Ai vs. legacy industry

Artificial intelligence is undoubtedly a growing segment of technology and society, but history shows that technological advances don’t eliminate the need for work, though they can shift its pattern.

This applies to agricultural production. In the UK, more than 20 per cent of the workforce was employed in the agricultural sector at the turn of the 20th century, while today, thanks to mechanisation, less than one percent work in agricultural roles. However, that small group produces vastly more food than their predecessors a century ago, which is a clear benefit to society.

Ai is likely to drive other significant productivity gains too, and that should also feed through into the cost of providing some public services. However it’s difficult to see many inroads being made into the welfare bill, particularly if fewer working hours per capita lead to the introduction of a Universal Income paid by governments to their citizens.

Taxes & a need for change

If income tax receipts should fall as automation rises, there are a number of levers governments can pull to push up tax revenues, while other existing taxes may have to pull more weight.

Consumption taxes like VAT could be hiked, and if people are working less then they may have time to consume more, which would swell coffers from this kind of taxation even without a rise in the headline rate.

Taxes on business or wealth could also enter the equation if governments find the rise of the robots opens up a black hole in their budgets.

Alternatively, new taxes may be introduced which directly tax automated production, or the gains made by owners of that production.

Indeed, the UK is now forging ahead with a digital sales tax which shows some governments are not simply going to give technology a free pass when it comes to contributing to the tax take. However, ti should be noted an alliance of Ireland, Sweden, Denmark and Germany blocked the proposal in Brussels for an EU digital sales tax on 29 November 2018.

Why Ai could spur a change in taxes

Artificial intelligence will undoubtedly deliver progress in many important areas, particularly in health care.

The accountancy firm PwC reckons that UK GDP will be around 10 per cent higher in 2030 as a result of the Ai revolution, mainly through its ability to drive consumption by the production of better and more tailored products. In the long term the impact of Ai is likely to be bigger yet, and the tax system will have to adjust accordingly.

It’s too early to call how this will happen – however, one thing we can be relatively sure of is that different models will be adopted across the globe, as political ideologies feed into the equation.

Laith Khalaf

Laith Khalaf is a senior analyst with Hargreaves Lansdown and has worked for the retail investor platform since 2001, after graduating from Cambridge University.

His research encompasses funds, markets and investment trends.

Laith is a well-known commentator and frequently features on television and radio, as well as in the national press.

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In its Global Enforcement Review, complied for the financial services industry, the regulatory advisor presents analysis highlighting that the degree penalty amounts against individuals have dropped to new lows.

The 2018 review, a long-running annual report which is now in its fifth year, states that between 2016–2017, the  fall in UK penalty amounts against individuals can be attributed to global financial regulators switching their focus from imposing large fines against firms to making individuals more accountable; pushing those individuals to improve their ability to detect misconduct earlier through both data and technology.

Takeaways

• UK penalty amounts against individuals dropped from £18.8m to £970,000 from 2016 to 2017, its lowest since the financial crisis.
• U.S., European (excluding UK) and Hong Kong penalty amounts against individuals rose over the same period.
• Hong Kong, Singapore and Australia had a greater proportion of their total penalty amounts against individuals than northern hemisphere markets from 2013-2017.

Regulatory risk insights on global & UK penalty levels

Duff & Phelps’ analysis of large enforcement cases, which has been collated by Corlytics – a global provider of insight analysis into regulatory risk –  shows total penalty amounts globally climbed 30% between 2015 and 2017 to 26.5 bln usd.

However, total penalty amounts globally are forecast to be lower this year (2018), reaching just 8.1 bln usd in the first six months of 2018 compared to 18.35 bln over the same period in 2017.

The data shows this decline is particularly evident in the U.S., UK and Europe.

Of the total global penalties in 2017, the U.S. remains the dominant force, levying penalties accounting for 94% (24.4 bln) of the global total against firms and 99% (621.3 mln) individual penalties: In the U.S., total penalty amounts against firms and individuals rose by 2% and 23% respectively from 2016 to 2017.

UK individual penalties

Total UK individual penalties rose markedly to 866 mln stg in 2017 from 71 mln stg in 2016, though this can be explained in part by two large penalties issued separately by the Serious Fraud Office (SFO) and the Financial Conduct Authority (FCA) totalling 673.3 mln stg, Duff & Phelps’ data shows.

However, UK individual penalties dropped significantly from 18.8 mln stg to £970,000 over the same period; the lowest amount on record since the financial crisis in 2008, the data shows.

In line with the global picture, total penalty amounts in the UK are forecast to be lower this year, having reached just 175 mln stg in the first six months of 2018.

With the introduction of the Senior Managers and Certification Regime (SM&CR) for banks in 2016, which is being rolled out to all firms by December 2019, enforcement cases and penalties against individuals can reasonably be expected to rise in the UK over the next few years, according to Duff & Phelps.

Importantly, individuals holding senior management positions within the banking sector should note, the FCA published changes to the SM&CR (effective from 4 July 2018), stating:

‘The most senior people (‘senior managers’) performing key roles (‘senior management functions’) need FCA approval before starting their roles’.

Individual penalties in Europe excluding the UK

In Europe (excluding the UK), total penalty amounts from enforcement action against firms fell significantly, from 527.5 mln eur in 2016 to 109 mln eur in 2017 – however, it should be noted the 2016 total is skewed by three large benchmark cases totalling 485 mln eur.  

According to the data, activity in Europe has been bolstered by more active enforcement from regulators such as the European Commission, Central Bank of Ireland and France’s Autorité des Marchés Financiers.

Penalty amounts against individuals in Europe, whilst still modest, grew from 1.6 mln eur in 2016 to 2.9 mln eur in 2017.

Globally, according to the data, the trend from 2013 to 2017 shows on average a notably larger proportion of total penalty amounts being levied against individuals in southern hemispheres compared to northern hemisphere jurisdictions: Hong Kong (34%), Singapore (62%) and Australia (32%) – all recorded higher proportions than the United States (2%), UK (7%) and Europe (1%).

What the expert says

Managing Director of Regulatory and Compliance Consulting at Duff & Phelps, Nick Bayley, commented for IMS StratNews on the findings:

“Massive fines on firms have lost their power to shock, not just in the industry but also among the public. The declining penalty amounts from previous years in the UK point to the end of the big benchmark manipulation cases – but also potentially suggests a change in regulators’ enforcement approach and their faith in the ability of big fines alone to change culture: Regulators globally are also using a wider range of enforcement tools in an attempt to improve conduct.

Specifically on UK individual penalties …

“The UK regulators have led the way in promoting the importance of individual accountability through the SM(&)CR, something which has been subsequently mirrored in Australia (‘BEAR’), Hong Kong (‘MIC’) and Singapore (‘Individual Accountability and Conduct’).  As a result, we can expect the FCA to increasingly focus on enforcement action against individuals, as it seeks to make the new regime bare its teeth. However, as the majority of UK financial services firms will not be in scope of the SM(&)CR until 2019, combined with the time for regulators to investigate and conclude cases, we expect it could be up to three years before a significant increase in penalties against individuals start[s] to come through.

And his wider view …

“While regulators are revising and updating their priorities, we saw the potential for unforeseen issues such as the LIBOR and FX cases to arise or new market developments and risks [to] emerge, which inevitably will shift regulators’ attention and their resources.

“Regulators globally are investing in their technology capabilities, which in conjunction with more granular regulatory reporting, should enable them to detect misconduct more quickly and [make] greater use of early intervention and disruption techniques,” Nick Bayley concludes.

More about Duff & Phelps

Duff & Phelps is a global advisor that aims to protect, restore and maximise value for clients in the areas of valuation, corporate finance, investigations, disputes; cyber security, compliance and regulatory matters, and other governance-related issues. The firms works with clients across diverse sectors, focused on mitigating risk to assets, operations and people.

Following its acquisition of Kroll, a division of Duff & Phelps since 2018, the firm has has expanded its work force to include nearly 3,500 professionals in 28 countries around the world, it reported. For more information, visit www.duffandphelps.com.

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Granville Turner, a director at Turner Little – the corporate services  provider – focuses on the tax and residential status implications for such companies; detailing for IMS StratNews just what impact this has on the tax liabilities for those companies and individuals involved.

Here information is presented in the form of a straightforward  guide. It provides clear details for Non-UK resident shareholders and directors just what requirements need to be met to ensure they are complying with UK government company – as well as individual – residential and taxation status rules!

Determining a company’s residential status

The general rule is that a company is a UK resident if either:

• It is incorporated in the UK, or 
• If the central management and control of its business is in the UK.

Therefore, a UK incorporated company will be defined as a UK resident, irrespective of having foreign directors and shareholders, says Turner. 

When special conditions apply to residency and taxation complexities

To find out more about Non-UK resident shareholders and directors taxation complexities see our guide via our ‘Gold Membership’ at https://www.imsstratnews.com/non-uk-resident-…rs-company-taxes/

Related Posts

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UK limited liability companies with Non-UK resident shareholders and directors have often had to tip-toe through a range of taxation complexities.

Granville Turner, a director at Turner Little – the corporate services  provider – focuses on the tax and residential status implications for such companies; detailing for IMS StratNews just what impact this has on the tax liabilities for those companies and individuals involved.

Here information is presented in the form of a straightforward  guide. It provides clear details for Non-UK resident shareholders and directors just what requirements need to be met to ensure they are complying with UK government company – as well as individual – residential and taxation status rules!

Determining a company’s residential status

The general rule is that a company is a UK resident if either:

• It is incorporated in the UK, or 
• If the central management and control of its business is in the UK.

Therefore, a UK incorporated company will be defined as a UK resident, irrespective of having foreign directors and shareholders, says Turner. 

When special conditions apply to residency 

However, this resident status can be affected by a double tax treaty. 

A typical treaty provision provides that, for treaty purposes, a company can be treated as a tax resident dependent on where its effective management and control is located.

Turner directs attention to official commentary relating to the OECD model tax treaty (which will apply in most cases, and the Revenue and Courts will follow), which defines the place of effective management and control as:

‘The place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions; the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can only have one place of effective management at any one time’.

What exactly does this mean?

• The treaty provision in relation to residency is determined by where all key operational decisions are made by the company’s executives and management: ‘The place of effective management’.
•  This location needs to be where senior figures in the company – primarily the Board of Directors – make those decisions.
• This location also needs to be where company operations mainly take place.
• A caveat or condition exists that states all of the above must be fully investigated before a company qualifies for this treaty provision, despite the overarching rules within the treaty provision.
• Ultimately therefore, if, under this test, a UK resident company is managed from overseas it may be classed as treaty non resident.

In addition:

• Significantly, business may be managed from more than one location, but a company can only have one ‘place of effective management’.

and,

• Importantly, UK tax legislation states that, where this applies, the company is treated as not resident in the UK: Note that this is a special rule – so it means that all `treaty non-resident’ companies are not UK resident for all taxation purposes

The Takeaway

Non-UK resident shareholders and directors: income tax & dividends

Related Posts

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After three hundred years, the prospect of the 5 million population nation breaking its ties with the rest of the United Kingdom hangs in the balance and, as broadcaster after broadcaster reports, it ‘is too close to call’. 

What this debate has done is revitalise notions of libertarianism (decentralisation), exposed political arrogance at it most ignorant and revamped the personas of past government leaders who, to all intents and purposes, seemed to have been kicked to the kerb permanently. 

The latter includes former UK Prime Minster – of Scottish origin – Gordon Brown, who only two days ago laid out why he supports the ‘No’ campaign.  As he was interviewed by the somewhat hostile veteran UK interviewer David Dimbleby, Brown talked about the importance of allocating spending ‘according to need’, should the ‘No’ campaign succeed – thereby justifying why spending per head should remain higher for Scottish residents compared to English, Welsh & Northern Ireland residents. This, he laid out, is because Scotland proportionately has a higher population of elderly residents than the other three members of the UK family. 

Even as he spoke it became apparent, again, just how foreign the century-old concept of support-based-on-need still remains for many people, and how innately some seem to recoil at notions of libertarianism. 

Meanwhile, there is a certain degree of cynical humour engendered by the efforts of Westminster leaders of the main parties, (Conservative, Labour & the Liberal Democrats), turning up in Scotland for a family gathering, like disrespectful teenagers after the adults have already identified the major problems and the need for change – claiming that their declarations of regret and remorse really are now genuine and that they care whether the family stays together after all.  A perception that has made the ‘No’ campaign’s push that much harder. 

It’s obviously a complex debate (and almost heart-breaking for some of us who are still a part of that family as we know it). It doesn’t, or shouldn’t be based on issues of Scottish nationalism – who is more Scottish.  Rather, it’s a debate about alienation, disregard and feelings of second-class status for a Scottish population, (and I say this as an English national), which has produced individuals who have given so much to the union in terms of science and culture – and indeed to the world in both areas – as well as bringing a much needed level of intellect to Westminster’s parliament as Scottish MPs.  It’s a debate about a region which, nevertheless, has often been viewed as an adjunct to the UK, primarily valued for its good natural resource supply and space to lodge nuclear weapons; some reasons for resentment me thinks. 

The latest YouGov survey, conducted on behalf of The Times and The Sun, puts the ‘No’ vote at 52 percent with the ‘Yes’ vote at 48 percent. 

With the ‘Yes’ campaign again leading by 4 percent, this is a reversal from Yougov’s previous survey, (held between 2^nd September and 5^th September), when the ‘Yes’ campaign stood at 51 percent, to lead the ‘No’ campaign by 2 percent; final results are due around market opening on Friday 19^th September. 

Of course, wider macro-economic and investment implications can’t be ignored if the ‘Yes’ campaign is successful: 

Boost ETP head of research Viktor Nossek argues that Scottish secession will weaken fiscal fundamentals and expose the UK to unwarranted credit risks. Coupled with diminished political clout within the EU and internationally, and an increased risk of ‘Brexit’, UK equities risk being de-rated, he says.  

He adds: “Until clarity emerges well after the vote …it may be prudent for investors to hedge their exposure to UK debt and equities.” 

Nossek says it’s too early to tell whether permanent damage has been done to both safe haven and risk assets in the UK, but the pound has lost 1.7 percent against the dollar in August and 2 percent in September so far. 

Boost adds downbeat sentiment has also hit the UK’s bond markets, but, bond yields on 10 year UK Gilts have risen back to 2.7 percent, effectively recouping the 27 basis points lost over July and August. “Sentiment in UK money markets is also tense, as evidenced by the spike in short term interbank lending rates and UK government bills this month”, Boost says. 

Nossek adds: “Whatever the result, there is likely to be protracted negotiation thereafter (over the form of independence, or what powers will transfer to a ‘devo-max’ Scotland). 

Alex Salmond, the SNP’s leader, of course argues that a devo-max option would not be put on the table by the current conservative-end of the existing coalition government, should the ‘No’ campaign succeed. 

Nossek’s focus however is on UK debt, with him arguing that this is one of the biggest sticking points in relation to a successful succession vote: “How much debt  [the] rUK should assume when it loses its claim on Scotland’s tax revenues (and expenses) and how much risk is born with it. 

“Given the UK Treasury’s commitment to service all current outstanding government debt, the exclusion of Scotland’s GDP from the national account would mean a higher degree of rUK government indebtedness vs. rUK GDP,” he says. 

Nossak argues that this concern was heightened by Scotland’s separatists threatening to stop servicing rUK’s national debt, if Westminster refuses to share the pound with Scotland. 

He further anticipates; “Because Scotland’s and rUK’s credibility are both at stake, a compromise should emerge, with Scotland paying some of its share to holders of UK government bonds and bills, possibly in the form of extending the maturity of debt and/or lower interest rates. 

“While technically rUK’s gross government debt as a percentage of GDP may go up if Scotland becomes independent, relative to tax revenues it may well not change much. 

“Longer term however, the oil revenues that rUK loses from Scotland will likely be more than offset by gains derived from no longer having to finance Scotland’s relatively high expenditure. 

“Reliant on volatile crude oil prices and ever shrinking oil and gas reserves, Scotland’s main revenue contribution to the union is uncertain and in decline. Yet Scotland’s aging population is certain to drive higher fiscal transfers from Westminster to Edinburgh, unless Scottish taxes are raised. Independent analysts generally forecast Scottish budget deficits at more than 5 percent of GDP for the foreseeable future,” Nossek says. 

Some supporters of succession say market players should look to Ireland/Eire for a model of how a determined small country can reconstruct its economy in the face adversity, in stark contrast to the inertia in a bigger country such as Italy. 

According to IMF calculations, Ireland is still generating more income per capita than the UK. ‘Yes’ supporters say a strong national identity can give enough impetus to a government to be immediately proactive when faced with difficult economic conditions and that, by being a smaller nation, there is more room for manoeuvrability. 

In addition, ‘Yes’ supporters argue, an independent Scotland will have control of  90 percent of the UK’s current oil-producing assets, allowing it  to further develop its private sector from tax revenues in the foreseeable , as well as developing unique  public services. 

BOOST ETP is a WisdomTree Company.

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Keogh will be based in Hong Kong, where he will lead hedge fund, private equity and real estate businesses in Asia Pacific.

He was previously senior managing director for State Street’s hedge fund servicing business, based in Europe.

Keogh joined State Street in 2012 from Goldman Sachs, as part of State Street’s acquisition of Goldman Sachs Administration Services (GSAS). Prior to that, he was head of the GSAS business in Europe and Asia where he established offices in Ireland, Hong Kong and Singapore.

The executive has a total of two decades experience in financial services and has spent the last 14 n the hedge fund industry.

Bhagesh Malde, senior managing director for State Street’s Alternative Investment Solutions business said, “Asia is one of the most significant growth areas for our alternative servicing business …State Street’s recent global research shows that more capital has been flowing into alternative assets and this looks set to continue”.

Malde reiterated the relatively long-held view that institutional investors are seeking and allocating more assets to private equity, real estate and hedge funds “to diversify portfolios, reduce volatility and construct portfolios that match their longer-term investment objectives.

State Street established a presence in Asia Pacific as an alternative funds service provider when it acquired Mourant International Finance Administration (MIFA) in 2010, with locations in Hong Kong and Singapore.  In Asia Pacific, State Street currently offers real estate, hedge fund and private equity servicing in mainland China, Hong Kong, Singapore, Tokyo, and Australia.

State Street has 1,291 bln usd AuAd (Assets under Administration) as of 30 June 30, 2014). 

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