Addressing digital weaknesses to fuel growth opportunities

HLB's Survey of Business Leaders - Financial Services analysis

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Key survey findings at a glance:

  • Confidence in global growth is lower for business leaders in financial services. Only 20% of leaders believe the rate of global economic growth is likely to increase over the next 12 months
  • Undertaking joint ventures a priority for financial service business leaders
  • Digital capabilities considered a weakness, but adopting emerging technologies considered an action for growth over the next 12 months

As lockdowns began across the world, many in the financial industry were able to complete services online. However, shutdowns of in-person banking posed difficulties for small or rural institutions. Generational differences in consumer technology use combined with less robust infrastructure left some firms scrambling to adopt contactless technologies. 

Continued restrictions led to revenue losses as business owners and consumers weren’t able to pay loans. The loss of trade and bond values and low interest rates affected profitability. Moreover, business owners began drawing on open credit lines, leaving financial institutions with less liquidity.

With interest rates expected to remain low, financial executives face a myriad of challenges in 2021. We assessed the confidence levels of executives with HLB’s Survey of Business Leaders. Then we pulled datasets for individual sectors, such as the financial services industry, where we looked at top growth priorities, potential vulnerabilities, and future outlooks.

Financial executives are less optimistic about international growth prospects than their global peers, and only 12% say they’re very confident in their own growth prospects. Yet, an emphasis on growth tactics while reducing risks can help institutions navigate the current environment. Below we break down sentiments among global financial services leaders. 

 

The economy: Uncertainty lowers confidence

Financial services are unique because business activity reflects what’s happening across all industries. Institutions with less client diversity ran into more challenges during the pandemic than firms with assets balanced across multiple sectors. 

Additionally, traditional financial services face stiff competition from fintech backed by a growing customer base of digital-first consumers. Today’s clients are comfortable using online financial services to crowdsource funds or access loans without partaking in the longer in-person banking process. Add in concerns about regulatory changes, potential rising tax rates, and rock bottom interest rates, and those in the financial sector have plenty to be concerned about. 

Globally, 23% of business leaders believe global economic growth will increase. But, only 20% of financial executives feel the same way. In comparison, 26% of technology professionals and 25% of manufacturing leaders expect global economic growth to increase. 

Like other business leaders, 87% of financial executives worry about economic uncertainty, and 78% express concerns over the impacts of COVID-19. The majority of financial leaders also acknowledge potential threats to growth, such as: 

  • 66% cite cybersecurity issues 
  • 65% mention tax risks
  • 63% refer to regulatory change
  • 62% specify social instability

The combination of security, regulations, taxes, COVID-19, and social instability can lead to less faith in growth prospects for individual institutions. Although 65% reported confidence in their own growth prospects over the next twelve months, this lags behind the global average of 75%. 

Growth priorities for financial services leaders

Financial leaders face the same concerns as global peers when it comes to prioritising growth tactics. Nearly all business sectors list improving operational efficiencies and reducing costs as key ways to grow this year. Compared to global leaders, 11% more financial services executives believe the adoption of emerging tech is critical to growth. Furthermore, financial professionals prioritise joint ventures and strategic alliances higher than their global peers, with 12% more making this a top priority.  

Even before the pandemic, leaders focused on mergers and partnerships to improve digital capabilities and expand technologies. But a shift to remote work and client behavioural changes meant institutions had to speed up digital transformations. Fintech firms, wealth management agencies, and the global payment sector rely on technology to provide secure client and employee tools. 

To achieve growth, leaders understand they must reduce costs and develop new efficiencies while connecting with partners who can contribute technologies or new customer bases to balance the costs of implementing emerging technologies. 

Analysing barriers to growth 

Since 55% of financial leaders say digital capabilities are a weakness and believe it’s essential to growth, most executives will concentrate on expanding their digital platforms. The use of technology will also help leaders address other noted vulnerabilities, such as cybersecurity and talent acquisitions. To achieve results, 24% of respondents want to see more innovation, and 29% will focus on operational effectiveness. Strengthening these weaknesses can help the 60% of leaders with their goal of operational efficiency. 

Also, digital capabilities differ by segment. The global payments industry takes the lead with contactless payment technologies supported by hefty fees for card-not-present (CNP) transactions. Wealth management companies look to increase access to big data analytics to generate client insights, track business performance, and deliver real-time investment advice. However, smaller institutions may prioritise consumer-facing technologies in rural areas where 5G roll-outs may influence banking decisions. 

Although many banks are already digital, handling the influx of big data and using it for business decisions is still a challenge. Smaller institutions will continue to look for ways to generate insights from existing data to select the right mix of products and services to increase client acquisitions and retention rates. 

It’s also important to look at the impact of potential regulations and tax increases. For example, the global payments industry saw rapid adoption of Europay, MasterCard, and Visa (EMV) technology during 2020. But many retailers are pushing back against exorbitant CNP fees. While the customer is paying in person, payment processors may charge the higher CNP fee. Increased pressure could result in regulatory changes, or business owners may seek out options with lower costs. 

Future success relies on digital capability improvements 

Like the majority of business leaders, cloud computing is a top priority for digital transformations. However, financial executives are less interested in the internet of things (IoT), virtual reality (VR), and augmented reality (AR) than global peers. Instead, financial services executives identified the following technological advancements as important to future business success: 

  • 37% artificial intelligence (AI)
  • 25% machine learning (ML)
  • 24% 5G technology
  • 23% blockchain

Blockchain, AI, and ML

AI and ML both serve prominent roles in the financial industry, so increasing these capabilities are vital. There’s a growing demand for simple online processes with growth in platforms that tout speed and contactless methods for securing funds, approving applications, and transferring money into accounts. AI and ML can automate much of the back-office processes reducing human errors and operational costs. 

In our global survey, only 10% of respondents consider blockchain essential to future business success, but a digital ledger of transactions presents many opportunities for financial leaders. While some worry about potential revenue losses, others aim to leverage the technology to improve existing systems and reach new markets. With support from prominent financial institutions, such as JP Morgan, Citigroup, PNC, and Wells Fargo, more organisations evaluate ways blockchain can enhance their digital assets. 

Moving forward, many of these technologies will become less of a perk and more of a necessity. As 5G rolls out, financial institutions can use AI, ML, and blockchain to: 

  • Enable cross-border payments in real-time 
  • Reduce transaction costs and the paperwork required to transfer funds internationally 
  • Comply with anti-money laundering and know your customer (KYC) regulations
  • Attract digital-first generations wanting convenience, transparency, and security

Accessing talent and increasing diversity 

With financial leaders listing talent acquisition as a weakness, finding new ways to attract and retain employees is essential. For many in the sector, a shift to remote work has helped break down barriers to talent acquisitions and opened the door to a vast pool of job candidates. Flexible work options allow leaders to source talent with the skills needed for planned technology advancements. In fact, 73% of financial leaders expect remote work to make it easier to source diverse talent compared to 65% of their global peers. 

Indeed, diverse talent is a must for financial services leaders, with 87% saying building diversity in the board and workforce is increasingly important and 84% saying that a more diverse and inclusive workforce will ultimately improve financial performance. Furthermore, 96% agree on the importance of ensuring equal support and opportunities, particularly in the current environment.

Greening of the financial services sector

88% of business leaders in financial services are making changes to their company to profit in the low-carbon economy versus 77% of global peers, making it clear that those in the industry are already feeling the impact of climate change. Since the Network for Greening the Financial System (NGFS) formation in 2017, more executives are tuned into how climate changes affect their organisations. 

According to the Morgan Stanley Institute for Sustainable Investing, “Between 2016 and 2018, climate change-related weather events caused more than $630 billion in economic damage worldwide.” Some of the effects already felt include defaults on loans in areas with extreme weather events, debtors impacted by environmental fines, or manufacturers in the plastic or water-heavy segments losing business from new regulations and water shortages. 

Going forward, leaders aim to take measures to protect asset values and create value through innovation, which may be why 24% of financial leaders want to focus on improving weaknesses with innovation. Moreover, 70% of financial services leaders are reassessing their supply chain to source closer to home. Each of these steps may help executives increase operational efficiency and prepare their institution for climate change disruptions. 

A new way of work

Staying connected and ensuring business continuity during disruption is vital. Industry leaders believe they can leverage remote work to attract top talent, but many don’t feel an entirely remote workforce is the best solution. Furthermore, 86% agree that social distancing and remote working make it challenging to deploy the value of human touch in their businesses.

The top issues with remote work include, 55% of respondents say remote work makes collaborative working harder, 42% believe it affects creativity, and 42% think it dampens empathy. However, similar to other global leaders, 89% of financial services executives say physical and mental wellbeing is a top priority for human resource departments. With this in mind, the hybrid model is a way to support wellbeing while offering the flexibility craved by top talent.  

Looking ahead with optimism 

Although financial leaders keep a close eye on global and internal growth capabilities, they don’t doubt their expertise to navigate challenges. 94%of business leaders based in this sector are confident in their ability to successfully steer the business in a new direction in response to the impact of COVID-19.

With the possibility of future tax hikes, new regulations, and an increased focus on climate risks, financial service experts have their hands full. Intense focus on growth opportunities while increasing digital capabilities will allow institutions to cater to digital-first generations, mitigate risks, and remove barriers.

Methodology

Findings in this article are based on 93 survey responses from Financial Services business leaders collected in quarter 4 of 2020, as part of HLB’s Survey of Business Leaders 2021. The majority of businesses surveyed are privately or family owned. For the full research report see HLB’s Survey of Business Leaders 2021: Achieving the Post-Pandemic Vision: leaner, greener and keener. 

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People and technology:

At the forefront of European leaders' recovery agenda

HLB Survey of Business Leaders 2021 - Europe outlook

expect economic growth to decline 59% committed to building organic growth 45% confident in ability to steer their business in a new direction 90% acknowledge weaknesses in talent acquisition 28%

Risk-averse, but recovery ready

The pandemic still persists atop European leaders’ agendas. 81% named the ongoing consequences of COVID-19 as the main risk for their business in 2021. Uneven success with the virus containment across countries, manufacturing stop-starts, and repercussions around Brexit understandably made Europeans wary of the economic climate both within the region and globally. Admirably, local leaders managed to find a strong footing amidst the challenging (and constantly changing) operating conditions.

European leaders are focused on improving operational efficiency, further enhancing their digital collaboration abilities, and carrying on with the adoption of emerging technologies. Tempered in their plans and actions, but fairly tech-savvy European leaders are realigning their business to benefit from the newly emerged digital opportunities, as well as the “green” agenda.

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Key findings

Lesley Hornung

Head of Marketing & Digital

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E-commerce and VAT: How can you prepare for new EU legislation?

Webinar: 18 May 2021, 3pm-4pm BST

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On 1 January 2021, changes to e-commerce legislation in the UK came into effect. Following on from these, on 1 July 2021, the EU will change the VAT-legislation on e-commerce, bringing in a new set of rules, with different implications for distance sellers acting from within or outside of the EU. If your business is engaged in e-commerce, it is likely that it will be affected. Join us for this webinar on 18 May at 3pm BST as our speakers highlight the changes and what they will mean for your business and clients.

Speakers:

Ludmila Frangu, HLB Spain
Karin Korte, HLB Germany
Maria McConnell, HLB UK
Gianluca Panizza, HLB Italy
Pieter Tielemans, HLB Netherlands

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Switzerland

Tax and financial measures associated with COVID-19

30 April 2021

In March 2020, the Swiss Federal Council enacted measures to combat COVID-19. These measures have been well implemented by the population. Its conduct avoided overloading hospital intensive care units. The number of new infections is stable or even declining. For this reason, the Federal Council intends to gradually relax the measures. From the 8th of June 2020, if the forecasts remain encouraging, all sectors of the economy should resume their activities.

Tax measures

  • Possibility to extend tax payment periods
  • Interest on late payment of taxes from March 20 to December 31st, 2020 has been reduced to zero
  • Automatic extension of the deadline for submitting annual tax returns for 2019
  • Deadline for submission of the VAT statement and payment VAT tax may be extended to 3 months after the expiry of the deadline.
  • Some cantons (e.g. Geneva) provide for an extension of the deadline for tax at source rectification
  • Specific tax measures related to COVID-19 may differ from one canton to the other
  • The legal deadlines (deadline for lodging a claim against a tax decision) are not suspended and must therefore be respected
  • Swiss withholding tax and stamp duty are not affected and that interest on arrears therefore continues to be due for these taxes in the event of late payment
  • In Geneva canton
    • Deadline to submit individual and corporate tax returns: 31.05.2020
    • Deadline to submit tax at source rectification: 31.05.2020
    • Extension of deadline to request of information: 31.05.2020
    • Tax Bills and decisions postponed to 30.04

Social security measures

  • Companies impacted by the crisis can request a temporary interest-free deferral of the payment of social security contributions (AVS/AI/APG/AC)
  • Interest on late payment of social security contributions until September 2020, will be reduced to zero
  • Companies have the possibility of adjusting the social contributions instalments in case of a significant reduction of total payroll (same as for the independent worker)
  • Employers may temporarily use the employer’s contribution reserves for the payment of employee contribution to the LPP (pension) occupational benefit scheme

Employee and employer supportive measures

  • Companies can benefit from partial unemployment for a reduction or even a cessation of their activity in connection with the COVID-19 epidemic.
  • The employees should agree in advance for this measure, before the employer applies (amounts to 80% (for full-time employees) of loss of gain attributable to lost hours of work). If the application is accepted, the Employer receives reimbursement by the Unemployment Fund for the salaries paid. The decision is granted for (6) months and is renewable, if the crisis continues.
  • Based on new decisions announced by the Federal Council on April 8, 2020, the rules on partial unemployment have been extended and simplified.
  • Simplified notice request form and simplified statement form
  • Deletion of the notice period
  • Elimination of the waiting period
  • Widening of the circle of employees entitled to RHT indemnities to include, apart from employees with a undetermined duration employment contract: additionally employees on call (provided that they have been employed for 6 months in the company or that their activity rate varies by max. 20%), salaried managers of the company and their spouses working in the company, temporary workers, workers on fixed-term contracts and apprentices
  • Renewal of the notice request when the reduction in the work schedule lasts more than 6 months
  • Removal of the limitation of 4 months of RHT compensation in the event of loss of work greater than 85%
  • Elimination of the obligation to declare to the employer the income derived from another activity during the HTR and elimination of the taking into account of this income for the calculation of the loss of earnings

Business support

All self-employed people whose income subject to AVS contributions is between 10,000 and 90,000 francs are now entitled to the coronavirus loss of earnings allowance, in accordance with decisions announced on Thursday 16 April by the Federal Council. This allowance is intended for the self-employed who have suffered a loss of income because of the measures taken on March 13 by the Federal Council to combat the pandemic (closure or other loss of earnings).

The amount of the allowance corresponds to 80% of the annual income converted into daily gain. The daily allowance amounts to a maximum of 196 francs per day. The allowance is calculated on the basis of the most recent contribution decision for 2019. For this, the annual income is multiplied by 0.8 and divided by 360 days. For example, if your income was 45,000 francs in 2019, the allowance is therefore 100 francs per day (45,000 x 0.8 / 360 days = 100 francs / day).

The self-employed benefit from this allowance for a period of 2 months, from March 17 to May 16. This period is also valid for the self-employed who can reopen their business on April 27 or May 11.

Indemnification in the cultural sector

Loan requests (emergency aid to non-profit cultural enterprises) or compensation for financial losses (for-profit or non-profit enterprises; cultural actors) can be submitted from April 9, 2020 until April 30 2020 if possible, but no later than May 20, 2020.

Accounting/Audit implications

Companies benefiting from the COVID loans must follow strict rules about the use of the funds.

  • Companies cannot pay any dividends
  • Companies cannot lend funds to shareholder
  • Received loans should be used to pay current expenses of the company

As auditor, we need to ensure that these rules are followed. If not, we need to make denunciations to the authorities that the funds are not properly used.

Of course, there is also the “Going Concern” problematic that should be addressed in both Accounting and Auditing side.

Bridging loans

In view of the current COVID-19 epidemic, the Federal Council has adopted a package of various measures, with the objective to helping companies in difficulty to benefit from liquidity.

The Federal Council has taken steps to provide businesses with access to bank loans. The loans COVID-19 (loans up to CHF 500’000) and COVID-19 PLUS (between CHF 500’000 and CHF 20’000’000) are put in place and provided by various banks.

COVID-19 loans are fully guaranteed by the Swiss state and interest-free, without guarantee or other collateral, repayable over (60) months in principle. Companies should be seated in Switzerland and created before March 1st, 2020, should have suffered considerable economic damage as a result of the COVID-19 pandemic, particularly in terms of turnover and should be financially healthy, i.e. not in bankruptcy or debt restructuring proceedings or in liquidation. If accepted, this loan is available within few hours, upon receipt of full set of documents by the bank.

COVID-19 PLUS loans are guaranteed by the Swiss state at 85% and interest of 0.5%, repayable over (60) months in principle. In addition to the conditions above companies should have requested for a COVID-19 loan before asking for a COVID-19 PLUS and pass a credit exam before. If accepted, this loan is available within few days, upon receipt of full set of documents by the bank.

Other

  • Suspension of debt collection proceedings throughout Switzerland from March 19th to April 4th, 2020, in order to alleviate the situation of Swiss companies. During this period, debtors cannot be prosecuted
  • No court hearing to be held between March 16th and April 19th
  • Only urgent court hearings will be held from April 20th and henceforth

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Sustainability trending with business growth

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Sustainability has built up momentum over the past several decades. What some people thought would be a buzzword came to be a new perspective and way of thinking. It now incorporates all industries and businesses. Building sustainability into the brand doesn’t only help the environment, but it also helps businesses that want to cultivate company longevity.

Environmental, social and governance (ESG) metrics and their impact

Typically, government bodies and interested investors look at a company’s ESG or Environmental, Social, and Governance metrics. These metrics help to demonstrate how far along a company has advanced with its sustainability measures. Each letter stands for a different metric as sustainability is no longer only focused on environmental concerns but also on how it impacts social and governance matters. Modern sustainability means promoting the health of the environment, the health of the local community, and bringing economic profit back into the sector.

Research done by McKinsey and Company promotes companies having a higher ESG rating as it has shown to mean a lower cost of equity and debt. These initiatives foster the health and wellness of the company’s community while still improving a business’s financial performance, meaning a win-win situation for everyone.

Improve brand image = improve the environment

It goes without saying that a company’s brand image pulls out your audience, allowing you to have more of a targeted reach to the people that will lead to conversion and profit. Using and promoting your sustainability initiatives to your customer base improves your brand image while simultaneously improving the environment and the communities the company works in. 

Attracts customers and new Talent

According to a survey done by IBM, almost six out of ten consumers are willing to alter their shopping habits to reduce the environmental impact of their purchases and almost eight out of ten indicated that sustainability is essential. Consumers might drive the change, but it is ultimately up to the company to make it, thereby attracting more of those willing to convert to more sustainably focused brands.

Improved financial performance

Ultimately, without increased financial performance, most companies wouldn’t be interested in promoting sustainable initiatives. As the interest and research around them have increased, promoting and sustaining these initiatives has become more affordable. Since these sustainable production methods or support have become more affordable, the benefits often outweigh the financial siphons.

Increased investment interest

Sustainable strategies are necessary to cultivate a competitive edge, as seen by 62% of company executives. That competition isn’t just for a consumer base but for investment interest. Sustainability isn’t going away, and many investors consider it the route of the future. Jumping on it now and implementing those ESG initiatives is an excellent way to attract more investment interest.

Building a successful company often involves keeping one eye on the present functions and another on future possibilities. Modern sustainable enterprises have been proven to lead to business growth in more ways than one. What is stopping you from going green?

Manosij Ganguli

Global Sustainability Advisory Leader

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HLB Cross-Border Business Talks Podcast Series

27 April 2021

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.

 

 

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Eps 24: Emerging growth companies and M&A activity during the pandemic

For many emerging growth companies, the pandemic has presented unique opportunities. We sit down with Chris DeMayo, HLB’s Global Emerging Technology Leader, Patrizio Prospero from HLB Malta and HLB USA’s David Sacarelos to discuss how these companies have navigated M&A activity during 2020 and the expectations for 2021.

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Eps 23: Cyber-risks in the age of remote working

In light of Cybersecurity Awareness Month, HLB’s Chief Innovation Officer Abu Bakkar is joined by Global Advisory Leader Jim Bourke and HLB Digital Partners Almerindo Graziano and Gustavo Solis to discuss the most pressing cyber-risks of today, the lessons learned from lockdown and the road ahead for CTOs to protect against cyber-crime in the age of remote working.

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Eps 22: How the European investment climate is adapting to the New Normal

In a follow up to our North America podcast, we sit down with Bart de Volder from HLB Netherlands and David East, Head of FDI at Bureau van Dijk to discuss in what ways the European investment climate looks bright, despite the ongoing pandemic.

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Eps 21: COVID-19’s impact on the North American investment climate

The global investment climate has been considerably impacted by the pandemic. We sat down with Anant Patel, HLB’s Global Transaction Advisory Services Leader and David East, Head of FDI at Bureau van Dijk, to discuss the North American investment climate and the impact COVID-19 is having on cross-border activity.

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Eps 20: The ongoing impact of COVID-19 on financial reporting

COVID-19 has disrupted most professions across the globe with auditing being no exception. We sat down with HLB’s International Assurance Committee Member Jennifer Chowhan and HLB UK’s Caroline Monk to discuss the broader impact the pandemic is having on financial reporting. This includes some of the key issues global businesses and their auditors need to be aware of in light of operating in the “New Normal”.

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Eps. 19: Transfer Pricing considerations in light of COVID-19

With the abrupt change in economic conditions and likelihood for ongoing challenges, existing Transfer Pricing policies may no longer reflect economic realities. We sat down with HLB’s Global Transfer Pricing Leader, Carlos Camacho and Marina Gentile from HLB USA to  explore some of the issues being encountered and transfer pricing policy considerations when addressing short-term business disruptions as well as considerations for developing long-term strategies.

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Eps. 18: Emerging technology trends for 2020

Smart technologies such as IOT and blockchain are having a huge impact on global businesses. We sat down with HLB’s Patrizio Prospero and Jim Bourke to understand what new emerging technologies trends are on the horizon for 2020 or if we can expect businesses to embrace these existing technologies more.

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Eps. 17: Transforming business through AI

Business leaders across the globe consider Artificial Intelligence (AI) the most important technological innovation for business future success. We sat down with HLB’s Jim Bourke and Claus Frank and guest speaker Heiko Altrichter from AI research laboratory Laxford Capital to understand the benefits and limitations of AI for business.

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Eps 16: Investor confidence remains uncertain but opportunities are ahead

David East, Director of Product Strategy at Moody’s Analytics working for Bureau van Dijk and Andrew Mosby from HLB’s Global Accounting and Compliance Services group discuss how increased levels of uncertainty are affecting European FDI trends.

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Eps 15: The role of Not-For-Profits in the development of Africa

What role does the Not-For-Profit sector play in the development of Africa and overcoming key challenges such as social integration, unemployment and poverty alleviation? HLB’s Clensy Appavoo and Dave Springsteen discuss the matter.

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Eps 14: M&A Trends in Africa

Africa remains an attractive destination for buyers, with its growing middle class, improving economies and increasingly stable political environment. HLB’s Marco Donzelli sits down with Neermal Shimadry from MCB Capital Markets, William Hunnam from Orbitt and Clensy Appavoo from HLB Mauritius to discuss the latest M&A trends across the continent.

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Eps 13: Cities of the Future

Some of the world’s most well-known cities are often the most competitive. They must compete for talent and investment to ensure they become global hubs for businesses and people alike. In our latest podcast, Justin Kreamer, Senior Vice President, Partnerships, New York City Economic Development Corporation; Jason Mariarathanam, Practice Leader of Advisory Services HLB Netherlands; and Robin Chin, Senior Partner, HLB Singapore discuss what has made the top performing locations world leaders and where we see the ‘cities of the future’.

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Eps 12: Consumer behaviour changes and the response of global businesses

Consumers no longer buy simply on price or brand name -there are now a variety of factors that influence their choices. For global businesses, keeping on top of the latest trends can be a challenge. Barry Sheldon, President & Chief Operating Officer, Illy Caffe, North America & Jim Bourke, HLB’s Global Technology Advisory & Digital Solutions Service Leader discuss the change in consumer behaviour and how global brands are responding to these challenges.

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Eps 11: Challenges and opportunities in today’s global real estate market

Mark Robinson from Colliers International and HLB’s Global Real Estate Leader, Ralph Mitchison discuss how the global real estate market is well positioned for growth and why disruption in the market is not just limited to technology.

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Eps 10: Why does the world need Cyber Security Awareness Month?

With the number and variation of cyber-attacks continuing to increase, cyber security remains a top concern for business leaders across the globe. On this episode, HLB Chief Innovation Officer Abu Bakkar and Global Technology Advisory Leader Jim Bourke discuss the importance of education and implementation of best practices to minimise cyber security risk.

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Eps 9: Blockchain intelligence: A compliance framework for crypto-currency transactions

How is blockchain changing society and the way we do business? Together with HLB’s Patrizio Prospero, HLB CEO Marco Donzelli discusses the societal impact of blockchain technology and regulation around crypto-currency transactions with Giancarlo Russo, Founder of Neutrino and Alessandro Perillo, Innovation Manager at Young Platform.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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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Turkey

Tax and financial measures associated with COVID-19

26 April 2021

Short Time Working Compensation

Companies/ Individual Tax payers that have partially or wholly interrupted their activities are given the right to apply for a short-time working compensation for their employees salaries in Covid 19 pandemic period.

Short time working compensation will be paid by Social Security Administration Unemployment Fund directly to employees.

Short-term work compensation will expire on 31.03.2021 if it is not postponed.

 

 

Ban of Cancellation of Labour Contract and Non-Paid Leave Compensation

According to law No. 7244, termination of the employment contract by the employer and taking the employee on unpaid leave is prohibited until 17.05.2021, except for ethical provisions.

Employers have right to give non-paid leave to employees without employees approval. In this time non-paid leave compensation will be paid by Social Security Administration Unemployment Fund directly to employees as 47,70 TL daily.

 

Credit Package

It is announced that for micro and small firms in order to support employment, only once, a Loan Guarantee Fund (KGF) will be provided with a loan of up to 100.000,00 TL without repayment for 6 months, which can be extended to a maturity of 24 months.

 

VAT Rate Reductions For Certain Services

According to the presidential decree (published in the Official Gazette dated 31.07.2020), reduced VAT rates applied on some goods and services from 31.07.2020 to 31.12.2020.

 

It was extended until 31.05.2021 in accordance with the presidential decree (published in the Official Gazette of 23.12.2020).

VAT rate for some services were decreased to 8% and 1% until 31.05.2021.

VAT rate of workplace rental service was reduced from 18% to 8%. until 31 July 2021.

VAT rate for  education services was decreased from 8% to 1% until 30.06.2021.

VAT rate for restaurants is reduced to 8%; for other small restaurants the previous rate of 8% is reduced to 1%.

The Turkish Ministry of Finance announced the following measures in relation to tax obligations:

* Introduction of accommodation tax was deferred until January 2022.

* The withholding tax rate for rental of business premises and rental of vehicles is also reduced from 20% to 10% till 31 July 2021.

* 1.000,00 TL of aid has started to be provided to families in need by Social Services Ministry.

It is also announced that 750,00 TL rent allowance will be made in places where the workplaces are located in big cities and 500,00 TL will be paid in other cities and these payments will continue for 3 months.

 

New Economic Reforms announced for 2021-2021-2023

The package that is announced 16th March 2021 aims to grow the Turkish economy on the basis of investment, production, jobs, and exports. Turkey focused on public finance, inflation, the financial sector, current account deficit, and employment as part of macroeconomic stability.

According to reform package a tax exemption for low-income tradesmen will be introduced. Approximately 850,000 tradespeople who are subject to small business taxation rules, such as hairdressers, plumbers, haberdasheries, carpenters, lathe makers, tea shop operators, tailors, and repairmen will be exempted from income tax.

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The effect of climate change on international agriculture

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Climate change occurs as a direct result of global warming.  Here’s a quick refresher on the subject: as atmospheric CO2 levels increase, less radiation from the sun leaves the atmosphere. We feel this increase in radiation as heat. Differences in hot and cold air cause wind, which carries precipitation in the form of clouds. 

Historically, wind flowed in a distinct and consistent trajectory that allowed farmers and ranchers to more or less predict weather patterns season after season, and they could plan their cropping accordingly. For example, in certain regions, farmers knew when the first frost would usually occur, and were careful to harvest all of their crops before then for maximum yields.

But, with hotter air in the atmosphere, the wind moves in a way we’re not used to. Areas that used to get regular rainfall are now dry, and dry areas are now flooding. Frost dates are no longer predictable either. Agricultural businesses must think ahead and adapt to the threats of climate change instead of reacting to disasters after they occur.

Common ways climate change affects agriculture businesses

Climate change impacts food production by:

  • decreasing the average rainfall in an area, which leads to drought or water shortages;
  • increasing rainfall in an area, which leads to water-logged soil;
  • making the growing season hotter, which stunts the growth of numerous non-tropical crops and leads to fatal heat stress in livestock; and
  • causing crop failure due to increasingly common extreme weather events, such as wildfires, floods, and unseasonably cold weather.

Climate change also affects the presence of weeds, pests, and pathogens, as well as the ability of farmers and ranchers to tend to their crops or livestock. For example, land cannot be tilled if it’s underwater or water-logged. Many pesticide and herbicide products cannot be applied during extreme temperatures or strong winds. Animals are susceptible to heat stress and may perish before harvest. Mowing and curing hay has to occur during a stretch of sunny weather, or nutrients will leach from the hay and result in a difficult-to-digest forage. 

Examples of how climate change has affected international agriculture

As extreme weather events have become almost commonplace, the following examples of how climate change affects agriculture are no longer conjecture. Instead, they represent the reality facing agriculture businesses around the world:

  1. In the southwest region of the U.S., recurrent droughts have strained the local water supply and caused irrigation water to be rationed. With less water to support plant growth and development, the number of acres devoted to crops has decreased in this region. 
  2. A 2015 study evaluating data from Italian cattle farms found that cows older than 24 months were significantly more likely to die of heat stress than younger cows when exposed to temperatures of at least 90 degrees Fahrenheit for three consecutive days. Heat stress tolerance varies from species to species and breed to breed, with goats, sheep, and cattle breeds originating from the tropics proving to be more heat-tolerant in general. 
  3. Vineyards around the world have noticed a difference in wine quality, which researchers have traced back to rising temperatures that affect the grapes’ chemistry. Vineyards have also been impacted by rising sea levels reducing available land, as well as an increase in pests and insect-borne diseases due to warmer weather. 
  4. A rare winter storm hit Texas in February 2021. South Texans in particular had no infrastructure in place for freezing temperatures, as this area normally gets less than a third of an inch of snow per year. As a result, ranchers didn’t have items like heated water troughs or cold flow improver to keep their diesel tractors running. The storm also caused a disruption of power, which made it difficult to heat hatcheries and barns, resulting in animal death. 
  5. Extreme flooding in southern China in 2020 wiped out millions of acres of farmland reportedly the size of West Virginia. The disaster caused about $21 billion in damages. Because China is the world’s leading food producer, floods like this have the potential to cause serious food instability around the world.
  6. Australia experienced devastating bushfires between 2019 and 2020, which burned more than 2.45 million hectares of agricultural land. Climate change has been implicated in a 30% increased risk of bushfires: extreme heat and severe drought created the perfect conditions for fires to start and spread rapidly. 
  7. Unseasonably late snow in the UK in Spring 2018 caused the deaths of thousands of sheep. Dairy farmers were also forced to throw away vast quantities of Milk as a breakdown of logistics made it impossible to transport the product.

How agriculture businesses can adapt to climate change

Because climate change is an ongoing threat and not projected to reverse or slow down any time in the near future, agriculture businesses must mitigate the risks of climate change with contingency plans. Possible solutions include:

  • Choosing crop varieties that display a greater tolerance toward heat, drought, and/or intermittent flooding
  • Investing in irrigation infrastructure, even if droughts are not currently an issue
  • Adding organic matter to soil to increase water retention and reduce erosion
  • Transitioning from traditional agriculture to indoor hydroponic facilities
  • Generating power on-site with renewable resources to ensure all buildings remain climate-controlled despite mainline power outages
  • Diversiying plants grown and livestock raised just in case one variety is extra sensitive to extreme temperatures
  • Adopting farming methods and cultures from other regions of the world, for example the expansion of viniculture in the UK
  • Supporting investment in new Agritech and plant science
  • Investing in smaller farms and ranches spread across diverse regions and avoid large properties that could be wiped out with a single weather event
  • Transitioning to an agroforest model to use less land more efficiently
  • Developing emergency infrastructure for animals in the event of extreme weather, such as floating chicken coops or a “high and dry” mound for livestock to stand during a flood

The number-one thing agricultural businesses can do to adapt to climate change is to prepare for all foreseeable scenarios. As the saying goes, “Prepare for the worst, hope for the best.”  Extreme weather events can develop very quickly. Learn how to respond to a climate emergency and how to prepare in advance to protect your investments, if possible.

Manosij Ganguli

Global Sustainability Advisory Leader

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Global pandemic: Rising fraud - risks, prevention and protection

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COVID-19 has been a catalyst for change, forcing significant lifestyle adjustments and turbulence in the financial markets. Despite warnings, financial crime across the globe continues to rise in response to the uncertainty from the ever-changing landscape. So what steps should companies take to fight the rising tide in financial crimes? Join our expert speakers as they use their practical experience drawn from investigating fraud cases and advising on prevention measures worldwide to provide an overview of the rapid increase in cases and the need for professional firms and their clients to be vigilant in protecting themselves against the risks, as well as considering what to do if you are targeted by fraudsters.

Speakers:

Gavin Cunningham, Menzies LLP – HLB UK firm
Pedro Arevalo, Plenitude Consulting

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A brief overview of Australia’s economic response to COVID-19

By Peter Bembrick, HLB Australia

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The Australian Federal Government’s response to COVID-19 has been swift and sweeping. Since 12 March 2020, it has released three tranches of economic measures to support businesses, households and individuals who will experience financial hardship as a result of the pandemic.

The  Federal Government initially committed AUD299 billion in stimulus to support the Australian economy and people during the economic downturn arising from COVID-19.  The 2020-21 Federal Budget brings the Government’s overall support to AUD507 billion including AUD257 billion in direct economic support.

Below is a summary of some of the key economic measures that have been announced by the Australian Federal Government.

Support for employers and employees

JobKeeper Payment Program

The JobKeeper Payment provides a wage subsidy to businesses impacted by COVID-19. The Government will provide eligible employers with AUD1,000 per fortnight per employee (previously AUD1,500 for the period 30 March to 27 September 2020, and AUD1,200 for the period 28 September 2020 to 3 January 2021) to help them retain workers through this period. Key points related to this measure include:

  • Employers will be eligible if, at the time of applying, they estimate that their turnover has fallen (or will likely fall) by at least 30% as a result of the current restrictions / COVID-19 impact relative to a comparable period in the prior year.
  • Businesses whose “aggregated turnover” for income tax purposes is likely to exceed AUD1 billion must instead show a 50% reduction in turnover. For testing whether the 50% rate applies the turnover of certain related entities, including foreign residents, is taken into account.
  • Registered charities will be eligible if they estimate their turnover has fallen (or will likely fall) by at least 15% or more relative to a comparable period a year earlier.
  • Turnover is defined to be “GST turnover” as reported on Business Activity Statements. It includes all Australian taxable supplies and GST free supplies but not input taxed supplies.
  • Consistent with the GST law turnover includes only Australian-based sales, so a decline in overseas operations will not be counted in the turnover test.
  • The JobKeeper Payment covers part time, full time, stood down employees and long-term casual workers (that is, those who have been with their employer on a regular and systematic basis for at least 12 months).
  • There is a “one-in-all-in” rule where participation must be offered to all eligible employees, but the employee is not required to accept the offer.
  • Originally, payments were only be available for a period of 6 months from 30 March 2020.
  • However, the JobKeeper Payment Program has been extended for an additional 6 months ending 28 March 2021.
  • Employers will need to report to the ATO on a monthly basis regarding the number of eligible employees.
  • To be eligible however, employees cannot be getting other benefits such as JobSeeker payments.

JobMaker Hiring Credit scheme

The JobMaker Hiring Credit scheme is an incentive for businesses to employ additional young job seekers aged 16–35 years.

The JobMaker Hiring Credit is:

  • AUD200 per week for each eligible employee aged 16 to 29.
  • AUD100 per week for each eligible employee aged 30 to 35.

Eligible employers:

  • can access the JobMaker Hiring Credit for each eligible additional employee they hire between 7 October 2020 and 6 October 2021
  • Will be able to register with the Australian Taxation Office from 6 December 2020.
  • Can claim payments in arrears from 1 February 2021.
  • Can claim payments for eligible additional employees for up to 12 months from their employment start date.
  • Cannot claim JobKeeper and the JobMaker Hiring Credit at the same time

Temporary full expensing

Businesses with an aggregated turnover of less than AUD5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets.

Key points include:

  • Certain assets are excluded such as assets allocated to a software development pool, certain primary production assets, buildings and other capital works / improvements, and assets that are not located in Australia.
  • The temporary full expensing measure operates on an opt-in basis. Eligible businesses may choose to claim a deduction using other depreciation rules (e.g. the instant asset write-off measure).
  • The eligible new assets must be first held, and first used or installed ready for use for a taxable purpose, between 7.30pm AEDT on 6 October 2020 and 30 June 2022.
  • For businesses with an aggregated turnover of less than AUD50 million, temporary full expensing also applies to the business portion of eligible second-hand depreciating assets.
  • Corporate tax entities that do not meet the AUD5 billion aggregated turnover test can access temporary full expensing if they satisfy an alternative income test.

Loss carry back

The Government will allow companies with turnover up to AUD5 billion to offset losses against previous profits on which tax has been paid, to generate a refund.

Losses incurred up to 2021‑22 can be carried back against profits made in or after 2018‑19. Eligible companies may elect to receive a tax refund when they lodge their 2020‑21 and 2021‑22 tax returns.

Instant asset write-off

From 12 March 2020, the instant asset write-off threshold was increased to AUD150,000 (up from AUD30,000) and access was expanded to include businesses with a turnover of less than AUD500 million (up from AUD50 million).

The threshold applies on a per asset basis, so eligible businesses can instantly write-off multiple assets each costing less than AUD150,000 that are purchased by 31 December 2020.

Boosting cashflow for employers

From March to September 2020, eligible SMEs were eligible to receive a tax-free cash flow boost of between AUD20,000 and AUD100,000 through credits in the activity statement system when they lodge all relevant activity statements. Key points related to measure include:

  • The business must have an aggregated annual turnover of less than AUD50 million and employ workers
  • To be calculated based on the PAYG withholding as recorded in the affected business’ quarterly activity statement

Supporting apprentices and trainees

Employers were able to access the wage subsidy after an eligibility assessment was undertaken by an Australian Apprenticeship Support Network provider. Details include:

  • Eligible employers can apply for a wage subsidy of 50% of the apprentice’s or trainee’s wage paid during the 9 months from 1 January 2020 to 30 September 2020
  • Employers were reimbursed up to a maximum of AUD21,000 per eligible apprentice or trainee (i.e. AUD7,000 per quarter)
  • Eligible small businesses are those employing fewer than 20 full-time employees who retain an apprentice or trainee (with the apprentice or trainee being in training with a small business as at 1 March 2020).

The Government is extending and expanding the Supporting Apprentices and Trainees wage subsidy as follows:

  • From 1 July 2020, the subsidy will be available to support small and medium businesses with fewer than 200 employees, including those using a Group Training Organisation, who retain an Australian Apprentice engaged as at 1 July 2020.
  • Eligible employees can apply for a wage subsidy of 50% of the apprentice’s or trainee’s wage paid during the 9 months from 1 July 2020 to 31 March 2021, up to a cap of AUD7,000 per quarter.
  • Employers of any size including Group Training Organisations that re-engage an eligible out of trade apprentice or trainee will also be eligible for the subsidy.

SME Guarantee Scheme

The Government assisted guarantee 50% of new bank loans issued by eligible lenders by 30 September 2020 to SMEs. Unsecured loans of up to AUD250,000 with a three-year term and no repayments for the first six months.

SME Recovery Loan Scheme

The Government’s SME Recovery Loan Scheme is designed to support the economic recovery, and to provide continued assistance, to firms currently on JobKeeper. The Government will work with lenders to ensure that eligible firms will have access to finance to maintain and grow their businesses when JobKeeper ends.

The scheme is only open to recipients of the JobKeeper payment between 4 January 2021 and 28 March 2021.

Phase 2 of the existing SME Guarantee Scheme will remain open to eligible borrowers until 30 June 2021, and SMEs with Phase 1 or Phase 2 loans will be able to apply for loans in SME Recovery Loan Scheme.

Participating lenders are offering guaranteed loans on the following terms under Phase 2:

  • Borrowers can access up to AUD5 million in total, in addition to the Phase 1 and Phase 2 loan limits.
  • The Government guarantee will be 80% of the loan amount.
  • Lenders are allowed to offer borrowers a repayment holiday of up to 24 months.
  • Loans can be used for a broad range of business purposes, including to support investment. Loans may be used to refinance any pre-existing debt of an eligible borrower, including those from the SME Guarantee Scheme.
  • Loans are for terms of up to 10 years, with an optional repayment holiday period.
  • Loans can be either unsecured or secured (excluding residential property).
  • The interest rate on loans will be determined by lenders, but will be capped at around 7.5 per cent, with some flexibility for interest rates on variable rate loans to increase if market interest rates rise over time.

Insolvency and Director relief

On 22 March 2020, the Government announced temporary relief for financially distressed companies, to provide the opportunity for as many businesses as possible to survive.

On 7 September 2020, the Government announced a further extension of this relief to 31 December 2020. The relief includes changes to insolvency laws to provide:

  • A temporary increase in the threshold at which creditors can issue a statutory demand on a company from AUD2,000 to AUD20,000, and a temporary increase in the time companies have to respond to statutory demands they receive from 21 days to 6 months.
  • Temporary relief for directors from any personal liability for trading while insolvent, with respect to any debts incurred in the ordinary course of the company’s business.

As part of the JobMaker Plan the Government has announced that it is implementing permanent insolvency reforms to help small businesses survive the economic impact of the COVID-19 pandemic.

Bank loan deferral

Australian banks will defer loan repayments for 98% of all affected businesses. Those with a loan of up to AUD10 million will be able to defer repayments for up to six months. The measures are available on an opt-in basis and apply to current customers with existing facilities 90 days prior to applying.

Protection from foreign investment

To address concerns that distressed Australian assets could be vulnerable during the pandemic, the Government has mandated that the Foreign Investment Review Board scrutinise every single purchase application, regardless of its value.

The previous threshold limits for foreign private investment in Australia ranged from AUD50 million to AUD1.1 billion, for land and non-land proposals.

Support for individuals and households

Lower personal income taxes

The Government is delivering an additional AUD17.8 billion in personal income tax relief to support the economic recovery, including an additional AUD12.5 billion over the next 12 months.

In 2020‑21, low- and middle-income earners will receive tax relief of up to AUD2,745 for singles, and up to AUD5,490 for dual income families, compared with 2017-18 settings.

The majority of the benefit for 2020‑21 will go to those on incomes below AUD90,000.

JobSeeker supplement

The JobSeeker supplement provides additional financial support of up to AUD950 per fortnight for those seeking employment. The JobSeeker payments are calculated on a tiered system and may differ depending an applicant’s age, marital status, and whether they have dependents.

Applicants will need to demonstrate they:

  • Are between the ages of 22 and the Age Pension;
  • Meet the income test limits;
  • Meet the residency rules; and
  • Meet rules for one of the following situations:
    • Are unemployed and are looking for work, or
    • Are sick / injured and unable to carry out their usual employment / study for a short time.

Early access to superannuation

Australians affected financially by the virus were granted early access to their compulsory superannuation.

  • Withdraw tax-free up to AUD10,000 of superannuation before 1 July 2020 and another AUD10,000 withdrawal from 1 July 2020 to 30 September 2020.
  • An additional measure is allowing individuals affected by COVID-19 to access up to AUD10,000 of their superannuation in 2019–20 and a further AUD10,000 in 2020–21. Individuals will not need to pay tax on amounts released and will not need to include it in their income tax return.

On 23 July 2020, the Government announced the extension of the application period for the 2020–21 year to 31 December 2020.

Other measures

These additional measures are designed to assist around 6.5 million lower-income Australians, including pensioners and social, security and veteran income support recipients:

  • A one-off AUD750 payment (with one payment per recipient).
  • Reduction of the minimum drawdown for account-based pensions by 50% for the 2019-20 and 2020-21 financial years.
  • ‘Coronavirus supplement’ to welfare recipients of additional AUD550 per fortnight for the next six months and increased eligibility for benefits.
  • Additional AUD750 to social security and veteran income support recipients and eligible concession card holders.
  • Reduction of the social security deeming rates by a further 0.25 percentage points.

Support for industry

The Federal and State Governments have allocated funding for specific sectors directly impacted by the virus in the form of waivers, tax relief, rent relief, cash grants and loans.

Below are links to updates for Australia’s states:

We recommend speaking to an HLB Mann Judd Adviser about what state-based initiative are available to local businesses.

COVID-19 policy initiatives by Australia’s regulatory bodies

ATO administrative relief

  • Additional fringe benefits tax exemptions and concessions for employers providing benefits that they do not usually provide to employees
  • GST deferral allowing affected businesses on a quarterly reporting cycle to opt into monthly GST reporting to get quicker access to any GST refunds
  • PAYG tax instalment variation concessions
  • Income tax deferral
  • Remission of penalties
  • R&D lodgement deferral

ASIC administrative relief

  • As of 9 April 2020 relief takes the form of a one-month extension for unlisted entities with balance dates from 31 December 2019 to 31 March 2020 to lodge financial reports under Chapters 2M and 7 of the Corporations Act 2001.
  • ASIC will not take any action against an entity with a 31 December 2019 year end that fails to hold its AGM by 31 May 2020 as long as the AGM is held by 31 July 2020.

Will further support be needed?

As one of the few countries in the world with a triple-A credit rating, Australia is in a better position than some other countries in this unprecedented and uncertain time. However, it is too soon to speculate on the economic outcome of these measures, whether and what further support will be provided and the burden it will place on our society for the years to come.

Accounting implications

 ASX Class Waiver – Extended reporting & lodgement deadlines

As announced by ASIC in MR20-276, entities have been granted an additional one month to submit their financial reports. The one-month extension covers reporting dates up to and including 7 January 2021, and applies to entities reporting to ASIC under Chapter 2M and Chapter 7 of the Corporations Act. ASIC will also continue to adopt a ‘no action’ position where public companies hold their Annual General Meetings within seven months of reporting date. This means that public companies also have additional time to distribute financial reports to members prior to the AGM

For ASX-listed entities, the one-month extension is effected by an ASX Class Waiver that permits late lodgements. Such a Class Waiver was issued by the ASX on 29 December 2020. It sets out the specific conditions that listed entities must comply with to take advantage of the ASIC relief. In summary:

  • The Appendix 4E (for full-years) and Appendix 4D (for half-years) must be lodged within the usual ASX deadlines (this is not relevant for mining exploration and oil and gas exploration entities).
  • Unaudited or unreviewed financial information must initially be lodged with the ASX where audited or reviewed financial information is not yet available and the ASIC relief is relied on. For entities that are not mining exploration and oil and gas exploration entities, this information would be given as part of the Appendix 4E or Appendix 4D. For mining exploration and oil and gas exploration entities, the information would be provided to the ASX within three months of balance date for full-years, and within 75 days of balance date for half-years.
  • The entity must inform the market that the ASIC lodgement extension is being applied. The timing of the announcement must be either prior to, or at the same time as, the lodgement of the relevant Appendix 4E or 4D (or the unaudited or unreviewed accounts, in the case of mining exploration and oil and gas exploration entities).
  • The entity must immediately inform the market if there is a material difference between its unaudited (or unreviewed) accounts, and its audited (or reviewed) accounts.

 

 

Joint guidance issued regarding the impacts of COVID-19 on financial report disclosures

The Australian Institute of Company Directors (AICD), Chartered Accountants Australia and New Zealand (CA ANZ) and CPA Australia have joined forces to issue guidance (available via the link below) on the disclosure and reporting of COVID-19 impacts on entities.

https://www.charteredaccountantsanz.com/news-and-analysis/news/impacts-of-covid-19-on-annual-report-disclosures

The guidance is designed to assist both listed and unlisted entities (including not-for-profit entities, charities and small to medium entities) in describing the impact of COVID-19 in their annual reports.

Directors and preparers of financial reports may find the guide helpful in navigating the key considerations that are important when assessing how best to disclose the effects of the pandemic when preparing financial reports. A checklist of steps to be taken by directors in approaching annual reporting is provided on page 7 with each consideration explained in more detail in the relevant section of the guide.  Case studies are also provided in Appendix B of the guide.

 

Covid-19 rent concessions: Practical relief for lessees

IFRS 16 Leases has been amended to simplify lessee accounting for Covid-19-related rent concessions.

Due to current Covid-19 conditions, many lessees are being offered rent concessions by lessors. These could be in the form of, for example, rent deferrals, rent holidays or rent reductions. Under the usual requirements of the new leases standard, AASB 16, such rent concessions may meet the definition of a lease modification, unless they were envisaged as part of the original terms of the lease arrangement. Accounting for lease modifications can be complex and time-consuming, especially for those lessees with numerous leases with varying lease terms.   In response to the above, the International Accounting Standards Board (IASB) has amended IFRS 16 Leases (the international equivalent of AASB 16) to simplify the accounting of rent concessions directly linked to Covid-19 that meet certain requirements.

 

Lease modification accounting under IFRS 16

Without the relief offered by the IASB, lessees would be required to assess whether any rent concessions they receive meet the definition of a ‘lease modification’ under IFRS 16. A lease modification arises when there is a change in the scope of, or consideration for, a lease that was not part of the original terms and conditions of the lease.

 

Generally speaking, rent reductions and rent holidays would be lease modifications under the new leases standard. This means, under the usual requirements of IFRS 16, the original lease would have to be remeasured by:

  • Appropriately revising the discount rate;
  • Calculating the net present value of the revised future lease payments using the updated discount rate; and
  • Making a corresponding adjustment (decrease) to the right-of-use (ROU) asset for the decrease in the lease liability. Where the adjustment is greater than the carrying amount of the ROU asset, the excess would be recognised as a gain in profit or loss.

 

The above remeasurement would entail a substantial amount of work for lessees. Furthermore, the assessment of whether changes are in fact lease modifications could be complicated by force majeure clauses. Judgement may be necessary to determine whether such clauses (whether imposed by law or agreement) are triggered by Covid-19.

 

The relief offered

The amendment to IFRS 16 essentially eliminates the need, if a lessee so chooses, to determine whether Covid-19-related rent concessions are lease modifications or not. Instead, the lessee accounts for the rent concession as if the change was not a lease modification in accordance with the requirements of IFRS 16 paragraph 38. This means the change in lease payments is treated as a variable lease payment in profit or loss in the period in which the event or condition that triggers those payments occurs.

 

To be eligible to apply the optional practical expedient, all of the following conditions need to be met:

  • The revised consideration for the lease is substantially the same as, or less than, the original consideration;
  • The reduction in lease payments relates to payments originally due on or before 30 June 2021; and
  • There are no other substantive changes to the terms of the lease.

 

With respect to the second dot point above, this implies that the practical expedient applies to those payments that are reduced or deferred on or before 30 June 2021 even if subsequent rental increases extend beyond 30 June 2021.

Lessees that elect to apply the practical expedient must apply it consistently to all leases with similar characteristics and in similar circumstances, as required by paragraph 2 of IFRS 16.

No similar relief is provided for lessors. Lessors are required to continue to assess if the rent concessions are lease modifications and account for them accordingly.

 

Disclosure

The following disclosures are required when the practical expedient is used:

  • The fact that the practical expedient has been applied to all eligible rent concessions, or if only some of them, the nature of the contracts to which it has been applied; and
  • The amount recognised in profit or loss for the change in lease payments arising from the rent concessions, as a result of applying the practical expedient.

 

Effective date and transition

The international amendment is applicable for reporting periods beginning on or after 1 June 2020 with earlier application permitted, including for financial statements not yet authorised for issue at the date the amendment was issued. Note that the Australian-equivalent amendment has not yet been issued at the date of this Technical Alert, but it is expected to be issued shortly.

Retrospective application is required but only by adjusting the opening balance of retained earnings in the financial statements in which the relief is first applied, rather than by restating prior period numbers.

 

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Real estate leaders eye improvements amid uncertainty

HLB's Survey of Business Leaders - Real estate analysis

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Key survey findings at a glance:

  • Real estate business leaders are more optimistic about the economy than their global peers.
  • Leveraging digital technology and improving digital capabilities is one way real estate leaders are responding to the changes brought on by the pandemic
  • 45% of real estate business leaders plan to reassess their supply chain to source closer to home, which is 14% less than their peers

The global financial crisis of 2008 and 2009 left a deep impression on real estate professionals, making them wary about a post-pandemic future. However, many are embracing initiatives to build resilience while optimising operations. 

Since the real estate industry depends on diverse sectors, from retail to industrial, outlooks and business-related strategies vary. Nevertheless, leaders are centring improvement goals on cost management and operational efficiency while strengthening digital capabilities. 

To determine how real estate experts are adjusting and adapting, we reviewed data from our global HLB Survey of Business Leaders. Our study asked executives about their twelve-month outlook, main priorities, and perceived weaknesses. Furthermore, we examined objectives in critical areas, such as talent acquisition and approaches to environmental issues. 

Although the vaccine rollout improves prospects for the second half of 2021, our research suggests a lengthy recovery period. Industry leaders will focus on streamlining and restructuring processes to remain competitive and thrive in the years ahead.

Real estate expectations: Economic outlook

Looking forward to the next twelve months, 22% of real estate leaders believe the rate of global economic growth is likely to increase, and less than half expect a decline. These results suggest that real estate professionals are slightly more optimistic about the economy than their global peers. Still, everyone agrees that the top two risks to growth are economic uncertainty and the impacts of COVID-19. 

According to CBREproperty values for global commercial real estate (CRE) won’t find their bottom until later in the year. In addition, we could see a decline in rental growth, with vacancies continuing well into next year. 

At this point, leasing companies may keep the same asking price for units, but they’re prepared to give a bit in terms of concessions. Few in the real estate industry were immune from the pandemic’s impact, and most face uncertainty in the market.

When will values stabilise?

As things progress, city centres are better positioned to navigate change. Various real estate sectors, such as data centres, industrial properties, and single-family homes, may increase in value while retail and hospitality buildings may decrease. 

Part of the property valuation problem stems from an exodus of people from crowded urban areas, with a noticeable shift in London, New York, and Tokyo. However, it’s unclear how workplace social distancing policies and increased virtual work will affect office building values. 

Companies may downsize square footage to account for remote staff. Others will seek buildings with fewer offices but larger, well-equipped collaboration spaces. Going forward, brands may reassess property value propositions to focus on amenities. 

The bottom line is that leasing space and selling buildings aren’t close to price discovery yet, and the downward trend for certain real estate divisions may last through the year. To this end, real estate executives express less confidence in their own growth prospects, with 65% reporting feeling confident or very confident, compared to 75% of global respondents. In addition, only 12% feel very confident. 

Although economic uncertainty and COVID-19 are agreed-upon barriers to growth, real estate leaders are less concerned than their global peers about disruptive technologies, environmental or climate issues, or exchange rate volatility.

Actionable steps for real estate growth 

In 2021, leaders will focus on several growth activities, with responses for the top two priorities comparable to their global peers. 57% report improving operational efficiencies as a top goal, and 51% want to reduce costs. Building organic growth and developing strategic alliances or joint ventures also ranked high. 

Increasingly, real estate professionals consider strategic partnerships as a key to growth. In CRE, a design firm can help reimagine commercial real estate properties or identify high-value amenities driven by changing behaviours and workflows. 

Moreover, real estate leaders look for opportunities to connect with proptech companies to enhance tenant relationships. For example, mobile applications can improve the digital tenant experience by providing real-time building updates and an online space for community interactions. 

Core areas for improvement 

Efficiency, digital capabilities, and talent acquisition are the prime areas real estate leaders noted as business gaps. They plan to focus on these aspects over the next twelve months. But, 24% of leaders also pointed out identifying new partnerships as an area for priority over the next 12 months. 

Cost management via operational efficiencies is a crucial driver for leaders across industries. Yet, digital capabilities are essential to increasing efficiencies. Traditionally, the real estate industry has been slower to adopt new technologies, explaining why they consider it a weakness. Moving forward, going digital will be critical to achieving other goals, such as talent acquisition, operational efficiency, and resilience. 

Digital capabilities for financial and operational resilience

When looking at digital capabilities, the top five priorities are cloud computing, the internet of things (IoT), artificial intelligence (AI), robotics process automation (RPA), and 3D printing. Real estate executives aren’t short on innovation, but they need to upgrade technologies and skillsets to meet today’s demands.

IoT sensor data is increasingly important in the real estate industry. Successful implementation can help build trust and increase engagement with tenants. Furthermore, it can drive decision-making. By analysing tenant behaviour and preferences, owners can see how renters use amenities, enabling property managers to provide personalised experiences. Tenant data also is used to forecast potential lease renewals and develop custom retention strategies. 

By leveraging IoT and AI to collect data, real estate leaders can manage or survey properties in real-time while adjusting activities to account for fluctuations in the demand or supply of spaces. Data suggests that tech investments in property operations and management can help real estate professionals get a clearer view of operations and productivity. To boost resilience, companies plan to:

  • Analyse business workflows and processes
  • Identify ways to decrease redundancies and restructure
  • Update asset management systems
  • Automate or outsource non-core activities
  • Use the cloud, RPA, and AI to  modernise the leasing process

Real estate also has a keen interest in exploring 3D printing, partly due to the convenience and speed of modular construction enabled by 3D printing. Additionally, 80% agree that technological advancements will help overcome cross-border business challenges. Although real estate professionals outsource work overseas, technology has not solved everything, with many leaders experiencing that some systems and processes are not being able to be automated.   

Bolster talent and diversity initiatives

With talent acquisition ranked as a vulnerability, real estate leaders aim to improve it. However, advances in this area rely on increasing digital capabilities. Leaders must find ways to appeal to and retain a multigenerational workforce. To do this, companies will assess processes, redesign job roles, and improve recruiting strategies while focusing on diversity and inclusion. 

For D&I priorities, 86% of real estate leaders agree that building diversity in boards and the workforce is increasingly important. 93% say it’s essential to ensure equal support and opportunities. D&I initiatives can result in a stronger brand from improvements to profitability, creativity, employee morale, and productivity. In the future, hiring managers can expect to hear questions from job candidates about D&I initiatives and the company’s community involvement. 

For those who boost talent outreach to underserved and minority communities, the rewards can be significant. 78% of real estate leaders believe a more diverse and inclusive workforce will ultimately improve financial performance.

Although many industries have similar objectives for talent acquisition and D&I, fewer real estate leaders believe remote work will affect hiring. Globally, 65% think flex or virtual positions will attract diverse talent versus 51% of real estate professionals. Could it be assumed that the sector doesn’t lend itself to remote work, due to its perceived interpersonal nature? Or should we conclude the fact that real estate management have been less willing to embrace virtual work for any position, including those with limited public interactions which is reflected in the responses. 

The human impact: Wellbeing and in-person interactions

During the pandemic, the real estate industry felt the strain of social distancing, as did so many others. Digital technologies, such as virtual reality or drones, may offer 360-degree property views, but nothing beats showing a property in person. 

Accordingly, 82% of professionals feel that remote work and social distancing make it harder to deliver the value of human touch. It’s also an issue of seller-buyer relationships, with 39% of leaders saying that remote work and social distancing are detrimental to establishing trust.

Leaders express concerns about virtual workforces, with 51% feeling that it affects collaborative working and 31% suggesting it thwarts creativity. Balancing a public health crisis with work-related goals isn’t easy. Similar to global leaders, real estate executives overwhelmingly agree “that staff physical and mental wellbeing is a top priority for our human resource department.” 

Going green in real estate

Climate change and green initiatives continue to fuel innovation in the real estate arena, with 71% of business leaders making changes to their business to profit in the low-carbon economy. Increasing digital capabilities and choosing purposeful alliances can further environmental plans. 

New partnerships with smart building designers assist in reconfiguring spaces to attract and retain tenants. IoT devices and sensor technologies help leaders visualise space use and automate building maintenance and management processes. 

Eco-friendly buildings and actions aren’t just about bettering the climate. They can build a better brand. Leaders understand that their clients are under pressure to lighten their industrial footprint or comply with potential new regulations. Real estate leaders can adjust their value propositions to meet clients’ potential needs by rethinking ways to utilise space and build new ones. 

New construction and supply chain challenges

Real estate segments experience varying levels of supply chain issues, with 45% saying they’re reassessing their supply chain to source closer to home, which is 14% less than their global peers. For those eyeing new construction, materials in short supply have led to steep increases in building costs. 

Leaders can avert a possible crisis by diversifying supply lines and looking for local manufacturers when possible. This does the double duty of making businesses more environmentally friendly and less reliant on trade relations.

Looking ahead: Streamline and thrive

The push for leaner operations and cost containment isn’t without challenges. However, 96% of business leaders based in this sector are confident in their ability to successfully steer the business in a new direction in response to the impact of COVID-19. Although 2021 brings uncertainty, real estate leaders are well-positioned to navigate what lies ahead.

Methodology

Findings in this article are based on 51 survey responses from real estate business leaders collected in quarter 4 of 2020, as part of HLB’s Survey of Business Leaders 2021. The majority of businesses surveyed are privately or family owned. Thank you to Stephen Newbold from Colliers International for his valuable input. For the full research report see HLB’s Survey of Business Leaders 2021: Achieving the Post-Pandemic Vision: leaner, greener and keener. 

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Ralph Mitchison

Global Real Estate & Construction Industry Leader

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Understanding the latest tax treaty developments

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Join our experts for episode 18 of our International Tax Webinar series as they discuss the amendment of tax treaties by the MLI, practical implication of the application of the authorised OECD approach concerning the taxation of permanent establishments and the interpretation of tax treaties in general.  This webinar took place on 27 April 2021.

Speakers:

Aaron Boyer, HLB USA
Christian Jahndorf, HLB Germany
Nick Farmer, HLB UK
Surabhi Bansal, HLB India
Till Zech, HLB Germany

 

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