International Business Structuring in a Rapidly Changing Environment
This is the title for the fourth annual ITSAPT conference to be held this year at the Mandarin Oriental Hyde Park Hotel in Knightsbridge, London, on 7 November 2013 (click here for the programme) We all may accept that the environment is rapidly changing, but we don’t necessarily understand the alternatives to traditional business activities that exist nowadays and more important, how these alternatives will rapidly become the standard for their particular sector of the business environment.
Kevin Gardiner, Head of EMEA Investment Strategy at Barclays will open the conference to reveal thought provoking ideas of the strategic intelligence required to navigate this rapidly changing business landscape. This theme will be developed by Peter Kingsley of PJR Ltd who will examine some of the intellectual property ideas of how entrepreneurs will create wealth for the next decade.
My personal field is international taxation, and my July newsletter fully explains my thoughts on tax compliance for international groups (click here) Perhaps the most important strategy highlighted in that newsletter is the need to provide auditors with a detailed transfer pricing memorandum in respect of all inter-company relationships, and the probability that tax administrations will request auditors to submit such transfer pricing memoranda with tax computations. These memoranda do not need to be the daunting documents prepared by so called transfer pricing experts, daunting in terms of both volume and cost.
In truth, the real transfer pricing expert is the Client, for only he/she understands the entirety of his/her business, the functional analysis of each entity within the business and the risks and therefore the rewards in terms of profitability that should be divided between the relevant entities. Certainly, OECD guidelines are a help in understanding the different methods of computing profits where companies deal with one another, but in my experience, few companies can show comparable profit margins or royalty rates which apply both to them and their competitors. Each company has distinct business models, products and services, and only the Clients themselves can truly prepare the functional analysis required for a transfer pricing memorandum.
We have helped many Clients produce a simple 10 page document which is appropriate for submission to any tax administration reflecting the functional analysis prepared by the Client and justifying the tax computations of the various companies involved.
In the field of regulation, many of us have despaired at the extent of the due diligence information required by banks, professional advisors and corporate service providers. We all understand the need to protect the public against terrorism, and the prevention of money laundering which fuels such activities, but there needs to be more pragmatism in the approach of compliance officers at these organisations.
The law itself, in many of its guises, has become complex, convoluted and sometimes contradictory, and it is noteworthy that one of our speakers at the conference is John Whiting, the Head of the Office of Tax Simplification in the UK. He will be explaining to delegates his ideas to enable governments and taxpayers to achieve their mutual objective of simplicity and fairness in the tax system. The rapidly changing environment may well see more of a partnership between governments and taxpayers to achieve the right balance of tax revenue payable and receivable, in contrast to the aggressive and confrontational stance adopted by both sides in recent years.
The very term ‘banking’ has had perhaps the worst press of any sector of the business environment, perhaps even more than the taxation exploits of multi-national corporations! Following the banking collapse of 2008 and fuelled by excessive staff bonuses and manipulation of financial markets, banks have had to re-define their modus operandi in all areas of their activities. Although there have been several collapses of banks in recent years, all over the world, governments have generally intervened to ensure depositors are protected as much as possible.
Not so of course in Cyprus where the so-called ‘Troika’ have created a unique collapse of its two principal banks. This has produced enormous losses not only for investors with deposit accounts but also for many of the hard working Cypriot businessmen whose current accounts have also been decimated, leading to many bankruptcies. The illegality of these actions, un-paralleled previously and certainly no precedent for future crises, has led to mass unemployment and a total collapse of confidence in the Cypriot business community.
However, along with these collapses have come greenshoots in terms of new methods of financing businesses. We are all aware that traditional banks have curtailed their lending activities, leading to a much slower global growth pattern than would otherwise have been the case, and therefore new means of financing have emerged. These include ‘peer-to-peer’ banking, borrowing funds direct from the public and lending to businesses in need of such funds through a risk spreading strategy. The public receives a return higher than standard deposit rates, but of course with additional risk. Corporate retail bonds are another means of raising capital which have become a feature of modern financing techniques, and even the Islamic financing model has been introduced to businesses which have no Islamic connection whatsoever. Jonathan Lawrence, partner at K & L Gates, will be revealing some financing ideas at our conference.
BRICS and Emerging Markets
One cannot speak about a rapidly changing environment in the global sense without reviewing the various emerging economies over the past ten years which are taking over the growth pattern from Western countries. The BRICS countries of Brazil, Russian, India, China and South Africa now make up 20.5% of the global economy in terms of gross domestic product, but their average growth rate of 5.35% makes the growth of Western countries laughable in comparison. Certainly, international business is extending to all of these regions and many others where the potential for growth is unlimited. We believe Africa generally is one of the main areas for unlimited growth potential, and structuring business to penetrate this market is on top of the agendas of many professional advisors.
I referred in our July newsletter to the under-utilisation of techniques developing intellectual property. Just to repeat one section of the newsletter ‘What companies may be less aware of is the degree of know-how that exists in running their particular business, and if this know-how could be written into appropriate modus operandi, it may be capable of being licensed at the appropriate level of royalty income.‘ This is clearly an area of tremendous growth potential requiring a realisation of the inherent value of a company’s IP rights. Various speakers will address this issue in a separate Intellectual Property Stream at the November 7th conference including Nigel Eastaway OBE, Barrister Anne Fairpo, Dr Jackie Maquire and Adrian Walton in an informal workshop style format.
I hope you will be pleased to note that Philip Baker QC and I will be presenting topics of interest, Philip on how to protect the corporate taxpayer by reviewing the Vodafone case in which he was involved, and my review of the global tax and investment incentives that may still be available options to mitigate the overall corporate tax costs for international businesses.
This year’s ITSAPT conference, the fourth annual one we have held in London, is geared to cover so many interesting topics The detailed programme and speakers are on the ITSAPT website (click here) and I do hope that you will be able to join me at the Mandarin Oriental Hyde Park hotel on November 7th.
With my best regards
Roy Saunders, Chairman, IFS and ITSAPT