European Labour Authority: Setting up of a European body to enforce labour mobility rules in a fair and simple way
Laurent Capbern, Global Accounting & Compliance Service Leader
Free movement of people is a fundamental right of the European project. Today, 17 million European Union (EU) citizens live or work abroad in another EU Member State. Among them, some have a specific legal status: the posted workers. According to the latest Eurostat report, in 2015 there were over 2 million, an increase of 41% from 2010.
The framework of these practices has been discussed at the European Commission during the last couple of years, especially due to social dumping behaviours. This situation has led to two main decisions: the amendment of the posting of the workers directive and the setup of a transnational regulatory body.
In response, the European Labour Authority has been created. The organisation is based in Bratislava – Slovakia, and will start its activity from October 2019. It will:
- Facilitate access for individuals and employers to information on their rights and obligations as well as to relevant services;
- Support cooperation between EU countries in the cross-border enforcement of EU law, including facilitating joint inspections;
- Mediate and facilitate solutions in case of cross-border disputes between national authorities or labour market disruptions.
At HLB International many of our clients post workers abroad and we are used to assisting them with their social, tax and administrative needs. But a significant issue we have is that the interpretation of the European directives can be different from one country to another.
For instance, in France there are posted workers in the construction sector, in particular from Poland. Posted workers are supposed to have the “same working conditions” as the local workers, including minimum wages. But France and Poland do not have the same interpretation of “same working conditions”. While for Poland it means taking charges of lodging and lunch at the workplace, French labour authority considers that the Polish employer should also pay for breakfast and dinner (as a French employer would do for one employee who works outside his usual place of work).
And this is just an example of the problems we face with our clients on a day to day basis.
Before the setup of the ELA, there was no other solution than asking directly to the European Commission how to apply EU directives. It was time consuming and not efficient. In addition, joint cross-border cooperation was effective only between certain Member States.
For now, the ELA is supposed to provide national authorities with operational support to exchange information, develop day-to-day cooperation routines and carry out inspections. But we assume it will also assist our clients that post people across countries. These companies will receive technical support and more important the ELA will mediate and facilitate solutions in case of cross-border disputes between national authorities.
The ELA is designed to facilitate an environment which is fairer and securer in the European labour market.
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HLB International Tax webinar EPS 9. Latest trends in Permanent Establishment
Tue 24 September 2019 10:00-11:00am EST
Businesses continue expanding globally at a much more rapid pace than ever. But as your business cross borders, it’s important to understand whether your business activities will constitute a taxable presence in the foreign jurisdiction, a permanent establishment. In episode 9 of our webinar series, our HLB panellists will give an overview of the permanent establishment concepts and current trends in the global environment.
- Brett M. Starkman, Tax Partner, HLB Canada
- Suraj Patel, Tax Principal, HLB Canada
- Claudia Averbeck, Tax Adviser, HLB Germany
- Josh Gelernter, International Tax Senior Manager, HLB USA
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Hybrid mismatches tackled by the Dutch implementation of the EU Anti-Tax Avoidance Directive 2 (ATAD 2)
10 September 2019
On 2 July 2019, the Dutch State Secretary of Finance published a legislative proposal to implement the EU Anti-Tax Avoidance Directive 2 (ATAD 2) into Dutch domestic legislation. Given the variety of measures taken by ATAD 2, every structure that might be involved with hybrid mismatches, especially CV-BV structures, CV holding structures and imported hybrid mismatches, should be reviewed.
ATAD 2 aims to neutralize hybrid mismatches resulting in mismatch outcomes between associated enterprises, head offices and permanent establishments (i.e. situations with a double deduction or a deduction without inclusion). It covers especially financial instrument mismatches; hybrid entity mismatches; reverse hybrid mismatches; permanent establishment mismatches; tax residency mismatches and imported mismatches.
The newly proposed legislation will be effective as of 1 January 2020, albeit the rules on reverse hybrid mismatches will be effective as from 1 January 2022.
Financial instrument mismatches
A financial instrument is a debt, equity or derivative instrument. ATAD 2 defines a mismatch as a situation where a payment with respect to the instrument is deducted but does not lead to a corresponding inclusion at the level of the payee. A hybrid financial instrument also includes a hybrid transfer. This contains any arrangement to transfer a financial instrument where the underlying return on the transferred financial instrument is treated simultaneously by more than one of the parties to that arrangement.
The deduction of a such a payment shall not be allowed in the Netherlands when the payer is Dutch resident taxpayer. In addition, an optional second rule may apply in case the deduction is not already tackled by the primary rule, under which rule the payment will be included in the taxable income of the Netherlands if the receiver is a Dutch resident (the secondary rule).
Hybrid entity mismatches
An entity qualifies as a hybrid entity if according to one state the entity is non-transparent for tax purposes whereas according to another state the entity is transparent.
The mismatch may concern a payment to a hybrid entity which gives rise to a deduction without inclusion. This might be the case when the entity is considered as non-transparent by the jurisdiction in which the persons with a controlling interest in the entity are resident, but is considered transparent in its residence state, as a result of which the payment is not included in the taxable income of the recipient. In such a case, the deduction shall be denied in the Netherlands if the payer is a Dutch resident (primary rule). If the deduction is not denied by the state of which the payer is a resident (i.e. a non-EU Member State), the payment should be included in the taxable income in the Netherlands if the receiver is a Dutch resident (secondary rule).
It may also concern a payment made by a hybrid entity which results in a deduction without inclusion. This could be the case when the entity is considered as non-transparent in its residence state and makes a payment to a person that has a controlling interest in the entity and this person is resident in a state that treats the entity as transparent and therefore disregards the payment made by the hybrid entity. In such a situation, the payment will not be deductible at the level of the hybrid entity if the payer is a Dutch resident (primary rule). Otherwise, the payment should be included in the taxable income in the payee jurisdiction (secondary rule).
Finally, a hybrid entity mismatch may concern a payment by a hybrid entity resulting in double deduction. This might happen if the hybrid entity is considered as non-transparent in its residence state and considered transparent in the state that controls the hybrid entity, payments made by the hybrid entity are deductible in both the state of which the entity and the state of which the investor is a resident. Under the primary rule, if the investor is a Dutch resident, the Netherlands will deny the deduction if and to the extent the payment is deductible against taxable income. Otherwise, under the secondary rule, the deduction will be denied in the Netherlands if the payer is a Dutch resident taxpayer.
Reverse hybrid mismatches
This concerns the situation where an entity that is incorporated or established in the Netherlands and is treated as transparent, whereas the jurisdiction of one or more associated non-resident entities that hold in aggregate a direct interest of 50% or more of the voting rights, capital interest or profit shares in the entity treats this entity as non-transparent, resulting in a deduction without inclusion. Under the reverse-hybrid entity rule, such hybrid entity will be regarded as a resident taxpayer in the Netherlands. As one might notice, the reverse hybrid entity rule will not neutralize the effect of the hybrid mismatch, but rather tackle the hybrid mismatch at the source by making the hybrid entity entirely subject to tax.
Payments made to hybrid entities that result in a deduction without inclusion will in principle be tackled by the primary and secondary rule as from 1 January 2020 (see section B). As from 1 January 2022, these neutralizing rules will however no longer be necessary as there will be no mismatches anymore.
The reverse-hybrid rule will mainly affect Dutch transparent CV’s that are used in for example CV-BV structures, whereby the CV is considered as a transparent entity for Dutch tax purposes and non-transparent by the jurisdictions in which associated entities that hold qualifying interests in the CV are incorporated or established. Many of these structures have been set up because of the US check-the-box regime. As a result of the reverse-hybrid rule, such CV’s will be subject to tax in the Netherlands.
Permanent establishment mismatches
Hybrid permanent establishment (PE) mismatches concern situations where the business activities in a jurisdiction are treated as being carried on through a PE by the head office jurisdiction whereby such jurisdiction exempts the income derived from the PE while the other jurisdiction does not recognize a PE. In case the head office resides in the Netherlands, the object exemption for foreign profits will be denied as primary rule.
There may also arise mismatches in the allocation of income relating to deductible payments and mismatches in relation to deemed payments between a head office and a PE. In such situations the state of which the payer (PE) is a resident, should disallow the deduction (primary rule). If that state does not allow the deduction, the state where the head office is located, e.g. the Netherlands should deny the object exemption for foreign profits.
Finally, a hybrid mismatch may concern a deductible payment in the PE state and the head office state. In such a case, the state where the head office is located should deny the deduction if and to the extent the payment is deductible against taxable income. Where the deduction is denied in the head office jurisdiction, the deduction should be denied in the state of the PE.
Tax residency mismatches
A tax residency mismatch occurs when a taxpayer is a resident for tax purposes in two or more jurisdictions. This could result in deductions of payments, expenses or loses of taxable income in more than one jurisdiction. In such a situation, the deductibility or set-off should be denied by the EU Member State of which the taxpayer is deemed not to be a resident according to the tax treaty between those Member States.
An imported hybrid mismatch shifts the effect off a hybrid mismatch into the jurisdiction of an EU Member State using a non-hybrid instrument within the framework of a structured arrangement. In order to neutralize these imported mismatches, the EU Member State should deny the deduction of interest, expect to the extent that the other states involved have made equivalent adjustments in respect of hybrid mismatches.
By Erik de Ruijter and Corney Versteden, HLB Netherlands
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HLB Cross-Border Business Talks Podcast Series
9 September 2019
Welcome to our podcast series, where we’ll be exploring the latest cross-border business topics with HLB thought leaders and special guests. Our podcast episodes provide bite-size analysis on today’s issues in 10 to 15 minute long episodes.
New episodes will appear regularly, as we share insights and ideas on a range of international business topics, from FDI and global economic trends, to the latest technology advancements in business and sector specific analyses. Sign up to listen to our podcast series via Spotify or Apple Podcasts.
Eps 8: Made in Italy: How Italian companies are successfully conducting cross-border business
While in Milan, HLB Italy Chairman, Marco Gragnoli, discusses the Made in Italy industry and how Italian companies are successfully conducting cross-border business.
Eps 7: The importance of soft skills in business
Professor Adrian Furnam and HLB’s Bettina Cassegrain discuss how having the ability to influence, persuade and negotiate with others, both inside and outside an organisation, is crucial for leadership success and business growth.
Eps 6: A profession in transformation: Audit practices are becoming more technology driven and culturally diverse
Julie Carman, Head of Global Strategic Alliances and Digital Transformation for Accountants at Sage and HLB’s Jim Bourke discuss the tech and culture driven evolution of the accounting profession across the globe and how it is creating value for clients.
Eps 5: Investor confidence remains fragile
David East, Director of Product Strategy at Moody’s Analytics working for Bureau van Dijk and HLB’s Marco Donzelli discuss global FDI trends and how escalating trade tensions and policy uncertainty is impacting investor confidence.
Eps 4: Why the revision of ISA 540 is creating a more collaborative dialogue between auditors and clients
Bettina Cassegrain, HLB’s Global Assurance Leader and Jennifer Chowhan, Leadership Team Member for HLB’s International Assurance Committee, discuss the importance of the ISA 540 revision and how a new emphasis on professional scepticism will impact and improve accounting estimates.
Eps 3: The next generation of start-ups: Going across borders
In the heart of Silicon Valley, HLB’s Industry X.0 Marco Donzelli, Chris DeMayo and David Sacarelos together with guest speaker Lei Wang, Chairman and CEO of Huahai Technology discuss the next generation of start-ups and the challenges and opportunities to grow across borders in today’s global business environment.
Eps 2: US-China trade conflict: In every crisis there are always opportunities
Zhenge Zhao, General Representative of China Council for the Promotion of International Trade in the USA and HLB’s Coco Liu, Chief Regional Officer Asia Pacific discuss the trade war between China and the US, the impact on FDI activity between the two economies and the opportunities the current situation presents.
Eps 1: Challenges and opportunities for foreign companies in the US in times of trade uncertainty
Trade conflict and Brexit are cause for turbulent times for international businesses. Stephen Cheung, President of the World Trade Center Los Angeles and HLB’s Yan Jiang, Senior Tax Manager specialised in US-Asia cross-border activity discuss current challenges and opportunities for foreign companies operating in the US.
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Building sustainability into food production
Chris Solt, Global Agriculture, Food and Beverages Industry Leader
When the United Nations adopted its 17 Sustainable Development Goals (SDGs) in 2015, one of the biggest changes from what had come before was that for the first time, businesses became key stakeholders. This means that different sectors of the economy – and indeed individual businesses within each sector – are being increasingly expected to play a part in building sustainability across a wide variety of target areas. Amongst the 17 goals are such targets as ‘Zero Hunger’, ‘Responsible Consumption and Production’, ‘Life on Land’ and ‘Industry, Innovation and Infrastructure’ – all of which have a direct impact on agriculture and food production.
The goals specifically call for the integration of sustainability performance information in standard reporting cycles. The food sector is under closer scrutiny than most when it comes to sustainability, so this new framework for reporting on performance against sustainability challenges is one which cannot be ignored by businesses working within it.
In a recent publication by of the University of East Anglia, Professor Andrew Lovett explains that in regions where agriculture is a major part of the economy, many of the most important sustainability challenges ultimately revolve around the use of land.
He argues that greater demand for low-carbon sources of energy has implications for land use, and that the challenge is to balance food production, energy generation, provision of wildlife habitats and recreation facilities – and he points out that the UK currently imports 60 per cent by value of its food, and any increased protectionism would inevitably require a shift in land-use priority towards agricultural production.
“Managing land use to integrate social and environmental considerations in the long-term is at the heart of attaining sustainability objectives,” he says. “Evaluating options to achieve such integration needs to examine spatial variations and relationships at scales from the local to the global.”
Alongside such land-use challenges come the simple fact that feeding the world in the future will itself become a bigger challenge, given that intensive agriculture is one of the biggest contributors to climate change and environmental pollution. As ‘Zero Hunger’ is goal number two in the UN’s Sustainable Development Goals, this dichotomy, and how the food production sector tackles it, is one of the biggest challenges when it comes to making our sector sustainable.
Professor Arjan Verschoor of the School of International Development at the University of East Anglia argues that the solution cannot be local – it has to be global, and more than that, globally inclusive.
He cites the example of the 33 million smallholder farmers in Africa – 80 per cent of all farmers on the continent – who lack good agronomic advice, do not have access to reliable agricultural inputs (and don’t have the cash or credit to access them even if they did), and are threatened by disease, climate change and ‘predatory governments’.
“Sustainable development may be within reach when it includes marginalised and forgotten people, people whose wellbeing turns out to be crucial for the wellbeing of us all,” says Prof Verschoor.
If all of this seems distant and too far-removed for individual food production businesses, that is not a reason to ignore the sustainability issue. As Suffolk brewer Adnams has demonstrated, taking the lead on sustainability can have profound commercial business benefits alongside the environmental ones – and can be the catalyst for wider change across the sector.
More than a decade ago, Adnams put in place a set of social and environmental values which it wanted to abide by. These were not just words: a brand new and incredibly innovative distribution centre followed, sustainable in just about every way; the brewery itself was renewed, with new processes which (for example) capture steam and thus more than halved the amount of water required to make each pint of beer; making bottles more lightweight has significantly reduced carbon emissions from distribution. The list goes on.
“Being able to measure the environmental impact of what you do is critical,” says Adnams chief executive Dr Andy Wood. “When we started talking about what we were doing, we had supermarket chains and pub retailers beating a path to our door.
“We were suddenly having different conversations with these powerful retailers into that environmental best practice space. It’s been a win-win-win – a win for the industry, a commercial win for us and a win for the environment.”
The food sector faces many more sustainability challenges, not least in the realm of packaging, with a burgeoning consumer backlash against plastics making this a priority focus. We have all absorbed Sir David Attenborough’s powerful message on this subject, and it shows that pressure on the sector about sustainability can come from a variety of sources, from the United Nations right down to the individual consumer.
What is clear is that finding a way to balance the commercial imperatives of every business with the (sometimes conflicting) sustainable development goals we all face is one of the biggest challenges facing our sector. There are innovators out there who are showing it can be done – now that thinking needs to become mainstream.
Anti-abuse provisions may affect international companies in the Netherlands
Erik de Ruijter and Corney Versteden, HLB Netherlands
Tax directors of international operating companies and their advisors should check the Dutch dividend withholding position because the exemption is no longer certain due to anti abuse provisions. We would recommend checking in advance whether anti-abuse provisions will apply on dividend distributions. Due to the possible retroactive effect of the anti-abuse provisions, high financial risks are at stake.
As a result of international developments, Dutch tax law has been altered with respect to dividend withholding tax and corporate income tax. During 2018, a general anti-abuse provision was added to the Dutch Dividend Tax Act (Wet op de dividendbelasting) and the Dutch Corporate Income Tax Act (Wet op de vennootschapsbelasting). In case obtaining a tax benefit is one of the principal purposes of any arrangement or transaction that results in the benefit and in case granting that benefit in such circumstances will not be in accordance with the object and purpose of the relevant provisions of the law, the benefit will be denied. One must apply an anti-abuse test. This test consists of two elements. It is sufficient to satisfy one of the two elements to obtain the Dutch dividend withholding exemption. The first element obliges one to check whether Dutch dividend withholding tax is avoided because a recipient of dividends is put between a company which is not eligible for the withholding exemption and a Dutch company. The second element obliges one to check whether the receiver of the dividends has certain specified substance or activities. If a company meets those substance requirements, there is no abuse of law. The substance requirements therefore function as a safe harbour.
In his recent judgements of 26 February 2019 (the Danish cases) the European Court of Justice (CJEU) has specified further guidance on when an arrangement constitutes abuse of law. There is an indication of abuse of law when distributed interests, royalty’s or dividends are passed on wholly or partially shortly after they are received. Such an entity might be a flow through or conduit company. Another indication for abuse may be if the recipient has been interposed in a structure that otherwise wouldn’t be covered by the Interest and Royalty’s Directive or the Parent Subsidiary Directive. The CJEU emphasizes that all facts and circumstances of a specific case are important for the determination of abuse. From that perspective, it is questionable whether the Dutch substance requirements prevent the levy of Dutch dividend withholding tax in all cases.
As a result, the Dutch Secretary of Finance announced that the burden of proof on the substance requirements will change as of 1 January 2020. The substance requirements will therefore no longer function as a safe harbour.
There are also anti-abuse provisions in case of hybrid mismatches. In the past, hybrid entities, especially US Limited Partnerships and Dutch CV’s (Commanditaire Vennootschappen), have been used to avoid the levy of the dividend withholding tax and corporate income tax. Because of the altered Dutch Dividend Tax Act, such a structure might not be as favourable as it has been in the past. It could lead to potential dividend withholding claims, in some cases even retroactively.
As of 1 January 2020, with the implementation of ATAD 2, the Dutch Government announced that the Decree “Hybrid Entities under the tax treaty between the Netherlands and the US” of 2005 will be withdrawn. As a result, the participants or shareholders of a hybrid entity can no longer apply for the reduced dividend withholding tax rate to 5% or even 0% of that tax treaty and may be required to withhold 15% dividend withholding tax.
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HLB International Tax webinar EPS 8. Taxation challenges of cryptocurrency
Tue 27 August 2019 10:00-11:00am EST
While cryptocurrency is not a new phenomenon, its use is becoming more present in today’s global marketplace. As a result, organisations need to understand how cryptocurrency may become a common use asset and the potential impact on cross border business. In episode 8 of HLB’s International Tax webinar series, our HLB panelists will guide you on the opportunities and challenges of using cryptocurrencies and the tax implications across different jurisdictions.
- David Cairns, Tax Partner, HLB UK
- Chris DeMayo, HLB Global Industry X.O Leader
- Andrea Mouw, Partner, HLB USA
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Managing trading profiles in the construction industry
22 July 2019
For construction firms undertaking long-term, high-budget projects, accounting for long-term contracts (project accounting) is a requirement under IFRS. However, many construction businesses struggle to meet some key requirements. These include capturing and allocating all costs to projects/jobs, accurately assessing appropriate stages of project completion and allocating profits on projects to the correct accounting period. As a result, they may fail to accurately calculate profitability by project, resulting in poor decision-making.
To bring in additional complexities, IAS 11: Construction Contracts has now been replaced by a new standard called IFRS 15 Revenue from Contracts with Customers in order to provide a more robust framework for addressing revenue issues and to improve comparability of revenue recognition practices across industries.
The core principle in the new standard is to recognise revenue in a way that reflects how the goods or services are provided to the customer, whether that be at a point in time or over a period of time through project accounting. This new standard may lead to significant changes in the pattern in which revenue and profit recognition is applied.
The need to spend money on materials and labour before receiving payment from customers can leave businesses behind the cash-flow curve, potentially leading to serious financial difficulties. Maintaining strong visibility of the cash-flow impact of all new tenders and work taken on is key to ensuring the business takes on financially viable projects, which are not going to put it at risk. Keeping projects on budget, monitoring profit margins and understanding what and when to bill is key. But how should construction companies go about this and what can they do to avoid falling into the overtrading trap?
Long-term contract accounting is widely used by businesses in the construction industry and offers several benefits over traditional accounting methods. The complexities of large-scale projects mean that they are often treated differently to business-as-usual activities and their distinct timelines mean that standard accounting practices are often insufficient for tracking project profitability, cash-flow and working capital. However, a lack of understanding about how to effectively monitor project profitability and cash-flow means that some businesses may be underperforming as a result and could be at risk of overtrading.
Despite the requirement to do so, some businesses in the sector may not properly prepare their accounts accurately using the long-term contract accounting basis. For example, if on a project they predict will be profitable, they have expended 70 per cent of the costs, but only recognised 30 per cent of the income, the profitability in their accounts will be understated.
Another possible pitfall is where businesses use a traditional accounting method and just insert a figure for ‘work in progress’ on the balance sheet. This often includes a degree of estimation and may not be an accurate representation of the business’ financial situation. If this approach continues, the business may make flawed decisions based on inaccurate assessment of profitability. Alongside poor cash-flow management and visibility of cash-flow on new tenders, this could place the business at serious financial risk, potentially leading to business failure and/or penalties for wrongful trading.
Cash-flow modelling is one way in which construction firms can help to minimise the risk of overtrading. Three-way forecasting, which involves combining financial data for profit and loss, cash-flow and the company’s balance sheet, can help businesses to predict how they might perform based on a few different scenarios. This analysis can also help to inform decision-making and ensure the cash-flow impact of new projects is carefully considered and they are financially viable for the business. Other relevant data can also be fed into financial forecasts, such as if the firm is planning a recruitment drive or intends to invest in new equipment in the next few months.
Assessing profit margins and cash-flow impact should be priorities when quoting for new work. Decision-makers should ensure that they have strong visibility of both these factors at the outset, as quoting for a job based on margins alone could easily lead to cash-flow issues and overtrading.
Visibility of all decision-making processes is crucial, and perfectly accessible given recent innovations in accounting system technologies. When quoting for any new job, organisations should have a clear and effective template for calculating predicted profit margins and the cash-flow impact of the project. This template should include a consideration of when they are going to raise invoices, how soon they will get paid and the timing and level of costs they must pay out for, such as wages, materials and subcontractors. Without this information in place, managers will effectively be running their business blind.
This transparent approach to project planning should not stop once quotes are made and contracts are signed. On the contrary, a variety of factors could end up derailing the business financially during the course of the project. For instance, variations (requested extras or changes to the contract) can start to erode profit margins and require careful consideration. Some businesses fail to capture these additional costs when raising invoices, or feel nervous asking for more money, but this should not be the case. If costs are going up and additional work is being done, seeking further payment from the client can be the difference between delivering profits and maintaining a healthy cash position, and making a loss.
If a business does experience cash-flow difficulties, it may be tempting to slow down payments to suppliers. However, this can be sensitive in terms of maintaining a strong supplier relationship and the business’ reputation in the industry. If a business is perceived to be a credit risk, its market reputation can quickly become damaged and it could become more difficult to secure contracts or finance in the future.
Professional advisors can help businesses to implement three-way forecasting effectively, as well as helping them to identify the most profitable jobs and stress-testing their cash flow cycle. If all of this is achieved, then project accounting businesses can stay one step ahead of the cash-flow curve and start building their way to a more successful and sustainable future. As well as having much better visibility of how their business is faring, they will minimise the risk of falling into the overtrading trap and owners will have more cash for future investment or extract value to meet their personal objectives.
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Organisational purpose, CSR and learnings from #HLBCommunities Day
Have you had a look at any business literature lately? Organisational purpose appears to be the new competitive advantage. From public scrutiny over tax structures and customer demand for sustainable products, to government regulation around gender pay gaps reporting and fierce competition on the labour market with talent looking for more than just a paycheck. In modern society, CEOs have to satisfy and win trust from a far more complex set of stakeholders than ever before.
We are more aware of how our decisions effect the world and the choices we make in business reflect this. But while organisational purpose is important, it is not your company’s job to save the world. Instead, aim to conduct business in a responsible way and build an authentic culture around it. Modern organisations don’t shy away from their societal responsibilities. They recognise both the business benefits as well as the positive impact they can make on society and are actively engaging in corporate social responsibility (CSR) initiatives. Here is why.
It is good for business
CSR activities can help an organisation fulfill their purpose and differentiate itself from its competition in many ways. Creating a corporate image for your company around positive societal impact helps build a strong brand. This is important to your customers who want to buy sustainable products, your shareholders who like to see the equity of the brand grow, and your employees who want to be part of a bigger cause. As differentiation though products and services has become increasingly difficult, your brand is what helps you stand out from the competition and instill confidence in your company with the right audiences.
Building the right culture
Employees are an organisations’ most important stakeholder group and they tell the brand story in a way that no amount of advertising can. Today’s workforce want more than just to work, they want to make an impact. Their happiness and contentment while working for your organisation can influence its success. In fact, according to 2019 Edelman Trust Barometer, ”employees’ expectation that prospective employers will join them in taking action on societal issues (67 percent) is nearly as high as their expectations of personal empowerment (74 percent) and job opportunity (80 percent)”. By putting CSR authentically at the heart of your organisation’s culture, you give your biggest advocates a reason to build an environment where they feel empowered and that they are making a difference. With talent attraction and retention being a top concern for CEOs today, having a culture that stands out for doing good in the world will help move your company to the front of the queue for the right candidates.
Creating a business imperative
Authenticity is key. A brand and culture built around social responsibility will never be sustainable if the message and behaviours are not adopted and embedded from the top down. Today’s workforce expects leadership by example. And that doesn’t just go for your employees. An organisations social responsibility agenda is increasingly dictating who wants to work with you or buy from you. Throughout the supply chain up to the customer, people are looking to associate with authentic and responsible brands. Visa versa, you can also choose to work with suppliers and on projects that fit with your company philosophy to fulfil your purpose.
As part of HLB’s CSR programme, our recent #HLBCommunities Day saw many of HLB leaders engage in projects ranging from blood donations and beach clean-ups, to volunteering at food banks and giving time and resources to educational programmes. The take-aways we at HLB took from this global CSR initiative are lessons anyone can all learn from:
- Giving back is even more important to our workforce than we anticipated, based on the fast number of people who wanted to be involved and positive feedback from participants;
- Transparent reporting on the combined network impact amplified local messages and global enthusiasm among both internal and external stakeholders;
- Active participation in local communities is a smart and strategic management decision, which we need to embed deeper in our culture.
Business leaders should recognise the benefits and rethink their organisational purpose and CSR agenda. If you haven’t begun to yet, the time is now to put social responsibility at the heart of your strategy. It makes good business sense.
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FinTech and the future of finance
By Abu Bakkar, Chief Innovation Officer at HLB
Financial technology, or FinTech for short, is one of the most exciting – and fastest growing – areas in global business today. While the definition may be simple, products and companies that employ newly developed digital and online technologies in the banking and financial services industries, how it is used, and its impact on consumers is much more complex. In fact, in a relatively short period of time, the emergence of a new generation of FinTech has greatly impacted how we do business, transact as customers, and think about the future of finance. Among other things, it is significantly blurring the lines between business services, allowing bankers, advisers, and technology providers to provide nearly identical services.
Drivers of innovation
A variety of factors are at work when we look at the advancement of FinTech.
Technological advancements have changed how we do nearly everything in our day-to-day lives. Technologies such as IoT, AI, blockchain and cloud computing are the major drivers of FinTech companies.
Consumer behaviour, particularly in Gen X, Y and Z, has shifted and the previously existing financial systems in some markets are simply not keeping pace with societal changes, allowing technology enabled players to enter the market.
Barriers to entry have lowered as technology has flourished, forcing financial institutions to change or be left behind. It has opened the door for new challenger start-ups, like Monzo in the banking industry, who are targeting consumers with different needs and behaviours.
Greater access to information through analytics, artificial intelligence, and cloud computing allow companies to see trends – and adjust to them – more quickly.
Investment in the sector has been gargantuan and is continuing to grow rapidly, ensuring we will see many more advancements in the near future.
A new relationship with money
FinTech has changed the way people think about money and value exchange in a real-time, digital world “Cashless” businesses are popping up around the everywhere, forcing reluctant consumers to adopt the habit of digital transactions and governments to discuss whether it is discriminatory or simply progress.
Requiring consumers to pay electronically for goods and services instead of using cash is just the first step. Tech giant Amazon is leading the way in merging an online shopping account with a traditional brick and mortal experience in nine cashier-less convenience stores to test their new concept. Customers simply grab what they need, leave the store, and the items are automatically charged to their Amazon account. Concepts like these will likely shape the future of shopping.
Payment transfers though smartphones or smartwatches are another example of FinTech advancements many consumers have adopted today. While PayPal has been in this game for a long time, relative newcomers like Venmo, TransferWise and Zelle are revolutionising how we share money for common interactions like splitting a bill and selling items to friends. Add to that the rise in crowdfunding sites like GoFundMe that allow nearly anyone to create a simple way for those who care about a person, situation, or cause to contribute with a few clicks.
Much less understood, but likely more innovative in the long run, is the rise of digital currencies like Bitcoin and the record-keeping technology known as blockchain behind them. While not yet well-integrated into our daily lives, it could eventually greatly change how we pay, save and borrow money, as well as how we manage financial risk.
FinTech as an enabler for better financial services
IoT, AI, blockchain and cloud computing are some of the technologies driving change in how consumers interact with those they purchase from and how they manage their money. Although traditional financial services players may consider FinTech a disruptor of their industry, those that are embracing technology innovation are transforming the industry from the outside in, and succeeding in areas traditional players have failed in. FinTech companies are now leading the industry and are creating a wide range of new financial products and services, with the purpose of making money management easier and more effective.
Borrowing & lending money: Getting access to funds has become much more transparent and less centralised, and the traditional way of borrowing money from a bank via loans and mortgages is being joined by options like crowdfunding and peer-to-peer lending. These new, non-traditional methods of sharing money have allowed investors to flourish while giving those who may not qualify for a traditional loan access to the money they need through resources like Seedrs and others.
Financial markets: Originally built in a pre-digital world, financial markets are seeing a good deal of disruption and innovation. The use of artificial intelligence (AI) and machine learning is allowing algorithmic or automated trading in the stock exchanges. Prediction markets, like Augur, aggregate data through connections and network intelligence to predict possible future events. This new access gives individuals access to trading facilities that were once only available to corporate investors.
Asset management: Data processing and analysis tools and technologies have increased automation, specifically in asset rebalancing. Additionally, cloud-based, robo-advisory-enabled platforms are using algorithms to advise users about investment and asset management.
Regtech: With changes happening so fast, it is hard for many businesses to compete yet still remain within their industry’s regulatory frameworks. Using big data and machine-learning, regtech tools monitor transactions and identify outliers that may indicate fraudulent activity. By identifying potential threats in real time, risks are minimised, and data breaches can often be addressed or completely avoided.
Grandtech: While FinTech companies have long focused on Gen X and Millennials, some innovators in the market are creating protections to look after grandparents and great-grandparents who are considered financially vulnerable. Entrants like SilverBills in conjunction with Eversafe aim to make it easier to administer the fragmented process of managing senior citizens monthly bills. By linking all of the senior’s various financial accounts to the service, the app can learn their habits and send alerts when it spots something unusual, like 2:00 a.m. ATM visits.
New consumer markets
FinTech is enabling financial services providers to explore new markets and allowing consumers in areas where options were few to access services previously unavailable, through the use of mobile devices. Access to under-banked and un-banked consumers is allowing FinTech companies to reach and capitalise on markets that have been underserved to date, particularly in Asia and the Southern Hemisphere.
Legacy economies in the West have long been “in charge” of the financial sector. However, because of the existing systems and traditional financial services providers and institutions reluctance to change, Western markets are slower to adopt new technologies than other parts of the world. Growth economies in places like China, India, and other parts of Asia can leapfrog their Western counterparts. Banks and businesses in these markets began building infrastructure in the late 1990s and 2000s and are now reaping the benefits. For example, China’s mobile payments already outnumber cash payments, with $5.5 trillion paid through apps last year, dwarfing the $112 billion in mobile payments in the U.S. in 2016. Economies in the Southern Hemisphere such as the Philippines, Indonesia, parts of Latin America and countries across Sub-Saharan Africa have largely been under-banked or un-banked for decades, but this is changing due to the rise of mobile payment and wallet innovations. Thanks to telecommunications networks, most consumers in these markets now have easy access to smartphones, which enable them to make digital transactions. Mobile sales for these regions are anticipated to rise into the billions soon.
Where do we go from here?
While advancements in the area of FinTech have been happening at lightning speed, we have only just begun to scratch the surface of what is possible and likely to happen in the next few years. It is no exaggeration to say that FinTech is literally changing our lives and habits by making it easy to trade, bank, and exchange money without the need for physical human interaction. However, the financial sector has a few challenges to overcome, especially in the regulatory and data protection space, to win consumer trust and for FinTech to truly overtake the market. With big data, blockchain, AI and so many other tech advances already in use or on the horizon, business leaders are advised to seek opportunities and adopt FinTech applications in their own business models to win tomorrow’s consumers.
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HLB International Transactions webinar EPS 7. Investor opportunities: Navigating Africa's deals climate
Tue 25 June 2019 10:00-11:00am EST
As the second fastest growing region in the world and with a rapidly growing consumer base, Africa poses numerous opportunities for foreign investors. We’ve seen a recent trend in the availability of trade finance, creating opportunities for local businesses and those looking to expand across borders. In this HLB webinar, we’ve invited William Hunnam, co-founder of Orbitt, a digital deal origination and processing platform for Africa-focused investment professionals. Together with Orbitt, our HLB panellist cover an outlook of Africa’s investment ecosystem, African trends in deal activity and M&A tax consideration for some key African jurisdictions.
- William Hunnam, Co-founder of Orbitt
- Anant Patel, HLB Global Transactions Advisory Leader
- Clensy Appavoo, HLB Global Not-For-Profit Leader
- Dave Springsteen, HLB Global Tax Leader
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US tax reform impacts inbound foreign companies
6 June 2019
As 2017 ended, the United States (US) government implemented a sweeping tax reform that impacts non-US companies doing business in the US. If you do business in or operate a subsidiary in the US, here are some key changes to consider:
Reduced corporate tax rate
The US has been well known as having one of the highest corporate tax rates in the world. Effective January 1, 2018, the US corporate tax rate changed from 35 percent to 21 percent. Many multinationals are considering whether prior earnings stripping and transfer pricing strategies may need to be evaluated due to this change.
Foreign derived intangible income
For US companies that have sales to foreign customers, a new tax incentive is available which allows for a deduction of 37.5 percent for qualifying sales. This deduction results in an effective rate of 13.125 percent and has the potential to reduce state taxes as well. Qualifying sales include unrelated and related party sales of property for foreign consumption and services provided to persons or with respect to property located outside the US. To qualify, the qualifying foreign income needs to exceed 10 percent of the US corporation’s qualified business asset investment (fixed assets). Many foreign companies are considering whether to shift activities to the US to reduce the effective tax rate on such income.
Interest deduction limitation
Foreign parented US companies were previously subject to an interest deduction limitation when interest payments were made to a related party and the debt to equity ratio of the US company exceeded 1.5 to 1. Due to tax reform, the interest deduction limitation applies to companies with gross receipts over US$25 million. The limitation applies to all interest, whether paid to related or unrelated parties, and is generally the excess of the total of a) business interest income b) 30% of the US company’s Adjusted Taxable Income and c) floor plan financing. Companies that utilize leverage need to evaluate the impact of this change and the need for potential changes to their capitalization strategy.
Base Erosion and Anti-Abuse Minimum Tax (BEAT)
US Corporations who have average annual gross receipts of US$500 million for the prior three years may be subject to a minimum tax of 10% (12.5% after 2025) on intercompany payments. The BEAT will apply if the total deductible payments made to related parties is 3% or more of deductible expenses and the minimum tax exceeds the regular tax liability. Companies with significant intercompany payments may need to evaluate supply chain and transfer pricing strategies in light of the BEAT.
Sale of US partnership interests
As part of tax reform, the US government codified their view that the sale of an interest in a US partnership by a foreign person should be considered US effectively connected income (ECI) and subject to US taxation. In addition, they implemented a mandatory 10 percent withholding tax on the disposition of a US partnership interest by a foreign partner. Foreign partners operating as a partnership or joint venture should consider this change in planning their exit strategy.
By Shannon Lemmon, International Tax Partner, HLB USA