6/9/2013: BlackRock Institute survey: EMEA: August 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region.
 Note: my note on survey results for North America & Western Europe is available here.

Per summary: "... this month’s EMEA Economic Cycle Survey presented a generally bullish outlook for the region. 

The consensus of respondents describe Slovenia, the Ukraine, Croatia, Egypt and Russia currently to be in a recessionary state, with an even split of economists gauging Slovakia to be in expansion or contraction. Over the next 2 quarters, all these countries are expected to stay in a recessionary state except Russia, Slovakia and Croatia. 

At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen or remain the same, with the exception of the Ukraine and Turkey."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Here are two summary charts:

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24/7/2013: Few Links to Thought-Provoking Articles in Economics

Few reading links on economics of inequality and income growth trends links to human capital: "Is Inequality Inhibiting Growth?" by Professor Raghuram Rajan

"Starting in the early 1970’s, advanced economies found it increasingly difficult to grow. Countries like the US and the United Kingdom eventually responded by deregulating their economies.

"Greater competition and the adoption of new technologies increased the demand for, and incomes of, highly skilled, talented, and educated workers doing non-routine jobs like consulting. More routine, once well-paying, jobs done by the unskilled or the moderately educated were automated or outsourced. So income inequality emerged, not primarily because of policies favoring the rich, but because the liberalized economy favored those equipped to take advantage of it.

"The short-sighted political response to the anxieties of those falling behind was to ease their access to credit. Faced with little regulatory restraint, banks overdosed on risky loans."

Another interesting link on income inequality data 

War for Talent is covered here: "It’s the Market: The Broad-Based Rise in the Return to Top Talent" Steven N. Kaplan and Joshua Rauh

And a very provocative, and thought-provoking paper "Defending the One Percent" by N. Gregory Mankiw.

On G20 Tax Proposals: "OECD bureacrats in new diversionary plan to harm business and hike taxes" by  Daniel J. Mitchell covers the OECD proposals for dealing with tax anomalies presented to G20. 

I wrote about these here: http://www.fergco.co/2013/07/2272013-g20-spells-out-squeeze-on-tax.html and http://www.fergco.co/2013/07/272013-sunday-times-june-23-2013-g8-and.html

and http://www.fergco.co/2013/02/1822013-oecd-on-corpo-tax-havens-for-g20.html

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22/7/2013: G20 Spells Out a Squeeze on Tax Arbitrage

Last week we saw the conclusion of the G20 Finance Ministers and Central Bank Governors meeting in Moscow. The meeting covered, in part, financial regulation and international taxation issues, aimed at addressing, as the IMF put it, "international spillovers of national tax policies".

Here's what the basic set of the proposals discussed implies for Ireland - a country at the centre of these spillovers in the euro area and largest per-capita beneficiary of the international tax arbitrage after Luxembourg.

The OECD-prepared, G20 discussed 'Action Plan' on Base Erosion and Profit Shifting (BEPS) covers loads of technical ground. The main points of relevance to Ireland's real economy are:

1. Tax issues relating to the Digital Economy - including coverage of tax application to services, geographic distribution of tax revenues etc. In the nutshell, the G20 will aim to adapt international direct and indirect taxation rules to the digital economy, including attribution of profit 'together with the character and source of income'. In simple terms, aggressive tax base shifting from, say the UK-sold advertising revenues to, say Ireland-based pro forma sales centre. In other words, the rules will challenge the system on which much of the Ireland's comparative advantage in ICT and financial services currently rests. The threat is more genuine in my view in the case of ICT services than in the case of financial services.
2. Tighter controls over Controlled Foreign Company rules - a relatively minor issue from the point of view of Irish real economy, but having a potential to impose small adjustment on our official GDP.
3. Reduce artificial avoidance of tax application, presumably including by schemes such as Double Irish. This has potentially strong adverse impact on Irish economy.
4. Intangibles transfers within the company group are to be tightened, to reduce effectiveness of transfer pricing. Once again, this suggests pressures on IP tax arbitrage and licenses arbitrage - a core competitive point for Ireland.
5. The Plan also aims to (explicitly) develop rules to align profits with value creation. Bad news for major MNCs operations here.
6. Beefing up of data, tax and transfer pricing documentation, and reporting compliance in line with BEPS proposals - an additional significant cost for Irish companies and MNCs, although this is symmetric for all other jurisdictions, so not an issue from comparative advantage of Ireland point of view.

In effect, many proposals link directly into CCCTB structure (see my analysis of this in the G8 context here):

• Reporting on tax matters re-aligned to cover business activities and capital bases
• Focusing on documentation of the location where key business risks and business processes are located
• A country-specific breakdown of group profits and revenues
• Common anti-avoidance regime
• Services delivered on-line will migrate toward effective tax rates based on location of end-user of services
• As KPMG analysis statesd: "Change in effective rate of tax on group profits where change in transfer pricing basis for profit attribution alters the mix of profits attributable to group members". Or in other words: kiss goodbye the key pillar of tax arbitrage in Ireland via consolidation of the tax base.
• Tax base will migrate to the locations "of key functions and management and oversight of key risks"

So good luck eating that 'breakfast of champions' of the claims that the G20 proposals present no threat to Ireland's economic model. They might not spell a full-scale closure of the tax 'haven' we run, but they do present a significant costs and risks threat to our model, where it is reliant heavily on tax arbitrage. Not a catastrophe, but...

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BVI and Other Jurisdictions Protest Against Blaming Them

After the summit of the G-20 leaders, which was held on September 24-25 in Pittsburgh, Pennsylvania, offshore jurisdictions in the Caribbean and Atlantic regions started to protest against the attempts of the countries of the Group 20 to penalise them for not complying with taxation and transparency standards, which only become stricter, and take other steps that make the offshore centres the image of shady tax havens.

The leaders, policymakers and business chiefs of the offshore centres, including the Cayman Islands, the British Virgin Islands, Bermuda, Belize and many others, expressed the common opinion that their countries are used as the scapegoats for the global financial crisis and downturn. By their words, it is not fair that they are treated as hide-outs for tax evaders and crooks, and this anti-tax haven “finger pointing” is just the attempt to shift blame away from the policies and tax regulation methods of the world's economic leaders.

In April 2009, the leaders of G20 group and the OECD issued the “grey list” of offshore countries which did not fully comply with internationally agreed tax standards. There were more than 12 Caribbean jurisdictions on the list, including BVI and Bermuda. The governments of these countries made efforts to get themselves out of this list, and most of them succeeded in it, signing 12 bilateral tax agreements. BVI and the Caymans were excluded from the “grey list” in July 2009, Bermuda was moved to the “white list” in June, and other Caribbean states are signing tax treaties.

Brian Obvi,
Offshore Analyst

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