The argument over whether banks need to face tighter regulations rumbles on, with the head of America’s largest financial institution claiming calls for a break up would do serious harm to the country’s financial system.
Revealing a decline in quarterly profits of 6.6 percent, JPMorgan Chase CEO Jamie Dimon claimed that banks were “under assault” from a number of regulators, and that this has seriously impacted on the company’s ability to operate successfully. In November, the bank was forced to pay $990m worth of fines because of its actions in the foreign exchange markets.
JPMorgan Chase CEO Jamie Dimon claimed that banks were “under assault”
Dimon told analysts and investors in a conference call, “We have five or six regulators or people coming after us on every different issue. It’s a hard thing to deal with.” He added that the payments were likely to continue, although he hoped they would return to normal rates soon. “The several billion dollars that we’re going to have to pay for legal stuff, we want to fix it. And it’s unfortunate we do this to you all, but it’s unavoidable right now.”
Some that claim US financial institutions had been free to run amok in the years preceding the financial crisis of 2008 have welcomed the severity of the fines to hit banks like JPMorgan. However, Dimon warns that the country’s dominance of the global financial system is under threat if regulators try and restrict banks much more.
He said, “America has been the leader in global capital markets for the last 50, 100 years. It’s part of the reason the country is so strong. As a matter of public policy, I wouldn’t want to see the next JPMorgan Chase be a Chinese company.”
Some critics of the industry have claimed that large banks should be split up into separate operations, so that the riskier parts of the business did not impact on deposits. However, Dimon argues that doing so would prevent the banks from operating on a global level. “There is a reason you have big global multinational banks, and they serve big global multinationals, including governments. This company moves $6tn- $10tn a day. You’re not going do that as a small bank and you’re not going to take it out of a $20bn bridge loan, and you can’t do certain things globally in 20 countries if you aren’t in 20 countries.”
Board members from Samsung Electronics and Blackberry have engaged in talks over a potential buyout at $7.5bn, according to reports. South Korea’s Samsung allegedly proposed an initial price of between $13.35 and $15.49 per share; a premium as high as 60 percent over Blackberry’s current trading price. Following the initial report of the offer from Reuters, Blackberry’s shares soared 30 percent; its biggest share price gain in almost a decade.
Following the initial report of the offer from Reuters, Blackberry’s shares soared 30 percent
Canadian firm Blackberry has rejected various takeover offers in recent years in favour of a turnaround strategy launched by chief executive John Chen, national newspaper The Globe and Mail reports. Samsung’s interest in Blackberry is likely so it can get its hands on some 44,000 patents owned by the latter, which would position the South Korean firm better to compete with Apple and other rivals.
Blackberry was once a leader of the mobile market with a nearly 50 percent share in the late 2000s, but has since fallen from grace, having struggled to stay afloat in a fiercely competitive market. It now possesses less than one percent of that market share after touch-screen devices took off, largely led by Apple’s iPhone. Its revenues continue to decline, and although neither company has confirmed a sale at this point, analysts predict a buyout within two years. In December, Blackberry reported that it failed to meet targets yet again, with its revenue having fallen to $793m from $1.19bn a year earlier.
Samsung holds around a 25 percent share of the global smartphone market, while Apple takes 11 percent. The rise of cheaper Chinese rivals, such as Xiaomi and Lenovo, in recent years is making it more difficult for Samsung to see growth, but a Blackberry takeover and all the patents that come with it would potentially attract unwanted attention from the Competition Commission.
The Reserve Bank of India (RBI) has issued a surprise announcement that it will move immediately to slash its benchmark interest rate to 7.75 percent, down from eight percent previously. Businesses and government have been upping the pressure on the country’s central bank to reduce interest rates for some time now, though it has taken lower-than-expected inflation to force the bank’s hand.
Rajan also suggested that there would be further interest rate cuts in the months ahead
Although the rate cut was widely expected, the timing is surprising, given that the move has come a few weeks before the RBI’s next scheduled meeting on February 3. Statistics show the Indian economy is growing at half the rate it was four years ago and inflation is below par. Figures for December showed that year-on-year inflation was up 0.11 percent, far short of the RBI’s 0.6 percent target.
The RBI’s Governor of Monetary Policy, Raghuram Rajan, said in a statement that a sharp decline in the price of fruits and vegetables since September and falling international commodity prices, namely crude oil, are behind the nation’s inflation numbers. “These factors have significantly reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects,” he commented. “Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009. Inflation outcomes have fallen significantly below the eight per cent targeted by January 2015. On current policy settings, inflation is likely to be below six percent by January 2016.”
Rajan also suggested that there would be further interest rate cuts in the months ahead: “once the monetary policy stance shifts, subsequent policy actions will be consistent with this stance,” he wrote. And if the response to this first move is anything to go by, the rate cuts will be warmly received by government figures, in that they will enable the country to more easily attract investment and boost consumer spending.
A novel private-public partnership is paving the way for road developing in Peru. World Finance speaks to two representatives from Odebrecht Latinvest, Jorge Barata (Executive Director) and Raul Pereira (CEO), to discuss what lessons can be gleaned from this local success story.
World Finance: Now I understand that there were some complexities around financing this project through bond financing. Can you tell me something about that, Jorge? Jorge Barata: There were two phases in the financial-structuring process. The first: we took out a bridge loan of 27 million, which allowed us to do the initial works before implementing the improvements needed immediately on roadways, in addition to reforming the tollbooths and other small works. Immediately afterwards, we finalised the final financing structure.
Said final financing structure had a significant impact on the country, as financing of PVS 1.4bn was generated, which exceeded other financing structures significantly.
We then issued an additional US$200m dollars to be used one year afterwards, just when we were about to start the expropriation process on the land in the Ramiro Priale district and start works.
[T]he political situation in Peru is stable, which has allowed for quick growth in recent years
World Finance: So Jorge, tell me about the role that Odebrecht Latinvest played in financing this deal. Jorge Barata:The experience of Odebrecht Latininvest in the case of Rutas de Lima, as the company responsible for developing this project, which is quite ambitious and very important to the development of the city of Lima, has been quite successful.
Odebrecht is a company that is very committed to the development of countries. This range of experience in various countries makes it possible for the company to guarantee, both funders and partners and, primarily, clients, a level of certainty that we will deliver on-time, on-budget and pursuant to the conditions established in contracts.
World Finance: Now Raul, I know that the municipality of Lima was very much in need of this sort of an upgrade. Can you tell me what it means for the local community? Raeul Pereira: Lima, the country’s capital, is home to nine million people. One of the local government’s priorities is reducing the gap in infrastructure and, as a result, the objective of Rutas de Lima is to increase the connectivity and efficiency of the system.
Our contract, in addition to covering operations and maintenance, involves constructing new roads, and maintaining existing roads.
As regards operations, we offer users the entire range of emergency and roadside assistance services, regardless of whether they have driven through a toll booth or paid a toll or not.
World Finance: Well Jorge, why couldn’t the government coffers be used in terms of financing this project? Jorge Barata: We believe that, firstly: financing, when private, is a much faster option. It is available immediately, you can build and start works within a period of time that the government is normally unable to match. So, for example, in this project, once the financing process is complete, within two years we will complete work on the two main roadways.
Furthermore, the political situation in Peru is stable, which has allowed for quick growth in recent years. This growth has accelerated the infrastructure gap issue that affected the country. So today, Peru is losing its ability to compete due to the lack of infrastructure. So the government has had to make a tremendous effort along with private companies to overcome this difficulty and ensure that the country could return to the desired level of competitiveness
World Finance: Further Jorge, can you explain to me how other road urban construction projects can be replicated through PPPs? Jorge Barata:This concession has quite strong characteristics.
For example, there are currently more than 200,000 vehicles being used each day in the city. Therefore, we needed to carry out all the work without interrupting traffic and ensuring that it continued flowing.
Odebrecht is a company that is very committed to the development
of countries
Everything that we do has to be approved by the Ministry of Transport and Lima city council. So, we submitted studies, which were not only approved and checked, but they were tested using up-to-date software systems.
This made it possible to see that the model developed was going to work, even under the most severe and demanding traffic conditions in the region against the current projected level of growth.
So, then you are left with the issue of traffic volumes, with the issue of the models and engineering used and you also have to have the capacity to intermediate between the private sector and the government.
All of this effectively becomes a very representative development and quite a significant model to be replicated by other PPPs.
World Finance: Finally Jorge, can you tell me about some of the other PPPs you’re planning on embarking on in the future? Jorge Barata:The entire region has been facing the same problem. This problem involves a transport system that needs to be developed and updated. People believe that the same model that we are applying could be replicated in different cities; at least five.
The fact that Odebrecht Latininvest is working in more or less 10 countries in the region is really going to help us replicate this model and help us to identify opportunities and together, with the governments of each region and each city affected, work on developing these projects.
World Finance: Fascinating to hear. Jorge, Raul; thank you so much for joining me today. Jorge Barata, Raul Pereira: Thanks a lot.
Founded in 1999, Mina Group has sourced over a billion gallons of fuel, transporting it thousands of kilometres through the most difficult terrain, to the most remote areas, often under the most challenging of conditions.
“We operate in a highly competitive market”, Mina’s President and CEO, Graham O’Donoghue, tells World Finance. “Mina’s greatest strength is having the real-time flexibility to source fuel from different regions and transport it via whichever route is necessary to get the job done. In our business, much of our work involves security challenges, complex logistical demands, and supply cycles lasting several months and spanning thousands of kilometres. Mina is unique in its proven ability to meet customer requirements in the face of these challenges.”
It is a strategy that appears to be paying off. Today, Mina is the largest supplier of jet fuel to the US military in Afghanistan, where the company pioneered a new supply route to support coalition forces. Mina owns, operates, and maintains significant infrastructure to support its Afghan operations. This includes multiple storage facilities with capacity of over 20 million gallons; and rail tank car and tanker truck facilities. It is such achievements that saw it recognised as the Best Downstream Service and Solutions Company, Middle East in the 2014 World Finance awards.
A fuel storage facility. Mina is constructing a bulk fuel facility in Oman for use by the US Navy
Growing presence
Mina’s principal storage facility near Kabul can consistently discharge over 200 trucks per day and load nearly 100 trucks per day for delivery throughout the country. “In places like Afghanistan, we take proactive steps to ensure the security and reliability of deliveries, such as building and operating our own pipeline for fuel deliveries in order to reduce dependency on trucks, which can be targets for insurgents”, says O’Donoghue.
And Mina has done precisely that. The group built and operates a pipeline directly connecting its fuel storage facility to Bagram Air Base, the largest US military base in Afghanistan, with a dual runway capable of handling military aircraft.
Mina’s US Government contracts do not end there. In the past year, the company has won multiple competitive tenders to supply jet fuel to the US Defence Logistics Agency in various locations in Poland, Lithuania, Estonia, and Latvia. “We’re building our presence in the Baltic region and Eastern Europe”, says Zack Friedman, the company’s Group Executive Vice President and CFO. “The fact that we are nimble enough to mobilise resources at short notice and move fuel in challenging conditions, be it through extreme weather or conflict zones, makes us a valuable partner for the US Government, NATO, and the United Nations, among others.”
Another major project in motion is Mina’s construction of the US Defence Logistics Agency’s highest profile infrastructure project in Oman. The operation will consist of a 230,000 cubic metre bulk fuel facility capable of receiving, storing, and delivering a massive 61 million gallons of fuel for use by the US Navy. “With Mina’s expansion into Oman and our intention to develop a long-term, meaningful presence there, the Salalah project is undeniably one of the most important infrastructure projects in Mina’s history”, says Friedman.
O’Donoghue and Friedman lead
Talking to O’Donoghue and Friedman, you get a clear picture that Mina’s growth may in large part be down to the energy of its new leadership. Both Harvard graduates, O’Donoghue and Friedman were appointed on July 1, 2013. At just 35 and 36 years of age, respectively, they are among the youngest executives running a company of Mina’s scale and stature, which sits at the cross-section of commodities trading, transportation logistics defence contracting, and international relations.
Their biographies are impressive. O’Donoghue served as Associate Counsel to President George W Bush in the White House and holds a JD from Columbia Law School and a BA from Harvard University; while Friedman was a hedge fund investor and worked at both The Blackstone Group and Morgan Stanley. Friedman has a BA from Johns Hopkins University, a Masters in Public Policy from Harvard University, a JD from Columbia Law School, and an MBA from Wharton Business School.
Since assuming the top leadership at Mina, O’Donoghue and Friedman have significantly increased Mina’s operating and net profit margins, which have led to the company’s best financial performance in four years. They have also increased government contract revenue, bolstered trading profits, tightened financial controls, reduced administrative costs, optimised inventory management, and expanded the global footprint.
Maintaining the highest ethical standards is high on O’Donoghue and Friedman’s list of prioritiesa. “We move product through many different countries in the world and are acutely aware that we must respect the communities in which we operate and that it is often the people in those communities that enable our success”, Friedman says. “There is no reason not to conduct our operations according to the ethical and compliance standards of the world’s largest publicly traded companies. That is our goal.”
Transporting jet fuel to Afghanistan
In 2004, Mina helped pioneer a new supply route to support coalition forces in Afghanistan, the now widely used Northern Distribution Network. The US Defence Logistics Agency continues to contract with Mina to supply jet fuel to Afghanistan. Mina overcomes extreme security challenges, difficult terrain, and supply cycles that often span several months and involve thousands of kilometres of travel, to meet its customers’ requirements.
The company owns, operates, and maintains significant infrastructure to support its Afghanistan operations. Its quality assurance team operates a laboratory capable of full specification testing on fuel products before delivery. To ensure consistent supply as well as to maintain required strategic reserves, Mina manages several storage facilities with available capacity of over 20 million US gallons and operates rail tank car and tanker truck facilities. Mina’s principal storage facility near Kabul can consistently discharge over 200 trucks per day and load nearly 100 trucks per day for delivery to points throughout the country. To improve the security and reliability of deliveries, Mina constructed and continues to operate its own pipeline to Bagram Air Base.
Over the last decade, in which Mina has delivered more than a billion gallons of fuel to US forces, Mina’s performance in Afghanistan has proven its ability to surmount challenges and reliably deliver quality products in the most difficult environments in the world.
Corporate social responsibility
O’Donoghue and Friedman have overhauled the company’s compliance programme by revising, updating and strengthening corporate policies. The group’s corporate social responsibility programme is equally extensive. Among its programmes is Mina’s partnership with the American University of Central Asia (AUCA) in a venture known as the New Generation Academy (NGA), which provides deserving secondary school graduates from central Asia with an intense one-year curriculum to help them prepare for university. Mina has committed funding for the programme through to 2017 and the group sponsors 70 scholars chosen from all regions of the Kyrgyz Republic at the NGA each year. The company provides the most promising with full four-year tuition.
Mina also participates in a programme to promote young female leaders and sponsored delegates from Afghanistan, China, Georgia, Kenya, the Kyrgyz Republic and Saudi Arabia to attend a leadership summit in Washington DC.
Moving forward
Amid the near-term volatility of world energy markets, what does the future hold for Mina? “We pay close attention to world affairs and current events to assess the impact on energy prices and supply chains”, Friedman says. “From Syria and Iraq to Afghanistan and Ukraine, Mina is prepared to help ensure uninterrupted, on-time fuel supply no matter the location. Further, we are focused on expanding our physical commodities trading business to new geographies where we can identify arbitrage opportunities or trade around a strategic asset.”
Many things have changed since the turn of the century, and the most important of them is probably the dispersion of wealth and power. When we look back at history, it is quite evident that the shifting of power and wealth is a continuous process as it moves around the world from region to region, and mostly everyone gets a chance to make use of it.
Though many of the countries that comprise emerging markets started from a low base, they have grown rapidly and now their size has become significant. Currently these emerging markets account for about 50 percent of the global GDP (see Fig. 1). An interesting statistic to note is that there are about 8,000 large companies worldwide with revenues of more than $1bn, and three out of four of these are based in the developed world.
It is estimated that by 2025, the number will become 15,000 – 70 percent of which will belong to the emerging markets. While there is an undeniable shift in wealth and resources towards Asian economies, the case is more favourable for the GCC region, comprising of Saudi Arabia, Kuwait, Qatar, United Arab Emirates, Oman and Bahrain.
Continuously pushing ground
The region is an exception to several of the commonly faced problems in the Asian economies, and is also often misread along with the other countries of the Middle East. The continuous political imbroglio at its periphery has always been a distraction, which is why foreign participation was limited in the region. A great deal of literature has already been written on the progress made in the economy and improvement in the socio economic status of the union, which has contributed to its success.
As an investor, and having seen the growth in the region, I believe the improvements witnessed in the economy and equity markets in the recent past is sustainable, and the years ahead will be far more exciting (see Fig. 2). The graph clearly indicates the higher rate of growth experienced in the GCC. This has been affected partly due to high oil prices, and to the gradual social transformation that has created underlying buoyancy in the economy. There has been a phenomenal increase in the employment rate, new industries have propped up and FDI levels have increased.
The paradigm shift to the region ensued with the remarkable emergence of Dubai and the media sensation it created over the last decade. The flutter has forced open the eyes of several foreign investors, and huge investment has gradually flowed in. The minimal time for setting up a business, hassle free operations, low cost of infrastructure, tax-free haven and stable currency have been some of the main attractions.
The influx of capital has also led to wide spread improvements in the regulatory and policy framework of the region as a whole to match and accommodate the objectives of the local and international investors. As a result of the increasing attention, the GCC union – on a combined basis – has entered the trillion-dollar economy club and growing at a much faster pace than its peers. This kind of size and rate of growth is difficult to ignore.
GCC economies that were once fully dependent on revenues from oil and gas have taken great strides in diversifying into various service- and production-related industries. The non-oil revenue for the GCC region combined has grown over seven fold in the last decade. The average contribution of the non-oil sector to the nominal GDP of the GCC is close to 50 percent now. Sectors such as tourism, healthcare and education have received major boosts in the government budgets.
Employment opportunities have increased along with the local pool of skilled labour. Most of the sectors that are at the end of their product life cycle in other places are still in their nascent stage here, and hence there is ample scope for growth. Retail and healthcare are two sectors that have maintained double-digit bottom line growth for more than five years and still going strong.
Young, rich and driven
Developed nations are facing heat over an ageing population. GCC countries have the youngest demographic status, with a majority of the population under the working age – and younger. This will have a far-reaching long-term positive impact on the region, and growth would be a must to provide for this generation. Also, unlike other developing countries, the GCC nations are wealthy and can afford to provide the appropriate training and education for citizens to make them employable.
The equity markets in the GCC have gone through tremendous changes over the last decade. Corporates that were initially shy of entering the public space have realised the various advantages of sourcing capital through the stock markets and deploying them effectively in their business. This trend has primarily been a forced progression and as a result of the rapid growth and capital requirements it entailed.
The evolution of various business opportunities brought with it a host of professional managers both from within the region and abroad. They have imbibed the best practices from across the globe and transferred the same in the GCC. Currently we have an increasing base of local and foreign participants in the equity and bond markets. There are over 100 asset management companies managing 400 funds with a total corpus of near to $50bn in the region.
Further there is a private equity segment that separately manages over $20bn. The fund management industry has not only grown in size but also in terms of sophistication and risk controls. The aggregate market cap of the listed GCC companies in the GCC has almost doubled from 2006. Aiding to the growth of the industries, companies have also evolved to become investor friendly, adhering to disclosure norms and publishing data on a voluntary basis. The improvement in transparency has been acknowledged by several international agencies such as MSCI that recently upgraded Qatar and the UAE to an emerging market status after thorough consideration and in-depth research of the entire process flow in the capital market.
Global trade has focused itself around the Middle East region for some time now. Capitalising on the geographical advantage that the region already possesses, it has built an integrated system of road, air and sea ports. Currently it boasts the biggest air and sea ports in the world. The most ambitious GCC rail that will connect all the six countries in the union is already in the final stages of planning, and work is expected to commence next year.
Superior infrastructure and efficient management of resources has attracted several large global companies to move their base or office in the region for the future. The significance of this sharing of security network and infrastructure will bolster the GCC’s strength. As the region gets global attention the local population also stands to benefit imbibing the best practices from international players. The GCC currency is pegged to the dollar and offers a great amount of stability and comfort to the investors. Any improvement in the advanced economies will have a direct multi-fold positive impact on the region.
Going forward, it is expected that crude prices will continue to remain in the $80-90/bbl range, aiding sufficiently for large-scale projects in the pipeline. It is envisaged that over the next decade, projects worth over $1.1tn will be completed and several more in the design stages. IMF has forecasted the regional GDP growth rate at 4.5 percent that is in the higher range compared to the global average of 3.3 percent. Out of this the non-oil GDP is expected to grow at six percent while oil GDP at 0.5 percent.
The GCC current account surplus is among the highest in the world, and stands at $238bn. The World Expo 2020 in Dubai and the football World Cup 2022 in Doha both have a total project outlay of $220bn. These events confirm the fact that GCC has arrived on the global stage and is capable of managing such comprehensive large-scale deals.
World Finance: What are the main traps legitimate companies can fall into when it comes to illegal activity? Stephen Platt: There are really three traps. The first is that they commit forms of as it were criminal conduct themselves, whether that’s in the form of insider trading, rate-rigging, or sanctions busting activity. So where you’ve actually got wrongdoing from within the organisation.
The second would be where this is no wrongdoing within the organisation, but the organisation launders the proceeds of other people’s wrongdoing. So classic money laundering, by way of an example.
The third example would be where the financial institution, in its relationships with its customers, facilitates the criminal conduct of those customers through the provision of financial services, whether that’s the provision of structures – trusts, companies, foundations, partnerships, and so on and so forth – and through the banking of those structures, and through the provision of investment and brokerage services to those customers.
World Finance: So how can they safeguard themselves? Stephen Platt: Primarily by being honest about the nature of their susceptibility to abuse. Both from within and indeed from without. So from within, clearly one as a financial institution has got to be absolutely honest about your vulnerabilities to involvement in wrongdoing by your own employees and by your own institution.
Secondly you’ve got to, adopting a risk-based model, be honest with yourself about your susceptibility to abuse through your customer relationships. One of the ways many institutions can do the latter a lot better is by ditching the traditional model of money laundering, and utilising for the purposes of managing these risks a much more realistic model, which is based on what we describe as the enabled distance-and-disguise model of money laundering.
Inflation in the UK is on a downward trend, and figures just released show rates fell to 0.5 percent in December – the lowest on record. Is this good news for the economy? World Finance speaks to Dr Dennis Novy, Associate Professor of Economics at the University of Warwick, to discuss what this could mean for consumers and the Bank of England.
World Finance: Dennis, 0.5 percent – it’s so low. What does such a low rate mean for the UK economy? Dennis Novy:It’s good news for consumers in general. If prices are down and inflation is coming down, it means that real purchasing power has gone up, and their budgets are no longer as squeezed.
Now, the bad news is that if inflation keeps on falling even further, it might make life much harder for policy-makers, and for the Bank of England in particular.
The drop in inflation that has just come out is very steep this time around. And mainly that’s because of lower energy prices and oil prices having dropped quite a bit. But even if you strip out this recent drop in oil prices, core inflation has been on a downward trend for many months – actually a couple of years now.
If prices are down and inflation is coming down, it means that real purchasing power has gone up
The inflation rate might drop even further, which might put the UK economy closer to deflationary territory. That means the UK economy might weaken further, and it might be very difficult for policymakers to do something about it. In particular, the Bank of England might have to think about how it can re-inflate the economy. That will be a tough thing for them to do.
World Finance: So, 0.5 percent: this will mean a letter of explanation from Mark Carney to George Osborne. The first of this kind – because inflation is too low. What sort of pressure is the Bank of England under? Dennis Novy: So the Bank of England needs to tell the public – not only George Osborne – how it will deal with this threat. If inflation continues to slip, it might have to actually think about unconventional measures.
Normally what the Bank of England would want to do in such a situation is cut interest rates. But interest rates have been very low for a long time now – for five or six years. They cannot be cut any further.
So what the Bank might have to do instead is think about more unconventional measures. Things like quantitative easing. This is something that we haven’t heard that much about recently, and we probably will hear much more about in the next few weeks and months.
World Finance: Do you think perhaps we’re a bit too infatuated with inflation as an economic measure? Dennis Novy:Inflation is a key indicator of the economy. It matters to ordinary people; it matters how big their budgets are, and how far they go. So if inflation is very high their budgets are squeezed; if inflation is low they can buy more with their income.
But it also matters for policymakers. If inflation is very low, if it turns towards deflation, it becomes a big problem for central banks to deal with. Just look at Japan: Japan has had deflation for many years now, it’s been a major, major problem. Look at the eurozone – there’s deflation in the eurozone right now – in some eurozone countries such as Greece, there’s severe deflation. It makes for a huge problem to deal with the macroeconomy for central banks and governments. So I do not think that we pay too much attention to inflation; it’s important that we do.
Inflation is a key indicator of the economy. It matters to ordinary people; it matters how big their budgets are, and how far they go
World Finance: Well as you said, other countries and areas are going into deflation – such as Japan and the EU. So it’s not all doom and gloom, as our lower inflation rates will mean we can offer a more competitive edge? Dennis Novy:Yes… in principle yes. But we cannot just look at the UK in isolation. In the eurozone inflation is also down. So you think about the relative change, it’s not clear that the UK competitive position has improved. You can’t just look at the inflation rate in one country in isolation; you have to look at it in other countries as well. And right now, certainly in Europe, inflation is on a downward trend pretty much everywhere.
World Finance: Is there a possibility we’ve entered a liquidity trap? And if so, how do we get out of it? Dennis Novy: Yes! Inflation has been very low for a while, and interest rates in particular have been at rock bottom for a couple of years. So I think it’s clear by now, after so many years, that we are in a liquidity trap. Central banks find it incredibly difficult to get traction; interest rates cannot be cut any further. They have started quantitative easing: in the UK that has happened, in the US that has happened, people expect it to happen in the eurozone very soon.
I think there’s no doubt by now, even by detractors, that we have a problem. And it is a liquidity trap, and it might be quite difficult to get out of it.
The renewable energy sector in Africa is growing a rapid pace, spurned by technology and local financial acumen. One company at the head of innovation in the continent is Eaglestone Advisory. World Finance speaks to its CEO and Founding Partner, Pedro Neto, to find out more.
World Finance: Tell me about some of the unique investment opportunities that you and your company have identified. Pedro Neto:First of all, I think it’s good for everybody to understand that in Africa, after all these years of development, we have over 600 million people without access to electricity. And on average, we think that four out of five families don’t have access. And that really is a challenge in terms of getting new ways to improve that.
In the last couple of years, the development of the renewable sector, with advancing technology, was able to change and improve those numbers.
We have been very active in the renewable sector for the last four years. Coming from South Africa – South Africa is really the driver in the sub-Saharan region in terms of renewables. And really this combination of new technology, and the use of renewable resources, really makes the difference.
We are starting to see a strong link and a strong development in Mozambique
Traditionally you see in Africa a combination of gas in the north, hydro resources in the centre, and the south was really based on coal. And really what we needed to do was to change the predicament, try to get slightly away from the coal, because of the environmental issues. But also hydro nevertheless is renewable, has also advantages. And these advantages are in terms of the environmental impact.
So really, betting on the wind and solar has been really a big driver for South Africa, and has allowed South Africa to be a real driver in the region.
World Finance: Now, in developing all of those local projects, did you have the skills base in the countries to be able to develop them? Pedro Neto:We start with the local developer: people that have the land, made the technological studies, and came up with the idea that it was good to have a windfarm or solar project in that place.
That really has started to create different market niches, in terms of improving the human resources skills. For example, young engineers that come out of university and set up their own companies on the technical side. You can think about construction companies that have really built up new skills – in terms of building up windfarms or solar farms. And you can think about the financing system, where the banks have to really enter into a new stage: about financing new types of projects.
So it has improved a number of skills in different sectors.
World Finance: You have your ambitions, but you can’t make those projects come to fruition without a sound financial regulatory climate. Tell me: did that exist? Pedro Neto:It’s the largest challenge, always. So we have a sound legal framework, and that on the renewable sector and the energy sector is always a combination of a power purchase agreement. And with an entity that is solid enough to buy, and to give assurance to the banks, to the lending community, that the project will work in the long term.
I think South Africa, after these couple of years, we have now a kind of stable framework. And we see that on this link between South Africa and Mozambique, where people are very comfortable – or seem to be comfortable – in a scheme that we have a PPA between a Mozambiquan company for example, Azcom in South Africa is a buyer of the energy, and the banks, namely the South African banks and international community, are willing to finance on this basis.
So stability is there: that’s the most important thing. People need to believe that the legal framework is stable, and the governments are supporting it.
World Finance: Now you and your company have these ambitions to expand beyond your local markets into the renewable energy sectors elsewhere; can you tell me about some of those local markets? Pedro Neto:South Africa has been a driver in the region for the next couple of years. We are starting to see a strong link and a strong development in Mozambique. Angola also has plans for the development of its renewables sector. And we are starting to take some initiatives in Rwanda, Zambia, Ghana, Kenya; so, it’s growing.
But it’s growing based on the positive experience of South Africa. That I think is the main driver.
World Finance: Pedro, with such an intimate understanding of the natural resources sector, can you tell me what other sectors are not being tapped effectively in the continent? Pedro Neto:The next challenge is really the use of the natural gas that we will have a huge quantity available. With the development of Mozambique – Mozambique has discovered the natural gas sector, Mozambique will probably be the fourth largest reserve worldwide. And that really can change the predicament in the region, if you can start to transport that gas to the other countries, and use the gas to transform energy in different ways.
Between the availability of gas in Angola and Mozambique, we really can have a number of new projects in the region in the next few years.
World Finance: And what role is your company going to play in all of this development? Pedro Neto: We have a team that is really built up around the infrastructure and energy. So really, all of us have done infrastructure and energy projects around the world for the last 20 years. And really, we are trying to build up on the energy producing projects, but also on the pipelines that will be needed to transport the gas on the transmission lines that will be necessary. And all the infrastructures that will be related to these projects – talking about airports, railway, everything that connects to these developments.
And really, we believe that you can see the numbers that are forecast for infrastructure development in Africa are huge. So we expect for the next 10-15 years, the amount of work that has to be done between the sub-Saharan region is fantastic, and will be keeping us in work for a long time.
European banks are still being cautious; investment in the European economies is behind that in the US. Simon Featherstone, Global CEO of Bibby Financial Services, speaks to World Finance to discuss what is occurring across the world, and in the emerging market of China.
World Finance: Simon, Asia and Australia are powering ahead, fuelled by China’s demand for raw materials emerging from the mining boom. How do you see China developing, and is the country’s growth still a pivotal cog for the global economy? Simon Featherstone:For me, China will remain and become an even bigger pivotal cog. It’s got to get its own, the balance of its economy, a little better I think. There’s way too much fixed asset, and a little bit more consumption driven for me. It also needs to stabilise its financial system in the sense of the amount of borrowing that comes from the bigger central banks, and bring more outward private investors into the lending space as well.
I see the central government’s taken some fantastic steps, particularly in the receivable space, to bring in specific regulation and set up specific credit instruments, support independent business like ourselves going in to China, but it still has work to do, particularly with the court and legal system, for external investors before people have the confidence to really go for it in China.
China will remain and become an even bigger pivotal cog
World Finance: Where would you say is the biggest receivables financial industry, and how has it developed in emerging markets? Simon Featherstone: China technically is the world’s largest factoring marketplace, or receivables lending marketplace, but that’s driven by its large central banks and through large state industries who use its central banks for receivables lending. It doesn’t have anywhere near the same SME receivable marketplace that the United States does or the UK, France, Germany.
World Finance: So how much need do you think there is for the International Factors Group and similar bodies to have a universal voice? Simon Featherstone: It’s crucial for me. There has for too long been too many competing voices with the type of bodies, whether it be the Chinese central government taking advice from different ones, whether it be UNCITRAL at the United Nations, or even the European Union closer to home.
Those bodies, who themselves want to promote lending to SMEs by all means possible to support the economies, they need one voice saying ‘this is what you need to do to be able to improve lending conditions for SMEs.
World Finance: Now 80 percent of trade is conducted on open account terms. This must be a nightmare for sellers? Simon Featherstone: From my perspective the more business that’s done on open account trading the better. It’s also more attractive for banks from a balance sheet perspective in the way that it gets treated. For me open account trading is only going to continue to grow right across developed markets, particularly as those larger developed markets like China, Brazil, India and so forth, become more sophisticated over the next ten, twenty years.
China technically is the world’s largest factoring marketplace
World Finance: So what happens when people can’t pay? Simon Featherstone:You have to go through the usual court redress process, and a big part of whether those emerging markets themselves can help themselves is, do they have an effective court process? We need to see some more action to support lenders’ rights in the court system in emerging markets if they’re to give confidence, particularly for foreign capital, to come in and help support the SME economy.
Just one week before the business aviation industry’s largest North American air show, Gulfstream Aerospace unveiled an all-new aircraft family at its headquarters in Savannah, Georgia.
Here, Gulfstream’s Scott Neal, Senior Vice President of Worldwide Sales and Marketing, told World Finance about the new aircraft fleet, and what it means for the business aviation industry.
Tell us about the new aircraft family you introduced in October last year
The all-new family of business jets consists of the Gulfstream G500 and G600. The two new aircrafts optimise speed, wide-cabin comfort and efficiency to offer customers best-in-class performance with advanced safety features.
The G500 and G600 have a unique combination of speed, efficiency and cabin size not found in any other aircraft in the industry
Gulfstream announced the clean-sheet aircraft before a crowd of approximately 3,000 people. During the event, the first G500 taxied up under its own power, and the General Dynamics Chairman and CEO Phebe Novakovic revealed a nearly 70-foot/21-meter mock up of the G600.
What specific details are there on the latest aircraft?
The new aircraft build upon the technology present in our G650 and our latest aircraft, the G650ER. The G500 can fly 9,260km at Mach 0.85 or 7,038km at Mach 0.90. The G600 is capable of traveling 11,482km at Mach 0.85 or 8,890km at Mach 0.90. The maximum operating speed for both aircraft is Mach 0.925, the same speed as Gulfstream’s G650 and G650ER.
The G500 and G600 are powered by versions of the new Pratt & Whitney Canada PW800 series engine. The PW800 delivers excellent fuel efficiency, fewer emissions and engine noise, and has a 10,000-hour time between overhaul with no midlife inspection for lower operating cost.
The combination of the new PW800 engines and the Gulfstream-designed wing resulted in industry leading fuel efficiency for both the G500 and G600. Once again, our customers played a major role in the development and creation of these aircraft.
How did customers actually help with the upcoming design?
We started working on these aircraft in 2008 with our Advanced Technology Customer Advisory team, which includes both domestic and international flight departments. The team said they wanted increased cruise speed, better fuel efficiency and more cabin comfort with advanced flight-deck technologies.
The G500 and G600 have a unique combination of speed, efficiency and cabin size not found in any other aircraft in the industry. We anticipate that these aircraft will attract new customers to the Gulfstream family and will provide an opportunity for existing company operators to upgrade the fleet with these new aircraft.
The flight decks are unique. Can you tell us more about what makes them so different?
Gulfstream is the first in the industry to incorporate active control side sticks. They offer enhanced safety and situational awareness over passive sticks through tactile feedback. Since the sticks are electronically linked, the pilot and co-pilot can see and feel each other’s control inputs, which helps improve pilot coordination in the cockpit.
Adding to the pilots’ more intuitive interaction with the aircraft are 10 integrated touchscreens, which will be used for system controls, flight management, communication, checklists and monitoring weather and flight information. These touchscreens dramatically reduce the number of switches in the cockpit, making it easier and more intuitive for pilots to interface with the aircraft.
When can we expect to see these aircraft enter the market?
The first flight of the G500 is scheduled for 2015. We project we’ll receive type certification from the US Federal Aviation Administration and European Aviation Safety Agency in 2017 and begin deliveries in 2018. The G600 flight-test program is expected to begin approximately 12 to 18 months after the G500s, and entry-into-service is projected to be in 2019.
Have you started taking orders?
We have. Following the announcement, we held signing ceremonies with both Qatar Airways and Flexjet that included fleet purchases for the G450, G500, G650 and G650ER aircraft.
Where do you see the long-term customer demand for future products?
Gulfstream has a very robust R&D programme and is always looking at ways to enhance the company’s experience for customers. We’ll continue to work closely with our Customer Advisory Board as well as our Advanced Technology Customer Advisory Team to gauge their needs and how we can help fulfil them. Right now, we have a broad range of aircraft and a wide range of missions.
New data shows that the second-largest economy in the world ended 2014 more positively than expected, with imports jumping 9.7 percent and imports down 2.3 percent from a year earlier. State news agency Xinhua said these final figures mean exports were up 6.1 percent for the year compared with 2013, while imports rose by 0.4 percent. The results still missed the government’s trade growth target of 7.5 percent, but left the country with a surplus of $49.1bn for the month.
[E]conomic growth slowed to 7.3 percent in 2014, marking China’s weakest year since 1990
Meanwhile, analysts had expected exports to rise by a more modest 6.8 percent, and imports to fall by more than seven percent. Even as domestic demand is restricted by a property slump and tighter credit conditions, strong economic activity in the US, China’s largest export market for three years running now, is bolstering its factories.
Yet economic growth slowed to 7.3 percent in 2014, marking China’s weakest year since 1990, when the country found itself under international sanctions following the Tiananmen Square massacre. As a result of this, economists expect the government to slash its GDP growth target for 2015 to around seven percent, as well as lowering its annual trade growth target.
Although the results are somewhat positive and lessen the urgency for China’s central bank to introduce stimulus measures for now, economists aren’t too optimistic. “The data shows the resilience of Chinese exports in the face of soft global demand – and this is positive because China still relies heavily on foreign markets for generating economic growth,” Dariusz Kowalczyk, Senior Economist and Strategist at Credit Agricole, told CNBC. “But, we still think the data is consistent with the need to ease policy in order to achieve stronger domestic demand.”
The Bank of Tokyo-Mitsubishi UFJ and Mizuho Bank have lowered their interest rates of 10-year fixed mortgages to 1.15 percent, down by 1.45 and 1.15 percent respectively. Sumitomo Mitsui Trust Bank goes further to beat rivals by reducing its rate to 0.9 percent. With considerably fewer people in Japan taking out mortgages in 2014 in comparison with the previous year, banks are now in fierce competition to provide housing loans.
Real estate experts believe that the residential market is beginning to improve
The reduction in the interest rates of 35-year fixed mortgages also reflects this growing concern. In August the Japan Housing Finance Agency reduced its rate down to 1.69 percent, the lowest for a decade. This rate was further undercut to 1.47 percent in January.
Smaller banks are also expected to follow suit.
The fall in mortgage interest rates is the result of large scale monetary easing in Japan as the economy continues to struggle with deflation, with consumer inflation shrinking to 0.7 percent. In October, the Bank of Japan announced the expansion of its stimulus package, despite April’s hopeful hike in sales tax. The strategy of qualitative and quantitative easing continues in an attempt to achieve a target inflation rate of 2 percent.
Real estate experts believe that the residential market is beginning to improve, as illustrated by the increase in housing starts for condominiums at the tail end of last year. According to a report carried out by the Real Estate Economic Institute, the number of condominium sales in Tokyo is set to increase by 5.9 percent this year. With the lure of low interest rates, more individuals are increasingly likely to take the plunge and invest in property, thereby boosting the floundering residential market. In addition, the Japanese economy is forecasted to improve; the OECD expects output growth to rebound to around 0.75 percent in 2015. If this is achieved, corporate earnings and wages will begin to improve, which in turn will have a positive effect on the number of mortgage loans taken and on housing sales.
Nevertheless, the outcome is simply unknown, particularly as mortgage rates were already comparatively low before a further reduction was introduced this month, yet the number of loans remained disappointing in 2014. Furthermore, with the augmentation of property prices as a result of deflation and higher building costs, property investment is still unattractive for many individuals in Japan. In the wider context, until the economy begins to recover, it is unlikely that sluggish wages in Japan will experience the much needed hike required to increase the number of mortgage loans taken out and boost property sales. Despite the continual efforts being made by the Bank of Japan and the three arrow approach of Abenomics, the threat of Japan’s economic slump worsening is still very real.
In 2008, the world became all too aware of the problem of excessive risk taking, but at least as pernicious in financial services is the role the industry has played in facilitating crime. So says Stephen Platt, the author of Criminal Capital, and one of the leading experts on financial crime prevention, who joins World Finance.
World Finance: Well Stephen, the financial industry facilitating crime, that sounds sensational. How much truth is there in it? Stephen Platt:It’s very very important in the post-2008 analysis that we recognise that the facilitation of crime by the finance industry is causally linked with the effects essentially of the financial crisis. What we essentially see is a spectrum of conduct within financial services.
On the one hand we’ve got excessive risk taking, and what’s emerged since is mis-selling, rate rigging, sanctions evasion, money laundering and criminal facilitation. And they’re all causally linked. The reason that it’s so important for us to focus more than we have done in the past on criminal facilitation, is because that really represents the most egregious of the activity of the industry.
[T]hey are not educated in how to run a bank in the 21st century
World Finance: So how exactly is it linked and where are the vulnerable spots? Stephen Platt: Because of what I would regard as a lack of professionalism in the stewardship of financial institutions. We’ve got people sitting on the boards of systemically important banks, for example, very competent lawyers, very competent accountants, very successful businesspeople in their own right, but they are not educated in how to run a bank in the 21st century.
World Finance: So facilitating crime, how much of this is done consciously? Stephen Platt:The vast majority of it is done unwittingly, and it’s the product partly of incompetence, partly of a conscious decision to turn a blind eye, partly because of a misconception about the vulnerability of the industry, and therefore one’s particular financial institution, to criminal abuse.
One of my contentions is that the model of money laundering, for example, that the financial service industry relies upon because government policy makers tell them to rely on it, is fundamentally flawed. The traditional placement, layering and integration model of money laundering is far too transaction based to enable the industry to identify circumstances in which it is being abused actually in the facilitation of predicate crimes.
World Finance: Can you give examples of large corporations that have been caught up in this? Stephen Platt:Let me give you an illustration. A corrupt politician in east or west Africa wants to award a large contract. Let’s say it’s an arms contract. A number of corporations around the world would like that business. It’s a significant contract. The politician concerned wants to have his palm greased. He is not going to take that money from the bribe paying corporation directly and nor is the bribe paying corporation going to be prepared to give him a bribe directly.
Instead, what they’re going to do is that they’re going to set up some sort of off-balance sheet structure, in the form of trusts, foundations, corporations, which are administered by the financial services industry, and banked by the banking industry. That structure is going to pay a some of money to a similar structure which is administered and banked on behalf ultimately of the corrupt politician.
The payment that goes between those two bank accounts is dressed up as being a payment that represents a sum of money in respect of a consultancy arrangement, or an agency agreement. Of course, that’s entirely fictitious.
What we’ve got is the payment of a bribe, made up to look like something that it isn’t, and that act of predicate criminality, the bribe payment, has been facilitated through the provision of financial services by the finance industry.
World Finance: Well we are talking about risk management, which is all about cost-benefit analysis, so surely a few bad apples is acceptable? Stephen Platt: I accept that this is not an exact science, and I accept that irrespective of the investment that the industry makes, there are always going to be problems of this type, and let me make it absolutely clear, there are very many people within the financial services sector who are committed to the prevention of financial crime and not its facilitation, but I think that a lot of the investment that’s made could be applied better.
World Finance: Well what’s the solution then, surely not more red tape or regulation? Stephen Platt:We don’t need more red tape, this is a fundamental problem. Every time we have a crisis, government reacts by introducing more rules. We don’t need more rules.
What we need is for regulators and prosecutors to develop a bit more stomach
What we need is for regulators and prosecutors to develop a bit more stomach, and to utilise the tools that they already have at their disposal to bring people to book. We need to see more of that, and where we need to see it in particular is in relation to senior individuals of financial institutions, who are responsible for the environments in which employees feel able to behave in the way that they clearly have been behaving in the course of the last 10 years.
It’s all very well prosecuting an individual trader, but we need to take a step back and say, ‘yes if we prosecute that individual, that’s fine, it makes great headlines, but does that actually represent an enforcement success that is going to change the behaviour and the culture of that institution moving forward?’ I would suggest that the answer to that is no.
World Finance: Putting aside what the media say, the financial industry has been turned inside out since 2008, and the crash of course. So really more needs to be done? Stephen Platt: I think that we’ve been as it were tinkering with the edges. I don’t want to undermine the steps that have been taken, I think that some of them are positive steps. But I don’t really think that they go far enough.
Let me give you an example. In 2008, the financial crisis blew. We had obviously a global post-mortem analysis on that, which frankly we’re still going through. If we fast-forward six years to today, several banks were fined over $2bn in respect of LIBOR rigging. The facts show that some of that rigging activity was taking place up to four or five years after the financial crisis.
So when we look at LIBOR through a narrow optic, we think that that’s an enforcement success. But if we look at it through a wider optic, it’s actually a story of enforcement failure, as well as failure of internal governance within the financial institutions concerned. Because, for some of them, the most senior officials within those organisations post-2008, must have known that there were fundamental problems.
There are currently several ongoing regulatory changes within the international tax arena. The OECD base erosion and profit shifting project (BEPS) – initiated in 2012 – is looking at whether and why multinational corporations’ taxable profits are being allocated to locations different from those where the actual business activities take place. A BEPS action plan was published by the OECD in July 2013. The main purposes of the BEPS action plan are to ensure that companies are taxed in the countries in which they are conducting their business activities, and to prevent double non-taxation as a result of gaps in the interaction between domestic tax systems.
The plan includes 15 action points within areas such as hybrid arrangements, interest and other financial payments deductions, transparency, substance and transfer pricing. The action plan is to be completed by December 2015.
On a regional level the EU implemented changes to the its Parent-Subsidiary Directive in July 2014. In brief, the main purpose of the Parent-Subsidiary Directive is to exempt dividends – and other profit distributions paid by subsidiary companies to their parent companies – from withholding taxes, and to eliminate double taxation of such income at the level of the parent company. The purpose of the recently implemented changes is to counteract the effects of mismatches resulting from the differences in the tax treatment of hybrid loans.
The changes imply that EU member states are obligated to refrain from taxing profit distributions to the extent that such distributions are not deductible by the subsidiary, and to tax profit distributions to the extent such distributions are deductible by the subsidiary. The changes are to be implemented by the EU member states at the latest on 31 December 2015. It has also been proposed to introduce a general anti-avoidance rule in the Parent-Subsidiary Directive.
Swedish regulatory changes
Changes in the regulatory environment can also be found on a country level. Prior to 2009 there were no limitations on interest deductibility in Sweden. In 2009 rules were introduced implying restrictions on deductibility of interest on intra-group loans used for intra-group acquisitions of shares. As of 2013 the rules have been tightened and the main rule is currently that interest on intra-group loans is non-deductible, regardless of the purpose of the loan.
There are two exceptions to this main rule focusing on, among other things, the level at which the interest income is taxed and the business reasons for the debt. So far the Swedish tax agency has taken a restrictive approach towards applying these exceptions. In June 2014 there were new rules regarding interest deductibility in Sweden proposed by a government appointed committee. The main rule in the proposal is that interest expenses – applying to interest on both intra-group loans and external loans – and other financial expenses are non-deductible to the extent they exceed interest income and other financial income. Interest expenses and other financial expenses are, accordingly, only deductible to the extent there are corresponding amounts of interest income and other financial income.
A standard financial deduction – financial allowance – has also been proposed. The financial allowance equals 25 percent of a company’s taxable profit. It has also been proposed that tax losses carried forward in a company as per December 31, 2015 will be subject to a 50 percent reduction. The committee has proposed the new rules to be enacted from January 1, 2016. The proposal has in general been met with considerable criticism.
Challenges with these changes
All current and future regulatory changes on a global, regional and country level – such as the ones described above – make the international tax law environment considerably more complex and unpredictable. The economic consequences of a company’s business activities also include tax costs. Changes in the tax consequences are important for companies to know prior to making a business decision regarding, for example, an investment or financing.
It is a challenge for companies to conduct business activities efficiently as the regulatory environment changes and the changes affect not only future, but also current business activities. The tax consequences of business activities that are known today may be different in the near future, making it difficult for companies to make long-term plans with predictable consequences.
Changes that happen quickly require adjustments with short notice. From PwC’s 17th Annual Global CEO Survey it is clear that these are concerning for companies, with 64 percent of CEO’s surveyed agreeing that the international tax system does not meet the requirements of multinational companies (see Fig. 1). Furthermore, only 21 percent of the CEO’s are of the view that the authorities have been efficient in the creation of internationally viable tax systems (see Fig. 2).
Behavioural changes
Regulatory changes are not the only changes currently taking place in the international tax world. There are also fairly new discussions regarding what tax companies should be paying. These discussions concern whether globally present companies are paying their fair share of taxes. The focus here is not whether these companies are following the relevant tax laws and regulations, but whether they are paying a reasonable amount of income taxes considering their income. One example of this can be seen in the recent British parliamentary questioning regarding multinational companies’ business activities in the UK in relation to the amount of corporate income tax paid in the UK.
There is also a focus on corporate social responsibility (CSR). The view that is being expressed in this regard is that companies should consider their obligation to pay taxes in the same way as they consider their environmental and ethical obligations. In Sweden these discussions have also become relevant at the level of the Swedish tax agency, which in its activity plan for 2014 stated that it will act towards companies developing their own tax policies. Development of tax policies is a way for a company to look after its brands and take social responsibility. The tax policies should, according to the Swedish tax agency, be an equally integral part of CSR work as having environmental policies and ethical guidelines.
The ongoing discussions about fair share of taxes and CSR add a new dimension to the dynamics of the international tax environment. The discussions can be said to be an expression of the global tax system not being up to speed. It is also an expression of the tax system being more politicised. The relevance for companies in this regard is evident from PwC’s survey, which shows that 75 percent of CEO’s are of the opinion that it is important that their companies are perceived as paying their fair share of taxes (see Fig. 3).
Successful strategy
In our work as tax advisors, PwC Sweden notice the impact of both the regulatory and behavioural changes on our corporate clients. We are as always being asked to provide our professional advice on the application and interpretation of tax law. However we are also being asked to express our view on future possible changes of the tax regulations, as well as the probability of such changes being implemented. It is also of increased interest for our clients to know what is going on in other countries in the tax regulatory environment.
At the same time we are being asked what the current discussions within the tax environment are, with regard to fair share of taxes and CSR. The requests for developing tax policies and guidelines are more frequent. Companies’ interest in tools for monitoring and managing tax risk with efficient processes is also increasing.
Tax legal advice is as important as it has always been – if not more important. At the same time we see a simultaneous focus on the general approach towards taxes. The corporate leaders currently have a difficult balance to maintain. An increased tax cost would normally be expected to negatively impact a company at the same time as tax management impacts a company’s reputation. The reality is that tax is a cost and at the same time an obligation. A successful tax strategy will balance the regulatory and behavioural aspects in a sustainable way. Following the implementation of the ongoing regulatory initiatives, the regulatory and behavioural aspects of the tax environment may become more aligned and discussions could shift towards the new regulatory framework.
