the “No” campaign “was led by a coalition including the Social Democrats, Greens, trade unions and churches, who feared the public would bear the brunt of reduced company tax revenue through cuts in public services or higher personal taxes.”

The reasons voters had for rejecting the law may be valid, but Switzerland must now draft and pass another proposal to honor its commitment to the OECD to reform the country’s tax regime by 2019. The Financial Times indicates that Swiss finance minister Ueli Maurer says the 2019 deadline cannot be met in the wake of the referendum. He now fears multinationals will leave Switzerland “or no longer move to the country as a result of the uncertainty.”

Switzerland also faces the possibility of a backlash, including, CNN notes, “the risk of being ‘blacklisted’ by other nations if it doesn't change its tax system by 2019.” Finance Minister Maurer, as quoted by Reuters, feels that “the more immediate danger [is] that individual countries [will] start double taxation of Swiss-based companies.”

Switzerland, then, is in a precarious position. While it has committed to reforming its tax regime, it must do so without losing a significant number of the many multinationals now operating in the country. If those companies do flee, the economic consequences could be dire. Another Bloomberg article indicates that multinationals “generated around 12 percent of economic output and nine percent of employment in [in Switzerland] in 2015.” And Switzerland must seek to continue to attract and retain cutthroat corporate behemoths at a time when the UK and the US are discussing slashing their own corporate tax rates, moves that would further diminish Switzerland’s attractiveness as a tax haven.

Switzerland’s predicament is a measure of how serious politicians are about complying with OECD/G20 tax guidance. There are moreover serious negative consequences for countries perceived as low-tax havens that give special treatment to large multinationals, up to and including possible blacklisting. The pressure on those countries to comply with OECD guidance is growing.

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vincentvelour · 8 years ago

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Australia Puts Multinationals on Notice: Don’t Shift Profits to Offshore Hubs

2/15/2017

By Sally So, Senior Associate, Advisory, Radius

On January 18, 2017, the Australian Taxation Office (ATO) published Practical Compliance Guideline PCG 2017/1. It outlines the ATO’s approach to transfer pricing (TP) issues related to offshore “hubs,” which are defined in the Guideline as “centralized operating models” established to locate and relocate “certain business activities and operating risks.” In particular, the Guideline is targeted at the use of offshore hubs that carry out functions such as procurement, marketing, sales and distribution. The implication is that the use of such hubs is an artificial or contrived means of shifting profits out of Australia and into lower tax jurisdictions.

The Guideline sets out the ATO’s standard approach to assessing the risk associated with the use of offshore hubs. It presents six color-coded risk zones, ranging from white (“self-assessment of risk rating unnecessary”) to red (“very high risk”). Practically speaking, effective January 1, 2017, companies operating in Australia are required to:

Self-assess the tax risk of any current hub arrangements

Understand their disclosure obligations, including the Reportable Tax Position (RTP), and maintain adequate TP documentation

The issuing of PCG 2017/1 should be taken as a warning for multinationals — those headquartered in Australia and in any other jurisdiction — to be able defend their corporate structures and activities against any ATO allegations of profit shifting in Australia. Multinationals should also regard the ATO’s Guideline as part of a trend of tax authorities in all jurisdictions cracking down on base erosion and profit shifting, aided by the guidance of such groups as the Organization for Economic Cooperation and Development.

The Australian Context

In August 2016, Australia made global headlines in its crackdown of dozens of multinational companies alleged to have avoided taxes through the use of offshore hubs located in low-tax jurisdictions. One such taxpayer, BHP Billiton, is one of the world’s largest resource companies. It’s under ATO review regarding a potential tax liability of around USD $755 million. Specifically, the ATO asserts that BHP Billiton used a Singapore marketing hub to vastly reduce its corporate tax on revenues that should have been taxed in Australia. (Australia’s tax rate is 30 percent, while Singapore’s is 17.)

The Global Context

While Australia is indeed at the forefront of targeting perceived base erosion and profit shifting, many other OECD nations are similarly taking action to strengthen their own tax revenues. Put simply, for companies conducting business globally, there is increased scrutiny from tax authorities.

Australia's new Guideline is part of a trend of tax authorities in all jurisdictions cracking down on profit shifting.Tweet this

The ATO’s newly effective Guideline, then, is not an isolated example of changing tax guidance. From countries adopting the OECD’s BEPS recommendations on a unilateral basis, to changing transfer pricing documentation requirements and country-by-country reporting (CbCR) requirements (which began at the end of 2016), navigating the uncertainty of international tax, and ensuring that your multinational operations are compliant, are critical.

Complying with Changing Legislation in Multiple Jurisdictions

The key to remaining compliant as a global organization is to be armed with up-to-date, accurate information about your own legal and operational structure, and any related domestic and international tax laws. This will require:

Reviewing and documenting your company’s global supply chain

Conducting periodic tax-gap and tax-efficiency reviews

Ensuring that intra-group cross-border transactions are conducted on an “arm’s length” basis

Ensuring that adequate contemporaneous documentation is in place to support intra-group transfer pricing

Ensuring that you understand and comply with the evolving tax laws — and understand the tax-enforcement trends — of all your countries of operation, which almost always requires third-party assistance

For better or worse, corporate taxation and perceived tax avoidance are no longer issues heard only in the boardroom. They are front page news, as last year’s ruling from the European Commission that Apple must repay must repay €13 billion to Irish tax authorities attests. My colleague Tom Lickess wrote about the ruling on this blog, rightly noting that it is a reminder there “are major risks associated with cross-border tax … in a time of increased tax-authority scrutiny, public pressure for corporations to pay their perceived ‘fair share’ of taxes and global initiatives like BEPS that target tax base erosion and profit shifting.” In this time of quickly evolving global tax laws and enforcement, multinationals must be informed — and nimble in their strategies — to protect their bottom lines and reputations.

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vincentvelour · 8 years ago

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Global Glance: February 13, 2017

2/13/2017

A quick look at intriguing international stories

By John Bostwick, Managing Editor, Radius

China’s Massive Railway Investments in Africa

Last month, Public Radio International published a brief piece titled “Five Important News Stories That Aren't About Donald Trump.” It includes a link to an article about a new railway in East Africa largely funded by a Chinese bank. As with so many global stories, President Trump — and by extension his foreign policies — are essential to providing context. In this case, the new railway project may provide evidence (or more evidence) that China’s global aspirations are growing relative to those of the US.

Africa has a history of outsiders building railroads on the continent. A 2015 BBC article about a project in Ethiopia explains that many of Africa’s existing railways were “built by mining companies in the colonial era to link industrial sites to ports.” A New York Times piece says that many of those lines “fell into disrepair in the decades after their colonies achieved independence.”

Now, a new and emerging foreign power is hoping to enrich itself by building railways in Africa, some of which run right alongside their dilapidated colonial forerunners. The BBC article notes that Chinese banks and corporations are funding and building railways in Angola, DR Congo, Kenya, Nigeria and Tanzania. These massive projects are part of China’s One Belt One Road initiative (OBOR). CNBC explains that OBOR began in 2013 under Chinese president Xi Jinping, and “aims to revive the ancient Silk Road and strengthen Chinese ties with more than 60 countries across Asia, Europe and East Africa through infrastructure, trade and investment.”

Obviously, China’s infrastructure projects in sub-Saharan Africa and other developing regions aren’t undertaken solely for benevolent reasons, or even solely for economic ones. An expert told CNBC, for example, that OBOR “might be more about China's strategy to extend its global influence, rather than meeting the infrastructure needs of countries involved or commercial logic.” An article in Voice of America about China-backed African railways observes that while “Chinese projects benefit African workers, the foremen and technicians tend to be Chinese while the manual laborers are generally African.” That article (hardly from a disinterested source, it should be said) claims that, in the long term, China “would like to shift labor-intensive industrial work to places like Africa.”

Whatever Beijing’s motives, the China-backed railways proliferating across Africa offer great promise to the local economies, assuming the loans can be repaid and the tracks and trains maintained. The most prominent project at the moment is a recently opened railway running between the port of Djibouti and Addis Ababa, Ethiopia’s capital. (That's a picture of the Addis Ababa railway station above.) The Financial Times reported last month that about 2,000 people were on hand to mark the opening of the line, which is Africa’s first electric, standard gauge international railway. (Most of the old colonial tracks are narrow-gauge tracks with slower speed limits.)

Something exciting and potentially transformative is afoot with African railroadsTweet this

The Financial Times explains that the line will start commercial services “in a few months.” It adds that the time it takes “to transport a container from Addis Ababa to Djibouti should fall from three days to 10 hours and the cost is expected to be slashed by a third.” Currently, commercial transport — and humanitarian aid — between the coastal Djibouti and the landlocked, drought-plagued Ethiopia is conducted by truck. A representative of Djibouti’s Port Authority quoted in the 2015 BBC article says: “One thousand five hundred trucks a day leave Djibouti port for Ethiopia. … It is projected there will be 8,000 a day by 2020. This is not feasible. That is why the railway is so desperately needed.” Officials told The Financial Times that each train can carry the same freight as 200 trucks.

The International Business Times explains that the Djibouti-Ethiopia railroad was “mostly funded by Beijing's Exim Bank” and that “the entire network was constructed by two state-backed entities — China Civil Engineering Construction Corporation (CCECC) and China Railway Construction Corporation.” The article quotes a Djibouti official as saying: “This railway marks a new dawn for Africa's integration into the global economy. … Connecting Africa, Asia and Europe, Djibouti is at the heart of the world's trade routes, and we are proud to play a vital role in developing the region and wider continent.”

Conspicuously absent in those comments is North America, and in particular the United States. The New York Times article mentioned observes that “China’s enthusiasm for constructing railroads, schools and stadiums in Africa stands in marked contrast to the role of the United States, which has largely shied away from financing infrastructure on the continent.” It adds that China overtook the US as Africa’s largest trading partner nearly a decade ago, and that “it remains unclear how that calculus might change under the Trump administration.”

Given Trump’s protectionist rhetoric before and after the election — and his recent executive order banning entry to the US from Sudan, Somalia and five other countries — it’s probably fair to say that devoting resources to building infrastructure in Africa is not high on his to-do list. Many believe this indifference to Africa is shortsighted. The IBT article notes that Africa’s GDP is expected to double by 2035. A Brookings Institute authority on Africa is quoted by The New York Times as saying: “If you’re looking for new markets, Africa is the place to be. … But right now, the US is not leveraging Africa’s huge potential. By contrast, the Chinese are there, and they are willing to take risks.”

Those risks are substantial. Most articles on the Djibouti-Ethiopia rail project note that politicians and others in the region (not to mention Chinese investors) envision it as the first leg in a modern transcontinental railway network that boosts local economies and integrates the region more firmly into the global economy. Those articles also note the serious political and economic challenges involved in building such a network. The Financial Times, for example, notes that connecting any of the African railways now under construction “will be a mammoth task,” particularly any conceived track that would extend the Djibouti-Ethiopia line to the west coast. The article says of a potential east-west line: “That is likely to remain a pipe dream for years, not least because it will have to go through war-ravaged South Sudan, which is also almost bankrupt, and the Central African Republic.”

There are numerous other risks in this tumultuous but enormously promising region. Foreign and local investors must hope above all that the dilapidated colonial tracks are not willfully-ignored signs of things to come. Still, it is almost impossible not to feel that something exciting and potentially transformative is afoot with these African railroads, even when reading about them from half a world away. It also seems — or perhaps I should say it used to seem — un-American for the US to turn its back on these risks and forgo the possibility of sharing in future rewards.

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vincentvelour · 8 years ago

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Brexit and Immigration

2/8/2017

By Gareth Jarman, Director, HR Advisory, Radius

Over the past few months, the West has continued to reverberate with political change. We saw the Brexit referendum in June. In November, the US electorate sent a populist message to its political establishment with the election of Donald Trump.

Since Brexit, the populist trend has continued across the EU. In December, Italian prime minister Matteo Renzi stepped down after his constitutional reform plan was defeated in a referendum that was again widely interpreted as an anti-establishment vote. In particular, it’s been viewed as a vote for Italian sovereign determination and against the EU. An anti-EU party in Italy known as the Five Star Movement has grown in popularity.

As we enter 2017, we have Dutch, French and German national elections pending. Like the other votes mentioned, these will likely be determined by each electorate’s perception of the EU’s principle of the free movement of EU workers, and if that principle leads to an untenable lack of sovereign control. This issue will largely shape whether or not these nations continue to participate in the EU project.

Stability in the UK Labor Market

There have been adjustments in the UK’s economy over the past six months, most notably the fall of the British pound. As a recent Wall Street Journal article explains, however, Britain’s “economy has performed better than most experts expected since June’s Brexit vote,” in part because of steady consumer spending. In addition, the pound’s decline has in the short term assisted in boosting both exports and the UK’s GDP.

There are of course downsides to falling domestic currency, such as inflation, but the UK has continued to enjoy a buoyant labor market, with low levels of unemployment. In my last Brexit-related post I noted that large organizations with operations in Britain such as Nissan were awaiting the outcome of the UK referendum before announcing continued investment there. Since then, Nissan, Astra Zenica, Glaxo Smith Kline, Google, Facebook and others have all committed to continued UK investment and job creation.

The UK must remain an attractive country for workers inside and outside its own borders.Tweet this

In her recent speech on Britain’s Brexit plans, however, Prime Minister May made clear that the UK will exit the EU’s single market, which has left some UK businesses to consider contingency plans. The major European banks HSBC and UBS, for example, declared after May’s speech that they will move some jobs from London to locations in Europe, where business necessitates an EU presence.

UK Government Considerations

Providing access to critical skills and a capable workforce are critical to attracting investment in a country. The UK government knows this. As it exits the EU’s single market, the UK must remain an attractive country for workers inside and outside its own borders.

In my opinion, the UK will meet this challenge. Britain has been a trade-oriented, internationally focused economy for hundreds of years and this will not change. The challenge for the government is to place sensible controls around net migration while supporting local businesses to attract and hire talented people from the EU and beyond.

Investing in UK Talent

Many assume that slowing the number of immigrants into the UK will strangle its economy. Indeed, during consultation, the government will be keenly aware that policymakers and industry leaders will want to protect the UK’s economic engine. While Brexit will almost certainly lead to a shortage of workers in some areas, it is hard to envisage that the government will not continue to welcome the labor required to power growth, particularly skilled workers in science, technology and financial services.

Here are some immigration-related changes I do foresee:

Citizens from the remaining EU countries will no longer have an automatic “right to work” in the UK. That said, the UK government will still want to welcome workers with skills that are in demand, whether they come from the EU or further afield. The truth is that we don’t know at this point how Brexit negotiations will restrict the availability of skilled labor for the UK. It is likely that certain individuals will be given preference based on skills, key industries (e.g., financial services and medicine) and/or nationalities (based on trade agreements). It’s worth adding that Prime Minister May has stated she would like to guarantee the right of EU citizens currently living in the UK to retain that right, but she wants reciprocal agreements for British citizens living within the EU.

The UK will likely increase its investment in and promotion of vocational skills in preparation for Brexit. At the time of drafting, Prime Minister May was preparing to announce a new industrial strategy, investing £170 million in regional technical hubs aimed at developing STEM skills, providing greater opportunity to plug skill shortages, increasing UK self-reliance, and promoting key industries such as automotive manufacturing, technology and medicine.

Industry will also almost certainly increase investments in technical and vocational training schemes such as apprenticeships. This will likely be accompanied by increased investments in employee engagement and retention.

Finally, we should remember those major elections pending this year in the Netherlands, France and Germany. Their outcomes may further challenge the EU’s free movement of labor principle. If so, the level of uncertainty for doing business beyond the UK, and within wider European borders, might also dramatically increase.

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vincentvelour · 8 years ago

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Global Glance: February 6, 2017

2/6/2017

A quick look at intriguing international stories

By John Bostwick, Managing Editor, Radius

India’s Demonetization Experiment

On November 8, two surprises rocked the world's political-economic landscape: The US elected Donald Trump as its president, and Indian prime minister Narendra Modi declared by fiat that two of his country’s most-used bank notes would be worthless starting January 1, 2017. (Readers experiencing Trump-fatigue will be relieved to hear this post addresses only the second event.)

A New York Times editorial published about a week after Modi’s declaration described the prime minister’s announcement as “shocking,” particularly given the importance of cash payments to India’s large and growing economy. The Times explains that cash “is used in an estimated 78 percent of transactions, compared with 20 percent to 25 percent in industrialized countries like Britain and the United States.” The Times adds that many Indians don’t have bank accounts or credit cards and that many businesses in India are cash-only.

This outsized reliance on cash has perpetuated a number of problems that Modi hopes to address with the demonetization, including the fact that many transactions in India involve so-called “black money” — that is, cash that’s effectively kept under mattresses or used in under-the-table payments to avoid paying taxes. An article in Forbes reports that India’s “shadow economy” represents about a quarter of the country’s GDP. Also of serious concern: Since black money isn’t traceable, it can be used to fund terrorist activities.

Whatever its justifications (and ramifications), the basics of Modi’s plan are simple. Indian citizens had from November 8 to December 30 (i.e., less than two months) to go to a bank and exchange or deposit their 500- and 1,000-rupee notes (worth about $7.50 and $15 respectively). These bills, according to the various sources, made up a stunning 86% of India’s circulating currency. The bills will eventually be replaced by new ones. The Wall Street Journal reports that Modi’s government “has slowly rolled out a redesigned 500-rupee bill and a new 2,000-rupee bill.”

Modi has come under severe criticism for this experiment. The Times notes that his “poorly thought out and executed” decision “has thrown the economy into turmoil, with many millions of people forced to line up at banks to deposit or exchange their old bills,” while “many traders have established lucrative money-laundering services to help the cash-rich get rid of their old bills.”

Most sources have noted that poor and rural Indians have been particularly hard-hit by the program. The Forbes article indicates that, incredibly, 600 million Indians don’t have a back account, and about half of those don’t even have the official identification required to open an account. An article in The Diplomat observes that “days spent in ATM lines” by low-wage Indian workers “have a tremendous opportunity cost in the form of lost wages.” The article adds that “from a macroeconomic perspective, because more than 90 percent of all transactions in India are conducted in cash, taking 86 percent of the country’s cash out of circulation has stifled transaction volumes in almost all industries.”

Some industries have been more seriously negatively affected than others. The Financial Times notes that consumer goods companies, which deal mainly in cash in India, have experienced a decline in sales and “are trying to determine whether the interruption … might lead to a more protracted downturn.” The Financial Times and other sources have noted that India’s real estate market has also been hit, in large part because property transactions often involve two payments, one “official” payment and another unreported black-money cash payment. The Wall Street Journal article says that falling sales in general “have begun to translate into layoffs spanning various sectors, including construction, textiles and jewelry.”

Demonetization has dramatically forced India to shift towards ecommerce.Tweet this

The Financial Times reported last Tuesday that a representative from Modi’s government estimates the bank-note ban “would shave a quarter to half a percentage point off [India’s] GDP growth” in the next fiscal year, which starts April 1. The same article notes that even with this downward adjustment, India’s economy “is expected to grow 6.75-7.5 percent” next year, a rate most countries can only dream of these days. The Financial Times cautions that India’s economy, despite its robust growth in recent years, has problems beyond those related to the recent demonetization, including “overleveraged companies and banks burdened with high levels of non-performing loans.”

There are other negative and potentially negative consequences of the cash ban. The Diplomat article points out that Modi has “torched” his political and social capital with the decree, and that his reputation — and perhaps even India’s political future — are at stake. The article concludes: “By acting unilaterally, rather than by legislative mandate, Modi has further undermined the tenants of India’s democracy and stoked fears about his authoritarian inclinations.”

Modi’s demonetization does have its supporters, however, and some of them are prominent. Last week, for example, Apple, Inc. CEO Tim Cook told The Wall Street Journal that while India’s demonetization “created lots of economic pressure there last quarter … [Apple] had all-time record revenue results” in India. Cook added that in the long term, demonetization is “a great move.”

It’s not surprising a tech giant like Apple would laud Modi’s gamble, not just because (as the Journal article notes) the company is looking to manufacture products in India as “sales in China stagnate,” but more generally because demonetization has dramatically forced India to shift towards electronic commerce. Indeed, a number of commentators have observed that Modi’s public justifications for the initiative have evolved to emphasize the benefits of digitization. A Forbes article published last month, for example, points out that “as the demonetization campaign progressed, its narrative gradually transitioned from being a measure to fight corruption to one to modernize a large swath of India’s economy.”

The first Financial Times piece mentioned above says that in the wake of the cash ban, digital-payment companies “are reporting that demand for their services has increased several hundred per cent, and some have brought forward their growth targets by a year or more.” Other ecommerce companies “including Amazon, Flipkart and Snapdeal — India’s biggest online retailers — have welcomed the move,” and have taken it as an opportunity “to hoover up market share.” Meanwhile, bank accounts, the Forbes piece notes, “have been getting opened across India at an exponential rate,” which will of course support digitization while getting millions of Indians onto the official, taxable economic grid. A research expert from Deutsche Bank is quoted by The Financial Times as saying: “This could go down in the annals of Indian history as a massive transfer of wealth from those who were hoarding cash to ordinary people.”

An Indian government official said last week that the process of replacing old currency with new will be complete by April, in time for the new fiscal year. Modi’s government also announced its annual budget last week. In his budget speech, finance minister Arun Jaitley said, according to The Financial Times, “We are largely a tax non-compliant society. … The predominance of cash in our economy makes it possible to evade taxes. The burden of their share falls on those who are honest and tax compliant.” This is a clear reference to, and justification for, the demonetization program. In order to ease these burdens, and no doubt restore some of the good will recently lost as a result, the new budget will “cut taxes for poorer Indians and small companies and invest nearly $60 billion in infrastructure, as it seeks to revive demand and widen the tax net.”

The consequences of Modi’s demonetization have been significant and will continue to be felt for years. I won’t step into the ring with economic, political and other experts to weigh in on the potential short- and long-term benefits and disadvantages of the move. But I admire its boldness (while admitting that admiration comes easy from half a world away, with no bank lines to stand in, no lost wages, etc.) Modi could have chosen other measures to move much of his economy out of the shadows and into the 21st century, but few of them could have forced so many Indians to so quickly open bank accounts and begin moving away from cash payments and cash hoarding.

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vincentvelour · 8 years ago

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Why a Swedish Court's PE Ruling Could Affect Your Global Business

2/1/2017

By Tom Lickess, Director, International Tax

A Swedish Court has held that a German company has a permanent establishment (PE) in Sweden despite the fact that the company’s local activities were limited to short-term testing functions and the company maintained no physical office or storage facility in Sweden. The case reflects a trend of evolving and increasingly strict PE regulations around the world. This post explains why the case is important for multinationals everywhere and what they can do to protect themselves from PE-related risks.

Case Overview

The German company engages in the development, design, marketing and sale of tire inflation pressure software systems in Germany, not Sweden. For three to four months each year since 2008, however, the company has transported its testing equipment and a limited number of employees to Sweden to product test and collect data in Sweden’s harsh winter climate. This data is then analyzed back in Germany. The company has no permanent building or storage facility in Sweden.

Based on the above facts, and taking into account the Organization for Economic Cooperation and Development’s most recent PE guidance, the Swedish Court concluded the following:

The German company’s activities in Sweden were not of a preparatory or auxiliary character — in other words, they represented part of the company’s core business — and so were not subject to a PE exemption;

The annually recurring presence and nature of the German company’s business in Sweden was such that the German company had a “fixed place of business” in Sweden.

The Court essentially analyzed the German company’s Sweden-based activities in light of the company’s overall business. The Court was of the opinion that the winter testing of the software — which required Sweden’s harsh winter climate — was of such significance to the overall business of designing, testing and manufacturing the tire inflation software system that the Sweden-based activities could not be deemed to be preparatory or auxiliary in nature.

The recurring annual short-term visits to Sweden, moreover, involved the same specialized employees that were instrumental in the design and testing of the product in Germany. Given this, the Court deemed that the recurring visits to Sweden constituted a fixed place of business, notwithstanding their short-term nature.

Global Consequences

As I discussed in a blog post last year, rules dictating what constitutes PE in jurisdictions around the world are constantly evolving. The problem for companies with global operations is that the PE provisions are being implemented on a country-by-country basis, with revenue authorities administering rules in a stricter manner than was previously the case.

Review your global activities in light of evolving PE risks.Tweet this

This increasingly strict interpretation and enforcement is widespread among OECD tax authorities, particularly European ones. The May 2016 raid of Google’s Paris offices is one prominent example. And the Swedish Court’s recent ruling is evidence that courts across the world are now beginning to follow suit, often referencing the OECD’s updated PE guidelines in their rulings.

What Global Businesses Can Do to Protect Themselves

Given that tax jurisdictions everywhere are tightening PE rules and enforcement, multinationals should review their global activities in light of PE risks. As mentioned, this can be challenging given that each country has its own evolving laws, but the risks involved will almost certainly justify the efforts. Each organization’s situation is unique, but keep in mind the following:

Revenue authorities are increasingly reviewing the activities of employees working under a non-resident employer arrangement.

If you are using offshore representative office or a non-resident employer structure to conduct activities — even with a limited number of employees — beware that your operations may come under scrutiny.

Don’t assume any PE-related advice you received in the past is relevant to your current situation.

Revenue authorities are also scrutinizing foreign-based multinationals that are using cost-plus subsidiaries to assist with marketing and support activities in-country.

Under evolving PE laws, authorities may deem that the in-country activities constitute a greater proportion of the business than mere “support” activities and therefore could trigger a PE.

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vincentvelour · 8 years ago

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Global Glance: January 30, 2017

1/30/2017

A quick look at intriguing international stories

By John Bostwick, Managing Editor, Radius

Is the US About to Play the Part of the Buffalo Bills to China’s New England Patriots?

Going into their final 2003 NFL regular-season game, the New England Patriots were 13-2, but they were hardly an NFL juggernaut. They’d failed to make the playoffs the previous year. The team they were about to play — the Buffalo Bills — had trounced them 31-0 on opening day four months earlier. And their lone championship (after the 2001 season) came in a game that could have gone either way, with a pedestrian Patriots roster that led their coach to say afterwards, “Can you believe we won the Super Bowl with this?”

In an interesting coincidence, the Patriots pasted the Buffalo Bills by the same 31-0 scoreline in the 2003 regular-season finale. Hall of Fame coach and announcer John Madden said near the end of the broadcast: “These are two teams going in different directions.”

I quote Madden from memory, but his drift was clear and he was undoubtedly prescient. Since 2003, the Patriots have won 12 of 13 AFC East championships and are favored to win their fifth Super Bowl this weekend. Meanwhile the Bills — who’d dominated the AFC for much of the previous decade — have finished above .500 only twice during that stretch, never winning more than nine games in a season.

I go into this because I live in New England and Super Bowl talk is (as usual around this time of year) rampant, and because I recalled Madden’s comment when reading about Chinese president Xi Jinping’s speech this month in Switzerland at the World Economic Forum. Xi’s speech, when read in light of President Donald Trump’s inaugural address, may signal that China is headed in a new direction, as is the US. Unfortunately for us Yanks, some feel the US is in effect about to play the part of the 2003 Bills to China’s 2003 Patriots — Trump’s “vague friendship” with Pats quarterback Tom Brady notwithstanding.

It goes without saying that the US has been an economic, military and cultural powerhouse since the Second World War. For decades, the term “leader of the free world” has been synonymous with the US presidency. This unofficial title is, of course, a sledgehammer hint as to why much of the world views the US as arrogant and selfish, a charge that can be difficult to counter given that, among other facts, Americans comprise less than five percent of the world’s population and use about 25 percent of its natural resources.

Many feel the US is in effect about to play the part of the 2003 Bills to China’s 2003 Patriots.Tweet this

Then again Americans are, according to one 2016 study cited by The Boston Globe, “by far the most charitable [citizens on Earth] — roughly twice as generous as Canadians, Spaniards and the Irish, for instance, and more than 20 times as apt to give as Germans and Italians.” The US also has a history of helping other countries. Following World War II, to take the archetypal example, the US gave nearly $13 billion (or about $130 billion in today’s currency) to devastated European nations under the Marshall Plan. Incidentally, one of the Plan’s three goals outlined to the US Congress was “the reduction of barriers which hamper trade.”

China on the other hand has been characterized lately by insularity, even as it challenges the US as the world’s leading economic power. A Guardian article explains that, domestically, President Xi has “[rooted] out unwelcome foreign influences, such as freedom of speech and western-style democracy.” This mistrust of outsiders extends to foreign businesses. As a Time article points out, “Large sections of the Chinese economy are closed off to foreign trade, its leviathan state-owned enterprises (SOEs) enjoy such preferential treatment to render competition meaningless, and … the landscape for foreign investment is deteriorating.”

China’s foreign policy record has been similarly self-serving. Here’s Thomas E. Kellogg in an article published last week in The Diplomat: “Too often, Beijing views international crises through the prism of its own self-interest, and as a result gives short shrift to the needs of the international community and the international system.”

As mentioned, these trends involving the US and China appear to be shifting. One of Donald Trump’s first acts as president was to pull out of the Trans Pacific Partnership, a deal that was strongly supported by former president Obama and that, according to Greg Ip of The Wall Street Journal, reflected “the expansive American model of free trade — rather than China’s narrower variant.”

Ip’s article was published less than two years ago but now reads like ancient history. Trump’s inaugural address proclaimed an American economic strategy that, far from being “expansive,” is now narrowly, aggressively focused on the US’s own interests. Trump proclaimed that under his leadership, “Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families.” He and his cabinet, he said, “will follow two simple rules: Buy American and hire American.” In case anyone missed the point, he added, “At the bedrock of our politics will be a total allegiance to the United States of America.”

Trump’s speech came just two days after President Xi spoke at the World Economic Forum in Davos, Switzerland. By all accounts that I’ve read, Xi’s speech was a bizarre contrast to Trump’s, as the Chinese leader emphasized openness and cooperation. Fortune reports that “Xi called for ‘inclusive globalization’ and for global unity, saying ‘self-isolation will benefit no-one.’” Fortune adds that “China's cabinet issued measures to further open the economy to foreign investment, including easing limits on investment in banks and other financial institutions.”

An Economist article neatly captures the historical-political absurdity of the Davos event, which included a “fawning reception given to China’s leader” by Forum delegates that “lapped up” his speech. Remember, this is a leader that Andrew Nathan of The New York Review says “has reinstated many of the most dangerous features of Mao’s rule: personal dictatorship, enforced ideological conformity and arbitrary persecution.”

But back to Xi’s Davos speech: “Here,” the Economist article marvels, “at a time of global uncertainty and anxiety for capitalists, was the world’s most powerful communist presenting himself as a champion of globalization and open markets.” That article points out that Xi didn’t mention Trump’s name in his comments, but addressed him indirectly, saying, “No one will emerge as a winner in a trade war.” Xi also compared “protectionism to ‘locking oneself in a dark room.’”

Martin Wolf of The Financial Times provides more quotes from Xi that stand in contrast to Trump’s protectionist, America-first rhetoric. Xi, Wolf notes, argued that “blaming economic globalization for the world’s problems is inconsistent with reality” and that “globalization has powered global growth and facilitated movement of goods and capital, advances in science, technology and civilization, and interactions among people.”

Many Republicans (who tend to promote free trade) in Congress would side with Xi, not with their own president, on the subject of globalization. Wolf for one is baffled by Trump’s inward-looking trade strategy, saying, “Who would have imagined that primitive mercantilism would seize the policymaking machinery of the world’s most powerful market economy and issuer of the world’s principal reserve currency?” Wolf states unequivocally that “Mr. Xi’s vision is the right one.”

I won’t try to summarize all of Wolf’s points, but I urge you to read his article. I’m no fan of economists — who, it’s said, exist to make weathermen look good — but Wolf writes convincingly on the subject of Trump and Xi and their respective visions about globalization. And I take Wolf seriously when he writes of Trump’s economic advisors: “The frightening fact is that the people who seem closest to Mr. Trump believe things that are almost entirely false.” Wolf closes by saying that Trump’s protectionist stance will likely either undermine the global structure the US has largely created or open the door for a new hegemonic power. (That would be China in this case, not the New England Patriots.)

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