2015 | World Finance

Obama plans tax on overseas profits in 2016 budget

Posted on February 2, 2015February 8, 2017 by Ashton Wenborn

The White House announced on February 1 that President Obama’s 2016 budget will include plans to impose a tax penalty on US cash piles stashed abroad. The proposal again underlines the president’s longstanding commitment to clamp down on tax loopholes and level the playing field for local and international businesses.

The changed regime will impose a one-off 14 percent tax rate on any overseas profits, followed by a permanent 19 percent rate on any future overseas profits. The reform marks a significant departure from the current law, which imposes zero penalties on cash piles stashed abroad, given that they’re not brought into the country. The government’s failure to address this shortfall has prompted many a multinational to hoard its profits in low-tax jurisdictions, such as Luxembourg and Ireland, and reduce their corporate tax exposure accordingly.

The undistributed foreign earnings of the Russell 1000 companies tipped the $2trn mark in 2013

The so-called “transition” tax will raise an estimated $238bn, which the administration will then use to plug America’s infrastructure funding gap. Assuming the estimates are accurate, the revamped system should fund approximately half of the government’s six-year plan to restore the country’s roads and bridges.

An Audit Analytics report last year showed the undistributed foreign earnings of the Russell 1000 companies tipped the $2trn mark in 2013, with many US firms eager to escape the country’s 35 percent corporate tax rate – the highest in the OECD. What’s more, the total that year was 12 percent greater than the year previous, meaning that the identification and closure of tax loopholes has become a key priority for both Republicans and Democrats.

Both parties have agreed that the US tax regime is riddled with inefficiencies and that the system serves only to disadvantage SMEs and rob the state of the tax revenue it so deserves. However, any efforts to ramp up corporate taxation will come up against stiff opposition, especially amongst the pharmaceuticals and technology sector, where shifting profits abroad has become commonplace.

Investment One Financial Services on Nigeria’s emerging opportunities

Posted on February 1, 2015January 18, 2015 by Ashton Wenborn

With the realisation that Nigeria’s GDP is far ahead of what was previously thought, Africa’s most populous nation has recently become its biggest economy. What’s arguably more important, however, is that investors, both international and local, are capitalising on a number of new opportunities, and, bolstered by a growing non-oil sector, the country is fast-becoming a leading investment destination. World Finance spoke to Nicholas Nyamali, CEO and Managing Director of Investment One Financial Services, about the major ways in which the nation has changed, and what lies in store in the months and years ahead.

How has Nigeria grown to become Africa’s largest economy?
Primarily supported by its position as the largest producer of crude oil in Africa, Nigeria’s GDP has grown to be the biggest in Africa. The rebased GDP figures that place Nigeria as the largest African economy serves as an affirmation of the country’s economic size and value. Previous computations of the national output last carried out in 1990 had understated the contributions of a number of sectors, and the rebased figures showed a move from $96.9bn to $510bn.

In addition, relative to inflows in other African nations, the significant foreign capital investments made by supranationals and multinationals have also served as catalysts for the growth story of Nigeria.

The Nigerian economy has witnessed an impressive rise in its growth numbers, particularly after rebasing its GDP

Which industries have driven this growth?
Following the rebasing of the GDP, the contribution of services doubled to 51.86 percent, which represents the highest sectorial contributor, whereas agriculture and industries contribute 23.33 percent and 24.81 percent respectively.

The increased contribution of the services sector to GDP was partly due to the rise in the telecoms sub-sector to nine percent of GDP, coupled with the addition of a new sub-sector, ‘motion picture, sound recording and music presentation’ (known as Nollywood), which now accounts for 1.4 percent of the rebased GDP.

Other constituents of the services sub-sector include trade (8.91 percent), IT (5.96 percent), real estate (4.13 percent) and financial institutions (1.24 percent) – and contributions from crop production (11.65 percent), mining and quarrying (8.45 percent) and manufacturing (3.58 percent); as the primary drivers of the country’s economic growth.

What potential for investment is there for fund managers in Africa?
Pockets of opportunity present attractive investment prospects for fund managers; ranging from private equity to fixed income and equities securities. In the fixed-income market, bond yields mostly trade at a considerable discount to par with coupons for benchmark bonds yields, and present attractive returns in the treasury bills market. In the equities market, on the back of sustained economic growth rates at a five percent average, despite slowing global growth and threats of deflation in the eurozone and Japan, African markets appear preferable.

We expect the trend of reforms in key sectors across nations and development of necessary infrastructure to continue to drive economic growth internally. Global investment and equity firms have made large investments in Africa, which showed the assets met the requirements of the world’s top investors. In West Africa, more than 84 percent of the funds that invested in bi-global funds over the past 10 years were made in the past two.

There is greater political risk for particular sectors such as energy or resources; where having a local partner is critical. Stemming from the efforts channelled towards becoming the leading investment management firm in market insight, product innovation and service delivery in Nigeria, Investment One is on the path to becoming the preferred choice of investors seeking a partner in Africa to help them achieve their investment plans. Investing in companies operating within the continent portends a chance to partake of their expected earnings growth.

Which industries are seeing the most interest from investors?
As one of the top three destinations for Foreign Direct Investment (FDI) in Africa, Nigeria has seen investment flows in the power sector. In addition, the banking sector has also witnessed investment flows, given the recent M&A and capital raising activities currently in the sector, which has raised investors’ confidence. Other areas attracting foreign investments include real estate, agriculture and telecoms.

How are businesses using the investment they’re receiving?
Many businesses are using the investment received for capital expansion, process optimisation and, where possible, in backward integration. For example, the recent investments by Investment Corp in Dubai put through the purchase of a $300m stake in Dangote Cement, where the funds are to be deployed in expanding business operations. Loans worth $1.5bn and $2bn from the African Development Bank and World Bank respectively have been channelled into the Nigerian economy.

A number of grants from the World Bank have been provided to support the on-going electricity reforms, while the likes of Total Upstream and Shell recently announced investments in ramping up gas production. The banks are also on-lending debt investments received from issued Eurobonds.

In what ways is the emerging middle class changing the economy of Nigeria?
Nigeria’s emerging middle class has witnessed decent growth over the years, prompted a transformation in the economy as disposable income increased. Business demand has also grown to meet the needs of new consumers, and there’s greater demand for luxury goods, investments, banking services and electronic commerce.

The middle-class population has also prompted differentiated products and increased their availability. Investment One is strategically positioned to provide investment management services to this emerging middle-class group as a result of its focus – channelling adequate manpower and technology – on retail investment products and services. Its products are avenues for this middle class population to channel their disposable income, as the firm urges those in the retail segment to set aside their savings by investing today to secure tomorrow.

What are they investing in?
The average middle-class individual has a higher consumption pattern and thirst for novel products and services. Whereas the purchasing power (or disposable income) of the middle class in Nigeria can be observed from spending on discretionary goods instead of consumer staples, there is an increasing appetite for investments in technology, business start-ups and real estate.

Since the 2008 stock market meltdown, interests in equity investments have been low and are yet to recover. Investment One is committed to investment education to inculcate an investment culture among the average Nigerian, who like many, is naturally inclined to consume. This investment education drive disseminates information freely to Nigerians through various methods, including free seminars and workshops, provision of resource materials on the web and through short messaging services.

How aspirational is Nigeria’s middle class?
The emerging Nigerian middle class is ambitious; more enlightened and earn higher incomes than that of the previous generation. This can be seen in the rise and success of several start-up companies, the foray of the middle class into diverse business lines across sectors and their pursuit of better education. This middle class is expected to serve as a driving force to the consumer goods sector over the next decade and herald a change in general commerce from traditional retail to e-markets. Investment One sees strong growth in Nigeria’s middle class, and it is positioned to adequately service this sector when it hits full potential.

What else needs to be done to ensure Nigeria remains the region’s largest economy?
It is imperative that the government improves security and governance. It also has to intensify its efforts to diversify the economy and reduce its dependence on revenue from crude oil exports. Recent reforms and continued investments in the power sector, as well as the gas–to-power project of the government would enhance the ease of business and reduce operating costs, thereby boosting economic growth. This will be supported by the expected positive outcomes from the Agricultural Transformation Agenda, and increased investment in infrastructure. Also, the recent disbursement of $1.2bn to Micro, Small and Medium Enterprises Development Fund (MSMEDF) by the Federal Government to address the financing needs and increasing credit flows to the SMEs, particularly at single digit interest rates – if properly utilised – should trigger business growth in the real sector.

How do you see Nigeria’s economy progressing further in the coming months and years?
The Nigerian economy has witnessed an impressive rise in its growth numbers, particularly after rebasing its GDP (see Fig. 1). However, the recent decline in oil prices threatens to dampen the nation’s oil-based earnings, which account for a significant share of Nigeria’s foreign exchange inflows. Nonetheless, we’ve seen recent improvements in the non-oil sector, particularly in agriculture, trade and services, and it has been observed that the impressive economic performance of the nation in recent times is underpinned by improvements in the non-oil sector.

Going forward, we believe there are prospects for continuous economic growth despite near-term headwinds of declining oil prices and insecurity issues, supported by continuous investments in the power sector along with infrastructure, recent reforms by the Federal Government aimed at developing the non-oil sector, as well as expected positive outcomes from the Agricultural Transformation Agenda. With these factors, Nigeria remains the best investment destination in Africa.

First Bank of Nigeria: country’s private banking sector is ripe with opportunity

Posted on January 31, 2015January 18, 2015 by Ashton Wenborn

Private banking has long been an attractive segment in the financial services industry, both to potential clients and to those in charge of the management of financial service companies. Private bankers look to take advantage of the growth in assets under management (AUM), potential growth in business for other banking segments (most times as a result of the patronage from the various interests of the private banking clients), apparently rising profitability, increased liquidity and relatively low seed capital requirements. Clients, who are quite discerning, desire to belong to an exclusive club created for a venerated class of banking patrons to whom the utmost attention is paid.

Globally, private banks face similar demands stemming from a much more multifaceted operational environment. A number of developments are shaping the future of the private banking industry as it moves through an inflection point. Such developments include: the growing importance of developing economies, like Nigeria’s, in the area of profitability and AUM growth for the private banks; the environmental influences conspiring to force an alteration in the value proposition and service delivery models, especially to serve the unique requirements of an emerging generation of clients; and most importantly, the imperative to restore the severed trust in wealth managers and private bankers to provide superior financial and estate planning advice to clients.

Clients, who are quite discerning, desire to belong to an exclusive club created for a venerated class of banking patrons to whom the utmost attention
is paid

In addition, there is the geometric increment of the regulatory and tax requirements on the ‘one percent’, as well as those of us charged with managing their fortune. To add to the excitement, competition is growing rapidly from domestic and international players, as the market barriers between jurisdictions get lower with assets more fungible than ever witnessed.

Market insight
The wealthy in Nigeria present a huge opportunity for any bank, with personal assets to the tune of approximately $90bn as of the end of 2013, which is expected to grow to $109bn by 2016 (see Fig. 1).

Nigeria has one of the largest ultra-high-net-worth individual (UHNW) populations in Africa. The majority of UHNWs in the country possess an estimated wealth between $1m and $5m, albeit many newly created millionaires and returning diaspora are not financially savvy.

Like other emerging market economies, income distribution in Nigeria is concentrated in the upper echelons of the society, with the UHNW segment contributing nearly half of the country’s high-net-worth assets (approximately $44bn). Hence the opportunities are enormous for those willing to venture.

In light of the aforementioned, retaining clients remains a key requirement of any private bank to survive this terrain. In my experience, the average time it takes to convert a Nigerian UHNW individual to a full private banking client is approximately nine months. There’s an immeasurable amount of time, effort and resources required in gaining the trust of such individuals – trust that can be evaporated a split second for a number of reasons. For instance, an alteration in personal circumstances, which could be as a result of a change in the political climate; poor investment performance, which is rather subjective and may be measured against what is considered an unreasonable yardstick; following key staff to a competing bank; poor relationship management quality or a decision to change private bankers or wealth managers influenced by the UHNWs next generation.

An efficient approach
In order to stem such situations we adopted a segmentation approach to the management of our clients. The approach focuses on four main areas: age, investment objective, time horizon and risk appetite.

The crux of this approach is to exhibit a sophisticated understanding of our clients and ensure customisation in the provision of solutions to their investment needs. This ensures a unique client experience for each UHNW individual and their next generation. For instance, the approach best suited to the mother may not be the same for the daughter.

This method has gone a long way in securing the buy-in of the next generation for most of our clients, as we now have a situation whereby offspring who are next in line are approaching us for training in wealth management practices and in some instances for jobs. The above notwithstanding, the local banks will continue to have problems retaining clients as the focus on the growing assets of the emerging markets by the international banks increases.

Local banks are sourcing fewer products and services in-house and there is a gradual shift in third-party product provision. This could be seen as a more cost-efficient way of providing the diversification required by the next generation of private banking clients and as such is an approach we at FirstBank private banking are putting into practice. This would also reduce the instances of the poaching of our younger clients by the international banks.

With our growing presence in the UK and other European jurisdictions we are poised to provide more opportunities for willing partners in our value chain of wealth creation, management and transfer for our clients. Our activities in this aspect are particularly getting good acceptance from the new money clients. In deciding the composition of the investment outlets to white label it is worth noting the underlying assets of each product, taking into consideration the asset allocation of high-net-worths in Nigeria (see Fig. 2).

Customer relations
Customer relations management (CRM) is growing in its significance as the UHNW population possesses varying degrees of capability and less loyalty to service providers. With the rapidly increasing mobility of skilled human capital, a CRM system, which provides a seamless transfer of relationship managers, needs to be in place in order to ensure that the smallest detail is given the requisite attention for each client. Banks need to identify and invest in the talent they need, as this is going to be a major competitive advantage in the foreseeable future.

With the continuous modifications in the digital age, a good CRM system must be adaptable and also possess the capability to assist wealth managers and private bankers in reading each client’s ambitions towards mapping a plan for their future. Such capabilities include anticipating potential changes in life stages and the implications of these changes to all stakeholders, especially the next generation. Thus providing an opportunity to point these latent alterations ahead of the scrambling pack.

The aforementioned investment would further optimise the client experience and endear the next generation to the bank that puts this much focus on the future of the UHNW. With the sound macro economic environment gradually being created in Nigeria, steps being taken to improve infrastructure, continuous reforms in the various sectors, the resultant increment in consumer spending and growth in foreign direct investment; entrepreneurial activity is likely to be a primary source of wealth creation in the future.

Domestic players could leverage on their local knowledge and international access to edge out foreign competition in capturing new clients. On the client side, wealthy individuals will become increasingly diverse in their backgrounds, financial need and investment behaviour. The traditional service delivery model will most likely change with the rise of the next generation of inheritors as well as wealth creators. The increase in the use of technology will connect experts with their advisors/relationship managers on a real time basis; and the use of analytics in generating proprietary insights on huge sets of clients will be critical in meeting the needs and customising solutions.

We at FirstBank private banking are taking the necessary steps to ensure we are the primary conduit through which these changes would be brought about in the Nigerian market. We invite all our current and future clients (and partners) to strap in and enjoy the ride.

Kasikornbank: Thai wealth is on the increase

Posted on January 30, 2015January 18, 2015 by Ashton Wenborn

In 2013 there was an annual 9.3 percent increase in the Asia-Pacific region of high-net-worth individuals (HNWI) – those with assets of more than $1m – which is now second only to North America. This year high growth of the population in the region continues, according to Capgemini (see sidebar). The 2014 report flags an explosive 17.3 percent growth rate to some 4.32 million individuals for the region, approaching North America’s 4.33 million, thus narrowing the gap of the world’s HNWI population.

In term of the asset holding growth, the statistics show a 10.4 percent annual average growth rate in the Asia Pacific region, which is larger than eight and 8.9 percent of the global and North American average ratio respectively. The growth in population and wealth accordingly, points out the great opportunity for HNWI in Asia Pacific region.

Compared with other countries in the Asia Pacific region, Thai HNWI are worth watching both in terms of their population growth and asset holdings. The Thai HNWI population increased an average 12.7 percent annually over the past five years, outpacing Asia Pacific’s overall 9.5 percent. Moreover, the growth of annual asset holdings for Thai HNWI increased in wealth, averaging a whopping 14.4 percent, beating the regional 10.4 percent. These statistics explicitly show economic growth in the Asia Pacific region, and also add up to a significant opportunity among HNWI customers in the rapidly expanding Thai market.

Gaps in the Thai HNWI market
In spite of five years of stellar growth in both population and holding assets, most of the customer segment continues to rely on normal or basic financial products, such as bank deposits over financial investment products, like mutual funds. This preference is consistent with regional trends, particularly in emerging economies like Indonesia and Malaysia, where most HNWI opt to hold cash and cash equivalents or fixed income products rather than higher-risk financial products, like equities. In Thailand, this trend may be due to the fact that most HNWI lack of knowledge of available financial products and tend to view banks as convenient channels for making daily transactions rather than as venues for investment.

HNWI population in Thailand

49,800

2009

57,800

2011

65,200

2011

73,500

2012

80,200

2013

Over 70 percent of Thai HNWI earn their wealth through entrepreneurship, and their main focus is managing and expanding business. Such entrepreneurs may not have the requisite time to study the financial markets and to follow the financial news in any detail. When it comes to investment, they tend to invest in ways with which they are already familiar and in which they have confidence, such as business expansion.

Banks, in turn, are seen as little more than potential sources of financing support, rather than fields for the cultivation of wealth. It is a great opportunity for banks themselves to seize the opportunity, change this perception and fill the gap through wealth management services.

These services include personal savings and investment planning assistance by investment experts. Normally, a customer of this service has a relationship manager to coordinate with the bank’s various teams in developing and implementing saving and investment plans tailored to each individual customer. Kasikornbank believes that wealth management services are the key to meeting the needs of HNWI. Not only can such services cut the time required for making and managing investments, but they can meet the customer’s individual needs and also reinforce their confidence to invest in a bank.

In Kasikornbank’s model, customers enjoy the personal attention of a relationship manager (RM) conversant with national, regional and global markets, financial products and economies. With an understanding of individual clients, including risk appetite, expectations and more, RMs develop investment strategies tailored to clients for optimal returns. They then keep abreast of market movements along with their portfolios, easing the burdens of financial management for the clients. At the same time, customers still have the power to control their investment portfolio. Every investment decision is still made by customers based on information RMs have prepared. These comprehensive services, therefore, support customers to make effective decisions with less required time for management.

Beyond customised investment planning, HNWI clients enjoy personalised attention from investment experts with close attention to their needs. With a financial management expert and advisor on hand, clients can invest with increased confidence. The implementation of this model of wealth management services provides customers with better experiences of investment, and should work to alter their expectations and perceptions. Customers then see banks as venues for enhancing wealth through investment, rather than as no more than channels for daily transactions.

Finding the right policy
The HNWI group of customers has been the valued target group of both banking and financial institutes. Many banks have instituted wealth management services to high-end customers as a strategic response to the needs of HNWI. Wealth management is not new to the Thai market. Still, it is not widely known, and many HNWI in the market are not familiar with the details and benefits. Some even harbour a definite misperception.

In fact, the wealth management services offered by Thai banks are often neither robust nor aggressively promoted. With the Thai HNWI market in its infancy, many service providers have promoted their brands through offering privileges as an easy way to generate awareness and quickly reach a broad market. The results are that most Thai HNWI customers understand the brand, and compare brands based on the privileges they provide.

However, initially the wealth management service was offered as a complementary service, which only a limited portion of the HNWI market had knowledge or interest in. Moreover, the supplementary service was based on customer satisfaction, and did not include overall portfolio planning and management, or the aim to generate optimal benefits. In the past, the RM acted as little more than a convenient liaison between the customer and the bank. Therefore, most customers in the past might not see a significant difference from general banking services. All of these deviated the perception and expectation of customers from what there really is available.

Recently, the increasing Thai HNWI market captured the interest of banks, both locally and internationally, at a time when reaching out to privileged customers became saturated. Consequently, wealth management services become more focused in areas many financial institutions are now seeking to differentiate and attract high-end customers. Wealth management services are now widely present as the main services which banks provide HNWI.

Introducing the service to customers, however, is not a simple switch over, as it means altering the HNWI perception of banks. Moreover, it also includes changing the views of banking services to customers from a convenience oriented to their benefits oriented services.

To differentiate the wealth management service from regular banking services, it additionally requires banks to step back from a narrow focus on financial products, and recommend financial products as the primary concern. These are the major challenges to cultivating the HNWI market in Thailand.

Overall, the statistics point out that the HNWI market in Thailand is a great opportunity for the wealth management service providers. These are believed to fulfil the need of the customers who mostly lack financial knowledge, insight information and managing time. The service allows customers to trust in banks, and gradually change the perception from seeing banks as sources of financing to a place in which their wealth could be grown. However, since the Thai HNWI market is still at its infancy, simple but comprehensive wealth management services would be crucial for any provider, and can be perceived as the key to win the HNWI market in Thailand.

At Kasikornbank, we place a high priority on giving customers an understanding of wealth management benefits, and on providing services. Advice should be easy to understand, while being based on thorough analysis of what will give optimal benefit, taking into account customer expectations, risk appetite and investment profiles. This kind of service will inspire trust and confidence in customers, encouraging them to let us help manage their portfolios and deal with all complicated information.

That, in turn, frees the customer from the time-consuming tasks of financial management. Indeed, we believe that beyond generating additional wealth, one of the significant benefits of utilising wealth management services is the worry-free time gained to enjoy with family and friends.

Quantitative easing: conjurer’s trick or long-term solution to Europe’s woes?

Posted on January 30, 2015February 3, 2015 by Ashton Wenborn

No one needs to be reminded how important Mario Draghi’s QE measures are. It’s not often that a monetary measure is described as a ‘bazooka’, but here the rhetoric is entirely justified. As, indeed, was the size of the measure: deflation is an alarming prospect, and there was a need for bold action to confront it. Now we need to ask how the markets will react. Naturally, they responded well. Will this remain the case in the long-term?

Not if we are to believe the hawks of the Bundesbank, who are alarmed at the potential for runaway inflation. But for investors, perhaps the only thing scarier than that (which is, admittedly, unlikely to happen in the short-term) is not knowing what will happen at all. The long-term effects of QE are unknown. Never in history have we seen central banks apply so much stimulus to restore markets to ‘normal’ conditions. And investors who are trying to predict how things will pan out are confronted by conflicting forecasts.

Economists certainly can’t give us any clear answers. For followers of the Austrian school, Draghi’s move is a dangerous exercise that interferes with the normal workings of a market trying to find its equilibrium. For the Keynesians and neo-Keynesians, QE is urgently needed to restore aggregate demand: the only problem is that it has come so late in the day. Meanwhile, the Chicago school economists are prepared to concede that Draghi’s measures are necessary, but grimly observe that they don’t begin to address the structural problems that caused the current crisis; only further reforms can restore Europe to economic health.

Draghi deserves praise for his bold move

So, how will international investors react? Is now the time to invest in Europe? Or will people hold back from committing to an uncertain market? Those who believe macro market movements can be traded profitably will see this a good time to buy European equities. After all, we’ve seen American, British and Japanese equities soaring under the wave of easy money. Over the last three years US stocks rose 65 percent. Meanwhile, the Nikkei 225 is up 94 percent since the Japanese launched Abenomics.

These bouts of QE have actually changed how investors behave. Previously, investors responded principally to economic fundamentals; now, they increasingly move in tune to the policy makers. They tactically allocate investor funds to various asset classes as they try to gauge the next move by central bankers. In this more short-term scenario it’s tempting to see responding to Draghi’s latest announcement as a simple exercise with profits available in abundance.

However, the thing to remember about tactical investing is that you have to make two trades to make your profit. When you make the ‘buy’ trade you need to be buying your assets from someone at a fair price – in other words, a price he’s willing to sell at. So if the European equities you’re buying are clearly going to rise in the coming months because of QE then you need to find someone who’s willing to sell it to you at current prices. The only way they will do this is if they don’t have access to the information you have or they are simply in a position where they need to sell the assets quickly.

Furthermore, in order to make your profit you need to know when to make the ‘sell’ trade. Most market participants know that the effect of QE is artificial and temporary. This increase in the value of European companies is simply because of greater availability of capital. There’s more capital chasing a set range of assets. The profit numbers of these companies don’t necessarily move. When QE drives up the price of these shares, the higher price drives down the dividend yield on those same stocks. An oversupply of capital drives down future returns as it causes prices to rise. So when faced with your sell decision if you’ve managed to pick up the stocks at ‘pre-announcement’ levels, you’ll need to sell them before large numbers of investors decide to do the same. And sell they will. At a certain point dividend yields will get too low and price earnings ratios will be too high and everyone will be looking for an exit. Then, once again, you’re faced with finding someone who doesn’t know all of the above information or who simply has to buy euro stocks at this point in time.

The market response, therefore, is likely to be more complex than some forecasters have supposed, as if often the case. Nonetheless, Draghi’s measure is a step in the right direction. As an investor who holds a globally diversified portfolio of principally passive investments, I was concerned that deflation would drag down the European markets for the next few years. This action by the ECB has reduced that risk and buttressed the European markets. It is true that the value of European investments will probably be affected by the likely weakening of the Euro, but this will be offset by the increased competitiveness of Eurozone economies. Finally, the measures will allow Eurozone banks to trade sovereign debt from their countries for cash. This will make ailing banks stronger and make it easier for them to support businesses.

All of these are positive developments in the short-term. But we should not see them as more than this. In the long run, investors throughout the world will want to see European countries really get to grips with improving their economic fundamentals. Much more needs to be done to address the serious structural economic problems that continue to beset the continent, and the markets will increasingly expect to see action on this. But for the moment, Draghi deserves praise for his bold move, and investors can be pleased that their euro holdings are less likely to be the laggards in their portfolio.

Magellan sees containers become vital investment tool

Posted on January 29, 2015January 18, 2015 by Ashton Wenborn

It is evident that the impact of the global financial crisis extended much further than just the financial services sector. Trade throughout the world took a severe hit, and as a consequence, the world’s shipping industry experienced a sharp downturn.

However, there has been a concerted effort by many of the industry’s leading firms to modernise the way in which they do business, in particular through the use of containers. One of the leading proponents of such a strategy is Magellan Maritime Services, a global leaser and trader of containers that was founded in Hamburg in 1995. World Finance spoke to its CEO and founder Carsten Jans about the company’s history, the attractiveness of containerisation, and why containers are proving so popular for investors.

How long has Magellan been offering investments in containers?
Magellan was founded as a container trading and leasing company in 1995, so we’ll be celebrating our 20th anniversary in 2015. We’ve also been offering investors outside the industry the opportunity to benefit from container investments since 2005.

Standard containers have come to play an essential role in global trading. you could even say they’re a symbol of globalisation

Our investors purchase containers at a minimum investment of around €10,000 ($12,453), and they are the sole owners of the containers, each with their own individual purchase agreement with Magellan – no investment fund or similar enterprise involved. We also lease containers back for a five-year period in separate administration agreements that guarantee a fixed leasing rate of around 12 percent per annum on the purchase price. After the five-year period, we purchase the container back from the investor at a repurchase value of around two-thirds of the purchase price. We have since paid up all of our leasing payments and repurchase prices for the 56 container investments we have concluded since 2005, as predicted. Many investors have already invested in our containers more than once due to the good experience they have had with us.

What do investors find attractive about shipping containers?
The low interest rate policy has reduced the number of investment opportunities with a decent return on investment and predictable investment security for investors in Germany and Europe. Containers as tangible assets have been satisfying these criteria for increasing numbers of investors that go on and tell their friends and associates.

Investors aren’t recommending fixed-interest bank deposits at a maximum yield of two percent, which are hardly inflation-proof. Containers ensure returns of around six percent per annum, and the risk is manageable. Container values remain stable even in times of crisis – a 20ft container consists of around two tonnes of steel. Tangibles with steady values have become more important to investors since the financial crisis – specifically, tangibles with values that can’t be written off to zero. Containers are mobile and can be used wherever they’re needed, so these tangibles will still make sense to investors in the future.

What sets Magellan apart from other investments?
Magellan Maritime Services is not a typical fund company so familiar in the world of investment funds, but an operationally active container leasing company that takes care of every part of the container’s value as a tangible asset from manufacturing to sale at the end of the investment period.

We represent traditional business virtues such as reliability, clean management, punctuality and economic sustainability – values our national and international partners from industry appreciate, values that we pass on to our investors. We pursue a sustainable container business approach that our investors automatically benefit from. This completely eliminates the risk of an asset manager doing well while the investor loses out.

What are the success factors?
Obviously, it takes a sustainable approach alongside sound business activity. We don’t depend on third parties in our business operations, but order our containers straight from the manufacturer thanks to the years of contacts we have formed. These manufacturers as well as the liner shipping companies have full confidence in our company as a sound partner with the Magellan name on more than 190,000 TEUs (20-foot equivalent units). No other container investment company can claim that.

We don’t buy container portfolios to refinance them and sell them on for a better price as some investment companies do – our earnings come from the asset value of our containers in daily business. We have already gained a name as an international player in the container leasing business; Magellan is currently the largest container lessor in Germany, and 14th-largest worldwide.

Why are Magellan investments a more sound choice than other container investments?
We lease our containers to the top 25 liner shipping companies without intermediaries; you will often find us at the liner shipping companies and container manufacturers, and this gives us a financial edge over other companies as we work directly with manufacturers and lessees without agents and intermediaries.

Investors have confidence in entrusting their assets directly with an internationally experienced market player. There are no investment companies that also earn from financial management without themselves operating actively on the market, and no investment company would ever unnecessarily reduce its yield.

What containers does Magellan invest in?
We are involved in standard containers, with a few exceptions – 20ft, and 40ft high cube containers. These containers have been crossing the oceans for decades, so they’re not a fashion thing. Standard containers have come to play an essential role in global trading, and you could even say they’re a symbol of globalisation. These container types are obviously also subject to market mechanisms that can impact both sales prices and leasing rates, and the fluctuating price of steel also has an effect.

Even so, you’ll find these standard containers in any port, and they can be used virtually anywhere. Major liner shipping companies order these containers as needed, and any excess capacity takes a few months to absorb – you won’t find the unused capacity that you might find in ocean-going vessels or real estate. Very few containers were built during the financial crisis in 2008 and 2009, so 2010 even saw a shortage of them.

We at Magellan tend to avoid specialised containers such as refrigerated containers, known as reefers, and tank containers, as markets and market participants are often too small to predict long-term trends over five years with any certainty; investments in those niche markets are riskier.

How did Magellan make the investment offer so secure?
We apply all the necessary due diligence in our investment offerings. That is, we keep an eye on quality while purchasing containers, selecting liner-shipping companies as lessees, and in how we draw up container leasing agreements. We only conclude long-term agreements that liner-shipping companies can’t terminate, eliminating the need for container management by other container lessors or management companies, or any other third parties.

This eliminates the risk of container returns from liner shipping companies before term – so far, all of our containers have gone through at least five to seven-year leasing periods without a hitch. We only do business with the top 25 liner shipping companies with good credit ratings to match as lessees.

We survived 2008/2009 without losses, so we can keep our own buoyancy in rough seas. Have the other forms of investment also proved their mettle like this? Apart from that, we have independent auditors look at our leasing agreements with liner shipping companies to confirm the quality of our agreements for our investors. Finally, the auditors have confirmed that we’ve always paid back our investors since our first offering as predicted. So far, every one of our investors has seen every penny of their investment returned as promised by Magellan.

What of the future for the investor market with respect to new financial regulations on investment products and consultants?
Every investor has to give some thought to which investment has delivered the goods over the last 10 years and hasn’t robbed the investor of a good night’s sleep. What kind of investments were they – bank securities? Investment company portfolios with hot-shot asset managers? Or tangible assets in the real economy?

Tangibles are and always have been the mainstay of economic development. But what tangible asset can compete with a shipping container on flexibility in shipping goods? Laws and politicians won’t ever be able to change this in any lasting way by creating new rules and taxes to get the financial markets back under control. We’ll simply adapt to any new rules affecting the shipping industry. Remember that with Magellan, you’re investing in two tonnes of good hard steel – not in securities or other financial products.

This is a difference we’re proud of, a difference that our investors appreciate. The last financial crisis has shown how the markets have been moving away from the real economy, sinking astronomical sums into paper securities rather than tangibles. We think that we at Magellan have been playing a significant part in restoring investor confidence in the real economy over the last decade. More than 10,000 investors have shared our confidence so far.

Greece: still corrupt, still unsound infrastructurally, still uncompetitive

Posted on January 29, 2015January 30, 2015 by Ashton Wenborn

World Finance speaks to Roman Gerodimos, Founder of the Greek Politics Specialist, on what the election of Syriza means for Greece’s floundering economy

World Finance: Roman, let’s be blunt, if Syriza were to win its negotiations with the rest of the eurozone, other EU anti-austerity parties would look more credible to voters, and yet if Syriza were to lose, investors might pull their savings from any eurozone countries where nationalists are dominant. So why aren’t European markets in more of a state of panic?
Dr Roman Gerodimos: Really everybody is waiting to see what the next steps of the new government are going to be. There are two ways this could go, one way would be for the government, Mr Tsipras, Syriza, to in a sense water down their promises a little bit. Some are talking about a rebranding of the bailout measures, and of the whole monetary environment. Others are saying that he will not actually do that and he will stick to his hardline metrics.

[I]f you look at Spain, Podemos, or even Britain and UKIP, and other countries around Europe, they share very little in terms of actual ideology

World Finance: This vote has had big implications for the monetary union. What are we looking at?
Dr Roman Gerodimos: It’s really interesting that all these anti-EU or eurosceptic parties have very different agendas. Some of them come from the left, some of them from the right, but if you look at Spain, Podemos, or even Britain and UKIP, and other countries around Europe, they share very little in terms of actual ideology, but they have a very clear anti-establishment agenda.

So this vote really is the first proper indication, the first major victory, for this anti-establishment camp. The problem is that once you’ve moved away from the current model of EU governance, with all its problems and faults, there really isn’t anything else at the moment as an alternative, because all these actors in different countries have their own agendas. So really it’s going to be very interesting to see where that takes us.

World Finance: Well of course there’s always such high hopes when a new government comes into power. But how many options for change does Tsipras have? As a coalition with Syriza, will they be able to push through reforms, or will they have to negotiate domestically before they can approach the EU?
Dr Roman Gerodimos: They do share this fundamental anti-austerity, anti-bailout package core philosophy. But they do disagree on many other things like human rights, like the place of immigrants, all sorts of other things.

The truth is that Syriza ministers, as soon as they were sworn in, they are repeating all their pledges about stopping privatisation, raising the minimum wage. All these measures they promised, which sounded quite radical and going against really fundamental requirements put forward by the troika, the real position is going to come from the lenders.

World Finance: So the new ruling party in Greece’s slogans are “the end of humiliation has come” and “spend spend spend,” but where’s the money coming from?
Dr Roman Gerodimos: We’ll find out very soon, because in fact by the end of February the Greek government is contractually obliged to complete certain measures and certain actions that are required by the troika, otherwise it will not get its next tranche and then we’ll see whether they are able to finance all these measures that they have pledged. Obviously pledging something is different to implementing it.

World Finance: In reality, the EU doesn’t have an option, Greece either defaults on their own authority or the EU authorises the default. But at the end of the day, it’s surely going to be the same result, or do you see something different for Greece?
Dr Roman Gerodimos: I don’t think we will necessarily get to that point because, there is a very strong core, 75-80 percent of Greek voters, who do not want Greece to leave the Eurozone. If we go for a default, then obviously anything can happen.

75-80 percent of Greek voters…do not want Greece to leave the Eurozone

World Finance: Hans-Peter Friedrich, a member of Chancellor Angela Merkel’s party in parliament said “the Greeks have the right to vote for whom they want, we have the right to no longer finance Greece’s debt.” That’s the crix of the matter isn’t it?
Dr Roman Gerodimos: Absolutely, but the thing is, and that is something that the more vocal, the more radical members within the government obviously need to take into account at some point, but Mr. Tsipras, judging by the outcome, judging by his success so far, looks as I said confident but also it looks like he knows what he’s doing, it looks like he has a plan.

World Finance: At the end of the day, Greece did get itself into this mess, as the country was riddled with fraud and corruption. So has it cleaned up its act?
Dr Roman Gerodimos: Greece still has a lot of fundamental structural problems, but what we have found over and over again is that there are structural deficiencies within the eurozone and within the EU, and also regulation issues around the world really.

A lot of the measures that were put in place and the way they were put in place to deal with the debt issue, actually made things worse to an extent. The previous government’s emphasis was more on the financial, and sort of budgetary issues rather than the more structural issues to do with corruption, to do with public administration.

I don’t think there’s been as much progress in cleaning up and making the Greek state more efficient, but to be honest it’s arguable whether that is a top priority for the new government.

World Finance: So what would you say is a realistic solution to the whole Greek mess?
Dr Roman Gerodimos: When you look into the broader structural issues to do with how the economy is structured, whether it’s competitive, it’s not really. What it’s producing, what it’s exporting, and so on, all these issues require a really radical rethink of what Greece’s identity is in the 21st century. We haven’t heard much about it in the campaign, let’s see what the new government does.

No watered down agenda for Greece

Posted on January 28, 2015 by Ashton Wenborn

World Finance speaks to Dr Roman Gerodimos, Founder of the Greek Politics Specialist Group to find out what new ruling party Syriza has planned for the country’s debt ridden economy.

World Finance: The new Greek PM, Alexis Tsipras has said in his first cabinet meeting that the country will not default on its bailout debts. Is this really realistic? What’s his plan?
Dr Roman Gerodimos: I think his plan is to go in for a tough negotiation with the troika of lenders and to seek a radically different package of measures, and maybe a renegotiation of the debt.

At the same time what we’re seeing is top ministers in the government, today, yesterday, as soon as they’re sworn in, they actually repeat and confirm the pledges that they made before the election about certain radical changes – the raising of the minimum wage, renationalisation of public operations, and so on.

So it doesn’t look like Mr. Tsipras is watering down his agenda, it’s just that he’s trying to reassure both domestic and international audiences that he’s not planning to take Greece out of the euro.

World Finance: But Roman, is it realistic? How can Greece not default?
Dr Roman Gerodimos: Greece is very likely to stay in the eurozone, but that will depend on Mr. Tsipras’ decisions and whether he chooses to walk out of the negotiations or to make some concessions or to seek a middle way. That will probably have to be settled within the next few weeks.

The finance minister thins morning said it will all be over in 15 days time, so for a lot of people that is quite scary in Greece, but Mr. Tsipras looks very confident that he knows what he’s doing.

Richard Murphy: Companies have forgotten how to make money

Posted on January 28, 2015 by Ashton Wenborn

Zero corporation tax – a concept put into practice in many of the world’s top tax havens: the United Arab Emirates, Cayman Islands, and the British Virgin Islands. Places that have been less affected by the global financial downturn. Is there a correlation? World Finance discusses with Richard Murphy, tax researcher and political economist.

World Finance: Richard, you’re a supporter of the progressive tax regime, so exactly what is your case for punishing more successful companies with more tax?
Richard Murphy: For heaven’s sake, I’m not asking to punish anyone! Tax is the contribution that anybody makes to society for the benefit they get from it. And successful companies do not exist in isolation: they actually live on the back of the society that gives them their permission to trade: let’s be clear about it.

World Finance: Would we lose out if the UK abolished corporation tax?
Richard Murphy: Well, if you call losing out on £40bn of revenue losing out, then yes we clearly would. What would you like to do: close the NHS on Monday and Tuesday? Shut down half of the UK’s schools? Cut the state pension enormously?

Look: all of those things are inconceivable politically. As a matter of fact, the UK requires corporation tax as part of its tax system. There is no viable alternative at the moment; the big problem we have at the present point of time is that we simply don’t charge enough of it.

For heaven’s sake, I’m not asking to punish anyone!

World Finance: You wrote that companies would make no contribution at all to society, but surely there is the argument that if their tax burden was gone, then they would have more money to invest in human capital?
Richard Murphy: But most large companies – where most investment takes place – are actually cash rich at present. And they can of course borrow money at extraordinarily low interest rates. But they’re not. They’re choosing not to. Because actually, most large companies are pretty clueless about what to do with money right now. They simply do not know what to invest in. And this is a constant theme of, for example, the pages of the Financial Times and its commentators: that big business simply can’t use money.

Why, if we gave them more money, would they invest any better than they do already – when they’re already sitting on a cash pile? They wouldn’t. What we would actually be doing is benefitting their owners, who would remove that money out of the UK and into tax havens. Or would instead use it for speculation in housing, in stock markets, in commodity markets – none of which actually create a single extra pound of worth for the UK economy.

World Finance: But a number of studies conducted in recent years suggest that corporation tax penalise workers ahead of companies and shareholders. A study by the American Enterprise Institute found that there is a strong correlation between high corporate tax rates and low wages: so what’s your take on that?
Richard Murphy: Well, I would actually answer straight away that the American Enterprise Institute is of course funded by big business, and so they would say that, wouldn’t they.

But I’ve looked at a number of these studies; one for example done by Professor Mike Devereaux at Oxford University, who came to that conclusion. And it was an extraordinary piece of work, because it only looked at the consequence of corporation tax increases. And it was said that if there was a corporation tax increase, then there was a cut in real wages: so the correlation was proved.

Well first of all, we have remarkably few corporation tax increases in Europe over the last 20 years. We’ve had almost universally tax cuts. And there is absolutely no evidence that corporation tax cuts do give rise to an increase in real wages.

If that was true, then in the UK over the last few years we should have seen substantial increases in real wages, because corporation tax has been cut. That hasn’t happened.

The claim is completely bogus; there’s no evidential support for it at all.

World Finance: So you think no tax also translates into less monitoring of accounts, and therefore more fraud: so is this the case in places like the United Arab Emirates?
Richard Murphy: Look, I think the UAE is slightly different from some other locations. And I have to be honest, I’m not an expert in the UAE.

But I am very familiar with a great many of the world’s tax havens. I’ve written one of the leading books that is taught in the world’s universities on tax havens, or ‘secrecy jurisdictions’, as I would prefer to call them.

There is – candidly – almost no regulation of companies in those places at all. It was a few years ago, for example, that I pointed out to the British Virgin Islands that they were claiming there were 800,000 companies in the BVI. Then they rather embarrassedly said, ‘Well actually, there probably aren’t, but we’ve lost control of our company registry.’

Overnight they cut the claim to 400,000 companies. Is that effective administration of companies? Or is that somebody simply out of control, and hoping to collect some fees by licensing companies to operate, but without any proper regulation in place? I’d suggest it’s the latter.

Quite simply: companies where there is no tax system, where they aren’t required to payment, do not have to prepare proper accounts, do not have to account, and are subject to no effective regulation at all.

World Finance: Well back to the UK now, and from one government to the next, we constantly change progressive tax rates. Surely this is worse than the certainty that a zero-tax regime would afford the economic planners?
Richard Murphy: What is this ‘certainty’? I mean, the one thing that all business should be able to handle in uncertainty.

Actually the tax system is remarkably consistent. We have a tax rate in the UK which is pretty predictable. If it goes up after the next election, how much will it go up by? A few percentage points. I doubt if anybody is going to do more than that.

I think business ought to go out there, start to learn how to make money, start to learn how to invest, start to learn how to train people, and stop making a fuss about something which is frankly of little consequence to them.

Make the money, then worry about paying the tax. But at the moment they worry about the tax, and have forgotten how to make money. And that’s why we’re in such an economic conundrum in the UK.

World Finance: Well finally, considering David Cameron has suggested cutting trade ties with the EU: if we lower corporation tax we’ll make the UK more competitive, surely?
Richard Murphy: Competition in taxation is a misnomer. Competition presumes that there can be failure. The failed state looks something like Somalia, or South Sudan. That really is uncertainty, because it’s government at the end of a gun.

So that is not what people want. Actually what we want are strong, successful states. Businesses thrive when they have strong law in place. Actually that’s one reason why the UK’s tax havens are so successful, because they can rely on British law to back them up.

So in that case what they actually want is all the benefit of the state, but not pay for it.

Tax competition is not competition at all, then: it is tax war.

It is one state declaring war on another state, by trying to steal the profits that truly belong in another place, to have them relocated to their country, to be taxed at a lower rate. That is wholly unproductive. What is more, it shifts the entire burden of tax from companies and from wealth, onto ordinary people who are least able to pay it – because quite simply they don’t have as much money.

If we are talking about redistributing the tax burden to people, then fine: let’s have tax competition. But let’s be quite clear what it’s about. It is about making the poorest in society pay, so the richest can pay as little as possible.

I don’t believe in that. I believe that those with the capacity to pay should make payment; and that’s why I oppose all ideas of tax competition.

Afschrift: how to navigate new waves of tax regulation

Posted on January 28, 2015January 18, 2015 by Ashton Wenborn

Joint initiatives like the OECD/G20 base erosion and profit shifting (BEPS) project, and the US crackdown on tax inversions demonstrate authorities increased commitment to clamping down on incidents of tax evasion and avoidance. As governments try to recover from the effects of the financial crisis, the need for greater revenue streams is essential in order to find the necessary capital for funding public services still strapped for cash.

As citizens feel the effects of difficult global economic circumstances, there is increased interest and scrutiny by the media over the tax planning practices of multinationals, with high-profile companies such as Apple, Amazon and Google all attracting the wrong kind of attention due to their aggressive tax avoidance strategies.

In this tumultuous time it is more important than ever to have the right support in order to adequately navigate this increasingly convoluted tax environment. One organisation that is helping in doing just that is tax law firm, Afschrift. World Finance got the opportunity to talk with Thierry Afschrift, Partner at the firm, to find out what effect this approach is having.

The right to privacy is probably the one that will suffer the most, as the access to banking data allows the state to retrieve information concerning all aspects of private life

Will the Global Forum on Transparency and Exchange of Information for Tax Purposes be effective in combating tax avoidance?
In 2014, the OECD actually published a multilateral standard for automatic exchange of financial information, which aims to fight tax fraud, and which the OECD’s Secretary General Angel Gurría said “deprive governments of revenues needed to restore growth and jeopardise citizens’ trust in the fairness and integrity of the tax system.”

It is obvious that as this text is the result of collaboration between the OECD, the EU and the G20 countries, we look to a kind of universal standard, deemed to be commonly accepted and applied by most of the states on the globe.

Emerging countries will not constitute an exception. Nevertheless, the implementation may prove difficult to realise, or to realise completely, as the application of this new standard requires the utilisation of important resources, given the size of the information to exchange. This covers, for example, the details of all the existing accounts, information on capital gains and dividends, patrimonial structures, etc.

In conclusion, it is clear that developing countries will have to respect this standard, but at the same time it is more than probable that they will need to be given a credit of time and financial and technical aid in order to achieve this target.

How have governments, particularly Belgium’s, reacted to the concept of automatic exchange of information?
Since July 2005, European states already exchange information under the EU Savings Directive. From the beginning, most of the EU member states have complied very quickly with the provisions of this directive, and so too has Belgium since 2011.

Furthermore, many European states have signed agreements with the US, in the frame of the US Foreign Account Tax Compliance Act (Fatca). Therefore, the ‘automatic exchange of information’ concept is not really a novelty for EU member states.

I suppose that Belgium will take the necessary steps to the implementation of the new standard as soon as possible, as the information received will allow the Belgian state to retrieve additional resources by taxing the newly discovered income and, at the same time, by rendering foreign countries less interesting, discouraging in this way its taxpayers to transfer their assets or set up businesses abroad.

What are some of the concerns of your clients about their information being shared in such a manner?
In Belgium, as with everywhere else, taxpayers and our clients have or should have the same concerns. The right to privacy is probably the one that will suffer the most, as the access to banking data allows the state to retrieve information concerning all aspects of private life.

Normally, concerning EU citizens, the conditions to derogate to the protection provided by Article 8 of the European Convention on Human Rights should be fulfilled, as well as the principle of proportionality provided by Articles 7 and 52 of the Charter of Fundamental Rights of the EU. Nevertheless, I doubt that in the frame of an automatic exchange a compliance control with the aforementioned provisions could in fact take place.

Even though Article 8 of the Charter of Fundamental Rights of the EU provides that “everyone has the right to the protection of personal data concerning him or her”, in the frame of an automatic exchange (and storage) of information, a number of questions will necessarily arise.

For instance, to what extent may states cross-compare this information concerning data received from the automatic exchange of information (or Fatca), or detailed data resulting from exchange of information on demand? And, in any case, one could wonder if states have the right to use this information for purposes other than tax-related.

Finally, discrimination issues will arise with respect to the situation of citizens of the different states. For example, such treaties do not provide an obligation for the states to eliminate bank secrecy at national level. Certain countries have set forth restrictive access and eligibility conditions for their national administrations, but these conditions are usually not required in case of a demand sent by another state.

Furthermore, in the frame of the exchange of information on demand, certain countries require that the taxpayer is not notified of the existence of such a demand, while others consider such notification and the existence of a recourse prior to the transmission of the information as necessary for the respect of the rights of defence. Under the circumstances, discrimination based on a residence criterion will arise.

How has the introduction of a fairness tax and special tax on capital gains affected your clients’ tax planning?
Indeed, in the frame of a policy aiming not to create new resources, but rather to draw more from existing ones, the Belgian government has implemented a fairness tax which is not an additional withholding tax on dividends, but rather a tax on the benefit of the company. That means that there is actually an indirect effect on shareholders (application of the same tax on dividends but calculated on a lower benefit).

In any case, the continuous changes of the legislative frame make tax planning difficult, as the solution adopted today may be insufficient, or even totally void, only months later.

How have you helped mitigate the impact of these taxes for your clients’ tax strategies?
Our approach consists on constantly analysing the actual and emerging trends, in order to predict future changes. In my opinion, no professional in tax planning may work today based only on the existing rules; thus, the success of some and the failure of others will depend, besides their technical knowledge, on their capacity to predict the future.

What are the consequences from multilateral developments such as the BEPS project and what are your concerns?
BEPS deliverables are supposed to ensure the coherence of corporate income taxation at the international level and ensure, among others, predictability and transparency.

Nevertheless, even if the concerned administrations should manage to work together – and this is a prerequisite – it is obvious that the implementation of such a system will also create problems for the concerned taxpayers, as well as additional compliance and administrative expenses.

From a general point of view, it is obvious that if standardisation indisputably presents certain advantages, for example in terms of predictability, it also presents a main disadvantage. Particular situations are not taken into account; therefore, the same rules would apply to every company, independently of its state of residence and the relevant infrastructure.

Therefore, if the general BEPS idea is acceptable, the implementation of the related principles may cause problems to a substantial number of companies.

Have any controversial powers been granted to the Belgium tax authorities?
No new controversial powers have been granted to the Belgian tax administration lately; nevertheless, one can observe that the already existing principles and rules are being applied much more strictly.

Belgium has been deliberating over whether to apply a super tax for professional poker players to be set at 75 percent, your thoughts?
Lately, many countries, such as Ireland and Singapore, have implemented tax measures concerning poker players; in other countries, such as Denmark or Russia, poker gains are already taxed under certain conditions.

It seems normal that, if poker becomes a professional activity, the gains arising from this activity get taxed, and that in parallel the deduction of expenses and losses is accepted. The situation in Belgium is not clear for the moment. In any case, I doubt that a special 75 percent rate would be implemented for professional poker income, while the highest rate for all the other kinds of professional income is 50 percent.

Apple gains staggering profits thanks to Chinese deal

Posted on January 28, 2015February 8, 2017 by Ashton Wenborn

Despite claims within the tech industry that Apple has lost its lustre in recent years, the company has gone from strength to strength in the eyes of investors. In a conference call to investors yesterday, Apple CEO Tim Cook unveiled revenue growth of $74.6bn, causing $18bn in profits; the largest ever quarterly profit by a publicly traded company.

Cook described the iPhone sales as “staggering”

This is increase in profits is largely down to the deal struck last year with China’s biggest mobile phone carrier – China Telecom – which has seen the country flooded with Apple’s hugely popular iPhone. The company sold 74.5 million of its flagship iPhone smartphone in the final three months of 2014; far more than many analysts had expected. During this period it became the leading smartphone provider in China and increased its revenue by 157 percent to $16.1bn.

Cook described the iPhone sales as “staggering”, adding that the company has an even bigger year to look forward to. He says that Apple Pay is set to take off during 2015, moving from just a US service to markets across the globe. The much anticipated Apple Watch will also be launched in April. Cook was also bullish about the prospects of both its in-car CarPlay and home-automation HomeKit platforms, which he says will lead to new product categories over the course of this year.

The better than expected profits have led to Apple’s already considerable cash pile soaring to $178bn. While the company has been reluctant to offer dividends to investors in the past, the rising level of cash is likely to mean there will be further calls for an increase in the dividends that it started offering over the last couple of years.

Bank Aljazira on Saudi Arabia’s Islamic finance trends

Posted on January 28, 2015February 19, 2016 by Ashton Wenborn

The global banking sector took a big hit in the 2008 crisis, as collaterised debt increased to concerning levels. Now in its wake, sharia-compliant institutions grew in number. One bank that has taken off in the region is Bank Aljazira. Its Senior Vice President and Head of Retail Banking Group joins World Finance to discuss.

World Finance: Khalid, now we saw how many banks around the world contracted as a result of the 2008 crisis. Can you tell me how Sharia-compliance helped Saudi Arabia and your bank transcend these global trends?
Khalid Al-Othman: Luckily in Saudi Arabia, under the supervision of the central bank, no banks were bailed out or anything.

For Bank Aljazira, since we fully transformed the bank in 2007 to a fully Sharia-compliant bank, that’s another governing board: the Sharia board.

The Sharia board passes or disallows certain activities or investment vehicles such as CDOs, and they ensure that the bank does its transactions and offers its financial services through the morality of the product offering.

So you have the Sharia board also governing the board on what it does, and cannot do. Especially on the mortgage side or on the asset offerings. They get involved also on pricing, they get involved in the target segments of our offering. So we were immune to what happened in 2008.

I think Saudi Arabia is underbanked

World Finance: Let’s talk specifically about international ratings of the local banking system. Fitch was able to reaffirm your bank, as well as some of your peers, in the market place: partly due to strong business growth. Your area of expertise is the retail banking sector; can you tell me about the growth there?
Khalid Al-Othman: I think Saudi Arabia is underbanked. We have about 50-60 branches a year coming in throughout the Kingdom. And Bank Aljazira is one of them. So in 2008, the bank decided not to be – as it was – a brokerage house, but to turn into a full-fledged commercial bank. Mainly in retail.

So we transformed from having only 25 branches in 2008 to 70 today. We invested heavily in our technology, our electronic banking channels, and that resulted in double-digit growth in our asset book, from $3bn to about $15bn today. And our customers grew from 50,000 in 2007 to 350,000 today.

We grew double or more the market growth in almost every aspect. And not only that; because we were one of the smaller banks among our peers, we realised that customers come to us for our products in particular. So we tapped into the sponsorship area of football clubs. That also increased the brand awareness, so that was our investment in our brand equity.

So I think we have been very successful in that regard. But again, Saudi Arabia will I think take more branches and business in retail.

World Finance: The advent of the mortgage loan market has meant a lot to the banking sector; can you tell me what it means for young Saudis?
Khalid Al-Othman: Well the mortgage business is in its infancy. So it only really started about five years ago, but it’s growing of course. Saudi Arabia requires about 250-350,000 units a year. The GDP of Saudi Arabia doubled since 2007.

So the economy’s booming; jobs are being created; the government is investing heavily in the infrastructure.

Almost one in every four mortgages passes through Bank Aljazira

On the mortgage side, we recently had a new law limiting the loan-to-value ratio to 70 percent. So there’s a cap on what we can do as banks. We expect in 2015 a slow-down in the mortgage business, but we anticipate that it will go back up and boom again.

I think we perfected the model, in terms of the mortgage business. Almost one in every four mortgages passes through Bank Aljazira. But we did not limit ourselves to that; we introduced other mortgage finance products: mainly investment real estate, such as buy-to-let and equity release.

This is how we’ve been successful: by looking at the competition, and what they are not doing. And then try to be unique in our offering there.

We have been quite successful; our book in equity release and investment real estate reached about AED 1.4bn today out of nothing in 2010. So I think there is a market; although it’s not a mass market product, it’s just catered or tailored for the affluent segment, but has been extremely successful.

World Finance: Okay; finally, can you tell me about the increasing diversification of investment products in Saudi Arabia? What do you think is on the horizon, and how is your bank going to satisfy that desire?
Khalid Al-Othman: I think in the future we will continue on the real estate development type of investment tools. Through Al Jazira Capital we have several successful funds that are investing in affordable home development throughout the Kingdom. I expect that to continue: Saudi Arabia needs 300,000 units, and that requires a huge investment. So I expect that to continue.

World Finance: Well it will be interesting to see how the local investment sector matures, and your place in it: Khalid, thank you so much for joining me today.
Khalid Al-Othman: Thank you; thank you.

Vazon Energy on the changing landscape of oil and gas

Posted on January 27, 2015January 18, 2015 by Ashton Wenborn

Central Asia is among the relatively untapped global oil areas, which Dr David Robson, Executive Chairman of Vazon Energy, describes as the “fuel tank” for the Asian economy. A geologist and leading businessman, he spoke to World Finance about how oil and gas exploration is changing, where the world’s potential lies and how his industry experience has helped him lead the way as a pioneer in undiscovered regions.

What experience do you have in the oil and gas industry?
I studied geology, obtaining a BSc with first class honours from the University of Newcastle-upon-Tyne in the UK before completing a PhD in Geochemistry. I also hold an MBA from the University of Strathclyde Business School in Glasgow, Scotland.

I was looking at a career in academia but began working in the oil industry with the UK state oil and gas company BNOC, which became Britoil, based in Scotland. I was initially involved in exploration and then in operations for geology activities, working in the North Sea on exploration and appraisal wells, and then managing these activities from on-shore.

As infrastructure has developed over the years, areas such as Central Asia have become increasingly attractive – particularly with the newly developed links into the Chinese market

I then moved into production geology and geophysics, working on some of the large North Sea fields on which Britoil was the operator or joint venture partner, as well as looking at international projects for Britoil in places such as South America. Following that I moved to Hamilton Brothers Oil & Gas, working in the Petroleum Engineering Department as a development geologist, before acting as a deputy to the manager of petroleum engineering.

My projects focused on the development of new fields such as the large Bruce gas condensate field, and on smaller fields such as Crawford, where we drilled one of the very first off-shore horizontal wells in the North Sea. I also worked on the abandonment of the Argyll Complex, the UKs first offshore field.

In late 1989, I started developing Hamilton’s business in the then emerging markets of Eastern Europe and the former Soviet Union (fSU). I worked on projects across the whole region, from Poland through to Sakhalin, Siberia, the Pechora Sea, the Caspian Sea, Central Asia and down into the Caucasus. This gave me an extremely good knowledge base of the region and the projects available.

After a short spell at Mobil North Sea I started my own venture to build a new oil and gas company in the fSU in partnership with engineering company J P Kenny. Using my knowledge and contacts in the area, we created JKX Oil & Gas, working on projects in the Caspian, Georgia and Ukraine areas. The company was listed on the main market in London in 1995. In 1997 I started creating a new company, CanArgo Energy Corporation, focused initially on Georgia and then Ukraine and Southern Russia.

Tethys Petroleum grew out of that in 2003, focusing on Central Asia. I drew on my experience in the fSU to capitalise on the exciting potential of the Central Asia basins, including those in countries such as Tajikistan. I still regard myself very much as a geologist and a professional involved in finding and developing oil and gas.

Was it a conscious choice to work in Eastern Europe and the CIS, and if so why?
My move into Eastern Europe and the fSU was driven by my interest in developing these untapped basins and using modern technologies to develop oil and gas deposits in what is a vast area with enormous potential. That potential still remains to be fully exploited.

In what key areas of Eastern Europe and the CIS have you worked in?
My early involvement in areas such as Siberia and Mongolia led me to believe it would be better to work on developing oil and gas on the peripheries of the former Soviet Union, particularly in the newly independent republics, which were very keen to see their oil and gas resources exploited. That led me to places such as Ukraine, Georgia and areas in the North Caucasus and Caspian, such as Dagestan.

As infrastructure has developed over the years, areas such as Central Asia have become increasingly attractive – particularly with the newly developed links into the Chinese market.

In what major ways have you seen the oil and gas industry in the region change?
When I first started work in the area, the techniques used to drill and produce oil and gas were extremely rudimentary. Heavy and unsuitable drilling muds were being used, which effectively damaged the reservoir and severely limited production potential. Ineffective reservoir development methodologies were also being used, resulting in low recoveries, while very basic seismic and other exploration technology meant that many deposits weren’t being found.

The industry in the region has changed radically through investment from international oil and gas companies, the development of local technology companies, good management and improved techniques and technologies. There are however, still numerous opportunities for international companies to further improve both production and exploration success in the region.

How have you seen the geographical distribution of opportunities in the oil and gas industry change?
There are many opportunities with existing oil and gas deposits across the region to use modern techniques such as horizontal drilling, fracture stimulation and so on, and to enhance and produce significant volumes of additional oil and gas. There are huge areas which have hardly been explored, and I believe the focus in the future will be on finding deposits in areas such as Central Asia and Eastern Siberia where there are very large, underexplored basins with enormous potential.

New technology enables us to look further into areas which were previously restricted, such as off-shore in the Arctic Ocean and perhaps further into off-shore areas to the east of Siberia.

There are high potential geological environments where very little work has been carried out to date. The increased focus on things such as shale oil development has not yet hit the fSU, but the area has some of the best organic source rocks in the world, and some of the world’s best potential for shale oil production.

What would you say are your proudest professional achievements so far?
On the technical side, the first non-state drilling in the fSU Black Sea; the first horizontal wells in Georgia; the first multi-lateral wells in the Caucasus; the first development of a dry gas field in Kazakhstan by a non-state entity; and the first application of techniques such as under-balanced coiled tubing drilling in the fSU, and the first commercial discovery of oil in the Aral Sea area.

On the business side, the first oil and gas joint venture in Ukraine; the first loan from the EBRD to a private sector project in Ukraine; developing the country’s third biggest gas producer; the first Production Sharing Contract in Georgia and the first non-state drilling in Georgia; the first Production Sharing Contract in Tajikistan; and more recently, the first tripartite farm-in by a super-major and a super-NOC to work in partnership on exploration in the Bokhtar area in Tajikistan – which has very high potential.

Professionally, the Medal of Honour for Services to the Georgian Hydrocarbon Industry, presentations at the Paris Club of donor nations in Ukraine and Georgia, being a founder member of the President of Tajikistan’s investment council, and my appointment to the Supervisory Board of OrienBank, Tajikistan’s longest established bank, all stand out.

What are your predictions for the future of the industry in Eastern Europe and the CIS?
I believe with further investment huge amounts of oil and gas could be produced in Eastern Europe and the fSU. There are vast areas of the Russian Federation with enormous potential. Although some are in extreme environments they are likely to be developed, depending on energy prices in the future.

Areas such as Central Asia – where operations are somewhat cheaper – still have enormous potential for significant discoveries – which will fuel both gas and oil demand globally. These basins extend down into Afghanistan – another area where I have sought projects and which has significant untapped potential for the future.

The increased infrastructure and exports of gas and oil from Central Asia into the Chinese market is a very important factor in recent times, and I believe this will increase in the future to supply the energy hungry markets of East Asia. Potential in areas such as the Black Sea have not yet been fully explored. The developments in the Caspian Sea are already poised to yield significant flows of oil and gas into the world markets.

This area is an energy powerhouse for the surrounding regions, and with proper development its potential is enormous. The increasing pace of infrastructure development is likely to ensure an extremely bright future. I look at the area as being key to the development of Asia in general, particularly the Chinese market and, in the future, the Indian sub-continent.

As such, where I work today in Central Asia is effectively the fuel tank for the development of the Asian economy. I believe there is room for further integration of the area with the Asian markets, and for very strong economic development as those areas grow. I am very proud to be involved in the endeavour.

Can Greece wave goodbye to debt?

Posted on January 27, 2015January 28, 2015 by Ashton Wenborn

World Finance: Richard; how do you see Greece’s economy developing, now Syriza is in power?
Richard Murphy: Nobody knows what is going to happen in Greece; nobody knows how the European Central Bank and Germany are going to react to the demands that are going to be made of them.

But let’s also put that in context. We do have a new Greek government that is pro-European, and that is pro- staying in the euro. And if the European Central Bank and Germany have any sense, they will exploit that. Because they are facing plenty of opposition throughout Europe: UKIP in the UK, the National Front in France and so on, who are trying to pull out of Europe and the euro. So they really do need to take advantage where they can get it; and Syriza is offering that choice.

I think Europe should be doing everything it can to help Greece

Now, what else are we looking at in Greece? Look: the fundamental problem, and the reason why I think this new government was elected, was not because of the euro, but it was because of a complete and utter desire to create a new style of economy in Greece. To get rid of the corruption, to end the environment where tax evasion was endemic – 27 percent is the best estimate of the amount of tax not paid in that country – and to create a new society where people do pay their way, but at the same time also get the chance to work.

So what do I expect to happen in Greece? I actually expect they will be given the chance to waive some of their debts; some of their interest payments will be waived for some time. And Greece will then get on with building the new structures it needs.

I think Europe should be doing everything it can to help Greece: to build its economy, to collect its taxes, to provide information it needs to do those taxes. To lend its support to reform its tax systems – which are hopelessly bureaucratic, I’ve been there and seen them. And to streamline its civil service procedures to make sure that this is an economy that can move into the 21st century. And deliver for the people of Greece at home; whereas at the moment they’re being forced to move abroad – which they don’t want to do – to get any kind of income for themselves and their families.

So my hope is that Greece will actually move forward very strongly after this; but Germany in particular has got to realise that that is in its best interests; and I’m not sure it’s going to happen as yet.

WWJD? Cut executive pay?

Posted on January 27, 2015January 26, 2015 by Ashton Wenborn

World Finance: James, do you think religion should play a role in economic policy?
Dr James Corah: We’re not going to talk about economic policy at the macro level; but personally, one of the things that drives me to do the job that I do, and one of the things that our clients are very keen on, is making sure that businesses are aware of their social perspectives. They’re the people who are relating to the micro economy on a daily basis.

And churches who have teachings in this area: they’re telling us as an investment manager to make sure that we’re reflecting the most important concerns for them to the companies they’re investing in.

So yes, I do think there’s a role for church investors to play in representing the values of what it is they’ve got to do; and making a change happen as an additional mission benefit, over and on top of top quartile investment returns.

[C]hurch investors can be proud of how they really helped add to a social benefit to the corporate workplace

World Finance: Well inequality is a big issue at the moment; what are your thoughts on the living wage?
Dr James Corah: One of the things that our church investor clients have been saying for a long time, is they don’t like what they consider to be excessive executive pay. They really do believe that executives of companies should be rewarded for growing a business, for the skill and level of endeavour that they’ve shown in generating a growing business. And they do want to reward them. But they are just concerned that some of the pay packages are just too much.

So for a very long time now, we have been voting against something like 70 percent of FTSE 100 remuneration reports.

As a recent catch-up on that, the narrative has gone from ‘pay at the top is too much’ to ‘pay at the bottom is far too low.’ And if you look at the figures about in-work poverty, our clients are increasingly getting scared about the people who are being left behind in that sense.

So what they have asked us to do is to continue voting against those remuneration reports, but to signal our support for endeavours like the living wage, and make sure that we are really engaging with companies on a sector by sector basis, to make sure that all of their staff in the UK, and their contractors, are now being paid above the living wage rate.

World Finance: I want to draw your attention now to a quote by Frank Borman, who said that “capitalism without bankruptcy is like Christianity without hell.” So there have to be losers in society to justify winners – so surely finance and the church are not that different?
Dr James Corah: What we have learned from church investors and charities more broadly is that there’s a very productive conversation that can be had; they don’t have to be seen as opposites. You can really talk to each other, so the churches can generate top level financial returns to fund their activities, but also get a mission benefit by actually talking about the things that matter for the companies, who are very responsive to them, and can make changes happen.

And church investors can be proud of how they really helped add to a social benefit to the corporate workplace.