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Yellen confident of global unity on corporate tax – Industry roundup: 21 June

Yellen still expects a global minimum corporate tax rate

US Treasury Secretary Janet Yellen says that once some countries begin implementing a global minimum tax on multi-national companies, other countries with a lower corporate tax rate will need to follow their lead or risk losing tax revenues

“When some countries opt into this (minimum corporate tax) and put these taxes in effect, it’ll begin to be more and more that see that it’s in their interest to join up,” Yellen said at a discussion with Canadian Finance Minister Chrystia Freeland in Toronto.

A total of 137 countries agreed a global deal in October 2021 that would require big companies to pay a minimum tax rate of 15% and other policies aimed at cracking down on international tax avoidance make it harder for them to avoid taxation, although the policy has not yet been implemented anywhere.

Negotiations to reach a deal had taken years and often seemed to be near collapse, were bolstered by the support of President Biden and Yellen, who has maintained that a global tax, which would apply to companies’ overseas profits, would eliminate what she terms a “global race to the bottom” in levying corporate taxes.

But efforts to formally install a minimum tax rate have since faltered, both in the US where Congress has moved slowly to approve any proposal and the European Union. Lobbyist groups in the US have claimed that a global minimum tax rate could hurt America’s competitiveness by driving business out of the country. Progress in Europe encountered a further obstacle last week when Hungary vetoed the EU’s proposal to implement the measure at the end of 2023. A unanimous decision is required among the EU’s 27-member voting bloc before the initiative can be adopted.

“Under such circumstances, implementing the global minimum tax would cause serious damage to the European economy,” said Hungary’s finance minister Mihály Varga. “As soon as one problem gets sorted out, another one comes along,” commented French Finance Minister Bruno Le Maire – whose country currently holds the EU’s rotating presidency – after the meeting. “We will get there in the end.”

Poland previously opposed the plan but dropped its opposition during a visit from Yellen to Warsaw in May. The EU also worked with Poland to address some of its concerns, including reassurance that EU member countries would link the minimum tax to a separate proposal imposing a levy on the world’s 100 biggest companies.

“Obviously, this is not the end of the story, as we have seen objections emerge and then be removed before,” said Manal Corwin, a tax analyst at KPMG said. “In addition, it appears that there may be other countries that are willing to be first movers on implementation.”

Separately, in a recent interview with ABC News Yellen said that some tariffs on China inherited by Joe Biden's administration from predecessor Donald Trump served “no strategic purpose” and that the President was reviewing them as a way to bring down inflation.

“We all recognise that China engages in a range of unfair trade practices that is important to address but the tariffs we inherited, some serve no strategic purpose and raise cost to consumers,” Yellen said. She did not list any specific tariffs and declined to say when the Biden administration might make a decision.

India to scale up homegrown alternative to SWIFT

The Reserve Bank of India (RBI) plans to scale up Structured Financial Messaging Solution (SFMS), its homegrown alternative to the SWIFT network, as part of its goals for the year 2025.

In its just-published report ‘Payments Vision 2025’, India’s central bank said that it will explore the possibility of expanding the framework of SFMS to provide a domestic payment system platform to other jurisdictions, The RBI claims that SFMS can provide faster, convenient and cost-effective direct payment channels with other jurisdictions

The SFMS is backed by the Indian Financial Network (INFINET); essentially a closed user group network that includes the RBI, member banks of the centralised payment systems (CPS) and other financial institutions. 

“The feasibility of providing membership/technology of INFINET to other jurisdictions shall be explored. Further, it shall be explored to expand the framework of SFMS to provide a domestic payment system platform to other jurisdictions,” the RBI states in ‘Payments Vision 2025’.

The RBI’s ambitions to take the SFMS global comes after SWIFT banned seven Russian banks from the global payments messaging system following the invasion of Ukraine on 24 February. The move ejected one of the major exporters of oil from the financial system, which India appears to have used as the opportunity to unveil its new alternative.

Despite a raft of sanctions on Russia, many of global economies still import oil from Russia. In the absence of SWIFT, Russia has been trying to work out different arrangements with importers to resume economic exchange. Last week it was reported that Indian and Russian authorities are discussing the possible revival of the Rupee-Rouble payment mechanism.

In its Vision 2025 document the RBI outlines several more initiatives for the internationalisation of its products. The central bank also plans to ramp up the global outreach of Real-Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) and RuPay cards. The RBI also plans to shore up UPI infrastructure which has won kudos in reviews around the globe. 

The document also said that the RBI would seek inclusion of the Indian Rupee in the Continuous Linked Settlement (CLS), which provides protection for cross-currency settlement in 18 currencies.

UK to tighten ‘Buy-Now-Pay-Later’ regulation

The UK government is to tighten the rules for the fast-growing buy now, pay later (BNPL) loans sector of the short-term credit market in a bid to prevent borrowers from taking on unaffordable debts.

Companies ranging from Apple to Klarna have offered consumers the option to pay for smaller items by instalment. After lengthy consultations, the Treasury confirmed that BNPL lenders will be required to carry out affordability checks on customers and ensure advertisements are fair and do not mislead. Providers will need to be approved by UK watchdog the Financial Conduct Authority (FCA) and borrowers can take complaints to the Financial Ombudsman Service.

The government’s announcement follows a consultation which closed in January in response to concerns about the BNPL model and consumer protection as resurgent inflation triggers a cost-of-living crisis. The proposals will apply to other forms of short-term debt in addition to BNPL.

Concerns over the BNPL model centre on whether users understand that they are taking on debt, and if providers are ensuring people are able to afford the products they purchase using the service.

“Buy now pay later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place,” said John Glen, economic secretary to the Treasury.

 “By holding buy now pay later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”

Martin Lewis, founder of the Money Saving Expert website and a UK consumer rights champion was more direct. “Buy now, pay later is often insidiously marketed as a simple payment option, or worse, a lifestyle choice. It’s not. It’s a debt, with all the dangers of debts,” he warned.

“It perverts purchasing decision-making, leaving many in a continuous loop of ‘owe-owe-owe’. Firms make money from it because people transact more via BNPL than they would otherwise.”

BNPL services benefited from the ecommerce boom of the Covid pandemic, with the UK market worth an estimated £5.7 billion (US$7bn) in 2021, more than double the figure calculated by the FCA for 2020. But the lack of regulation has seen a variety of approaches taken by BNPL providers. Some have begun voluntarily providing information to UK credit reference agencies (CRAs), with Klarna announcing last month that it would begin doing so from 1 June.

The government said it expected to publish a consultation on the draft legislation towards the end of the year and aimed to lay secondary legislation by the middle of 2023. Following this, the FCA would consult on rules for the sector. Lewis said that he welcomed the consultation but regretted that the legislation would not be in place “for the financially bleak winter coming”.

Bangladesh to launch CBDC feasibility study

Bangladesh’s central bank plans to conduct a feasibility study on the possibility of introducing a central bank digital currency (CBDC) backed by blockchain technology.

Minister of Finance AHM Mustafa Kamal announced the plan to the Bangladesh parliament as part of the country’s budget for the 2022-23 financial year and said that many countries worldwide are looking into CBDCs as viable alternatives to risky private digital currencies.

Kamal said that the growth of the country’s internet coverage and e-commerce sector had made it necessary to consider this alternative, adding that the main purpose of the CBDC would be to facilitate virtual transactions and encourage start-ups and e-commerce businesses. 

“As a result of the time-befitting steps of the present government, the coverage of the internet and e-commerce in the country has increased tremendously. In this context, Bangladesh Bank will conduct a feasibility study on the possibility of introducing CBDC in Bangladesh,” the minister said.

The feasibility study on a CBDC launch is part of a broader reform initiative the country’s MoF and central bank have planned. Other programs include digitising the country’s public service, deepening financial inclusion, and maintaining stability in the financial sector.

Bangladesh has long encouraged the adoption of blockchain technology, but is wary of digital currencies; reports suggesting that several people have even been arrested for illegally using digital assets in the country.

Indian banks call time on Hong Kong

A combination of trade financing losses, increasingly stringent rules and tightening Covid-19 restrictions have persuaded Indian public sector banks (PSBs) such as Union Bank of India (UBI) and Punjab National Bank to wind down their operations in Hong Kong or seek alternative locations.

Hong Kong has already seen four out of eight Indian PSBs exit and the remaining banks are reviewing their operations following the pandemic. Reports suggest that the State Bank of India (SBI) could be the only PSB to stay on in the city state, along with private Indian banks HDFC Bank and ICICI Bank.

UBI has already transferred client accounts to its branches in Singapore and Australia and is waiting for a final no-dues certificate from the Hong Kong Monetary Authority (HKMA).

The Punjab National Bank has commenced a withdrawal plan while Canara Bank’s plan to shut down its Hong Kong operations are in advanced stages. Bank of Baroda has already closed its branch in the city and Indian Overseas Bank (IOB) is continuing to review the future of its HK branch.

“Many Indian banks suffered major losses due to the Covid-linked economic meltdown in 2020 as traders could not pay up and there is also a thinking that so many banks are not required there now,” commented a senior trade banker. “The Chinese authorities are also not easy to deal with, especially in the current geopolitics of the region. But the main reason is the weak trade financing business as flows have been routed through Shanghai.”

According to AK Das, CEO of Bank of India: “Margins in the HK business are very low and it’s a very small part of our business. Like others, we also saw a spike in non-performing assets (NPAs) in 2020 but things have settled down now. We applied for a licence to open a branch in Gift City (the new business district planned for Gujarat, India) last month and if that comes through, we will have to relook at the necessity of the HK branch.”

UCO Bank CEO SS Prasad said that his bank reviews its overseas operations annually and has already reduced its operations in Singapore and Hong Kong to just one branch. “We have not taken a view on the remaining operations,” he added.

In addition to the reasons cited, the PSB exodus from Hong Kong is also in line with directions from India’s government in 2016-17, which suggested that only one or two Indian banks need be present in other Asian markets as this would conserve capital.

“There has been no new direction, but this has been a general view from the government,” said a prominent PSB official. “It is also a fact that trade flows have reduced and Chinese counterparties give little or no business to non-Chinese lenders. The Gift City option has also changed dynamics, so it makes sense for the smaller PSB banks to move out.”

German auditor queries standards for EU green bonds

A German government auditor has criticised the standards used by the European Union for its "green bonds" that aim to help governments and companies finance efforts to combat climate change.

Reuters says that an internal report it has seen suggests that the current rating system used by the German government and EU Commission for sustainable securities “demands more commitment to climate protection from private parties than from themselves.”

It describes the criteria set for the bonds as “less ambitious and less transparent” than the benchmarks demanded from private issuers. The lax standards could invite accusations of so-called greenwashing and could “permanently damage the confidence of investors who want to invest capital in a green way,” the German Supreme Audit Institution said in the 9 June report.

The EU is expected to become one of the biggest issuers of green bonds globally, ramping up sales as part of a multi-billion euro coronavirus recovery fund.

A German parliamentary budget committee will discuss the report later this week and submit recommendations to parliament.

Russia developing sandbox for cross-border crypto payments

With many of its banks ejected from the SWIFT network and faced with a growing number of business and financial sanctions, Russia is preparing to test crypto payments for exports in a dedicated sandbox, according to local media reports.

The state-run Russian Export Center (REC), an institute tasked with supporting Russian exports is apparently working to set up a sandbox for international crypto payments as an alternative approach to international settlements under sanctions. The aim is also to identify potential regulatory and technological challenges for settlements with digital assets.

The REC regards a “cross-border digital sandbox” as a promising initiative that will aim to create opportunities for fintech companies to process payments using digital financial instruments on behalf of Russian exporters and importers.

Settlements in cryptocurrencies represent an alternative payment system, which will develop incredibly quickly according to Veronika Nikishina CEO of the REC. Speaking at the St. Petersburg International Economic Forum, she said that as a development institution that captures current trends, the Center was closely studying the possibility of becoming a digital sandbox to pilot the use of cryptocurrencies in cross-border payments.

Quoted by the state news agency Tass, Nikishina added that the REC has already gathered representatives of fintech firms and regulatory bodies and was closely collaborating with Russia's central bank and also the country’s financial watchdog, Rosfinmonitoring. Without these participants, it would be impossible to create all layers of crypto payments, she added, while building a sandbox would allow the Center to identify the potential regulation and technology-related risks.

The initiative comes after Bank of Russia, which has strongly opposed the legalisation of cryptocurrencies in the country, softened its stance on crypto payments in foreign trade deals, amid mounting Western restrictions on Russia’s finances imposed over its military invasion of Ukraine.

According to reports most Russian institutions agree that the rouble should remain the only legal tender inside the country as authorities prepare to adopt comprehensive crypto regulations. Last week, members of the State Duma, the lower house of parliament, approved a draft law banning the use of cryptocurrency as a means of payment but left the door open for exceptions envisaged in other federal laws.

HSBC Oman agrees to merger talks with Sohar International Bank

HSBC Bank Oman has agreed to hold preliminary talks with local rival Sohar International Bank after the latter last week raised the possibility of a cash-and-shares deal to merge the two lenders.

Sohar International stated: “The board of directors of Sohar International (SIB) in its meeting held on June 15, 2022, resolved to send a letter of intent to the Board of Directors of HSBC Bank Oman (HSBC Oman) to explore the possibility of a merger between the two entities, in a deal which would involve HSBC Oman shareholders being offered cash and shares – subject to obtaining final approvals from the respective boards, regulators and shareholders.”

HSBC Bank Oman said that it was ready to engage in preliminary discussions to obtain more information on the possible offer. It added: “If the parties agree to proceed with the merger, it will be subject to various conditions including ... approval of the relevant regulatory authorities and of the shareholders at the extraordinary general assembly of each bank.”

The banking sector across the Gulf region has seen an increased in merger and acquisition activity as lower government spending squeezes profit margins. Banks are looking to scale up and become more competitive regionally and HSBC has been working on a restructure to improve operating efficiency. In February 2020, the bank announced its transformation plan, which is aimed at reshaping underperforming businesses, simplifying complex organisation and reducing costs.

HSBC has also focused on building its operations in Asia, including Hong Kong and China. In February it paid US$529 million for AXA Insurance in Singapore and agreed to acquire L&T Investment Management Limited for US$425 million. It has launched an exclusive fund focused on the metaverse for private banking clients in Hong Kong and Singapore and has long-term plans to position itself as a top bank for Asia’s high net worth (HNW) and ultra-HNW clients.

 

 

 

 

 

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