HLB Podcast Eps 34: Unlocking the potential: AI and tax

Speakers:

Amy Spillard, HLB 's Head of Technology Partnerships
Jim Bourke, HLB's Global Technology Advisory Services Leader
Bruce Stanley, Tax Consulting Partner, HLB Ireland

Hello and welcome to HLB Cross Border Business Talks HLB's Global podcast series on international business topics.

Amy Spillard:  Hi everyone, and welcome to the HLB podcast series, Cross-Border Business Talks. My name is Amy Spillard, Head of Technology Partnerships here at HLB International, and today we're going to be diving into the world of AI and tax and shining a light on some of the key challenges and opportunities that we're seeing in this area. 

So, we're living in an age now where the volume and the rate at which data is being produced, and the way that we access this data, is happening quicker than it's ever happened before. So, this is driving super rapid advances in technologies that are really transforming the way that business and economies operate. And by extension, the way in which the accounting industry must operate. So, the cost of data processing and data storage has reduced so significantly over the past decade. And this data revolution means that we're living in an increasingly agile and innovative world. So new technologies are constantly evolving in a broad range of fields, but we're all very well aware that AI is the hot topic at the moment. 

It is growing at such a staggering rate and the potential seems endless, but it can also be a bit of a minefield, just to use a recent example, obviously everybody's talking about ChatGPT at the moment and not so long ago it, it took them just five days to reach 1 million users. Whereas if we look back a few years, it took Twitter two whole years to reach a million users and it took Netflix three and a half years to hit the same kind of user count. So staggering stuff. Today what we want to do is really explore the relationship between AI and tax. And as mentioned, AI has become so accessible now that the benefit of early adoption has effectively disappeared. 

So instead, our tax leaders are facing the risk of falling behind their competitors if they're not investing the right type of time and resource in cleansing their data and kicking off their own AI programs. So today I'm really delighted to be joined by Jim Bourke, Global Advisory and Technology leader, and Bruce Stanley Tax Consulting Partner at HLB Ireland. 

A really warm welcome to you both. Thanks Amy.  

So Bruce, maybe if I kick off with you. U would love to dive into whether or not you're seeing tax functions starting to use AI more, or is there still some confusion around what exactly it is and, and what it entails?  

Bruce Stanley: Sure. I think tax functions have been using AI for quite some time now. Certainly, the tax software that we use at HLB Ireland has AI capabilities within it. For example, the personal tax software can interact with the revenue online services, and it can access client's employment details, so we can gather that and then pre-populate that part of their personal income tax return. 

There's also accounting software such as Hubdoc, which can read PDF. Invoices with purchase invoices, and it will post those expenses and record the batch rates on a line-by-line basis, which is then used in preparing the batch returns. That software has been around for almost 10 years now. 

So, with both direct and indirect taxes, AI is already in play. I think the big shift that we're seeing is really around this generative AI which again, it's not really new technology. I believe it's been around since about 2014, but it's only recently that it started to get kind of the publicity and it's really started to make huge improvements in the way that it works and the information that it generates. 

And I think firms are cautiously starting to explore how that can help us. You know, as tax consultants, we're very close to our clients and our roles as a trusted advisor. So, I think it's important that we're using AI in the right way and getting that part is very important. And so just to kind of touch upon that cautious exploring and you know, we, we see this in the mainstream media that perhaps there is. 

Amy Spillard: There’s still some kind of apprehension and some nervousness when it comes to that generative AI piece, do you think there's still some kind of apprehension, particularly amongst tax functions when it comes to embracing this technology? Or do you think people are starting to move towards an open-minded kind of willingness to embrace AI? 

Bruce Stanley: I think there is still certainly a lot of apprehension around it. I think people do want to explore it and see how it can be used. I think as tax consultants and accountants we're generally a kind of a cautious bunch by nature, but I suppose the technology is a bit of a closed box. 

So, the way that generative AI works, you don't really get to see what's kind of going on behind the scenes. You only kind of see the output, which is then kind of put into a human voice, and I think that's just. Having that transparency really isn't there all the time. So, you know, if I'm asked a question in relation to that or income tax or whatever, I can go away and do the research and I can be confident that I've only used kind of trusted sources. 

I think there's concerns just in, in using it to generate information. Like I've seen examples where it's been kind of used to create like client letters to give them updates on kind of new developments in tax, and I think it can kind of be a good starting point, but it would just be kind of a tool, I think to help with the kind of the first draft, which then has to be reworked and kind of put into your own voice, but I think it can be useful.  

Amy Spillard: Absolutely. It's kind of, you know, creating the governance and the procedure around that. And I guess, you know, educating the full firm around it will get you so far, but that absolutely having the procedure in place whereby the results and the output are reviewed by the appropriate people within the team and that's validated or checked in the appropriate ways.  

Bruce Stanley: Yes, I think. The risk management around that is one of the key areas that people do have that concern around, but I think that exists with a lot of technology.  

Amy Spillard: Jim, maybe, perhaps coming to you now, I guess on a, a slightly more positive note, you know, where perhaps there's still some apprehensions, some nervousness, I think advances that need to happen in, like you said, the kind of the policy and the regulation around it. But what do you think Jim are some of the opportunities that we're seeing for the tax profession when it comes to AI?  

Jim Bourke: Sure. Amy, when you think about the tax profession, you think about all of those manual tasks that we have in tax, so many manual steps, and that to me, when you look high level about the value that artificial intelligence can add to the tax practice, it really comes down to automating all of those manual steps. 

I mean, you think about it. Globally tax works in so many ways, but there's one common link, lots of manual tasks. So, when I look at our new hires, we bring them in out of school. You know, they didn't go to school to learn how to take information off of source documents and key them in into your tax software, right? 

So, what I would encourage everyone to do is really look at all of those manual tasks that exist in a tax practice, all the way from information gathering documents, from our clients, tax documents every single step of the way. Examine all those steps and say, you know, how can artificial intelligence AI solve this piece? And you talk about fear a few minutes ago, you know, there's, there's a big fear that AI is going to take our jobs away in tax. I will tell you that is clearly not the case. What's going to happen is AI will make us more efficient in tax. It'll help to automate those manual tasks as Bruce identified already, some of those manual tasks that are being identified already automated with AI. 

So that's what's going to happen. We're going to continue to see progression in that space. And continued modification of all those manual tasks with artificial intelligence. 

Amy Spillard: That leads perfectly onto my next question, which I guess is diving into the practical steps of how a tax function can best begin its journey with AI. If there's firms listening that are perhaps kind of just getting started into looking at the tools out there and understanding how to kind of practically apply them in the best way possible, any advice for the firm? You mentioned kind of looking at these are all of their manual processes. What's kind of the best or the most valuable place to begin, do you think?  

Jim Bourke: Well, what I would do, Amy, it's not rocket science here. This is a very, believe it or not, easy process. Don't be mystified by the Artificial intelligence. Don't be scared. Don't run and hide. Literally have a puddle with your staff and talk about how the tax return goes through the firm right from day one, which some firms send out information, some, questionnaires to their clients to complete. 

Other firms simply meet with their clients, and they deliver the source documents needed for the tax prep process, but literally, Step through your tax process and identify all I would ask. I'm not asking someone to create right now all the automation around those steps, but simply, identify those steps, identify all the pain points. 

I encourage auditors to do the same thing when it comes to audit. We, our whole profession is filled with so many of these pain points. So, sit down, identify all of those pain points, and then when they're identify, you could sit down with someone that understands artificial intelligence. What role could artificial intelligence play? 

And not only that, but we also have HLB members that specialise in identifying those manual steps and automating those manual steps. So, engage them for advice on helping, you know, how can we automate these pieces? Fantastic advice. And, you know, we see amongst the network that firms who are at varying kind of stages of the journey and, and perhaps more advanced than others. Just to reiterate that kind of connecting with the network and learning from peers in terms of where they began and, and you know, perhaps learning from some of the pitfalls and the successes that they've had. So, kind of absolutely reach out to, to the HLB office to help connect you with those firms. 

Amy Spillard: And with that in mind, do you think there are still some potential barriers to AI adoption specifically within the tax function? Do you think it's kind of an open area where there's lots of opportunity. Are there any challenges or, or barriers, we need to be kind of diving into and, and picking? 

Jim Bourke: So, I would say absolutely like any other new technology, when we embrace new technology, there are always barriers. You know one of the biggest barriers that I've identified is there's the misconception that artificial intelligence is going to take jobs away from tax preparers. False! Artificial intelligence will not take jobs away. 

Artificial intelligence will put us in a position to be better, trusted advisors for our clients, right? It's going to help the young professionals out of school to do what they learned how to do. I mean, I mentioned it earlier, they need to learn in school how to take information off of source documents. And key it into tax software, a machine, a bot, artificial intelligence can do that. The barriers are that it's the misconception it's going to take jobs away. No, it's going to make us better at our current jobs. It's the misconception that it's very complicated. It's too complicated. This artificial intelligence. No, it's not. I'm not asking any tax practitioner to sit down, create bots and create algorithms to do this. All I'm asking them to do is identify the manual tasks and then engage those data scientists or those individuals to help with that process. It is not a mystery. It's not complicated. It's not going to take jobs away. It's really going to enhance what we do in the tax practice. 

Amy Spillard: Fantastic. And Bruce, perhaps just bouncing to you, were there any barriers or challenges that you came up against when first getting started that we can make other firms aware of? Or just things to look out for, I guess?  

Bruce Stanley: Yeah, I think we could really see the benefits of it.  I think when you're doing any kind of change implementation, if people have been doing something for a long time, one way they don't necessarily want to change, but I think when we could see the benefits so clearly that helped us get over that. 

One of the other things I think is just making sure that the staff are properly skilled on using the software there. I think we all probably have software packages that have a myriad of functions that we just don't use. I think just making sure that you're getting the best out of it. There's also obviously the cost and the regulatory issues, but you know, all the software that kind of pre-exist out there, like Hubdoc, obviously that's cleared for any regulatory issues that we would have. So, they're all fine. But yeah, I think it’s keeping the people in your firm informed on the change and really showing them what the benefits are because I think everybody just wants their life to be easier as Jim was saying, nobody wants to be there, kind of just doing data entry so if there's software that can do that, we should certainly adopt it. 

Amy Spillard: It's an interesting point actually and a challenge that we've seen come up kind of time and time again at various HLB events is when it comes to implementing technological change or new tools, especially in I guess, a relatively new field such as AI, those kind of polarizing opinions, particularly when it's within a firm and you've got some, perhaps personalities that are a little bit more resistant and kind of setting their ways of doing things, what can be a key challenge is trying to bring them along on the journey and make sure that everybody's as receptive and open-minded to adopting these new, new tools as possible. 

You touched upon demonstrating the benefits and showing the value that something like AI can have. Again, just in a practical sense, how did you go about doing that? You know, did you kind of implement and ask for forgiveness afterwards and present that back to the business and say, look, this is how much efficiency we've driven, or how much value we've driven?  How did you kind of, I guess, bring everybody on board and was that a challenge that you kind of came up against or was everyone kind of raring to go?  

Bruce Stanley: Most of the people were very open to change. We're kind of lucky like that in our practice, but we kept them informed. We were explaining from very beginning what software we were introducing, why we were introducing first and being very clear on on the benefits from day one, and then making sure that everybody was, was adequately trained on it, you know, so that nobody was just being given the software and told to get on with it. 

We had external consultants coming in and showing us how to get the most out of the software. And be really clear on the benefits of it as well, as I say that upskilling the staff and clear communication, we're key to it. 

Amy Spillard: I guess we've touched upon some of the risks and the challenges and again Jim, this is something that we've seen come up time and time again at the events is how do we regulate the use, specifically in AI and how do we put the appropriate kind of policy and procedure in place to make sure that it's being used in a risk free way. And with something that is so new, do we kind of think that it's going be difficult to regulate AI in the profession? And where do we kind of begin with that process?  

Jim Bourke: Amy, that's a really good question. You know, whenever we deploy new technologies in our profession there's always room where we ask about regulation and should it be regulated, you know, I'm out there, I am not convinced that Artificial intelligence's role in the tax practice in our profession requires regulation. It’s like anything else. Its changes will continue to happen as we introduce new technologies. I mean, the coolest thing is, you know, artificial intelligence. It's not Chat GPT for tax, right. Chat GPT has its roots in artificial intelligence, and I know the whole tax community and the accounting community and our HLB community, they're right now debating how to wrap their heads around that artificial intelligence. It’s different. It's really something that's long overdue. Technology is finally up to speed. It's finally moving quick so that now we're able to do this quicker than we've ever done it before. Processing speed is lightning fast.  There's so many different components of artificial intelligence, but when I look at it, I don't see regulation as a core component of it. 

I say embrace this new technology concept, and I say new when it's really not new. It's just that it's shown up on everyone's radar because now we're all about that. You know, we went to the cloud. That wasn't rocket science. We didn't require regulation. There were things that fell out that required regulation as we went to the cloud. It was privacy, it was security. So, you know, around privacy and security, that's still at first and foremost for all our firms, we are the trusted advisors protecting our client information. And I would say even as we go down this path with identifying opportunities for automating the manual task, specifically artificial intelligence, first and foremost is we're protecting that data that our clients entrust to us. 

Amy Spillard: Yeah, I know there's some, some work ongoing to update kind of data privacy rules to meet the kind of ever-changing world of AI. I guess gaps that aren't currently covered by things such as GDPR for example. Yes, so you know, still potentially some work to do it in that space. And I know Jim, we spoke about some of the challenges specifically around international work where AI is involved and we're kind of passing data from one jurisdiction to another. Yes. And you know, perhaps some of the difficulties that are going to come up there that regulation might solve in in the future. 

Jim Bourke: Yes, it seems like there's still a couple of gaps like that, that we need to fill for sure. Yes, and you're absolutely right. Again, it is not the concept AI that's requiring massive change. It's that this is the next level of technology that we're deploying in our profession. And as with every deployment of new technology, it gives rise to questions. How is that client data protected? Like you mentioned, where is that data going to sit? Is it going to sit in our country? Is there a chance that artificial intelligence could be doing calculations in another country? Could that data be stored in another country so it doesn't change the concepts. It causes greater awareness on those existing things. And again, it comes back to protection of client data and it's something that has exploded over the last few years.  

Amy Spillard: I guess with that in mind, is there anything, and you know, we spoke about kind of, collaboration and leaning on the network to hear from fellow firms in terms of what they've done and how they've got started so what can HLB be doing to support its members?  

Jim Bourke: Embrace AI for the future in terms of expanding into new service lines, driving efficiency and really leaning on AI. What could HLB be doing to, to support its members? I mean, what HLB could be doing, HLB is doing right now. Look at our conference that we're having, our global conference coming up in Madrid. We have artificial intelligence on the agenda. We're going to be talking about, or going be talking about its role. We're going, going to continue to create awareness about artificial intelligence. We've already identified firms around the globe that are specialising in helping companies with understanding artificial intelligence and the role that they can make. And we're inviting those firms to be part of HLB. When I look at HLB I look at the fact that we are out there ahead of the curve. We're cutting edge with respect to a lot of these new technologies. So just rest assured, if you're an HLB member out here in our space practicing, we have that aspect covered. 

We are always looking and identifying those opportunities. I mean, Amy, you know that as head of our affinity and relationship program with third parties out there today, we're identifying technology companies that are embedding ai. Machine learning utilising bots in their technology. So that is going to continue at a pace that we have never witnessed in the past. 

Amy Spillard: Yeah, there's some, some fantastic expertise within the network and as you said, both in terms of the firms and the progressive work that they're doing. And also our third party partners. So we'll just implore everyone if you need some advice or recommendations for the best tools to be using then please do reach out and get in touch. 

Lastly, before we wrap up, Bruce, Jim anything else that you'd like to kind of dive into today, specifically within the realms of AI and tax? You know, we've touched upon some of the challenges and the opportunities. Anything else that you think firms need to be aware of or considering at this point in time? 

Bruce Stanley: It's very important just to embrace change. And you know, our most successful clients are generally the most innovative ones, and we need to keep pace with their needs and their requirements. And AI is one of the ways which we can do that. You know, and as Jim's saying, it should be seen as a tool which will help us get our work done and improve our efficiencies and our capacities. 

I think a shortage of talent is one of the major problems that's facing practices everywhere. Everyone I talk to is talking about the difficulty of getting staff, so I think AI can, by increasing the capability to input data entry quickly can then free up staff time in order to concentrate on the more value adding activities, which is why our clients really come to us in the first place. That would be my take away from it is to embrace the change.  

Jim Bourke:  Amy, my takeaway would be just that don't be mystified by artificial intelligence. Understand it's just that next level of technology that's entering our practices. The entire profession is ripe for introduction of new technologies, and this is one that could really help us. So don't run a hide from it. Don't be afraid of it. Don't be mystified by it. It will not take our jobs away. And at the end of the day, I think we'll have better quality deliverables to our clients, and we'll be doing them in a much more efficient way and a plug for advisory, if we're utilising all of these technologies in the compliance area of tax, think about how much free time that we will now have to be better advisors to our clients.  

Amy Spillard:  Love that mindset and like you both said, all about having the kind of the right attitude to these types of things and embracing them.  

It has been an absolute pleasure to speak with you both and hear your insights and certainly more to come from HLB in terms of AI and various thought leadership, whether that's through the conferences, through our various marketing channels. There'll be plenty more to come on this but thank you both so much for your time. If anyone has any questions or wants to know any more, then please do reach out to any one of us, we'd be delighted to talk with you more.  

Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

HLB Podcast Eps 34: Unlocking the potential: AI and tax

Speakers:

Amy Spillard, HLB 's Head of Technology Partnerships
Jim Bourke, HLB's Global Technology Advisory Services Leader
Bruce Stanley, Tax Consulting Partner, HLB Ireland

Hello and welcome to HLB Cross Border Business Talks HLB's Global podcast series on international business topics.

Amy Spillard:  Hi everyone, and welcome to the HLB podcast series, Cross-Border Business Talks. My name is Amy Spillard, Head of Technology Partnerships here at HLB International, and today we're going to be diving into the world of AI and tax and shining a light on some of the key challenges and opportunities that we're seeing in this area. 

So, we're living in an age now where the volume and the rate at which data is being produced, and the way that we access this data, is happening quicker than it's ever happened before. So, this is driving super rapid advances in technologies that are really transforming the way that business and economies operate. And by extension, the way in which the accounting industry must operate. So, the cost of data processing and data storage has reduced so significantly over the past decade. And this data revolution means that we're living in an increasingly agile and innovative world. So new technologies are constantly evolving in a broad range of fields, but we're all very well aware that AI is the hot topic at the moment. 

It is growing at such a staggering rate and the potential seems endless, but it can also be a bit of a minefield, just to use a recent example, obviously everybody's talking about ChatGPT at the moment and not so long ago it, it took them just five days to reach 1 million users. Whereas if we look back a few years, it took Twitter two whole years to reach a million users and it took Netflix three and a half years to hit the same kind of user count. So staggering stuff. Today what we want to do is really explore the relationship between AI and tax. And as mentioned, AI has become so accessible now that the benefit of early adoption has effectively disappeared. 

So instead, our tax leaders are facing the risk of falling behind their competitors if they're not investing the right type of time and resource in cleansing their data and kicking off their own AI programs. So today I'm really delighted to be joined by Jim Bourke, Global Advisory and Technology leader, and Bruce Stanley Tax Consulting Partner at HLB Ireland. 

A really warm welcome to you both. Thanks Amy.  

So Bruce, maybe if I kick off with you. U would love to dive into whether or not you're seeing tax functions starting to use AI more, or is there still some confusion around what exactly it is and, and what it entails?  

Bruce Stanley: Sure. I think tax functions have been using AI for quite some time now. Certainly, the tax software that we use at HLB Ireland has AI capabilities within it. For example, the personal tax software can interact with the revenue online services, and it can access client's employment details, so we can gather that and then pre-populate that part of their personal income tax return. 

There's also accounting software such as Hubdoc, which can read PDF. Invoices with purchase invoices, and it will post those expenses and record the batch rates on a line-by-line basis, which is then used in preparing the batch returns. That software has been around for almost 10 years now. 

So, with both direct and indirect taxes, AI is already in play. I think the big shift that we're seeing is really around this generative AI which again, it's not really new technology. I believe it's been around since about 2014, but it's only recently that it started to get kind of the publicity and it's really started to make huge improvements in the way that it works and the information that it generates. 

And I think firms are cautiously starting to explore how that can help us. You know, as tax consultants, we're very close to our clients and our roles as a trusted advisor. So, I think it's important that we're using AI in the right way and getting that part is very important. And so just to kind of touch upon that cautious exploring and you know, we, we see this in the mainstream media that perhaps there is. 

Amy Spillard: There’s still some kind of apprehension and some nervousness when it comes to that generative AI piece, do you think there's still some kind of apprehension, particularly amongst tax functions when it comes to embracing this technology? Or do you think people are starting to move towards an open-minded kind of willingness to embrace AI? 

Bruce Stanley: I think there is still certainly a lot of apprehension around it. I think people do want to explore it and see how it can be used. I think as tax consultants and accountants we're generally a kind of a cautious bunch by nature, but I suppose the technology is a bit of a closed box. 

So, the way that generative AI works, you don't really get to see what's kind of going on behind the scenes. You only kind of see the output, which is then kind of put into a human voice, and I think that's just. Having that transparency really isn't there all the time. So, you know, if I'm asked a question in relation to that or income tax or whatever, I can go away and do the research and I can be confident that I've only used kind of trusted sources. 

I think there's concerns just in, in using it to generate information. Like I've seen examples where it's been kind of used to create like client letters to give them updates on kind of new developments in tax, and I think it can kind of be a good starting point, but it would just be kind of a tool, I think to help with the kind of the first draft, which then has to be reworked and kind of put into your own voice, but I think it can be useful.  

Amy Spillard: Absolutely. It's kind of, you know, creating the governance and the procedure around that. And I guess, you know, educating the full firm around it will get you so far, but that absolutely having the procedure in place whereby the results and the output are reviewed by the appropriate people within the team and that's validated or checked in the appropriate ways.  

Bruce Stanley: Yes, I think. The risk management around that is one of the key areas that people do have that concern around, but I think that exists with a lot of technology.  

Amy Spillard: Jim, maybe, perhaps coming to you now, I guess on a, a slightly more positive note, you know, where perhaps there's still some apprehensions, some nervousness, I think advances that need to happen in, like you said, the kind of the policy and the regulation around it. But what do you think Jim are some of the opportunities that we're seeing for the tax profession when it comes to AI?  

Jim Bourke: Sure. Amy, when you think about the tax profession, you think about all of those manual tasks that we have in tax, so many manual steps, and that to me, when you look high level about the value that artificial intelligence can add to the tax practice, it really comes down to automating all of those manual steps. 

I mean, you think about it. Globally tax works in so many ways, but there's one common link, lots of manual tasks. So, when I look at our new hires, we bring them in out of school. You know, they didn't go to school to learn how to take information off of source documents and key them in into your tax software, right? 

So, what I would encourage everyone to do is really look at all of those manual tasks that exist in a tax practice, all the way from information gathering documents, from our clients, tax documents every single step of the way. Examine all those steps and say, you know, how can artificial intelligence AI solve this piece? And you talk about fear a few minutes ago, you know, there's, there's a big fear that AI is going to take our jobs away in tax. I will tell you that is clearly not the case. What's going to happen is AI will make us more efficient in tax. It'll help to automate those manual tasks as Bruce identified already, some of those manual tasks that are being identified already automated with AI. 

So that's what's going to happen. We're going to continue to see progression in that space. And continued modification of all those manual tasks with artificial intelligence. 

Amy Spillard: That leads perfectly onto my next question, which I guess is diving into the practical steps of how a tax function can best begin its journey with AI. If there's firms listening that are perhaps kind of just getting started into looking at the tools out there and understanding how to kind of practically apply them in the best way possible, any advice for the firm? You mentioned kind of looking at these are all of their manual processes. What's kind of the best or the most valuable place to begin, do you think?  

Jim Bourke: Well, what I would do, Amy, it's not rocket science here. This is a very, believe it or not, easy process. Don't be mystified by the Artificial intelligence. Don't be scared. Don't run and hide. Literally have a puddle with your staff and talk about how the tax return goes through the firm right from day one, which some firms send out information, some, questionnaires to their clients to complete. 

Other firms simply meet with their clients, and they deliver the source documents needed for the tax prep process, but literally, Step through your tax process and identify all I would ask. I'm not asking someone to create right now all the automation around those steps, but simply, identify those steps, identify all the pain points. 

I encourage auditors to do the same thing when it comes to audit. We, our whole profession is filled with so many of these pain points. So, sit down, identify all of those pain points, and then when they're identify, you could sit down with someone that understands artificial intelligence. What role could artificial intelligence play? 

And not only that, but we also have HLB members that specialise in identifying those manual steps and automating those manual steps. So, engage them for advice on helping, you know, how can we automate these pieces? Fantastic advice. And, you know, we see amongst the network that firms who are at varying kind of stages of the journey and, and perhaps more advanced than others. Just to reiterate that kind of connecting with the network and learning from peers in terms of where they began and, and you know, perhaps learning from some of the pitfalls and the successes that they've had. So, kind of absolutely reach out to, to the HLB office to help connect you with those firms. 

Amy Spillard: And with that in mind, do you think there are still some potential barriers to AI adoption specifically within the tax function? Do you think it's kind of an open area where there's lots of opportunity. Are there any challenges or, or barriers, we need to be kind of diving into and, and picking? 

Jim Bourke: So, I would say absolutely like any other new technology, when we embrace new technology, there are always barriers. You know one of the biggest barriers that I've identified is there's the misconception that artificial intelligence is going to take jobs away from tax preparers. False! Artificial intelligence will not take jobs away. 

Artificial intelligence will put us in a position to be better, trusted advisors for our clients, right? It's going to help the young professionals out of school to do what they learned how to do. I mean, I mentioned it earlier, they need to learn in school how to take information off of source documents. And key it into tax software, a machine, a bot, artificial intelligence can do that. The barriers are that it's the misconception it's going to take jobs away. No, it's going to make us better at our current jobs. It's the misconception that it's very complicated. It's too complicated. This artificial intelligence. No, it's not. I'm not asking any tax practitioner to sit down, create bots and create algorithms to do this. All I'm asking them to do is identify the manual tasks and then engage those data scientists or those individuals to help with that process. It is not a mystery. It's not complicated. It's not going to take jobs away. It's really going to enhance what we do in the tax practice. 

Amy Spillard: Fantastic. And Bruce, perhaps just bouncing to you, were there any barriers or challenges that you came up against when first getting started that we can make other firms aware of? Or just things to look out for, I guess?  

Bruce Stanley: Yeah, I think we could really see the benefits of it.  I think when you're doing any kind of change implementation, if people have been doing something for a long time, one way they don't necessarily want to change, but I think when we could see the benefits so clearly that helped us get over that. 

One of the other things I think is just making sure that the staff are properly skilled on using the software there. I think we all probably have software packages that have a myriad of functions that we just don't use. I think just making sure that you're getting the best out of it. There's also obviously the cost and the regulatory issues, but you know, all the software that kind of pre-exist out there, like Hubdoc, obviously that's cleared for any regulatory issues that we would have. So, they're all fine. But yeah, I think it’s keeping the people in your firm informed on the change and really showing them what the benefits are because I think everybody just wants their life to be easier as Jim was saying, nobody wants to be there, kind of just doing data entry so if there's software that can do that, we should certainly adopt it. 

Amy Spillard: It's an interesting point actually and a challenge that we've seen come up kind of time and time again at various HLB events is when it comes to implementing technological change or new tools, especially in I guess, a relatively new field such as AI, those kind of polarizing opinions, particularly when it's within a firm and you've got some, perhaps personalities that are a little bit more resistant and kind of setting their ways of doing things, what can be a key challenge is trying to bring them along on the journey and make sure that everybody's as receptive and open-minded to adopting these new, new tools as possible. 

You touched upon demonstrating the benefits and showing the value that something like AI can have. Again, just in a practical sense, how did you go about doing that? You know, did you kind of implement and ask for forgiveness afterwards and present that back to the business and say, look, this is how much efficiency we've driven, or how much value we've driven?  How did you kind of, I guess, bring everybody on board and was that a challenge that you kind of came up against or was everyone kind of raring to go?  

Bruce Stanley: Most of the people were very open to change. We're kind of lucky like that in our practice, but we kept them informed. We were explaining from very beginning what software we were introducing, why we were introducing first and being very clear on on the benefits from day one, and then making sure that everybody was, was adequately trained on it, you know, so that nobody was just being given the software and told to get on with it. 

We had external consultants coming in and showing us how to get the most out of the software. And be really clear on the benefits of it as well, as I say that upskilling the staff and clear communication, we're key to it. 

Amy Spillard: I guess we've touched upon some of the risks and the challenges and again Jim, this is something that we've seen come up time and time again at the events is how do we regulate the use, specifically in AI and how do we put the appropriate kind of policy and procedure in place to make sure that it's being used in a risk free way. And with something that is so new, do we kind of think that it's going be difficult to regulate AI in the profession? And where do we kind of begin with that process?  

Jim Bourke: Amy, that's a really good question. You know, whenever we deploy new technologies in our profession there's always room where we ask about regulation and should it be regulated, you know, I'm out there, I am not convinced that Artificial intelligence's role in the tax practice in our profession requires regulation. It’s like anything else. Its changes will continue to happen as we introduce new technologies. I mean, the coolest thing is, you know, artificial intelligence. It's not Chat GPT for tax, right. Chat GPT has its roots in artificial intelligence, and I know the whole tax community and the accounting community and our HLB community, they're right now debating how to wrap their heads around that artificial intelligence. It’s different. It's really something that's long overdue. Technology is finally up to speed. It's finally moving quick so that now we're able to do this quicker than we've ever done it before. Processing speed is lightning fast.  There's so many different components of artificial intelligence, but when I look at it, I don't see regulation as a core component of it. 

I say embrace this new technology concept, and I say new when it's really not new. It's just that it's shown up on everyone's radar because now we're all about that. You know, we went to the cloud. That wasn't rocket science. We didn't require regulation. There were things that fell out that required regulation as we went to the cloud. It was privacy, it was security. So, you know, around privacy and security, that's still at first and foremost for all our firms, we are the trusted advisors protecting our client information. And I would say even as we go down this path with identifying opportunities for automating the manual task, specifically artificial intelligence, first and foremost is we're protecting that data that our clients entrust to us. 

Amy Spillard: Yeah, I know there's some, some work ongoing to update kind of data privacy rules to meet the kind of ever-changing world of AI. I guess gaps that aren't currently covered by things such as GDPR for example. Yes, so you know, still potentially some work to do it in that space. And I know Jim, we spoke about some of the challenges specifically around international work where AI is involved and we're kind of passing data from one jurisdiction to another. Yes. And you know, perhaps some of the difficulties that are going to come up there that regulation might solve in in the future. 

Jim Bourke: Yes, it seems like there's still a couple of gaps like that, that we need to fill for sure. Yes, and you're absolutely right. Again, it is not the concept AI that's requiring massive change. It's that this is the next level of technology that we're deploying in our profession. And as with every deployment of new technology, it gives rise to questions. How is that client data protected? Like you mentioned, where is that data going to sit? Is it going to sit in our country? Is there a chance that artificial intelligence could be doing calculations in another country? Could that data be stored in another country so it doesn't change the concepts. It causes greater awareness on those existing things. And again, it comes back to protection of client data and it's something that has exploded over the last few years.  

Amy Spillard: I guess with that in mind, is there anything, and you know, we spoke about kind of, collaboration and leaning on the network to hear from fellow firms in terms of what they've done and how they've got started so what can HLB be doing to support its members?  

Jim Bourke: Embrace AI for the future in terms of expanding into new service lines, driving efficiency and really leaning on AI. What could HLB be doing to, to support its members? I mean, what HLB could be doing, HLB is doing right now. Look at our conference that we're having, our global conference coming up in Madrid. We have artificial intelligence on the agenda. We're going to be talking about, or going be talking about its role. We're going, going to continue to create awareness about artificial intelligence. We've already identified firms around the globe that are specialising in helping companies with understanding artificial intelligence and the role that they can make. And we're inviting those firms to be part of HLB. When I look at HLB I look at the fact that we are out there ahead of the curve. We're cutting edge with respect to a lot of these new technologies. So just rest assured, if you're an HLB member out here in our space practicing, we have that aspect covered. 

We are always looking and identifying those opportunities. I mean, Amy, you know that as head of our affinity and relationship program with third parties out there today, we're identifying technology companies that are embedding ai. Machine learning utilising bots in their technology. So that is going to continue at a pace that we have never witnessed in the past. 

Amy Spillard: Yeah, there's some, some fantastic expertise within the network and as you said, both in terms of the firms and the progressive work that they're doing. And also our third party partners. So we'll just implore everyone if you need some advice or recommendations for the best tools to be using then please do reach out and get in touch. 

Lastly, before we wrap up, Bruce, Jim anything else that you'd like to kind of dive into today, specifically within the realms of AI and tax? You know, we've touched upon some of the challenges and the opportunities. Anything else that you think firms need to be aware of or considering at this point in time? 

Bruce Stanley: It's very important just to embrace change. And you know, our most successful clients are generally the most innovative ones, and we need to keep pace with their needs and their requirements. And AI is one of the ways which we can do that. You know, and as Jim's saying, it should be seen as a tool which will help us get our work done and improve our efficiencies and our capacities. 

I think a shortage of talent is one of the major problems that's facing practices everywhere. Everyone I talk to is talking about the difficulty of getting staff, so I think AI can, by increasing the capability to input data entry quickly can then free up staff time in order to concentrate on the more value adding activities, which is why our clients really come to us in the first place. That would be my take away from it is to embrace the change.  

Jim Bourke:  Amy, my takeaway would be just that don't be mystified by artificial intelligence. Understand it's just that next level of technology that's entering our practices. The entire profession is ripe for introduction of new technologies, and this is one that could really help us. So don't run a hide from it. Don't be afraid of it. Don't be mystified by it. It will not take our jobs away. And at the end of the day, I think we'll have better quality deliverables to our clients, and we'll be doing them in a much more efficient way and a plug for advisory, if we're utilising all of these technologies in the compliance area of tax, think about how much free time that we will now have to be better advisors to our clients.  

Amy Spillard:  Love that mindset and like you both said, all about having the kind of the right attitude to these types of things and embracing them.  

It has been an absolute pleasure to speak with you both and hear your insights and certainly more to come from HLB in terms of AI and various thought leadership, whether that's through the conferences, through our various marketing channels. There'll be plenty more to come on this but thank you both so much for your time. If anyone has any questions or wants to know any more, then please do reach out to any one of us, we'd be delighted to talk with you more.  

Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

HLB Podcast Eps 33: Upping the game: esports & tax

Speakers:

Amy Spillard, Head of Technology Partnerships, HLB
Michael Pahira, Senior Manager, Withum
Joshua Horowitz, Senior Tax Manager, Withum

Hello and welcome to HLB Cross Border Business Talks HLB's Global podcast series on international business topics.

Amy Spillard: Welcome to the HLB Podcast series Cross Border Business Talks. Today we're going to be diving into the world of Tax and gaming, and shining a light on some of the key challenges and opportunities that we're seeing in this space. My name is Amy Spillard, Head of technology partnerships here at HLB International, and today I'm joined by Michael Pahira, Senior Manager, and Joshua Horowitz, senior tax manager from our HLB member firm in North America Withum. So welcome everyone, and hi Michael and Joshua. Delighted to have you with us today. So yeah, maybe it’ll make sense Michael to kick off with you, if that's okay, and just to give us a rounded overview of the gaming industry with particular regard to the rise that we're seeing in the eSports space.

Michael Pahira: Sure. Well, the gaming industry you know, it's, it's been around a long time, but really recently we've seen a rise in competitive gaming in eSports and, and really if there was a, I don't want to call it a silver lining of the pandemic, but when everybody was home, one of the main forms of entertainment was watching someone's favorite streamer online, play a game, or watching an actual competition go on between two set teams, or now we're seeing. Competitions go on in college.

Joshua Horowitz: I personally discovered League of Legends during the pandemic when, you know, the LPL was playing overseas. So I, I could talk from personal experience that that's how it went.

Michael Pahira: Yeah. It became, it became huge. I mean, if you look at it from a numbers aspect, I think in 2020, eSports, in general, had a market value of a billion dollars.

They're expecting that to be 2 billion by 2025, and then 4 billion by 2030. That's incredible growth. Even in the investment sector. There were a few hundred million dollars invested into eSports, I think back in 2018. You know, we're looking at a few billion dollars now in, in 2022, 2023. So the rise in the professional circuit and where money's changing hands has been growing exponentially.

But where we see, a substantial amount of growth in eSports is that the collegiate circuit, the college circuit, has become almost like a breeding ground. Now for like, like the other traditional sports where for the new professional athletes, and the thing is, anybody can, can play it, right?

You don't have to be the biggest, the fastest, the strongest. Anybody can set up a club at a university set up a team, and then join one of the three or four college conferences that are currently available and compete competitively and sometimes for what they call scholarships. For money. So, the boom has been substantial.

I know my own alma mater built a brand-new eSports arena, when I was in school, eSports only took place in our dorm rooms, you know, after practice, you know, with baseball now it's, it's a legitimate competitive sport in college that is being taken seriously as though it should. Yeah.

Amy Spillard: And competing with you know, in-person sport, in, in the same kind of way it's getting if not overtaking in that, in that aspect, so.

Right. It's crazy. Yeah, absolutely crazy. Thank you. And so I guess you know thinking about kind of the work that you do specifically and that overlap between kind of the, the growth that we're seeing within the gaming industry and where tax kind of forms a part of that what does that kind of look like in a practical sense? And how is that kind of working at the moment? Joshua, perhaps if I come to you?

Joshua Horowitz: Sure. I mean, the tax side from a practical sense isn't much different than your normal sports that have been out there for a long time. You know, the biggest question, and there really isn't any answer for this right now, is regarding Nexus and taxability, at least in the United States of where tournaments are held.

If you're an individual player, you know, if you're an individual player who lives in New York, but you're playing in a tournament in California, there's a question of if you win money, where does that tax, does it, California? Is it New York? It, it's a very grey area at this moment. You know, but most players when they play for a team, the team will have the earnings give a K1 or W2 out to the players if they're an escort or they're an LLC and it'll pass through down to the players and they'll report it on their individual tax return, just like a professional player would.

Okay. Yeah, from the tax standpoint, you know, luckily, you know, we have rules in place already that make it pretty seamlessly easy to understand where tax returns fall here.

Amy Spillard: Wonderful. I was going to, that was going to be my next question was where there's perhaps a little bit of a grey area and where this is kind of relatively new and growing at such a rate.

You know, how, how that regulation is keeping up and you know, yeah. Where it's a grey area are things potentially falling through the gaps or is it working fairly seamlessly? How is that? Looking really at the moment.

Joshua Horowitz: So when it comes to grey areas and, and our government and tax code, I'd, I'd say it moves relatively slowly sometimes, unfortunately.

Mm-hmm. And a lot of the times it's up to the tax repair to determine the best course of action in sourcing that income and then, you know, seeing if the states will come and pick it up and give an argument over it. You know, I would argue that if you're playing online and you win a tournament in another state, probably should be sourced to where you win it, as you know, even if you're home.

But you know, there are more complex rules on that. There are some states that have these convenience for employer rules. So New York, Connecticut there's two more that I can't really think of right now. But if you play for a team that operates in that state, even if you're playing home, all your income is sourced to that home, to that state where your team's located. So there's, there's additional layers of complexity on top of everything.

Amy Spillard: Okay, wonderful and forgive my ignorance, but the majority kind of operating in this like team environment or is it a lot of kind of individual sports? What's the makeup of the eSports industry at the moment? Or is it a perfect mix of both?

Joshua Horowitz: I think it's a perfect mix of both. You know on the professional level it's, it's more of a team based. But you have, you know EA sports has been running Madden tournaments and sport tournaments for years, which are just individual players that, that win money.

Michael Pahira: Even if you play for a team, some of these athletes, they play for a team. The pros on the side, they also have their own streaming channel, which is another revenue source for them. Through advertising revenue donations, contributions again, all taxable events that are going on. So it's kind of a perfect blend. Depending on what the individual wants to do, maybe the individual doesn't want to play for a team or plays in kind of a single-player tournament, right?

Doesn't play for a team of four. They could, if there's a lot of latitude on what they can choose to do.

Amy Spillard: So that's something that kind of first came onto my radar was kind of during covid, that idea of and this is mind-blowing to me you know, contributions online, made from complete strangers to kind of fund, I guess that that lifestyle and is that stream of revenue through kind of donations and so on, is that treated differently to I guess like winning revenue or prizes as a team? How, or does it all come under the same like umbrella?

Joshua Horowitz: We're coming up with loaded questions already at nine o'clock in the morning. I love it. So, so typically how like a GoFundMe page works.

At least, you know, I could talk about raising for a film. So any donations into that film is considered income into them. Usually, you have expenses to offset it so there's no taxable income at the end of the day. This would be no different if, if people are donating to you to fund, your gaming adventure.

You know, some people could try to claim that it's a gift and try to get around that income. But that's a grey area and I probably would advise against doing that a hundred percent. But yeah, that would be normal income as revenue from winning a tournament or, you know, sponsorship income would, would be.

Amy Spillard: Amazing. Good, good for me to know. And so, yeah, I guess just through the kind of the conversation it's clear to me that you know, the kind of, the industry is moving at such a place that often it's going to be hard for you know, for the regulation and the, the understanding of this space to, to keep up at a similar rate.

So with that in mind, I guess, are there any kind of key, like cybersecurity or wealth management concerns as we see this kind of rapid rise in e-gaming?

Michael Pahira: Yeah, the cybersecurity aspect is always going to be a big, big point from the eSports industry, obviously, because the field of play is completely online, right?

The professional circuit kind of has it down pat. They kind of know that this is a pain point. They have a lot of money changing hands. You can go on DraftKings and, and. maybe, you bet on your favorite eSports team on a tournament coming up. So with that aspect, with the money changing hands, they kind of know that cybersecurity is a big issue to prevent cheating.

Right? But at the collegiate circuit, this is where it now kind of gets disjointed, right? Because the collegiate circuit is so young they kind of don't have a code of conduct, right? Or a code of engagement for teams or players. So the cybersecurity aspect from, based on the individuals that we've spoken to, it's not even on their radar yet.

And really that's kind of how it is with everybody in business. Nobody really thinks about the cybersecurity aspect because it's so expensive until a breach happens and now you're already past the point of no return. And one thing we look at, especially in colleges I can't remember the study off the top of my head, this statistical analysis of industries and where they rank in terms of cybersecurity, universities and colleges in the states rank dead last. Right. So now with the emergence of eSports, you've essentially opened up a new door for hackers and you know, evildoers to come in and, and either hold you ransom for the various social security numbers that we know colleges have.

Or other types of intellectual property that you might not want to get into the wrong hands, it's just opening up another avenue. And it'd be prudent for, I'd say for the athletic directors, the university CIOs, to start thinking about this seriously because you don't want to be that first school or that first university that has a big cyber breach.

Joshua Horowitz: Even on the professional level with all the cybersecurity that they have. You know, we had, a couple of months ago, unfortunately, Riot Games had a breach, which is, which runs League of Legends. So that's the largest gaming company out there for eSports right now. And they were getting attacked. So if you're not thinking about this now to like insurance, if it, you do it after the fire, it's too late.

So you need to, you know, be on top of it and, and get ahead of it from a cybersecurity standpoint.

Michael Pahira: Josh, I'm glad you brought that up, because the schools are really, they're relying on the gaming publisher right now for their cybersecurity. They figure the publisher when, you know, they host the game, so it's kind of one of their mo’s is to ensure that nobody's hacking in, nobody's cheating.

But when you're seeing in the actual marketplace that the publisher's getting hacked and held for ransom, for multimillion dollars, you know, they're just as vulnerable as you are and they do take it seriously.

Amy Spillard: Do you think the publishers of those games and those that are hosting, do you think there's kind of a solid awareness there and an understanding and it's kind of the, the colleges that need to, to keep up are they kind of leading a, a positive example?

Is there enough awareness what's kind of the state of play there, do you think? Or is it going to take a big breach to kind of, you know, show unfortunately here is a prime example and you guys better move quick?

Joshua Horowitz: So, Unfortunately, as businesses work in the US it's probably going to take a big breach of a college before people take it seriously.

We know the publishers take it seriously. You know, the professional circuit is very sec, as secure as it can be. You know, you're never a hundred percent secure you know, out, out there. But yeah, unfortunately, I think once a big breach happens, people will say, okay, I got to look at this more seriously.

Even though they are aware of it, they know it exists. You know, unfortunately, it's just not a big high priority now.

Amy Spillard: Is that kind of an attitude or do you think it's like a funding issue or I guess they've got other things on as well? Combination of all of the above.

Michael Pahira: I don't, I don't think it'd be a funding issue for universities, especially stateside.

I mean, I mean, I feel like. Most of them are lush with cash. Especially the bigger universities. I, I don't think the expense is really something that shies them away. I think it's, it's just the lack of awareness to it and, not thinking that we are opening this new door that could potentially lead to a breach.

And it's just, it's not being thought about yet. It's, it's being thought about how do we run the league? You know, how do we. Get the best players and run our team and make sure that their GPAs are there, so where that they're eligible to compete. I think they're thinking of those aspects right now and not cybersecurity yet. But unfortunately, as Josh said, I think it's going to take a big breach for some eyes to be open toward this.

Amy Spillard: Interesting. Yeah, interesting that, you know, they're willing to, you know, like you said, kind of build, build those arenas and you know, put the funding and the support in elsewhere and kind of the, the, the rest needs to follow pretty quickly I guess.

Joshua Horowitz: And then, and then your other question on money management side. That is something that should be taken extremely seriously for professional and collegiate players. Since collegiate players are now able to earn NIL money, name, image Likeness Act came in and college players who get paid for their play essentially now but with eSports, the retirement age is so young that there is a very short window to earn your big, big check.

Most of the retirement age, I believe is 25 right now. I'm past my prime. Same. Yeah. So say the same for me. You know, and, and a lot of these professional players are starting at 12, 13, 14 years old when, you know, they're in their prime of being able to click a millisecond faster than anybody else.

That, you know, you have a nine 10-year gap to save four or $5 million without way when you retire, you're able to, you know, live a comfortable lifestyle without, you know, having to worry about work. You know, it's not so, it's not so different than your typical N F L. Player, you know, the NFL, the career's three years.

So these guys graduate college at 22 by 25. Some, most of them are out the league, unfortunately, and if you're not thinking about saving for the future, and you know, you're thinking about, oh, I got all this money now, let me go spend this. I know that I, if I was an 18-year-old and I was making $2 million a year, I'd have a, a much nicer car than the Mazda I drove around.

But if you're not thinking about, you know, the future, you know, I think the statistics say after retirement three to five athletes in basketball go broke four to five and football go broke. You know, it's something that as fiduciaries in the marketplace and CPAs, we try to teach our clients about being responsible, you know, with everything and how taxes work and how to make sure that should something happen, you're taken care of, and it's so hard to teach teenagers, and athletes.

Amy Spillard: I was just about to say, you know, you think back to when you were kind of you know, 17 or 18 years old. Are you thinking about, you know, wealth management and you know how to be doing your taxes properly and how to be approaching this stuff responsibly?

Think if you were handed, you know, 5 million within the short space of years, are you going to be spending that wisely and managing it properly? And like you said, being able to kind of speak to that group and educate them and make sure that that's heard and listened to is, a huge challenge.

So you know, that responsibility perhaps almost, you know, sits with the colleges. They've got that close relationship there and you know, they're the ones that can be, you know, driving that message home and providing that education if they're providing all of the other support around it as well.

Joshua Horowitz: I mean, let me just give you some numbers to how much they actually have to save by the age of 25. This is back a year and, you know, it hasn't been adjusted for the new interest rates of the world. But, as of 2021 if you wanted to spend $5,000 a month for the rest of your life, you'd have to save 2.8 million dollars by the time you're 25. If you wanted it to be 10,000 per month, you need 6.4 and 20,000 you need 14.1 million. So you need to really be thinking conservatively and you know, really putting money away to save for the future. Because when you're 25 you have a good 50, 60, 70 years ahead of you still. And most people don't think that way

Michael Pahira: And it's really hard to teach a teenager or an early 20-something, that type of lesson right there.

So the universities especially really should, you know, deliver this type of education, especially if they're, if they have these athletes now that are making. The, you know, a lot of money off, off their name, image, and likeness now, because this is a brand-new landscape in college. And you know, we'd like to see all, all these kids, all these athletes, you know, be aware to save for your retirement, that it's a short lifespan if you're going to, if you're going to stay in this arena for a while.

Joshua Horowitz: There's a lot of athletes in the collegiate space that are earning seven figures just on the NIL from advertising and you know, a bunch of states have expanded that to the high school level. So you have these top QBs in, in the football space, landing those six-figure deals in high school that are going to turn to seven-figure deals in college, and by the time they're in the NFL, they're already a multimillionaire.

So, you know, the money is shifting downward. It's, it, it is great for the industry, it's great for college sports. You know, unfortunately, I think 1% of all collegiate athletes make it to the pros. Less than that. So if you are able to generate some income while you're in college, and start saving for your future you know, it's just a great thing for, for these athletes.

Amy Spillard: And just talking about how colleges or universities are perhaps struggling to keep up, with the pace of change and we've talked around kind of education and the infrastructural support that sit around this kind of relatively new space. When it comes to regulation, do you think that's keeping up with the pace of change and the pace of growth, are there still some significant gaps? It's a hard space to regulate I imagine.

Michael Pahira: At the collegiate circuit, it's very hard to regulate because you have four or five conferences with different rule sets in each one of them. So it's, it's not like NCA football where everybody plays by the same rules regardless of what school you're in, and that mainly comes because the NCAA wanted nothing to do with eSports in 2019.

They wanted to kick the can down the road. But if anybody knows the NCAA when they see the amount of money that's in this industry and the amount of money that's going to be changing hands through gambling. I'd say it's a certainty that one day they're going to revisit this and want to come back to it.

Cuz if there's a dollar to be made, they're going to want to have something to do with it. And of course that also expands the question, well what happens to those other collegiate conferences that popped up? Is there going to be competition between the two or is there going to be one set for one, one set of teams and then, or one set of schools and then another rule set for another who follow the NCA?

There's a lot of question marks that are going to come down the pike in this issue of regulation.

Amy Spillard: Is anyone kind of closely looking at that or owning that at the moment? Or is everybody kind of waiting for somebody else to,

Michael Pahira: I'd say they're, they're waiting and trying at the same time to develop their own type of regulation within their own conference.

They've seen substantial growth over the past couple of years. I think that they're trying to keep their heads above water with a lot of the back-office operations, knowing if the players are eligible, the scheduling and all that stuff. So in terms of regulation, I think they kind of put it on the back burner and like the cybersecurity, it, it might take You know, maybe one big event for them to say, maybe we need to focus on the regulation aspect more.

Make sure that whoever is signing in is who they say they are. Or this team is who they say they are because they're not in front of your face anymore in college. They're competing over the internet and everybody's not complete. They're competing on a physical field of play anymore.

Amy Spillard: So I guess that kind of feeds on nicely to your work and, you know, maybe some of the challenges that you are seeing when it comes to you know, kind of advising on that piece. What would be really interesting is kind of how did this like, come about for you guys? Like how did you get started? And what are some of the key challenges that you're seeing when it comes to kind of advising on this eSports and, and the taxation of that Josh?

Joshua Horowitz: Yeah. So how this all got started? You know, I started the sports and entertainment niche of the firm about 10 years ago with my colleague Harris Solis. We took everything we love outside of accounting and said, this is what we want to do and this is the industry we want to be in and, you know, luckily enough Withum is very entrepreneurial with how they treat their staff.

So they said, put together a business plan we'll approve it, and here's $10,000 go run with it. See who you can meet in the industry. Five years later, I mentioned eSports to, I think I was the youngest person in the room by about 15 years, and all the partners looked at me and laughed and said, you can't make money playing video games.

And I said, yes you can. You know, this is, this is where the world's going, you know, it's starting to grow. You're starting to see professional athletes put money in there. I think at that point, Robert Craft and Tom Brady had just invested in their first eSports team. The Wilpons had just who owned the Mets at that point, had just came out with NYXL.

So you're starting to see these teams pop up here and there and it was getting traction, but you know, just like any new industry, you know, it takes a lot for people to wrap their heads around it to this day and age, I still think that if I brought it into a room of, you know, People that are 15 years older than me, they'd still look at me and say, I have no idea what you're talking about.

But now we can say, look, it's a 2 billion industry, going to be a 4 billion industry. Here's the, here's the metrics. And you know that it's come a whole long way from there. Thankfully, you know, Mike reached out about two years ago saying, I have a huge eSports passion and this is something I want to do.

So Mike is, is the co-leader with me on the eSports niche, which, which is great. Cuz I love working with a guy. We have a lot of fun together working and all that stuff. But yeah, it's certainly come a long way and there's a long way to still go. You know, they're still behind all older professional sports, or I'll say established professional sports in, in the US. But eSports is probably the easiest sport to grow because you don't need weather, you don't need, you know, pandemic hits. They could keep playing. No injuries? No. Well, I mean there are, there are major carpal tunnel

Amy Spillard: Repetitive strain? I was about to say.

Joshua Horowitz: But that's actually, you know, I'm glad you brought up injuries because that is, An area where there's major need of help. Absolutely. The insurance side hasn't really caught up to professional eSports yet. I know from a few insurance companies that I've, I've talked to, they've been looking at this.

There was an l I think it was an LPL player who tore all of his ligaments in his thumb. He was their jungler for League of Legends. That's the fourth guy who goes up and wanders around for anyone who doesn't know League of Legends, and he tore all of his ligaments in his thumb, he was their best player, but he didn't have insurance and he had to retire because he can't click anymore.

It, it took a long time for collegiate athletes to understand insurance from a football aspect. I believe it was about three or four years ago, there was one collegiate player who slated to be a first-rounder, and had the proper insurance in place, where if he got hurt in college and slowed down the draft, he'd still be protected.

He blew out his knee in a bowl and was drafted, I think in the fourth round. But because he had the insurance in place, he got the price tag of 20 million, which is what a first-rounder gets. So he still was able to protect himself from that standpoint. You know, there's currently no draft, so it's hard to put an evaluation on that.

But if you're making a million dollars or $2 million in a year playing eSports just to take out some insurance to protect yourself, in case you get carpal tunnel or you tear ligaments, or you know, your eyesight goes, you know, that's just another layer of understanding that needs to happen.

Michael Pahira: You know, eSports now is, you know, is where football was for college 130 years ago. Right. You know, I'm sure the same conversations were had where it's, I. You know, you had some guy bring up, Hey, why don't we institute a football team into college? And you know, the old guys are saying, you know, football, it's a game.

Like, why would we, why do we need that at university, it's kind of the same aspect. And as eSports will evolve in the collegiate circuit, the amateur circuit, the insurance aspect and all other financial aspects are going to evolve with it. But you know, like Josh said, it's not there yet, but it will get there.

Amy Spillard: When it comes to that insurance piece, do you guys take an advisory role? You know, are you kind of strongly recommending these things? Do you have insurance partners who are kind of progressive in this space that you would recommend? How does that advisory piece kind of work for you?

Joshua Horowitz: So, you know, with any of our athletes, we want to work with all their partners on there. When you're a professional athlete, you have to have all your pieces connected. You know, you have to have your accountants speak with your wealth managers, speak with the insurance guys to make sure we're all on the same page to protect the athlete. It's no different here. Luckily we do have insurance companies that we are able to talk to about this, that handle professional sports and are well aware of eSports.

And I know one has actually put together a policy in eSports previously. But yeah we are the advisory piece. You know, we, we don't sell insurance. It's not our expertise, but we know to ask a professional athlete, Hey, do you have insurance? You know, are you covered? And then at least start the conversation.

Because we want to protect our clients at the end of the day at all costs, you know? We're not just your accountant. You know, we want to, we're more than that. We're, we want to be the trusted advisor for all of our clients and make sure that we understand everything about their companies, everything about their lifestyles, and, you know, we want to protect them.

Whether or not we, we have the expertise to handle that. We have built a network of trusted professionals that, you know, we are able to refer to and, and call upon to make sure that our clients are protected.

Amy Spillard: Amazing. Well, there's an incredible opportunity, isn't there? You know, whilst we talked around some of the gaps that can be seen in kind of pairing the regulation is keeping up and so on, you know, those gaps also provide the perfect opportunity for you guys to step in where it is all relatively new and say, look, you know, these are the things that you might not have thought about that, you know, we've seen before.

We understand and you should be in here. Right? So incredible opportunity. And I guess would that in mind would be keen to know. Is there any kind of advice, I guess for other HLB firms that are perhaps kind of kind of dabbling in this space or kind of considering any advice that you might have in terms of kind of starting out or key challenges or any words of wisdom?

Michael Pahira: I would say for any of our affiliates to always just think athlete inclined centric on this, right? The care for the athlete comes first and foremost before anything because the market is taking it very, very seriously and, and not to, not to sleep on it because it's, it's coming up quickly and it's going to be growing and growing and growing and it doesn't look like there's any signs if it's slowing down any time soon. So I would say for those firms to prepare for it, look into it, and then, and take it seriously.

Joshua Horowitz: I would also say download one of the games and try it out yourself. Because understanding the games and understanding how these players play and make money, you know, watch a couple of Twitch streams you know, it goes a long way when speaking with your clients, you know, to understand the entire industry.

You know, Mike and I, I'll say we're lucky, we grew up playing games, so, you know, we have a major passion for this and yes, we love this inside and out. And you know, when you could connect what you love with your clients and then just get that additional level of appreciation and understanding with them, that goes a long way as well.

Michael Pahira: The passion, these athletes have such a passion for the industry. Even the administrators and the elite commissioners, they're all very passionate about eSports and video games in general, and the fact that we share that passion, you meet on level ground. You know, so if you have that passion, this is going to be a very interesting and very dynamic industry going forward.

Amy Spillard: Amazing. Well really, really interesting and exciting summary of kind of this space and, and where it's headed and kind of your guys' experience with it. So you know, really appreciate your insight and your expertise. It's something that was kind of fairly new to me and it's just been really fascinating, kind of getting into the detail and, and understanding your work.

So thanks for sharing that with me. Really appreciate your time guys. Thank you so much.

Michael Pahira: Thank you, Amy. Really appreciate it.

Joshua Horowitz: Thank you.

Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

HLB Podcast Eps 33: Upping the game: esports & tax

Speakers:

Amy Spillard, Head of Technology Partnerships, HLB
Michael Pahira, Senior Manager, Withum
Joshua Horowitz, Senior Tax Manager, Withum

Hello and welcome to HLB Cross Border Business Talks HLB's Global podcast series on international business topics.

Amy Spillard: Welcome to the HLB Podcast series Cross Border Business Talks. Today we're going to be diving into the world of Tax and gaming, and shining a light on some of the key challenges and opportunities that we're seeing in this space. My name is Amy Spillard, Head of technology partnerships here at HLB International, and today I'm joined by Michael Pahira, Senior Manager, and Joshua Horowitz, senior tax manager from our HLB member firm in North America Withum. So welcome everyone, and hi Michael and Joshua. Delighted to have you with us today. So yeah, maybe it’ll make sense Michael to kick off with you, if that's okay, and just to give us a rounded overview of the gaming industry with particular regard to the rise that we're seeing in the eSports space.

Michael Pahira: Sure. Well, the gaming industry you know, it's, it's been around a long time, but really recently we've seen a rise in competitive gaming in eSports and, and really if there was a, I don't want to call it a silver lining of the pandemic, but when everybody was home, one of the main forms of entertainment was watching someone's favorite streamer online, play a game, or watching an actual competition go on between two set teams, or now we're seeing. Competitions go on in college.

Joshua Horowitz: I personally discovered League of Legends during the pandemic when, you know, the LPL was playing overseas. So I, I could talk from personal experience that that's how it went.

Michael Pahira: Yeah. It became, it became huge. I mean, if you look at it from a numbers aspect, I think in 2020, eSports, in general, had a market value of a billion dollars.

They're expecting that to be 2 billion by 2025, and then 4 billion by 2030. That's incredible growth. Even in the investment sector. There were a few hundred million dollars invested into eSports, I think back in 2018. You know, we're looking at a few billion dollars now in, in 2022, 2023. So the rise in the professional circuit and where money's changing hands has been growing exponentially.

But where we see, a substantial amount of growth in eSports is that the collegiate circuit, the college circuit, has become almost like a breeding ground. Now for like, like the other traditional sports where for the new professional athletes, and the thing is, anybody can, can play it, right?

You don't have to be the biggest, the fastest, the strongest. Anybody can set up a club at a university set up a team, and then join one of the three or four college conferences that are currently available and compete competitively and sometimes for what they call scholarships. For money. So, the boom has been substantial.

I know my own alma mater built a brand-new eSports arena, when I was in school, eSports only took place in our dorm rooms, you know, after practice, you know, with baseball now it's, it's a legitimate competitive sport in college that is being taken seriously as though it should. Yeah.

Amy Spillard: And competing with you know, in-person sport, in, in the same kind of way it's getting if not overtaking in that, in that aspect, so.

Right. It's crazy. Yeah, absolutely crazy. Thank you. And so I guess you know thinking about kind of the work that you do specifically and that overlap between kind of the, the growth that we're seeing within the gaming industry and where tax kind of forms a part of that what does that kind of look like in a practical sense? And how is that kind of working at the moment? Joshua, perhaps if I come to you?

Joshua Horowitz: Sure. I mean, the tax side from a practical sense isn't much different than your normal sports that have been out there for a long time. You know, the biggest question, and there really isn't any answer for this right now, is regarding Nexus and taxability, at least in the United States of where tournaments are held.

If you're an individual player, you know, if you're an individual player who lives in New York, but you're playing in a tournament in California, there's a question of if you win money, where does that tax, does it, California? Is it New York? It, it's a very grey area at this moment. You know, but most players when they play for a team, the team will have the earnings give a K1 or W2 out to the players if they're an escort or they're an LLC and it'll pass through down to the players and they'll report it on their individual tax return, just like a professional player would.

Okay. Yeah, from the tax standpoint, you know, luckily, you know, we have rules in place already that make it pretty seamlessly easy to understand where tax returns fall here.

Amy Spillard: Wonderful. I was going to, that was going to be my next question was where there's perhaps a little bit of a grey area and where this is kind of relatively new and growing at such a rate.

You know, how, how that regulation is keeping up and you know, yeah. Where it's a grey area are things potentially falling through the gaps or is it working fairly seamlessly? How is that? Looking really at the moment.

Joshua Horowitz: So when it comes to grey areas and, and our government and tax code, I'd, I'd say it moves relatively slowly sometimes, unfortunately.

Mm-hmm. And a lot of the times it's up to the tax repair to determine the best course of action in sourcing that income and then, you know, seeing if the states will come and pick it up and give an argument over it. You know, I would argue that if you're playing online and you win a tournament in another state, probably should be sourced to where you win it, as you know, even if you're home.

But you know, there are more complex rules on that. There are some states that have these convenience for employer rules. So New York, Connecticut there's two more that I can't really think of right now. But if you play for a team that operates in that state, even if you're playing home, all your income is sourced to that home, to that state where your team's located. So there's, there's additional layers of complexity on top of everything.

Amy Spillard: Okay, wonderful and forgive my ignorance, but the majority kind of operating in this like team environment or is it a lot of kind of individual sports? What's the makeup of the eSports industry at the moment? Or is it a perfect mix of both?

Joshua Horowitz: I think it's a perfect mix of both. You know on the professional level it's, it's more of a team based. But you have, you know EA sports has been running Madden tournaments and sport tournaments for years, which are just individual players that, that win money.

Michael Pahira: Even if you play for a team, some of these athletes, they play for a team. The pros on the side, they also have their own streaming channel, which is another revenue source for them. Through advertising revenue donations, contributions again, all taxable events that are going on. So it's kind of a perfect blend. Depending on what the individual wants to do, maybe the individual doesn't want to play for a team or plays in kind of a single-player tournament, right?

Doesn't play for a team of four. They could, if there's a lot of latitude on what they can choose to do.

Amy Spillard: So that's something that kind of first came onto my radar was kind of during covid, that idea of and this is mind-blowing to me you know, contributions online, made from complete strangers to kind of fund, I guess that that lifestyle and is that stream of revenue through kind of donations and so on, is that treated differently to I guess like winning revenue or prizes as a team? How, or does it all come under the same like umbrella?

Joshua Horowitz: We're coming up with loaded questions already at nine o'clock in the morning. I love it. So, so typically how like a GoFundMe page works.

At least, you know, I could talk about raising for a film. So any donations into that film is considered income into them. Usually, you have expenses to offset it so there's no taxable income at the end of the day. This would be no different if, if people are donating to you to fund, your gaming adventure.

You know, some people could try to claim that it's a gift and try to get around that income. But that's a grey area and I probably would advise against doing that a hundred percent. But yeah, that would be normal income as revenue from winning a tournament or, you know, sponsorship income would, would be.

Amy Spillard: Amazing. Good, good for me to know. And so, yeah, I guess just through the kind of the conversation it's clear to me that you know, the kind of, the industry is moving at such a place that often it's going to be hard for you know, for the regulation and the, the understanding of this space to, to keep up at a similar rate.

So with that in mind, I guess, are there any kind of key, like cybersecurity or wealth management concerns as we see this kind of rapid rise in e-gaming?

Michael Pahira: Yeah, the cybersecurity aspect is always going to be a big, big point from the eSports industry, obviously, because the field of play is completely online, right?

The professional circuit kind of has it down pat. They kind of know that this is a pain point. They have a lot of money changing hands. You can go on DraftKings and, and. maybe, you bet on your favorite eSports team on a tournament coming up. So with that aspect, with the money changing hands, they kind of know that cybersecurity is a big issue to prevent cheating.

Right? But at the collegiate circuit, this is where it now kind of gets disjointed, right? Because the collegiate circuit is so young they kind of don't have a code of conduct, right? Or a code of engagement for teams or players. So the cybersecurity aspect from, based on the individuals that we've spoken to, it's not even on their radar yet.

And really that's kind of how it is with everybody in business. Nobody really thinks about the cybersecurity aspect because it's so expensive until a breach happens and now you're already past the point of no return. And one thing we look at, especially in colleges I can't remember the study off the top of my head, this statistical analysis of industries and where they rank in terms of cybersecurity, universities and colleges in the states rank dead last. Right. So now with the emergence of eSports, you've essentially opened up a new door for hackers and you know, evildoers to come in and, and either hold you ransom for the various social security numbers that we know colleges have.

Or other types of intellectual property that you might not want to get into the wrong hands, it's just opening up another avenue. And it'd be prudent for, I'd say for the athletic directors, the university CIOs, to start thinking about this seriously because you don't want to be that first school or that first university that has a big cyber breach.

Joshua Horowitz: Even on the professional level with all the cybersecurity that they have. You know, we had, a couple of months ago, unfortunately, Riot Games had a breach, which is, which runs League of Legends. So that's the largest gaming company out there for eSports right now. And they were getting attacked. So if you're not thinking about this now to like insurance, if it, you do it after the fire, it's too late.

So you need to, you know, be on top of it and, and get ahead of it from a cybersecurity standpoint.

Michael Pahira: Josh, I'm glad you brought that up, because the schools are really, they're relying on the gaming publisher right now for their cybersecurity. They figure the publisher when, you know, they host the game, so it's kind of one of their mo’s is to ensure that nobody's hacking in, nobody's cheating.

But when you're seeing in the actual marketplace that the publisher's getting hacked and held for ransom, for multimillion dollars, you know, they're just as vulnerable as you are and they do take it seriously.

Amy Spillard: Do you think the publishers of those games and those that are hosting, do you think there's kind of a solid awareness there and an understanding and it's kind of the, the colleges that need to, to keep up are they kind of leading a, a positive example?

Is there enough awareness what's kind of the state of play there, do you think? Or is it going to take a big breach to kind of, you know, show unfortunately here is a prime example and you guys better move quick?

Joshua Horowitz: So, Unfortunately, as businesses work in the US it's probably going to take a big breach of a college before people take it seriously.

We know the publishers take it seriously. You know, the professional circuit is very sec, as secure as it can be. You know, you're never a hundred percent secure you know, out, out there. But yeah, unfortunately, I think once a big breach happens, people will say, okay, I got to look at this more seriously.

Even though they are aware of it, they know it exists. You know, unfortunately, it's just not a big high priority now.

Amy Spillard: Is that kind of an attitude or do you think it's like a funding issue or I guess they've got other things on as well? Combination of all of the above.

Michael Pahira: I don't, I don't think it'd be a funding issue for universities, especially stateside.

I mean, I mean, I feel like. Most of them are lush with cash. Especially the bigger universities. I, I don't think the expense is really something that shies them away. I think it's, it's just the lack of awareness to it and, not thinking that we are opening this new door that could potentially lead to a breach.

And it's just, it's not being thought about yet. It's, it's being thought about how do we run the league? You know, how do we. Get the best players and run our team and make sure that their GPAs are there, so where that they're eligible to compete. I think they're thinking of those aspects right now and not cybersecurity yet. But unfortunately, as Josh said, I think it's going to take a big breach for some eyes to be open toward this.

Amy Spillard: Interesting. Yeah, interesting that, you know, they're willing to, you know, like you said, kind of build, build those arenas and you know, put the funding and the support in elsewhere and kind of the, the, the rest needs to follow pretty quickly I guess.

Joshua Horowitz: And then, and then your other question on money management side. That is something that should be taken extremely seriously for professional and collegiate players. Since collegiate players are now able to earn NIL money, name, image Likeness Act came in and college players who get paid for their play essentially now but with eSports, the retirement age is so young that there is a very short window to earn your big, big check.

Most of the retirement age, I believe is 25 right now. I'm past my prime. Same. Yeah. So say the same for me. You know, and, and a lot of these professional players are starting at 12, 13, 14 years old when, you know, they're in their prime of being able to click a millisecond faster than anybody else.

That, you know, you have a nine 10-year gap to save four or $5 million without way when you retire, you're able to, you know, live a comfortable lifestyle without, you know, having to worry about work. You know, it's not so, it's not so different than your typical N F L. Player, you know, the NFL, the career's three years.

So these guys graduate college at 22 by 25. Some, most of them are out the league, unfortunately, and if you're not thinking about saving for the future, and you know, you're thinking about, oh, I got all this money now, let me go spend this. I know that I, if I was an 18-year-old and I was making $2 million a year, I'd have a, a much nicer car than the Mazda I drove around.

But if you're not thinking about, you know, the future, you know, I think the statistics say after retirement three to five athletes in basketball go broke four to five and football go broke. You know, it's something that as fiduciaries in the marketplace and CPAs, we try to teach our clients about being responsible, you know, with everything and how taxes work and how to make sure that should something happen, you're taken care of, and it's so hard to teach teenagers, and athletes.

Amy Spillard: I was just about to say, you know, you think back to when you were kind of you know, 17 or 18 years old. Are you thinking about, you know, wealth management and you know how to be doing your taxes properly and how to be approaching this stuff responsibly?

Think if you were handed, you know, 5 million within the short space of years, are you going to be spending that wisely and managing it properly? And like you said, being able to kind of speak to that group and educate them and make sure that that's heard and listened to is, a huge challenge.

So you know, that responsibility perhaps almost, you know, sits with the colleges. They've got that close relationship there and you know, they're the ones that can be, you know, driving that message home and providing that education if they're providing all of the other support around it as well.

Joshua Horowitz: I mean, let me just give you some numbers to how much they actually have to save by the age of 25. This is back a year and, you know, it hasn't been adjusted for the new interest rates of the world. But, as of 2021 if you wanted to spend $5,000 a month for the rest of your life, you'd have to save 2.8 million dollars by the time you're 25. If you wanted it to be 10,000 per month, you need 6.4 and 20,000 you need 14.1 million. So you need to really be thinking conservatively and you know, really putting money away to save for the future. Because when you're 25 you have a good 50, 60, 70 years ahead of you still. And most people don't think that way

Michael Pahira: And it's really hard to teach a teenager or an early 20-something, that type of lesson right there.

So the universities especially really should, you know, deliver this type of education, especially if they're, if they have these athletes now that are making. The, you know, a lot of money off, off their name, image, and likeness now, because this is a brand-new landscape in college. And you know, we'd like to see all, all these kids, all these athletes, you know, be aware to save for your retirement, that it's a short lifespan if you're going to, if you're going to stay in this arena for a while.

Joshua Horowitz: There's a lot of athletes in the collegiate space that are earning seven figures just on the NIL from advertising and you know, a bunch of states have expanded that to the high school level. So you have these top QBs in, in the football space, landing those six-figure deals in high school that are going to turn to seven-figure deals in college, and by the time they're in the NFL, they're already a multimillionaire.

So, you know, the money is shifting downward. It's, it, it is great for the industry, it's great for college sports. You know, unfortunately, I think 1% of all collegiate athletes make it to the pros. Less than that. So if you are able to generate some income while you're in college, and start saving for your future you know, it's just a great thing for, for these athletes.

Amy Spillard: And just talking about how colleges or universities are perhaps struggling to keep up, with the pace of change and we've talked around kind of education and the infrastructural support that sit around this kind of relatively new space. When it comes to regulation, do you think that's keeping up with the pace of change and the pace of growth, are there still some significant gaps? It's a hard space to regulate I imagine.

Michael Pahira: At the collegiate circuit, it's very hard to regulate because you have four or five conferences with different rule sets in each one of them. So it's, it's not like NCA football where everybody plays by the same rules regardless of what school you're in, and that mainly comes because the NCAA wanted nothing to do with eSports in 2019.

They wanted to kick the can down the road. But if anybody knows the NCAA when they see the amount of money that's in this industry and the amount of money that's going to be changing hands through gambling. I'd say it's a certainty that one day they're going to revisit this and want to come back to it.

Cuz if there's a dollar to be made, they're going to want to have something to do with it. And of course that also expands the question, well what happens to those other collegiate conferences that popped up? Is there going to be competition between the two or is there going to be one set for one, one set of teams and then, or one set of schools and then another rule set for another who follow the NCA?

There's a lot of question marks that are going to come down the pike in this issue of regulation.

Amy Spillard: Is anyone kind of closely looking at that or owning that at the moment? Or is everybody kind of waiting for somebody else to,

Michael Pahira: I'd say they're, they're waiting and trying at the same time to develop their own type of regulation within their own conference.

They've seen substantial growth over the past couple of years. I think that they're trying to keep their heads above water with a lot of the back-office operations, knowing if the players are eligible, the scheduling and all that stuff. So in terms of regulation, I think they kind of put it on the back burner and like the cybersecurity, it, it might take You know, maybe one big event for them to say, maybe we need to focus on the regulation aspect more.

Make sure that whoever is signing in is who they say they are. Or this team is who they say they are because they're not in front of your face anymore in college. They're competing over the internet and everybody's not complete. They're competing on a physical field of play anymore.

Amy Spillard: So I guess that kind of feeds on nicely to your work and, you know, maybe some of the challenges that you are seeing when it comes to you know, kind of advising on that piece. What would be really interesting is kind of how did this like, come about for you guys? Like how did you get started? And what are some of the key challenges that you're seeing when it comes to kind of advising on this eSports and, and the taxation of that Josh?

Joshua Horowitz: Yeah. So how this all got started? You know, I started the sports and entertainment niche of the firm about 10 years ago with my colleague Harris Solis. We took everything we love outside of accounting and said, this is what we want to do and this is the industry we want to be in and, you know, luckily enough Withum is very entrepreneurial with how they treat their staff.

So they said, put together a business plan we'll approve it, and here's $10,000 go run with it. See who you can meet in the industry. Five years later, I mentioned eSports to, I think I was the youngest person in the room by about 15 years, and all the partners looked at me and laughed and said, you can't make money playing video games.

And I said, yes you can. You know, this is, this is where the world's going, you know, it's starting to grow. You're starting to see professional athletes put money in there. I think at that point, Robert Craft and Tom Brady had just invested in their first eSports team. The Wilpons had just who owned the Mets at that point, had just came out with NYXL.

So you're starting to see these teams pop up here and there and it was getting traction, but you know, just like any new industry, you know, it takes a lot for people to wrap their heads around it to this day and age, I still think that if I brought it into a room of, you know, People that are 15 years older than me, they'd still look at me and say, I have no idea what you're talking about.

But now we can say, look, it's a 2 billion industry, going to be a 4 billion industry. Here's the, here's the metrics. And you know that it's come a whole long way from there. Thankfully, you know, Mike reached out about two years ago saying, I have a huge eSports passion and this is something I want to do.

So Mike is, is the co-leader with me on the eSports niche, which, which is great. Cuz I love working with a guy. We have a lot of fun together working and all that stuff. But yeah, it's certainly come a long way and there's a long way to still go. You know, they're still behind all older professional sports, or I'll say established professional sports in, in the US. But eSports is probably the easiest sport to grow because you don't need weather, you don't need, you know, pandemic hits. They could keep playing. No injuries? No. Well, I mean there are, there are major carpal tunnel

Amy Spillard: Repetitive strain? I was about to say.

Joshua Horowitz: But that's actually, you know, I'm glad you brought up injuries because that is, An area where there's major need of help. Absolutely. The insurance side hasn't really caught up to professional eSports yet. I know from a few insurance companies that I've, I've talked to, they've been looking at this.

There was an l I think it was an LPL player who tore all of his ligaments in his thumb. He was their jungler for League of Legends. That's the fourth guy who goes up and wanders around for anyone who doesn't know League of Legends, and he tore all of his ligaments in his thumb, he was their best player, but he didn't have insurance and he had to retire because he can't click anymore.

It, it took a long time for collegiate athletes to understand insurance from a football aspect. I believe it was about three or four years ago, there was one collegiate player who slated to be a first-rounder, and had the proper insurance in place, where if he got hurt in college and slowed down the draft, he'd still be protected.

He blew out his knee in a bowl and was drafted, I think in the fourth round. But because he had the insurance in place, he got the price tag of 20 million, which is what a first-rounder gets. So he still was able to protect himself from that standpoint. You know, there's currently no draft, so it's hard to put an evaluation on that.

But if you're making a million dollars or $2 million in a year playing eSports just to take out some insurance to protect yourself, in case you get carpal tunnel or you tear ligaments, or you know, your eyesight goes, you know, that's just another layer of understanding that needs to happen.

Michael Pahira: You know, eSports now is, you know, is where football was for college 130 years ago. Right. You know, I'm sure the same conversations were had where it's, I. You know, you had some guy bring up, Hey, why don't we institute a football team into college? And you know, the old guys are saying, you know, football, it's a game.

Like, why would we, why do we need that at university, it's kind of the same aspect. And as eSports will evolve in the collegiate circuit, the amateur circuit, the insurance aspect and all other financial aspects are going to evolve with it. But you know, like Josh said, it's not there yet, but it will get there.

Amy Spillard: When it comes to that insurance piece, do you guys take an advisory role? You know, are you kind of strongly recommending these things? Do you have insurance partners who are kind of progressive in this space that you would recommend? How does that advisory piece kind of work for you?

Joshua Horowitz: So, you know, with any of our athletes, we want to work with all their partners on there. When you're a professional athlete, you have to have all your pieces connected. You know, you have to have your accountants speak with your wealth managers, speak with the insurance guys to make sure we're all on the same page to protect the athlete. It's no different here. Luckily we do have insurance companies that we are able to talk to about this, that handle professional sports and are well aware of eSports.

And I know one has actually put together a policy in eSports previously. But yeah we are the advisory piece. You know, we, we don't sell insurance. It's not our expertise, but we know to ask a professional athlete, Hey, do you have insurance? You know, are you covered? And then at least start the conversation.

Because we want to protect our clients at the end of the day at all costs, you know? We're not just your accountant. You know, we want to, we're more than that. We're, we want to be the trusted advisor for all of our clients and make sure that we understand everything about their companies, everything about their lifestyles, and, you know, we want to protect them.

Whether or not we, we have the expertise to handle that. We have built a network of trusted professionals that, you know, we are able to refer to and, and call upon to make sure that our clients are protected.

Amy Spillard: Amazing. Well, there's an incredible opportunity, isn't there? You know, whilst we talked around some of the gaps that can be seen in kind of pairing the regulation is keeping up and so on, you know, those gaps also provide the perfect opportunity for you guys to step in where it is all relatively new and say, look, you know, these are the things that you might not have thought about that, you know, we've seen before.

We understand and you should be in here. Right? So incredible opportunity. And I guess would that in mind would be keen to know. Is there any kind of advice, I guess for other HLB firms that are perhaps kind of kind of dabbling in this space or kind of considering any advice that you might have in terms of kind of starting out or key challenges or any words of wisdom?

Michael Pahira: I would say for any of our affiliates to always just think athlete inclined centric on this, right? The care for the athlete comes first and foremost before anything because the market is taking it very, very seriously and, and not to, not to sleep on it because it's, it's coming up quickly and it's going to be growing and growing and growing and it doesn't look like there's any signs if it's slowing down any time soon. So I would say for those firms to prepare for it, look into it, and then, and take it seriously.

Joshua Horowitz: I would also say download one of the games and try it out yourself. Because understanding the games and understanding how these players play and make money, you know, watch a couple of Twitch streams you know, it goes a long way when speaking with your clients, you know, to understand the entire industry.

You know, Mike and I, I'll say we're lucky, we grew up playing games, so, you know, we have a major passion for this and yes, we love this inside and out. And you know, when you could connect what you love with your clients and then just get that additional level of appreciation and understanding with them, that goes a long way as well.

Michael Pahira: The passion, these athletes have such a passion for the industry. Even the administrators and the elite commissioners, they're all very passionate about eSports and video games in general, and the fact that we share that passion, you meet on level ground. You know, so if you have that passion, this is going to be a very interesting and very dynamic industry going forward.

Amy Spillard: Amazing. Well really, really interesting and exciting summary of kind of this space and, and where it's headed and kind of your guys' experience with it. So you know, really appreciate your insight and your expertise. It's something that was kind of fairly new to me and it's just been really fascinating, kind of getting into the detail and, and understanding your work.

So thanks for sharing that with me. Really appreciate your time guys. Thank you so much.

Michael Pahira: Thank you, Amy. Really appreciate it.

Joshua Horowitz: Thank you.

Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

HLB Podcast Eps 32: Navigating the Intersection of ESG and Taxation

Speakers:

Shannon Smith: Partner International Tax Practice leader, Eide Bailey

Vijay LNarasimham: HLB Global sustainability leader

Joe Holman: ESG Practice leader, Withum

Hello and welcome to HLB's Cross-Border Business Talks. HLB's Global podcast series on international business topics.

Shannon Smith: Hi everyone, and welcome to the HLB Podcast series Cross-Border Business Talks. Today we'll be tackling some of the complexities and opportunities around the very topical subject of ESG and what it means for our work in tax. I'm Shannon Smith, partner International Tax Practice leader with an HLB member firm Eide Bailey, and I'm joined today with HLB Global sustainability leader, Vijay LNarasimham, and Joe Holman, ESG, practice leader with HLB member, firm Withum. Welcome everyone. So Vijay, let's start with the basics. What is ESG?

Vijay LNarasimham: Thanks Shannon, and thanks Joe for joining me in the podcast on Tax and ESG. So ESG stands the acronym stands for Environmental, social and Governance. It's a strategic framework designed to be embedded into organization's strategy, which considers the needs and ways in which to do generate a long-term value for all organizational stakeholders.

It measures how your business integrates environmental, social, and governance practices into operations, as well as your business model, its impact and its sustainability. So ESG is a collective term for a business's impact on environment, society, and as well as how robust and transparent its governance is in terms of company leadership, executive pay audits, internal controls, and shareholder rights.

Shannon Smith: Thanks, Vijay, and I will just give an overview of how ESG involves taxes. So taxes no longer just a question of compliance to statutory regulations. It's a critical element of the business's social contribution. Part of the s in ESG reflects the corporate governance ethos of a company. In looking at tax reporting through an ESG lens can help businesses build trust and demonstrate their commitment to sustainability and social responsibility by telling a story about a business's purpose.

So how much taxes are paid and into whom provides a marker at how businesses manage their tax footprint and shines a mirror on other aspects of the ESG agenda. ESG reporting lens can enhance transparency in effect how tax disclosures are viewed. First, it increases the scope of reporting to non-financial material factors such as carbon emissions and workplace race, racial and gender diversity.

Which themselves have tax implications. Second, it emphasizes the link between governance and transparency, which is the foundation of trust. And third, an ESG-based approach to tax reporting is about more than publishing data. It's about having a tax strategy and a narrative surrounding that strategy that is aligned with the company's overall vision and values.

ESG in turn gives stakeholders great scope to draw inferences, not just about a business's financial per performance, but about its sense of purpose and social responsibility. And so moving on to the more technical aspects. Are you seeing pressure on your business from clients or society in general on ESG matters?

Joe Holman: This is Joe Holman, and this is really the US perspective on what we're seeing in the US and we're seeing a lot of regulatory pressure, governmental pressure on companies to be better corporate citizens from a tax standpoint. And we're seeing this because I would say back in 2013, apple was accused by the US of not paying any taxes and by avoiding taxes, by setting up Irish tax structures. And just as an aside, the EU also came down on Apple for setting up those Irish tax structures. Then in 2018, our favourite company, Amazon made 11 billion in the United States and paid zero tax, and AT&T, which we see on the media all the time, advertising their US presence made 30 billion in the US and paid zero tax.

So the US government's response to these companies not paying tax in the United States was about around disclosure, and they created in 2016 a regulation requiring country by country disclosure by large corporations. It was framed around what's known as BEPS or the BEPS plan, which requires multinational companies to break down key financial elements across jurisdictions, and this information then is shared with those other jurisdictions.

So companies today are reporting to the IRS and also transversely to the other members of the BEPS plan their country by country breakdown. However, what's really important to note is this information is not publicly disclosed, so the information that's being given to the IRS is not given to the shareholders, the general public.

So to address that the House of Representatives in 2020/21 session, passed a resolution called the Disclosure of Tax Havens and Offshore Act, which directs the SCC to require large public companies to disclose country by country tax reporting just as they do on the CBC. This bill, by the way, is still working its way through Congress, but should this pass the SEC would have the power to require these companies to report this information. So it's a lot happening from the government standpoint. Vijay, what are you, are you seeing something? What are you seeing?

Vijay LNarasimham: Yes, Joe, and thanks for that view from the US. I would say that we see increasing pressure on the companies and their boards, especially from regulators, investors, media, civil society, and clients to embrace ESG reporting with tax disclosures.

You spoke about US and EU, the EU taxonomy of 2022 under new standards, investors are running sustainable strategies will need to disclose how much of the investment activity can be classified as sustainable, which in turn forces companies to disclose certain green revenue or Capex metrics. So this has become a big pressure on the businesses coming from the investors because of the EU taxonomy as regards to client, civil society and public.

As we know, there is no trust in the ESG data that is being published. So these stakeholders are pushing companies to provide more consistent, repeatable metrics as well. Investors, aren't waiting on companies to address the issues with ESG data. Especially the asset owners are all showing signs, increasing signs of looking for managers with strong ESG strategies and reporting and pulling out of companies that aren't reporting ESG data.

An example in 2022 in the UK, the UK's advertising Watch Dog banned two HSBC ads for being misleading about its green credentials and not mentioning the bank's financing of polluting industries. So not just the ads were banned as well the regulators are becoming strict, the clients and civil societies are making it difficult.

The investors are asking for more and more information, and from GRI standards, which you alluded to as well, Joe, with SCC, there are governments in OECD and G20 countries were adopting country by country reporting as well so that you know, they need just not the overall tax, but what are you doing in a country of operation and how are you reporting tax has become very important.

And a new EU directive, which came into effect in December, 2021, makes that form of country by country reporting for many businesses operating in the EU mandatory by 2024. So, Joe, that's from my side would be the input on the pressures that are building up on ESG matters.

Shannon Smith: Thank you Vijay and Joe for that information. We're going to turn a bit now specifically looking at how tax laws require companies to contribute to society, and if we think about you know, ordinary citizens like me, taxes are just mandatory payments that the government asks us to make and usually that those funds are used for something that does contribute to society.

Making sure that we have roads and hospitals and other things that benefit society as a whole. So businesses are attempting to implement tax policies that demonstrate their ESG commitments as a way to build that public trust and stakeholder trust. ESG doesn't explicitly talk about tax, but tax is central to the principles of ESG.

Examples are carbon taxes on greenhouse gas emissions and green tax incentives. Those encourage sustainable practices by various companies, and so tax laws do require companies to contribute to the societies in which they operate, which facilitates the public trust and responsible corporate actors.

So next I want to turn to Joe and ask about the tax incentives. Specifically that I know that there are some, some new items in the US tax law tax incentives and how they yield to better corporate citizenship.

Joe Holman: Okay. Before I go on to that, I just want to address some of the points you just made Shannon.

I just want to highlight the fact that a lot of this tax reporting is surrounded around transparency of how much tax companies pay on a country by country basis, and the reason why it falls into the ESG realm is that those tax payments support the local communities. So if a company can set up a tax structure in a different country from where they operate, they're able to pull away tax money from those jurisdictions which desperately need that money.

Typically if those jurisdictions are in third world countries those countries don't have access to the resources. But even in the US companies like AT&T where they didn't pay any tax the tax dollars are much needed in the US even though the US appears to have that endless pile of cash.

Moving on though to what the US is trying to do to promote its own self-interest or to promote itself tax incentives in 2022, they passed the Inflation Reduction Act, or I should say they, Congress did and signed by the president, and it really tried to accomplish several things in the US.

One, it was primarily focused on addressing climate change. Climate change is a critical element thing that the world needs to come together on that has so much implications around the world. What they're doing though is from a US-centric standpoint, they want to allocate the 400 billion dollars of benefits that they've estimated were to causes like environmental social justice grants, where they're helping create social justice, that supports local communities that maybe have been disadvantaged and overlooked in the past.

They're looking to reduce US emissions by increasing incentives for clean energy. They're looking into sustainable aviation fuel credits. Aviation's a big source of greenhouse gas emissions, there's no real electric airplanes, and by coming up with sustainable aviation fuel, they can considerably reduce the emissions associated with air travel.

Sustainable agriculture and forestry helps save our forest and create sustainable methods for agriculture and promote those methods. And lastly, what they've tried to do, because it is US centric. Is promote US jobs and the US supply chain. So for instance electric cars, which as everybody talks about, Tesla Ford has them they're giving out say, $7,500 credits per electric vehicle for a new car.

But that $7,500 credit as an example. You don't get the full credit if the materials of the car weren't sourced from the United States. So the lithium, the rare metals, what percentage needs to be sourced in the US? You need to have a certain type of labour, probably union labour to build that car to get that full $7,500 credit, and that's actually designed to go after Tesla, which doesn't have union labour. So they're trying to promote good jobs, they're trying to promote the US supply chain with this investment inflation reduction act. And the result of it, if I'm not confusing people too much, is that, according to a company or a not-for-profit group called E two.

In the first six months of the IRA signing, it's estimated that 64 billion dollars of new investments were made and more than 130 clean energy projects were created, and 53,000 new good job paying jobs were created all in the clean energy business. So that's a lot of activity in the first six months, and it's estimated by an investment banking firm that over the next 10 years, the IRA will create public and private investments of 1.7 trillion dollars as a result of this act.

So these attack incentives are affecting society by helping the underserved, by helping climate change and by helping the farmers and the forestry in the US as well as creating a sustainable supply chain. So a lot has happened with that from a tax incentive stand. Vijay from an international.

Vijay LNarasimham: Yeah, I would say that incentives are a key part of any government sustainability policy because they are intended to bring change and drive certain behaviours, which is increasingly important if you have to meet our ambitious net zero targets of 2050. For example, in the European Union, you know, the green deal, a set of policies and initiatives adopted in 2019 to help make Europe the first climate neutral continent included more than thousand modified levies, so it was more taxes. But alongside the taxes, there were a growing number of green incentives, which were a hundred at the national level and regional level as well that could affect asset allocation, product development, and overall strategic planning.

So incentives are allowed, you know, given in, in certain areas in terms of priority to help grow the requirement or relocation of capital, if you may call it, towards more environmentally and socially sustainable outcomes. As a contrary to incentives in UK as well, last year, it was in October, I think the UK's financial conduct authority in October proposed a new anti-green washing law and said it was announcing its enforcement strategy.

With investigations expected to follow. So there are incentives, but UK is also thinking through, we can give the incentive, which should not be misused and so there are certain things which needs to balance it out, and that's what it did with the Greenwashing law as well last year. Thanks, Joe. Thanks Shannon.

Shannon Smith: Excellent. I, I also just wanted to move on to thought of investor expectations and what you are seeing with regards to ESG and how investor expectations may be changing the view on tax?

Vijay LNarasimham: Yeah, so if I, if I go on that, Shannon, you know, for me, the investors, when I look at it in the generic world, whether it is a small company or a big company, as I said before, investors are not waiting for companies to just address the ESG.

They're aware that the data is not available in full set with everybody to give a whole picture. But they're also looking at the same time, the asset owners are looking for managers who can give them a transparency on the data, and report it in a transparent way so that they can take their decisions as well.

So it's an organizational construct, it's governance structure that becomes increasingly important to become socially responsible investors who want to invest in companies that are IE ESG rating or score. So many in the investment industry believe that the development of ESG factors as considerations in investment analysis will become paramount and important, and inevitable in the future as well. There are various investors looking at various criteria, whether it is environmental criteria, how does a company safeguard the environment? You know, is there an oil spill like the BP one in US or any other spills? How does that take care of the climate?

In effect on climate with their operations. What sort of social criteria are they building in into their organization, which manages the relationship with the employees? Is there a D&I policy in the company? How are they working with their suppliers? Are they paying in the right time? As per the industry sort of law?

So those things are also taken in terms of social criteria the investors are looking at, and more so they're looking at governance with more and more issues coming up on the governance side as being a new area. The governance deals with companies leadership, their executive pay audits, you know, internal controls and shareholder rights.

So this has become quite important for investors, and so the investor expectation has grown up multifold in the ESG area. That's from my side.

Shannon Smith: Thank you Vijay and Joe, what are you seeing in terms of the investors looking at ESG and how that might be impacting the tax landscape?

Joe Holman: So in public companies, first of all, corporations don't do anything without being nudged by their investors or owners.

Right. And in public companies. Yeah. There were three major shareholder initiatives in 2022 trying to get the companies to disclose their country by country reporting in accordance with the GRI tax standards and the GRI tax standard is a global Reporting Initiative, which is a organization where many companies followed to do their sustainability reporting.

They created a standard a couple years back to require companies that did the full GRI reporting a country by country reporting, which I'll come back to in a minute. But anyway, so we have these three companies, Amazon, Microsoft, and Cisco all had major shareholder initiative. Which the Amazon one actually had to go to court to be able to get on the Amazon ballot.

All three weren't successful, but what was successful was that for Amazon's case, 20% of their shareholders voted for the proposal to have the firm provide tax transparency, and this was backed by the Norway agents tax pension funds, the UK funds, the New York Common Fund, as well as other large pension and asset owner funds.

So it had big backing of institutions, but not quite enough to get it over the line. In Microsoft situation, they did slightly better with 22% of the shareholders approving the proxy for better transparency, and as an aside, the 22% approval though failed was the highest approval for all the voting for shareholder proposals, so there were several shareholder proposals.

The highest one in terms of being approved was the transparency for tax and Cisco. Had 27% of the people or shareholders vote to provide tax transparency to the shareholders. So all three of them were defeated. Yet the number of shareholders was substantial To get those types of numbers it shows that it really meant something to the investment community.

Unfortunately, the companies and the board of directors don't feel that disclosing they're country by country reporting to the general public or investors is meaningful. And I feel it's to the detriment of the company because it may disclose certain tax strategies or create bad press. Just to show you where we stand in the United States or where the public companies are according to the financial accountability and corporate transparency, which is called Fact coalition, not a single US company published country by country reporting of tax until 2022.

So until 2022, nobody reported this information, and only in 2022 did two companies come forward and report publish tax country by country reporting in accordance with the GRI tax standards that came out and that's Hess Corporation and a mining company called Newmont.

The second thing I just want to mention is sort of about tax and sort of about, but it's definitely about transparency is PRI. PRI is principle responsible investment, which is an investor organization comprising a hundred trillion dollars of assets being used to implement ESG policies and procedures.

Within that there's something called the ESG Integrated Disclosure Projects, which came out in November of last year, which asking portfolio managers to disclose certain metrics on the portfolio companies they invest with, and then provide that disclosure to the investors as well as on debt situations to the syndicated debt holders of that debt and included in that template, they do talk about GRI and they imply that tax strategies, if material should be disclosed on location by location area for each of the companies business activities.

So, Definitely there's a lot on the road for investors from a public standpoint through proxy and through a private investment through the PRI.

Shannon Smith: And Joe, I understand the company's hesitancy to disclose country by country tax information. What do you think the investors' hesitancy to require the companies to disclose that information is?

Joe Holman: I think from an investor standpoint, you'd like to know, first of all how they're run their business. So you want to understand what's the strategy they employ, why do they have these structures in Lux Co or Dutch Co or in Cayman Islands, and what they're doing with those structures.

They also want to, a lot of these are pension funds and they want to be able to support the communities in which these companies do business and they really do look with fair, equitable sharing of profits to the various jurisdictions, what they do business. So it's definitely a lot of the S in ESG. Mm-hmm, and you're not necessarily, think of it from a financial standpoint. Though, you do have financial exposure if you have very aggressive tax policies and you have tax professionals such as yourself Shannon, who could identify them and say that the challenge, they will probably pay a big penalty.

But I think they're more interested in making sure that the local communities in which Microsoft, Cisco, Amazon operate in get their fair of tax revenues to be able to support the programs of the communities in which they're operating. So I think it's a lot about the s and not as much about the f.

Shannon Smith: And with the, the 20, it's seems like, you know, with the initiatives, proxy initiatives that have happened recently 20% of the investors are saying, yes, let's do that, but the majority are saying no. What do you think is behind that?

Joe Holman: I think it's a lot of insiders, especially Amazon has a lot of insiders. Owning that particular stock and they don't want to disclose that information. To me I believe, you know, transparency is really important.

A lot of the rules that are coming out with ESG are really about transparency. The SCC rule for climate reporting for public companies, which is expected to be out sometime this year, is, you know, transparency in terms of your emissions and your effect on the climate and how you view climate risk, and I think tax is no different. It's just transparency in providing people information. Mm-hmm. I personally don't understand why companies wouldn't want that information to come out, because eventually it will, and when it does come out, it could make companies look quite poor. Right.

Vijay LNarasimham: Yeah. And if I may add, Shannon, you know, to the point that Joe made, it's very important in terms of transparency because there are many cases, including one of the big companies in India, Adani, which didn't disclose it, and then when Hindenburg did the research, found shell companies in different jurisdictions which was investing in their companies. So it's about transparency and if the companies don't come back with transparency, and if it is using the loopholes in its own country regulations, then it's difficult for investors.

So once Total came to know that okay, this company Adani was investing in coal in Australia, it pulled off or it stayed one of its investment in hydrogen with Adani. So it's a question of that transparency and it will catch-up and it'll become big deal if it is not, if com companies are not transparent.

Shannon Smith: Thank you for that insight. So we've talked a lot about public companies in this last section of our discussion, and I want to just turn now to the small and mid-size multinational companies and talk about what we're seeing there in the market in terms of ESG trends related to taxation as well, and ESG in general. Vijay, do you want to start?

Vijay LNarasimham: I'm happy to start if I'm looking at small companies, you know, if you look at what is this ESG reporting? You know, what is it standing on? It's standing on non-financial data as well. So if you look at the financial data, it's, it's known for 150 years plus a hundred plus years.

Financial data is always available. What is needed as part of GRI or any other IFRS requirements, but the non-finance data is the critical piece, which not all companies are able to gather it as well. So for me, the collecting data on all taxes paid by multi complex multinational group has always been a challenge.

And the robots disclosure, whether it is, you know, when it is, it's growing rapidly, remains an exception as well. And it is important that not one size will fit all in all geographies or sectors and businesses as well. So sometimes small and mid-size companies find it difficult to report to international standards as well because that's where you know, people are requiring this multinational companies, whether it is small or mid-size to report as well.

So collecting data on non-financial and social has become that much more difficult for companies as well, you know, if to collect those social data D&I data, you know, how do you hire those companies? This is a softer side of the finance data, which, you know, you don't get that same, what you call consistency from different countries as well.

And so that's why I would say it's difficult to, for the ESG trends, you know, are difficult to manage or report from these small countries as well. And so although non-financial is still is voluntary, many business are preparing for the future and you know where it'll become a legal requirement. So I'm sure under the Global Reporting Initiative or GRI standards and the reporting on all of these elements will become important as part of tax reporting as well. Joe, anything you want to add?

Joe Holman: I mean, I think yeah, I see a lot of the small companies to say doing business in Europe, struggle on the EU taxonomy. They struggle on SFDR and the various other regulations that come outta Europe that are, say, inconsistent with the regulations in the United or the non-existent regulations of the United States.

But what I'm really, I'm seeing though these companies are addressing it by like boosting up as you mentioned, Vijay more on the governance side, internal controls they're formally assigning responsibilities over ESG as opposed to in the past it was kind of a haphazard practice of pulling information.

So I think it's becoming much more formalized and more intellectually looked at, and then they rely more upon their professionals to advise them in terms of how to do business, say in Europe and the United States when there's different frameworks from an ESG standpoint to follow. There's also two standards that are really being looked at, which is the is ISSB, which is the International Sustainability Standards Board.

And what that's doing is promoting a consistency in ESG reporting on an industry by industry basis in financials and annual reports. So if you look at two companies and same industry you'll get the same reporting as opposed to, today people get to cherry pick what ESG information they want to report in their sustainability reporting.

And then you have TCFD, which also is looking at disclosure of tax benefits and costs as it relates to climate. So you're seeing a lot of you see the international standard boards are starting to look at ESG, they're starting to try to create a consistent approach to it in terms of disclosure and within those disclosures, you're going to get taxed by, you know, country, by country reporting. But these smaller companies are struggling in terms of figuring it all out.

Shannon Smith: Thanks Joe and Vijay for that. We have dedicated quite a bit of resources within the HLB network related to global sustainability and ESG, and so we'd be remiss if we didn't talk about how HLB can support our clients, especially those in the small to middle market. In terms of what they can do to really create sustainability within their companies and look at the future and think about what needs, what may be on the horizon in terms of reporting for them as well.

Maybe Joe, you could start off by talking a little bit about what you see as HLB's role in assisting our clients.

Joe Holman: I think that, I mean, HLB is an international organization of professionals, and I think what HLB offers is that you can find a professional that's an expert in ESG or international tax in the centres where you conduct your business activities.

So that they could advise you in best practices. So for instance, I probably would not be the person you would call if you had an operation in India, in China, in terms of what are the practices there, or even as much as in Europe, given the changing landscapes. But you would look to me for say, ESG consulting in the United States.

Regarding, you know, frameworks and what investors are looking for. So that would be my expertise and I think HLB gives you that menu of finding the pro right professional to match your needs. So I think it's a powerful organization that has a lot of resources to be able to, you know, match your need with the right professional.

Shannon Smith: Thanks Joe and Vijay, you're the leader in this area for the network, so it'd be great to hear what your vision is for this this initiative to assist our clients in this area.

Vijay LNarasimham: For me, HLB has got, as rightly Joe said, even if it Joe, you know, saying about the US, as we saw from this discussion, it can give quite a bit of input for the other jurisdictions as well.

So we do have HLB being a global company, having its footprint in most of the countries across the globe. We do have local expertise and global expertise in ESG, which can, you know, the local tax expertise, which can bring together as a collaborative effort to talk about, how do we support on the ESG strategies and procedures under the umbrella of What I call it as, as a tax strategy as well.

So if I may say, you know, global tax strategy and reporting by itself is complex, easily misunderstood, and at times challenging. You know, various countries are at different stages of maturity on ESG reporting. Understanding its implications on a global scale is complicated. So I would say looking at not just the main tax points of profits, revenue, but also to talk about environmental taxes, carbon offset tax.

Each has got its own rules and regulations in each country to report, and ESG is an essential tool for creating accountability, transparency, and confidence in HLB as a company for customers and investors. So I would say that approach to tax transparency and tax governance is a key thing which HLB can help.

HLB can sit with any clients and talk about the company's tax strategy in the clearest possible way under the ESG lens as well. So for me, HLB can help companies build a storyline that explains the concepts behind a business' tax strategy, especially given the likelihood of future tax incentives for environmentally sustainable growth.

With our global footprint, we can help make that local sort of input and a global expertise, what I call it as a global solution to an ESG problem combined with tax, you know, sort of strategy as well. So that's what HLB brings to the table. Shannon.

Shannon Smith: Excellent. Well, I just want to thank Vijay and Joe for their deep expertise in this area.

That concludes our discussion for today on the intersection between ESG and Taxation. We look forward to hearing from you and having your thoughts and hope that you will join us for our next podcast as well. Take care.

Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

HLB Podcast Eps 32: Navigating the Intersection of ESG and Taxation

Speakers:

Shannon Smith: Partner International Tax Practice leader, Eide Bailey

Vijay LNarasimham: HLB Global sustainability leader

Joe Holman: ESG Practice leader, Withum

Hello and welcome to HLB's Cross-Border Business Talks. HLB's Global podcast series on international business topics.

Shannon Smith: Hi everyone, and welcome to the HLB Podcast series Cross-Border Business Talks. Today we'll be tackling some of the complexities and opportunities around the very topical subject of ESG and what it means for our work in tax. I'm Shannon Smith, partner International Tax Practice leader with an HLB member firm Eide Bailey, and I'm joined today with HLB Global sustainability leader, Vijay LNarasimham, and Joe Holman, ESG, practice leader with HLB member, firm Withum. Welcome everyone. So Vijay, let's start with the basics. What is ESG?

Vijay LNarasimham: Thanks Shannon, and thanks Joe for joining me in the podcast on Tax and ESG. So ESG stands the acronym stands for Environmental, social and Governance. It's a strategic framework designed to be embedded into organization's strategy, which considers the needs and ways in which to do generate a long-term value for all organizational stakeholders.

It measures how your business integrates environmental, social, and governance practices into operations, as well as your business model, its impact and its sustainability. So ESG is a collective term for a business's impact on environment, society, and as well as how robust and transparent its governance is in terms of company leadership, executive pay audits, internal controls, and shareholder rights.

Shannon Smith: Thanks, Vijay, and I will just give an overview of how ESG involves taxes. So taxes no longer just a question of compliance to statutory regulations. It's a critical element of the business's social contribution. Part of the s in ESG reflects the corporate governance ethos of a company. In looking at tax reporting through an ESG lens can help businesses build trust and demonstrate their commitment to sustainability and social responsibility by telling a story about a business's purpose.

So how much taxes are paid and into whom provides a marker at how businesses manage their tax footprint and shines a mirror on other aspects of the ESG agenda. ESG reporting lens can enhance transparency in effect how tax disclosures are viewed. First, it increases the scope of reporting to non-financial material factors such as carbon emissions and workplace race, racial and gender diversity.

Which themselves have tax implications. Second, it emphasizes the link between governance and transparency, which is the foundation of trust. And third, an ESG-based approach to tax reporting is about more than publishing data. It's about having a tax strategy and a narrative surrounding that strategy that is aligned with the company's overall vision and values.

ESG in turn gives stakeholders great scope to draw inferences, not just about a business's financial per performance, but about its sense of purpose and social responsibility. And so moving on to the more technical aspects. Are you seeing pressure on your business from clients or society in general on ESG matters?

Joe Holman: This is Joe Holman, and this is really the US perspective on what we're seeing in the US and we're seeing a lot of regulatory pressure, governmental pressure on companies to be better corporate citizens from a tax standpoint. And we're seeing this because I would say back in 2013, apple was accused by the US of not paying any taxes and by avoiding taxes, by setting up Irish tax structures. And just as an aside, the EU also came down on Apple for setting up those Irish tax structures. Then in 2018, our favourite company, Amazon made 11 billion in the United States and paid zero tax, and AT&T, which we see on the media all the time, advertising their US presence made 30 billion in the US and paid zero tax.

So the US government's response to these companies not paying tax in the United States was about around disclosure, and they created in 2016 a regulation requiring country by country disclosure by large corporations. It was framed around what's known as BEPS or the BEPS plan, which requires multinational companies to break down key financial elements across jurisdictions, and this information then is shared with those other jurisdictions.

So companies today are reporting to the IRS and also transversely to the other members of the BEPS plan their country by country breakdown. However, what's really important to note is this information is not publicly disclosed, so the information that's being given to the IRS is not given to the shareholders, the general public.

So to address that the House of Representatives in 2020/21 session, passed a resolution called the Disclosure of Tax Havens and Offshore Act, which directs the SCC to require large public companies to disclose country by country tax reporting just as they do on the CBC. This bill, by the way, is still working its way through Congress, but should this pass the SEC would have the power to require these companies to report this information. So it's a lot happening from the government standpoint. Vijay, what are you, are you seeing something? What are you seeing?

Vijay LNarasimham: Yes, Joe, and thanks for that view from the US. I would say that we see increasing pressure on the companies and their boards, especially from regulators, investors, media, civil society, and clients to embrace ESG reporting with tax disclosures.

You spoke about US and EU, the EU taxonomy of 2022 under new standards, investors are running sustainable strategies will need to disclose how much of the investment activity can be classified as sustainable, which in turn forces companies to disclose certain green revenue or Capex metrics. So this has become a big pressure on the businesses coming from the investors because of the EU taxonomy as regards to client, civil society and public.

As we know, there is no trust in the ESG data that is being published. So these stakeholders are pushing companies to provide more consistent, repeatable metrics as well. Investors, aren't waiting on companies to address the issues with ESG data. Especially the asset owners are all showing signs, increasing signs of looking for managers with strong ESG strategies and reporting and pulling out of companies that aren't reporting ESG data.

An example in 2022 in the UK, the UK's advertising Watch Dog banned two HSBC ads for being misleading about its green credentials and not mentioning the bank's financing of polluting industries. So not just the ads were banned as well the regulators are becoming strict, the clients and civil societies are making it difficult.

The investors are asking for more and more information, and from GRI standards, which you alluded to as well, Joe, with SCC, there are governments in OECD and G20 countries were adopting country by country reporting as well so that you know, they need just not the overall tax, but what are you doing in a country of operation and how are you reporting tax has become very important.

And a new EU directive, which came into effect in December, 2021, makes that form of country by country reporting for many businesses operating in the EU mandatory by 2024. So, Joe, that's from my side would be the input on the pressures that are building up on ESG matters.

Shannon Smith: Thank you Vijay and Joe for that information. We're going to turn a bit now specifically looking at how tax laws require companies to contribute to society, and if we think about you know, ordinary citizens like me, taxes are just mandatory payments that the government asks us to make and usually that those funds are used for something that does contribute to society.

Making sure that we have roads and hospitals and other things that benefit society as a whole. So businesses are attempting to implement tax policies that demonstrate their ESG commitments as a way to build that public trust and stakeholder trust. ESG doesn't explicitly talk about tax, but tax is central to the principles of ESG.

Examples are carbon taxes on greenhouse gas emissions and green tax incentives. Those encourage sustainable practices by various companies, and so tax laws do require companies to contribute to the societies in which they operate, which facilitates the public trust and responsible corporate actors.

So next I want to turn to Joe and ask about the tax incentives. Specifically that I know that there are some, some new items in the US tax law tax incentives and how they yield to better corporate citizenship.

Joe Holman: Okay. Before I go on to that, I just want to address some of the points you just made Shannon.

I just want to highlight the fact that a lot of this tax reporting is surrounded around transparency of how much tax companies pay on a country by country basis, and the reason why it falls into the ESG realm is that those tax payments support the local communities. So if a company can set up a tax structure in a different country from where they operate, they're able to pull away tax money from those jurisdictions which desperately need that money.

Typically if those jurisdictions are in third world countries those countries don't have access to the resources. But even in the US companies like AT&T where they didn't pay any tax the tax dollars are much needed in the US even though the US appears to have that endless pile of cash.

Moving on though to what the US is trying to do to promote its own self-interest or to promote itself tax incentives in 2022, they passed the Inflation Reduction Act, or I should say they, Congress did and signed by the president, and it really tried to accomplish several things in the US.

One, it was primarily focused on addressing climate change. Climate change is a critical element thing that the world needs to come together on that has so much implications around the world. What they're doing though is from a US-centric standpoint, they want to allocate the 400 billion dollars of benefits that they've estimated were to causes like environmental social justice grants, where they're helping create social justice, that supports local communities that maybe have been disadvantaged and overlooked in the past.

They're looking to reduce US emissions by increasing incentives for clean energy. They're looking into sustainable aviation fuel credits. Aviation's a big source of greenhouse gas emissions, there's no real electric airplanes, and by coming up with sustainable aviation fuel, they can considerably reduce the emissions associated with air travel.

Sustainable agriculture and forestry helps save our forest and create sustainable methods for agriculture and promote those methods. And lastly, what they've tried to do, because it is US centric. Is promote US jobs and the US supply chain. So for instance electric cars, which as everybody talks about, Tesla Ford has them they're giving out say, $7,500 credits per electric vehicle for a new car.

But that $7,500 credit as an example. You don't get the full credit if the materials of the car weren't sourced from the United States. So the lithium, the rare metals, what percentage needs to be sourced in the US? You need to have a certain type of labour, probably union labour to build that car to get that full $7,500 credit, and that's actually designed to go after Tesla, which doesn't have union labour. So they're trying to promote good jobs, they're trying to promote the US supply chain with this investment inflation reduction act. And the result of it, if I'm not confusing people too much, is that, according to a company or a not-for-profit group called E two.

In the first six months of the IRA signing, it's estimated that 64 billion dollars of new investments were made and more than 130 clean energy projects were created, and 53,000 new good job paying jobs were created all in the clean energy business. So that's a lot of activity in the first six months, and it's estimated by an investment banking firm that over the next 10 years, the IRA will create public and private investments of 1.7 trillion dollars as a result of this act.

So these attack incentives are affecting society by helping the underserved, by helping climate change and by helping the farmers and the forestry in the US as well as creating a sustainable supply chain. So a lot has happened with that from a tax incentive stand. Vijay from an international.

Vijay LNarasimham: Yeah, I would say that incentives are a key part of any government sustainability policy because they are intended to bring change and drive certain behaviours, which is increasingly important if you have to meet our ambitious net zero targets of 2050. For example, in the European Union, you know, the green deal, a set of policies and initiatives adopted in 2019 to help make Europe the first climate neutral continent included more than thousand modified levies, so it was more taxes. But alongside the taxes, there were a growing number of green incentives, which were a hundred at the national level and regional level as well that could affect asset allocation, product development, and overall strategic planning.

So incentives are allowed, you know, given in, in certain areas in terms of priority to help grow the requirement or relocation of capital, if you may call it, towards more environmentally and socially sustainable outcomes. As a contrary to incentives in UK as well, last year, it was in October, I think the UK's financial conduct authority in October proposed a new anti-green washing law and said it was announcing its enforcement strategy.

With investigations expected to follow. So there are incentives, but UK is also thinking through, we can give the incentive, which should not be misused and so there are certain things which needs to balance it out, and that's what it did with the Greenwashing law as well last year. Thanks, Joe. Thanks Shannon.

Shannon Smith: Excellent. I, I also just wanted to move on to thought of investor expectations and what you are seeing with regards to ESG and how investor expectations may be changing the view on tax?

Vijay LNarasimham: Yeah, so if I, if I go on that, Shannon, you know, for me, the investors, when I look at it in the generic world, whether it is a small company or a big company, as I said before, investors are not waiting for companies to just address the ESG.

They're aware that the data is not available in full set with everybody to give a whole picture. But they're also looking at the same time, the asset owners are looking for managers who can give them a transparency on the data, and report it in a transparent way so that they can take their decisions as well.

So it's an organizational construct, it's governance structure that becomes increasingly important to become socially responsible investors who want to invest in companies that are IE ESG rating or score. So many in the investment industry believe that the development of ESG factors as considerations in investment analysis will become paramount and important, and inevitable in the future as well. There are various investors looking at various criteria, whether it is environmental criteria, how does a company safeguard the environment? You know, is there an oil spill like the BP one in US or any other spills? How does that take care of the climate?

In effect on climate with their operations. What sort of social criteria are they building in into their organization, which manages the relationship with the employees? Is there a D&I policy in the company? How are they working with their suppliers? Are they paying in the right time? As per the industry sort of law?

So those things are also taken in terms of social criteria the investors are looking at, and more so they're looking at governance with more and more issues coming up on the governance side as being a new area. The governance deals with companies leadership, their executive pay audits, you know, internal controls and shareholder rights.

So this has become quite important for investors, and so the investor expectation has grown up multifold in the ESG area. That's from my side.

Shannon Smith: Thank you Vijay and Joe, what are you seeing in terms of the investors looking at ESG and how that might be impacting the tax landscape?

Joe Holman: So in public companies, first of all, corporations don't do anything without being nudged by their investors or owners.

Right. And in public companies. Yeah. There were three major shareholder initiatives in 2022 trying to get the companies to disclose their country by country reporting in accordance with the GRI tax standards and the GRI tax standard is a global Reporting Initiative, which is a organization where many companies followed to do their sustainability reporting.

They created a standard a couple years back to require companies that did the full GRI reporting a country by country reporting, which I'll come back to in a minute. But anyway, so we have these three companies, Amazon, Microsoft, and Cisco all had major shareholder initiative. Which the Amazon one actually had to go to court to be able to get on the Amazon ballot.

All three weren't successful, but what was successful was that for Amazon's case, 20% of their shareholders voted for the proposal to have the firm provide tax transparency, and this was backed by the Norway agents tax pension funds, the UK funds, the New York Common Fund, as well as other large pension and asset owner funds.

So it had big backing of institutions, but not quite enough to get it over the line. In Microsoft situation, they did slightly better with 22% of the shareholders approving the proxy for better transparency, and as an aside, the 22% approval though failed was the highest approval for all the voting for shareholder proposals, so there were several shareholder proposals.

The highest one in terms of being approved was the transparency for tax and Cisco. Had 27% of the people or shareholders vote to provide tax transparency to the shareholders. So all three of them were defeated. Yet the number of shareholders was substantial To get those types of numbers it shows that it really meant something to the investment community.

Unfortunately, the companies and the board of directors don't feel that disclosing they're country by country reporting to the general public or investors is meaningful. And I feel it's to the detriment of the company because it may disclose certain tax strategies or create bad press. Just to show you where we stand in the United States or where the public companies are according to the financial accountability and corporate transparency, which is called Fact coalition, not a single US company published country by country reporting of tax until 2022.

So until 2022, nobody reported this information, and only in 2022 did two companies come forward and report publish tax country by country reporting in accordance with the GRI tax standards that came out and that's Hess Corporation and a mining company called Newmont.

The second thing I just want to mention is sort of about tax and sort of about, but it's definitely about transparency is PRI. PRI is principle responsible investment, which is an investor organization comprising a hundred trillion dollars of assets being used to implement ESG policies and procedures.

Within that there's something called the ESG Integrated Disclosure Projects, which came out in November of last year, which asking portfolio managers to disclose certain metrics on the portfolio companies they invest with, and then provide that disclosure to the investors as well as on debt situations to the syndicated debt holders of that debt and included in that template, they do talk about GRI and they imply that tax strategies, if material should be disclosed on location by location area for each of the companies business activities.

So, Definitely there's a lot on the road for investors from a public standpoint through proxy and through a private investment through the PRI.

Shannon Smith: And Joe, I understand the company's hesitancy to disclose country by country tax information. What do you think the investors' hesitancy to require the companies to disclose that information is?

Joe Holman: I think from an investor standpoint, you'd like to know, first of all how they're run their business. So you want to understand what's the strategy they employ, why do they have these structures in Lux Co or Dutch Co or in Cayman Islands, and what they're doing with those structures.

They also want to, a lot of these are pension funds and they want to be able to support the communities in which these companies do business and they really do look with fair, equitable sharing of profits to the various jurisdictions, what they do business. So it's definitely a lot of the S in ESG. Mm-hmm, and you're not necessarily, think of it from a financial standpoint. Though, you do have financial exposure if you have very aggressive tax policies and you have tax professionals such as yourself Shannon, who could identify them and say that the challenge, they will probably pay a big penalty.

But I think they're more interested in making sure that the local communities in which Microsoft, Cisco, Amazon operate in get their fair of tax revenues to be able to support the programs of the communities in which they're operating. So I think it's a lot about the s and not as much about the f.

Shannon Smith: And with the, the 20, it's seems like, you know, with the initiatives, proxy initiatives that have happened recently 20% of the investors are saying, yes, let's do that, but the majority are saying no. What do you think is behind that?

Joe Holman: I think it's a lot of insiders, especially Amazon has a lot of insiders. Owning that particular stock and they don't want to disclose that information. To me I believe, you know, transparency is really important.

A lot of the rules that are coming out with ESG are really about transparency. The SCC rule for climate reporting for public companies, which is expected to be out sometime this year, is, you know, transparency in terms of your emissions and your effect on the climate and how you view climate risk, and I think tax is no different. It's just transparency in providing people information. Mm-hmm. I personally don't understand why companies wouldn't want that information to come out, because eventually it will, and when it does come out, it could make companies look quite poor. Right.

Vijay LNarasimham: Yeah. And if I may add, Shannon, you know, to the point that Joe made, it's very important in terms of transparency because there are many cases, including one of the big companies in India, Adani, which didn't disclose it, and then when Hindenburg did the research, found shell companies in different jurisdictions which was investing in their companies. So it's about transparency and if the companies don't come back with transparency, and if it is using the loopholes in its own country regulations, then it's difficult for investors.

So once Total came to know that okay, this company Adani was investing in coal in Australia, it pulled off or it stayed one of its investment in hydrogen with Adani. So it's a question of that transparency and it will catch-up and it'll become big deal if it is not, if com companies are not transparent.

Shannon Smith: Thank you for that insight. So we've talked a lot about public companies in this last section of our discussion, and I want to just turn now to the small and mid-size multinational companies and talk about what we're seeing there in the market in terms of ESG trends related to taxation as well, and ESG in general. Vijay, do you want to start?

Vijay LNarasimham: I'm happy to start if I'm looking at small companies, you know, if you look at what is this ESG reporting? You know, what is it standing on? It's standing on non-financial data as well. So if you look at the financial data, it's, it's known for 150 years plus a hundred plus years.

Financial data is always available. What is needed as part of GRI or any other IFRS requirements, but the non-finance data is the critical piece, which not all companies are able to gather it as well. So for me, the collecting data on all taxes paid by multi complex multinational group has always been a challenge.

And the robots disclosure, whether it is, you know, when it is, it's growing rapidly, remains an exception as well. And it is important that not one size will fit all in all geographies or sectors and businesses as well. So sometimes small and mid-size companies find it difficult to report to international standards as well because that's where you know, people are requiring this multinational companies, whether it is small or mid-size to report as well.

So collecting data on non-financial and social has become that much more difficult for companies as well, you know, if to collect those social data D&I data, you know, how do you hire those companies? This is a softer side of the finance data, which, you know, you don't get that same, what you call consistency from different countries as well.

And so that's why I would say it's difficult to, for the ESG trends, you know, are difficult to manage or report from these small countries as well. And so although non-financial is still is voluntary, many business are preparing for the future and you know where it'll become a legal requirement. So I'm sure under the Global Reporting Initiative or GRI standards and the reporting on all of these elements will become important as part of tax reporting as well. Joe, anything you want to add?

Joe Holman: I mean, I think yeah, I see a lot of the small companies to say doing business in Europe, struggle on the EU taxonomy. They struggle on SFDR and the various other regulations that come outta Europe that are, say, inconsistent with the regulations in the United or the non-existent regulations of the United States.

But what I'm really, I'm seeing though these companies are addressing it by like boosting up as you mentioned, Vijay more on the governance side, internal controls they're formally assigning responsibilities over ESG as opposed to in the past it was kind of a haphazard practice of pulling information.

So I think it's becoming much more formalized and more intellectually looked at, and then they rely more upon their professionals to advise them in terms of how to do business, say in Europe and the United States when there's different frameworks from an ESG standpoint to follow. There's also two standards that are really being looked at, which is the is ISSB, which is the International Sustainability Standards Board.

And what that's doing is promoting a consistency in ESG reporting on an industry by industry basis in financials and annual reports. So if you look at two companies and same industry you'll get the same reporting as opposed to, today people get to cherry pick what ESG information they want to report in their sustainability reporting.

And then you have TCFD, which also is looking at disclosure of tax benefits and costs as it relates to climate. So you're seeing a lot of you see the international standard boards are starting to look at ESG, they're starting to try to create a consistent approach to it in terms of disclosure and within those disclosures, you're going to get taxed by, you know, country, by country reporting. But these smaller companies are struggling in terms of figuring it all out.

Shannon Smith: Thanks Joe and Vijay for that. We have dedicated quite a bit of resources within the HLB network related to global sustainability and ESG, and so we'd be remiss if we didn't talk about how HLB can support our clients, especially those in the small to middle market. In terms of what they can do to really create sustainability within their companies and look at the future and think about what needs, what may be on the horizon in terms of reporting for them as well.

Maybe Joe, you could start off by talking a little bit about what you see as HLB's role in assisting our clients.

Joe Holman: I think that, I mean, HLB is an international organization of professionals, and I think what HLB offers is that you can find a professional that's an expert in ESG or international tax in the centres where you conduct your business activities.

So that they could advise you in best practices. So for instance, I probably would not be the person you would call if you had an operation in India, in China, in terms of what are the practices there, or even as much as in Europe, given the changing landscapes. But you would look to me for say, ESG consulting in the United States.

Regarding, you know, frameworks and what investors are looking for. So that would be my expertise and I think HLB gives you that menu of finding the pro right professional to match your needs. So I think it's a powerful organization that has a lot of resources to be able to, you know, match your need with the right professional.

Shannon Smith: Thanks Joe and Vijay, you're the leader in this area for the network, so it'd be great to hear what your vision is for this this initiative to assist our clients in this area.

Vijay LNarasimham: For me, HLB has got, as rightly Joe said, even if it Joe, you know, saying about the US, as we saw from this discussion, it can give quite a bit of input for the other jurisdictions as well.

So we do have HLB being a global company, having its footprint in most of the countries across the globe. We do have local expertise and global expertise in ESG, which can, you know, the local tax expertise, which can bring together as a collaborative effort to talk about, how do we support on the ESG strategies and procedures under the umbrella of What I call it as, as a tax strategy as well.

So if I may say, you know, global tax strategy and reporting by itself is complex, easily misunderstood, and at times challenging. You know, various countries are at different stages of maturity on ESG reporting. Understanding its implications on a global scale is complicated. So I would say looking at not just the main tax points of profits, revenue, but also to talk about environmental taxes, carbon offset tax.

Each has got its own rules and regulations in each country to report, and ESG is an essential tool for creating accountability, transparency, and confidence in HLB as a company for customers and investors. So I would say that approach to tax transparency and tax governance is a key thing which HLB can help.

HLB can sit with any clients and talk about the company's tax strategy in the clearest possible way under the ESG lens as well. So for me, HLB can help companies build a storyline that explains the concepts behind a business' tax strategy, especially given the likelihood of future tax incentives for environmentally sustainable growth.

With our global footprint, we can help make that local sort of input and a global expertise, what I call it as a global solution to an ESG problem combined with tax, you know, sort of strategy as well. So that's what HLB brings to the table. Shannon.

Shannon Smith: Excellent. Well, I just want to thank Vijay and Joe for their deep expertise in this area.

That concludes our discussion for today on the intersection between ESG and Taxation. We look forward to hearing from you and having your thoughts and hope that you will join us for our next podcast as well. Take care.

Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

HLB Podcast Eps 31 - ESG and what it means for Transfer pricing

Speakers

Emma McCartney: Director, Menzies LLP

Carlos Camacho: HLB Global Transfer pricing Leader

Clensy Appavoo: HLB's Global Not-For-Profit industry leader

Rita Carolan: HLB PR and Communications manager

Intro: Hello and welcome to HLB's Cross Border Business Talks. HLB’s Global podcast series on international business topics.

Rita Carolan: Hi everyone, and welcome to our Cross Border Business Talks. Today we will be speaking about three letters with big impacts, ESG, and what it means for Transfer pricing. I am Rita Carolan, PR and communications manager with HLB, and I am joined by HLB's Global Transfer pricing Leader, Carlos Camacho, Emma McCarthy, Director at HLB member firm Menzies, and Clensy Appavo, HLB's Global Not-For-Profit industry leader, and member of the HLB Sustainability Group. Welcome everyone.

So Emma, let's start with the basics. What is ESG?

Emma McCartney: ESG stands for environmental, social, and Governance. Effectively, these are standards measuring a business's impact on the environment, society, and how transparent and responsible the business is. Getting ESG right should drive value creation and manage risk, but getting it wrong could expose a business to significant risk and lead to dissatisfied stakeholders, which will include investors, customers, business partners, and of course employees.

In the UK the companies that requires large and medium sized companies to publish an annual strategic report, which must include information on ESG related items such as the business's environmental impact, employee disclosures, social community and human rights issues, and the company's policies on each.

In April, 2022, the UK also enacted two mandatory ESG disclosure laws relating to climate change, and these make climate related financial disclosures mandatory for certain publicly quoted companies, banks, insurance companies, large private companies, and also certain limited liability partnerships. The government certainly hopes this will lead to the development of best practice and has also produced guidance which can assist smaller companies that may want to disclose their data on a voluntary basis.

So for all companies, regardless of size, it's becoming increasingly important that they can understand and access their ESG data as they may be asked for it by their stakeholders. Although many businesses readily acknowledge that ESG equates with corporate responsibility, many others are still confused about ESG reporting and the impacts it may have on the business, including its interaction with Transfer pricing.

Rita Carolan: Thanks, Emma. That brings me nicely onto my next question to you, Carlos. How exactly does ESG involve Transfer pricing?

Carlos Camacho: Thank you. Yes, indeed. In fact, one of the things that ESG has as a subject is that is very transversal viewpoint, so there is very few things that you may be doing or avoiding to do in your business running that may not be touched by ESG.

And of course, Transfer pricing is one of those areas where ESG involves the accurate payment of the fresh share of taxes to the given jurisdiction that is appropriate in accordance to the value chain analysis. This leads us to what is that value chain and how do we allocate the profitability to the different business environments that a multinational enterprise might be doing business in.

Transfer pricing also has the attribution and the objective to serve as a tool of attribution of such profits according to this value creation in a fairly compensated environment, and to have an impact on a given jurisdiction with fairness in the relationships amongst the related parties as well.

Transfer pricing will also lead with dealing with intangibles where the digital economy, which is today's major challenge for all tax purposes, Is the way that we attribute the residual profits coming from the trade over the digital economy and platforms. Therefore, we have a big challenge that has been addressed by the OECD recently with pillar one and pillar two approach of the digital economy.

Rita Carolan: Thanks Carlos. It seems that ESG certainly does seep its way into many areas of Transfer pricing. So Emma, I'd like to come back to you now to find out what other areas of tax does ESG affect?

Emma McCartney: Okay, thanks Rita. So, yes as Carlos has mentioned, Transfer pricing is so key because if ESG strategy is front and central and making a significant difference to business, then of course the business must update its Transfer pricing, analysis and documentation so that those ESG-related changes are considered and their impact on the TP model and pricing policies. But there are so many other areas of tax as well. So in the UK for example, we have a really beneficial R&D tax relief regime, although that one that is changing quite considerably from the 1st of April 2023 with further change is expected to take place from 1st of April, 2024.

But businesses investing in ESG and undertaking innovative work could perhaps benefit from making R&D claims, and even if businesses are collaborating with third parties on ESG initiatives, it may still be possible to qualify for some of this valuable R&D relief. And I believe there is similar such beneficial R&D tax relief schemes in other countries that global businesses might consider.

Also where businesses invest significant sums in couple expenditures, such as perhaps greener more energy efficient plant machine and equipment. It's important to ensure that the business is claiming and maximizing all relevant capital allowances in their UK tax returns. So we thought about opportunities there, but of course, in terms of tax cost, there are green taxes that are levied both in the UK and various countries around the globe, and businesses should make sure they're aware of these. They are levied as a way of encouraging businesses to try and operate in a more environmentally friendly way. So any business should consider any actions that can be taken to minimize these taxes, as well as assessing the overall cost impact on the business.

Green taxes currently in place in the UK include the climate change, levy emissions trading scheme, landfill tax aggregates levy, and the plastic packaging tax, or PPT. I thought I might today just talk a bit more about the plastic packaging tax, since some businesses may not yet have considered the full implications since it was only introduced last year in April, 2022. It's been introduced for any businesses, manufacturing or importing plastic packaging of at least 10 tons per year and broadly applies to packaging that contains more plastic by weight than any other single material.

There are also some exemptions to take into account, such as a medical exemption and a transportation packaging exemption. But for any businesses with plastic packaging in their supply chain, it's important they understand how this regime impacts them and whether they have any reporting or liabilities under this new regime.

Maybe just finally on some other areas of tax relevant to ESG and thinking about businesses who want to change their behaviour. Are there some quick and easy wins? Well, yes there are. For example, those with company car schemes could consider providing employees with energy efficient vehicles.

Electric vehicles as company cars will have a lower benefit in kind value, which significantly lowers the tax payable on the benefit, meaning less income tax for the employee, and less national insurance contributions for the employer and such a scheme can also be introduced by a perhaps salary sacrifice, which could also be beneficial for all parties.

Rita Carolan: Okay, great. So I think we have been given a good overview on how ESG tax and plans for pricing are intertwined. So now let's move on to more stakeholder or client expectations. Clensy, are you seeing pressure on your business or from clients on ESG mandates?

Clensy Appavoo: Thank you, Rita. Hi everyone. Definitely Mauritius I don't know whether everyone knows about Mauritius, but it's a small island in the Indian Ocean a tourist island.

The example, typical small economy where the clock is already ticking for us, you know, we have got a lot of pressure from climate changes and ESG is an important and critical issue. In those small island economies normally, you know, for example, in Mauritius we live a paradox on an everyday basis because generally right, we say that we produce around 0.01% of carbon dioxide of the whole world, and yet we suffer the fact that we are ranked among the most risky countries. So we are classified 51st right countries, among the 200 countries which have been assessed. So the government here is taking a lot of commitment, right, to mobilize at least 2% of the country's GDP for ESG, and this agenda will bring us to the net zero until 2030.

Our firm is actually under pressure from clients who have to take firm commitments to reduce their carbon footprint and report their own. So the pressure comes from new climate legislation, government regulations, and civil societies.

I can summarize a few. I just mentioned a few of those measures actually. For example, we have been since two years now, we have been obliged to abolish the use of plastic. This has got an effect directly on clients who run supermarket and they have to undergo a complete shift in the delivery of goods from shops and even factories, which are manufacturing plastic products, how to undergo major production shift.

We also have the case of hotels. As you know, Mauritius is a tourist destination has many islands, and here there is so much pressure that hotels are, are required to design and install autonomous system for energy generation, for example, now there is a shift into windmills, a shift into wave technology, into solar energy.

Also there is a need for hotels, for example, for those which are around, around the coast, right, to do their own waste management and water purification. So desalination of seawater for human consumption. For you know even recycling, of rainwater, is something that we are living as a normal thing now.

So just to say that the sources coming from different areas and today, for example, in Mauritius, we have got only some 7% of waste is being recycled. So within the ESG landscape we have got much pressure to develop and to use, right, to convert, right to make to make it become a reality, what we call a circular economy.

So converting waste into energy. So in this shift actually in production methods and even a small entrepreneur, we are obliged to go for new changes and adopt ESG principles in what they do. We already implemented ESG in school curriculum. So it has become a central theme for us, and everybody is living it.

So definitely we are having pressure from regulations, from laws, you know, from different things happening, and we are living it every day as a small island.

Rita Carolan: Wow. Well, for a small island you have a very, a lot going on in terms of ESG. So Emma, do you have anything to add from a UK perspective?

Emma McCartney: Yes. So I think we, we obviously, we all have an important role to play in ESG and everyone I think is, is becoming more and more interested in it.

So for all companies regardless of size I think it's becoming increasingly important that, they both understand, manage, and can report on their ESG data to any interested parties and that they really closely monitor what's going on in the world and legislative developments so that they can ensure compliance, and that, that ESG agenda really is at the front of their minds in all that they're doing.

Rita Carolan: Ok, thank you. I'm going to stick with you for another while, Emma. What do you feel is the most important aspect of ESG and are there any aspects that cause challenge?

Emma McCartney: Okay, so I think going back to what I said right at the beginning is that getting ESG right, it should drive value creation and help businesses manage risk, and it is what stakeholders expect.

Getting it wrong can be really damaging, but ESG covers so much, and so the breadth and depth of how different businesses are embracing ESG hugely varies between different industries and different companies. What we're doing at Menzies is encouraging clients to talk to us about the challenges that their businesses face, and also how ESG can potentially help.

It isn't just something for the biggest businesses or investors to worry about really everyone needs to think about what they can do. So a business should maybe think about whether it can answer these three questions. First of all, what ESG information do you currently receive and what are you measuring?

Secondly, are you aware of the impact the ESG pressures are having on your business? And thirdly, have you considered the internal and external pressures, threats and opportunities? So, When thinking about these areas, think about what is the long term goal for your business and how can ESG help and how in your business do you define purpose, values, culture, and strategy.

Menzies recently produced a report for the manufacturing sector, which was called Unlocking Value on the Road to Net Zero, and this identified some research by Make UK, which found that 30% of UK manufacturing firms still hadn't made an individual or team within their business accountable for the development and delivery of an ESG strategy.

It also found that 50% of firms weren't measuring their sustainability performance. So I think those statistics nicely illustrate the huge scale of challenge that's still ahead for so many businesses. So just to wrap all that up, I believe that the challenge for companies is that they really need to assess where they are on their ESG journey, where they want to get to, and what help or advice they may need to get there.

Rita Carolan: Thank you Emma. Clensy or Carlos, have you anything further to add to this?

Clensy Appavoo: Yes. Rita, I, I think that what Emma is saying is very, very true and it applies everywhere. It is cut across all types of industries, all types of companies coming from a small island economy as I was saying, the three elements of ESG are all important for us because we consider that they all create value. They have value creation. And at the Shelby Mauritius, we encourage companies to include ESG objective's as primary goals in their mission and vision statement. So that it becomes common to everyone.

Everybody is aware and every employee, all the board, not only from the board level, but it comes down the line but everybody is aware of that. Some companies are still, we know, we recognize that the many companies are still cemented in this idea, in this concept of bottom line results, and it, in fact, consciousness about ESG is taking a bit more time, but the clock is ticking and everybody is seeing the effects around and definitely value creation is very important through ESG

Carlos Camacho: Absolutely. In the region in Latin America where we have ESG as a subject that people is just embracing and talking about while that is happening, the facts of action are still waiting for becoming a reality. This just shows how uneven this is in a worldwide basis overtaking and how can this impact in the level of accomplishing the goals of ESG in one hand, but also in the level of unfair competition because those that are having the burden of getting the commitment and being also responsible accomplishing with the ESG commitments, have a burden that those that are just talking about are not really having an impact in their business modules and their economics.

So I think its important to run for the pace to be aligned amongst the rest of the world. So there is not unfair competition as far as the level of commitment and the impact in the P and L of the different entities that go along the lines of the value chain and the comprehensive externalities that the production of the clients are able to understand for the goodness of their own products, as well as the services regarding ESG.

The documentation regarding the transparency, coherence, and substance or of factual attribution of the value chain is something that is becoming more and more critical and we can foresee that this is quite uneven from region to region in the world.

Rita Carolan: Okay, thank you. So moving on from some of the challenges to more of the advantages of ESG to Transfer pricing and how these advantages can impact clients. So Carlos, I'll come to you first and then I'd like to hear from Emma and Clensy.

Carlos Camacho: Yes, the, the big advantage that Transfer pricing has as a methodology is that it's a very objective methodology. Therefore, the appropriate allocation in theoretical terms of such a profit that is to be attributable to given jurisdiction based upon the value of creation is something that will serve as a landmark in order to establish whether or not the entities are compliant or not with the fair commitment to their taxation in the different jurisdictions.

Taxes are key to the social element of the ESG and of course taxes is the way that the society, the modern society, is agreed in order to redistribute the income generated and the wealth generated amongst the value chain production.

When the attribution of the value chain is comprehensive and have some negative externalities, those production of the clients are able to understand the goodness of their products and services regarding the ESG. Therefore, the documentation of, of these facts regarding the Transfer pricing, value chain, and attribution of profits and fair share of taxes is something that is key in the elements of alignment of the value chain.

Rita Carolan: Emma have you had anything else to add?

Emma McCartney: Okay. Yeah, I, I think what I'd add is to say in terms of advantages. For a group of companies that's really embracing ESG, incorporating ESG considerations into their Transfer pricing analysis can really help them to demonstrate their commitment to sustainability and ethical practices, and really importantly, avoid any negative attention and penalties perhaps from tax authorities as, as well as other stakeholders.

Perhaps to bring this to life a bit more an example of investment in ESG could be setting up a more environmentally friendly supply chain with a focus on reduced carbon footprints. If this was set up for a multinational sales and distribution group, it may cost the business more, but could result in being able to sell products to end customers at higher prices because of customers really valuing that ethical and green supply chain, and the businesses focuses on that.

So any entity in the group that has has born any investment in relation to ESG, which benefits the supply chain and, and benefits the group of companies as a whole should ensure that they receive an appropriate reward for this investment through their Transfer pricing model.

So when any group looks at their Transfer pricing model each year and analyzes industry and company specifics, they should understand the impact of any ESG initiatives and revisit their functional analysis and look at the functions driving business profits, and creating value and that may well include those ESG considerations. So that business will then consider whether perhaps they need to change their TP policies, and of course, update any TP documentation accordingly.

Rita Carolan: Thanks, Emma. Clensy, anything you'd like to add?

Clensy Appavoo: Yeah, just want to add Rita, that, you know a I think there have been a double effect with the pandemic the pandemic coming through, right.

With the disruption that there has been in supply chains, and at the same time now with ESG. The pressure coming out from ESG there is, there is for companies now a, a, a real obligation to prioritize ecological supply chain, right? And even in different economies now we see that even local producers now are making a mass not only right to implement the principles of ESG in their supply chain, but also to get green reporting. To get reports which the green level to report on production which really is ecological.

Rita Carolan: Great. Okay, so to conclude, I would like to do a quick whip around on what you think your role as advisors is on ESG, and this question probably comes in two parts. So firstly, what is in it for member firms? And secondly, what can clients expect from their firms? Carlos, I'll start with you.

Carlos Camacho: Thank you. I guess that member firms are a conduit for the cultural change that is necessary in order to embrace the ESG commitment in general.

H L B International is a sphere for change of global environment and as a multidisciplinary organization with a great level of professionalisms and very wide diverse professionals to spread the meaning of the place and have a real influence to let ESG become a reality other than just another trend, another mega trend, so-called. I think that is, is fair to say that each of us as business leaders and as business advisors have the, the mission to really put the, the talk and the walk in place.

Rita Carolan: Thank you Carlos and Emma.

Emma McCartney: I completely agree with Carlos there that cultural change is so very important and critical. And, and I would say that, that Menzies as a firm believes in pushing the boundaries to develop employees, act sustainably, work with the community and, and grow our business in a really responsible manner.

Menzies has a better place commitment embedded in our culture and really wants to make a difference to clients with our brighter thinking. We've got clear plans in place around diversity, equity, and inclusion, corporate social responsibility, reducing emissions, and becoming net carbon zero by 2027.

So looking at how we can help our clients on, on the Transfer pricing front, and as part of our Transfer pricing services to clients, we'll always consider where the, where their business is on the ESG journey and whether it's a key value driver and or a risk in the business, which of course will be relevant when looking at the group's Transfer pricing model.

We'll also consider any other associated tax issues, some of which I've mentioned today, such as R&D, and whether there's any opportunity for making R&D tax relief claims. And of course, our clients think through the impact of the plastic packaging tax, which I mentioned earlier, and any other green taxes, and also any energy efficient tax breaks.

Because it's so critical Menzies have recently launched a whole new ESG service offering and we hope that this will be really helpful to clients over the coming years. I really firmly believe that the most successful and progressive leaders of today will be embracing ESG throughout their businesses in various forms.

It's such a vast and ever-changing topic, and it's certainly no longer background noise and really should be considered the backbone of any business. And at Menzies, we're really enthusiastic about helping to guide businesses through a process to decide what areas they should be looking at and the value it can bring to them.

Ultimately, I guess it comes down to a de-risking and future-proofing strategy that will make businesses more valuable and provide opportunities for growth. Whether a company is under pressure to do this yet or not, we would advise that really acting now is the best option.

Rita Carolan: Okay. Thank you, Emma. And last but not least, over to you, Clensy, for the final words.

Clensy Appavoo: Yes. Rita, I, I have personally had the opportunity to form part of the sustainability leadership group of HLB Global, and I brought that home, right everything that we have been working together, and now we have set the scene for HLB mauritius because we are going to step further by becoming a registered, what we call a UN compact company.

We want, we wanted your registration with the United Nations and how last September had the opportunity to present a paper on climate change on our hospitality industry. Now today HLB Mauritius has its own pilot carbon footprint as an example, to clients, which is based on UN guidelines, and this initiative has been key in helping us structure our ESG business services. We've got a team now, an ESG team, which works with independent ESG consultant and the regional UN office to promote ESG as a service.

Apart from implementing ESG objective and in those enterprises and in their TP policies, we help clients to tap green loan facilities, we provide training, and we are there. Which means there is a service which is there already, and we, we continue to be in the frontline, by making ourself known. Right? And it is very well known in our, in our, in our community, in the business community that we, we really are in the forefront of client services for this.

Rita Carolan: Well, that's all folks. Thank you, Carlos, Emma, and Clensy for all your insights into what ESG is and how it impacts Transfer pricing. It seems we have still a way to go, but you definitely seem to be on your way and have given us much food for thought, so thank you all for listening.

Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlbglobal/insights.

HLB Podcast Eps 31 - ESG and what it means for Transfer pricing

Speakers

Emma McCartney: Director, Menzies LLP

Carlos Camacho: HLB Global Transfer pricing Leader

Clensy Appavoo: HLB's Global Not-For-Profit industry leader

Rita Carolan: HLB PR and Communications manager

Intro: Hello and welcome to HLB's Cross Border Business Talks. HLB’s Global podcast series on international business topics.

Rita Carolan: Hi everyone, and welcome to our Cross Border Business Talks. Today we will be speaking about three letters with big impacts, ESG, and what it means for Transfer pricing. I am Rita Carolan, PR and communications manager with HLB, and I am joined by HLB's Global Transfer pricing Leader, Carlos Camacho, Emma McCarthy, Director at HLB member firm Menzies, and Clensy Appavo, HLB's Global Not-For-Profit industry leader, and member of the HLB Sustainability Group. Welcome everyone.

So Emma, let's start with the basics. What is ESG?

Emma McCartney: ESG stands for environmental, social, and Governance. Effectively, these are standards measuring a business's impact on the environment, society, and how transparent and responsible the business is. Getting ESG right should drive value creation and manage risk, but getting it wrong could expose a business to significant risk and lead to dissatisfied stakeholders, which will include investors, customers, business partners, and of course employees.

In the UK the companies that requires large and medium sized companies to publish an annual strategic report, which must include information on ESG related items such as the business's environmental impact, employee disclosures, social community and human rights issues, and the company's policies on each.

In April, 2022, the UK also enacted two mandatory ESG disclosure laws relating to climate change, and these make climate related financial disclosures mandatory for certain publicly quoted companies, banks, insurance companies, large private companies, and also certain limited liability partnerships. The government certainly hopes this will lead to the development of best practice and has also produced guidance which can assist smaller companies that may want to disclose their data on a voluntary basis.

So for all companies, regardless of size, it's becoming increasingly important that they can understand and access their ESG data as they may be asked for it by their stakeholders. Although many businesses readily acknowledge that ESG equates with corporate responsibility, many others are still confused about ESG reporting and the impacts it may have on the business, including its interaction with Transfer pricing.

Rita Carolan: Thanks, Emma. That brings me nicely onto my next question to you, Carlos. How exactly does ESG involve Transfer pricing?

Carlos Camacho: Thank you. Yes, indeed. In fact, one of the things that ESG has as a subject is that is very transversal viewpoint, so there is very few things that you may be doing or avoiding to do in your business running that may not be touched by ESG.

And of course, Transfer pricing is one of those areas where ESG involves the accurate payment of the fresh share of taxes to the given jurisdiction that is appropriate in accordance to the value chain analysis. This leads us to what is that value chain and how do we allocate the profitability to the different business environments that a multinational enterprise might be doing business in.

Transfer pricing also has the attribution and the objective to serve as a tool of attribution of such profits according to this value creation in a fairly compensated environment, and to have an impact on a given jurisdiction with fairness in the relationships amongst the related parties as well.

Transfer pricing will also lead with dealing with intangibles where the digital economy, which is today's major challenge for all tax purposes, Is the way that we attribute the residual profits coming from the trade over the digital economy and platforms. Therefore, we have a big challenge that has been addressed by the OECD recently with pillar one and pillar two approach of the digital economy.

Rita Carolan: Thanks Carlos. It seems that ESG certainly does seep its way into many areas of Transfer pricing. So Emma, I'd like to come back to you now to find out what other areas of tax does ESG affect?

Emma McCartney: Okay, thanks Rita. So, yes as Carlos has mentioned, Transfer pricing is so key because if ESG strategy is front and central and making a significant difference to business, then of course the business must update its Transfer pricing, analysis and documentation so that those ESG-related changes are considered and their impact on the TP model and pricing policies. But there are so many other areas of tax as well. So in the UK for example, we have a really beneficial R&D tax relief regime, although that one that is changing quite considerably from the 1st of April 2023 with further change is expected to take place from 1st of April, 2024.

But businesses investing in ESG and undertaking innovative work could perhaps benefit from making R&D claims, and even if businesses are collaborating with third parties on ESG initiatives, it may still be possible to qualify for some of this valuable R&D relief. And I believe there is similar such beneficial R&D tax relief schemes in other countries that global businesses might consider.

Also where businesses invest significant sums in couple expenditures, such as perhaps greener more energy efficient plant machine and equipment. It's important to ensure that the business is claiming and maximizing all relevant capital allowances in their UK tax returns. So we thought about opportunities there, but of course, in terms of tax cost, there are green taxes that are levied both in the UK and various countries around the globe, and businesses should make sure they're aware of these. They are levied as a way of encouraging businesses to try and operate in a more environmentally friendly way. So any business should consider any actions that can be taken to minimize these taxes, as well as assessing the overall cost impact on the business.

Green taxes currently in place in the UK include the climate change, levy emissions trading scheme, landfill tax aggregates levy, and the plastic packaging tax, or PPT. I thought I might today just talk a bit more about the plastic packaging tax, since some businesses may not yet have considered the full implications since it was only introduced last year in April, 2022. It's been introduced for any businesses, manufacturing or importing plastic packaging of at least 10 tons per year and broadly applies to packaging that contains more plastic by weight than any other single material.

There are also some exemptions to take into account, such as a medical exemption and a transportation packaging exemption. But for any businesses with plastic packaging in their supply chain, it's important they understand how this regime impacts them and whether they have any reporting or liabilities under this new regime.

Maybe just finally on some other areas of tax relevant to ESG and thinking about businesses who want to change their behaviour. Are there some quick and easy wins? Well, yes there are. For example, those with company car schemes could consider providing employees with energy efficient vehicles.

Electric vehicles as company cars will have a lower benefit in kind value, which significantly lowers the tax payable on the benefit, meaning less income tax for the employee, and less national insurance contributions for the employer and such a scheme can also be introduced by a perhaps salary sacrifice, which could also be beneficial for all parties.

Rita Carolan: Okay, great. So I think we have been given a good overview on how ESG tax and plans for pricing are intertwined. So now let's move on to more stakeholder or client expectations. Clensy, are you seeing pressure on your business or from clients on ESG mandates?

Clensy Appavoo: Thank you, Rita. Hi everyone. Definitely Mauritius I don't know whether everyone knows about Mauritius, but it's a small island in the Indian Ocean a tourist island.

The example, typical small economy where the clock is already ticking for us, you know, we have got a lot of pressure from climate changes and ESG is an important and critical issue. In those small island economies normally, you know, for example, in Mauritius we live a paradox on an everyday basis because generally right, we say that we produce around 0.01% of carbon dioxide of the whole world, and yet we suffer the fact that we are ranked among the most risky countries. So we are classified 51st right countries, among the 200 countries which have been assessed. So the government here is taking a lot of commitment, right, to mobilize at least 2% of the country's GDP for ESG, and this agenda will bring us to the net zero until 2030.

Our firm is actually under pressure from clients who have to take firm commitments to reduce their carbon footprint and report their own. So the pressure comes from new climate legislation, government regulations, and civil societies.

I can summarize a few. I just mentioned a few of those measures actually. For example, we have been since two years now, we have been obliged to abolish the use of plastic. This has got an effect directly on clients who run supermarket and they have to undergo a complete shift in the delivery of goods from shops and even factories, which are manufacturing plastic products, how to undergo major production shift.

We also have the case of hotels. As you know, Mauritius is a tourist destination has many islands, and here there is so much pressure that hotels are, are required to design and install autonomous system for energy generation, for example, now there is a shift into windmills, a shift into wave technology, into solar energy.

Also there is a need for hotels, for example, for those which are around, around the coast, right, to do their own waste management and water purification. So desalination of seawater for human consumption. For you know even recycling, of rainwater, is something that we are living as a normal thing now.

So just to say that the sources coming from different areas and today, for example, in Mauritius, we have got only some 7% of waste is being recycled. So within the ESG landscape we have got much pressure to develop and to use, right, to convert, right to make to make it become a reality, what we call a circular economy.

So converting waste into energy. So in this shift actually in production methods and even a small entrepreneur, we are obliged to go for new changes and adopt ESG principles in what they do. We already implemented ESG in school curriculum. So it has become a central theme for us, and everybody is living it.

So definitely we are having pressure from regulations, from laws, you know, from different things happening, and we are living it every day as a small island.

Rita Carolan: Wow. Well, for a small island you have a very, a lot going on in terms of ESG. So Emma, do you have anything to add from a UK perspective?

Emma McCartney: Yes. So I think we, we obviously, we all have an important role to play in ESG and everyone I think is, is becoming more and more interested in it.

So for all companies regardless of size I think it's becoming increasingly important that, they both understand, manage, and can report on their ESG data to any interested parties and that they really closely monitor what's going on in the world and legislative developments so that they can ensure compliance, and that, that ESG agenda really is at the front of their minds in all that they're doing.

Rita Carolan: Ok, thank you. I'm going to stick with you for another while, Emma. What do you feel is the most important aspect of ESG and are there any aspects that cause challenge?

Emma McCartney: Okay, so I think going back to what I said right at the beginning is that getting ESG right, it should drive value creation and help businesses manage risk, and it is what stakeholders expect.

Getting it wrong can be really damaging, but ESG covers so much, and so the breadth and depth of how different businesses are embracing ESG hugely varies between different industries and different companies. What we're doing at Menzies is encouraging clients to talk to us about the challenges that their businesses face, and also how ESG can potentially help.

It isn't just something for the biggest businesses or investors to worry about really everyone needs to think about what they can do. So a business should maybe think about whether it can answer these three questions. First of all, what ESG information do you currently receive and what are you measuring?

Secondly, are you aware of the impact the ESG pressures are having on your business? And thirdly, have you considered the internal and external pressures, threats and opportunities? So, When thinking about these areas, think about what is the long term goal for your business and how can ESG help and how in your business do you define purpose, values, culture, and strategy.

Menzies recently produced a report for the manufacturing sector, which was called Unlocking Value on the Road to Net Zero, and this identified some research by Make UK, which found that 30% of UK manufacturing firms still hadn't made an individual or team within their business accountable for the development and delivery of an ESG strategy.

It also found that 50% of firms weren't measuring their sustainability performance. So I think those statistics nicely illustrate the huge scale of challenge that's still ahead for so many businesses. So just to wrap all that up, I believe that the challenge for companies is that they really need to assess where they are on their ESG journey, where they want to get to, and what help or advice they may need to get there.

Rita Carolan: Thank you Emma. Clensy or Carlos, have you anything further to add to this?

Clensy Appavoo: Yes. Rita, I, I think that what Emma is saying is very, very true and it applies everywhere. It is cut across all types of industries, all types of companies coming from a small island economy as I was saying, the three elements of ESG are all important for us because we consider that they all create value. They have value creation. And at the Shelby Mauritius, we encourage companies to include ESG objective's as primary goals in their mission and vision statement. So that it becomes common to everyone.

Everybody is aware and every employee, all the board, not only from the board level, but it comes down the line but everybody is aware of that. Some companies are still, we know, we recognize that the many companies are still cemented in this idea, in this concept of bottom line results, and it, in fact, consciousness about ESG is taking a bit more time, but the clock is ticking and everybody is seeing the effects around and definitely value creation is very important through ESG

Carlos Camacho: Absolutely. In the region in Latin America where we have ESG as a subject that people is just embracing and talking about while that is happening, the facts of action are still waiting for becoming a reality. This just shows how uneven this is in a worldwide basis overtaking and how can this impact in the level of accomplishing the goals of ESG in one hand, but also in the level of unfair competition because those that are having the burden of getting the commitment and being also responsible accomplishing with the ESG commitments, have a burden that those that are just talking about are not really having an impact in their business modules and their economics.

So I think its important to run for the pace to be aligned amongst the rest of the world. So there is not unfair competition as far as the level of commitment and the impact in the P and L of the different entities that go along the lines of the value chain and the comprehensive externalities that the production of the clients are able to understand for the goodness of their own products, as well as the services regarding ESG.

The documentation regarding the transparency, coherence, and substance or of factual attribution of the value chain is something that is becoming more and more critical and we can foresee that this is quite uneven from region to region in the world.

Rita Carolan: Okay, thank you. So moving on from some of the challenges to more of the advantages of ESG to Transfer pricing and how these advantages can impact clients. So Carlos, I'll come to you first and then I'd like to hear from Emma and Clensy.

Carlos Camacho: Yes, the, the big advantage that Transfer pricing has as a methodology is that it's a very objective methodology. Therefore, the appropriate allocation in theoretical terms of such a profit that is to be attributable to given jurisdiction based upon the value of creation is something that will serve as a landmark in order to establish whether or not the entities are compliant or not with the fair commitment to their taxation in the different jurisdictions.

Taxes are key to the social element of the ESG and of course taxes is the way that the society, the modern society, is agreed in order to redistribute the income generated and the wealth generated amongst the value chain production.

When the attribution of the value chain is comprehensive and have some negative externalities, those production of the clients are able to understand the goodness of their products and services regarding the ESG. Therefore, the documentation of, of these facts regarding the Transfer pricing, value chain, and attribution of profits and fair share of taxes is something that is key in the elements of alignment of the value chain.

Rita Carolan: Emma have you had anything else to add?

Emma McCartney: Okay. Yeah, I, I think what I'd add is to say in terms of advantages. For a group of companies that's really embracing ESG, incorporating ESG considerations into their Transfer pricing analysis can really help them to demonstrate their commitment to sustainability and ethical practices, and really importantly, avoid any negative attention and penalties perhaps from tax authorities as, as well as other stakeholders.

Perhaps to bring this to life a bit more an example of investment in ESG could be setting up a more environmentally friendly supply chain with a focus on reduced carbon footprints. If this was set up for a multinational sales and distribution group, it may cost the business more, but could result in being able to sell products to end customers at higher prices because of customers really valuing that ethical and green supply chain, and the businesses focuses on that.

So any entity in the group that has has born any investment in relation to ESG, which benefits the supply chain and, and benefits the group of companies as a whole should ensure that they receive an appropriate reward for this investment through their Transfer pricing model.

So when any group looks at their Transfer pricing model each year and analyzes industry and company specifics, they should understand the impact of any ESG initiatives and revisit their functional analysis and look at the functions driving business profits, and creating value and that may well include those ESG considerations. So that business will then consider whether perhaps they need to change their TP policies, and of course, update any TP documentation accordingly.

Rita Carolan: Thanks, Emma. Clensy, anything you'd like to add?

Clensy Appavoo: Yeah, just want to add Rita, that, you know a I think there have been a double effect with the pandemic the pandemic coming through, right.

With the disruption that there has been in supply chains, and at the same time now with ESG. The pressure coming out from ESG there is, there is for companies now a, a, a real obligation to prioritize ecological supply chain, right? And even in different economies now we see that even local producers now are making a mass not only right to implement the principles of ESG in their supply chain, but also to get green reporting. To get reports which the green level to report on production which really is ecological.

Rita Carolan: Great. Okay, so to conclude, I would like to do a quick whip around on what you think your role as advisors is on ESG, and this question probably comes in two parts. So firstly, what is in it for member firms? And secondly, what can clients expect from their firms? Carlos, I'll start with you.

Carlos Camacho: Thank you. I guess that member firms are a conduit for the cultural change that is necessary in order to embrace the ESG commitment in general.

H L B International is a sphere for change of global environment and as a multidisciplinary organization with a great level of professionalisms and very wide diverse professionals to spread the meaning of the place and have a real influence to let ESG become a reality other than just another trend, another mega trend, so-called. I think that is, is fair to say that each of us as business leaders and as business advisors have the, the mission to really put the, the talk and the walk in place.

Rita Carolan: Thank you Carlos and Emma.

Emma McCartney: I completely agree with Carlos there that cultural change is so very important and critical. And, and I would say that, that Menzies as a firm believes in pushing the boundaries to develop employees, act sustainably, work with the community and, and grow our business in a really responsible manner.

Menzies has a better place commitment embedded in our culture and really wants to make a difference to clients with our brighter thinking. We've got clear plans in place around diversity, equity, and inclusion, corporate social responsibility, reducing emissions, and becoming net carbon zero by 2027.

So looking at how we can help our clients on, on the Transfer pricing front, and as part of our Transfer pricing services to clients, we'll always consider where the, where their business is on the ESG journey and whether it's a key value driver and or a risk in the business, which of course will be relevant when looking at the group's Transfer pricing model.

We'll also consider any other associated tax issues, some of which I've mentioned today, such as R&D, and whether there's any opportunity for making R&D tax relief claims. And of course, our clients think through the impact of the plastic packaging tax, which I mentioned earlier, and any other green taxes, and also any energy efficient tax breaks.

Because it's so critical Menzies have recently launched a whole new ESG service offering and we hope that this will be really helpful to clients over the coming years. I really firmly believe that the most successful and progressive leaders of today will be embracing ESG throughout their businesses in various forms.

It's such a vast and ever-changing topic, and it's certainly no longer background noise and really should be considered the backbone of any business. And at Menzies, we're really enthusiastic about helping to guide businesses through a process to decide what areas they should be looking at and the value it can bring to them.

Ultimately, I guess it comes down to a de-risking and future-proofing strategy that will make businesses more valuable and provide opportunities for growth. Whether a company is under pressure to do this yet or not, we would advise that really acting now is the best option.

Rita Carolan: Okay. Thank you, Emma. And last but not least, over to you, Clensy, for the final words.

Clensy Appavoo: Yes. Rita, I, I have personally had the opportunity to form part of the sustainability leadership group of HLB Global, and I brought that home, right everything that we have been working together, and now we have set the scene for HLB mauritius because we are going to step further by becoming a registered, what we call a UN compact company.

We want, we wanted your registration with the United Nations and how last September had the opportunity to present a paper on climate change on our hospitality industry. Now today HLB Mauritius has its own pilot carbon footprint as an example, to clients, which is based on UN guidelines, and this initiative has been key in helping us structure our ESG business services. We've got a team now, an ESG team, which works with independent ESG consultant and the regional UN office to promote ESG as a service.

Apart from implementing ESG objective and in those enterprises and in their TP policies, we help clients to tap green loan facilities, we provide training, and we are there. Which means there is a service which is there already, and we, we continue to be in the frontline, by making ourself known. Right? And it is very well known in our, in our, in our community, in the business community that we, we really are in the forefront of client services for this.

Rita Carolan: Well, that's all folks. Thank you, Carlos, Emma, and Clensy for all your insights into what ESG is and how it impacts Transfer pricing. It seems we have still a way to go, but you definitely seem to be on your way and have given us much food for thought, so thank you all for listening.

Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlbglobal/insights.

Eps 30 Transfer pricing - What is profit potential and how to define it

Speakers

Carlos Camacho: HLB Global Transfer Pricing Leader

Christian Jahndorf: HLB Germany

Marina Gentile: HLB USA

Intro: Hello and welcome to HLB Cross Border Business Talks HLB's global podcast series on international business topics.

Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho. I'm the leader of transfer pricing in Hlb International, and I'm very pleased and glad to be sharing this podcast with my colleagues, Kristin Jahndorf and Marina Gentile. We are going to be addressing a subject regarding transfer pricing matters applicable to intangible assets.

Christian Jahndorf: The valuation of intangible has nothing to do with the ideal theoretical concepts of valuating intangibles its just look like under the bottom line. What is the profit potential? For me, this is the decisive term and the profit potential is in the end, the success, the outcome of the company. But this you don't know when you do the transaction.

You know later once you have an observation period, five, seven years, and you know, what's the estimated price, the estimated profit potential as the basis for the value. Was it correct or not? And so. Or what one can say it's an estimation of profit. And this has nothing to do with, let's say, a sophisticated comparable method or whatever.

So in the end, the price is negotiate absolutely.

Marina Gentile: Christian, I think I think Germany has some new regulations around a sort of look back around intangibles. Do you wanna talk us through that a little bit? I found that very interesting.

Christian Jahndorf: Well, the German legislators almost 10 years ago brought up. One rule, which was I think exceptional in the world, but then was picked up by the O E C D reconstruction chapter, which says if we transfer an intangible, we do not look at the value of the intangible.

We look at the value of the function because around the intangible, there's more than such one thing. Let's say a profit carrying unit. And we have the technical term transfer package and transfer package packages. Nothing else but the profit potential. So in the end, we do not look. In a closer sense to the intangible as such, but we look to the profit potential.

So, and determining this profit potential, we have to figure out what is the benefit of the receiving company and what is the disbenefit of the company that gives away. This has a very remarkable consequence because in this calculation, you have to take into account local circumstances that brings up the price.

Give you an example. If you move IP to a country with low wages. For the company in this country, this IP has a bigger value because the profit potential for the receiving company is bigger because the wages are lower than in Germany. This means the German company has to take into account this circumstance and say, okay, when this is so much value for him, I can charge him 50% of that and I think from the perspective of the legislator, this is a genius way to tax profit potential abroad. This was not your question, Marina. Now I come to the answer. This remark was useful in order to understand it.

If it, now, it turns out in a period of seven years that the estimation of day one was wrong. Mm-hmm ,then you have to adjust and, if the price is within the period of 20% plus minus, then it's fine. Otherwise you have to reassess the whole transaction. Let's say quite a tough consequences.

Carlos Camacho: Yeah. The look back period then is seven years and the, likelihood of getting an adjustment for that period. So when I'm buying a company in an independent math fashion that have had a previous acquisition amongst related practice, which is the look back process, I'm taking the risk, I'm buying the risk of that look back, so I will have to keep part of the price as a reserve for the tax liability that might arise as a result of a tax audit or a tax assessment.

Marina Gentile: Yeah, no, absolutely. In the US we have a similar, we have a five year look back period. It's called the commensurate with income standard, right? So at the time of the valuation and transfer, you know how reliable were your projections, right? Because this is very projections based with a lot of assumptions about the future potential, right?

You're taking really the net present value of the future success, right? Future cash flows, right? So so it's the type of thing where, you know, you're meant to annually, show that you are within that projection. It's a similar thing I believe it's 80% to 120% of within that range.

Carlos Camacho: And, and this bring us also to, to the other point that is referred to intangible assets. That is, when we talk about intangible assets, we are not talking about very complicated things. It might be just your list of clients. It might be just the critical contracts that you have with a vendor that is so important for me as an, as an inquiry to, to give value to my business.

Therefore, in that sense, we don't have to limit the scope of the analysis of intangibles to those that are sophisticated ip. Type of activities, but all other synergies that are created either by clients, vendors, geographical location laws, regulations, and all of that is just changing the value of this intangible.

Christian Jahndorf: That's a very good point. It's actually one of my favorite is the client list. When we are talking, we have the case that somebody is transferring intangible and he wants to do so because this is the, the the transaction he wants to do. For example, transfer of clientless. It happens in different circumstances and the very representative case is the acquisition of a company. Mm-hmm. Just four weeks ago a client acquired Dutch group of companies and the first thing he did, he reallocated all clients list of the old company to the German parent. And I say, what are you doing there? Had anybody thought about the issue that this might concern a transfer price issue, and they say no.

We are no tax guys. We are the operational officers and we do business and no taxes. But you see even though the transaction has not an intangible aim as such it can be triggered in any other sort of business transaction.

Carlos Camacho: Yes. Because in some instances when your definition is, I'm going to do research and development of a formula for curing people of any disease, that is a clear understanding of an intangible.

But what we. Are rising in tangibles, which are the ones that comes along these transactions where there is a value for the clientele or the suppliers or the contracts that you have in place. This is an arising intangible that needs to be value as well. And of course, this is only getting more and more exciting and more and more complicated, but I guess that this is being plenty for a round of issues that can be the consequence of intangibles.

We thank you for all your input. Both Marina and Christian and of course we'll be delighted to be sharing with you for their podcasts in future.

Outtro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

Eps 30 Transfer pricing - What is profit potential and how to define it

Speakers

Carlos Camacho: HLB Global Transfer Pricing Leader

Christian Jahndorf: HLB Germany

Marina Gentile: HLB USA

Intro: Hello and welcome to HLB Cross Border Business Talks HLB's global podcast series on international business topics.

Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho. I'm the leader of transfer pricing in Hlb International, and I'm very pleased and glad to be sharing this podcast with my colleagues, Kristin Jahndorf and Marina Gentile. We are going to be addressing a subject regarding transfer pricing matters applicable to intangible assets.

Christian Jahndorf: The valuation of intangible has nothing to do with the ideal theoretical concepts of valuating intangibles its just look like under the bottom line. What is the profit potential? For me, this is the decisive term and the profit potential is in the end, the success, the outcome of the company. But this you don't know when you do the transaction.

You know later once you have an observation period, five, seven years, and you know, what's the estimated price, the estimated profit potential as the basis for the value. Was it correct or not? And so. Or what one can say it's an estimation of profit. And this has nothing to do with, let's say, a sophisticated comparable method or whatever.

So in the end, the price is negotiate absolutely.

Marina Gentile: Christian, I think I think Germany has some new regulations around a sort of look back around intangibles. Do you wanna talk us through that a little bit? I found that very interesting.

Christian Jahndorf: Well, the German legislators almost 10 years ago brought up. One rule, which was I think exceptional in the world, but then was picked up by the O E C D reconstruction chapter, which says if we transfer an intangible, we do not look at the value of the intangible.

We look at the value of the function because around the intangible, there's more than such one thing. Let's say a profit carrying unit. And we have the technical term transfer package and transfer package packages. Nothing else but the profit potential. So in the end, we do not look. In a closer sense to the intangible as such, but we look to the profit potential.

So, and determining this profit potential, we have to figure out what is the benefit of the receiving company and what is the disbenefit of the company that gives away. This has a very remarkable consequence because in this calculation, you have to take into account local circumstances that brings up the price.

Give you an example. If you move IP to a country with low wages. For the company in this country, this IP has a bigger value because the profit potential for the receiving company is bigger because the wages are lower than in Germany. This means the German company has to take into account this circumstance and say, okay, when this is so much value for him, I can charge him 50% of that and I think from the perspective of the legislator, this is a genius way to tax profit potential abroad. This was not your question, Marina. Now I come to the answer. This remark was useful in order to understand it.

If it, now, it turns out in a period of seven years that the estimation of day one was wrong. Mm-hmm ,then you have to adjust and, if the price is within the period of 20% plus minus, then it's fine. Otherwise you have to reassess the whole transaction. Let's say quite a tough consequences.

Carlos Camacho: Yeah. The look back period then is seven years and the, likelihood of getting an adjustment for that period. So when I'm buying a company in an independent math fashion that have had a previous acquisition amongst related practice, which is the look back process, I'm taking the risk, I'm buying the risk of that look back, so I will have to keep part of the price as a reserve for the tax liability that might arise as a result of a tax audit or a tax assessment.

Marina Gentile: Yeah, no, absolutely. In the US we have a similar, we have a five year look back period. It's called the commensurate with income standard, right? So at the time of the valuation and transfer, you know how reliable were your projections, right? Because this is very projections based with a lot of assumptions about the future potential, right?

You're taking really the net present value of the future success, right? Future cash flows, right? So so it's the type of thing where, you know, you're meant to annually, show that you are within that projection. It's a similar thing I believe it's 80% to 120% of within that range.

Carlos Camacho: And, and this bring us also to, to the other point that is referred to intangible assets. That is, when we talk about intangible assets, we are not talking about very complicated things. It might be just your list of clients. It might be just the critical contracts that you have with a vendor that is so important for me as an, as an inquiry to, to give value to my business.

Therefore, in that sense, we don't have to limit the scope of the analysis of intangibles to those that are sophisticated ip. Type of activities, but all other synergies that are created either by clients, vendors, geographical location laws, regulations, and all of that is just changing the value of this intangible.

Christian Jahndorf: That's a very good point. It's actually one of my favorite is the client list. When we are talking, we have the case that somebody is transferring intangible and he wants to do so because this is the, the the transaction he wants to do. For example, transfer of clientless. It happens in different circumstances and the very representative case is the acquisition of a company. Mm-hmm. Just four weeks ago a client acquired Dutch group of companies and the first thing he did, he reallocated all clients list of the old company to the German parent. And I say, what are you doing there? Had anybody thought about the issue that this might concern a transfer price issue, and they say no.

We are no tax guys. We are the operational officers and we do business and no taxes. But you see even though the transaction has not an intangible aim as such it can be triggered in any other sort of business transaction.

Carlos Camacho: Yes. Because in some instances when your definition is, I'm going to do research and development of a formula for curing people of any disease, that is a clear understanding of an intangible.

But what we. Are rising in tangibles, which are the ones that comes along these transactions where there is a value for the clientele or the suppliers or the contracts that you have in place. This is an arising intangible that needs to be value as well. And of course, this is only getting more and more exciting and more and more complicated, but I guess that this is being plenty for a round of issues that can be the consequence of intangibles.

We thank you for all your input. Both Marina and Christian and of course we'll be delighted to be sharing with you for their podcasts in future.

Outtro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

Eps 29: Transfer pricing and tax planning

Speakers:

Carlos Camacho: HLB Global Transfer Pricing Leader

Christian Jahndorf: HLB Germany

Marina Gentile: HLB USA

Intro: Hello and welcome to HLB Cross Border Business Talks, HLB's Global podcast series on international business topics.

Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho. I'm the leader of trans pricing in HLB International, and I'm very pleased and glad to be sharing this podcast with my colleagues, Christian Jahndorf and Marina Gentile. We are going to be addressing a subject regarding transfer pricing matters.

And this leads us to the point of tax planning because the, source of this B actions was aggressive tax planning, and avoidance. Multinational enterprises are plea to be guilty if that to be switched. Assets are not paying their fair share of taxes almost with no guarantees as taxpayers. And this is the ground that just let the OECD take off these 15 actions, which.

Action seven, eight, and nine leads to this d approach, which are the ones that refer to this potential coexistence of economical owner, such as five or even more. Economical owners if they are joint ledges involved in the development of a intangible. The other interesting point that Barina brought in is that in the collaborative economy that we're living in and the post covid era you don't know basically where the people is sitting at.

In fact, while we're recording, we are seated in a different jurisdiction. And this is an intangible, let's, let's assume that this has an economical value. This knowledge that we are trying to share has an economical value. So, this becomes intangible. We can sell this, we can benefit from royalties of it, we can get paid for this.

We are not, but we may. And having said that, the fact that we. Taxpayers in different jurisdictions and we might be rendering the service in different jurisdictions, do trigger the issue of where is intangible deemed to be paying taxes or what apportionment of tax is deemed to each of their jurisdictions involved in that very complex analysis.

Marina Gentile: It's a great point. It certainly is a very complex topic, right? I mean, by definition it's an intangible. It's hard to, to value. It's hard to you know, It, it's not like the other functions that are far more routine that you can measure them and test them and benchmark them against the marketplace, right?

Every multinational's intangibles should be to some extent, you know, Bespoke, right? Unique to them. So you know, it's, it's hard to get that direct comparison. I, I definitely encourage, you know, with my clients that they, they set the stage for those dey functions, Christian, that you'd, you know, you, you introduced, right?

You're right, it's far more complex now in terms of economic ownership and what that means. But I do find. Getting the strategy in place and being proactive and prospective about it so that, you know, the multinational tells its story of its own business as opposed to having tax authorities claim what they see out there.

And the. They don't, you know, the, the reason to sort of look at the transfer pricing carefully is it helps to tell that, that economic story of the business, right, so that the decisions, the functions, what's happening is actually operationally driven and not. Not tax driven. And I think that protects the company and its assets.

You know, I, I work with a lot of tech companies, so I'm very concerned with, with asset protection. And a lot of times, you know, the transfer pricing really is far more driven. For reasons other than tax, right? Even if there's a tax compliance component to it, or you know, possible tax minimization, right?

Strategies, you know, I'm focused with them on protecting the assets in the jurisdiction where it's funded, developed, where the entrepreneurial risk taker is. So that's getting really tight about how to compensate the other people involved in this asset, right? So anyone who's. Software developing, improving the maintaining, right?

In any parts of the world where that's happening, that entity needs to be viewed as a service provider and needs to be profitable from day one. And that's a concept that sometimes is difficult, difficult to To get through, right, because it's not intuitive. You know you have a company working on IP, let's say, early stages.

They're in a, an nool, a loss position, you know, wherever they're located. And now they need to be a taxpayer in a foreign market because they have a development team. Yes, the answer is yes to that, even though it's, it's, you know, difficult to understand. But making that happen ensures that that entity in that foreign market, A service provider to the entrepreneur.

And thus protecting, I believe, goes a long way in protecting and showing the substance and protecting that IP in that location. And, and again, it's important for many reasons, right? A lot of tech companies, for example, you know, they're, they wanna be transaction ready, they're looking to sell the business at some point, and you.

Buyers are very savvy now. Savvy now, excuse me. When they're trying to buy you know, acquire a global business, they ask the right questions and transfer pricing really has a seat at that, at that table now, for sure. Absolutely, and, and in fact, you mentioned something that is very important prior to just changing a little bit of the subject, but I want to remark two things.

Carlos Camacho: One is the uniqueness of the intangible itself, because if it is already. Invented if it is already in use. If it is not unique, then it is not your intangible, it's somebody else's intangible. So you have to be very careful about that because one of the techniques in order to get the approach to the right market range of acceptance of the transfer pricing is whether or not you have comparability.

But the unique. Of the intangibles makes the comparability very tough. So when we do document the trans pricing papers, what we do is go to the contracts and to the essence of the contracts, not to the written contract, but the in fact contract. What is really happening? What is that very story that you are documenting?

From day one, not when the tax authority calls you, but when you are starting up and developing that intangible, you have to come up with a story that is almost life-streaming in order to be able to have something to tell if you get out it. The other thing is, The uniqueness lead us to another very difficult factor, which is that developing is something that may be successful.

Or maybe failure. Yeah. So when you are developing, you don't know whether you're going to be successful or not, and tax administrations do not understand this. Tax administrations think that every other thing that an individual taxpayer do is going to generate profit. Hopefully, that will be the case, but that's.

For business people that is hearing this business, people understand very well that that's not the case before you get success in any vaccine, for instance, you have to fail many times in order to get that intangible. So basically, the intangible, you can't value that very easy way as the tax authorities are looking for.

Christian Jahndorf: All right, and this bring us as a point. To value at the end. That's what about our standard methods. We text authorities like comparing prices, but as you already mentioned, things are unique and how can you compare unique things? It's impossible. So let's say the standard tools that we use for services or non intend goods, They do not work.

So this brings us maybe now through the complexity of how to value such items. And then even though we can differentiate between, let's say new technologies as intangible or brands, they follow, in my opinion, different rules. Yes. In evaluation. So, We see we run into a very complex situation and let's see how we can get out of it.

Carlos Camacho: Indeed. I guess one of the things that is going to make it a little bit more difficult is the fact that there is a definition for intangibles. In the accounting world that is absolutely different than intangibles for economical purposes, which is exactly what we are referring to when we are referring to intangibles here.

We are not referring necessarily in coherence with accounting standards. Absolutely. We are referring to the economical mean of an intangible and. The challenge here, just the reason why I bring up this point is because if you are the developer and you go by the accounting rules, you are not allowed to impute that as your asset in your books because you didn't, you didn't pay for it.

You develop it, you spend out, you put it all your risk in the development. You didn't, you don't have the ability to impute that as part of your assets in your books. This only happens when you acquire the intangible, according to the international accounting standard. So that only makes it. More complex because in some instances the first thing that you want to do is look at the financial statements, but all of a sudden you are going to find no line in the financial statements referring to intangibles because you didn't pay for them.

Therefore, although you spend out, you have to be and. Profit, the loss statement will have to swallow those payments and investments while you're the developer. But number one, this is good for the taxpayer because all expenses are business expensive that are deductible immediately. So even though from the tax performance, this is a good thing, but in the end, you have business expenses, but no assets in your books.

And, and, and at the end of the day when the flow funds. The income is generated, there is a mismatch time wise of the cost incur and the income generated. So that is another issue that makes intangibles very challenging arena as we are moving forward. So, so car. So Carlos you brought up a really good point in that, and the reason why, you know, I tend to speak to my clients and describe it as the secret sauce, even though I, you know, I use that phrase daily and I don't particularly like it.

Marina Gentile: But it gets them to understand a little bit more how we're talking about this, right? Because you're absolutely right, the balance sheet isn't going to be reflective. We're not talking about the accounting around this. We're talking about an economic function. And, and Christian, getting back to what you were saying about the methods I mean, like, like we said, it, it's an intangible.

How do you value that? Right. I mean, so either you go out and you find, you know, An independent, you know comparable price between two other entities that, you know, have a similar, you know, intangible. But is that really going to get you there? Because I mean, again, it's unique by definition, so it's not going to be very close and the standard of comparability.

In that type of analysis is much higher than it would be for something like a time CPM, you know, profitability-based analysis. And then the second option is do you have an internal cup or cut? Right? So are you transacting with an independent entity in the same way you're transacting with your related entity?

You know, I'm telling you 25 years in, the answer is always no in one way or another, right? Because it's either, you know, a different volume, a different geography, you know, a different level of the market a different point in time. All those things sort of blow out the comparability factor because again, the standard for comparability is very high.

I also want to add, you know, I have a heavy background in. Advanced pricing agreement negotiations are bilateral multilateral, right? And helping my clients through, you know, competent authority negotiations as well. And as much as every tax authority out there you know, speaks to the fact or the regulations or whatever, speak to the fact that, you know, a comparable transaction is ideal right in, in, in testing the transfer pricing.

The truth is, I could never walk into a negotiation with a comparable transaction, right? No tax authority is going to. Agree to something without understanding the bottom-line profitability of the entity and what they can actually tax. Right. You know, I can't go in with a royalty rate, you know, I can't go in with you know, a, a cup only without having and showing the impact of that profitability.

And, you know, again, why? Because they don't, they don't tax at the transactional level. The tax, you know, at the bottom-line profit level. So just, just wanted to throw that out. Absolutely. And, and further, the more what you have got to go with is a business story, not a taxes story. So, the problem, is that tax authorities only understand taxes.

Carlos Camacho: So you have a business story that you have to translate into a text story, which by definition is almost impossible. So very likely. Advisable for clients not to. Approach tax authorities for APAs for advanced pricing agreements with intangibles, because more likely than not, you are going to be rejected first and in immature markets, which is the case of developing emerging economies, more likely than not that information that you have been given in good faith in order to get your agreement is going to turn.

You unleash yourself with art, I guess that this is being plenty for a round of issues that can be the consequence of intangibles. We thank you for all your input. Both Marina and Christian, and of course we'll be delighted to be sharing with you for their podcasts in the future.

Outro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

Eps 29: Transfer pricing and tax planning

Speakers:

Carlos Camacho: HLB Global Transfer Pricing Leader

Christian Jahndorf: HLB Germany

Marina Gentile: HLB USA

Intro: Hello and welcome to HLB Cross Border Business Talks, HLB's Global podcast series on international business topics.

Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho. I'm the leader of trans pricing in HLB International, and I'm very pleased and glad to be sharing this podcast with my colleagues, Christian Jahndorf and Marina Gentile. We are going to be addressing a subject regarding transfer pricing matters.

And this leads us to the point of tax planning because the, source of this B actions was aggressive tax planning, and avoidance. Multinational enterprises are plea to be guilty if that to be switched. Assets are not paying their fair share of taxes almost with no guarantees as taxpayers. And this is the ground that just let the OECD take off these 15 actions, which.

Action seven, eight, and nine leads to this d approach, which are the ones that refer to this potential coexistence of economical owner, such as five or even more. Economical owners if they are joint ledges involved in the development of a intangible. The other interesting point that Barina brought in is that in the collaborative economy that we're living in and the post covid era you don't know basically where the people is sitting at.

In fact, while we're recording, we are seated in a different jurisdiction. And this is an intangible, let's, let's assume that this has an economical value. This knowledge that we are trying to share has an economical value. So, this becomes intangible. We can sell this, we can benefit from royalties of it, we can get paid for this.

We are not, but we may. And having said that, the fact that we. Taxpayers in different jurisdictions and we might be rendering the service in different jurisdictions, do trigger the issue of where is intangible deemed to be paying taxes or what apportionment of tax is deemed to each of their jurisdictions involved in that very complex analysis.

Marina Gentile: It's a great point. It certainly is a very complex topic, right? I mean, by definition it's an intangible. It's hard to, to value. It's hard to you know, It, it's not like the other functions that are far more routine that you can measure them and test them and benchmark them against the marketplace, right?

Every multinational's intangibles should be to some extent, you know, Bespoke, right? Unique to them. So you know, it's, it's hard to get that direct comparison. I, I definitely encourage, you know, with my clients that they, they set the stage for those dey functions, Christian, that you'd, you know, you, you introduced, right?

You're right, it's far more complex now in terms of economic ownership and what that means. But I do find. Getting the strategy in place and being proactive and prospective about it so that, you know, the multinational tells its story of its own business as opposed to having tax authorities claim what they see out there.

And the. They don't, you know, the, the reason to sort of look at the transfer pricing carefully is it helps to tell that, that economic story of the business, right, so that the decisions, the functions, what's happening is actually operationally driven and not. Not tax driven. And I think that protects the company and its assets.

You know, I, I work with a lot of tech companies, so I'm very concerned with, with asset protection. And a lot of times, you know, the transfer pricing really is far more driven. For reasons other than tax, right? Even if there's a tax compliance component to it, or you know, possible tax minimization, right?

Strategies, you know, I'm focused with them on protecting the assets in the jurisdiction where it's funded, developed, where the entrepreneurial risk taker is. So that's getting really tight about how to compensate the other people involved in this asset, right? So anyone who's. Software developing, improving the maintaining, right?

In any parts of the world where that's happening, that entity needs to be viewed as a service provider and needs to be profitable from day one. And that's a concept that sometimes is difficult, difficult to To get through, right, because it's not intuitive. You know you have a company working on IP, let's say, early stages.

They're in a, an nool, a loss position, you know, wherever they're located. And now they need to be a taxpayer in a foreign market because they have a development team. Yes, the answer is yes to that, even though it's, it's, you know, difficult to understand. But making that happen ensures that that entity in that foreign market, A service provider to the entrepreneur.

And thus protecting, I believe, goes a long way in protecting and showing the substance and protecting that IP in that location. And, and again, it's important for many reasons, right? A lot of tech companies, for example, you know, they're, they wanna be transaction ready, they're looking to sell the business at some point, and you.

Buyers are very savvy now. Savvy now, excuse me. When they're trying to buy you know, acquire a global business, they ask the right questions and transfer pricing really has a seat at that, at that table now, for sure. Absolutely, and, and in fact, you mentioned something that is very important prior to just changing a little bit of the subject, but I want to remark two things.

Carlos Camacho: One is the uniqueness of the intangible itself, because if it is already. Invented if it is already in use. If it is not unique, then it is not your intangible, it's somebody else's intangible. So you have to be very careful about that because one of the techniques in order to get the approach to the right market range of acceptance of the transfer pricing is whether or not you have comparability.

But the unique. Of the intangibles makes the comparability very tough. So when we do document the trans pricing papers, what we do is go to the contracts and to the essence of the contracts, not to the written contract, but the in fact contract. What is really happening? What is that very story that you are documenting?

From day one, not when the tax authority calls you, but when you are starting up and developing that intangible, you have to come up with a story that is almost life-streaming in order to be able to have something to tell if you get out it. The other thing is, The uniqueness lead us to another very difficult factor, which is that developing is something that may be successful.

Or maybe failure. Yeah. So when you are developing, you don't know whether you're going to be successful or not, and tax administrations do not understand this. Tax administrations think that every other thing that an individual taxpayer do is going to generate profit. Hopefully, that will be the case, but that's.

For business people that is hearing this business, people understand very well that that's not the case before you get success in any vaccine, for instance, you have to fail many times in order to get that intangible. So basically, the intangible, you can't value that very easy way as the tax authorities are looking for.

Christian Jahndorf: All right, and this bring us as a point. To value at the end. That's what about our standard methods. We text authorities like comparing prices, but as you already mentioned, things are unique and how can you compare unique things? It's impossible. So let's say the standard tools that we use for services or non intend goods, They do not work.

So this brings us maybe now through the complexity of how to value such items. And then even though we can differentiate between, let's say new technologies as intangible or brands, they follow, in my opinion, different rules. Yes. In evaluation. So, We see we run into a very complex situation and let's see how we can get out of it.

Carlos Camacho: Indeed. I guess one of the things that is going to make it a little bit more difficult is the fact that there is a definition for intangibles. In the accounting world that is absolutely different than intangibles for economical purposes, which is exactly what we are referring to when we are referring to intangibles here.

We are not referring necessarily in coherence with accounting standards. Absolutely. We are referring to the economical mean of an intangible and. The challenge here, just the reason why I bring up this point is because if you are the developer and you go by the accounting rules, you are not allowed to impute that as your asset in your books because you didn't, you didn't pay for it.

You develop it, you spend out, you put it all your risk in the development. You didn't, you don't have the ability to impute that as part of your assets in your books. This only happens when you acquire the intangible, according to the international accounting standard. So that only makes it. More complex because in some instances the first thing that you want to do is look at the financial statements, but all of a sudden you are going to find no line in the financial statements referring to intangibles because you didn't pay for them.

Therefore, although you spend out, you have to be and. Profit, the loss statement will have to swallow those payments and investments while you're the developer. But number one, this is good for the taxpayer because all expenses are business expensive that are deductible immediately. So even though from the tax performance, this is a good thing, but in the end, you have business expenses, but no assets in your books.

And, and, and at the end of the day when the flow funds. The income is generated, there is a mismatch time wise of the cost incur and the income generated. So that is another issue that makes intangibles very challenging arena as we are moving forward. So, so car. So Carlos you brought up a really good point in that, and the reason why, you know, I tend to speak to my clients and describe it as the secret sauce, even though I, you know, I use that phrase daily and I don't particularly like it.

Marina Gentile: But it gets them to understand a little bit more how we're talking about this, right? Because you're absolutely right, the balance sheet isn't going to be reflective. We're not talking about the accounting around this. We're talking about an economic function. And, and Christian, getting back to what you were saying about the methods I mean, like, like we said, it, it's an intangible.

How do you value that? Right. I mean, so either you go out and you find, you know, An independent, you know comparable price between two other entities that, you know, have a similar, you know, intangible. But is that really going to get you there? Because I mean, again, it's unique by definition, so it's not going to be very close and the standard of comparability.

In that type of analysis is much higher than it would be for something like a time CPM, you know, profitability-based analysis. And then the second option is do you have an internal cup or cut? Right? So are you transacting with an independent entity in the same way you're transacting with your related entity?

You know, I'm telling you 25 years in, the answer is always no in one way or another, right? Because it's either, you know, a different volume, a different geography, you know, a different level of the market a different point in time. All those things sort of blow out the comparability factor because again, the standard for comparability is very high.

I also want to add, you know, I have a heavy background in. Advanced pricing agreement negotiations are bilateral multilateral, right? And helping my clients through, you know, competent authority negotiations as well. And as much as every tax authority out there you know, speaks to the fact or the regulations or whatever, speak to the fact that, you know, a comparable transaction is ideal right in, in, in testing the transfer pricing.

The truth is, I could never walk into a negotiation with a comparable transaction, right? No tax authority is going to. Agree to something without understanding the bottom-line profitability of the entity and what they can actually tax. Right. You know, I can't go in with a royalty rate, you know, I can't go in with you know, a, a cup only without having and showing the impact of that profitability.

And, you know, again, why? Because they don't, they don't tax at the transactional level. The tax, you know, at the bottom-line profit level. So just, just wanted to throw that out. Absolutely. And, and further, the more what you have got to go with is a business story, not a taxes story. So, the problem, is that tax authorities only understand taxes.

Carlos Camacho: So you have a business story that you have to translate into a text story, which by definition is almost impossible. So very likely. Advisable for clients not to. Approach tax authorities for APAs for advanced pricing agreements with intangibles, because more likely than not, you are going to be rejected first and in immature markets, which is the case of developing emerging economies, more likely than not that information that you have been given in good faith in order to get your agreement is going to turn.

You unleash yourself with art, I guess that this is being plenty for a round of issues that can be the consequence of intangibles. We thank you for all your input. Both Marina and Christian, and of course we'll be delighted to be sharing with you for their podcasts in the future.

Outro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

Eps 28: Transfer pricing and Intangibles

Speakers:

Carlos Camacho: HLB Global Transfer Pricing Leader

Christian Jahndorf: HLB Germany

Marina Gentile: HLB USA

Intro: Hello and welcome to HLB Cross Border Business Talks, HLB’s Global podcast series on international business topics.

Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho and I'm the leader of transfer pricing at HLB International. I'm very pleased and glad to be sharing this podcast with my colleagues, Kristin Jan Fog and Marin Jan. We are going to be addressing a subject regarding transfer pricing intangible assets. So I think it's better to start talking about general transfer pricing. The terminology of transfer pricing may lead people to think about a price of a good or service. Unfortunately, the terminology is not enough to explain what transfer pricing is all about.

Transfer pricing is all about a comparison of the assets involved in the production of a good or service. The risk that each of the parties is bearing in the transaction, as well as the functions that each of the parties is undertaking. Transfer pricing is only applicable when those transactions do occur within related practices.

So if two independent individuals, companies, or entities, in general, do enter into a contract, it is deemed to be treated as a right transfer pricing analysis because both parties are trying to behave economically. Behaving economically means that the seller is trying to obtain the highest price possible, and the buyer is going to try to obtain the least value for that acquisition. That doesn't happen when you are a related party because there is a common interest of shareholders that you have in common, maybe directors that are in common, and it varies from legislation to legislation. Today we are going to try to go over what is deemed to be related parties within the framework of the O E C D guidelines, which are followed by most of the jurisdictions, are all over the world.

Carlos Camacho: Welcome Christian. Welcome, Marina.

Christian Jahndorf: Hello.

Marina Gentile: Great to be here, Carlos. Hello everyone. I'd love to jump on what you said Carlos, about not just about the transfer of goods and services. I think intangibles are sometimes forgotten in the mix of transfer pricing. I know when I speak to my clients they don't necessarily think about it that way, or understand the concept, or understand that the entity that's developing and incurring the cost of development of the intangible, whatever that is, needs to be compensated by the other entities in the group. They are then profiting from it, selling it out in the marketplace, earning revenue on that intangible that it hasn't expended any resources towards developing. I also want to say that in terms of intangible or intellectual property, we need to consider it less legally defined.

It's not necessarily something that's been patented, registered, or legally claimed as an intangible, but rather the secret sauce of the global business. Like, what drives this business? What are they expending funds towards developing that puts them at an advantage,

Carlos Camacho: Absolutely, Christian.

Christian Jahndorf: Yeah, I agree. The intangible is visible as long as it is registered as a patent. So if you transfer such an intangible, you see it and you think about tax consequences. As long as you have other values which are not registered in such a way, then you have the case and you run the danger and the tax risk that this trench action is not considered under fair transfer pricing with the tax consequences if this is picked up in tax audit. Let's say, Intangible we can understand today for tax purposes, at least in the broadest sense possible, because each profit potential carrying item in a company which can be transferred is a possible intangible. Digitalization makes it extremely necessary to think about this in tax terms because intangibles become a global driver in creating value and they are shifted in multinational companies from the parent company to subsidiaries or from subsidiaries to another sister company and so on. The tax consequences are almost obvious if you are aware that if you shift a value driver from one place to another, you transfer value and value is the profit-generating unit, which from the perspective of the tax authorities is the source of taxable income.

That's why it's so important in our days now to put utmost attention on this topic.

Carlos Camacho: Absolutely. That's why this is becoming a global issue. I mean, the O E C D, which is kind of the patrolling entity of the type of approach to avoid taxation and tax avoidance internationally. They do the patrolling to make sure that the fair share of taxation is allocated to the jurisdiction that it pertains avoiding having artificial meanings of shifting the intangibles, for instance, from a highly heavy tax jurisdiction to a lower tax jurisdiction, and that's what brought the discussion amongst the O E C D in 2015 to create a set of rules, so-called BEPS, which is based erosion profit shifting.

It's an avoidance program which consists of 15 actions prepared in a very coherent fashion by the O E C D. There is a very interesting point Christian mentioned, which is digitalization because the number one action of the 15 actions of BEPS is the digital economy, and all of a sudden, all the 15 actions were delivered except for action number one, which is the most difficult one. We will have other chances to go over the digital economy in another podcast episode coming up, but in fact, the BEPS analysis is trying to determine whether or not there is a business reason for this shifting of the asset. If there is a purely tax-driven motivation to save the taxes, whether that is legal, that's avoidance, or whether that's illegal that's evasion. So, I think that that's the big challenge that these transactions have when amongst related parties.

Marina Gentile: Yeah, Carlos, that's an excellent point. I mean, let's face it, right? The taxpayer, the multinational is at a bit of a disadvantage in that, the tax authorities, no matter what, no matter what country is, you know, almost have this preconceived notion that multinationals are manipulating taxes through transfer pricing, right? It's just, the expectation that is what's happening. I think the reality, I mean for a lot of us is people just don't understand the complex regulations and international laws around transfer pricing, value creation and, what that means when you're shifting something. So, really is on the taxpayer to get the right advice and understand what that is and what that means, right?

IP, intellectual property, is king in any global organization. Following the functions, assets and risk it's typically the assets part wherever that IP is located, funded, developed, et cetera, paid for, that's the entrepreneurial risk taker of the business.

Meaning, it's the entity that, yes, in the beginning, incurs the highest cost related to the development, but also reaps the biggest rewards. There's no ceiling to that entity. That entity can be as profitable as that IP is successful. Other entities in the organization are some kind of, lower risk or limited risk, limited function entity within the chain.

Identifying that IP and where it's located and sending that message to all the tax authorities related to this global business is key. You want to set the stage and, ideally, the stage is that it's one location that owns that IP, but we can get into that as well because it gets more complicated if it's more than one location but then building the substance around it.

So the transfer pricing piece of it is where you have that IP, the substance needs to be there, the strategy, the chief technology officer, a development team, et cetera. You can still have developers in other parts of the world, of course especially post covid people are located everywhere and that's fine as long as they're compensated appropriately. So that's where that net cost plus markup structure for the service of developing comes in while maintaining the integrity of the risk with the entrepreneurial risk taker.

Christian Jahndorf: I think Marina expresses one decisive point it is the question of where is the intangible allocated. Before BEPS, it was quite easy. We had the concept of legal ownership. The legal owner is the entity that pays the bill for the development or acquisition of the IP. This concept of legal ownership is put from top to the bottom. Now we have the concept of economic ownership, and it can happen that the legal owner, meaning the company paying the bill, is not the economic owner, and this is in my opinion, the most severe consequence of BEPS that we have to screen. The existing concepts are already in place. If the allocation to the legal owner is still the right way to allocate the asset. And now coming to the point, of economic ownership, what does it mean?

The topic or the keyword is DIMPE. This DIMPE asks who develops, improves, maintains, protects, or employs the intangible asset. So we have five criteria to determine who is the economic owner. We can also have a maximum of five possible economic owners. One may be that pays the bill, the other one that develops, the other one that improves the other one that maintains. So this makes things very complex. In the end. It is a very difficult question of how to evaluate and how consider which portion of contribution to the development of such a good is, so decisive that you can say you are the economic owner.

We will see endless discussions with tax authorities, not only in one country but in the worst case in various countries. This little change from the principle of legal to economic ownership is disruptive in practice.

Carlos Camacho: Indeed, I guess that this is plenty for a round of issues that can be the consequence of intangibles. We thank you for all your input both Marina and Christian, and of course, we'll be delighted to be sharing with you in the next podcasts.

Outtro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

Eps 28: Transfer pricing and Intangibles

Speakers:

Carlos Camacho: HLB Global Transfer Pricing Leader

Christian Jahndorf: HLB Germany

Marina Gentile: HLB USA

Intro: Hello and welcome to HLB Cross Border Business Talks, HLB’s Global podcast series on international business topics.

Carlos Camacho: Hello everyone. Welcome to our podcast. My name is Carlos Camacho and I'm the leader of transfer pricing at HLB International. I'm very pleased and glad to be sharing this podcast with my colleagues, Kristin Jan Fog and Marin Jan. We are going to be addressing a subject regarding transfer pricing intangible assets. So I think it's better to start talking about general transfer pricing. The terminology of transfer pricing may lead people to think about a price of a good or service. Unfortunately, the terminology is not enough to explain what transfer pricing is all about.

Transfer pricing is all about a comparison of the assets involved in the production of a good or service. The risk that each of the parties is bearing in the transaction, as well as the functions that each of the parties is undertaking. Transfer pricing is only applicable when those transactions do occur within related practices.

So if two independent individuals, companies, or entities, in general, do enter into a contract, it is deemed to be treated as a right transfer pricing analysis because both parties are trying to behave economically. Behaving economically means that the seller is trying to obtain the highest price possible, and the buyer is going to try to obtain the least value for that acquisition. That doesn't happen when you are a related party because there is a common interest of shareholders that you have in common, maybe directors that are in common, and it varies from legislation to legislation. Today we are going to try to go over what is deemed to be related parties within the framework of the O E C D guidelines, which are followed by most of the jurisdictions, are all over the world.

Carlos Camacho: Welcome Christian. Welcome, Marina.

Christian Jahndorf: Hello.

Marina Gentile: Great to be here, Carlos. Hello everyone. I'd love to jump on what you said Carlos, about not just about the transfer of goods and services. I think intangibles are sometimes forgotten in the mix of transfer pricing. I know when I speak to my clients they don't necessarily think about it that way, or understand the concept, or understand that the entity that's developing and incurring the cost of development of the intangible, whatever that is, needs to be compensated by the other entities in the group. They are then profiting from it, selling it out in the marketplace, earning revenue on that intangible that it hasn't expended any resources towards developing. I also want to say that in terms of intangible or intellectual property, we need to consider it less legally defined.

It's not necessarily something that's been patented, registered, or legally claimed as an intangible, but rather the secret sauce of the global business. Like, what drives this business? What are they expending funds towards developing that puts them at an advantage,

Carlos Camacho: Absolutely, Christian.

Christian Jahndorf: Yeah, I agree. The intangible is visible as long as it is registered as a patent. So if you transfer such an intangible, you see it and you think about tax consequences. As long as you have other values which are not registered in such a way, then you have the case and you run the danger and the tax risk that this trench action is not considered under fair transfer pricing with the tax consequences if this is picked up in tax audit. Let's say, Intangible we can understand today for tax purposes, at least in the broadest sense possible, because each profit potential carrying item in a company which can be transferred is a possible intangible. Digitalization makes it extremely necessary to think about this in tax terms because intangibles become a global driver in creating value and they are shifted in multinational companies from the parent company to subsidiaries or from subsidiaries to another sister company and so on. The tax consequences are almost obvious if you are aware that if you shift a value driver from one place to another, you transfer value and value is the profit-generating unit, which from the perspective of the tax authorities is the source of taxable income.

That's why it's so important in our days now to put utmost attention on this topic.

Carlos Camacho: Absolutely. That's why this is becoming a global issue. I mean, the O E C D, which is kind of the patrolling entity of the type of approach to avoid taxation and tax avoidance internationally. They do the patrolling to make sure that the fair share of taxation is allocated to the jurisdiction that it pertains avoiding having artificial meanings of shifting the intangibles, for instance, from a highly heavy tax jurisdiction to a lower tax jurisdiction, and that's what brought the discussion amongst the O E C D in 2015 to create a set of rules, so-called BEPS, which is based erosion profit shifting.

It's an avoidance program which consists of 15 actions prepared in a very coherent fashion by the O E C D. There is a very interesting point Christian mentioned, which is digitalization because the number one action of the 15 actions of BEPS is the digital economy, and all of a sudden, all the 15 actions were delivered except for action number one, which is the most difficult one. We will have other chances to go over the digital economy in another podcast episode coming up, but in fact, the BEPS analysis is trying to determine whether or not there is a business reason for this shifting of the asset. If there is a purely tax-driven motivation to save the taxes, whether that is legal, that's avoidance, or whether that's illegal that's evasion. So, I think that that's the big challenge that these transactions have when amongst related parties.

Marina Gentile: Yeah, Carlos, that's an excellent point. I mean, let's face it, right? The taxpayer, the multinational is at a bit of a disadvantage in that, the tax authorities, no matter what, no matter what country is, you know, almost have this preconceived notion that multinationals are manipulating taxes through transfer pricing, right? It's just, the expectation that is what's happening. I think the reality, I mean for a lot of us is people just don't understand the complex regulations and international laws around transfer pricing, value creation and, what that means when you're shifting something. So, really is on the taxpayer to get the right advice and understand what that is and what that means, right?

IP, intellectual property, is king in any global organization. Following the functions, assets and risk it's typically the assets part wherever that IP is located, funded, developed, et cetera, paid for, that's the entrepreneurial risk taker of the business.

Meaning, it's the entity that, yes, in the beginning, incurs the highest cost related to the development, but also reaps the biggest rewards. There's no ceiling to that entity. That entity can be as profitable as that IP is successful. Other entities in the organization are some kind of, lower risk or limited risk, limited function entity within the chain.

Identifying that IP and where it's located and sending that message to all the tax authorities related to this global business is key. You want to set the stage and, ideally, the stage is that it's one location that owns that IP, but we can get into that as well because it gets more complicated if it's more than one location but then building the substance around it.

So the transfer pricing piece of it is where you have that IP, the substance needs to be there, the strategy, the chief technology officer, a development team, et cetera. You can still have developers in other parts of the world, of course especially post covid people are located everywhere and that's fine as long as they're compensated appropriately. So that's where that net cost plus markup structure for the service of developing comes in while maintaining the integrity of the risk with the entrepreneurial risk taker.

Christian Jahndorf: I think Marina expresses one decisive point it is the question of where is the intangible allocated. Before BEPS, it was quite easy. We had the concept of legal ownership. The legal owner is the entity that pays the bill for the development or acquisition of the IP. This concept of legal ownership is put from top to the bottom. Now we have the concept of economic ownership, and it can happen that the legal owner, meaning the company paying the bill, is not the economic owner, and this is in my opinion, the most severe consequence of BEPS that we have to screen. The existing concepts are already in place. If the allocation to the legal owner is still the right way to allocate the asset. And now coming to the point, of economic ownership, what does it mean?

The topic or the keyword is DIMPE. This DIMPE asks who develops, improves, maintains, protects, or employs the intangible asset. So we have five criteria to determine who is the economic owner. We can also have a maximum of five possible economic owners. One may be that pays the bill, the other one that develops, the other one that improves the other one that maintains. So this makes things very complex. In the end. It is a very difficult question of how to evaluate and how consider which portion of contribution to the development of such a good is, so decisive that you can say you are the economic owner.

We will see endless discussions with tax authorities, not only in one country but in the worst case in various countries. This little change from the principle of legal to economic ownership is disruptive in practice.

Carlos Camacho: Indeed, I guess that this is plenty for a round of issues that can be the consequence of intangibles. We thank you for all your input both Marina and Christian, and of course, we'll be delighted to be sharing with you in the next podcasts.

Outtro: Thanks for listening. For more information about this topic and other cross-border business insights, visit www.hlb.global/insights.

EPS 27: Key findings from HLB Cybersecurity Report 2022

Speakers:

Global CIO, Abu Bakkar

Global Advisory and Technology Leader, Jim Bourke

HLB Digital Leader, Gustavo Solis

Abu Bakkar: Good afternoon everybody, and welcome to, the HLB podcast series on cross Border Business Talks.

Now October is Cybersecurity Awareness Month, and it's dedicated to helping individuals and businesses protect themselves online as threats to technology and confidential data become more commonplace. At HLB, we produced our annual report to mark cybersecurity awareness month. The report has been prepared with responses from over 750, senior IT professionals from a variety of sectors.

This report gives guidance to the network on prevalent risks to cyber security and how they adopt best practices to protect their firms. I am joined in the podcast by Jim Bourke, HLB Chair of Technology and Advisory. Hi Jim.

Jim Bourke: How's it going, Abu?

Abu Bakkar: Great. Thank you. And Gustavo Solis partner firm at HLB in Mexico and member of HLB Digital. Hey, Gustavo.

Gustavo Solis: Hi. Good morning.

Abu Bakkar: Thank you guys for joining. So let's deep dive into the findings of our cybersecurity report. Maybe I'll open up with a question to both of you really? Yes. I'd like to start by asking what you thought was the most surprising finding of the report.

Jim Bourke: Okay, so let me, let me lead on this one, Abu.

I'll tell you, I was shocked right when we looked at the responses and we saw, again, keep in mind the population here. We have senior IT professionals that answer the survey, and we put out a press release on this a few weeks ago. 78% of senior IT professionals believe their organizations are not prepared for cyber attacks. I said not prepared for cyber attacks. So here I am, right? I'm a business owner, I'm an entrepreneur, I'm a CEO of a company. If my senior IT professionals believe that they are not prepared for a cyber attack, I need to be concerned. That to me, Abu was shocking.

Abu Bakkar: Thank you, Jim.

And I echo your sentiments. Some of the results we found were as you mentioned, shocking. Gustavo.

Gustavo Solis: Yes. well, to me it wasn't a surprise, it's just a confirmation that the problem that we have as a society that, one of the most concerning things is the cyber security skills sort shortage. We don't have enough people to deal with all this cybersecurity threats all around the world. This is a serious concern because this is not a problem that is going to be solved from one day to another. We need universities and we need colleges and postgraduate studies to fulfill this gap between what is needed, and where we are currently in terms of our capabilities. To me, that's one of the most shocking issues.

Abu Bakkar: Thank you Gustavo. A question along those lines. Is there anything that in our industry as accounting firms that we can do or we can add to the training and learning that we provide for cybersecurity?

Jim Bourke: Sure. We've talked about this many times. You know, life is all about training. Life is all about learning and when, especially when it comes to cyber and cyber attacks and cyber security awareness, you need to continually be addressing those issues with your staff. I look at best practices for our industry.

Very often we get asked, why should we hire an accounting firm? Why should we hire a chartered accountant? Why should we hire a CPA to help us with protection and cybersecurity awareness? Why? Because we understand the vulnerabilities that exist around data. There's a service that CPAs can provide. It's called a SOC two audit. Think about this. You trust your accountant today with your financial statements, right? You go to your accountant to do audited financial statements. Many people around the globe are not aware of a SOC two. SOC two is basically an audit around those best practices concerning technology and protecting data.

So that's one of the things that someone could reach out to our industry to better understand those types of reports for best practices around that space.

Abu Bakkar: Great. Thank you Jim. Leading onto that, so it seems like the labor market is going through some challenges particularly in attracting and retaining talent. Retaining talent has come up in many industries, has been prevalent in our industry for a while now and has also come up as a threat to cybersecurity. How do you recommend firms retain the talent they have and upskill them? So they're constantly learning and keeping with the evolving cyber landscape.

Really interesting thing that's come up from this survey as well is that the top two concerns of IT professionals, are more focused on skills and training. So the human aspect of cybersecurity rather than technology. Gustavo, I think you mentioned about universities and learning. Is there anything else maybe you want to add to this question?

Gustavo Solis: Yes. For sure we have a shortage of people, but I think one of the perspectives that we are not facing is the different generations in the workspace. First we started like the baby boomers, the X generation, the millennials, and then the centennials.

We struggle with the arrival of millennials to the market, but right now millennials are already working on a senior level. Most of them are 40 plus and they're getting used to the job. But now the challenge is with the younger people, the centennials, that they have a different view of life and they have a different way of approaching things.

And if they're not interested in something, they will not behave accordingly for example, security threats. So to me, one of the major concerns is to make people aware about the threats, about what we should be doing at work and millennials are a generation that grew up with technology it's in their nature.

They grew up with iPads, with iPhones the technology. So they're, by nature, they're more skilled than the previous generations. But what I think is missing Is the awareness. Awareness is the key factor to me at all levels.

Jim Bourke: That's a great point Gustavo. The only thing I'll add to that is that, you know, as employers out there, we need to be aware that technology is moving at lightning speeds.

Right? It's moving very quickly. So although someone may have graduated from university or college with an expertise in technology, there is such a skill shortage because they're going everywhere. We know about the great resignation going on around the globe today with a shortage of great employees, the cybersecurity space is no different.

What I would suggest is that we as employers out there really understand the needs of cyber security specialists and continue to give training in that cyber security space. Continue to foster the development of their skill sets to keep up with the ever-increasing awareness around the cybersecurity space.

It's not going away. We just need to make sure that we continually train all of our employees, including those in our IT teams, our cybersecurity teams, about latest and greatest best practices when it comes to protecting company data.

Abu Bakkar: Brilliant. Thank you, Jim. Thank you, Gustavo. Maybe one other thing that I can add to this, and your comments will be really useful here as well, is that the top issue is cybersecurity skills shortage.

So do you think, it is a good idea that maybe using offshore managed services where you have a service that's provided by you for security, your company is protected by the managed service provider. How would you feel about that? Taking into account that we are accounting firms.

Jim Bourke: I often say why accounting firms? Why go to your accounting firm when it comes to cybersecurity? Because we understand the risks around financial data. That's what it's all about. So we understand the financial aspects we also understand the cyber aspects. You may have a great internal IT team. They're great at keeping the lights on. They're great at making sure there's no disruption with respect to hardware. But to be honest with you, they may not be properly trained in cyber and cybersecurity awareness.

Many of our firms are around the globe. Our member firms of hlb around the globe, they have cyber security specialists on staff. So I would seriously consider tapping into those resources that are available through our network and possibly outsource some of those cybersecurity services.

Abu Bakkar: Perfect. Thank you Jim. Gustavo, any thoughts on this?

Gustavo Solis: I think that Covid 19 brought a lot of pain, a lot of problems. But also opened opportunities with remote work. The boundaries or the borders among the countries virtually have disappeared. So right now I could be working with some people, anywhere in the world. So I believe that in this matter especially in cybersecurity, you can hire people from all over the world. They don't have to travel, they don't have to be inside. We can be working remotely and we can take advantage of all the skills that are developing in different territories. As we mentioned sometime in the past, even though every country has cybersecurity threats, every country is different.

Every country have different consequences. They have different laws, they have different capabilities, infrastructure. So we have to have, a localized point of view when we're talking about cybersecurity work. But it's like an old saying that think globally and act locally. We have resources all over the world that would enable us to give specialized service in every location.

Abu Bakkar: Thanks, Gustavo. I love that. Think globally act locally. That's great. Moving on to the next question, and you touched on this a little bit, Gustavo.

The environment that we are in now has changed and since the pandemic, so hybrid working has been embraced as a preferred way of working by many organizations. As you mentioned, Gustavo, the pandemic has accelerated this, but however, it has left companies and employees at an increased threat of an attack.

So how can firms better adopt procedures and protect themselves from the cloud and its vulnerabilities. Maybe a question to Jim on this one and just while leading you on to Jim, that we found that, as you mentioned earlier as well, we found that the only a quarter of companies that we've surveyed are fully prepared for a cyber attack.

Jim Bourke: Right. So let, let's think about this, Abu, right? The whole world is migrating to the cloud. So all their applications are growing to the cloud. We are all dealing with, I know in North America we're dealing with staff that are not going to come back to work. We see that in Eastern Europe. We see it in Western Europe, We see it throughout Asia, we see it in Australia.

We see it throughout all different regions around the world. So look this is here to stay. With this I think one of the items highlighted in our survey is 81% express concern over cloud vulnerabilities. Cloud vulnerabilities are caused by two things. One our employees working in this remote environment, utilizing the cloud to transfer data.

And the other is just the fact that we are all migrating to the cloud on cloud based applications. We have to be aware that we need to address, If we had processes and procedures in place for addressing cyber vulnerabilities, pre pandemic during a pandemic, we have to revisit them today.

I would seriously revisit those policies. Understand it's not going away and we need to make changes. There are certain best practices that we see out there globally. We talk about the Nist framework, which to me Is a global framework upon which so many other frameworks, whether it's GDPR or the standards that, have appeared throughout, other regions are built upon.

Everything can be traced to that. We go back to that Nist framework and understand when we have remote work environment where we're utilized in the cloud, taking advantage of applications out there, vulnerabilities exist. We minimize those vulnerabilities by following standards that are dictated under the Nist framework.

Abu Bakkar: Great. Thank you, Jim. Gustavo, if you could touch on that question, but as well, I just wanted to add another aspect of this. Do you think because of the accelerated technology that we have companies have put in and the increased likeness of attack do you see hybrid working disappearing and companies going back into on premise working again?

Gustavo Solis: No. I don't see that happening at all. In big cities as in Mexico City, the commuting time for people is terrible. They spend one or two hours or more every day commuting. So right now the people have the benefit of working from home. I don't see people going back to office in the future. Actually there are companies that are struggling and people prefer to resign than going back to the office. So I see that home office or remote office is here to stay.

Saying that and the rapid change of technology as Jim mentioned it's a very worrying aspect because to have something secure, you have to have a lot of things, technology itself, procedures, training many things, and you just need one thing to fail to have a problem. So the challenge is huge. You who are responsible for security you have to provide tons and tons of security controls, but you only need one thing to fail, to have a major problem. So that, is an enormous challenge to cybersecurity people.

Abu Bakkar: Great. Thank you Gustavo. This leads me to the next question. With regards to technology you know it's advancing at a colossal rate, and really the question is around what firms can do to protect themselves from this, from this evolvement. We hear now cyber attacks are now using AI to send out phishing emails which look so real that it takes an expert to be able to spot these now. So is it enough to react to an attack? What would you say to a company, Jim, if they said, we have technologies in place we don't need a framework or a procedure to follow?

Jim Bourke: I would say you are crazy, right? I would say look, best practices, make sure what you're doing is you're exercising best practices around putting controls in place regarding cyber and cybersecurity awareness.

Working with your internal IT teams, working with external providers to ensure that you've implemented those best practices. You heard me talk about Nist framework, making sure your cybersecurity specialists understand the purpose of it. Maybe you've gone out, you've got a SOC 2 audit as I've talked about, but it doesn't end there.

It happens every single day. You need to push continuous training to your employees. And I'll add one thing. Abu, make sure if you're an executive in a business that there's a no-exception policy. The same training that you push for the entry-level person in your business one day outta school is the same training that you're pushing for the seasoned legacy professionals that are running at the highest levels within your organization.

Because all it takes is one, one flaw, one breakdown in the system, one person to be victim to a fishing attack. It could literally be the downfall of an entire organization. So all I would say, train, train, train. And continue to train every single person in your organization about cybersecurity best practices.

Abu Bakkar: Thanks, Jim. It's a great point. You touched on there maybe a question for Gustavo. How about companies and the investments they make in cybersecurity? And what about leadership from the top are these factors?

Gustavo Solis: Wow, that's a very good question, Abu. From a country which is trying to apply saving measures in the economy for people who have the decision-making power, but they don't have the awareness of security. Sometimes they believe that they're overspending in security because they don't see any short-term results. When you invest in cybersecurity, you really hope not to see the result because that would mean that everything is working fine.

If you don't see anything, things are working fine because you, don't have any, security events. But normally when they then decide where to invest money, if they don't see any return in the short term, they tend to start cutting expenses in cybersecurity, which leads to bigger exposure to threats.

So to me, awareness at the decision-making level is a key factor to stay protected from cybersecurity threats.

Abu Bakkar: Brilliant. Thank you, Gustavo. My final question, we're coming to the end of the podcast now. So running onto what we've discussed earlier suppose leads us nicely to what we all mentioned was an alarming find 78% of those surveyed felt that their organization wasn't prepared for a cyber attack. Maybe Jim, Gustavo if you could touch firstly on your thoughts, on why businesses, although we talk about it all the time, are still not prepared on cybersecurity and maybe one piece of advice that you would give them?

Jim Bourke: Abu, look, there are lots of distractions going on in the world at all times. We have wars going on. We have, pandemics that are happening. We have economies that are either inflation or recession. There are lots of things that are concerning business entrepreneurs today. I would say you need to put cybersecurity up there.

I'll tell you as one of, if not the biggest threat to our society today. It's hands down and there's so much that we can be doing. We can't control a lot of the wars. We can't control the economy, but you can control your cybersecurity position. All I would suggest is that if you don't have the resources internally to address this, and even if you think you do, engage someone.

I look at our entire HLB network we have cyber security specialists throughout our entire HLB network around the globe have us peek under the covers, and have us take a look at your cybersecurity awareness. So when your internal IT team says, we're good with cybersecurity, we're protected. Just have another set of eyes peek under just to ensure things are going good because, to me, this is what would keep me up at night, especially when we hear that 78% of IT professionals feel that they're not prepared.

I'm really concerned about that. I would engage someone on the outside peek under the covers, and you know what? Let's be prepared so that we could flip this ratio upside down.

Abu Bakkar: Brilliant. Jim, thank you so much. Gustavo, final comments from you?

Gustavo Solis: Yes. There's a saying in Spanish. I don't have to translate that into English but when you see that your neighbour is struggling with something, you should get ready because you're next, and in Mexico recently we had a major leak of information in the Army. They extracted millions of documents from the army, and these are the same hackers, that attacked the army in Chile, in Columbia. And when you think, which, are the more reliable institutions in these countries?

I mean, if you have to trust in some institution that is secure, normally you would think the army is very, very secure. The reality is different. So, If hackers can attack successfully armies in, their cybersecurity vulnerabilities, imagine what the hackers can do to your company.

You don't know and are not sure what happened until it happens, and maybe that's too late. So you have to be ready and don't think that it's not, going to happen to you. It will happen to you eventually. It's just a matter of time, unfortunately.

Abu Bakkar: Thank you, Gustavo. So this is the end of our podcast and just to summarize. We've heard that the biggest threat to our society today is cybersecurity. We've heard that our way of working has changed and there's more likely than not that it will stay, it will not go back to on-premise again as we had previously, but you can control your cybersecurity position.

We heard some of the best practices that were highlighted by Jim and Gustavo. Engage cyber specialists, implement a framework, and continue training in education. Check out the HLB Cybersecurity report 2022 to see the best practices and see how HLB can help with your cyber position. Thank you so much for listening to us and till the next time.

EPS 27: Key findings from HLB Cybersecurity Report 2022

Speakers:

Global CIO, Abu Bakkar

Global Advisory and Technology Leader, Jim Bourke

HLB Digital Leader, Gustavo Solis

Abu Bakkar: Good afternoon everybody, and welcome to, the HLB podcast series on cross Border Business Talks.

Now October is Cybersecurity Awareness Month, and it's dedicated to helping individuals and businesses protect themselves online as threats to technology and confidential data become more commonplace. At HLB, we produced our annual report to mark cybersecurity awareness month. The report has been prepared with responses from over 750, senior IT professionals from a variety of sectors.

This report gives guidance to the network on prevalent risks to cyber security and how they adopt best practices to protect their firms. I am joined in the podcast by Jim Bourke, HLB Chair of Technology and Advisory. Hi Jim.

Jim Bourke: How's it going, Abu?

Abu Bakkar: Great. Thank you. And Gustavo Solis partner firm at HLB in Mexico and member of HLB Digital. Hey, Gustavo.

Gustavo Solis: Hi. Good morning.

Abu Bakkar: Thank you guys for joining. So let's deep dive into the findings of our cybersecurity report. Maybe I'll open up with a question to both of you really? Yes. I'd like to start by asking what you thought was the most surprising finding of the report.

Jim Bourke: Okay, so let me, let me lead on this one, Abu.

I'll tell you, I was shocked right when we looked at the responses and we saw, again, keep in mind the population here. We have senior IT professionals that answer the survey, and we put out a press release on this a few weeks ago. 78% of senior IT professionals believe their organizations are not prepared for cyber attacks. I said not prepared for cyber attacks. So here I am, right? I'm a business owner, I'm an entrepreneur, I'm a CEO of a company. If my senior IT professionals believe that they are not prepared for a cyber attack, I need to be concerned. That to me, Abu was shocking.

Abu Bakkar: Thank you, Jim.

And I echo your sentiments. Some of the results we found were as you mentioned, shocking. Gustavo.

Gustavo Solis: Yes. well, to me it wasn't a surprise, it's just a confirmation that the problem that we have as a society that, one of the most concerning things is the cyber security skills sort shortage. We don't have enough people to deal with all this cybersecurity threats all around the world. This is a serious concern because this is not a problem that is going to be solved from one day to another. We need universities and we need colleges and postgraduate studies to fulfill this gap between what is needed, and where we are currently in terms of our capabilities. To me, that's one of the most shocking issues.

Abu Bakkar: Thank you Gustavo. A question along those lines. Is there anything that in our industry as accounting firms that we can do or we can add to the training and learning that we provide for cybersecurity?

Jim Bourke: Sure. We've talked about this many times. You know, life is all about training. Life is all about learning and when, especially when it comes to cyber and cyber attacks and cyber security awareness, you need to continually be addressing those issues with your staff. I look at best practices for our industry.

Very often we get asked, why should we hire an accounting firm? Why should we hire a chartered accountant? Why should we hire a CPA to help us with protection and cybersecurity awareness? Why? Because we understand the vulnerabilities that exist around data. There's a service that CPAs can provide. It's called a SOC two audit. Think about this. You trust your accountant today with your financial statements, right? You go to your accountant to do audited financial statements. Many people around the globe are not aware of a SOC two. SOC two is basically an audit around those best practices concerning technology and protecting data.

So that's one of the things that someone could reach out to our industry to better understand those types of reports for best practices around that space.

Abu Bakkar: Great. Thank you Jim. Leading onto that, so it seems like the labor market is going through some challenges particularly in attracting and retaining talent. Retaining talent has come up in many industries, has been prevalent in our industry for a while now and has also come up as a threat to cybersecurity. How do you recommend firms retain the talent they have and upskill them? So they're constantly learning and keeping with the evolving cyber landscape.

Really interesting thing that's come up from this survey as well is that the top two concerns of IT professionals, are more focused on skills and training. So the human aspect of cybersecurity rather than technology. Gustavo, I think you mentioned about universities and learning. Is there anything else maybe you want to add to this question?

Gustavo Solis: Yes. For sure we have a shortage of people, but I think one of the perspectives that we are not facing is the different generations in the workspace. First we started like the baby boomers, the X generation, the millennials, and then the centennials.

We struggle with the arrival of millennials to the market, but right now millennials are already working on a senior level. Most of them are 40 plus and they're getting used to the job. But now the challenge is with the younger people, the centennials, that they have a different view of life and they have a different way of approaching things.

And if they're not interested in something, they will not behave accordingly for example, security threats. So to me, one of the major concerns is to make people aware about the threats, about what we should be doing at work and millennials are a generation that grew up with technology it's in their nature.

They grew up with iPads, with iPhones the technology. So they're, by nature, they're more skilled than the previous generations. But what I think is missing Is the awareness. Awareness is the key factor to me at all levels.

Jim Bourke: That's a great point Gustavo. The only thing I'll add to that is that, you know, as employers out there, we need to be aware that technology is moving at lightning speeds.

Right? It's moving very quickly. So although someone may have graduated from university or college with an expertise in technology, there is such a skill shortage because they're going everywhere. We know about the great resignation going on around the globe today with a shortage of great employees, the cybersecurity space is no different.

What I would suggest is that we as employers out there really understand the needs of cyber security specialists and continue to give training in that cyber security space. Continue to foster the development of their skill sets to keep up with the ever-increasing awareness around the cybersecurity space.

It's not going away. We just need to make sure that we continually train all of our employees, including those in our IT teams, our cybersecurity teams, about latest and greatest best practices when it comes to protecting company data.

Abu Bakkar: Brilliant. Thank you, Jim. Thank you, Gustavo. Maybe one other thing that I can add to this, and your comments will be really useful here as well, is that the top issue is cybersecurity skills shortage.

So do you think, it is a good idea that maybe using offshore managed services where you have a service that's provided by you for security, your company is protected by the managed service provider. How would you feel about that? Taking into account that we are accounting firms.

Jim Bourke: I often say why accounting firms? Why go to your accounting firm when it comes to cybersecurity? Because we understand the risks around financial data. That's what it's all about. So we understand the financial aspects we also understand the cyber aspects. You may have a great internal IT team. They're great at keeping the lights on. They're great at making sure there's no disruption with respect to hardware. But to be honest with you, they may not be properly trained in cyber and cybersecurity awareness.

Many of our firms are around the globe. Our member firms of hlb around the globe, they have cyber security specialists on staff. So I would seriously consider tapping into those resources that are available through our network and possibly outsource some of those cybersecurity services.

Abu Bakkar: Perfect. Thank you Jim. Gustavo, any thoughts on this?

Gustavo Solis: I think that Covid 19 brought a lot of pain, a lot of problems. But also opened opportunities with remote work. The boundaries or the borders among the countries virtually have disappeared. So right now I could be working with some people, anywhere in the world. So I believe that in this matter especially in cybersecurity, you can hire people from all over the world. They don't have to travel, they don't have to be inside. We can be working remotely and we can take advantage of all the skills that are developing in different territories. As we mentioned sometime in the past, even though every country has cybersecurity threats, every country is different.

Every country have different consequences. They have different laws, they have different capabilities, infrastructure. So we have to have, a localized point of view when we're talking about cybersecurity work. But it's like an old saying that think globally and act locally. We have resources all over the world that would enable us to give specialized service in every location.

Abu Bakkar: Thanks, Gustavo. I love that. Think globally act locally. That's great. Moving on to the next question, and you touched on this a little bit, Gustavo.

The environment that we are in now has changed and since the pandemic, so hybrid working has been embraced as a preferred way of working by many organizations. As you mentioned, Gustavo, the pandemic has accelerated this, but however, it has left companies and employees at an increased threat of an attack.

So how can firms better adopt procedures and protect themselves from the cloud and its vulnerabilities. Maybe a question to Jim on this one and just while leading you on to Jim, that we found that, as you mentioned earlier as well, we found that the only a quarter of companies that we've surveyed are fully prepared for a cyber attack.

Jim Bourke: Right. So let, let's think about this, Abu, right? The whole world is migrating to the cloud. So all their applications are growing to the cloud. We are all dealing with, I know in North America we're dealing with staff that are not going to come back to work. We see that in Eastern Europe. We see it in Western Europe, We see it throughout Asia, we see it in Australia.

We see it throughout all different regions around the world. So look this is here to stay. With this I think one of the items highlighted in our survey is 81% express concern over cloud vulnerabilities. Cloud vulnerabilities are caused by two things. One our employees working in this remote environment, utilizing the cloud to transfer data.

And the other is just the fact that we are all migrating to the cloud on cloud based applications. We have to be aware that we need to address, If we had processes and procedures in place for addressing cyber vulnerabilities, pre pandemic during a pandemic, we have to revisit them today.

I would seriously revisit those policies. Understand it's not going away and we need to make changes. There are certain best practices that we see out there globally. We talk about the Nist framework, which to me Is a global framework upon which so many other frameworks, whether it's GDPR or the standards that, have appeared throughout, other regions are built upon.

Everything can be traced to that. We go back to that Nist framework and understand when we have remote work environment where we're utilized in the cloud, taking advantage of applications out there, vulnerabilities exist. We minimize those vulnerabilities by following standards that are dictated under the Nist framework.

Abu Bakkar: Great. Thank you, Jim. Gustavo, if you could touch on that question, but as well, I just wanted to add another aspect of this. Do you think because of the accelerated technology that we have companies have put in and the increased likeness of attack do you see hybrid working disappearing and companies going back into on premise working again?

Gustavo Solis: No. I don't see that happening at all. In big cities as in Mexico City, the commuting time for people is terrible. They spend one or two hours or more every day commuting. So right now the people have the benefit of working from home. I don't see people going back to office in the future. Actually there are companies that are struggling and people prefer to resign than going back to the office. So I see that home office or remote office is here to stay.

Saying that and the rapid change of technology as Jim mentioned it's a very worrying aspect because to have something secure, you have to have a lot of things, technology itself, procedures, training many things, and you just need one thing to fail to have a problem. So the challenge is huge. You who are responsible for security you have to provide tons and tons of security controls, but you only need one thing to fail, to have a major problem. So that, is an enormous challenge to cybersecurity people.

Abu Bakkar: Great. Thank you Gustavo. This leads me to the next question. With regards to technology you know it's advancing at a colossal rate, and really the question is around what firms can do to protect themselves from this, from this evolvement. We hear now cyber attacks are now using AI to send out phishing emails which look so real that it takes an expert to be able to spot these now. So is it enough to react to an attack? What would you say to a company, Jim, if they said, we have technologies in place we don't need a framework or a procedure to follow?

Jim Bourke: I would say you are crazy, right? I would say look, best practices, make sure what you're doing is you're exercising best practices around putting controls in place regarding cyber and cybersecurity awareness.

Working with your internal IT teams, working with external providers to ensure that you've implemented those best practices. You heard me talk about Nist framework, making sure your cybersecurity specialists understand the purpose of it. Maybe you've gone out, you've got a SOC 2 audit as I've talked about, but it doesn't end there.

It happens every single day. You need to push continuous training to your employees. And I'll add one thing. Abu, make sure if you're an executive in a business that there's a no-exception policy. The same training that you push for the entry-level person in your business one day outta school is the same training that you're pushing for the seasoned legacy professionals that are running at the highest levels within your organization.

Because all it takes is one, one flaw, one breakdown in the system, one person to be victim to a fishing attack. It could literally be the downfall of an entire organization. So all I would say, train, train, train. And continue to train every single person in your organization about cybersecurity best practices.

Abu Bakkar: Thanks, Jim. It's a great point. You touched on there maybe a question for Gustavo. How about companies and the investments they make in cybersecurity? And what about leadership from the top are these factors?

Gustavo Solis: Wow, that's a very good question, Abu. From a country which is trying to apply saving measures in the economy for people who have the decision-making power, but they don't have the awareness of security. Sometimes they believe that they're overspending in security because they don't see any short-term results. When you invest in cybersecurity, you really hope not to see the result because that would mean that everything is working fine.

If you don't see anything, things are working fine because you, don't have any, security events. But normally when they then decide where to invest money, if they don't see any return in the short term, they tend to start cutting expenses in cybersecurity, which leads to bigger exposure to threats.

So to me, awareness at the decision-making level is a key factor to stay protected from cybersecurity threats.

Abu Bakkar: Brilliant. Thank you, Gustavo. My final question, we're coming to the end of the podcast now. So running onto what we've discussed earlier suppose leads us nicely to what we all mentioned was an alarming find 78% of those surveyed felt that their organization wasn't prepared for a cyber attack. Maybe Jim, Gustavo if you could touch firstly on your thoughts, on why businesses, although we talk about it all the time, are still not prepared on cybersecurity and maybe one piece of advice that you would give them?

Jim Bourke: Abu, look, there are lots of distractions going on in the world at all times. We have wars going on. We have, pandemics that are happening. We have economies that are either inflation or recession. There are lots of things that are concerning business entrepreneurs today. I would say you need to put cybersecurity up there.

I'll tell you as one of, if not the biggest threat to our society today. It's hands down and there's so much that we can be doing. We can't control a lot of the wars. We can't control the economy, but you can control your cybersecurity position. All I would suggest is that if you don't have the resources internally to address this, and even if you think you do, engage someone.

I look at our entire HLB network we have cyber security specialists throughout our entire HLB network around the globe have us peek under the covers, and have us take a look at your cybersecurity awareness. So when your internal IT team says, we're good with cybersecurity, we're protected. Just have another set of eyes peek under just to ensure things are going good because, to me, this is what would keep me up at night, especially when we hear that 78% of IT professionals feel that they're not prepared.

I'm really concerned about that. I would engage someone on the outside peek under the covers, and you know what? Let's be prepared so that we could flip this ratio upside down.

Abu Bakkar: Brilliant. Jim, thank you so much. Gustavo, final comments from you?

Gustavo Solis: Yes. There's a saying in Spanish. I don't have to translate that into English but when you see that your neighbour is struggling with something, you should get ready because you're next, and in Mexico recently we had a major leak of information in the Army. They extracted millions of documents from the army, and these are the same hackers, that attacked the army in Chile, in Columbia. And when you think, which, are the more reliable institutions in these countries?

I mean, if you have to trust in some institution that is secure, normally you would think the army is very, very secure. The reality is different. So, If hackers can attack successfully armies in, their cybersecurity vulnerabilities, imagine what the hackers can do to your company.

You don't know and are not sure what happened until it happens, and maybe that's too late. So you have to be ready and don't think that it's not, going to happen to you. It will happen to you eventually. It's just a matter of time, unfortunately.

Abu Bakkar: Thank you, Gustavo. So this is the end of our podcast and just to summarize. We've heard that the biggest threat to our society today is cybersecurity. We've heard that our way of working has changed and there's more likely than not that it will stay, it will not go back to on-premise again as we had previously, but you can control your cybersecurity position.

We heard some of the best practices that were highlighted by Jim and Gustavo. Engage cyber specialists, implement a framework, and continue training in education. Check out the HLB Cybersecurity report 2022 to see the best practices and see how HLB can help with your cyber position. Thank you so much for listening to us and till the next time.

Introduction to Transfer pricing

Speakers: Carlos Camacho, HLB's Global Transfer pricing Leader is joined by Till Zech, from HLB Germany 

Hello, and welcome to HLB cross-border business talks. HLB's global podcast series on international business topics. 

Carlos Camacho: Hello and welcome to today's podcast. My name is Carlos Camacho, HLB Global Transfer pricing leader. I'm joined today by Till Zech from HLB Germany to discuss Transfer pricing as a strategic instrument for multinational organizations and to touch on some of the latest trends in the Transfer pricing arena.  

First, of course, we need to know what Transfer pricing is. So perhaps we will have to start from there, talking about the basic concept of Transfer pricing and when Transfer pricing is applicable Till.  

Till Zech: Transfer pricing is nowadays so important because if you have a multi-national enterprise, and that means if you have a company with two subsidiaries in two different countries, then you are already in the middle of Transfer pricing issues. 

In our example, Carlos comes from Costa Rica, I come from Germany, and if you have a Costa Rican enterprise with a subsidiary in Germany, and if you have any business relations between the German subsidiary and the Costa Rican parent company, then you have already Transfer pricing issues.  

Carlos Camacho: Absolutely. The most difficult issue to figure out is that in some instances, these transactions due to the fact of the relationship between the holding company and the subsidiary may be so-called implicit transactions. That is, due to the fact that we both have a common ground of interest, we are pertaining to the same shareholders, or the majority of our stock is owned by the same group of shareholders, we might just keep some of the real formalities and the antagonist of the economic behaviour that is natural to unrelated parties. 

In other words, if, Till, and I would be just dealing as individuals unrelated when Till is selling something to me or his company is selling something to my company, he will try to get the highest possible price in order to increase his profitability. Instead, my behaviour would be to negotiate the lowest possible price to acquire his knowledge, his services, his merchandise, and therefore that very economical behaviour when in the ambience of a related party gets diffused or absolutely disappears. 

Till Zech: Yeah, absolutely. I totally agree with this. Even with individuals, they might be a relation. This is not so much the case that we see it directly here in Germany, but sometimes we have individuals with different enterprises, and we have intercompany transactions and even then, they might be related under German, Transfer Pricing law we have some clients like this. So, we have also to prove in these cases, whether we have Transfer pricing issues. 

Carlos Camacho: This is getting more complicated and a broader, applicable issue since companies may tend to use Transfer pricing to skip, reduce or minimize the total tax burden that they pay as a group, and this is one of the things that Transfer pricing is all about when referred to a base erosion profit shifting program launched by the OECD in 2015. As a consequence, it provoked amendments and the reshaping of the multinational guidelines of Transfer pricing by the OECD.  

Till Zech: Yeah, I don't know how it is in Costa Rica, but Transfer pricing became so important that in Germany, for example, we had last year, the total reformation, because we adopted the OECD Transfer pricing rules now. So, we have now a worldwide approach to this topic. I don't know whether you have this too, but since 2013, since the OECD started the base erosion profit shifting program, which included Transfer pricing issues, more and more countries in Europe and in Germany, and Germany's one part of this, really started to enforce Transfer pricing orders and we modernized it. I suppose that in middle and south America, you have the same approach so it's now one global approach, how to deal with these issues.  

Carlos Camacho: Indeed, very few countries have still to adopt the OECD new module of Transfer pricing guidelines, and this makes it more global. Those exceptions are in the way of getting more aligned with the OECD guidelines, and therefore, as you are stating, the issue is becoming more flattened. As far as the application to multinational enterprises.  

There are specific changes of rules when you go to countries such as Brazil, which is committed to the enforceability of the OECD module by the end of 2024. There is a trend of alignment in the US with the internal revenue code with the OECD guidelines, but more likely than not what we are having is an alignment on a global basis that allow companies to have an interaction that is also providing legal certainty as far as the application of their Transfer pricing policies.  

Till Zech: I think we see this trend now all over the world. The work has become much closer and especially the United States, Brazil, India, China, and Russia are very eager to get their share of the Transfer Price taxation.  

Carlos Camacho: Absolutely. The other thing that is very close to the Transfer pricing matter is the fact of what we are comparing because the issue here is you always have to compare the assets, the functions, and the risks assumed by the parties when dealing with a Transfer pricing analysis. 

To some extent, the broader confusion in the marketplace for people that aren't an expert in Transfer pricing is to attempt to compare price with the price. It's not a comparison between price A or price B of the same product or service because what we make in Transfer pricing activity and Transfer pricing analysis is an analysis of the assets used the risks that have been borne and the functions that have been performed by each member of the multinational enterprise and have still stated very well.  

When you talk about multinationals before the beginning of this century, you perhaps would have thought of huge multinationals but now to have just two different jurisdictions involved is plenty and you are in a multinational environment. 

Till Zech: We always report the other way. At least the German fiscal situation always comes back to these basics. They always ask now more and more, where are the risks assumed? Are they in Germany or are they in the other country? They always start with a function and risk analysis and they are normally processed with a people function analysis. 

They ask where the people functions are because where the people functions are their decisions are made, and once they have decided, the companies which are part of the Transfer pricing analysis have most of the people functions, normally they assume that they might also have a decisive influence on the company. Then they ask, where are the research and development functions, and then they ask, where are the market risks. This is the approach we see in Germany and also in many European tax situations. 

Carlos Camacho: Indeed. Furthermore, one of the other issues that have changed dramatically ever since the launching of this program of the OECD so-called BEP's is the fact of the ability to be able to assume either the functions or the risks, because prior to this, the facts were that multinationals justly nominatively allocate a risk or a function to a paper company, and that company was not able to bear the actual risk. If the risk would've materialized, the company was not financially or operationally capable to answer to the public about that very risk.  

What the OECD approach today is more factual. Is this entity capable enough and financially strong to be able to bear that risk or is it only nominatively allocating that risk in order to allocate a portion of the profit in a given jurisdiction. 

Till Zech: I understand this. In Germany, the tax administration would approach the case in the same manner. 

Carlos Camacho: Yes, that in general is a trend of going more for the assets over the form. The asset over form is an analysis that most of the OECD countries and most of the OECD following modules are just taken. There are certain exceptions. For instance, in Canada, you have the exception of the court rules regarding that the form is normally more likely to be prevailing over the assets, but that is an exception that I guess is going to change as time goes on in order to align the ability to be compatible over the world. 

Till Zech: I totally agree. I can only use Germany as an example, but here we had to fight for over 70 years where economic substance or legal form should be decisive. In the past, it was always the legal form, but in 20 years, the whole thing has changed and the legal substance becomes known as the center of analysis. For a very long time, Margination of enterprises were able to use legal structures to avoid paying off taxes and under BEP's and under the idea of fighting against the erosion profit shifting now the new approach is that the economic substance is the decisive base for the analysis also for Transfer pricing, pricing.  

Carlos Camacho: At the end of the story, Transfer pricing is all about taxes and it is all about taxable days. Of course it has other angles that we might just be touching base in different podcasts, but for today, it's important to summarize that Transfer pricing is always going to be present when two related parties are interacting, whether or not they do allocate a price to that interaction there is an economical approach other than a financial approach.  

That means that even if the transaction is for free, financially speaking is deemed to be treated economically as subject to a value and that valuation will entail the ability of tax administration to impose the levy on such a income generated or allocatable to that very jurisdiction.  

Therefore, that is one of the conclusions we have to get as a takeaway today. The other one is that the multinational approach of the past, which was the huge multinational companies, which have presence in every other jurisdiction is just getting narrow and narrow. The fact that there are two entities, two jurisdictions make us liable to be in compliance with both documentation of Transfer pricing and the ability to substantiate that we are in compliance with the arms-length principle, which is this very basic statement that we are dealing as if we were not related parties, although we acknowledge and recognize the fact that we are related parties.  

It's what we call an economical hypothesis is a fiction. It's a legal fiction whereby the factual issue is that we are related, but the fiction consists in that we are dealing as unrelated. Therefore, that is a big challenge for taxpayers all over the world.  

It's also a big challenge for business people trying to set their structures in an efficient operational fashion, as well as it is a huge challenge for audit companies when dealing with their assurance work related to the fact of whether or not the financial statements represent fairly the amount of profits and the financial position of the actual entities, when they're looked on a single basis despite of the consolidated basis.  

Till Zech: Let me add one last point from my side. What is important is this is a trend. Multinational enterprise does not mean anymore, only huge multinationals, like the top American companies or from Germany, D Bens or Volkswagen or something like this, but now it comes down also to relatively small companies, with only 10 million revenue, sometimes only 5 million revenue we see already the tax administrations in Europe proving these cases. It is not anymore, only a topic for the multinational, huge and large enterprises with billions and billions of revenues, but also for our clients with revenue of five to 10 million Euro. 

Carlos Camacho: That also is a very important effect of compliance cost. The small, and medium enterprises are suffering the same burden as the huge multinational enterprises. Therefore, it is becoming a real administrative burden that has correlated cost of compliance that is making the expansion to different jurisdictions, a more costly and more carefully to be planned and is better to plan than to fix. 

So our recommendation, if we have another takeaway of today is Transfer pricing, isn't just compliance, but it's better when it turns out to be part of a planning stage. Thank you for your attention to that.  

Thanks for listening for more information about this topic and other cross-border business insights. Visit www.hlb.global/insights. 

Introduction to Transfer pricing

Speakers: Carlos Camacho, HLB's Global Transfer pricing Leader is joined by Till Zech, from HLB Germany 

Hello, and welcome to HLB cross-border business talks. HLB's global podcast series on international business topics. 

Carlos Camacho: Hello and welcome to today's podcast. My name is Carlos Camacho, HLB Global Transfer pricing leader. I'm joined today by Till Zech from HLB Germany to discuss Transfer pricing as a strategic instrument for multinational organizations and to touch on some of the latest trends in the Transfer pricing arena.  

First, of course, we need to know what Transfer pricing is. So perhaps we will have to start from there, talking about the basic concept of Transfer pricing and when Transfer pricing is applicable Till.  

Till Zech: Transfer pricing is nowadays so important because if you have a multi-national enterprise, and that means if you have a company with two subsidiaries in two different countries, then you are already in the middle of Transfer pricing issues. 

In our example, Carlos comes from Costa Rica, I come from Germany, and if you have a Costa Rican enterprise with a subsidiary in Germany, and if you have any business relations between the German subsidiary and the Costa Rican parent company, then you have already Transfer pricing issues.  

Carlos Camacho: Absolutely. The most difficult issue to figure out is that in some instances, these transactions due to the fact of the relationship between the holding company and the subsidiary may be so-called implicit transactions. That is, due to the fact that we both have a common ground of interest, we are pertaining to the same shareholders, or the majority of our stock is owned by the same group of shareholders, we might just keep some of the real formalities and the antagonist of the economic behaviour that is natural to unrelated parties. 

In other words, if, Till, and I would be just dealing as individuals unrelated when Till is selling something to me or his company is selling something to my company, he will try to get the highest possible price in order to increase his profitability. Instead, my behaviour would be to negotiate the lowest possible price to acquire his knowledge, his services, his merchandise, and therefore that very economical behaviour when in the ambience of a related party gets diffused or absolutely disappears. 

Till Zech: Yeah, absolutely. I totally agree with this. Even with individuals, they might be a relation. This is not so much the case that we see it directly here in Germany, but sometimes we have individuals with different enterprises, and we have intercompany transactions and even then, they might be related under German, Transfer Pricing law we have some clients like this. So, we have also to prove in these cases, whether we have Transfer pricing issues. 

Carlos Camacho: This is getting more complicated and a broader, applicable issue since companies may tend to use Transfer pricing to skip, reduce or minimize the total tax burden that they pay as a group, and this is one of the things that Transfer pricing is all about when referred to a base erosion profit shifting program launched by the OECD in 2015. As a consequence, it provoked amendments and the reshaping of the multinational guidelines of Transfer pricing by the OECD.  

Till Zech: Yeah, I don't know how it is in Costa Rica, but Transfer pricing became so important that in Germany, for example, we had last year, the total reformation, because we adopted the OECD Transfer pricing rules now. So, we have now a worldwide approach to this topic. I don't know whether you have this too, but since 2013, since the OECD started the base erosion profit shifting program, which included Transfer pricing issues, more and more countries in Europe and in Germany, and Germany's one part of this, really started to enforce Transfer pricing orders and we modernized it. I suppose that in middle and south America, you have the same approach so it's now one global approach, how to deal with these issues.  

Carlos Camacho: Indeed, very few countries have still to adopt the OECD new module of Transfer pricing guidelines, and this makes it more global. Those exceptions are in the way of getting more aligned with the OECD guidelines, and therefore, as you are stating, the issue is becoming more flattened. As far as the application to multinational enterprises.  

There are specific changes of rules when you go to countries such as Brazil, which is committed to the enforceability of the OECD module by the end of 2024. There is a trend of alignment in the US with the internal revenue code with the OECD guidelines, but more likely than not what we are having is an alignment on a global basis that allow companies to have an interaction that is also providing legal certainty as far as the application of their Transfer pricing policies.  

Till Zech: I think we see this trend now all over the world. The work has become much closer and especially the United States, Brazil, India, China, and Russia are very eager to get their share of the Transfer Price taxation.  

Carlos Camacho: Absolutely. The other thing that is very close to the Transfer pricing matter is the fact of what we are comparing because the issue here is you always have to compare the assets, the functions, and the risks assumed by the parties when dealing with a Transfer pricing analysis. 

To some extent, the broader confusion in the marketplace for people that aren't an expert in Transfer pricing is to attempt to compare price with the price. It's not a comparison between price A or price B of the same product or service because what we make in Transfer pricing activity and Transfer pricing analysis is an analysis of the assets used the risks that have been borne and the functions that have been performed by each member of the multinational enterprise and have still stated very well.  

When you talk about multinationals before the beginning of this century, you perhaps would have thought of huge multinationals but now to have just two different jurisdictions involved is plenty and you are in a multinational environment. 

Till Zech: We always report the other way. At least the German fiscal situation always comes back to these basics. They always ask now more and more, where are the risks assumed? Are they in Germany or are they in the other country? They always start with a function and risk analysis and they are normally processed with a people function analysis. 

They ask where the people functions are because where the people functions are their decisions are made, and once they have decided, the companies which are part of the Transfer pricing analysis have most of the people functions, normally they assume that they might also have a decisive influence on the company. Then they ask, where are the research and development functions, and then they ask, where are the market risks. This is the approach we see in Germany and also in many European tax situations. 

Carlos Camacho: Indeed. Furthermore, one of the other issues that have changed dramatically ever since the launching of this program of the OECD so-called BEP's is the fact of the ability to be able to assume either the functions or the risks, because prior to this, the facts were that multinationals justly nominatively allocate a risk or a function to a paper company, and that company was not able to bear the actual risk. If the risk would've materialized, the company was not financially or operationally capable to answer to the public about that very risk.  

What the OECD approach today is more factual. Is this entity capable enough and financially strong to be able to bear that risk or is it only nominatively allocating that risk in order to allocate a portion of the profit in a given jurisdiction. 

Till Zech: I understand this. In Germany, the tax administration would approach the case in the same manner. 

Carlos Camacho: Yes, that in general is a trend of going more for the assets over the form. The asset over form is an analysis that most of the OECD countries and most of the OECD following modules are just taken. There are certain exceptions. For instance, in Canada, you have the exception of the court rules regarding that the form is normally more likely to be prevailing over the assets, but that is an exception that I guess is going to change as time goes on in order to align the ability to be compatible over the world. 

Till Zech: I totally agree. I can only use Germany as an example, but here we had to fight for over 70 years where economic substance or legal form should be decisive. In the past, it was always the legal form, but in 20 years, the whole thing has changed and the legal substance becomes known as the center of analysis. For a very long time, Margination of enterprises were able to use legal structures to avoid paying off taxes and under BEP's and under the idea of fighting against the erosion profit shifting now the new approach is that the economic substance is the decisive base for the analysis also for Transfer pricing, pricing.  

Carlos Camacho: At the end of the story, Transfer pricing is all about taxes and it is all about taxable days. Of course it has other angles that we might just be touching base in different podcasts, but for today, it's important to summarize that Transfer pricing is always going to be present when two related parties are interacting, whether or not they do allocate a price to that interaction there is an economical approach other than a financial approach.  

That means that even if the transaction is for free, financially speaking is deemed to be treated economically as subject to a value and that valuation will entail the ability of tax administration to impose the levy on such a income generated or allocatable to that very jurisdiction.  

Therefore, that is one of the conclusions we have to get as a takeaway today. The other one is that the multinational approach of the past, which was the huge multinational companies, which have presence in every other jurisdiction is just getting narrow and narrow. The fact that there are two entities, two jurisdictions make us liable to be in compliance with both documentation of Transfer pricing and the ability to substantiate that we are in compliance with the arms-length principle, which is this very basic statement that we are dealing as if we were not related parties, although we acknowledge and recognize the fact that we are related parties.  

It's what we call an economical hypothesis is a fiction. It's a legal fiction whereby the factual issue is that we are related, but the fiction consists in that we are dealing as unrelated. Therefore, that is a big challenge for taxpayers all over the world.  

It's also a big challenge for business people trying to set their structures in an efficient operational fashion, as well as it is a huge challenge for audit companies when dealing with their assurance work related to the fact of whether or not the financial statements represent fairly the amount of profits and the financial position of the actual entities, when they're looked on a single basis despite of the consolidated basis.  

Till Zech: Let me add one last point from my side. What is important is this is a trend. Multinational enterprise does not mean anymore, only huge multinationals, like the top American companies or from Germany, D Bens or Volkswagen or something like this, but now it comes down also to relatively small companies, with only 10 million revenue, sometimes only 5 million revenue we see already the tax administrations in Europe proving these cases. It is not anymore, only a topic for the multinational, huge and large enterprises with billions and billions of revenues, but also for our clients with revenue of five to 10 million Euro. 

Carlos Camacho: That also is a very important effect of compliance cost. The small, and medium enterprises are suffering the same burden as the huge multinational enterprises. Therefore, it is becoming a real administrative burden that has correlated cost of compliance that is making the expansion to different jurisdictions, a more costly and more carefully to be planned and is better to plan than to fix. 

So our recommendation, if we have another takeaway of today is Transfer pricing, isn't just compliance, but it's better when it turns out to be part of a planning stage. Thank you for your attention to that.  

Thanks for listening for more information about this topic and other cross-border business insights. Visit www.hlb.global/insights. 

00:12
and welcome to hlb's international tax
00:15
webinar
00:16
the title is tax implications of a no
00:19
deal brexit
00:21
it is november 24th the year 2020
00:24
and what a year it has been not only
00:28
are we dealing with covet and the
00:30
implications of
00:31
businesses the implication of movement
00:33
around the globe
00:34
and the social impact it's had we're
00:37
also dealing with
00:39
the us elections and finally the topic
00:42
of today
00:43
is brexit brexit and how that impacts
00:45
businesses and individually
00:48
people moving around the world so stay
00:50
tuned
00:51
we have a great panel to take a uh us
00:54
through these
00:54
updates but just a reminder you are
00:58
attending a brexit
00:59
conference webinar it's not a trek city
01:02
conference and if you don't know uh trex
01:05
it is a
01:05
trump exit from the white house so
01:08
we are having a more interesting topic
01:10
right now
01:12
and let's introduce the panel uh of mark
01:15
butler
01:16
from ireland say hello mark nick farmer
01:19
from the uk
01:20
the heat of the source of uh brexit
01:22
christian yonder from germany
01:24
pascal sheridan netherlands and
01:27
dave springsteen here to guide you
01:29
through the presentation
01:31
so let's move forward to the next slide
01:34
and get into the mandate from you guys
01:37
to make this interactive to answer your
01:39
questions
01:40
please use the q a box and we'll get to
01:43
your questions the best
01:44
the best we can so again the q advice
01:48
so what are we going to be talking about
01:50
today well there's four broad areas that
01:53
we will talk about and share ideas and
01:55
concerns
01:56
but before i do that by show of hands to
01:59
see what kind of biases we have on the
02:01
panel
02:02
who thinks is going to be a deal by year
02:04
end
02:07
the uk and ireland so chris
02:10
in pascal you don't think there's gonna
02:12
be a deal by your end
02:14
interesting okay so the agenda will be
02:18
an update on the negotiations
02:21
what are some of the sticking points
02:22
that we're facing right now in the

00:12
and welcome to hlb's international tax
00:15
webinar
00:16
the title is tax implications of a no
00:19
deal brexit
00:21
it is november 24th the year 2020
00:24
and what a year it has been not only
00:28
are we dealing with covet and the
00:30
implications of
00:31
businesses the implication of movement
00:33
around the globe
00:34
and the social impact it's had we're
00:37
also dealing with
00:39
the us elections and finally the topic
00:42
of today
00:43
is brexit brexit and how that impacts
00:45
businesses and individually
00:48
people moving around the world so stay
00:50
tuned
00:51
we have a great panel to take a uh us
00:54
through these
00:54
updates but just a reminder you are
00:58
attending a brexit
00:59
conference webinar it's not a trek city
01:02
conference and if you don't know uh trex
01:05
it is a
01:05
trump exit from the white house so
01:08
we are having a more interesting topic
01:10
right now
01:12
and let's introduce the panel uh of mark
01:15
butler
01:16
from ireland say hello mark nick farmer
01:19
from the uk
01:20
the heat of the source of uh brexit
01:22
christian yonder from germany
01:24
pascal sheridan netherlands and
01:27
dave springsteen here to guide you
01:29
through the presentation
01:31
so let's move forward to the next slide
01:34
and get into the mandate from you guys
01:37
to make this interactive to answer your
01:39
questions
01:40
please use the q a box and we'll get to
01:43
your questions the best
01:44
the best we can so again the q advice
01:48
so what are we going to be talking about
01:50
today well there's four broad areas that
01:53
we will talk about and share ideas and
01:55
concerns
01:56
but before i do that by show of hands to
01:59
see what kind of biases we have on the
02:01
panel
02:02
who thinks is going to be a deal by year
02:04
end
02:07
the uk and ireland so chris
02:10
in pascal you don't think there's gonna
02:12
be a deal by your end
02:14
interesting okay so the agenda will be
02:18
an update on the negotiations
02:21
what are some of the sticking points
02:22
that we're facing right now in the

Speakers:

Andrea Moseley, HLB’s Marketing and PR Manager

Chris DeMayo, HLB’s Global Emerging Technology Leader

Patrizio Prospero, HLB Malta

David Sacarelos, HLB USA

[00:00:00] Welcome to HLB Cross-border Business Talks, HLB's global podcast series on international business topics.

Andrea Moseley: Hello everyone. Welcome to the podcast I'm joined today by Chris DeMayo HLB's global emerging technology leader, Patricio Prospero from HLB Malta and David Sacarelos from HLB USA. We're going to be discussing emerging growth companies and M&A activity during the pandemic. In terms of MNA activity. What are you seeing in the marketplace? Chris, I'll start with you.

Chris DeMayo: I think when we look at 2020, we've seen a pretty significant increase in M&A but it's been for a lot of different reasons. There's been acquisitions happening because companies are sort of looking at the pandemic and it was, it was a painful, you know, event for them.

And they were sort of waving the white flag and saying, we don't [00:01:00] have the gumption to go another two, three years and rebuild from this pandemic. We'd rather just merge up and that was combined with big companies with big balance sheets, like the Facebooks of the world who had capital to deploy and wanted to acquire good technology and good client, a good employee basis.

So, you saw a lot of deals happening there. But then you also saw a lot of companies that had been really positively impacted by the pandemic based on where they were in the marketplace, online retailers, especially on wrong retailers of food and going out to the market and raising money and high valuations off of really aggressive revenue growth became another area where companies were benefiting from the pandemic in terms of M&A.

Andrea Moseley: Patricio, what are your thoughts?

Patricio Prospero: I think that as [00:02:00] every disruptive event brings even COVID has provided with a certain level of opportunities. So, I think for what concerns M&A what we have seen is that there were a lot of companies, especially in the new emerging technology that they had found the opportunity of acquiring companies, which they didn't manage to sustain their business through the pandemic. Having said that, I think that there were also companies which they have held to their original. We have seen a number of merger and acquisitions. They were delayed and they eventually will be closing in 2021.

We know that there are also a lot of companies, which they have requested a reassessment of the venue education of the value of the merger [00:03:00] because of the pandemic. So, I don't think that it affected everybody in the same way. I think that there is a way that there are companies, which they have actually benefited from the situation and from good opportunities.

But some other companies, they had to hold their horses and this fell through as well. So, I think that 2020 was a bit of a year where companies, they also had to put everything on stand by to eventually see how this situation is going to get after the COVID situation.

So, I'm quite curious to see what’s going to happen in 2021, because from the analysis that we have, through surveys and through the study, we'll see that we are seeing that eventually some merger and acquisition are going to be closed by the end of [00:04:00] 2021.

So, 2021 could be also a good year for this kind of deals to be actually achieved and close. Finally, what it was held in 2020 it could be finalised in 2021 so we will see what's going to happen this year.

Andrea Moseley: David, how, how have you seen the market?

David Sacarelos: Well, I think after the lockdown has happened in the last year and going into 2021, maybe my comments really about 2021, I think there's a renewed optimism. I think there is you know, quite a bit of government response. We get vaccines going out and I think there's a view that there's quite a bit of funding available and demand available.

The 2021 is going to be really a good year. Most people were talking with believe that 2021 will have valuations about the same or found higher than, than the in the past. And the [00:05:00] deals will be if anything, the same if not more. So, I think, yeah, obviously we had a big influx toward the end of 2020.

Most people are, are really looking toward 2021 to be a good year. I think, especially in technology, healthcare, consumer goods. Clearly retail and real estate probably are at the downside of that, of that trend. But I think overall, I think it's going to be an optimistic year for 2021.

Andrea Moseley: We're now, obviously in the era of remote working. Is real estate changing in this new time. And what are the role of emerging growth companies? David, I'll start with you.

David Sacarelos: Well, I think I think that the real estate and it kind of in a handful of different ways and it does impact how you think about emerging growth companies and, and their involvement in there. I think a real estate's going to have [00:06:00] to assess and continue to figure out their needs

and worked from home models and really whether or not, or how the market has changed from a supply and demand area clearly emerging work, emerging companies found new ways to attract capital, attract both financial capital and human capital and technology and other aspects of, of, of development and innovation. Globally because of the pandemic and you don't have to be in a building but that assessment's going have to continue. What we're seeing and hearing also is that young people are frankly, a little tired of not going into the office and being with other people they believe it does, in some cases, hamper innovation.

And they want to be able to do both. They want to be at home, and they want to go in. So, I think right now, you know, the market's going to have to assess really what is the supply and demand. In addition to that, at least in the United States, I think we're all looking at the [00:07:00] new Biden administration, secondly, to see where regulatory rules are going to change our tax laws, going to change.

Whether or not the broaden or limit opportunities zones those all impact the real estate market and they do impact, especially in Silicon Valley. A lot of folks have been thinking about putting start-up companies in opportunity zones because not paying tax on that gain is kind of a nice thing if you think about it.

So, there is questions about just regulatory rules and tax policy. Moving ahead. And I, and I think at least in the larger markets, probably in California, New York, and some of the others, we are looking at the disputes among landlords and tenants here in California. We just, yesterday came down and they are going to stop any kind of evictions from commercial, commercial property.

At least for now. So we're at least through June. So, we'll see where that leads. That's going to impact [00:08:00] technology companies, emerging companies that have long-term leases that theirs right now have on their balance sheets. So, we'll see where that goes as well.

Andrea Moseley: Patricio can we have your opinion as well?

Patricio Prospero: Yes. I'm in agreement with what David said.

Meaning that, of course working from home has brought a number of companies effectively cut costs and eventually having also the possibility of relocating their space or, changing the use of their space at the office. Although when we're looking at the human capital, I think that this has negatively affected on the long term.

On the long term, it will be negatively affecting also the way how especially in the tech industry people before used to perceive the work, I mean, I remember a few years ago before this pandemic [00:09:00] happened you know, working in a tech company was fun. It was fun job. You used to work with a tech company.

You used to go, for example, working in Google offices. And it was like enjoying the time with your, with your friends, having time to meet each other, to brainstorm, to create new ideas to discuss. Possibly new things to do. And that was one, most, probably one of the key success factor of a tech company, because they used to approach the human capital in a different way.

So, I think that before we use people working in tech company used to identify themselves with the culture of the company and they used to feel more belonging to the company. I mean, they, they, they felt this, this kind of sense of belonging because it was you know, the whole culture was actually sort of transmitted to the, to the person working in those offices. Today, working [00:10:00] from home, it standardized a bit, the experience, the experience.

So Although it could have brought a number of positive financial repercussions definitely it has also an impact on the way how people are living the work experience. I mean, we read statistics and we see that there are people who feel more depressed. People that they feel more the need of sharing. You know and, and maybe meeting other people and exchanging and sharing ideas. And this is something which on the long term it could affect, or obviously, especially for innovative company the innovation, the innovative elements. So, you know, even the fact that sharing experience, it makes, you know, a whole experience for people, you know, to come up with new ideas and innovative ideas.

So, I think that could be on long term something which we should be looking at in terms of human resources. [00:11:00]

Andrea Moseley: Chris, any thoughts?

Chris DeMayo: I think the ripple effect of remote work and the remote work environment is so deep. You could spend hours talking about how this is going to change the way that we work and live.

When you're in the middle of it, you always think of it as, as probably more of a change than it will be. So, I agree, it's not binary. We're not going to go to a full remote environment because there was, there was absolutely very real benefit to being around people. But I haven't talked with single client that has said we're going back to a five-day work week in the office.

Those days are over. And that's an interesting thing to think about because it opens up. So many different possibilities. First of all, you now can have people, you can now seek talent in places that were, are far, far away from your office. You can now accommodate [00:12:00] talent that, maybe you have somebody that didn't want to live in New York city or California, and wants to live in Topeka, Kansas. And they can't. So it's going to open up possibilities. It's going to change the offices are laid out. It may or may not change the square footage, but it may change the way that they're designed more collaboration, space, less offices and cubes, because not as many people were going to be needing offices because we'll be sharing spaces more than we will you know, having permanent spaces or perhaps we won't share spaces, but the spaces will be substantially smaller.

So, there's a lot of potential change that's going to come. And we just don't know yet what that looks like. You know, some of this is going to be great. For industries, certain industries, and some of it's going to be very damaging. I'll give you an example. When you think about where we have gone with online conferences and with video conferencing, you know, everyone [00:13:00] says we've advanced 10 years in, in a matter of 10 months that is going to have a very negative impact, a decimating impact in some cases on travel and hospitality, right?

Because business travel. It does not have to happen anymore in the way that it once did. Big important meeting to now happen on video conferences. That changes the dynamic of the marketplace. And real estate is, is, is, is certainly not going to be spared by that you know, to, to David's point, I think, you know, could people be looking for less space for no space?

Could people be changing their space? Absolutely. And, and I don't think anyone's going to be able to fully predict the long-term impact. But it will be a winners and losers impact. I think some, some industries will be very positively impacted. Some will be very negatively impacted. But I think the cultural norms have yet to be set as to what we're going to be expecting from our, our, our employee bases going forward.

Andrea Moseley: And you've [00:14:00] mentioned already how companies are still going public, but that has obviously changed. So, what do SPACs mean to tech companies in the marketplace? Chris, I'll start with you.

Chris DeMayo: Sure. Yeah. You know, SPACs have been around for, for a long time. But you know, over the last decade or so you really, haven't seen a lot of activity in this back marketplace in the United States the process of going public is normally a fairly long drawn-out expensive process. It could take years for a company to start the process of going public and actually come to that fruition. What's SPACs have done is it has created a fast track to going public. You know, the, the simple concept of this SPAC is a, an entity, which is a shell was formed that goes public. It has no activity other than literally having a bank account with money in it. It then goes out and acquires a private company. Which therefore makes that company now a public company [00:15:00] and it can be done in a matter of months rather than taking years to do. So, it fast-tracks the process of going public and getting companies into the public market.

And, and that has created a really frothy market in the United States in terms of potential companies, potential targets of SPACs and having liquidity events.

Andrea Moseley: How are you seeing things in Silicon Valley?

David Sacarelos: Well clearly whether you're a traditional SAS company, FinTech electric vehicle company, whoever you are the SPACs are offering a really enticing financing option.

Th this is another way to raise capital and it's it. It's somebody. Easier, I guess. And then it's going going through IPO. I, I noted Chris that on Monday, I just in preparation for our call, five companies announced plans to go public through SPAC mergers at valuations over a billion dollars a piece.[00:16:00]

Yep. And, and all the, one of the deals in the last number of last four months, it only one didn't include SPAC that was a, so there's quite a bit involved, quite a bit out there. And I think it's just another, the way I look at us, it's another financing option, whether it be faster or cheaper, or what have you is another way to go. If you are a tech company to, to raise capital. And so it's also attractive to private equity companies in California, and then in Silicon valley they've already been interested for years in SPACs and you're going to see many more funded, I think, in the coming years. Yes, there's reduced disclosure on the front end.

I think the companies have, have a chance to really speak more directly to their investors. Have a little more transparency in what they're doing. But Chris, I agree I have the question of the day is whether or not these valuations are realistic in the end. So, there is conversation in Congress and [00:17:00] in the federal reserve and some other folks and just making sure that, Whether or not, there should be some more regulation. We don't know nothing's happened at this point in time, but as we look at 2021, it's just another very good way to raise capital. I think that's a good way to look at it. Yeah.

Chris DeMayo: The risks that I see out there is so many of these companies that are going to be targets of SPACs.

Yeah, they're not really ready to be public companies, right? So they're going to snap a finger and all of a sudden they're going to be a public company. And these companies, the rules for their reporting is no different than a traditional public company. So, you know, are they going to have the internal accounting functions to be able to provide accurate financial statements on a quarterly basis?

Are they going to be able to speak accurately to the street about revenue, projections, and growth. These are things that they were never trained to do as a private company. And usually that's part of that kind of two-year process of going public is putting that infrastructure in place. And, you know, [00:18:00] how is that going to affect the market in the future when you have companies that just, they haven't, they're sort of building the plane as they're flying it and going into a big IPO.

And now you've got the public markets investing into these companies. You know, they're going to have. You know, step up and it's going to be, it's going to be a challenge for the next couple of years, to the extent that these you know, these private companies with thin internal accounting departments are going public.

Andrea Moseley: So, I'm conscious that the situation obviously is rapidly changing. And it continues to change it like an accelerated speed. What are your expectations for 2021? Who do you think the winners and losers will be in the kind of the tech space in regards to the pandemic? Patricio I'll start with you.

Patricio Prospero: We have seen a number of winners and losers during this pandemic. Whereas before discussing about working from home people, they stay more at home they travel less, they spend more time at their houses. So, all those, tech companies that somehow [00:19:00] provide services to people which stays at home, definitely they are the winner of the spirit of the pandemic. We mentioned before the videoconferencing and how this effectively has impacted the way how we do business and how we actually interact today. When you look at zoom, for example, an application that before pandemic had about 10 million subscribers, And in few months went up to 200 million that makes you understand how these kinds of companies they have actually achieved a big success during the pandemic.

Another winner is for example, the gaming company, as we said, people are spending more time at. And they have to entertain themselves. So, when you're at home, what you're doing is either watching a movie. So, there we see that the streaming company like Netflix or Amazon Prime and all these [00:20:00] kinds of, of, of companies, they have actually had a huge success, but also gaming company like Nintendo has more than doubled his sales during pandemic online gaming so those, I think that definitely. Two of the winners. I mean, if we want to identify winners, then there are companies which they didn't. I mean, in my opinion, they didn't benefit.

I mean, they, they won in some stages, but they also have lost in some other situations. Just to give you an example. If you take up Amazon, which is perceived to be one of the big winner of of this pandemic, if you look deeply to the situation, they have raised a lot of concerns with people working at Amazon about the work conditions of employees at Amazon which is creating a lot of pressure on on the company.

And on the other side, don't forget that Amazon, for example, has decided having the online sales business has [00:21:00] also owns one of the biggest cloud systems. So people are so, and a lot of companies, which they actually are in difficulty of payment are finding very difficult to pay Amazon's fees for what concerns so involve in formation, the cloud.

So that could detailing in a, in a high-risk. So it doesn't mean that everything, that signal it's looking good, it's actually. You know, something which is definitely a win. And there are those that we identify as major loser. Thinking about companies like Uber, for example, the transportation company that they have lost a lot of of business during the pandemic

They had to change their business model. Most of these companies, now they have moved to the business of delivering food rather than delivering person or driving people from, from, from one site to another. And definitely then the company. That we have seen in the past booming like [00:22:00] Airbnb or, or all the internet based tech middleman, what we call middleman.

They have seen a big loss during the pandemic because people are not traveling. So especially tourists to these importance, as we said, Airbnb booking.com. And all the other is they have seen a big loss in revenue during this period because there is no actually you know there are no actually people traveling, so business automatically has reduced.

I think that's a, in a nutshell, these could be those that, which we could identify as winners and losers. I maybe, I don't know if Chris or, or, or, or they, they have more, more to add to this, maybe they have a. Or opinions or other examples to provide.

Chris DeMayo: To your point. And if you're an online business that is able to deliver, you know, a good conveniently you saw a huge increase in revenue in [00:23:00] 2020. And the thing is, that's a permanent shift because you forced people to adopt a new technology. And now that they have they're going to stay with it. So, you know, retailers will, will have to, you know, deal with the fact that you're going to have a lot of people that were once going to walk into a storefront to buy something.

And now they're comfortable buying online. And, and, and when you think about different demographics, you know, younger people have always been doing that, but if you're, if you're in the, you know, the 50 to 70 year old demographic, maybe you weren't, and now you are, you may not be going back. And that's a huge, huge buying demographic I think that's probably one of the bigger shifts that you're going to see.

I think you know, they're definitely going to be a winner. And as I mentioned before, I think hospitality is, is going to, it's going to struggle for a long time travel and hospitality is going to struggle. I think you'll see a surge when the pandemic is over and people wanting to get their vacations in, but over the longterm, I think you're going to see business travel is going to, is going to be so different.

And that's where a lot of [00:24:00] money is made. Quite frankly, not necessarily on vacationers. You know I think that the, the technology community will net benefit from the pandemic and, you know, getting away from the economics. I think one area where I think is, is, is important is, you know, leadership in crisis. You know, when, when revenue's always going north and money's always flowing in from investors it becomes easy to lead.

I don't want to say it's easy to lead, but you know, you don't have some of the pressures that maybe are out there. You, you see companies emerge and leadership emerge when there's crisis, you know, how do you deal with cutting costs? How do you deal with people? Where, what are the decisions that you make?

And I think that having gone through this, the companies that come out the other side will be better, more solid companies that will be better businesses. Because they'll, they'll know that it's not just going to be about burning cash. And how fast can you spend money on, you know on employee [00:25:00] perks it's going to be about how do you build a business that can survive things that happen, that you don't see coming.

And I think that that may be one of the most important by-products of this pandemic that, that maybe we're not seeing right now, but that, that will grow out over time.

Andrea Moseley: David, any final thoughts?

David Sacarelos: Well, okay, so predictions for 2021. I always like when people ask me that question I have clearly, I think what most people feel is technology healthcare, consumer goods are still going to be at the forefront.

I think we have a number of clients who are doing some amazing things in ag tech. The, the field robotics and in farming is certainly something. People are keeping an eye on artificial intelligence, machine learning. We mentioned earlier, just the whole issue of remote work technology. The cloud tech companies are going to be, I think we're going to do fine.

The FinTech companies are going to do very well. Anything related to enterprise health [00:26:00] and wellness, I think we'll continue to do very well food tech, if you haven't already, you're probably won't buy a plant-based , is it called the hamburger? I don't know, but you'll be buying something that's plant based in the near future because that's something that people are interested, at least in the United States technology around the insurance industry will be, will be key in 2021.

We know in the bay area here in the Silicon Valley and mobility companies, your electronic electric vehicles. A lot of demand there. And I think there's going to be a lot of money put into that, into that technology space retail, health wellness and anything connected with supply chain technology can make it easier to move things from here to there and not have to be so the hold into a, a physical infrastructure that's some thoughts that I have at least maybe I'll leave it there.

Thank you

Andrea Moseley: all very much for your time. And thank you all for listening. [00:27:00] Thanks for listening for more information about this topic and other Cross-border business insights visit www.hlb.global/insights

Speakers:

Andrea Moseley, HLB’s Marketing and PR Manager

Chris DeMayo, HLB’s Global Emerging Technology Leader

Patrizio Prospero, HLB Malta

David Sacarelos, HLB USA

[00:00:00] Welcome to HLB Cross-border Business Talks, HLB's global podcast series on international business topics.

Andrea Moseley: Hello everyone. Welcome to the podcast I'm joined today by Chris DeMayo HLB's global emerging technology leader, Patricio Prospero from HLB Malta and David Sacarelos from HLB USA. We're going to be discussing emerging growth companies and M&A activity during the pandemic. In terms of MNA activity. What are you seeing in the marketplace? Chris, I'll start with you.

Chris DeMayo: I think when we look at 2020, we've seen a pretty significant increase in M&A but it's been for a lot of different reasons. There's been acquisitions happening because companies are sort of looking at the pandemic and it was, it was a painful, you know, event for them.

And they were sort of waving the white flag and saying, we don't [00:01:00] have the gumption to go another two, three years and rebuild from this pandemic. We'd rather just merge up and that was combined with big companies with big balance sheets, like the Facebooks of the world who had capital to deploy and wanted to acquire good technology and good client, a good employee basis.

So, you saw a lot of deals happening there. But then you also saw a lot of companies that had been really positively impacted by the pandemic based on where they were in the marketplace, online retailers, especially on wrong retailers of food and going out to the market and raising money and high valuations off of really aggressive revenue growth became another area where companies were benefiting from the pandemic in terms of M&A.

Andrea Moseley: Patricio, what are your thoughts?

Patricio Prospero: I think that as [00:02:00] every disruptive event brings even COVID has provided with a certain level of opportunities. So, I think for what concerns M&A what we have seen is that there were a lot of companies, especially in the new emerging technology that they had found the opportunity of acquiring companies, which they didn't manage to sustain their business through the pandemic. Having said that, I think that there were also companies which they have held to their original. We have seen a number of merger and acquisitions. They were delayed and they eventually will be closing in 2021.

We know that there are also a lot of companies, which they have requested a reassessment of the venue education of the value of the merger [00:03:00] because of the pandemic. So, I don't think that it affected everybody in the same way. I think that there is a way that there are companies, which they have actually benefited from the situation and from good opportunities.

But some other companies, they had to hold their horses and this fell through as well. So, I think that 2020 was a bit of a year where companies, they also had to put everything on stand by to eventually see how this situation is going to get after the COVID situation.

So, I'm quite curious to see what’s going to happen in 2021, because from the analysis that we have, through surveys and through the study, we'll see that we are seeing that eventually some merger and acquisition are going to be closed by the end of [00:04:00] 2021.

So, 2021 could be also a good year for this kind of deals to be actually achieved and close. Finally, what it was held in 2020 it could be finalised in 2021 so we will see what's going to happen this year.

Andrea Moseley: David, how, how have you seen the market?

David Sacarelos: Well, I think after the lockdown has happened in the last year and going into 2021, maybe my comments really about 2021, I think there's a renewed optimism. I think there is you know, quite a bit of government response. We get vaccines going out and I think there's a view that there's quite a bit of funding available and demand available.

The 2021 is going to be really a good year. Most people were talking with believe that 2021 will have valuations about the same or found higher than, than the in the past. And the [00:05:00] deals will be if anything, the same if not more. So, I think, yeah, obviously we had a big influx toward the end of 2020.

Most people are, are really looking toward 2021 to be a good year. I think, especially in technology, healthcare, consumer goods. Clearly retail and real estate probably are at the downside of that, of that trend. But I think overall, I think it's going to be an optimistic year for 2021.

Andrea Moseley: We're now, obviously in the era of remote working. Is real estate changing in this new time. And what are the role of emerging growth companies? David, I'll start with you.

David Sacarelos: Well, I think I think that the real estate and it kind of in a handful of different ways and it does impact how you think about emerging growth companies and, and their involvement in there. I think a real estate's going to have [00:06:00] to assess and continue to figure out their needs

and worked from home models and really whether or not, or how the market has changed from a supply and demand area clearly emerging work, emerging companies found new ways to attract capital, attract both financial capital and human capital and technology and other aspects of, of, of development and innovation. Globally because of the pandemic and you don't have to be in a building but that assessment's going have to continue. What we're seeing and hearing also is that young people are frankly, a little tired of not going into the office and being with other people they believe it does, in some cases, hamper innovation.

And they want to be able to do both. They want to be at home, and they want to go in. So, I think right now, you know, the market's going to have to assess really what is the supply and demand. In addition to that, at least in the United States, I think we're all looking at the [00:07:00] new Biden administration, secondly, to see where regulatory rules are going to change our tax laws, going to change.

Whether or not the broaden or limit opportunities zones those all impact the real estate market and they do impact, especially in Silicon Valley. A lot of folks have been thinking about putting start-up companies in opportunity zones because not paying tax on that gain is kind of a nice thing if you think about it.

So, there is questions about just regulatory rules and tax policy. Moving ahead. And I, and I think at least in the larger markets, probably in California, New York, and some of the others, we are looking at the disputes among landlords and tenants here in California. We just, yesterday came down and they are going to stop any kind of evictions from commercial, commercial property.

At least for now. So we're at least through June. So, we'll see where that leads. That's going to impact [00:08:00] technology companies, emerging companies that have long-term leases that theirs right now have on their balance sheets. So, we'll see where that goes as well.

Andrea Moseley: Patricio can we have your opinion as well?

Patricio Prospero: Yes. I'm in agreement with what David said.

Meaning that, of course working from home has brought a number of companies effectively cut costs and eventually having also the possibility of relocating their space or, changing the use of their space at the office. Although when we're looking at the human capital, I think that this has negatively affected on the long term.

On the long term, it will be negatively affecting also the way how especially in the tech industry people before used to perceive the work, I mean, I remember a few years ago before this pandemic [00:09:00] happened you know, working in a tech company was fun. It was fun job. You used to work with a tech company.

You used to go, for example, working in Google offices. And it was like enjoying the time with your, with your friends, having time to meet each other, to brainstorm, to create new ideas to discuss. Possibly new things to do. And that was one, most, probably one of the key success factor of a tech company, because they used to approach the human capital in a different way.

So, I think that before we use people working in tech company used to identify themselves with the culture of the company and they used to feel more belonging to the company. I mean, they, they, they felt this, this kind of sense of belonging because it was you know, the whole culture was actually sort of transmitted to the, to the person working in those offices. Today, working [00:10:00] from home, it standardized a bit, the experience, the experience.

So Although it could have brought a number of positive financial repercussions definitely it has also an impact on the way how people are living the work experience. I mean, we read statistics and we see that there are people who feel more depressed. People that they feel more the need of sharing. You know and, and maybe meeting other people and exchanging and sharing ideas. And this is something which on the long term it could affect, or obviously, especially for innovative company the innovation, the innovative elements. So, you know, even the fact that sharing experience, it makes, you know, a whole experience for people, you know, to come up with new ideas and innovative ideas.

So, I think that could be on long term something which we should be looking at in terms of human resources. [00:11:00]

Andrea Moseley: Chris, any thoughts?

Chris DeMayo: I think the ripple effect of remote work and the remote work environment is so deep. You could spend hours talking about how this is going to change the way that we work and live.

When you're in the middle of it, you always think of it as, as probably more of a change than it will be. So, I agree, it's not binary. We're not going to go to a full remote environment because there was, there was absolutely very real benefit to being around people. But I haven't talked with single client that has said we're going back to a five-day work week in the office.

Those days are over. And that's an interesting thing to think about because it opens up. So many different possibilities. First of all, you now can have people, you can now seek talent in places that were, are far, far away from your office. You can now accommodate [00:12:00] talent that, maybe you have somebody that didn't want to live in New York city or California, and wants to live in Topeka, Kansas. And they can't. So it's going to open up possibilities. It's going to change the offices are laid out. It may or may not change the square footage, but it may change the way that they're designed more collaboration, space, less offices and cubes, because not as many people were going to be needing offices because we'll be sharing spaces more than we will you know, having permanent spaces or perhaps we won't share spaces, but the spaces will be substantially smaller.

So, there's a lot of potential change that's going to come. And we just don't know yet what that looks like. You know, some of this is going to be great. For industries, certain industries, and some of it's going to be very damaging. I'll give you an example. When you think about where we have gone with online conferences and with video conferencing, you know, everyone [00:13:00] says we've advanced 10 years in, in a matter of 10 months that is going to have a very negative impact, a decimating impact in some cases on travel and hospitality, right?

Because business travel. It does not have to happen anymore in the way that it once did. Big important meeting to now happen on video conferences. That changes the dynamic of the marketplace. And real estate is, is, is, is certainly not going to be spared by that you know, to, to David's point, I think, you know, could people be looking for less space for no space?

Could people be changing their space? Absolutely. And, and I don't think anyone's going to be able to fully predict the long-term impact. But it will be a winners and losers impact. I think some, some industries will be very positively impacted. Some will be very negatively impacted. But I think the cultural norms have yet to be set as to what we're going to be expecting from our, our, our employee bases going forward.

Andrea Moseley: And you've [00:14:00] mentioned already how companies are still going public, but that has obviously changed. So, what do SPACs mean to tech companies in the marketplace? Chris, I'll start with you.

Chris DeMayo: Sure. Yeah. You know, SPACs have been around for, for a long time. But you know, over the last decade or so you really, haven't seen a lot of activity in this back marketplace in the United States the process of going public is normally a fairly long drawn-out expensive process. It could take years for a company to start the process of going public and actually come to that fruition. What's SPACs have done is it has created a fast track to going public. You know, the, the simple concept of this SPAC is a, an entity, which is a shell was formed that goes public. It has no activity other than literally having a bank account with money in it. It then goes out and acquires a private company. Which therefore makes that company now a public company [00:15:00] and it can be done in a matter of months rather than taking years to do. So, it fast-tracks the process of going public and getting companies into the public market.

And, and that has created a really frothy market in the United States in terms of potential companies, potential targets of SPACs and having liquidity events.

Andrea Moseley: How are you seeing things in Silicon Valley?

David Sacarelos: Well clearly whether you're a traditional SAS company, FinTech electric vehicle company, whoever you are the SPACs are offering a really enticing financing option.

Th this is another way to raise capital and it's it. It's somebody. Easier, I guess. And then it's going going through IPO. I, I noted Chris that on Monday, I just in preparation for our call, five companies announced plans to go public through SPAC mergers at valuations over a billion dollars a piece.[00:16:00]

Yep. And, and all the, one of the deals in the last number of last four months, it only one didn't include SPAC that was a, so there's quite a bit involved, quite a bit out there. And I think it's just another, the way I look at us, it's another financing option, whether it be faster or cheaper, or what have you is another way to go. If you are a tech company to, to raise capital. And so it's also attractive to private equity companies in California, and then in Silicon valley they've already been interested for years in SPACs and you're going to see many more funded, I think, in the coming years. Yes, there's reduced disclosure on the front end.

I think the companies have, have a chance to really speak more directly to their investors. Have a little more transparency in what they're doing. But Chris, I agree I have the question of the day is whether or not these valuations are realistic in the end. So, there is conversation in Congress and [00:17:00] in the federal reserve and some other folks and just making sure that, Whether or not, there should be some more regulation. We don't know nothing's happened at this point in time, but as we look at 2021, it's just another very good way to raise capital. I think that's a good way to look at it. Yeah.

Chris DeMayo: The risks that I see out there is so many of these companies that are going to be targets of SPACs.

Yeah, they're not really ready to be public companies, right? So they're going to snap a finger and all of a sudden they're going to be a public company. And these companies, the rules for their reporting is no different than a traditional public company. So, you know, are they going to have the internal accounting functions to be able to provide accurate financial statements on a quarterly basis?

Are they going to be able to speak accurately to the street about revenue, projections, and growth. These are things that they were never trained to do as a private company. And usually that's part of that kind of two-year process of going public is putting that infrastructure in place. And, you know, [00:18:00] how is that going to affect the market in the future when you have companies that just, they haven't, they're sort of building the plane as they're flying it and going into a big IPO.

And now you've got the public markets investing into these companies. You know, they're going to have. You know, step up and it's going to be, it's going to be a challenge for the next couple of years, to the extent that these you know, these private companies with thin internal accounting departments are going public.

Andrea Moseley: So, I'm conscious that the situation obviously is rapidly changing. And it continues to change it like an accelerated speed. What are your expectations for 2021? Who do you think the winners and losers will be in the kind of the tech space in regards to the pandemic? Patricio I'll start with you.

Patricio Prospero: We have seen a number of winners and losers during this pandemic. Whereas before discussing about working from home people, they stay more at home they travel less, they spend more time at their houses. So, all those, tech companies that somehow [00:19:00] provide services to people which stays at home, definitely they are the winner of the spirit of the pandemic. We mentioned before the videoconferencing and how this effectively has impacted the way how we do business and how we actually interact today. When you look at zoom, for example, an application that before pandemic had about 10 million subscribers, And in few months went up to 200 million that makes you understand how these kinds of companies they have actually achieved a big success during the pandemic.

Another winner is for example, the gaming company, as we said, people are spending more time at. And they have to entertain themselves. So, when you're at home, what you're doing is either watching a movie. So, there we see that the streaming company like Netflix or Amazon Prime and all these [00:20:00] kinds of, of, of companies, they have actually had a huge success, but also gaming company like Nintendo has more than doubled his sales during pandemic online gaming so those, I think that definitely. Two of the winners. I mean, if we want to identify winners, then there are companies which they didn't. I mean, in my opinion, they didn't benefit.

I mean, they, they won in some stages, but they also have lost in some other situations. Just to give you an example. If you take up Amazon, which is perceived to be one of the big winner of of this pandemic, if you look deeply to the situation, they have raised a lot of concerns with people working at Amazon about the work conditions of employees at Amazon which is creating a lot of pressure on on the company.

And on the other side, don't forget that Amazon, for example, has decided having the online sales business has [00:21:00] also owns one of the biggest cloud systems. So people are so, and a lot of companies, which they actually are in difficulty of payment are finding very difficult to pay Amazon's fees for what concerns so involve in formation, the cloud.

So that could detailing in a, in a high-risk. So it doesn't mean that everything, that signal it's looking good, it's actually. You know, something which is definitely a win. And there are those that we identify as major loser. Thinking about companies like Uber, for example, the transportation company that they have lost a lot of of business during the pandemic

They had to change their business model. Most of these companies, now they have moved to the business of delivering food rather than delivering person or driving people from, from, from one site to another. And definitely then the company. That we have seen in the past booming like [00:22:00] Airbnb or, or all the internet based tech middleman, what we call middleman.

They have seen a big loss during the pandemic because people are not traveling. So especially tourists to these importance, as we said, Airbnb booking.com. And all the other is they have seen a big loss in revenue during this period because there is no actually you know there are no actually people traveling, so business automatically has reduced.

I think that's a, in a nutshell, these could be those that, which we could identify as winners and losers. I maybe, I don't know if Chris or, or, or, or they, they have more, more to add to this, maybe they have a. Or opinions or other examples to provide.

Chris DeMayo: To your point. And if you're an online business that is able to deliver, you know, a good conveniently you saw a huge increase in revenue in [00:23:00] 2020. And the thing is, that's a permanent shift because you forced people to adopt a new technology. And now that they have they're going to stay with it. So, you know, retailers will, will have to, you know, deal with the fact that you're going to have a lot of people that were once going to walk into a storefront to buy something.

And now they're comfortable buying online. And, and, and when you think about different demographics, you know, younger people have always been doing that, but if you're, if you're in the, you know, the 50 to 70 year old demographic, maybe you weren't, and now you are, you may not be going back. And that's a huge, huge buying demographic I think that's probably one of the bigger shifts that you're going to see.

I think you know, they're definitely going to be a winner. And as I mentioned before, I think hospitality is, is going to, it's going to struggle for a long time travel and hospitality is going to struggle. I think you'll see a surge when the pandemic is over and people wanting to get their vacations in, but over the longterm, I think you're going to see business travel is going to, is going to be so different.

And that's where a lot of [00:24:00] money is made. Quite frankly, not necessarily on vacationers. You know I think that the, the technology community will net benefit from the pandemic and, you know, getting away from the economics. I think one area where I think is, is, is important is, you know, leadership in crisis. You know, when, when revenue's always going north and money's always flowing in from investors it becomes easy to lead.

I don't want to say it's easy to lead, but you know, you don't have some of the pressures that maybe are out there. You, you see companies emerge and leadership emerge when there's crisis, you know, how do you deal with cutting costs? How do you deal with people? Where, what are the decisions that you make?

And I think that having gone through this, the companies that come out the other side will be better, more solid companies that will be better businesses. Because they'll, they'll know that it's not just going to be about burning cash. And how fast can you spend money on, you know on employee [00:25:00] perks it's going to be about how do you build a business that can survive things that happen, that you don't see coming.

And I think that that may be one of the most important by-products of this pandemic that, that maybe we're not seeing right now, but that, that will grow out over time.

Andrea Moseley: David, any final thoughts?

David Sacarelos: Well, okay, so predictions for 2021. I always like when people ask me that question I have clearly, I think what most people feel is technology healthcare, consumer goods are still going to be at the forefront.

I think we have a number of clients who are doing some amazing things in ag tech. The, the field robotics and in farming is certainly something. People are keeping an eye on artificial intelligence, machine learning. We mentioned earlier, just the whole issue of remote work technology. The cloud tech companies are going to be, I think we're going to do fine.

The FinTech companies are going to do very well. Anything related to enterprise health [00:26:00] and wellness, I think we'll continue to do very well food tech, if you haven't already, you're probably won't buy a plant-based , is it called the hamburger? I don't know, but you'll be buying something that's plant based in the near future because that's something that people are interested, at least in the United States technology around the insurance industry will be, will be key in 2021.

We know in the bay area here in the Silicon Valley and mobility companies, your electronic electric vehicles. A lot of demand there. And I think there's going to be a lot of money put into that, into that technology space retail, health wellness and anything connected with supply chain technology can make it easier to move things from here to there and not have to be so the hold into a, a physical infrastructure that's some thoughts that I have at least maybe I'll leave it there.

Thank you

Andrea Moseley: all very much for your time. And thank you all for listening. [00:27:00] Thanks for listening for more information about this topic and other Cross-border business insights visit www.hlb.global/insights

00:12
and welcome to hlb's international tax
00:15
webinar
00:16
the title is tax implications of a no
00:19
deal brexit
00:21
it is november 24th the year 2020
00:24
and what a year it has been not only
00:28
are we dealing with covet and the
00:30
implications of
00:31
businesses the implication of movement
00:33
around the globe
00:34
and the social impact it's had we're
00:37
also dealing with
00:39
the us elections and finally the topic
00:42
of today
00:43
is brexit brexit and how that impacts
00:45
businesses and individually
00:48
people moving around the world so stay
00:50
tuned
00:51
we have a great panel to take a uh us
00:54
through these
00:54
updates but just a reminder you are
00:58
attending a brexit
00:59
conference webinar it's not a trek city
01:02
conference and if you don't know uh trex
01:05
it is a
01:05
trump exit from the white house so
01:08
we are having a more interesting topic
01:10
right now
01:12
and let's introduce the panel uh of mark
01:15
butler
01:16
from ireland say hello mark nick farmer
01:19
from the uk
01:20
the heat of the source of uh brexit
01:22
christian yonder from germany
01:24
pascal sheridan netherlands and
01:27
dave springsteen here to guide you
01:29
through the presentation
01:31
so let's move forward to the next slide
01:34
and get into the mandate from you guys
01:37
to make this interactive to answer your
01:39
questions
01:40
please use the q a box and we'll get to
01:43
your questions the best
01:44
the best we can so again the q advice
01:48
so what are we going to be talking about
01:50
today well there's four broad areas that
01:53
we will talk about and share ideas and
01:55
concerns
01:56
but before i do that by show of hands to
01:59
see what kind of biases we have on the
02:01
panel
02:02
who thinks is going to be a deal by year
02:04
end
02:07
the uk and ireland so chris
02:10
in pascal you don't think there's gonna
02:12
be a deal by your end
02:14
interesting okay so the agenda will be
02:18
an update on the negotiations
02:21
what are some of the sticking points
02:22
that we're facing right now in the

00:12
and welcome to hlb's international tax
00:15
webinar
00:16
the title is tax implications of a no
00:19
deal brexit
00:21
it is november 24th the year 2020
00:24
and what a year it has been not only
00:28
are we dealing with covet and the
00:30
implications of
00:31
businesses the implication of movement
00:33
around the globe
00:34
and the social impact it's had we're
00:37
also dealing with
00:39
the us elections and finally the topic
00:42
of today
00:43
is brexit brexit and how that impacts
00:45
businesses and individually
00:48
people moving around the world so stay
00:50
tuned
00:51
we have a great panel to take a uh us
00:54
through these
00:54
updates but just a reminder you are
00:58
attending a brexit
00:59
conference webinar it's not a trek city
01:02
conference and if you don't know uh trex
01:05
it is a
01:05
trump exit from the white house so
01:08
we are having a more interesting topic
01:10
right now
01:12
and let's introduce the panel uh of mark
01:15
butler
01:16
from ireland say hello mark nick farmer
01:19
from the uk
01:20
the heat of the source of uh brexit
01:22
christian yonder from germany
01:24
pascal sheridan netherlands and
01:27
dave springsteen here to guide you
01:29
through the presentation
01:31
so let's move forward to the next slide
01:34
and get into the mandate from you guys
01:37
to make this interactive to answer your
01:39
questions
01:40
please use the q a box and we'll get to
01:43
your questions the best
01:44
the best we can so again the q advice
01:48
so what are we going to be talking about
01:50
today well there's four broad areas that
01:53
we will talk about and share ideas and
01:55
concerns
01:56
but before i do that by show of hands to
01:59
see what kind of biases we have on the
02:01
panel
02:02
who thinks is going to be a deal by year
02:04
end
02:07
the uk and ireland so chris
02:10
in pascal you don't think there's gonna
02:12
be a deal by your end
02:14
interesting okay so the agenda will be
02:18
an update on the negotiations
02:21
what are some of the sticking points
02:22
that we're facing right now in the