HLB Cross-Border Business Talks Podcast Series
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Eps 30: Transfer pricing - What is profit potential and how to define it
In this final instalment of a 3-episode Transfer pricing mini-series, Carlos Camacho, HLB's Global Transfer Pricing Leader, sits down with Christian Jahndorf (HLB Germany) and Marina Gentile (HLB USA) to discuss what is profit potential and how to define it. Hide
Eps 30 Transfer pricing - What is profit potential and how to define it
Speakers
Carlos Camacho: HLB Global Transfer Pricing Leader
Christian Jahndorf: HLB Germany
Marina Gentile: HLB USA
Intro: Hello and welcome to HLB Cross Border Business Talks HLB's global podcast series on international business topics.
Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho. I'm the leader of transfer pricing in Hlb International, and I'm very pleased and glad to be sharing this podcast with my colleagues, Kristin Jahndorf and Marina Gentile. We are going to be addressing a subject regarding transfer pricing matters applicable to intangible assets.
Christian Jahndorf: The valuation of intangible has nothing to do with the ideal theoretical concepts of valuating intangibles its just look like under the bottom line. What is the profit potential? For me, this is the decisive term and the profit potential is in the end, the success, the outcome of the company. But this you don't know when you do the transaction.
You know later once you have an observation period, five, seven years, and you know, what's the estimated price, the estimated profit potential as the basis for the value. Was it correct or not? And so. Or what one can say it's an estimation of profit. And this has nothing to do with, let's say, a sophisticated comparable method or whatever.
So in the end, the price is negotiate absolutely.
Marina Gentile: Christian, I think I think Germany has some new regulations around a sort of look back around intangibles. Do you wanna talk us through that a little bit? I found that very interesting.
Christian Jahndorf: Well, the German legislators almost 10 years ago brought up. One rule, which was I think exceptional in the world, but then was picked up by the O E C D reconstruction chapter, which says if we transfer an intangible, we do not look at the value of the intangible.
We look at the value of the function because around the intangible, there's more than such one thing. Let's say a profit carrying unit. And we have the technical term transfer package and transfer package packages. Nothing else but the profit potential. So in the end, we do not look. In a closer sense to the intangible as such, but we look to the profit potential.
So, and determining this profit potential, we have to figure out what is the benefit of the receiving company and what is the disbenefit of the company that gives away. This has a very remarkable consequence because in this calculation, you have to take into account local circumstances that brings up the price.
Give you an example. If you move IP to a country with low wages. For the company in this country, this IP has a bigger value because the profit potential for the receiving company is bigger because the wages are lower than in Germany. This means the German company has to take into account this circumstance and say, okay, when this is so much value for him, I can charge him 50% of that and I think from the perspective of the legislator, this is a genius way to tax profit potential abroad. This was not your question, Marina. Now I come to the answer. This remark was useful in order to understand it.
If it, now, it turns out in a period of seven years that the estimation of day one was wrong. Mm-hmm ,then you have to adjust and, if the price is within the period of 20% plus minus, then it's fine. Otherwise you have to reassess the whole transaction. Let's say quite a tough consequences.
Carlos Camacho: Yeah. The look back period then is seven years and the, likelihood of getting an adjustment for that period. So when I'm buying a company in an independent math fashion that have had a previous acquisition amongst related practice, which is the look back process, I'm taking the risk, I'm buying the risk of that look back, so I will have to keep part of the price as a reserve for the tax liability that might arise as a result of a tax audit or a tax assessment.
Marina Gentile: Yeah, no, absolutely. In the US we have a similar, we have a five year look back period. It's called the commensurate with income standard, right? So at the time of the valuation and transfer, you know how reliable were your projections, right? Because this is very projections based with a lot of assumptions about the future potential, right?
You're taking really the net present value of the future success, right? Future cash flows, right? So so it's the type of thing where, you know, you're meant to annually, show that you are within that projection. It's a similar thing I believe it's 80% to 120% of within that range.
Carlos Camacho: And, and this bring us also to, to the other point that is referred to intangible assets. That is, when we talk about intangible assets, we are not talking about very complicated things. It might be just your list of clients. It might be just the critical contracts that you have with a vendor that is so important for me as an, as an inquiry to, to give value to my business.
Therefore, in that sense, we don't have to limit the scope of the analysis of intangibles to those that are sophisticated ip. Type of activities, but all other synergies that are created either by clients, vendors, geographical location laws, regulations, and all of that is just changing the value of this intangible.
Christian Jahndorf: That's a very good point. It's actually one of my favorite is the client list. When we are talking, we have the case that somebody is transferring intangible and he wants to do so because this is the, the the transaction he wants to do. For example, transfer of clientless. It happens in different circumstances and the very representative case is the acquisition of a company. Mm-hmm. Just four weeks ago a client acquired Dutch group of companies and the first thing he did, he reallocated all clients list of the old company to the German parent. And I say, what are you doing there? Had anybody thought about the issue that this might concern a transfer price issue, and they say no.
We are no tax guys. We are the operational officers and we do business and no taxes. But you see even though the transaction has not an intangible aim as such it can be triggered in any other sort of business transaction.
Carlos Camacho: Yes. Because in some instances when your definition is, I'm going to do research and development of a formula for curing people of any disease, that is a clear understanding of an intangible.
But what we. Are rising in tangibles, which are the ones that comes along these transactions where there is a value for the clientele or the suppliers or the contracts that you have in place. This is an arising intangible that needs to be value as well. And of course, this is only getting more and more exciting and more and more complicated, but I guess that this is being plenty for a round of issues that can be the consequence of intangibles.
We thank you for all your input. Both Marina and Christian and of course we'll be delighted to be sharing with you for their podcasts in future.
Outtro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.
Eps 30 Transfer pricing - What is profit potential and how to define it
Speakers
Carlos Camacho: HLB Global Transfer Pricing Leader
Christian Jahndorf: HLB Germany
Marina Gentile: HLB USA
Intro: Hello and welcome to HLB Cross Border Business Talks HLB's global podcast series on international business topics.
Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho. I'm the leader of transfer pricing in Hlb International, and I'm very pleased and glad to be sharing this podcast with my colleagues, Kristin Jahndorf and Marina Gentile. We are going to be addressing a subject regarding transfer pricing matters applicable to intangible assets.
Christian Jahndorf: The valuation of intangible has nothing to do with the ideal theoretical concepts of valuating intangibles its just look like under the bottom line. What is the profit potential? For me, this is the decisive term and the profit potential is in the end, the success, the outcome of the company. But this you don't know when you do the transaction.
You know later once you have an observation period, five, seven years, and you know, what's the estimated price, the estimated profit potential as the basis for the value. Was it correct or not? And so. Or what one can say it's an estimation of profit. And this has nothing to do with, let's say, a sophisticated comparable method or whatever.
So in the end, the price is negotiate absolutely.
Marina Gentile: Christian, I think I think Germany has some new regulations around a sort of look back around intangibles. Do you wanna talk us through that a little bit? I found that very interesting.
Christian Jahndorf: Well, the German legislators almost 10 years ago brought up. One rule, which was I think exceptional in the world, but then was picked up by the O E C D reconstruction chapter, which says if we transfer an intangible, we do not look at the value of the intangible.
We look at the value of the function because around the intangible, there's more than such one thing. Let's say a profit carrying unit. And we have the technical term transfer package and transfer package packages. Nothing else but the profit potential. So in the end, we do not look. In a closer sense to the intangible as such, but we look to the profit potential.
So, and determining this profit potential, we have to figure out what is the benefit of the receiving company and what is the disbenefit of the company that gives away. This has a very remarkable consequence because in this calculation, you have to take into account local circumstances that brings up the price.
Give you an example. If you move IP to a country with low wages. For the company in this country, this IP has a bigger value because the profit potential for the receiving company is bigger because the wages are lower than in Germany. This means the German company has to take into account this circumstance and say, okay, when this is so much value for him, I can charge him 50% of that and I think from the perspective of the legislator, this is a genius way to tax profit potential abroad. This was not your question, Marina. Now I come to the answer. This remark was useful in order to understand it.
If it, now, it turns out in a period of seven years that the estimation of day one was wrong. Mm-hmm ,then you have to adjust and, if the price is within the period of 20% plus minus, then it's fine. Otherwise you have to reassess the whole transaction. Let's say quite a tough consequences.
Carlos Camacho: Yeah. The look back period then is seven years and the, likelihood of getting an adjustment for that period. So when I'm buying a company in an independent math fashion that have had a previous acquisition amongst related practice, which is the look back process, I'm taking the risk, I'm buying the risk of that look back, so I will have to keep part of the price as a reserve for the tax liability that might arise as a result of a tax audit or a tax assessment.
Marina Gentile: Yeah, no, absolutely. In the US we have a similar, we have a five year look back period. It's called the commensurate with income standard, right? So at the time of the valuation and transfer, you know how reliable were your projections, right? Because this is very projections based with a lot of assumptions about the future potential, right?
You're taking really the net present value of the future success, right? Future cash flows, right? So so it's the type of thing where, you know, you're meant to annually, show that you are within that projection. It's a similar thing I believe it's 80% to 120% of within that range.
Carlos Camacho: And, and this bring us also to, to the other point that is referred to intangible assets. That is, when we talk about intangible assets, we are not talking about very complicated things. It might be just your list of clients. It might be just the critical contracts that you have with a vendor that is so important for me as an, as an inquiry to, to give value to my business.
Therefore, in that sense, we don't have to limit the scope of the analysis of intangibles to those that are sophisticated ip. Type of activities, but all other synergies that are created either by clients, vendors, geographical location laws, regulations, and all of that is just changing the value of this intangible.
Christian Jahndorf: That's a very good point. It's actually one of my favorite is the client list. When we are talking, we have the case that somebody is transferring intangible and he wants to do so because this is the, the the transaction he wants to do. For example, transfer of clientless. It happens in different circumstances and the very representative case is the acquisition of a company. Mm-hmm. Just four weeks ago a client acquired Dutch group of companies and the first thing he did, he reallocated all clients list of the old company to the German parent. And I say, what are you doing there? Had anybody thought about the issue that this might concern a transfer price issue, and they say no.
We are no tax guys. We are the operational officers and we do business and no taxes. But you see even though the transaction has not an intangible aim as such it can be triggered in any other sort of business transaction.
Carlos Camacho: Yes. Because in some instances when your definition is, I'm going to do research and development of a formula for curing people of any disease, that is a clear understanding of an intangible.
But what we. Are rising in tangibles, which are the ones that comes along these transactions where there is a value for the clientele or the suppliers or the contracts that you have in place. This is an arising intangible that needs to be value as well. And of course, this is only getting more and more exciting and more and more complicated, but I guess that this is being plenty for a round of issues that can be the consequence of intangibles.
We thank you for all your input. Both Marina and Christian and of course we'll be delighted to be sharing with you for their podcasts in future.
Outtro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.
Eps 29: Transfer pricing and tax planning
Join our experts as they discuss the complexities of tax and intangible assets. In this episode, our Global Transfer Pricing Leader, Carlos Camacho, sits down with Christian Jahndorf (HLB Germany) and Marina Gentile (HLB USA). Hide
Eps 29: Transfer pricing and tax planning
Speakers:
Carlos Camacho: HLB Global Transfer Pricing Leader
Christian Jahndorf: HLB Germany
Marina Gentile: HLB USA
Intro: Hello and welcome to HLB Cross Border Business Talks, HLB's Global podcast series on international business topics.
Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho. I'm the leader of trans pricing in HLB International, and I'm very pleased and glad to be sharing this podcast with my colleagues, Christian Jahndorf and Marina Gentile. We are going to be addressing a subject regarding transfer pricing matters.
And this leads us to the point of tax planning because the, source of this B actions was aggressive tax planning, and avoidance. Multinational enterprises are plea to be guilty if that to be switched. Assets are not paying their fair share of taxes almost with no guarantees as taxpayers. And this is the ground that just let the OECD take off these 15 actions, which.
Action seven, eight, and nine leads to this d approach, which are the ones that refer to this potential coexistence of economical owner, such as five or even more. Economical owners if they are joint ledges involved in the development of a intangible. The other interesting point that Barina brought in is that in the collaborative economy that we're living in and the post covid era you don't know basically where the people is sitting at.
In fact, while we're recording, we are seated in a different jurisdiction. And this is an intangible, let's, let's assume that this has an economical value. This knowledge that we are trying to share has an economical value. So, this becomes intangible. We can sell this, we can benefit from royalties of it, we can get paid for this.
We are not, but we may. And having said that, the fact that we. Taxpayers in different jurisdictions and we might be rendering the service in different jurisdictions, do trigger the issue of where is intangible deemed to be paying taxes or what apportionment of tax is deemed to each of their jurisdictions involved in that very complex analysis.
Marina Gentile: It's a great point. It certainly is a very complex topic, right? I mean, by definition it's an intangible. It's hard to, to value. It's hard to you know, It, it's not like the other functions that are far more routine that you can measure them and test them and benchmark them against the marketplace, right?
Every multinational's intangibles should be to some extent, you know, Bespoke, right? Unique to them. So you know, it's, it's hard to get that direct comparison. I, I definitely encourage, you know, with my clients that they, they set the stage for those dey functions, Christian, that you'd, you know, you, you introduced, right?
You're right, it's far more complex now in terms of economic ownership and what that means. But I do find. Getting the strategy in place and being proactive and prospective about it so that, you know, the multinational tells its story of its own business as opposed to having tax authorities claim what they see out there.
And the. They don't, you know, the, the reason to sort of look at the transfer pricing carefully is it helps to tell that, that economic story of the business, right, so that the decisions, the functions, what's happening is actually operationally driven and not. Not tax driven. And I think that protects the company and its assets.
You know, I, I work with a lot of tech companies, so I'm very concerned with, with asset protection. And a lot of times, you know, the transfer pricing really is far more driven. For reasons other than tax, right? Even if there's a tax compliance component to it, or you know, possible tax minimization, right?
Strategies, you know, I'm focused with them on protecting the assets in the jurisdiction where it's funded, developed, where the entrepreneurial risk taker is. So that's getting really tight about how to compensate the other people involved in this asset, right? So anyone who's. Software developing, improving the maintaining, right?
In any parts of the world where that's happening, that entity needs to be viewed as a service provider and needs to be profitable from day one. And that's a concept that sometimes is difficult, difficult to To get through, right, because it's not intuitive. You know you have a company working on IP, let's say, early stages.
They're in a, an nool, a loss position, you know, wherever they're located. And now they need to be a taxpayer in a foreign market because they have a development team. Yes, the answer is yes to that, even though it's, it's, you know, difficult to understand. But making that happen ensures that that entity in that foreign market, A service provider to the entrepreneur.
And thus protecting, I believe, goes a long way in protecting and showing the substance and protecting that IP in that location. And, and again, it's important for many reasons, right? A lot of tech companies, for example, you know, they're, they wanna be transaction ready, they're looking to sell the business at some point, and you.
Buyers are very savvy now. Savvy now, excuse me. When they're trying to buy you know, acquire a global business, they ask the right questions and transfer pricing really has a seat at that, at that table now, for sure. Absolutely, and, and in fact, you mentioned something that is very important prior to just changing a little bit of the subject, but I want to remark two things.
Carlos Camacho: One is the uniqueness of the intangible itself, because if it is already. Invented if it is already in use. If it is not unique, then it is not your intangible, it's somebody else's intangible. So you have to be very careful about that because one of the techniques in order to get the approach to the right market range of acceptance of the transfer pricing is whether or not you have comparability.
But the unique. Of the intangibles makes the comparability very tough. So when we do document the trans pricing papers, what we do is go to the contracts and to the essence of the contracts, not to the written contract, but the in fact contract. What is really happening? What is that very story that you are documenting?
From day one, not when the tax authority calls you, but when you are starting up and developing that intangible, you have to come up with a story that is almost life-streaming in order to be able to have something to tell if you get out it. The other thing is, The uniqueness lead us to another very difficult factor, which is that developing is something that may be successful.
Or maybe failure. Yeah. So when you are developing, you don't know whether you're going to be successful or not, and tax administrations do not understand this. Tax administrations think that every other thing that an individual taxpayer do is going to generate profit. Hopefully, that will be the case, but that's.
For business people that is hearing this business, people understand very well that that's not the case before you get success in any vaccine, for instance, you have to fail many times in order to get that intangible. So basically, the intangible, you can't value that very easy way as the tax authorities are looking for.
Christian Jahndorf: All right, and this bring us as a point. To value at the end. That's what about our standard methods. We text authorities like comparing prices, but as you already mentioned, things are unique and how can you compare unique things? It's impossible. So let's say the standard tools that we use for services or non intend goods, They do not work.
So this brings us maybe now through the complexity of how to value such items. And then even though we can differentiate between, let's say new technologies as intangible or brands, they follow, in my opinion, different rules. Yes. In evaluation. So, We see we run into a very complex situation and let's see how we can get out of it.
Carlos Camacho: Indeed. I guess one of the things that is going to make it a little bit more difficult is the fact that there is a definition for intangibles. In the accounting world that is absolutely different than intangibles for economical purposes, which is exactly what we are referring to when we are referring to intangibles here.
We are not referring necessarily in coherence with accounting standards. Absolutely. We are referring to the economical mean of an intangible and. The challenge here, just the reason why I bring up this point is because if you are the developer and you go by the accounting rules, you are not allowed to impute that as your asset in your books because you didn't, you didn't pay for it.
You develop it, you spend out, you put it all your risk in the development. You didn't, you don't have the ability to impute that as part of your assets in your books. This only happens when you acquire the intangible, according to the international accounting standard. So that only makes it. More complex because in some instances the first thing that you want to do is look at the financial statements, but all of a sudden you are going to find no line in the financial statements referring to intangibles because you didn't pay for them.
Therefore, although you spend out, you have to be and. Profit, the loss statement will have to swallow those payments and investments while you're the developer. But number one, this is good for the taxpayer because all expenses are business expensive that are deductible immediately. So even though from the tax performance, this is a good thing, but in the end, you have business expenses, but no assets in your books.
And, and, and at the end of the day when the flow funds. The income is generated, there is a mismatch time wise of the cost incur and the income generated. So that is another issue that makes intangibles very challenging arena as we are moving forward. So, so car. So Carlos you brought up a really good point in that, and the reason why, you know, I tend to speak to my clients and describe it as the secret sauce, even though I, you know, I use that phrase daily and I don't particularly like it.
Marina Gentile: But it gets them to understand a little bit more how we're talking about this, right? Because you're absolutely right, the balance sheet isn't going to be reflective. We're not talking about the accounting around this. We're talking about an economic function. And, and Christian, getting back to what you were saying about the methods I mean, like, like we said, it, it's an intangible.
How do you value that? Right. I mean, so either you go out and you find, you know, An independent, you know comparable price between two other entities that, you know, have a similar, you know, intangible. But is that really going to get you there? Because I mean, again, it's unique by definition, so it's not going to be very close and the standard of comparability.
In that type of analysis is much higher than it would be for something like a time CPM, you know, profitability-based analysis. And then the second option is do you have an internal cup or cut? Right? So are you transacting with an independent entity in the same way you're transacting with your related entity?
You know, I'm telling you 25 years in, the answer is always no in one way or another, right? Because it's either, you know, a different volume, a different geography, you know, a different level of the market a different point in time. All those things sort of blow out the comparability factor because again, the standard for comparability is very high.
I also want to add, you know, I have a heavy background in. Advanced pricing agreement negotiations are bilateral multilateral, right? And helping my clients through, you know, competent authority negotiations as well. And as much as every tax authority out there you know, speaks to the fact or the regulations or whatever, speak to the fact that, you know, a comparable transaction is ideal right in, in, in testing the transfer pricing.
The truth is, I could never walk into a negotiation with a comparable transaction, right? No tax authority is going to. Agree to something without understanding the bottom-line profitability of the entity and what they can actually tax. Right. You know, I can't go in with a royalty rate, you know, I can't go in with you know, a, a cup only without having and showing the impact of that profitability.
And, you know, again, why? Because they don't, they don't tax at the transactional level. The tax, you know, at the bottom-line profit level. So just, just wanted to throw that out. Absolutely. And, and further, the more what you have got to go with is a business story, not a taxes story. So, the problem, is that tax authorities only understand taxes.
Carlos Camacho: So you have a business story that you have to translate into a text story, which by definition is almost impossible. So very likely. Advisable for clients not to. Approach tax authorities for APAs for advanced pricing agreements with intangibles, because more likely than not, you are going to be rejected first and in immature markets, which is the case of developing emerging economies, more likely than not that information that you have been given in good faith in order to get your agreement is going to turn.
You unleash yourself with art, I guess that this is being plenty for a round of issues that can be the consequence of intangibles. We thank you for all your input. Both Marina and Christian, and of course we'll be delighted to be sharing with you for their podcasts in the future.
Outro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.
Eps 29: Transfer pricing and tax planning
Speakers:
Carlos Camacho: HLB Global Transfer Pricing Leader
Christian Jahndorf: HLB Germany
Marina Gentile: HLB USA
Intro: Hello and welcome to HLB Cross Border Business Talks, HLB's Global podcast series on international business topics.
Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho. I'm the leader of trans pricing in HLB International, and I'm very pleased and glad to be sharing this podcast with my colleagues, Christian Jahndorf and Marina Gentile. We are going to be addressing a subject regarding transfer pricing matters.
And this leads us to the point of tax planning because the, source of this B actions was aggressive tax planning, and avoidance. Multinational enterprises are plea to be guilty if that to be switched. Assets are not paying their fair share of taxes almost with no guarantees as taxpayers. And this is the ground that just let the OECD take off these 15 actions, which.
Action seven, eight, and nine leads to this d approach, which are the ones that refer to this potential coexistence of economical owner, such as five or even more. Economical owners if they are joint ledges involved in the development of a intangible. The other interesting point that Barina brought in is that in the collaborative economy that we're living in and the post covid era you don't know basically where the people is sitting at.
In fact, while we're recording, we are seated in a different jurisdiction. And this is an intangible, let's, let's assume that this has an economical value. This knowledge that we are trying to share has an economical value. So, this becomes intangible. We can sell this, we can benefit from royalties of it, we can get paid for this.
We are not, but we may. And having said that, the fact that we. Taxpayers in different jurisdictions and we might be rendering the service in different jurisdictions, do trigger the issue of where is intangible deemed to be paying taxes or what apportionment of tax is deemed to each of their jurisdictions involved in that very complex analysis.
Marina Gentile: It's a great point. It certainly is a very complex topic, right? I mean, by definition it's an intangible. It's hard to, to value. It's hard to you know, It, it's not like the other functions that are far more routine that you can measure them and test them and benchmark them against the marketplace, right?
Every multinational's intangibles should be to some extent, you know, Bespoke, right? Unique to them. So you know, it's, it's hard to get that direct comparison. I, I definitely encourage, you know, with my clients that they, they set the stage for those dey functions, Christian, that you'd, you know, you, you introduced, right?
You're right, it's far more complex now in terms of economic ownership and what that means. But I do find. Getting the strategy in place and being proactive and prospective about it so that, you know, the multinational tells its story of its own business as opposed to having tax authorities claim what they see out there.
And the. They don't, you know, the, the reason to sort of look at the transfer pricing carefully is it helps to tell that, that economic story of the business, right, so that the decisions, the functions, what's happening is actually operationally driven and not. Not tax driven. And I think that protects the company and its assets.
You know, I, I work with a lot of tech companies, so I'm very concerned with, with asset protection. And a lot of times, you know, the transfer pricing really is far more driven. For reasons other than tax, right? Even if there's a tax compliance component to it, or you know, possible tax minimization, right?
Strategies, you know, I'm focused with them on protecting the assets in the jurisdiction where it's funded, developed, where the entrepreneurial risk taker is. So that's getting really tight about how to compensate the other people involved in this asset, right? So anyone who's. Software developing, improving the maintaining, right?
In any parts of the world where that's happening, that entity needs to be viewed as a service provider and needs to be profitable from day one. And that's a concept that sometimes is difficult, difficult to To get through, right, because it's not intuitive. You know you have a company working on IP, let's say, early stages.
They're in a, an nool, a loss position, you know, wherever they're located. And now they need to be a taxpayer in a foreign market because they have a development team. Yes, the answer is yes to that, even though it's, it's, you know, difficult to understand. But making that happen ensures that that entity in that foreign market, A service provider to the entrepreneur.
And thus protecting, I believe, goes a long way in protecting and showing the substance and protecting that IP in that location. And, and again, it's important for many reasons, right? A lot of tech companies, for example, you know, they're, they wanna be transaction ready, they're looking to sell the business at some point, and you.
Buyers are very savvy now. Savvy now, excuse me. When they're trying to buy you know, acquire a global business, they ask the right questions and transfer pricing really has a seat at that, at that table now, for sure. Absolutely, and, and in fact, you mentioned something that is very important prior to just changing a little bit of the subject, but I want to remark two things.
Carlos Camacho: One is the uniqueness of the intangible itself, because if it is already. Invented if it is already in use. If it is not unique, then it is not your intangible, it's somebody else's intangible. So you have to be very careful about that because one of the techniques in order to get the approach to the right market range of acceptance of the transfer pricing is whether or not you have comparability.
But the unique. Of the intangibles makes the comparability very tough. So when we do document the trans pricing papers, what we do is go to the contracts and to the essence of the contracts, not to the written contract, but the in fact contract. What is really happening? What is that very story that you are documenting?
From day one, not when the tax authority calls you, but when you are starting up and developing that intangible, you have to come up with a story that is almost life-streaming in order to be able to have something to tell if you get out it. The other thing is, The uniqueness lead us to another very difficult factor, which is that developing is something that may be successful.
Or maybe failure. Yeah. So when you are developing, you don't know whether you're going to be successful or not, and tax administrations do not understand this. Tax administrations think that every other thing that an individual taxpayer do is going to generate profit. Hopefully, that will be the case, but that's.
For business people that is hearing this business, people understand very well that that's not the case before you get success in any vaccine, for instance, you have to fail many times in order to get that intangible. So basically, the intangible, you can't value that very easy way as the tax authorities are looking for.
Christian Jahndorf: All right, and this bring us as a point. To value at the end. That's what about our standard methods. We text authorities like comparing prices, but as you already mentioned, things are unique and how can you compare unique things? It's impossible. So let's say the standard tools that we use for services or non intend goods, They do not work.
So this brings us maybe now through the complexity of how to value such items. And then even though we can differentiate between, let's say new technologies as intangible or brands, they follow, in my opinion, different rules. Yes. In evaluation. So, We see we run into a very complex situation and let's see how we can get out of it.
Carlos Camacho: Indeed. I guess one of the things that is going to make it a little bit more difficult is the fact that there is a definition for intangibles. In the accounting world that is absolutely different than intangibles for economical purposes, which is exactly what we are referring to when we are referring to intangibles here.
We are not referring necessarily in coherence with accounting standards. Absolutely. We are referring to the economical mean of an intangible and. The challenge here, just the reason why I bring up this point is because if you are the developer and you go by the accounting rules, you are not allowed to impute that as your asset in your books because you didn't, you didn't pay for it.
You develop it, you spend out, you put it all your risk in the development. You didn't, you don't have the ability to impute that as part of your assets in your books. This only happens when you acquire the intangible, according to the international accounting standard. So that only makes it. More complex because in some instances the first thing that you want to do is look at the financial statements, but all of a sudden you are going to find no line in the financial statements referring to intangibles because you didn't pay for them.
Therefore, although you spend out, you have to be and. Profit, the loss statement will have to swallow those payments and investments while you're the developer. But number one, this is good for the taxpayer because all expenses are business expensive that are deductible immediately. So even though from the tax performance, this is a good thing, but in the end, you have business expenses, but no assets in your books.
And, and, and at the end of the day when the flow funds. The income is generated, there is a mismatch time wise of the cost incur and the income generated. So that is another issue that makes intangibles very challenging arena as we are moving forward. So, so car. So Carlos you brought up a really good point in that, and the reason why, you know, I tend to speak to my clients and describe it as the secret sauce, even though I, you know, I use that phrase daily and I don't particularly like it.
Marina Gentile: But it gets them to understand a little bit more how we're talking about this, right? Because you're absolutely right, the balance sheet isn't going to be reflective. We're not talking about the accounting around this. We're talking about an economic function. And, and Christian, getting back to what you were saying about the methods I mean, like, like we said, it, it's an intangible.
How do you value that? Right. I mean, so either you go out and you find, you know, An independent, you know comparable price between two other entities that, you know, have a similar, you know, intangible. But is that really going to get you there? Because I mean, again, it's unique by definition, so it's not going to be very close and the standard of comparability.
In that type of analysis is much higher than it would be for something like a time CPM, you know, profitability-based analysis. And then the second option is do you have an internal cup or cut? Right? So are you transacting with an independent entity in the same way you're transacting with your related entity?
You know, I'm telling you 25 years in, the answer is always no in one way or another, right? Because it's either, you know, a different volume, a different geography, you know, a different level of the market a different point in time. All those things sort of blow out the comparability factor because again, the standard for comparability is very high.
I also want to add, you know, I have a heavy background in. Advanced pricing agreement negotiations are bilateral multilateral, right? And helping my clients through, you know, competent authority negotiations as well. And as much as every tax authority out there you know, speaks to the fact or the regulations or whatever, speak to the fact that, you know, a comparable transaction is ideal right in, in, in testing the transfer pricing.
The truth is, I could never walk into a negotiation with a comparable transaction, right? No tax authority is going to. Agree to something without understanding the bottom-line profitability of the entity and what they can actually tax. Right. You know, I can't go in with a royalty rate, you know, I can't go in with you know, a, a cup only without having and showing the impact of that profitability.
And, you know, again, why? Because they don't, they don't tax at the transactional level. The tax, you know, at the bottom-line profit level. So just, just wanted to throw that out. Absolutely. And, and further, the more what you have got to go with is a business story, not a taxes story. So, the problem, is that tax authorities only understand taxes.
Carlos Camacho: So you have a business story that you have to translate into a text story, which by definition is almost impossible. So very likely. Advisable for clients not to. Approach tax authorities for APAs for advanced pricing agreements with intangibles, because more likely than not, you are going to be rejected first and in immature markets, which is the case of developing emerging economies, more likely than not that information that you have been given in good faith in order to get your agreement is going to turn.
You unleash yourself with art, I guess that this is being plenty for a round of issues that can be the consequence of intangibles. We thank you for all your input. Both Marina and Christian, and of course we'll be delighted to be sharing with you for their podcasts in the future.
Outro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.
Eps 28: Transfer pricing and intangibles
Our Global Transfer Pricing Leader, Carlos Camacho, sits down with Christian Jahndorf (HLB Germany) and Marina Gentile (HLB USA) to discuss what intangible assets are and what role they play in transfer pricing. Hide
Eps 28: Transfer pricing and Intangibles
Speakers:
Carlos Camacho: HLB Global Transfer Pricing Leader
Christian Jahndorf: HLB Germany
Marina Gentile: HLB USA
Intro: Hello and welcome to HLB Cross Border Business Talks, HLB’s Global podcast series on international business topics.
Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho and I'm the leader of transfer pricing at HLB International. I'm very pleased and glad to be sharing this podcast with my colleagues, Kristin Jan Fog and Marin Jan. We are going to be addressing a subject regarding transfer pricing intangible assets. So I think it's better to start talking about general transfer pricing. The terminology of transfer pricing may lead people to think about a price of a good or service. Unfortunately, the terminology is not enough to explain what transfer pricing is all about.
Transfer pricing is all about a comparison of the assets involved in the production of a good or service. The risk that each of the parties is bearing in the transaction, as well as the functions that each of the parties is undertaking. Transfer pricing is only applicable when those transactions do occur within related practices.
So if two independent individuals, companies, or entities, in general, do enter into a contract, it is deemed to be treated as a right transfer pricing analysis because both parties are trying to behave economically. Behaving economically means that the seller is trying to obtain the highest price possible, and the buyer is going to try to obtain the least value for that acquisition. That doesn't happen when you are a related party because there is a common interest of shareholders that you have in common, maybe directors that are in common, and it varies from legislation to legislation. Today we are going to try to go over what is deemed to be related parties within the framework of the O E C D guidelines, which are followed by most of the jurisdictions, are all over the world.
Carlos Camacho: Welcome Christian. Welcome, Marina.
Christian Jahndorf: Hello.
Marina Gentile: Great to be here, Carlos. Hello everyone. I'd love to jump on what you said Carlos, about not just about the transfer of goods and services. I think intangibles are sometimes forgotten in the mix of transfer pricing. I know when I speak to my clients they don't necessarily think about it that way, or understand the concept, or understand that the entity that's developing and incurring the cost of development of the intangible, whatever that is, needs to be compensated by the other entities in the group. They are then profiting from it, selling it out in the marketplace, earning revenue on that intangible that it hasn't expended any resources towards developing. I also want to say that in terms of intangible or intellectual property, we need to consider it less legally defined.
It's not necessarily something that's been patented, registered, or legally claimed as an intangible, but rather the secret sauce of the global business. Like, what drives this business? What are they expending funds towards developing that puts them at an advantage,
Carlos Camacho: Absolutely, Christian.
Christian Jahndorf: Yeah, I agree. The intangible is visible as long as it is registered as a patent. So if you transfer such an intangible, you see it and you think about tax consequences. As long as you have other values which are not registered in such a way, then you have the case and you run the danger and the tax risk that this trench action is not considered under fair transfer pricing with the tax consequences if this is picked up in tax audit. Let's say, Intangible we can understand today for tax purposes, at least in the broadest sense possible, because each profit potential carrying item in a company which can be transferred is a possible intangible. Digitalization makes it extremely necessary to think about this in tax terms because intangibles become a global driver in creating value and they are shifted in multinational companies from the parent company to subsidiaries or from subsidiaries to another sister company and so on. The tax consequences are almost obvious if you are aware that if you shift a value driver from one place to another, you transfer value and value is the profit-generating unit, which from the perspective of the tax authorities is the source of taxable income.
That's why it's so important in our days now to put utmost attention on this topic.
Carlos Camacho: Absolutely. That's why this is becoming a global issue. I mean, the O E C D, which is kind of the patrolling entity of the type of approach to avoid taxation and tax avoidance internationally. They do the patrolling to make sure that the fair share of taxation is allocated to the jurisdiction that it pertains avoiding having artificial meanings of shifting the intangibles, for instance, from a highly heavy tax jurisdiction to a lower tax jurisdiction, and that's what brought the discussion amongst the O E C D in 2015 to create a set of rules, so-called BEPS, which is based erosion profit shifting.
It's an avoidance program which consists of 15 actions prepared in a very coherent fashion by the O E C D. There is a very interesting point Christian mentioned, which is digitalization because the number one action of the 15 actions of BEPS is the digital economy, and all of a sudden, all the 15 actions were delivered except for action number one, which is the most difficult one. We will have other chances to go over the digital economy in another podcast episode coming up, but in fact, the BEPS analysis is trying to determine whether or not there is a business reason for this shifting of the asset. If there is a purely tax-driven motivation to save the taxes, whether that is legal, that's avoidance, or whether that's illegal that's evasion. So, I think that that's the big challenge that these transactions have when amongst related parties.
Marina Gentile: Yeah, Carlos, that's an excellent point. I mean, let's face it, right? The taxpayer, the multinational is at a bit of a disadvantage in that, the tax authorities, no matter what, no matter what country is, you know, almost have this preconceived notion that multinationals are manipulating taxes through transfer pricing, right? It's just, the expectation that is what's happening. I think the reality, I mean for a lot of us is people just don't understand the complex regulations and international laws around transfer pricing, value creation and, what that means when you're shifting something. So, really is on the taxpayer to get the right advice and understand what that is and what that means, right?
IP, intellectual property, is king in any global organization. Following the functions, assets and risk it's typically the assets part wherever that IP is located, funded, developed, et cetera, paid for, that's the entrepreneurial risk taker of the business.
Meaning, it's the entity that, yes, in the beginning, incurs the highest cost related to the development, but also reaps the biggest rewards. There's no ceiling to that entity. That entity can be as profitable as that IP is successful. Other entities in the organization are some kind of, lower risk or limited risk, limited function entity within the chain.
Identifying that IP and where it's located and sending that message to all the tax authorities related to this global business is key. You want to set the stage and, ideally, the stage is that it's one location that owns that IP, but we can get into that as well because it gets more complicated if it's more than one location but then building the substance around it.
So the transfer pricing piece of it is where you have that IP, the substance needs to be there, the strategy, the chief technology officer, a development team, et cetera. You can still have developers in other parts of the world, of course especially post covid people are located everywhere and that's fine as long as they're compensated appropriately. So that's where that net cost plus markup structure for the service of developing comes in while maintaining the integrity of the risk with the entrepreneurial risk taker.
Christian Jahndorf: I think Marina expresses one decisive point it is the question of where is the intangible allocated. Before BEPS, it was quite easy. We had the concept of legal ownership. The legal owner is the entity that pays the bill for the development or acquisition of the IP. This concept of legal ownership is put from top to the bottom. Now we have the concept of economic ownership, and it can happen that the legal owner, meaning the company paying the bill, is not the economic owner, and this is in my opinion, the most severe consequence of BEPS that we have to screen. The existing concepts are already in place. If the allocation to the legal owner is still the right way to allocate the asset. And now coming to the point, of economic ownership, what does it mean?
The topic or the keyword is DIMPE. This DIMPE asks who develops, improves, maintains, protects, or employs the intangible asset. So we have five criteria to determine who is the economic owner. We can also have a maximum of five possible economic owners. One may be that pays the bill, the other one that develops, the other one that improves the other one that maintains. So this makes things very complex. In the end. It is a very difficult question of how to evaluate and how consider which portion of contribution to the development of such a good is, so decisive that you can say you are the economic owner.
We will see endless discussions with tax authorities, not only in one country but in the worst case in various countries. This little change from the principle of legal to economic ownership is disruptive in practice.
Carlos Camacho: Indeed, I guess that this is plenty for a round of issues that can be the consequence of intangibles. We thank you for all your input both Marina and Christian, and of course, we'll be delighted to be sharing with you in the next podcasts.
Outtro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.
Eps 28: Transfer pricing and Intangibles
Speakers:
Carlos Camacho: HLB Global Transfer Pricing Leader
Christian Jahndorf: HLB Germany
Marina Gentile: HLB USA
Intro: Hello and welcome to HLB Cross Border Business Talks, HLB’s Global podcast series on international business topics.
Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho and I'm the leader of transfer pricing at HLB International. I'm very pleased and glad to be sharing this podcast with my colleagues, Kristin Jan Fog and Marin Jan. We are going to be addressing a subject regarding transfer pricing intangible assets. So I think it's better to start talking about general transfer pricing. The terminology of transfer pricing may lead people to think about a price of a good or service. Unfortunately, the terminology is not enough to explain what transfer pricing is all about.
Transfer pricing is all about a comparison of the assets involved in the production of a good or service. The risk that each of the parties is bearing in the transaction, as well as the functions that each of the parties is undertaking. Transfer pricing is only applicable when those transactions do occur within related practices.
So if two independent individuals, companies, or entities, in general, do enter into a contract, it is deemed to be treated as a right transfer pricing analysis because both parties are trying to behave economically. Behaving economically means that the seller is trying to obtain the highest price possible, and the buyer is going to try to obtain the least value for that acquisition. That doesn't happen when you are a related party because there is a common interest of shareholders that you have in common, maybe directors that are in common, and it varies from legislation to legislation. Today we are going to try to go over what is deemed to be related parties within the framework of the O E C D guidelines, which are followed by most of the jurisdictions, are all over the world.
Carlos Camacho: Welcome Christian. Welcome, Marina.
Christian Jahndorf: Hello.
Marina Gentile: Great to be here, Carlos. Hello everyone. I'd love to jump on what you said Carlos, about not just about the transfer of goods and services. I think intangibles are sometimes forgotten in the mix of transfer pricing. I know when I speak to my clients they don't necessarily think about it that way, or understand the concept, or understand that the entity that's developing and incurring the cost of development of the intangible, whatever that is, needs to be compensated by the other entities in the group. They are then profiting from it, selling it out in the marketplace, earning revenue on that intangible that it hasn't expended any resources towards developing. I also want to say that in terms of intangible or intellectual property, we need to consider it less legally defined.
It's not necessarily something that's been patented, registered, or legally claimed as an intangible, but rather the secret sauce of the global business. Like, what drives this business? What are they expending funds towards developing that puts them at an advantage,
Carlos Camacho: Absolutely, Christian.
Christian Jahndorf: Yeah, I agree. The intangible is visible as long as it is registered as a patent. So if you transfer such an intangible, you see it and you think about tax consequences. As long as you have other values which are not registered in such a way, then you have the case and you run the danger and the tax risk that this trench action is not considered under fair transfer pricing with the tax consequences if this is picked up in tax audit. Let's say, Intangible we can understand today for tax purposes, at least in the broadest sense possible, because each profit potential carrying item in a company which can be transferred is a possible intangible. Digitalization makes it extremely necessary to think about this in tax terms because intangibles become a global driver in creating value and they are shifted in multinational companies from the parent company to subsidiaries or from subsidiaries to another sister company and so on. The tax consequences are almost obvious if you are aware that if you shift a value driver from one place to another, you transfer value and value is the profit-generating unit, which from the perspective of the tax authorities is the source of taxable income.
That's why it's so important in our days now to put utmost attention on this topic.
Carlos Camacho: Absolutely. That's why this is becoming a global issue. I mean, the O E C D, which is kind of the patrolling entity of the type of approach to avoid taxation and tax avoidance internationally. They do the patrolling to make sure that the fair share of taxation is allocated to the jurisdiction that it pertains avoiding having artificial meanings of shifting the intangibles, for instance, from a highly heavy tax jurisdiction to a lower tax jurisdiction, and that's what brought the discussion amongst the O E C D in 2015 to create a set of rules, so-called BEPS, which is based erosion profit shifting.
It's an avoidance program which consists of 15 actions prepared in a very coherent fashion by the O E C D. There is a very interesting point Christian mentioned, which is digitalization because the number one action of the 15 actions of BEPS is the digital economy, and all of a sudden, all the 15 actions were delivered except for action number one, which is the most difficult one. We will have other chances to go over the digital economy in another podcast episode coming up, but in fact, the BEPS analysis is trying to determine whether or not there is a business reason for this shifting of the asset. If there is a purely tax-driven motivation to save the taxes, whether that is legal, that's avoidance, or whether that's illegal that's evasion. So, I think that that's the big challenge that these transactions have when amongst related parties.
Marina Gentile: Yeah, Carlos, that's an excellent point. I mean, let's face it, right? The taxpayer, the multinational is at a bit of a disadvantage in that, the tax authorities, no matter what, no matter what country is, you know, almost have this preconceived notion that multinationals are manipulating taxes through transfer pricing, right? It's just, the expectation that is what's happening. I think the reality, I mean for a lot of us is people just don't understand the complex regulations and international laws around transfer pricing, value creation and, what that means when you're shifting something. So, really is on the taxpayer to get the right advice and understand what that is and what that means, right?
IP, intellectual property, is king in any global organization. Following the functions, assets and risk it's typically the assets part wherever that IP is located, funded, developed, et cetera, paid for, that's the entrepreneurial risk taker of the business.
Meaning, it's the entity that, yes, in the beginning, incurs the highest cost related to the development, but also reaps the biggest rewards. There's no ceiling to that entity. That entity can be as profitable as that IP is successful. Other entities in the organization are some kind of, lower risk or limited risk, limited function entity within the chain.
Identifying that IP and where it's located and sending that message to all the tax authorities related to this global business is key. You want to set the stage and, ideally, the stage is that it's one location that owns that IP, but we can get into that as well because it gets more complicated if it's more than one location but then building the substance around it.
So the transfer pricing piece of it is where you have that IP, the substance needs to be there, the strategy, the chief technology officer, a development team, et cetera. You can still have developers in other parts of the world, of course especially post covid people are located everywhere and that's fine as long as they're compensated appropriately. So that's where that net cost plus markup structure for the service of developing comes in while maintaining the integrity of the risk with the entrepreneurial risk taker.
Christian Jahndorf: I think Marina expresses one decisive point it is the question of where is the intangible allocated. Before BEPS, it was quite easy. We had the concept of legal ownership. The legal owner is the entity that pays the bill for the development or acquisition of the IP. This concept of legal ownership is put from top to the bottom. Now we have the concept of economic ownership, and it can happen that the legal owner, meaning the company paying the bill, is not the economic owner, and this is in my opinion, the most severe consequence of BEPS that we have to screen. The existing concepts are already in place. If the allocation to the legal owner is still the right way to allocate the asset. And now coming to the point, of economic ownership, what does it mean?
The topic or the keyword is DIMPE. This DIMPE asks who develops, improves, maintains, protects, or employs the intangible asset. So we have five criteria to determine who is the economic owner. We can also have a maximum of five possible economic owners. One may be that pays the bill, the other one that develops, the other one that improves the other one that maintains. So this makes things very complex. In the end. It is a very difficult question of how to evaluate and how consider which portion of contribution to the development of such a good is, so decisive that you can say you are the economic owner.
We will see endless discussions with tax authorities, not only in one country but in the worst case in various countries. This little change from the principle of legal to economic ownership is disruptive in practice.
Carlos Camacho: Indeed, I guess that this is plenty for a round of issues that can be the consequence of intangibles. We thank you for all your input both Marina and Christian, and of course, we'll be delighted to be sharing with you in the next podcasts.
Outtro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.
Eps 27: Key findings from HLB Cybersecurity Report 2022
In this episode, Global CIO Abu Bakkar discussed the key findings of this year's HLB Cybersecurity Report 2022 with Global Advisory and Technology Leader Jim Bourke and HLB Digital Leader for Gustavo Solis. Hide
EPS 27: Key findings from HLB Cybersecurity Report 2022
Speakers:
Global CIO, Abu Bakkar
Global Advisory and Technology Leader, Jim Bourke
HLB Digital Leader, Gustavo Solis
Abu Bakkar: Good afternoon everybody, and welcome to, the HLB podcast series on cross Border Business Talks.
Now October is Cybersecurity Awareness Month, and it's dedicated to helping individuals and businesses protect themselves online as threats to technology and confidential data become more commonplace. At HLB, we produced our annual report to mark cybersecurity awareness month. The report has been prepared with responses from over 750, senior IT professionals from a variety of sectors.
This report gives guidance to the network on prevalent risks to cyber security and how they adopt best practices to protect their firms. I am joined in the podcast by Jim Bourke, HLB Chair of Technology and Advisory. Hi Jim.
Jim Bourke: How's it going, Abu?
Abu Bakkar: Great. Thank you. And Gustavo Solis partner firm at HLB in Mexico and member of HLB Digital. Hey, Gustavo.
Gustavo Solis: Hi. Good morning.
Abu Bakkar: Thank you guys for joining. So let's deep dive into the findings of our cybersecurity report. Maybe I'll open up with a question to both of you really? Yes. I'd like to start by asking what you thought was the most surprising finding of the report.
Jim Bourke: Okay, so let me, let me lead on this one, Abu.
I'll tell you, I was shocked right when we looked at the responses and we saw, again, keep in mind the population here. We have senior IT professionals that answer the survey, and we put out a press release on this a few weeks ago. 78% of senior IT professionals believe their organizations are not prepared for cyber attacks. I said not prepared for cyber attacks. So here I am, right? I'm a business owner, I'm an entrepreneur, I'm a CEO of a company. If my senior IT professionals believe that they are not prepared for a cyber attack, I need to be concerned. That to me, Abu was shocking.
Abu Bakkar: Thank you, Jim.
And I echo your sentiments. Some of the results we found were as you mentioned, shocking. Gustavo.
Gustavo Solis: Yes. well, to me it wasn't a surprise, it's just a confirmation that the problem that we have as a society that, one of the most concerning things is the cyber security skills sort shortage. We don't have enough people to deal with all this cybersecurity threats all around the world. This is a serious concern because this is not a problem that is going to be solved from one day to another. We need universities and we need colleges and postgraduate studies to fulfill this gap between what is needed, and where we are currently in terms of our capabilities. To me, that's one of the most shocking issues.
Abu Bakkar: Thank you Gustavo. A question along those lines. Is there anything that in our industry as accounting firms that we can do or we can add to the training and learning that we provide for cybersecurity?
Jim Bourke: Sure. We've talked about this many times. You know, life is all about training. Life is all about learning and when, especially when it comes to cyber and cyber attacks and cyber security awareness, you need to continually be addressing those issues with your staff. I look at best practices for our industry.
Very often we get asked, why should we hire an accounting firm? Why should we hire a chartered accountant? Why should we hire a CPA to help us with protection and cybersecurity awareness? Why? Because we understand the vulnerabilities that exist around data. There's a service that CPAs can provide. It's called a SOC two audit. Think about this. You trust your accountant today with your financial statements, right? You go to your accountant to do audited financial statements. Many people around the globe are not aware of a SOC two. SOC two is basically an audit around those best practices concerning technology and protecting data.
So that's one of the things that someone could reach out to our industry to better understand those types of reports for best practices around that space.
Abu Bakkar: Great. Thank you Jim. Leading onto that, so it seems like the labor market is going through some challenges particularly in attracting and retaining talent. Retaining talent has come up in many industries, has been prevalent in our industry for a while now and has also come up as a threat to cybersecurity. How do you recommend firms retain the talent they have and upskill them? So they're constantly learning and keeping with the evolving cyber landscape.
Really interesting thing that's come up from this survey as well is that the top two concerns of IT professionals, are more focused on skills and training. So the human aspect of cybersecurity rather than technology. Gustavo, I think you mentioned about universities and learning. Is there anything else maybe you want to add to this question?
Gustavo Solis: Yes. For sure we have a shortage of people, but I think one of the perspectives that we are not facing is the different generations in the workspace. First we started like the baby boomers, the X generation, the millennials, and then the centennials.
We struggle with the arrival of millennials to the market, but right now millennials are already working on a senior level. Most of them are 40 plus and they're getting used to the job. But now the challenge is with the younger people, the centennials, that they have a different view of life and they have a different way of approaching things.
And if they're not interested in something, they will not behave accordingly for example, security threats. So to me, one of the major concerns is to make people aware about the threats, about what we should be doing at work and millennials are a generation that grew up with technology it's in their nature.
They grew up with iPads, with iPhones the technology. So they're, by nature, they're more skilled than the previous generations. But what I think is missing Is the awareness. Awareness is the key factor to me at all levels.
Jim Bourke: That's a great point Gustavo. The only thing I'll add to that is that, you know, as employers out there, we need to be aware that technology is moving at lightning speeds.
Right? It's moving very quickly. So although someone may have graduated from university or college with an expertise in technology, there is such a skill shortage because they're going everywhere. We know about the great resignation going on around the globe today with a shortage of great employees, the cybersecurity space is no different.
What I would suggest is that we as employers out there really understand the needs of cyber security specialists and continue to give training in that cyber security space. Continue to foster the development of their skill sets to keep up with the ever-increasing awareness around the cybersecurity space.
It's not going away. We just need to make sure that we continually train all of our employees, including those in our IT teams, our cybersecurity teams, about latest and greatest best practices when it comes to protecting company data.
Abu Bakkar: Brilliant. Thank you, Jim. Thank you, Gustavo. Maybe one other thing that I can add to this, and your comments will be really useful here as well, is that the top issue is cybersecurity skills shortage.
So do you think, it is a good idea that maybe using offshore managed services where you have a service that's provided by you for security, your company is protected by the managed service provider. How would you feel about that? Taking into account that we are accounting firms.
Jim Bourke: I often say why accounting firms? Why go to your accounting firm when it comes to cybersecurity? Because we understand the risks around financial data. That's what it's all about. So we understand the financial aspects we also understand the cyber aspects. You may have a great internal IT team. They're great at keeping the lights on. They're great at making sure there's no disruption with respect to hardware. But to be honest with you, they may not be properly trained in cyber and cybersecurity awareness.
Many of our firms are around the globe. Our member firms of hlb around the globe, they have cyber security specialists on staff. So I would seriously consider tapping into those resources that are available through our network and possibly outsource some of those cybersecurity services.
Abu Bakkar: Perfect. Thank you Jim. Gustavo, any thoughts on this?
Gustavo Solis: I think that Covid 19 brought a lot of pain, a lot of problems. But also opened opportunities with remote work. The boundaries or the borders among the countries virtually have disappeared. So right now I could be working with some people, anywhere in the world. So I believe that in this matter especially in cybersecurity, you can hire people from all over the world. They don't have to travel, they don't have to be inside. We can be working remotely and we can take advantage of all the skills that are developing in different territories. As we mentioned sometime in the past, even though every country has cybersecurity threats, every country is different.
Every country have different consequences. They have different laws, they have different capabilities, infrastructure. So we have to have, a localized point of view when we're talking about cybersecurity work. But it's like an old saying that think globally and act locally. We have resources all over the world that would enable us to give specialized service in every location.
Abu Bakkar: Thanks, Gustavo. I love that. Think globally act locally. That's great. Moving on to the next question, and you touched on this a little bit, Gustavo.
The environment that we are in now has changed and since the pandemic, so hybrid working has been embraced as a preferred way of working by many organizations. As you mentioned, Gustavo, the pandemic has accelerated this, but however, it has left companies and employees at an increased threat of an attack.
So how can firms better adopt procedures and protect themselves from the cloud and its vulnerabilities. Maybe a question to Jim on this one and just while leading you on to Jim, that we found that, as you mentioned earlier as well, we found that the only a quarter of companies that we've surveyed are fully prepared for a cyber attack.
Jim Bourke: Right. So let, let's think about this, Abu, right? The whole world is migrating to the cloud. So all their applications are growing to the cloud. We are all dealing with, I know in North America we're dealing with staff that are not going to come back to work. We see that in Eastern Europe. We see it in Western Europe, We see it throughout Asia, we see it in Australia.
We see it throughout all different regions around the world. So look this is here to stay. With this I think one of the items highlighted in our survey is 81% express concern over cloud vulnerabilities. Cloud vulnerabilities are caused by two things. One our employees working in this remote environment, utilizing the cloud to transfer data.
And the other is just the fact that we are all migrating to the cloud on cloud based applications. We have to be aware that we need to address, If we had processes and procedures in place for addressing cyber vulnerabilities, pre pandemic during a pandemic, we have to revisit them today.
I would seriously revisit those policies. Understand it's not going away and we need to make changes. There are certain best practices that we see out there globally. We talk about the Nist framework, which to me Is a global framework upon which so many other frameworks, whether it's GDPR or the standards that, have appeared throughout, other regions are built upon.
Everything can be traced to that. We go back to that Nist framework and understand when we have remote work environment where we're utilized in the cloud, taking advantage of applications out there, vulnerabilities exist. We minimize those vulnerabilities by following standards that are dictated under the Nist framework.
Abu Bakkar: Great. Thank you, Jim. Gustavo, if you could touch on that question, but as well, I just wanted to add another aspect of this. Do you think because of the accelerated technology that we have companies have put in and the increased likeness of attack do you see hybrid working disappearing and companies going back into on premise working again?
Gustavo Solis: No. I don't see that happening at all. In big cities as in Mexico City, the commuting time for people is terrible. They spend one or two hours or more every day commuting. So right now the people have the benefit of working from home. I don't see people going back to office in the future. Actually there are companies that are struggling and people prefer to resign than going back to the office. So I see that home office or remote office is here to stay.
Saying that and the rapid change of technology as Jim mentioned it's a very worrying aspect because to have something secure, you have to have a lot of things, technology itself, procedures, training many things, and you just need one thing to fail to have a problem. So the challenge is huge. You who are responsible for security you have to provide tons and tons of security controls, but you only need one thing to fail, to have a major problem. So that, is an enormous challenge to cybersecurity people.
Abu Bakkar: Great. Thank you Gustavo. This leads me to the next question. With regards to technology you know it's advancing at a colossal rate, and really the question is around what firms can do to protect themselves from this, from this evolvement. We hear now cyber attacks are now using AI to send out phishing emails which look so real that it takes an expert to be able to spot these now. So is it enough to react to an attack? What would you say to a company, Jim, if they said, we have technologies in place we don't need a framework or a procedure to follow?
Jim Bourke: I would say you are crazy, right? I would say look, best practices, make sure what you're doing is you're exercising best practices around putting controls in place regarding cyber and cybersecurity awareness.
Working with your internal IT teams, working with external providers to ensure that you've implemented those best practices. You heard me talk about Nist framework, making sure your cybersecurity specialists understand the purpose of it. Maybe you've gone out, you've got a SOC 2 audit as I've talked about, but it doesn't end there.
It happens every single day. You need to push continuous training to your employees. And I'll add one thing. Abu, make sure if you're an executive in a business that there's a no-exception policy. The same training that you push for the entry-level person in your business one day outta school is the same training that you're pushing for the seasoned legacy professionals that are running at the highest levels within your organization.
Because all it takes is one, one flaw, one breakdown in the system, one person to be victim to a fishing attack. It could literally be the downfall of an entire organization. So all I would say, train, train, train. And continue to train every single person in your organization about cybersecurity best practices.
Abu Bakkar: Thanks, Jim. It's a great point. You touched on there maybe a question for Gustavo. How about companies and the investments they make in cybersecurity? And what about leadership from the top are these factors?
Gustavo Solis: Wow, that's a very good question, Abu. From a country which is trying to apply saving measures in the economy for people who have the decision-making power, but they don't have the awareness of security. Sometimes they believe that they're overspending in security because they don't see any short-term results. When you invest in cybersecurity, you really hope not to see the result because that would mean that everything is working fine.
If you don't see anything, things are working fine because you, don't have any, security events. But normally when they then decide where to invest money, if they don't see any return in the short term, they tend to start cutting expenses in cybersecurity, which leads to bigger exposure to threats.
So to me, awareness at the decision-making level is a key factor to stay protected from cybersecurity threats.
Abu Bakkar: Brilliant. Thank you, Gustavo. My final question, we're coming to the end of the podcast now. So running onto what we've discussed earlier suppose leads us nicely to what we all mentioned was an alarming find 78% of those surveyed felt that their organization wasn't prepared for a cyber attack. Maybe Jim, Gustavo if you could touch firstly on your thoughts, on why businesses, although we talk about it all the time, are still not prepared on cybersecurity and maybe one piece of advice that you would give them?
Jim Bourke: Abu, look, there are lots of distractions going on in the world at all times. We have wars going on. We have, pandemics that are happening. We have economies that are either inflation or recession. There are lots of things that are concerning business entrepreneurs today. I would say you need to put cybersecurity up there.
I'll tell you as one of, if not the biggest threat to our society today. It's hands down and there's so much that we can be doing. We can't control a lot of the wars. We can't control the economy, but you can control your cybersecurity position. All I would suggest is that if you don't have the resources internally to address this, and even if you think you do, engage someone.
I look at our entire HLB network we have cyber security specialists throughout our entire HLB network around the globe have us peek under the covers, and have us take a look at your cybersecurity awareness. So when your internal IT team says, we're good with cybersecurity, we're protected. Just have another set of eyes peek under just to ensure things are going good because, to me, this is what would keep me up at night, especially when we hear that 78% of IT professionals feel that they're not prepared.
I'm really concerned about that. I would engage someone on the outside peek under the covers, and you know what? Let's be prepared so that we could flip this ratio upside down.
Abu Bakkar: Brilliant. Jim, thank you so much. Gustavo, final comments from you?
Gustavo Solis: Yes. There's a saying in Spanish. I don't have to translate that into English but when you see that your neighbour is struggling with something, you should get ready because you're next, and in Mexico recently we had a major leak of information in the Army. They extracted millions of documents from the army, and these are the same hackers, that attacked the army in Chile, in Columbia. And when you think, which, are the more reliable institutions in these countries?
I mean, if you have to trust in some institution that is secure, normally you would think the army is very, very secure. The reality is different. So, If hackers can attack successfully armies in, their cybersecurity vulnerabilities, imagine what the hackers can do to your company.
You don't know and are not sure what happened until it happens, and maybe that's too late. So you have to be ready and don't think that it's not, going to happen to you. It will happen to you eventually. It's just a matter of time, unfortunately.
Abu Bakkar: Thank you, Gustavo. So this is the end of our podcast and just to summarize. We've heard that the biggest threat to our society today is cybersecurity. We've heard that our way of working has changed and there's more likely than not that it will stay, it will not go back to on-premise again as we had previously, but you can control your cybersecurity position.
We heard some of the best practices that were highlighted by Jim and Gustavo. Engage cyber specialists, implement a framework, and continue training in education. Check out the HLB Cybersecurity report 2022 to see the best practices and see how HLB can help with your cyber position. Thank you so much for listening to us and till the next time.
EPS 27: Key findings from HLB Cybersecurity Report 2022
Speakers:
Global CIO, Abu Bakkar
Global Advisory and Technology Leader, Jim Bourke
HLB Digital Leader, Gustavo Solis
Abu Bakkar: Good afternoon everybody, and welcome to, the HLB podcast series on cross Border Business Talks.
Now October is Cybersecurity Awareness Month, and it's dedicated to helping individuals and businesses protect themselves online as threats to technology and confidential data become more commonplace. At HLB, we produced our annual report to mark cybersecurity awareness month. The report has been prepared with responses from over 750, senior IT professionals from a variety of sectors.
This report gives guidance to the network on prevalent risks to cyber security and how they adopt best practices to protect their firms. I am joined in the podcast by Jim Bourke, HLB Chair of Technology and Advisory. Hi Jim.
Jim Bourke: How's it going, Abu?
Abu Bakkar: Great. Thank you. And Gustavo Solis partner firm at HLB in Mexico and member of HLB Digital. Hey, Gustavo.
Gustavo Solis: Hi. Good morning.
Abu Bakkar: Thank you guys for joining. So let's deep dive into the findings of our cybersecurity report. Maybe I'll open up with a question to both of you really? Yes. I'd like to start by asking what you thought was the most surprising finding of the report.
Jim Bourke: Okay, so let me, let me lead on this one, Abu.
I'll tell you, I was shocked right when we looked at the responses and we saw, again, keep in mind the population here. We have senior IT professionals that answer the survey, and we put out a press release on this a few weeks ago. 78% of senior IT professionals believe their organizations are not prepared for cyber attacks. I said not prepared for cyber attacks. So here I am, right? I'm a business owner, I'm an entrepreneur, I'm a CEO of a company. If my senior IT professionals believe that they are not prepared for a cyber attack, I need to be concerned. That to me, Abu was shocking.
Abu Bakkar: Thank you, Jim.
And I echo your sentiments. Some of the results we found were as you mentioned, shocking. Gustavo.
Gustavo Solis: Yes. well, to me it wasn't a surprise, it's just a confirmation that the problem that we have as a society that, one of the most concerning things is the cyber security skills sort shortage. We don't have enough people to deal with all this cybersecurity threats all around the world. This is a serious concern because this is not a problem that is going to be solved from one day to another. We need universities and we need colleges and postgraduate studies to fulfill this gap between what is needed, and where we are currently in terms of our capabilities. To me, that's one of the most shocking issues.
Abu Bakkar: Thank you Gustavo. A question along those lines. Is there anything that in our industry as accounting firms that we can do or we can add to the training and learning that we provide for cybersecurity?
Jim Bourke: Sure. We've talked about this many times. You know, life is all about training. Life is all about learning and when, especially when it comes to cyber and cyber attacks and cyber security awareness, you need to continually be addressing those issues with your staff. I look at best practices for our industry.
Very often we get asked, why should we hire an accounting firm? Why should we hire a chartered accountant? Why should we hire a CPA to help us with protection and cybersecurity awareness? Why? Because we understand the vulnerabilities that exist around data. There's a service that CPAs can provide. It's called a SOC two audit. Think about this. You trust your accountant today with your financial statements, right? You go to your accountant to do audited financial statements. Many people around the globe are not aware of a SOC two. SOC two is basically an audit around those best practices concerning technology and protecting data.
So that's one of the things that someone could reach out to our industry to better understand those types of reports for best practices around that space.
Abu Bakkar: Great. Thank you Jim. Leading onto that, so it seems like the labor market is going through some challenges particularly in attracting and retaining talent. Retaining talent has come up in many industries, has been prevalent in our industry for a while now and has also come up as a threat to cybersecurity. How do you recommend firms retain the talent they have and upskill them? So they're constantly learning and keeping with the evolving cyber landscape.
Really interesting thing that's come up from this survey as well is that the top two concerns of IT professionals, are more focused on skills and training. So the human aspect of cybersecurity rather than technology. Gustavo, I think you mentioned about universities and learning. Is there anything else maybe you want to add to this question?
Gustavo Solis: Yes. For sure we have a shortage of people, but I think one of the perspectives that we are not facing is the different generations in the workspace. First we started like the baby boomers, the X generation, the millennials, and then the centennials.
We struggle with the arrival of millennials to the market, but right now millennials are already working on a senior level. Most of them are 40 plus and they're getting used to the job. But now the challenge is with the younger people, the centennials, that they have a different view of life and they have a different way of approaching things.
And if they're not interested in something, they will not behave accordingly for example, security threats. So to me, one of the major concerns is to make people aware about the threats, about what we should be doing at work and millennials are a generation that grew up with technology it's in their nature.
They grew up with iPads, with iPhones the technology. So they're, by nature, they're more skilled than the previous generations. But what I think is missing Is the awareness. Awareness is the key factor to me at all levels.
Jim Bourke: That's a great point Gustavo. The only thing I'll add to that is that, you know, as employers out there, we need to be aware that technology is moving at lightning speeds.
Right? It's moving very quickly. So although someone may have graduated from university or college with an expertise in technology, there is such a skill shortage because they're going everywhere. We know about the great resignation going on around the globe today with a shortage of great employees, the cybersecurity space is no different.
What I would suggest is that we as employers out there really understand the needs of cyber security specialists and continue to give training in that cyber security space. Continue to foster the development of their skill sets to keep up with the ever-increasing awareness around the cybersecurity space.
It's not going away. We just need to make sure that we continually train all of our employees, including those in our IT teams, our cybersecurity teams, about latest and greatest best practices when it comes to protecting company data.
Abu Bakkar: Brilliant. Thank you, Jim. Thank you, Gustavo. Maybe one other thing that I can add to this, and your comments will be really useful here as well, is that the top issue is cybersecurity skills shortage.
So do you think, it is a good idea that maybe using offshore managed services where you have a service that's provided by you for security, your company is protected by the managed service provider. How would you feel about that? Taking into account that we are accounting firms.
Jim Bourke: I often say why accounting firms? Why go to your accounting firm when it comes to cybersecurity? Because we understand the risks around financial data. That's what it's all about. So we understand the financial aspects we also understand the cyber aspects. You may have a great internal IT team. They're great at keeping the lights on. They're great at making sure there's no disruption with respect to hardware. But to be honest with you, they may not be properly trained in cyber and cybersecurity awareness.
Many of our firms are around the globe. Our member firms of hlb around the globe, they have cyber security specialists on staff. So I would seriously consider tapping into those resources that are available through our network and possibly outsource some of those cybersecurity services.
Abu Bakkar: Perfect. Thank you Jim. Gustavo, any thoughts on this?
Gustavo Solis: I think that Covid 19 brought a lot of pain, a lot of problems. But also opened opportunities with remote work. The boundaries or the borders among the countries virtually have disappeared. So right now I could be working with some people, anywhere in the world. So I believe that in this matter especially in cybersecurity, you can hire people from all over the world. They don't have to travel, they don't have to be inside. We can be working remotely and we can take advantage of all the skills that are developing in different territories. As we mentioned sometime in the past, even though every country has cybersecurity threats, every country is different.
Every country have different consequences. They have different laws, they have different capabilities, infrastructure. So we have to have, a localized point of view when we're talking about cybersecurity work. But it's like an old saying that think globally and act locally. We have resources all over the world that would enable us to give specialized service in every location.
Abu Bakkar: Thanks, Gustavo. I love that. Think globally act locally. That's great. Moving on to the next question, and you touched on this a little bit, Gustavo.
The environment that we are in now has changed and since the pandemic, so hybrid working has been embraced as a preferred way of working by many organizations. As you mentioned, Gustavo, the pandemic has accelerated this, but however, it has left companies and employees at an increased threat of an attack.
So how can firms better adopt procedures and protect themselves from the cloud and its vulnerabilities. Maybe a question to Jim on this one and just while leading you on to Jim, that we found that, as you mentioned earlier as well, we found that the only a quarter of companies that we've surveyed are fully prepared for a cyber attack.
Jim Bourke: Right. So let, let's think about this, Abu, right? The whole world is migrating to the cloud. So all their applications are growing to the cloud. We are all dealing with, I know in North America we're dealing with staff that are not going to come back to work. We see that in Eastern Europe. We see it in Western Europe, We see it throughout Asia, we see it in Australia.
We see it throughout all different regions around the world. So look this is here to stay. With this I think one of the items highlighted in our survey is 81% express concern over cloud vulnerabilities. Cloud vulnerabilities are caused by two things. One our employees working in this remote environment, utilizing the cloud to transfer data.
And the other is just the fact that we are all migrating to the cloud on cloud based applications. We have to be aware that we need to address, If we had processes and procedures in place for addressing cyber vulnerabilities, pre pandemic during a pandemic, we have to revisit them today.
I would seriously revisit those policies. Understand it's not going away and we need to make changes. There are certain best practices that we see out there globally. We talk about the Nist framework, which to me Is a global framework upon which so many other frameworks, whether it's GDPR or the standards that, have appeared throughout, other regions are built upon.
Everything can be traced to that. We go back to that Nist framework and understand when we have remote work environment where we're utilized in the cloud, taking advantage of applications out there, vulnerabilities exist. We minimize those vulnerabilities by following standards that are dictated under the Nist framework.
Abu Bakkar: Great. Thank you, Jim. Gustavo, if you could touch on that question, but as well, I just wanted to add another aspect of this. Do you think because of the accelerated technology that we have companies have put in and the increased likeness of attack do you see hybrid working disappearing and companies going back into on premise working again?
Gustavo Solis: No. I don't see that happening at all. In big cities as in Mexico City, the commuting time for people is terrible. They spend one or two hours or more every day commuting. So right now the people have the benefit of working from home. I don't see people going back to office in the future. Actually there are companies that are struggling and people prefer to resign than going back to the office. So I see that home office or remote office is here to stay.
Saying that and the rapid change of technology as Jim mentioned it's a very worrying aspect because to have something secure, you have to have a lot of things, technology itself, procedures, training many things, and you just need one thing to fail to have a problem. So the challenge is huge. You who are responsible for security you have to provide tons and tons of security controls, but you only need one thing to fail, to have a major problem. So that, is an enormous challenge to cybersecurity people.
Abu Bakkar: Great. Thank you Gustavo. This leads me to the next question. With regards to technology you know it's advancing at a colossal rate, and really the question is around what firms can do to protect themselves from this, from this evolvement. We hear now cyber attacks are now using AI to send out phishing emails which look so real that it takes an expert to be able to spot these now. So is it enough to react to an attack? What would you say to a company, Jim, if they said, we have technologies in place we don't need a framework or a procedure to follow?
Jim Bourke: I would say you are crazy, right? I would say look, best practices, make sure what you're doing is you're exercising best practices around putting controls in place regarding cyber and cybersecurity awareness.
Working with your internal IT teams, working with external providers to ensure that you've implemented those best practices. You heard me talk about Nist framework, making sure your cybersecurity specialists understand the purpose of it. Maybe you've gone out, you've got a SOC 2 audit as I've talked about, but it doesn't end there.
It happens every single day. You need to push continuous training to your employees. And I'll add one thing. Abu, make sure if you're an executive in a business that there's a no-exception policy. The same training that you push for the entry-level person in your business one day outta school is the same training that you're pushing for the seasoned legacy professionals that are running at the highest levels within your organization.
Because all it takes is one, one flaw, one breakdown in the system, one person to be victim to a fishing attack. It could literally be the downfall of an entire organization. So all I would say, train, train, train. And continue to train every single person in your organization about cybersecurity best practices.
Abu Bakkar: Thanks, Jim. It's a great point. You touched on there maybe a question for Gustavo. How about companies and the investments they make in cybersecurity? And what about leadership from the top are these factors?
Gustavo Solis: Wow, that's a very good question, Abu. From a country which is trying to apply saving measures in the economy for people who have the decision-making power, but they don't have the awareness of security. Sometimes they believe that they're overspending in security because they don't see any short-term results. When you invest in cybersecurity, you really hope not to see the result because that would mean that everything is working fine.
If you don't see anything, things are working fine because you, don't have any, security events. But normally when they then decide where to invest money, if they don't see any return in the short term, they tend to start cutting expenses in cybersecurity, which leads to bigger exposure to threats.
So to me, awareness at the decision-making level is a key factor to stay protected from cybersecurity threats.
Abu Bakkar: Brilliant. Thank you, Gustavo. My final question, we're coming to the end of the podcast now. So running onto what we've discussed earlier suppose leads us nicely to what we all mentioned was an alarming find 78% of those surveyed felt that their organization wasn't prepared for a cyber attack. Maybe Jim, Gustavo if you could touch firstly on your thoughts, on why businesses, although we talk about it all the time, are still not prepared on cybersecurity and maybe one piece of advice that you would give them?
Jim Bourke: Abu, look, there are lots of distractions going on in the world at all times. We have wars going on. We have, pandemics that are happening. We have economies that are either inflation or recession. There are lots of things that are concerning business entrepreneurs today. I would say you need to put cybersecurity up there.
I'll tell you as one of, if not the biggest threat to our society today. It's hands down and there's so much that we can be doing. We can't control a lot of the wars. We can't control the economy, but you can control your cybersecurity position. All I would suggest is that if you don't have the resources internally to address this, and even if you think you do, engage someone.
I look at our entire HLB network we have cyber security specialists throughout our entire HLB network around the globe have us peek under the covers, and have us take a look at your cybersecurity awareness. So when your internal IT team says, we're good with cybersecurity, we're protected. Just have another set of eyes peek under just to ensure things are going good because, to me, this is what would keep me up at night, especially when we hear that 78% of IT professionals feel that they're not prepared.
I'm really concerned about that. I would engage someone on the outside peek under the covers, and you know what? Let's be prepared so that we could flip this ratio upside down.
Abu Bakkar: Brilliant. Jim, thank you so much. Gustavo, final comments from you?
Gustavo Solis: Yes. There's a saying in Spanish. I don't have to translate that into English but when you see that your neighbour is struggling with something, you should get ready because you're next, and in Mexico recently we had a major leak of information in the Army. They extracted millions of documents from the army, and these are the same hackers, that attacked the army in Chile, in Columbia. And when you think, which, are the more reliable institutions in these countries?
I mean, if you have to trust in some institution that is secure, normally you would think the army is very, very secure. The reality is different. So, If hackers can attack successfully armies in, their cybersecurity vulnerabilities, imagine what the hackers can do to your company.
You don't know and are not sure what happened until it happens, and maybe that's too late. So you have to be ready and don't think that it's not, going to happen to you. It will happen to you eventually. It's just a matter of time, unfortunately.
Abu Bakkar: Thank you, Gustavo. So this is the end of our podcast and just to summarize. We've heard that the biggest threat to our society today is cybersecurity. We've heard that our way of working has changed and there's more likely than not that it will stay, it will not go back to on-premise again as we had previously, but you can control your cybersecurity position.
We heard some of the best practices that were highlighted by Jim and Gustavo. Engage cyber specialists, implement a framework, and continue training in education. Check out the HLB Cybersecurity report 2022 to see the best practices and see how HLB can help with your cyber position. Thank you so much for listening to us and till the next time.
Eps 26: Introduction to Transfer pricing and latest trends
In this episode, Carlos Camacho, HLB's Global Transfer Pricing Leader is joined by Till Zech, from HLB Germany, gives an introduction to Transfer pricing and discusses the latest trends in this arena. Hide
Introduction to Transfer pricing
Speakers: Carlos Camacho, HLB's Global Transfer pricing Leader is joined by Till Zech, from HLB Germany
Hello, and welcome to HLB cross-border business talks. HLB's global podcast series on international business topics.
Carlos Camacho: Hello and welcome to today's podcast. My name is Carlos Camacho, HLB Global Transfer pricing leader. I'm joined today by Till Zech from HLB Germany to discuss Transfer pricing as a strategic instrument for multinational organizations and to touch on some of the latest trends in the Transfer pricing arena.
First, of course, we need to know what Transfer pricing is. So perhaps we will have to start from there, talking about the basic concept of Transfer pricing and when Transfer pricing is applicable Till.
Till Zech: Transfer pricing is nowadays so important because if you have a multi-national enterprise, and that means if you have a company with two subsidiaries in two different countries, then you are already in the middle of Transfer pricing issues.
In our example, Carlos comes from Costa Rica, I come from Germany, and if you have a Costa Rican enterprise with a subsidiary in Germany, and if you have any business relations between the German subsidiary and the Costa Rican parent company, then you have already Transfer pricing issues.
Carlos Camacho: Absolutely. The most difficult issue to figure out is that in some instances, these transactions due to the fact of the relationship between the holding company and the subsidiary may be so-called implicit transactions. That is, due to the fact that we both have a common ground of interest, we are pertaining to the same shareholders, or the majority of our stock is owned by the same group of shareholders, we might just keep some of the real formalities and the antagonist of the economic behaviour that is natural to unrelated parties.
In other words, if, Till, and I would be just dealing as individuals unrelated when Till is selling something to me or his company is selling something to my company, he will try to get the highest possible price in order to increase his profitability. Instead, my behaviour would be to negotiate the lowest possible price to acquire his knowledge, his services, his merchandise, and therefore that very economical behaviour when in the ambience of a related party gets diffused or absolutely disappears.
Till Zech: Yeah, absolutely. I totally agree with this. Even with individuals, they might be a relation. This is not so much the case that we see it directly here in Germany, but sometimes we have individuals with different enterprises, and we have intercompany transactions and even then, they might be related under German, Transfer Pricing law we have some clients like this. So, we have also to prove in these cases, whether we have Transfer pricing issues.
Carlos Camacho: This is getting more complicated and a broader, applicable issue since companies may tend to use Transfer pricing to skip, reduce or minimize the total tax burden that they pay as a group, and this is one of the things that Transfer pricing is all about when referred to a base erosion profit shifting program launched by the OECD in 2015. As a consequence, it provoked amendments and the reshaping of the multinational guidelines of Transfer pricing by the OECD.
Till Zech: Yeah, I don't know how it is in Costa Rica, but Transfer pricing became so important that in Germany, for example, we had last year, the total reformation, because we adopted the OECD Transfer pricing rules now. So, we have now a worldwide approach to this topic. I don't know whether you have this too, but since 2013, since the OECD started the base erosion profit shifting program, which included Transfer pricing issues, more and more countries in Europe and in Germany, and Germany's one part of this, really started to enforce Transfer pricing orders and we modernized it. I suppose that in middle and south America, you have the same approach so it's now one global approach, how to deal with these issues.
Carlos Camacho: Indeed, very few countries have still to adopt the OECD new module of Transfer pricing guidelines, and this makes it more global. Those exceptions are in the way of getting more aligned with the OECD guidelines, and therefore, as you are stating, the issue is becoming more flattened. As far as the application to multinational enterprises.
There are specific changes of rules when you go to countries such as Brazil, which is committed to the enforceability of the OECD module by the end of 2024. There is a trend of alignment in the US with the internal revenue code with the OECD guidelines, but more likely than not what we are having is an alignment on a global basis that allow companies to have an interaction that is also providing legal certainty as far as the application of their Transfer pricing policies.
Till Zech: I think we see this trend now all over the world. The work has become much closer and especially the United States, Brazil, India, China, and Russia are very eager to get their share of the Transfer Price taxation.
Carlos Camacho: Absolutely. The other thing that is very close to the Transfer pricing matter is the fact of what we are comparing because the issue here is you always have to compare the assets, the functions, and the risks assumed by the parties when dealing with a Transfer pricing analysis.
To some extent, the broader confusion in the marketplace for people that aren't an expert in Transfer pricing is to attempt to compare price with the price. It's not a comparison between price A or price B of the same product or service because what we make in Transfer pricing activity and Transfer pricing analysis is an analysis of the assets used the risks that have been borne and the functions that have been performed by each member of the multinational enterprise and have still stated very well.
When you talk about multinationals before the beginning of this century, you perhaps would have thought of huge multinationals but now to have just two different jurisdictions involved is plenty and you are in a multinational environment.
Till Zech: We always report the other way. At least the German fiscal situation always comes back to these basics. They always ask now more and more, where are the risks assumed? Are they in Germany or are they in the other country? They always start with a function and risk analysis and they are normally processed with a people function analysis.
They ask where the people functions are because where the people functions are their decisions are made, and once they have decided, the companies which are part of the Transfer pricing analysis have most of the people functions, normally they assume that they might also have a decisive influence on the company. Then they ask, where are the research and development functions, and then they ask, where are the market risks. This is the approach we see in Germany and also in many European tax situations.
Carlos Camacho: Indeed. Furthermore, one of the other issues that have changed dramatically ever since the launching of this program of the OECD so-called BEP's is the fact of the ability to be able to assume either the functions or the risks, because prior to this, the facts were that multinationals justly nominatively allocate a risk or a function to a paper company, and that company was not able to bear the actual risk. If the risk would've materialized, the company was not financially or operationally capable to answer to the public about that very risk.
What the OECD approach today is more factual. Is this entity capable enough and financially strong to be able to bear that risk or is it only nominatively allocating that risk in order to allocate a portion of the profit in a given jurisdiction.
Till Zech: I understand this. In Germany, the tax administration would approach the case in the same manner.
Carlos Camacho: Yes, that in general is a trend of going more for the assets over the form. The asset over form is an analysis that most of the OECD countries and most of the OECD following modules are just taken. There are certain exceptions. For instance, in Canada, you have the exception of the court rules regarding that the form is normally more likely to be prevailing over the assets, but that is an exception that I guess is going to change as time goes on in order to align the ability to be compatible over the world.
Till Zech: I totally agree. I can only use Germany as an example, but here we had to fight for over 70 years where economic substance or legal form should be decisive. In the past, it was always the legal form, but in 20 years, the whole thing has changed and the legal substance becomes known as the center of analysis. For a very long time, Margination of enterprises were able to use legal structures to avoid paying off taxes and under BEP's and under the idea of fighting against the erosion profit shifting now the new approach is that the economic substance is the decisive base for the analysis also for Transfer pricing, pricing.
Carlos Camacho: At the end of the story, Transfer pricing is all about taxes and it is all about taxable days. Of course it has other angles that we might just be touching base in different podcasts, but for today, it's important to summarize that Transfer pricing is always going to be present when two related parties are interacting, whether or not they do allocate a price to that interaction there is an economical approach other than a financial approach.
That means that even if the transaction is for free, financially speaking is deemed to be treated economically as subject to a value and that valuation will entail the ability of tax administration to impose the levy on such a income generated or allocatable to that very jurisdiction.
Therefore, that is one of the conclusions we have to get as a takeaway today. The other one is that the multinational approach of the past, which was the huge multinational companies, which have presence in every other jurisdiction is just getting narrow and narrow. The fact that there are two entities, two jurisdictions make us liable to be in compliance with both documentation of Transfer pricing and the ability to substantiate that we are in compliance with the arms-length principle, which is this very basic statement that we are dealing as if we were not related parties, although we acknowledge and recognize the fact that we are related parties.
It's what we call an economical hypothesis is a fiction. It's a legal fiction whereby the factual issue is that we are related, but the fiction consists in that we are dealing as unrelated. Therefore, that is a big challenge for taxpayers all over the world.
It's also a big challenge for business people trying to set their structures in an efficient operational fashion, as well as it is a huge challenge for audit companies when dealing with their assurance work related to the fact of whether or not the financial statements represent fairly the amount of profits and the financial position of the actual entities, when they're looked on a single basis despite of the consolidated basis.
Till Zech: Let me add one last point from my side. What is important is this is a trend. Multinational enterprise does not mean anymore, only huge multinationals, like the top American companies or from Germany, D Bens or Volkswagen or something like this, but now it comes down also to relatively small companies, with only 10 million revenue, sometimes only 5 million revenue we see already the tax administrations in Europe proving these cases. It is not anymore, only a topic for the multinational, huge and large enterprises with billions and billions of revenues, but also for our clients with revenue of five to 10 million Euro.
Carlos Camacho: That also is a very important effect of compliance cost. The small, and medium enterprises are suffering the same burden as the huge multinational enterprises. Therefore, it is becoming a real administrative burden that has correlated cost of compliance that is making the expansion to different jurisdictions, a more costly and more carefully to be planned and is better to plan than to fix.
So our recommendation, if we have another takeaway of today is Transfer pricing, isn't just compliance, but it's better when it turns out to be part of a planning stage. Thank you for your attention to that.
Thanks for listening for more information about this topic and other cross-border business insights. Visit www.hlb.global/insights.
Introduction to Transfer pricing
Speakers: Carlos Camacho, HLB's Global Transfer pricing Leader is joined by Till Zech, from HLB Germany
Hello, and welcome to HLB cross-border business talks. HLB's global podcast series on international business topics.
Carlos Camacho: Hello and welcome to today's podcast. My name is Carlos Camacho, HLB Global Transfer pricing leader. I'm joined today by Till Zech from HLB Germany to discuss Transfer pricing as a strategic instrument for multinational organizations and to touch on some of the latest trends in the Transfer pricing arena.
First, of course, we need to know what Transfer pricing is. So perhaps we will have to start from there, talking about the basic concept of Transfer pricing and when Transfer pricing is applicable Till.
Till Zech: Transfer pricing is nowadays so important because if you have a multi-national enterprise, and that means if you have a company with two subsidiaries in two different countries, then you are already in the middle of Transfer pricing issues.
In our example, Carlos comes from Costa Rica, I come from Germany, and if you have a Costa Rican enterprise with a subsidiary in Germany, and if you have any business relations between the German subsidiary and the Costa Rican parent company, then you have already Transfer pricing issues.
Carlos Camacho: Absolutely. The most difficult issue to figure out is that in some instances, these transactions due to the fact of the relationship between the holding company and the subsidiary may be so-called implicit transactions. That is, due to the fact that we both have a common ground of interest, we are pertaining to the same shareholders, or the majority of our stock is owned by the same group of shareholders, we might just keep some of the real formalities and the antagonist of the economic behaviour that is natural to unrelated parties.
In other words, if, Till, and I would be just dealing as individuals unrelated when Till is selling something to me or his company is selling something to my company, he will try to get the highest possible price in order to increase his profitability. Instead, my behaviour would be to negotiate the lowest possible price to acquire his knowledge, his services, his merchandise, and therefore that very economical behaviour when in the ambience of a related party gets diffused or absolutely disappears.
Till Zech: Yeah, absolutely. I totally agree with this. Even with individuals, they might be a relation. This is not so much the case that we see it directly here in Germany, but sometimes we have individuals with different enterprises, and we have intercompany transactions and even then, they might be related under German, Transfer Pricing law we have some clients like this. So, we have also to prove in these cases, whether we have Transfer pricing issues.
Carlos Camacho: This is getting more complicated and a broader, applicable issue since companies may tend to use Transfer pricing to skip, reduce or minimize the total tax burden that they pay as a group, and this is one of the things that Transfer pricing is all about when referred to a base erosion profit shifting program launched by the OECD in 2015. As a consequence, it provoked amendments and the reshaping of the multinational guidelines of Transfer pricing by the OECD.
Till Zech: Yeah, I don't know how it is in Costa Rica, but Transfer pricing became so important that in Germany, for example, we had last year, the total reformation, because we adopted the OECD Transfer pricing rules now. So, we have now a worldwide approach to this topic. I don't know whether you have this too, but since 2013, since the OECD started the base erosion profit shifting program, which included Transfer pricing issues, more and more countries in Europe and in Germany, and Germany's one part of this, really started to enforce Transfer pricing orders and we modernized it. I suppose that in middle and south America, you have the same approach so it's now one global approach, how to deal with these issues.
Carlos Camacho: Indeed, very few countries have still to adopt the OECD new module of Transfer pricing guidelines, and this makes it more global. Those exceptions are in the way of getting more aligned with the OECD guidelines, and therefore, as you are stating, the issue is becoming more flattened. As far as the application to multinational enterprises.
There are specific changes of rules when you go to countries such as Brazil, which is committed to the enforceability of the OECD module by the end of 2024. There is a trend of alignment in the US with the internal revenue code with the OECD guidelines, but more likely than not what we are having is an alignment on a global basis that allow companies to have an interaction that is also providing legal certainty as far as the application of their Transfer pricing policies.
Till Zech: I think we see this trend now all over the world. The work has become much closer and especially the United States, Brazil, India, China, and Russia are very eager to get their share of the Transfer Price taxation.
Carlos Camacho: Absolutely. The other thing that is very close to the Transfer pricing matter is the fact of what we are comparing because the issue here is you always have to compare the assets, the functions, and the risks assumed by the parties when dealing with a Transfer pricing analysis.
To some extent, the broader confusion in the marketplace for people that aren't an expert in Transfer pricing is to attempt to compare price with the price. It's not a comparison between price A or price B of the same product or service because what we make in Transfer pricing activity and Transfer pricing analysis is an analysis of the assets used the risks that have been borne and the functions that have been performed by each member of the multinational enterprise and have still stated very well.
When you talk about multinationals before the beginning of this century, you perhaps would have thought of huge multinationals but now to have just two different jurisdictions involved is plenty and you are in a multinational environment.
Till Zech: We always report the other way. At least the German fiscal situation always comes back to these basics. They always ask now more and more, where are the risks assumed? Are they in Germany or are they in the other country? They always start with a function and risk analysis and they are normally processed with a people function analysis.
They ask where the people functions are because where the people functions are their decisions are made, and once they have decided, the companies which are part of the Transfer pricing analysis have most of the people functions, normally they assume that they might also have a decisive influence on the company. Then they ask, where are the research and development functions, and then they ask, where are the market risks. This is the approach we see in Germany and also in many European tax situations.
Carlos Camacho: Indeed. Furthermore, one of the other issues that have changed dramatically ever since the launching of this program of the OECD so-called BEP's is the fact of the ability to be able to assume either the functions or the risks, because prior to this, the facts were that multinationals justly nominatively allocate a risk or a function to a paper company, and that company was not able to bear the actual risk. If the risk would've materialized, the company was not financially or operationally capable to answer to the public about that very risk.
What the OECD approach today is more factual. Is this entity capable enough and financially strong to be able to bear that risk or is it only nominatively allocating that risk in order to allocate a portion of the profit in a given jurisdiction.
Till Zech: I understand this. In Germany, the tax administration would approach the case in the same manner.
Carlos Camacho: Yes, that in general is a trend of going more for the assets over the form. The asset over form is an analysis that most of the OECD countries and most of the OECD following modules are just taken. There are certain exceptions. For instance, in Canada, you have the exception of the court rules regarding that the form is normally more likely to be prevailing over the assets, but that is an exception that I guess is going to change as time goes on in order to align the ability to be compatible over the world.
Till Zech: I totally agree. I can only use Germany as an example, but here we had to fight for over 70 years where economic substance or legal form should be decisive. In the past, it was always the legal form, but in 20 years, the whole thing has changed and the legal substance becomes known as the center of analysis. For a very long time, Margination of enterprises were able to use legal structures to avoid paying off taxes and under BEP's and under the idea of fighting against the erosion profit shifting now the new approach is that the economic substance is the decisive base for the analysis also for Transfer pricing, pricing.
Carlos Camacho: At the end of the story, Transfer pricing is all about taxes and it is all about taxable days. Of course it has other angles that we might just be touching base in different podcasts, but for today, it's important to summarize that Transfer pricing is always going to be present when two related parties are interacting, whether or not they do allocate a price to that interaction there is an economical approach other than a financial approach.
That means that even if the transaction is for free, financially speaking is deemed to be treated economically as subject to a value and that valuation will entail the ability of tax administration to impose the levy on such a income generated or allocatable to that very jurisdiction.
Therefore, that is one of the conclusions we have to get as a takeaway today. The other one is that the multinational approach of the past, which was the huge multinational companies, which have presence in every other jurisdiction is just getting narrow and narrow. The fact that there are two entities, two jurisdictions make us liable to be in compliance with both documentation of Transfer pricing and the ability to substantiate that we are in compliance with the arms-length principle, which is this very basic statement that we are dealing as if we were not related parties, although we acknowledge and recognize the fact that we are related parties.
It's what we call an economical hypothesis is a fiction. It's a legal fiction whereby the factual issue is that we are related, but the fiction consists in that we are dealing as unrelated. Therefore, that is a big challenge for taxpayers all over the world.
It's also a big challenge for business people trying to set their structures in an efficient operational fashion, as well as it is a huge challenge for audit companies when dealing with their assurance work related to the fact of whether or not the financial statements represent fairly the amount of profits and the financial position of the actual entities, when they're looked on a single basis despite of the consolidated basis.
Till Zech: Let me add one last point from my side. What is important is this is a trend. Multinational enterprise does not mean anymore, only huge multinationals, like the top American companies or from Germany, D Bens or Volkswagen or something like this, but now it comes down also to relatively small companies, with only 10 million revenue, sometimes only 5 million revenue we see already the tax administrations in Europe proving these cases. It is not anymore, only a topic for the multinational, huge and large enterprises with billions and billions of revenues, but also for our clients with revenue of five to 10 million Euro.
Carlos Camacho: That also is a very important effect of compliance cost. The small, and medium enterprises are suffering the same burden as the huge multinational enterprises. Therefore, it is becoming a real administrative burden that has correlated cost of compliance that is making the expansion to different jurisdictions, a more costly and more carefully to be planned and is better to plan than to fix.
So our recommendation, if we have another takeaway of today is Transfer pricing, isn't just compliance, but it's better when it turns out to be part of a planning stage. Thank you for your attention to that.
Thanks for listening for more information about this topic and other cross-border business insights. Visit www.hlb.global/insights.
Eps 25: The integration of accounting and cyber forensics
In follow-up to our cybersecurity report 2021 we discuss the integration of accounting and cyber forensics, and ask - what should business leaders be aware of? With guests Tom Reck and Matt Ferrante, both Partners at HLB USA. Hide
00:12
and welcome to hlb's international tax
00:15
webinar
00:16
the title is tax implications of a no
00:19
deal brexit
00:21
it is november 24th the year 2020
00:24
and what a year it has been not only
00:28
are we dealing with covet and the
00:30
implications of
00:31
businesses the implication of movement
00:33
around the globe
00:34
and the social impact it's had we're
00:37
also dealing with
00:39
the us elections and finally the topic
00:42
of today
00:43
is brexit brexit and how that impacts
00:45
businesses and individually
00:48
people moving around the world so stay
00:50
tuned
00:51
we have a great panel to take a uh us
00:54
through these
00:54
updates but just a reminder you are
00:58
attending a brexit
00:59
conference webinar it's not a trek city
01:02
conference and if you don't know uh trex
01:05
it is a
01:05
trump exit from the white house so
01:08
we are having a more interesting topic
01:10
right now
01:12
and let's introduce the panel uh of mark
01:15
butler
01:16
from ireland say hello mark nick farmer
01:19
from the uk
01:20
the heat of the source of uh brexit
01:22
christian yonder from germany
01:24
pascal sheridan netherlands and
01:27
dave springsteen here to guide you
01:29
through the presentation
01:31
so let's move forward to the next slide
01:34
and get into the mandate from you guys
01:37
to make this interactive to answer your
01:39
questions
01:40
please use the q a box and we'll get to
01:43
your questions the best
01:44
the best we can so again the q advice
01:48
so what are we going to be talking about
01:50
today well there's four broad areas that
01:53
we will talk about and share ideas and
01:55
concerns
01:56
but before i do that by show of hands to
01:59
see what kind of biases we have on the
02:01
panel
02:02
who thinks is going to be a deal by year
02:04
end
02:07
the uk and ireland so chris
02:10
in pascal you don't think there's gonna
02:12
be a deal by your end
02:14
interesting okay so the agenda will be
02:18
an update on the negotiations
02:21
what are some of the sticking points
02:22
that we're facing right now in the
00:12
and welcome to hlb's international tax
00:15
webinar
00:16
the title is tax implications of a no
00:19
deal brexit
00:21
it is november 24th the year 2020
00:24
and what a year it has been not only
00:28
are we dealing with covet and the
00:30
implications of
00:31
businesses the implication of movement
00:33
around the globe
00:34
and the social impact it's had we're
00:37
also dealing with
00:39
the us elections and finally the topic
00:42
of today
00:43
is brexit brexit and how that impacts
00:45
businesses and individually
00:48
people moving around the world so stay
00:50
tuned
00:51
we have a great panel to take a uh us
00:54
through these
00:54
updates but just a reminder you are
00:58
attending a brexit
00:59
conference webinar it's not a trek city
01:02
conference and if you don't know uh trex
01:05
it is a
01:05
trump exit from the white house so
01:08
we are having a more interesting topic
01:10
right now
01:12
and let's introduce the panel uh of mark
01:15
butler
01:16
from ireland say hello mark nick farmer
01:19
from the uk
01:20
the heat of the source of uh brexit
01:22
christian yonder from germany
01:24
pascal sheridan netherlands and
01:27
dave springsteen here to guide you
01:29
through the presentation
01:31
so let's move forward to the next slide
01:34
and get into the mandate from you guys
01:37
to make this interactive to answer your
01:39
questions
01:40
please use the q a box and we'll get to
01:43
your questions the best
01:44
the best we can so again the q advice
01:48
so what are we going to be talking about
01:50
today well there's four broad areas that
01:53
we will talk about and share ideas and
01:55
concerns
01:56
but before i do that by show of hands to
01:59
see what kind of biases we have on the
02:01
panel
02:02
who thinks is going to be a deal by year
02:04
end
02:07
the uk and ireland so chris
02:10
in pascal you don't think there's gonna
02:12
be a deal by your end
02:14
interesting okay so the agenda will be
02:18
an update on the negotiations
02:21
what are some of the sticking points
02:22
that we're facing right now in the
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. Hide
Speakers:
Andrea Moseley, HLB’s Marketing and PR Manager
Chris DeMayo, HLB’s Global Emerging Technology Leader
Patrizio Prospero, HLB Malta
David Sacarelos, HLB USA
[00:00:00] Welcome to HLB Cross-border Business Talks, HLB's global podcast series on international business topics.
Andrea Moseley: Hello everyone. Welcome to the podcast I'm joined today by Chris DeMayo HLB's global emerging technology leader, Patricio Prospero from HLB Malta and David Sacarelos from HLB USA. We're going to be discussing emerging growth companies and M&A activity during the pandemic. In terms of MNA activity. What are you seeing in the marketplace? Chris, I'll start with you.
Chris DeMayo: I think when we look at 2020, we've seen a pretty significant increase in M&A but it's been for a lot of different reasons. There's been acquisitions happening because companies are sort of looking at the pandemic and it was, it was a painful, you know, event for them.
And they were sort of waving the white flag and saying, we don't [00:01:00] have the gumption to go another two, three years and rebuild from this pandemic. We'd rather just merge up and that was combined with big companies with big balance sheets, like the Facebooks of the world who had capital to deploy and wanted to acquire good technology and good client, a good employee basis.
So, you saw a lot of deals happening there. But then you also saw a lot of companies that had been really positively impacted by the pandemic based on where they were in the marketplace, online retailers, especially on wrong retailers of food and going out to the market and raising money and high valuations off of really aggressive revenue growth became another area where companies were benefiting from the pandemic in terms of M&A.
Andrea Moseley: Patricio, what are your thoughts?
Patricio Prospero: I think that as [00:02:00] every disruptive event brings even COVID has provided with a certain level of opportunities. So, I think for what concerns M&A what we have seen is that there were a lot of companies, especially in the new emerging technology that they had found the opportunity of acquiring companies, which they didn't manage to sustain their business through the pandemic. Having said that, I think that there were also companies which they have held to their original. We have seen a number of merger and acquisitions. They were delayed and they eventually will be closing in 2021.
We know that there are also a lot of companies, which they have requested a reassessment of the venue education of the value of the merger [00:03:00] because of the pandemic. So, I don't think that it affected everybody in the same way. I think that there is a way that there are companies, which they have actually benefited from the situation and from good opportunities.
But some other companies, they had to hold their horses and this fell through as well. So, I think that 2020 was a bit of a year where companies, they also had to put everything on stand by to eventually see how this situation is going to get after the COVID situation.
So, I'm quite curious to see what’s going to happen in 2021, because from the analysis that we have, through surveys and through the study, we'll see that we are seeing that eventually some merger and acquisition are going to be closed by the end of [00:04:00] 2021.
So, 2021 could be also a good year for this kind of deals to be actually achieved and close. Finally, what it was held in 2020 it could be finalised in 2021 so we will see what's going to happen this year.
Andrea Moseley: David, how, how have you seen the market?
David Sacarelos: Well, I think after the lockdown has happened in the last year and going into 2021, maybe my comments really about 2021, I think there's a renewed optimism. I think there is you know, quite a bit of government response. We get vaccines going out and I think there's a view that there's quite a bit of funding available and demand available.
The 2021 is going to be really a good year. Most people were talking with believe that 2021 will have valuations about the same or found higher than, than the in the past. And the [00:05:00] deals will be if anything, the same if not more. So, I think, yeah, obviously we had a big influx toward the end of 2020.
Most people are, are really looking toward 2021 to be a good year. I think, especially in technology, healthcare, consumer goods. Clearly retail and real estate probably are at the downside of that, of that trend. But I think overall, I think it's going to be an optimistic year for 2021.
Andrea Moseley: We're now, obviously in the era of remote working. Is real estate changing in this new time. And what are the role of emerging growth companies? David, I'll start with you.
David Sacarelos: Well, I think I think that the real estate and it kind of in a handful of different ways and it does impact how you think about emerging growth companies and, and their involvement in there. I think a real estate's going to have [00:06:00] to assess and continue to figure out their needs
and worked from home models and really whether or not, or how the market has changed from a supply and demand area clearly emerging work, emerging companies found new ways to attract capital, attract both financial capital and human capital and technology and other aspects of, of, of development and innovation. Globally because of the pandemic and you don't have to be in a building but that assessment's going have to continue. What we're seeing and hearing also is that young people are frankly, a little tired of not going into the office and being with other people they believe it does, in some cases, hamper innovation.
And they want to be able to do both. They want to be at home, and they want to go in. So, I think right now, you know, the market's going to have to assess really what is the supply and demand. In addition to that, at least in the United States, I think we're all looking at the [00:07:00] new Biden administration, secondly, to see where regulatory rules are going to change our tax laws, going to change.
Whether or not the broaden or limit opportunities zones those all impact the real estate market and they do impact, especially in Silicon Valley. A lot of folks have been thinking about putting start-up companies in opportunity zones because not paying tax on that gain is kind of a nice thing if you think about it.
So, there is questions about just regulatory rules and tax policy. Moving ahead. And I, and I think at least in the larger markets, probably in California, New York, and some of the others, we are looking at the disputes among landlords and tenants here in California. We just, yesterday came down and they are going to stop any kind of evictions from commercial, commercial property.
At least for now. So we're at least through June. So, we'll see where that leads. That's going to impact [00:08:00] technology companies, emerging companies that have long-term leases that theirs right now have on their balance sheets. So, we'll see where that goes as well.
Andrea Moseley: Patricio can we have your opinion as well?
Patricio Prospero: Yes. I'm in agreement with what David said.
Meaning that, of course working from home has brought a number of companies effectively cut costs and eventually having also the possibility of relocating their space or, changing the use of their space at the office. Although when we're looking at the human capital, I think that this has negatively affected on the long term.
On the long term, it will be negatively affecting also the way how especially in the tech industry people before used to perceive the work, I mean, I remember a few years ago before this pandemic [00:09:00] happened you know, working in a tech company was fun. It was fun job. You used to work with a tech company.
You used to go, for example, working in Google offices. And it was like enjoying the time with your, with your friends, having time to meet each other, to brainstorm, to create new ideas to discuss. Possibly new things to do. And that was one, most, probably one of the key success factor of a tech company, because they used to approach the human capital in a different way.
So, I think that before we use people working in tech company used to identify themselves with the culture of the company and they used to feel more belonging to the company. I mean, they, they, they felt this, this kind of sense of belonging because it was you know, the whole culture was actually sort of transmitted to the, to the person working in those offices. Today, working [00:10:00] from home, it standardized a bit, the experience, the experience.
So Although it could have brought a number of positive financial repercussions definitely it has also an impact on the way how people are living the work experience. I mean, we read statistics and we see that there are people who feel more depressed. People that they feel more the need of sharing. You know and, and maybe meeting other people and exchanging and sharing ideas. And this is something which on the long term it could affect, or obviously, especially for innovative company the innovation, the innovative elements. So, you know, even the fact that sharing experience, it makes, you know, a whole experience for people, you know, to come up with new ideas and innovative ideas.
So, I think that could be on long term something which we should be looking at in terms of human resources. [00:11:00]
Andrea Moseley: Chris, any thoughts?
Chris DeMayo: I think the ripple effect of remote work and the remote work environment is so deep. You could spend hours talking about how this is going to change the way that we work and live.
When you're in the middle of it, you always think of it as, as probably more of a change than it will be. So, I agree, it's not binary. We're not going to go to a full remote environment because there was, there was absolutely very real benefit to being around people. But I haven't talked with single client that has said we're going back to a five-day work week in the office.
Those days are over. And that's an interesting thing to think about because it opens up. So many different possibilities. First of all, you now can have people, you can now seek talent in places that were, are far, far away from your office. You can now accommodate [00:12:00] talent that, maybe you have somebody that didn't want to live in New York city or California, and wants to live in Topeka, Kansas. And they can't. So it's going to open up possibilities. It's going to change the offices are laid out. It may or may not change the square footage, but it may change the way that they're designed more collaboration, space, less offices and cubes, because not as many people were going to be needing offices because we'll be sharing spaces more than we will you know, having permanent spaces or perhaps we won't share spaces, but the spaces will be substantially smaller.
So, there's a lot of potential change that's going to come. And we just don't know yet what that looks like. You know, some of this is going to be great. For industries, certain industries, and some of it's going to be very damaging. I'll give you an example. When you think about where we have gone with online conferences and with video conferencing, you know, everyone [00:13:00] says we've advanced 10 years in, in a matter of 10 months that is going to have a very negative impact, a decimating impact in some cases on travel and hospitality, right?
Because business travel. It does not have to happen anymore in the way that it once did. Big important meeting to now happen on video conferences. That changes the dynamic of the marketplace. And real estate is, is, is, is certainly not going to be spared by that you know, to, to David's point, I think, you know, could people be looking for less space for no space?
Could people be changing their space? Absolutely. And, and I don't think anyone's going to be able to fully predict the long-term impact. But it will be a winners and losers impact. I think some, some industries will be very positively impacted. Some will be very negatively impacted. But I think the cultural norms have yet to be set as to what we're going to be expecting from our, our, our employee bases going forward.
Andrea Moseley: And you've [00:14:00] mentioned already how companies are still going public, but that has obviously changed. So, what do SPACs mean to tech companies in the marketplace? Chris, I'll start with you.
Chris DeMayo: Sure. Yeah. You know, SPACs have been around for, for a long time. But you know, over the last decade or so you really, haven't seen a lot of activity in this back marketplace in the United States the process of going public is normally a fairly long drawn-out expensive process. It could take years for a company to start the process of going public and actually come to that fruition. What's SPACs have done is it has created a fast track to going public. You know, the, the simple concept of this SPAC is a, an entity, which is a shell was formed that goes public. It has no activity other than literally having a bank account with money in it. It then goes out and acquires a private company. Which therefore makes that company now a public company [00:15:00] and it can be done in a matter of months rather than taking years to do. So, it fast-tracks the process of going public and getting companies into the public market.
And, and that has created a really frothy market in the United States in terms of potential companies, potential targets of SPACs and having liquidity events.
Andrea Moseley: How are you seeing things in Silicon Valley?
David Sacarelos: Well clearly whether you're a traditional SAS company, FinTech electric vehicle company, whoever you are the SPACs are offering a really enticing financing option.
Th this is another way to raise capital and it's it. It's somebody. Easier, I guess. And then it's going going through IPO. I, I noted Chris that on Monday, I just in preparation for our call, five companies announced plans to go public through SPAC mergers at valuations over a billion dollars a piece.[00:16:00]
Yep. And, and all the, one of the deals in the last number of last four months, it only one didn't include SPAC that was a, so there's quite a bit involved, quite a bit out there. And I think it's just another, the way I look at us, it's another financing option, whether it be faster or cheaper, or what have you is another way to go. If you are a tech company to, to raise capital. And so it's also attractive to private equity companies in California, and then in Silicon valley they've already been interested for years in SPACs and you're going to see many more funded, I think, in the coming years. Yes, there's reduced disclosure on the front end.
I think the companies have, have a chance to really speak more directly to their investors. Have a little more transparency in what they're doing. But Chris, I agree I have the question of the day is whether or not these valuations are realistic in the end. So, there is conversation in Congress and [00:17:00] in the federal reserve and some other folks and just making sure that, Whether or not, there should be some more regulation. We don't know nothing's happened at this point in time, but as we look at 2021, it's just another very good way to raise capital. I think that's a good way to look at it. Yeah.
Chris DeMayo: The risks that I see out there is so many of these companies that are going to be targets of SPACs.
Yeah, they're not really ready to be public companies, right? So they're going to snap a finger and all of a sudden they're going to be a public company. And these companies, the rules for their reporting is no different than a traditional public company. So, you know, are they going to have the internal accounting functions to be able to provide accurate financial statements on a quarterly basis?
Are they going to be able to speak accurately to the street about revenue, projections, and growth. These are things that they were never trained to do as a private company. And usually that's part of that kind of two-year process of going public is putting that infrastructure in place. And, you know, [00:18:00] how is that going to affect the market in the future when you have companies that just, they haven't, they're sort of building the plane as they're flying it and going into a big IPO.
And now you've got the public markets investing into these companies. You know, they're going to have. You know, step up and it's going to be, it's going to be a challenge for the next couple of years, to the extent that these you know, these private companies with thin internal accounting departments are going public.
Andrea Moseley: So, I'm conscious that the situation obviously is rapidly changing. And it continues to change it like an accelerated speed. What are your expectations for 2021? Who do you think the winners and losers will be in the kind of the tech space in regards to the pandemic? Patricio I'll start with you.
Patricio Prospero: We have seen a number of winners and losers during this pandemic. Whereas before discussing about working from home people, they stay more at home they travel less, they spend more time at their houses. So, all those, tech companies that somehow [00:19:00] provide services to people which stays at home, definitely they are the winner of the spirit of the pandemic. We mentioned before the videoconferencing and how this effectively has impacted the way how we do business and how we actually interact today. When you look at zoom, for example, an application that before pandemic had about 10 million subscribers, And in few months went up to 200 million that makes you understand how these kinds of companies they have actually achieved a big success during the pandemic.
Another winner is for example, the gaming company, as we said, people are spending more time at. And they have to entertain themselves. So, when you're at home, what you're doing is either watching a movie. So, there we see that the streaming company like Netflix or Amazon Prime and all these [00:20:00] kinds of, of, of companies, they have actually had a huge success, but also gaming company like Nintendo has more than doubled his sales during pandemic online gaming so those, I think that definitely. Two of the winners. I mean, if we want to identify winners, then there are companies which they didn't. I mean, in my opinion, they didn't benefit.
I mean, they, they won in some stages, but they also have lost in some other situations. Just to give you an example. If you take up Amazon, which is perceived to be one of the big winner of of this pandemic, if you look deeply to the situation, they have raised a lot of concerns with people working at Amazon about the work conditions of employees at Amazon which is creating a lot of pressure on on the company.
And on the other side, don't forget that Amazon, for example, has decided having the online sales business has [00:21:00] also owns one of the biggest cloud systems. So people are so, and a lot of companies, which they actually are in difficulty of payment are finding very difficult to pay Amazon's fees for what concerns so involve in formation, the cloud.
So that could detailing in a, in a high-risk. So it doesn't mean that everything, that signal it's looking good, it's actually. You know, something which is definitely a win. And there are those that we identify as major loser. Thinking about companies like Uber, for example, the transportation company that they have lost a lot of of business during the pandemic
They had to change their business model. Most of these companies, now they have moved to the business of delivering food rather than delivering person or driving people from, from, from one site to another. And definitely then the company. That we have seen in the past booming like [00:22:00] Airbnb or, or all the internet based tech middleman, what we call middleman.
They have seen a big loss during the pandemic because people are not traveling. So especially tourists to these importance, as we said, Airbnb booking.com. And all the other is they have seen a big loss in revenue during this period because there is no actually you know there are no actually people traveling, so business automatically has reduced.
I think that's a, in a nutshell, these could be those that, which we could identify as winners and losers. I maybe, I don't know if Chris or, or, or, or they, they have more, more to add to this, maybe they have a. Or opinions or other examples to provide.
Chris DeMayo: To your point. And if you're an online business that is able to deliver, you know, a good conveniently you saw a huge increase in revenue in [00:23:00] 2020. And the thing is, that's a permanent shift because you forced people to adopt a new technology. And now that they have they're going to stay with it. So, you know, retailers will, will have to, you know, deal with the fact that you're going to have a lot of people that were once going to walk into a storefront to buy something.
And now they're comfortable buying online. And, and, and when you think about different demographics, you know, younger people have always been doing that, but if you're, if you're in the, you know, the 50 to 70 year old demographic, maybe you weren't, and now you are, you may not be going back. And that's a huge, huge buying demographic I think that's probably one of the bigger shifts that you're going to see.
I think you know, they're definitely going to be a winner. And as I mentioned before, I think hospitality is, is going to, it's going to struggle for a long time travel and hospitality is going to struggle. I think you'll see a surge when the pandemic is over and people wanting to get their vacations in, but over the longterm, I think you're going to see business travel is going to, is going to be so different.
And that's where a lot of [00:24:00] money is made. Quite frankly, not necessarily on vacationers. You know I think that the, the technology community will net benefit from the pandemic and, you know, getting away from the economics. I think one area where I think is, is, is important is, you know, leadership in crisis. You know, when, when revenue's always going north and money's always flowing in from investors it becomes easy to lead.
I don't want to say it's easy to lead, but you know, you don't have some of the pressures that maybe are out there. You, you see companies emerge and leadership emerge when there's crisis, you know, how do you deal with cutting costs? How do you deal with people? Where, what are the decisions that you make?
And I think that having gone through this, the companies that come out the other side will be better, more solid companies that will be better businesses. Because they'll, they'll know that it's not just going to be about burning cash. And how fast can you spend money on, you know on employee [00:25:00] perks it's going to be about how do you build a business that can survive things that happen, that you don't see coming.
And I think that that may be one of the most important by-products of this pandemic that, that maybe we're not seeing right now, but that, that will grow out over time.
Andrea Moseley: David, any final thoughts?
David Sacarelos: Well, okay, so predictions for 2021. I always like when people ask me that question I have clearly, I think what most people feel is technology healthcare, consumer goods are still going to be at the forefront.
I think we have a number of clients who are doing some amazing things in ag tech. The, the field robotics and in farming is certainly something. People are keeping an eye on artificial intelligence, machine learning. We mentioned earlier, just the whole issue of remote work technology. The cloud tech companies are going to be, I think we're going to do fine.
The FinTech companies are going to do very well. Anything related to enterprise health [00:26:00] and wellness, I think we'll continue to do very well food tech, if you haven't already, you're probably won't buy a plant-based , is it called the hamburger? I don't know, but you'll be buying something that's plant based in the near future because that's something that people are interested, at least in the United States technology around the insurance industry will be, will be key in 2021.
We know in the bay area here in the Silicon Valley and mobility companies, your electronic electric vehicles. A lot of demand there. And I think there's going to be a lot of money put into that, into that technology space retail, health wellness and anything connected with supply chain technology can make it easier to move things from here to there and not have to be so the hold into a, a physical infrastructure that's some thoughts that I have at least maybe I'll leave it there.
Thank you
Andrea Moseley: all very much for your time. And thank you all for listening. [00:27:00] Thanks for listening for more information about this topic and other Cross-border business insights visit www.hlb.global/insights
Speakers:
Andrea Moseley, HLB’s Marketing and PR Manager
Chris DeMayo, HLB’s Global Emerging Technology Leader
Patrizio Prospero, HLB Malta
David Sacarelos, HLB USA
[00:00:00] Welcome to HLB Cross-border Business Talks, HLB's global podcast series on international business topics.
Andrea Moseley: Hello everyone. Welcome to the podcast I'm joined today by Chris DeMayo HLB's global emerging technology leader, Patricio Prospero from HLB Malta and David Sacarelos from HLB USA. We're going to be discussing emerging growth companies and M&A activity during the pandemic. In terms of MNA activity. What are you seeing in the marketplace? Chris, I'll start with you.
Chris DeMayo: I think when we look at 2020, we've seen a pretty significant increase in M&A but it's been for a lot of different reasons. There's been acquisitions happening because companies are sort of looking at the pandemic and it was, it was a painful, you know, event for them.
And they were sort of waving the white flag and saying, we don't [00:01:00] have the gumption to go another two, three years and rebuild from this pandemic. We'd rather just merge up and that was combined with big companies with big balance sheets, like the Facebooks of the world who had capital to deploy and wanted to acquire good technology and good client, a good employee basis.
So, you saw a lot of deals happening there. But then you also saw a lot of companies that had been really positively impacted by the pandemic based on where they were in the marketplace, online retailers, especially on wrong retailers of food and going out to the market and raising money and high valuations off of really aggressive revenue growth became another area where companies were benefiting from the pandemic in terms of M&A.
Andrea Moseley: Patricio, what are your thoughts?
Patricio Prospero: I think that as [00:02:00] every disruptive event brings even COVID has provided with a certain level of opportunities. So, I think for what concerns M&A what we have seen is that there were a lot of companies, especially in the new emerging technology that they had found the opportunity of acquiring companies, which they didn't manage to sustain their business through the pandemic. Having said that, I think that there were also companies which they have held to their original. We have seen a number of merger and acquisitions. They were delayed and they eventually will be closing in 2021.
We know that there are also a lot of companies, which they have requested a reassessment of the venue education of the value of the merger [00:03:00] because of the pandemic. So, I don't think that it affected everybody in the same way. I think that there is a way that there are companies, which they have actually benefited from the situation and from good opportunities.
But some other companies, they had to hold their horses and this fell through as well. So, I think that 2020 was a bit of a year where companies, they also had to put everything on stand by to eventually see how this situation is going to get after the COVID situation.
So, I'm quite curious to see what’s going to happen in 2021, because from the analysis that we have, through surveys and through the study, we'll see that we are seeing that eventually some merger and acquisition are going to be closed by the end of [00:04:00] 2021.
So, 2021 could be also a good year for this kind of deals to be actually achieved and close. Finally, what it was held in 2020 it could be finalised in 2021 so we will see what's going to happen this year.
Andrea Moseley: David, how, how have you seen the market?
David Sacarelos: Well, I think after the lockdown has happened in the last year and going into 2021, maybe my comments really about 2021, I think there's a renewed optimism. I think there is you know, quite a bit of government response. We get vaccines going out and I think there's a view that there's quite a bit of funding available and demand available.
The 2021 is going to be really a good year. Most people were talking with believe that 2021 will have valuations about the same or found higher than, than the in the past. And the [00:05:00] deals will be if anything, the same if not more. So, I think, yeah, obviously we had a big influx toward the end of 2020.
Most people are, are really looking toward 2021 to be a good year. I think, especially in technology, healthcare, consumer goods. Clearly retail and real estate probably are at the downside of that, of that trend. But I think overall, I think it's going to be an optimistic year for 2021.
Andrea Moseley: We're now, obviously in the era of remote working. Is real estate changing in this new time. And what are the role of emerging growth companies? David, I'll start with you.
David Sacarelos: Well, I think I think that the real estate and it kind of in a handful of different ways and it does impact how you think about emerging growth companies and, and their involvement in there. I think a real estate's going to have [00:06:00] to assess and continue to figure out their needs
and worked from home models and really whether or not, or how the market has changed from a supply and demand area clearly emerging work, emerging companies found new ways to attract capital, attract both financial capital and human capital and technology and other aspects of, of, of development and innovation. Globally because of the pandemic and you don't have to be in a building but that assessment's going have to continue. What we're seeing and hearing also is that young people are frankly, a little tired of not going into the office and being with other people they believe it does, in some cases, hamper innovation.
And they want to be able to do both. They want to be at home, and they want to go in. So, I think right now, you know, the market's going to have to assess really what is the supply and demand. In addition to that, at least in the United States, I think we're all looking at the [00:07:00] new Biden administration, secondly, to see where regulatory rules are going to change our tax laws, going to change.
Whether or not the broaden or limit opportunities zones those all impact the real estate market and they do impact, especially in Silicon Valley. A lot of folks have been thinking about putting start-up companies in opportunity zones because not paying tax on that gain is kind of a nice thing if you think about it.
So, there is questions about just regulatory rules and tax policy. Moving ahead. And I, and I think at least in the larger markets, probably in California, New York, and some of the others, we are looking at the disputes among landlords and tenants here in California. We just, yesterday came down and they are going to stop any kind of evictions from commercial, commercial property.
At least for now. So we're at least through June. So, we'll see where that leads. That's going to impact [00:08:00] technology companies, emerging companies that have long-term leases that theirs right now have on their balance sheets. So, we'll see where that goes as well.
Andrea Moseley: Patricio can we have your opinion as well?
Patricio Prospero: Yes. I'm in agreement with what David said.
Meaning that, of course working from home has brought a number of companies effectively cut costs and eventually having also the possibility of relocating their space or, changing the use of their space at the office. Although when we're looking at the human capital, I think that this has negatively affected on the long term.
On the long term, it will be negatively affecting also the way how especially in the tech industry people before used to perceive the work, I mean, I remember a few years ago before this pandemic [00:09:00] happened you know, working in a tech company was fun. It was fun job. You used to work with a tech company.
You used to go, for example, working in Google offices. And it was like enjoying the time with your, with your friends, having time to meet each other, to brainstorm, to create new ideas to discuss. Possibly new things to do. And that was one, most, probably one of the key success factor of a tech company, because they used to approach the human capital in a different way.
So, I think that before we use people working in tech company used to identify themselves with the culture of the company and they used to feel more belonging to the company. I mean, they, they, they felt this, this kind of sense of belonging because it was you know, the whole culture was actually sort of transmitted to the, to the person working in those offices. Today, working [00:10:00] from home, it standardized a bit, the experience, the experience.
So Although it could have brought a number of positive financial repercussions definitely it has also an impact on the way how people are living the work experience. I mean, we read statistics and we see that there are people who feel more depressed. People that they feel more the need of sharing. You know and, and maybe meeting other people and exchanging and sharing ideas. And this is something which on the long term it could affect, or obviously, especially for innovative company the innovation, the innovative elements. So, you know, even the fact that sharing experience, it makes, you know, a whole experience for people, you know, to come up with new ideas and innovative ideas.
So, I think that could be on long term something which we should be looking at in terms of human resources. [00:11:00]
Andrea Moseley: Chris, any thoughts?
Chris DeMayo: I think the ripple effect of remote work and the remote work environment is so deep. You could spend hours talking about how this is going to change the way that we work and live.
When you're in the middle of it, you always think of it as, as probably more of a change than it will be. So, I agree, it's not binary. We're not going to go to a full remote environment because there was, there was absolutely very real benefit to being around people. But I haven't talked with single client that has said we're going back to a five-day work week in the office.
Those days are over. And that's an interesting thing to think about because it opens up. So many different possibilities. First of all, you now can have people, you can now seek talent in places that were, are far, far away from your office. You can now accommodate [00:12:00] talent that, maybe you have somebody that didn't want to live in New York city or California, and wants to live in Topeka, Kansas. And they can't. So it's going to open up possibilities. It's going to change the offices are laid out. It may or may not change the square footage, but it may change the way that they're designed more collaboration, space, less offices and cubes, because not as many people were going to be needing offices because we'll be sharing spaces more than we will you know, having permanent spaces or perhaps we won't share spaces, but the spaces will be substantially smaller.
So, there's a lot of potential change that's going to come. And we just don't know yet what that looks like. You know, some of this is going to be great. For industries, certain industries, and some of it's going to be very damaging. I'll give you an example. When you think about where we have gone with online conferences and with video conferencing, you know, everyone [00:13:00] says we've advanced 10 years in, in a matter of 10 months that is going to have a very negative impact, a decimating impact in some cases on travel and hospitality, right?
Because business travel. It does not have to happen anymore in the way that it once did. Big important meeting to now happen on video conferences. That changes the dynamic of the marketplace. And real estate is, is, is, is certainly not going to be spared by that you know, to, to David's point, I think, you know, could people be looking for less space for no space?
Could people be changing their space? Absolutely. And, and I don't think anyone's going to be able to fully predict the long-term impact. But it will be a winners and losers impact. I think some, some industries will be very positively impacted. Some will be very negatively impacted. But I think the cultural norms have yet to be set as to what we're going to be expecting from our, our, our employee bases going forward.
Andrea Moseley: And you've [00:14:00] mentioned already how companies are still going public, but that has obviously changed. So, what do SPACs mean to tech companies in the marketplace? Chris, I'll start with you.
Chris DeMayo: Sure. Yeah. You know, SPACs have been around for, for a long time. But you know, over the last decade or so you really, haven't seen a lot of activity in this back marketplace in the United States the process of going public is normally a fairly long drawn-out expensive process. It could take years for a company to start the process of going public and actually come to that fruition. What's SPACs have done is it has created a fast track to going public. You know, the, the simple concept of this SPAC is a, an entity, which is a shell was formed that goes public. It has no activity other than literally having a bank account with money in it. It then goes out and acquires a private company. Which therefore makes that company now a public company [00:15:00] and it can be done in a matter of months rather than taking years to do. So, it fast-tracks the process of going public and getting companies into the public market.
And, and that has created a really frothy market in the United States in terms of potential companies, potential targets of SPACs and having liquidity events.
Andrea Moseley: How are you seeing things in Silicon Valley?
David Sacarelos: Well clearly whether you're a traditional SAS company, FinTech electric vehicle company, whoever you are the SPACs are offering a really enticing financing option.
Th this is another way to raise capital and it's it. It's somebody. Easier, I guess. And then it's going going through IPO. I, I noted Chris that on Monday, I just in preparation for our call, five companies announced plans to go public through SPAC mergers at valuations over a billion dollars a piece.[00:16:00]
Yep. And, and all the, one of the deals in the last number of last four months, it only one didn't include SPAC that was a, so there's quite a bit involved, quite a bit out there. And I think it's just another, the way I look at us, it's another financing option, whether it be faster or cheaper, or what have you is another way to go. If you are a tech company to, to raise capital. And so it's also attractive to private equity companies in California, and then in Silicon valley they've already been interested for years in SPACs and you're going to see many more funded, I think, in the coming years. Yes, there's reduced disclosure on the front end.
I think the companies have, have a chance to really speak more directly to their investors. Have a little more transparency in what they're doing. But Chris, I agree I have the question of the day is whether or not these valuations are realistic in the end. So, there is conversation in Congress and [00:17:00] in the federal reserve and some other folks and just making sure that, Whether or not, there should be some more regulation. We don't know nothing's happened at this point in time, but as we look at 2021, it's just another very good way to raise capital. I think that's a good way to look at it. Yeah.
Chris DeMayo: The risks that I see out there is so many of these companies that are going to be targets of SPACs.
Yeah, they're not really ready to be public companies, right? So they're going to snap a finger and all of a sudden they're going to be a public company. And these companies, the rules for their reporting is no different than a traditional public company. So, you know, are they going to have the internal accounting functions to be able to provide accurate financial statements on a quarterly basis?
Are they going to be able to speak accurately to the street about revenue, projections, and growth. These are things that they were never trained to do as a private company. And usually that's part of that kind of two-year process of going public is putting that infrastructure in place. And, you know, [00:18:00] how is that going to affect the market in the future when you have companies that just, they haven't, they're sort of building the plane as they're flying it and going into a big IPO.
And now you've got the public markets investing into these companies. You know, they're going to have. You know, step up and it's going to be, it's going to be a challenge for the next couple of years, to the extent that these you know, these private companies with thin internal accounting departments are going public.
Andrea Moseley: So, I'm conscious that the situation obviously is rapidly changing. And it continues to change it like an accelerated speed. What are your expectations for 2021? Who do you think the winners and losers will be in the kind of the tech space in regards to the pandemic? Patricio I'll start with you.
Patricio Prospero: We have seen a number of winners and losers during this pandemic. Whereas before discussing about working from home people, they stay more at home they travel less, they spend more time at their houses. So, all those, tech companies that somehow [00:19:00] provide services to people which stays at home, definitely they are the winner of the spirit of the pandemic. We mentioned before the videoconferencing and how this effectively has impacted the way how we do business and how we actually interact today. When you look at zoom, for example, an application that before pandemic had about 10 million subscribers, And in few months went up to 200 million that makes you understand how these kinds of companies they have actually achieved a big success during the pandemic.
Another winner is for example, the gaming company, as we said, people are spending more time at. And they have to entertain themselves. So, when you're at home, what you're doing is either watching a movie. So, there we see that the streaming company like Netflix or Amazon Prime and all these [00:20:00] kinds of, of, of companies, they have actually had a huge success, but also gaming company like Nintendo has more than doubled his sales during pandemic online gaming so those, I think that definitely. Two of the winners. I mean, if we want to identify winners, then there are companies which they didn't. I mean, in my opinion, they didn't benefit.
I mean, they, they won in some stages, but they also have lost in some other situations. Just to give you an example. If you take up Amazon, which is perceived to be one of the big winner of of this pandemic, if you look deeply to the situation, they have raised a lot of concerns with people working at Amazon about the work conditions of employees at Amazon which is creating a lot of pressure on on the company.
And on the other side, don't forget that Amazon, for example, has decided having the online sales business has [00:21:00] also owns one of the biggest cloud systems. So people are so, and a lot of companies, which they actually are in difficulty of payment are finding very difficult to pay Amazon's fees for what concerns so involve in formation, the cloud.
So that could detailing in a, in a high-risk. So it doesn't mean that everything, that signal it's looking good, it's actually. You know, something which is definitely a win. And there are those that we identify as major loser. Thinking about companies like Uber, for example, the transportation company that they have lost a lot of of business during the pandemic
They had to change their business model. Most of these companies, now they have moved to the business of delivering food rather than delivering person or driving people from, from, from one site to another. And definitely then the company. That we have seen in the past booming like [00:22:00] Airbnb or, or all the internet based tech middleman, what we call middleman.
They have seen a big loss during the pandemic because people are not traveling. So especially tourists to these importance, as we said, Airbnb booking.com. And all the other is they have seen a big loss in revenue during this period because there is no actually you know there are no actually people traveling, so business automatically has reduced.
I think that's a, in a nutshell, these could be those that, which we could identify as winners and losers. I maybe, I don't know if Chris or, or, or, or they, they have more, more to add to this, maybe they have a. Or opinions or other examples to provide.
Chris DeMayo: To your point. And if you're an online business that is able to deliver, you know, a good conveniently you saw a huge increase in revenue in [00:23:00] 2020. And the thing is, that's a permanent shift because you forced people to adopt a new technology. And now that they have they're going to stay with it. So, you know, retailers will, will have to, you know, deal with the fact that you're going to have a lot of people that were once going to walk into a storefront to buy something.
And now they're comfortable buying online. And, and, and when you think about different demographics, you know, younger people have always been doing that, but if you're, if you're in the, you know, the 50 to 70 year old demographic, maybe you weren't, and now you are, you may not be going back. And that's a huge, huge buying demographic I think that's probably one of the bigger shifts that you're going to see.
I think you know, they're definitely going to be a winner. And as I mentioned before, I think hospitality is, is going to, it's going to struggle for a long time travel and hospitality is going to struggle. I think you'll see a surge when the pandemic is over and people wanting to get their vacations in, but over the longterm, I think you're going to see business travel is going to, is going to be so different.
And that's where a lot of [00:24:00] money is made. Quite frankly, not necessarily on vacationers. You know I think that the, the technology community will net benefit from the pandemic and, you know, getting away from the economics. I think one area where I think is, is, is important is, you know, leadership in crisis. You know, when, when revenue's always going north and money's always flowing in from investors it becomes easy to lead.
I don't want to say it's easy to lead, but you know, you don't have some of the pressures that maybe are out there. You, you see companies emerge and leadership emerge when there's crisis, you know, how do you deal with cutting costs? How do you deal with people? Where, what are the decisions that you make?
And I think that having gone through this, the companies that come out the other side will be better, more solid companies that will be better businesses. Because they'll, they'll know that it's not just going to be about burning cash. And how fast can you spend money on, you know on employee [00:25:00] perks it's going to be about how do you build a business that can survive things that happen, that you don't see coming.
And I think that that may be one of the most important by-products of this pandemic that, that maybe we're not seeing right now, but that, that will grow out over time.
Andrea Moseley: David, any final thoughts?
David Sacarelos: Well, okay, so predictions for 2021. I always like when people ask me that question I have clearly, I think what most people feel is technology healthcare, consumer goods are still going to be at the forefront.
I think we have a number of clients who are doing some amazing things in ag tech. The, the field robotics and in farming is certainly something. People are keeping an eye on artificial intelligence, machine learning. We mentioned earlier, just the whole issue of remote work technology. The cloud tech companies are going to be, I think we're going to do fine.
The FinTech companies are going to do very well. Anything related to enterprise health [00:26:00] and wellness, I think we'll continue to do very well food tech, if you haven't already, you're probably won't buy a plant-based , is it called the hamburger? I don't know, but you'll be buying something that's plant based in the near future because that's something that people are interested, at least in the United States technology around the insurance industry will be, will be key in 2021.
We know in the bay area here in the Silicon Valley and mobility companies, your electronic electric vehicles. A lot of demand there. And I think there's going to be a lot of money put into that, into that technology space retail, health wellness and anything connected with supply chain technology can make it easier to move things from here to there and not have to be so the hold into a, a physical infrastructure that's some thoughts that I have at least maybe I'll leave it there.
Thank you
Andrea Moseley: all very much for your time. And thank you all for listening. [00:27:00] Thanks for listening for more information about this topic and other Cross-border business insights visit www.hlb.global/insights
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. Hide
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. Hide
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. Hide
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”. Hide
00:12
and welcome to hlb's international tax
00:15
webinar
00:16
the title is tax implications of a no
00:19
deal brexit
00:21
it is november 24th the year 2020
00:24
and what a year it has been not only
00:28
are we dealing with covet and the
00:30
implications of
00:31
businesses the implication of movement
00:33
around the globe
00:34
and the social impact it's had we're
00:37
also dealing with
00:39
the us elections and finally the topic
00:42
of today
00:43
is brexit brexit and how that impacts
00:45
businesses and individually
00:48
people moving around the world so stay
00:50
tuned
00:51
we have a great panel to take a uh us
00:54
through these
00:54
updates but just a reminder you are
00:58
attending a brexit
00:59
conference webinar it's not a trek city
01:02
conference and if you don't know uh trex
01:05
it is a
01:05
trump exit from the white house so
01:08
we are having a more interesting topic
01:10
right now
01:12
and let's introduce the panel uh of mark
01:15
butler
01:16
from ireland say hello mark nick farmer
01:19
from the uk
01:20
the heat of the source of uh brexit
01:22
christian yonder from germany
01:24
pascal sheridan netherlands and
01:27
dave springsteen here to guide you
01:29
through the presentation
01:31
so let's move forward to the next slide
01:34
and get into the mandate from you guys
01:37
to make this interactive to answer your
01:39
questions
01:40
please use the q a box and we'll get to
01:43
your questions the best
01:44
the best we can so again the q advice
01:48
so what are we going to be talking about
01:50
today well there's four broad areas that
01:53
we will talk about and share ideas and
01:55
concerns
01:56
but before i do that by show of hands to
01:59
see what kind of biases we have on the
02:01
panel
02:02
who thinks is going to be a deal by year
02:04
end
02:07
the uk and ireland so chris
02:10
in pascal you don't think there's gonna
02:12
be a deal by your end
02:14
interesting okay so the agenda will be
02:18
an update on the negotiations
02:21
what are some of the sticking points
02:22
that we're facing right now in the
00:12
and welcome to hlb's international tax
00:15
webinar
00:16
the title is tax implications of a no
00:19
deal brexit
00:21
it is november 24th the year 2020
00:24
and what a year it has been not only
00:28
are we dealing with covet and the
00:30
implications of
00:31
businesses the implication of movement
00:33
around the globe
00:34
and the social impact it's had we're
00:37
also dealing with
00:39
the us elections and finally the topic
00:42
of today
00:43
is brexit brexit and how that impacts
00:45
businesses and individually
00:48
people moving around the world so stay
00:50
tuned
00:51
we have a great panel to take a uh us
00:54
through these
00:54
updates but just a reminder you are
00:58
attending a brexit
00:59
conference webinar it's not a trek city
01:02
conference and if you don't know uh trex
01:05
it is a
01:05
trump exit from the white house so
01:08
we are having a more interesting topic
01:10
right now
01:12
and let's introduce the panel uh of mark
01:15
butler
01:16
from ireland say hello mark nick farmer
01:19
from the uk
01:20
the heat of the source of uh brexit
01:22
christian yonder from germany
01:24
pascal sheridan netherlands and
01:27
dave springsteen here to guide you
01:29
through the presentation
01:31
so let's move forward to the next slide
01:34
and get into the mandate from you guys
01:37
to make this interactive to answer your
01:39
questions
01:40
please use the q a box and we'll get to
01:43
your questions the best
01:44
the best we can so again the q advice
01:48
so what are we going to be talking about
01:50
today well there's four broad areas that
01:53
we will talk about and share ideas and
01:55
concerns
01:56
but before i do that by show of hands to
01:59
see what kind of biases we have on the
02:01
panel
02:02
who thinks is going to be a deal by year
02:04
end
02:07
the uk and ireland so chris
02:10
in pascal you don't think there's gonna
02:12
be a deal by your end
02:14
interesting okay so the agenda will be
02:18
an update on the negotiations
02:21
what are some of the sticking points
02:22
that we're facing right now in the
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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’. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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. Hide
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