Archive for June, 2009

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US anti-competitive tax practices

Tuesday 30 June, 2009

As of 1 June, Virchow Krause has now changed its name to Baker Tilly to reflect its commitment to the world’s 8th largest network of accounting firms.  To celebrate, they hosted this presentation ESTATE AND WEALTH PRESERVATION PLANNING FOR MULTI-JURISDICTIONAL INDIVIDUALS  given by Christopher Braun International Executive Breakfast Forum_June 24

Multi-jurisdictional individuals are simply expatriots sent by their corporations to build the business in the far reaches of the world.  Alternatively, they can also be entreprenuers who want to found companies in different countries.  The focus was generally on sending Americans abroad & foreigners coming to America, & the estate, gift, & generation-skipping transfer taxes they could pay.  (fyi-Australia & Canada abolished their death taxes in 1986.)  Granted these are not invoked that often, but when they are, the ramifications can be substantial.  Unlike most ofher countries, the United States taxes worldwide income, not just income earned in that country. It’s a uniquely American tax concept:  citizenship drives taxation, not residency.  Estate taxes are issued on any/all US assets.  To quote Chris, “If you have assets on Mars, the feds want of piece of them.”  Here are a few examples:

  • The risk of dying on US soil is too great, so foreigners are advised to keep their roots @ home.
  • When moving, think about 1. income taxes, & 2.  the effect on your company.  Baker Tilly advocates questioning which activities need to be located in the US.
  • Keep gifts off of US soil.
  • The US government imposes a 15% exit tax on worldwide assets to Americans who seek residency elsewhere or resident aliens who want to return home.  Uncle Sam also imposes taxes of up to 100% on distributions from foreign trusts.
  • In many cases foreign governments don’t recognize wills created in the United States, so you have to create a will in each country in which you reside.

My concern with all of this is that the US government has created a number of barriers which prevent globally-minded entreprenuers from setting up shop here.  The carrot has been the lure of the huge US market, but the US is ceding the title of world’s largest economy to China in the next generation or 2, so we need to consider how we can attract rather than scare away aspiring business-builders.  There are many loopholes, with which Baker Tilly is glad to help, but on the surface, the US taxation system might be keeping potential tax-payers away rather than encouraging them to invest in the US.

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bp world energy review

Friday 26 June, 2009

British Petroleum, the Chicago Council on Global Affairs, Chicagoland & Illinois Chambers of Commerce, brought you this event The 58th Annual BP Statistical Review of World Energy featuring former University of Michigan economics grad Mark Finley (just like me), GM of Global Energy Markets for BP.  Here’s the information contained in the presentation he gave & here’s the story behind the #’s:

Overall:  2008 was a year of volatility & structural change.  Demand for energy by emerging economies exceeded that of developed economies (OECD) for the 1st time ever, especially for natural gas & coal, but not for oil.  World economic growth slowed sharply & exporters suffered most keenly.  Consumer spending was essentially replaced by government spending.  Energy consumption moves with growth & growth slowed, which started in the OECD in 2006-7.

Oil:  consists of 37% of energy consumption & 2/3 of it is traded across borders.  It’s risen for 7 consecutive years, but fell for the 1st time since 1993 & at the biggest rate since 1982.  # of miles driven fell for the 1st time in 30 years.  Diesel & jet fuel grew until the recession hit.  Oil supply changes lag demand changes because it takes a long time to process production changes.  OPEC cut 3M barrels/day.  Countries outside of OPEC cut 600K barrels/day, the most since 1992.  Russia dropped for the 1st time in a decade, but because of tax changes is now up again.  Oil inventories & spare capacity are up to 2o year highs because although production is down since 2007, supply is up, while demand is down.  The world is not running out of oil. Reserves continue to build.  The issue is distribution.  Margins have fallen, so there’s little incentive to produce.

Natural Gas:  mirrors oil.  China showed strong growth.  The US had the biggest growth in history because of greater productvity while Canada showed its biggest decline.  The Atlantic Basin is shipping to China to serve its 12% demand.  There is still too much supply chasing demand.

Coal:   is the fastest growing @ 3.1%, although China fell with it electricity generation in the 4th quarter.  While it’s cheap, prices are more volatile than oil & gas.  Natural gas grew while coal fell in both Europe & the US.  While coal is not as widely traded, Europe shipped coal to Asia & the US.

Renewables:  grew in OECD countries where governments can afford subsidies.  Ethanol increased 31% (60% in the US), but still accounts for only 1% of oil demand.  Wind grew 30% to 1 1/2 % of all power generation.  Solar grew 70%.  CO2 emisssions grew because of the growth in coal.  Australia postponed their carbon credit program because of its affect on the economy.

Q&A:

  • the oil companies recognized the recession before it was announced
  • the cost of cap & trade programs will depend on supply & demand for those credits
  • natural gas is trading at a record discount to oil-coal plays a role too
  • US has shown the biggest growth in renewables (7 wind companies are now headquartered in Chicago)
  • reserves & production change over time which leads to changes in reserves, but figures don’t include new sources, i.e. Canadian oil sands, supplies off the Brazilian coast, etc.
  • there are tons of opportunities to increase procution in the OECD
  • you can’t separate the politics from the economics in hypothesizing about an instability tax-there is too little trust in market mechanisms
  • OPEC cartels have led to higher prices, but the industry is prone to booms & busts, & OPEC didn’t set quotas for 22 years

My take-I was a little disappointed with the lack of focus on new sources/renewables, I guess I shouldn’t be, given this presenation was made by a petroleum company.

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canadian investment tax credits explained

Wednesday 24 June, 2009

The Canadian Consulate in Chicago sponsored this SR & ED Information Breakfast, which stands for Scientific Research & Experimental Development program, which provides foreign investors tax credits in Canada when doing R&D in the great white north.

Mel Machado, currently of Price Waterhouse Coopers, but formerly of Revenue Canada, wrote the original legislation which brought these into existence.  He provided the details of the program:  DFAIT#2_June_25_2009 v1.0

Claude Jodoin, a tax attorney @ Fasken Martineau, provided a very valuable presentation on how to structure & leverage these investment tax credits from a tax planning point of view.  Here’s his presentation SRED Presentation Fasken Martineau He brought out that foreign companies need to generate income, i.e. build a business in Canada, against which you can deduct these tax credits for tax purposes in Canada.  In other words, you can’t simply set up an R&D cost center & take advantage of the program.  However, his presentation also offers a number of ways to set up companies within & outside of Canada which allow companies to leverage these tax credits without having to do everything required to build a business there.

Canadian provinces offer even more tax credits in addition to what the Canadian government offers. Jerome Nadeau of Investissement Quebec in Chicago let us know how much you can save in French-speaking Canada.  Here’s his presentation SRED Presentation Quebec

Erich Hochstein countered with Ontario‘s offering.  Here’s his presentation SRED Presentation Ontario

Q&A revealed:

  • Investment tax credits are not saleable & have nothing to do with carbon credits.
  • The Quebec office helps Chicago companies finance these tax credits.
  • Ontario is adding programs to take advantage of this.
  • Pharmceutical & aeronautics firms have taken most advantage in Quebec.  Of 90,000 claims in Ontario, 25-30% have gone to information technology companies.
  • The provincial offices & consulate form SWAT teams to help US investors find the right people in Canada.
  • Although historically LLC’s have not been favoured, now they are the favoured vehicle.
  • Investment tax credits must be declared & used within 18 months of filing.
  • The Quick Look for Eligibility takes a few hours & you have a pretty good idea whether or not you can take advantage of the investment tax credits.  The process does not require non-disclosure agreements.
  • The 1st steps are to decide what you want to do, identify research partners, & then contact the economic development agencies

When I worked @ the Canadian consulate, this is something we “sold” whenever we were encouraging foreign direct investment into Canada.  By combining federal with provincial tax incentives, foreign companies can get tax reductions of 50+% of what they spend on R&D there.  In some cases, you can even get cash back.  They are real & firms are taking advantage of them.  You have to abide by their rules, but they can be beneficial.  Consult Claude’s presentation to consider all the different options available.

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invest in eastern Germany?

Monday 22 June, 2009

The German American Chamber of Commerce of the Midwest hosted this  event How Far East? Eastern Germany – The No. 1 Location for US Investment Success Links to the presentations that were given should be there-consult them for the content of the program.

Peter Alltschekow of Germany Trade & Invest informed us that the US is the biggest investor in both green- & brownfield investments in eastern Germany, which has grown to a GDP of 400B Euros in 2008, which would make it the 7th largest economy in the European Union.  Here are 10 reasons to invest in eastern Germany:

  1. it’s part of the biggest market in Europe
  2. they are champion exporters
  3. productivity is consistently high
  4. workforce is well-trained
  5. ranked #2 in innovation
  6. infrastructure is well-developed
  7. incentives contribute to 50% of costs
  8. tax reform will help
  9. stability
  10. quality of life

Q&A:

While Despatch has only 270 employees, they’ve generated significant revenues by work with partners who employ 1500.  Despatch doesn’t like nanotech because it doesn’t generate any heat.  There are differences in skill sets of employees & government support between Russia & eastern Europe.

To resolve past differences between eastern & western Germany:

  • the levels of education are the same
  • there are now former westerners living in the east
  • wages are still 10-15% less in eastern Germany
  • language skills differ-the easterners speak better Russian
  • differences between north & south are as large/small as between east & west
  • there is still a small hardcore group of opposition to reunification

Nordex is looking for North American partners & suppliers because  transportation costs for components in this industry as so high, but they must be able to work in the metric system like the rest of the world.

I actually went to interview with Price Waterhouse (they hadn’t merged with Coopers & Lybrand yet) for a position to work with the Treuhandanstalt, the agency responsible for privatizing the former communist eastern Germany.  It didn’t work out due to transportation snafus.  I sometimes wonder what would have happened if…

I also went to Rostock a year or 2 after the wall fell to exhibit in a boating/marine show for a few clients.  At the time, the city, like many others, was still a “schaufenster”-show window, in other words, the shops downtown all looked good, but when you peeked behind the facades, all was not as beautiful as it seemed.  I’m sure it’s much improved now.

I think eastern Germany is still probably a pretty good place to base European operations.  You get many of the benefits of working in ultra-efficient Germany, all at a discount.  There are cheaper places to go farther east, but you lose the German advantage.  I would bet there are still a few differences between working in the east vs. the west, but again, you get much of the same @ 10-15% less.  That’s a pretty good deal.

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financial crisis effect on Mexico

Friday 19 June, 2009

I attended this conference organized by the US Mexican Chamber of Commerce – Mid America An Analysis on the U.S. Economic Situation and Its Impact on the Mexican Economy which featured a great panel from Mexico & Chicago.  Here are their presentations:

Quick summary:  Mexico is hugely dependent on the US economy-50% of its GDP comes from exports & imports & much of that is with the US.  Interestingly, although $ remittances to Mexico have declined, because of the peso devaluation, in peso terms remittances have increased.  Since Mexico is 1/3 jungle, 1/3 mountains, 1/3 desert, it has little agriculture.  On average Mexico gets its share of water, but it’s poorly distributed-they drown in the south & suffer from dehydration in the north.  Like Japan & Singapore, Mexico needs exports to come back.  Mexico didn’t acquire many toxic assets, but suffers their consequences like everyone else.  Mexico had its own Lehman Brothers, (Comerciale Mexicana?), which dragged down other Mexican stocks.  When financing in the US dried up, even big Mexican companies were crowded out, leading to a credit crunch in Mexico.

Q&A enlightened:

  • the regular surveys conducted of macquiedoras & distributed back to macquiedoras will probably not be revived
  • Mexico will probably not rise to the level of BRIC generally because it’s difficult to maintain sustained levels of growth because of fiscal reform, rigidity of a few companies with vast market & pricing power (ex. cement is most expensive in Mexico), oil inefficiencies, & require more education & R&D.
  • the $B injected in the US economy means we probably won’t suffer from deflation, & probably won’t suffer from hyperinflation, but could suffer from inflation, depending on how fast the fed takes $ back out of the economy-there is little risk of inflation in the short term because of available excess capacity.  The US affects everywhere, including Mexico.
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ambassador to czech republik on central europe

Wednesday 17 June, 2009

The World Trade Center Illinois hosted a breakfast reception featuring the recently returned US Ambassador to the Czech Republik Richard Graber of Reinhart Boerner Van Deuren in Milwaukee who talked about Building your Business and Relationships Across Borders.   This event was co-sponsored by CzechInvest & CzechTrade.  He noted, along with the US being the 4th largest investor in the Czech Republik, these opportunities:

  • Although central Europe is no longer the cheapest in the region, skilled labor still costs 1/3-1/2 of what it does in western Europe.
  • While Romania focuses on manufacturing & assembly, Poland & the Czech Republik are moving into high technology services.
  • American chambers of commerce have lobbied to change regulations, labor codes, & bankruptcy laws so that what formerly took months now takes days.
  • Although there is still not 1 voice, there is a need for alternative sources of energy supply in Europe because Russia’s transgressions have cut-off Europe from its oil & gas from time-to-time.
  • Health care is being reformed in central Europe as well because governments can’t afford to pay 100% of all costs for all people.  Czechs visited a doctor 16 times/year on average, which takes it s toll on the economy.  Despite an uproar, you’re seeing the beginnings of a co-payment system, which already cost some incumbents an election.
  • Central European capitals are great places to live & offer great locations to serve all of Europe, which combined with the US is 40% of world trade & accounts for 55% of world economic output.
  • Much of central Europe, except Poland, has joined the visa-waiver program, which makes travel much easier now

Problems remain with corruption, lack of transparency, intellectual property protection, & slow judicial processes.

His suggestions:

  • find local partners who know the lay of the land
  • take advantage of embassies & chambers of commerce
  • take particular advantage of American chambers of commerce

Q&A

  • upon returning in January from 2 1/2 years in Prague , he didn’t realize how bad the economic crisis is here.  In central Europe, it’s not catastrophic & the banking crisis is less severe.  The crisis varies on a country by country basis, i.e. Hungary is in worse shape than the Czech Republik.
  • a new generation has grown up in central Europe that has never known communism, so exchange programs, Fulbright scholarships, the International Visitors Centers are now even more valuable.
  • there is lots of eternal debate in central Europe on how big a role the European Parliament should play in each country.  Countries won’t lose their identities, although the debate will continue forever.

My take-having spent 7 months in Poland, I’m a somewhat unabashed advocate for central Europe.  Rolling up the EU helps these countries immeasurably, & will ensure their mutual success in the years to come.  The biggest threat is the growing divisions with neighbors to the east & south.  As long as those can be resolved, prosperity should ensue for a long long time.

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Azerbaijan & Turkey oil presentations

Monday 15 June, 2009

The Central Asian Productivity Research Center & National Strategy Forum sponsored “The Energy Security Triangle: Defining Risks and Rewards,” the 2009 edition of the Silk Road Conference.  Last year’s conference featured high quality presentations from Azerbaijan, Kazakhstan, India, Pakistan, Turkey & brief overview from the Asian Development Bank to an audience of 100+ attendees.  This year’s conference offered talks given by diplomats from Azerbaijan & Turkey & introductions/off-the-cuff remarks from the Export-Import Bank & sponsors to a group of about 35.

Although powerpoint presentations were not presented, Elshan Baloghlanov of Azerbaycan Respublikasinin sent along his (silkroad09) to the attendees.  In addition he said pipelines were spearheaded by British Petroleum, whose 1st exports began in 1997.  His country suffered collateral damage from the conflict in Georgia in August, 2008 & supplies were interrupted. There are business opportunities in IT & telecom.  Their office has facilitated relationships between 10 partnerships with companies from Silicon Valley including Microsoft & Cisco in egovernment & wimax technologies since 2006.

The consul general from Turkey noted, Turkey has proximity to 72% of the oil reserves in the world.  62% of gas & 32% of oil from Russia flows through Turkey.  5 western companies have invested heavily, but their names remain secret to keep them protected.

Q&A

  • Putin will be Turkey to discuss pipelines
  • Pipelines are relatively easy to protect from terrorists
  • Turkey is a democratic country where money has little to do with political decision-making, so Turkey refuses to do the bidding of the US despite $30B in economic aid
  • Turkey is a natural economic, military, etc. ally to Israel, being the 1st to recognize it as a country in 1948 & making anti-semitism a crime.
  • Azerbaijan’s relations with Pakistan are good, so that mitigates against danger there
  • Hesitation & lack of support/conduits are obstacles to the Nabuko natural gas pipeline project
  • Governments are looking beyond the reign of oil to “convert black gold into human gold.”  Azerbaijan has a joint venture with Korean companies to build 40 windmills.  Turkey is using its resources to invest logically in renewable energies resulting in 12% coming from hydroelectric & geothermal power.

My take-maybe this conference is an example of the fallout of the economic crisis.  Its contraction could indicate the decline in interest on both sides of the coin (presenters & attendees) in international topics & be a reflection of the tendency to revert to looking inwards rather than externally @ the rest of the world for global opportunities.  If so, I think that’s a shame because now is when change is occurring & those who engage the rest of the world during these trying times will be the 1st to reap the benefits when things inevitably turn around.