Category Archives: Tax

May 16, 2012 · 8:49 am

Resource rich Australia grapples with a two speed economy

Last month GE reported a 26% rise in revenue from Australia. The resource
rich nation exceeded China revenue by US$100 million, and the company
expects Australia will surpass China again in 2012. According to the Wall
Street Journal GE expects that the price of minerals will remain strong and support Australia’s burgeoning mining sector.

For GE, this presents an immense growth opportunity fuelled by sales of
industrial equipment to nations that produce healthy amounts of oil, gas
and iron ore.

Alongside Australia, GE CEO Geoff Immelt pointed at Canada, Peru and
Mongolia as other targets for the firm. He noted that these nations are
more or less geographically equal in size to China, but are “not as hard”
to do business in. The challenge for these countries is to develop
economies which holistically benefit from a boom in one sector.

Much is being made of Australia’s “two speed economy”. Its fully-fledged
mining boom is pushing the resources sector far ahead of the rest of the
economy, which is flagging under the weight of an increased trade deficit.
The strong Australian dollar is the culprit for these woes.

Then again, ask any European finance minister to consider a job swap, and I
am sure you’ll get no complaints about taking on the role in Australia –
low unemployment, low inflation and low interest rates are not to be
scoffed at.

There is some heavy work going on in Australia to align the economy. Budget
cuts were unveiled last week and the Government announced they are aiming
at going from deficit to a surplus of AUS$1.5 billion for 2012-2012.

There are, of course, a couple of issues GE and other companies in a
similar position need to be mindful of.

The incoming Minerals Resource Rent Tax (MMRT) is a tax levied on 30% of
the “super profits” from the mining of iron ore and coal in Australia. The
tax kicks in at profits of $75 million and while 320 companies could
potentially be affected, it will certainly raise the cost of doing business
with these firms. The Government expects the tax will raise around AU
$10.5bn.

Furthermore, the labour market is very tight and companies looking to work
within the sector will be competing for experienced staff. This will cause
further wage inflation and a tighter market than already exists.

The challenges and problems are there, but in looking at the global
economy, I would rather be a finance minister wrestling with sustainability
issues rather than existential issues. A two speed economy is certainly
preferential when your only other option is a one speed economy heading
downwards.

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May 2, 2012 · 1:44 pm

Guest post: Financial Transaction Tax: Learning crucial lessons from Sweden’s misadventure…

For many years Europe has struggled to introduce financial transaction tax (also known as FTT and Tobin tax). In 1984 when Sweden first installed FTT, it set off a chain reaction of events which effectively strangled its domestic financial markets until the tax was eliminated, six damaging years later.

The introduction of an FTT has recently been added to Hungary’s policy makers’ agenda. Zsolt Kalocsai, the Managing Partner of RSM DTM Hungary, RSM’s Hungarian member firm, believes that we should look at the case of when Sweden brought in an FTT back in the 1980’s…

The key development was in 1986 when Sweden erroneously doubled the tax, driving 60 percent of the turnover of its 11 most actively traded shares to move to London. By the 1990′s 50 percent of the Swedish stock exchange’s former turnover was traded in London, and most dramatic of all – futures trading fell by 95% and bond trading fell by 85%.

Key elements:
1. Foreign investors reacted to the tax by moving their trading offshore

2. Domestic investors reacted by reducing the number of their equity trades

3. Tax revenues from FTT were almost entirely absorbed by the drastic reduction of the personal income tax on the capital gain of transactions

4. Markets hated the FTT – The Stockholm stock exchange dropped by almost 5.5 percent and later, in response to the news of the increase of tax, shares fell a further 1 percent.

5. FTTs are not guaranteed to earn – the actual revenue from FTT for government securities in Sweden was a dismal 4 percent of the predicted tax revenue.

Sweden’s misadventure teaches us that the introduction of an FTT can clearly have dramatic implications for financial markets, with the potential to do long term damage.

These are important lessons and highly relevant today. The risks of the FTT are clear. But would these risks be mitigated by the introduction of regional or global FTTs? Probably yes, but the likelihood of such happening is remote.

If applied to Europe, transactions would (by their nature) move to the American continent or to Asian financial markets immediately.

So it is no coincidence that many EU member states are clearly against the introduction of FTT including the United Kingdom, Italy and, no surprise, Sweden.

Introducing an FTT is not a simple decision for policymakers as the historical evidence points to the risks almost certainly outweighing the benefits.

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April 23, 2012 · 3:48 pm

Guest post: Indian government reforms will lead to sustainable growth…

India continues to make great strides as an economy. Policy decisions made by the Government will increasingly reverberate around the world.

I am delighted to share with you the first post from Suresh Surana, founder of RSM Astute Consulting Group in India. Dr Surana is a leading commentator in India, and I hope to include more of his insights in the blog over the coming years…

India has successfully moved from a position of developing economy to emerging economy on the world map. This is a responsible position, considering the rise and fall of India’s growth rate has an impact on global growth and confidence. The same is also carefully observed by India’s trade partners and policy makers around the globe.

India’s growth through to 2013 is projected to be around 7.5%. This medium-term growth outlook is positive due to a young population and corresponding low dependency ratio, healthy savings and investment rates, and increasing integration into the global economy.

There have been some questions about the sustainability of this growth, which is certainly increasing the need for a solid programme of structural economic and fiscal reforms. Reforms will also go some way to repair investor confidence which has been ebbing away of recent owing to perceived wide spread corruption, increase in cost of finance and, of course, a historical lack of progress on economic reforms.

There have been a number of small reforms in the area of infrastructure, such as the extension of the viability gap funding mechanism to support public-private partnerships, doubling of the amount to be raised through tax-free bonds and wider use of external commercial borrowings in sectors such as roads, power and civil aviation. Measures like allowing qualified foreign investors in the corporate bond market and allowance of venture capital fund investment to all sectors as opposed to restricting this to specified nine sectors as in the past will also have a positive impact on some companies.

There are some structural fiscal reforms planned in the Finance Budget 2012 worth noting:

- Direct Tax Code (DTC)
The DTC consolidates and integrates all direct tax laws and replaces both the Income-tax Act, 1961 and the Wealth-tax Act, 1957 by a single legislation. The Government seeks to provide a modern tax code in step with the needs of a fast growing economy. This would ensure ease of usage by simplification of language.

- Goods and Services Tax (GST)
India has a number of indirect taxes with multiple cascading effects; the GST is aimed at consolidating all indirect taxes for providing ease of performing business in India.

- Foreign Direct Investment norms
It is expected that the government will push its efforts to pursue opening up the multi-brand retail sector for foreign investors. Also, it envisages increasing foreign participation in the aviation and power industry.

- Thrust on infrastructure
The drive on improving infrastructure facilities in India has been further strengthened. The Budget spending for infrastructure is aimed at INR 600 billion for the twelfth five year plan beginning from 1st April 2012.

- Capital Market
Various steps are proposed to be taken for deepening the reforms in the Capital markets, by allowing foreign retail investors to access Indian Bond Market.

There is no doubt that over the long term the Indian economy will continue to grow. How it grows is very important as to be globally competitive, rather than just create a “large market”, India needs to develop into a world class economy. To deliver this the government will need to maintain a firm programme of structural reforms which can constantly adapt the economy to compete in the top tier.

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