UHY strengthens presence in the Middle East as firm in Saudi Arabia joins the network.

Global accountancy network UHY extends its coverage within the Middle East region by appointing Abdul Jabber Certified Accountants and Consultants Office. The firm will be operating under the UHY branding as UHY Abdul Jabber Certified Accountants and Consultants Office.

Abdul Jabber Certified Accountants and Consultants Office, was established in 1992. The firm’s head office is based in Jeddah with a branch in Riyadh.  The firm provides accounting, audit, tax, consulting and specialised IT services for a portfolio of clients in the private and government sectors.

Managing partner of Abdul Jabber, Dr. ELsayed Elboussery says: “We have joined the UHY network for a number of reasons. We expect that being a member of UHY will strengthen our practice and local capabilities providing our current and prospective clients access to leading global assurance, accountancy and business advisors services globally. In addition, being part of the UHY global network underpins our commitment to deliver quality services, bring expert knowledge of US GAAP and IFRS, and elevate our offering to assist the needs of both our local and international clients.

Ladislav Hornan, chairman of UHY commented: “We are delighted Abdul Jabber Certified Accountants and Consultants Office has joined the UHY network extending our coverage and capabilities in the Arabian Peninsula, which plays a critical geopolitical role of the Middle East and the Arab World. As a leading producer of oil and natural gas, Saudi Arabia is keen to attract further foreign direct investment supported by the continued diversification efforts focusing on power generation, telecommunications, natural gas exploration, just to name a few. We strongly believe the firm is a very good fit for our network.”

‘Old’ world economies charge higher inheritance and estate taxes than the ‘new’ world

Stealth taxes make passing on a family home more expensive than handing on a cash sum

The UK and Ireland take the highest proportion of inheritance or estate taxes of any major world economies, according to a new study by UHY, the international accountancy network.   

Ireland would typically take 26%, and the UK 25.8% from the estate of an individual passing on an estate worth US$3m* to their heirs, well above the global average of 7.67%.  For UK individuals that have never been married, the amount of inheritance tax taken from their estate would be even higher at 32.9%.

The study also found that European countries generally levy the highest inheritance taxes of all, with EU countries in the study taking 14% tax on the inheritance of a property of US$3million, nearly twice as much as the global average of 7.67%.  However, on a lower value property worth US$350,000, the difference is narrower, with European countries taking on average 2.5% in inheritance or estate tax, compared to a global average of 1.9%.    

UHY explain that emerging economies have traditionally not imposed inheritance and estate taxes because inheritance taxes are sometimes seen as discouraging wealth creation and because many emerging market economies have tried to keep their tax systems relatively simple.   For example, China, India and Russia all have no inheritance taxes.

Several developed countries, including Australia, Israel and New Zealand, have chosen to abolish inheritance taxes in order to create simpler tax systems and encourage the creation of wealth, whether through investment or entrepreneurship.

Ladislav Hornan, chairman of UHY, says: “Many emerging economies are especially keen to encourage wealth creation, and very low, or no, inheritance tax is seen as an important way to do that.  Not only are individuals more incentivised to earn more in order to pass it on to the next generation, but inheritances are themselves often a crucial source of funding for new businesses, especially in countries where there is less bank finance available.” 

“In established European economies, by contrast, Governments are becoming increasingly reliant on the substantial income streams generated by inheritance tax.  It can also be seen as a way of creating tax revenues from ageing populations: retirees frequently have lower levels of taxable income, but substantial assets such as mortgage-free homes”

“Emerging markets economies, with their much more youthful populations, have no pressing demographic reason to need an inheritance tax.  Even as they become older and wealthier, they should resist the temptation to introduce them as they could act as a brake on future growth.”

Level of inheritance tax threshold crucial issue for middle class families

UHY explain that the level at which inheritance tax thresholds are set is a crucial issue for middle class families.  If thresholds are not adjusted in line with inflation, it can mean that taxes, that were originally designed to apply only to the very wealthy, start to affect a larger proportion of the population.

UHY note that in the USA, the 40% federal estate tax applies only to estates of over $5.34m, and so only affects those with substantial assets.  Moreover, the US has raised the threshold for paying the estate tax several times over the last decade, increasing it to its current level from$1,500,000 for deaths in 2004 – 2005. 

By contrast, in the UK, the inheritance tax threshold has been frozen at £325,000 (US$ 544,862) since 6 April 2009 and is expected to remain at the level until at least 5 April 2018.  This is actually below the average London house price of £409,881 (US$686,058), and not far above the UK average house price of £250,000 (US$418,450). 

In Japan, the Government has taken steps to lower the threshold at which inheritance taxes start to apply, with the result that more families are caught by the tax.

Ladislav Hornan, Chairman of UHY, comments, said: “Inheritance tax has become a big earner for the UK Treasury, and inevitably, as rocketing house prices push more and more people into its scope, the amount of tax planning going on is increasing.” 

“The Government of course recognises that most people would rather the taxman does not get his hands on their money, so there are specifically targeted investment reliefs from inheritance tax which encourage older people to continue to invest productively, rather than simply to spend their wealth, by making investments in unlisted trading company shares.” 

“In the UK, as in many other countries, there are gifting exemptions that allow individuals to pass on wealth while they are still alive, so that inheritance tax can be mitigated entirely if an individual makes gifts to their heirs at least seven years before their death.”

“In Japan, tax payers already make very extensive use of these exemptions, and the plans to lower the inheritance tax threshold there from next year has prompted a new wave of interest in the gifting rules.”

“Some would prefer developed economies like the UK and Japan to follow the example of Australia, where the system has been vastly simplified by the abolition of inheritance tax, or at least to start to wean themselves off the tax by increasing the threshold at which it is paid in a meaningful way, as has been the case in the USA.”

Rick David, Chief Operating Officer of UHY Advisors, member of UHY in the USA, said: “Americans regularly complain about estate taxes, but with the current high threshold for the federal taxes the great majority of estates will escape such taxation.    This provides a powerful incentive for middle class Americans to continue to invest and earn, even into late life, because they know they will be able to pass most of what they have onto their children and grandchildren.”

“State level taxes are another matter, and while a majority of the states do not impose an estate tax, many retirees consider the existence of such taxes when selecting a retirement location.  Certain states, such as Florida, increase their attractiveness when consideration of such taxes is part of their analysis.  With the anti-tax movement continuing to gain ground in the USA, we may well see more states weaken or scrap their estate taxes.” 

*Property price of £1.79million / EUR2.16m.  Calculations based on a passing on a home to two adult, non-dependent children.   Where taxes are levied on a state / local level as in USA, Brazil, Spain, Mexico and Canada, a national average has been used.   No special allowances such as Italian exemption for acquiring a first home apply.

 * In the US, 14 out of 50 states impose a state-level estate tax, ranging from 12% to 19%, with tax free allowances from $675,000 to a high of $5.25 Million. A federal estate tax applies from £5.3 million.

Europe’s open economies outperform the BRICs

Belgium third in absolute terms

Singapore, Ireland and Belgium’s favourable tax systems have helped them to outperform the rest of the world in attracting Foreign Direct Investment in the five years since the global credit crunch, according to a new study by UHY, the international accountancy network.

Over the period Belgium attracted Foreign Direct Investment equivalent to 91% of its GDP (a total of US$442 billion), while Singapore attracted the equivalent of 74% of its GDP ($203 billion in total) and Ireland 44% (a total of $93 billion). 

On average, countries have attracted FDI worth 17% of their GDP in the five years since the credit crunch.

The study looked at net FDI inflow over the last five years in 33 major economies around the world, measuring how successful they have been in attracting FDI compared to their GDP. 

Winning Foreign Direct Investment provides an important boost to national economies, creating new jobs and tax revenues in the short term, and in the longer term improving productivity by helping to fund capital investment and making domestic companies more competitive.

UHY explain that Ireland and Singapore have been enormously successful in setting up favourable tax and regulatory environments that have encouraged companies to set up regional headquarters there.  For example, Yahoo, Google, Apple, PayPal and LinkedIn all have European headquarters in Ireland, and Asian headquarters in Singapore. 

Both Ireland and Singapore offer low corporation tax rates compared to other countries in their regions, as well as attractive transfer pricing arrangements for international groups. Singapore also offers a number of tax incentives for companies active in target sectors including shipping, commodities trading, fund management and biotechnology.

However, top place in the table was taken by Belgium, which has attracted net FDI equivalent to 91.4% of its GDP over the last five years – FDI totalling over US $442 billion.  In terms of the absolute amount of FDI received it was behind only the USA (which received over $1 trillion) and China ($563 billion). 

Belgium has been particularly innovative in its use of tax legislation to attract international companies. While it has recently phased out the role of so-called ‘co-ordination centres’ for inter-company loans which helped companies to manage their global tax liabilities, it now hopes to differentiate itself by providing tax reliefs for companies that fund their businesses through equity rather than debt.  In addition, Belgium has generous tax breaks for R&D and investment in capital goods, as well as fiscal incentives for hiring employees.  Belgium’s attractiveness as a European HQ is reinforced by the access it offers to EU decision makers and its importance as a logistics location.

The two bottom performing countries in the study were Italy and Japan: Italy attracted the equivalent of 3.1% of its GDP over the five year period, and Japan just 0.6%.  Both can be difficult environments for foreign investors to acquire assets in.  Germany also did less well than might be expected, ranking in the bottom five in terms of the value of FDI it attracted as a percentage of its GDP.  UHY explain that the processes for establishing a company in Germany are complex, which can deter certain types of foreign investment.

Over the last five years, the USA and China pulled in the largest amount of FDI in absolute terms, though FDI represent a smaller share of their overall economies.

Ladislav Hornan, Chairman UHY, comments: “Small economies such as Singapore and Ireland can punch well above their weight by offering significant tax incentives to companies choosing to locate there.”

“But those tax incentives only work because they also have a well-educated workforce, strong infrastructure and the sophisticated ecosystem of suppliers that a multinational needs when they decide to locate to a country.”

“Although labour, real estate and energy costs tend to be far lower in emerging markets than in developed economies these figures show that developed economies that offer the right incentives, are able to attract in even higher levels of FDI.”

EU countries’ generally open economies allowed them to attract strong FDI inflows relative to their size, pulling in, on average FDI equivalent to 20% of their GDP over the period compared to an average of 10% for the BRIC economies.  UHY say that despite the scale of the investment opportunities in these growing economies, complex tax systems, unpredictable bureaucracies and limits on foreign ownership in certain sectors are proving a barrier.

Eric Waidergorn, Director of UHY Moreira Auditores, member of UHY in Brazil said: “Brazil is an exciting prospect for investors – it is a huge and growing economy with enormous mineral wealth and a young population that is becoming increasingly wealthy.  Unfortunately, the practicalities of investing in Brazil can be off-putting.  Our tax system is not well understood by overseas investors, certain sectors such as health-care are completely off-limits and there are restrictions on foreign ownership in others.”

“However, the national and regional governments are aware of the need to attract more FDI, and some overseas investors can enjoy exemption from certain federal and regional taxes.  What is needed is simplification so that Brazil can put what is ultimately a compelling investment case much more clearly.”

UHY says that many other countries have put off foreign investment by actively discouraging the takeover of domestic companies by foreign investors.  Egypt, Mexico and Spain are amongst the countries which have caps or outright bans on foreign ownership of companies or assets that are regarded as strategic, which may include nuclear power, oil, air transport, the media and defence industries or even agricultural land.  In the USA, certain transactions may be scrutinised by the Committee on Foreign Investment in the United States to determine whether they are potentially detrimental to US national security.

Says Ladislav Hornan: “Although there are occasional setbacks to the process, the long term trend has been for more economies to open up to all kinds of FDI.”

“The benefits certainly outweigh the downside, and that is why governments in many developed economies place a great emphasis on ensuring that they remain attractive to overseas investors.  In addition to tax incentives, that can include developing recognised expertise in high value and high technology industries, as Israel has done, or putting transport and other infrastructure in place that will encourage investment in neglected areas or assets.”

Alan Farrelly at UHY Farrelly Dawe White Limited, member of UHY in Ireland, commented: “The Irish tax system has been very successful in attracting Foreign Direct Investment.  While maintaining low corporate tax rates has not been uncontroversial at a time when we have gone through a painful austerity programme, it has helped Ireland to create and retain a lot of highly skilled jobs.”

Franck Narquin, partner at UHY GVA, member of UHY in France, which came in 25th place out of the 33 countries, added:  “The French Government  is aware of the need to attract more FDI, and has drawn up a ‘National Pact for Growth’, to help achieve this.  France already has great strengths in areas like science and offers generous research tax credits, but there needs to be more focus on cutting red tape and reducing labour costs.” 

UHY strengthens presence in the Balkans as firm in Montenegro joins the network

Global accountancy network UHY extends its coverage within Europe by appointing MONT AUDIT PLUS.

MONT AUDIT PLUS was established in 2007. With a team of 12 staff including 4 partners, the firm’s head office is based in Podgorica, the capital city. The firm provides audit, consulting, assets’ and capital valuations, tax counselling and accounting services to a portfolio of clients in a variety of private and public sectors in the region.

Managing partner of MONT AUDIT PLUS, Djordjije Rakocevic says: “We have joined the UHY network for a number of reasons. We expect that being a member of UHY will strengthen our local capabilities, which will give our current and prospective clients access to leading audit, accountancy and business advisors anywhere in the world.  We believe that as a part of the UHY family we can strengthen the audit quality control and promote methodological approach to the auditing, as well as cooperate and exchange best practices with members of this rich network to joint satisfaction and benefit.”

Ladislav Hornan, chairman of UHY commented: “We are delighted MONT AUDIT PLUS has joined the UHY network extending our coverage and capabilities in the Balkans. Montenegro is a growing economy and with impending membership of the EU and NATO attractive to foreign direct investments. MONT AUDIT PLUS’s admittance to the UHY network will bring strong regional market and sector expertise, enhancing further our capabilities in this region. We strongly believe the firm is a very good fit for our network.”

The firm will soon be adopting the UHY branding and will be known as UHY Mont Audit DOO.

UHY strengthens presence in the Middle East as firm in Qatar joins the network

Global accountancy network UHY extends its coverage within the Middle East region by appointing McKenzie Shaw Ltd. Qatar. The firm will be operating under the UHY branding as UHY Ammo & Co.

The parent company, McKenzie Shaw (McKenzie) was established in 2005 in London, United Kingdom. McKenzie Shaw Ltd, the Qatar branch, is mainly engaged in financial and managerial advisory. With a team of 16 staff including 4 partners, the firm’s office is based in Doha.  The firm provides accounting, bookkeeping, management advisory services, IT services and also audit and tax services for established and emerging companies in the private and government sectors in the Gulf region.

Executive partner of McKenzie Shaw Ltd., Mohamed Shady says: “We have joined the UHY network for a number of reasons.  UHY delivers a distinction in services that is sustained by UHY’s understanding of local knowledge combined with national, regional, and international expertise.  Our commitment in providing exemplary services, core values of professionalism with client involvement, understanding of business culture, consumer behavior, local market dynamics and our vision of future growth are in line with UHY’s.”

Ladislav Hornan, chairman of UHY commented: “We are delighted McKenzie Shaw Ltd. Qatar has joined the UHY network extending our coverage and capabilities in the Middle East. We fully support the firm’s commitment to expand its operations and to grow its capabilities. Qatar is currently undergoing a transformation under the National Vision 2030 to achieve an advanced, sustainable and diversified economy. It is also expected to become one of the fasted growing economies in the world in the next decade.”

Would-be Chinese and American multinationals held back by tax policy.

UHY taxation and business advisory professionals in 27 countries rated their economies on several factors including taxation and trade policy, that indicate how internationalised an economy already is and how well positioned it is to take advantage of future globalisation of trade.  

The USA and Japan are falling behind Europe and China in the race to capitalise on globalisation and could miss out on future economic growth as a result, according to a new study by UHY, the international accounting and consultancy network.

UHY taxation and business advisory professionals in 27 countries rated their economies on several factors including taxation and trade policy, that indicate how internationalised an economy already is and how well positioned it is to take advantage of future globalisation of trade.  

The factors examined in UHY’s study included; how successful a country has been in negotiating favourable tax arrangements with potential trading partners, how successful it has been in growing exports, how important a part trade already plays in its economy, how much tax it imposes on companies ‘repatriating’ overseas profits, how it is rated in the World Bank’s ‘Ease of Doing Business’ survey, and labour costs.  

Assessed on these factors, the USA and Japan with scores of 3.7 and 3.0 respectively were surprisingly far behind both China, with its score of 4.6, and the EU member states, with an average score of 5.2 out of a maximum of 10. 

While the USA and Japan both did well on their ‘Ease of Doing Business’ rating, their economies still remain more aligned to domestic activity than many of their competitors.  UHY explains that this means companies in these countries are not fully exposed to international competition, which may make them less effective internationally.  Additionally, both countries also had low scores for the factors measuring their success in negotiating favourable tax treatment by trading partners.

Germany topped the ratings with a score of 6.4 out of ten, while Slovakia was not far behind on 6.3 points.  China was the best performing of the world’s top 3 economies with a score of 4.6, and India was the best-performing BRIC with a score of 5.1, helped by its low labour costs with an average monthly salary less than half as high as China’s. 

Ladislav Hornan, chairman of UHY commented: “While both Japan and the USA still have huge domestic economies to help generate growth, making a more concerted effort to open themselves up to global trade and global competition could pay dividends in the future.  Japan in particular is very conscious of the need to revive its economy after the lost decade has drifted into two decades.”

“Japan was once seen as having an unassailable lead in consumer electronics and a level of high-tech expertise that outweighed relatively high labour costs.  No longer: Korean and Taiwanese giants like Samsung, LG and Foxconn now dominate that industry.”

Rick David of UHY LLP, member of UHY in the USA, stated: “In the past Canada, Mexico, Japan and the EU have been some of our most important and most co-operative trading partners, but it is perhaps time for policy makers to look at how we can improve relationships with emerging economies in Africa and Southern and South East Asia that are going to become bigger consumers and bigger importers as their incomes grow.”

Akira Wakatsuki of UHY Tokyo & Co and member of UHY in Japan, comments “So far, one of the centre pieces of recent Japanese economic policy – the devaluation of the Yen – has only had a limited impact on exports.   It may be that domestic structural reforms and Japan’s intention to open up more to free trade through its participation in talks on the Trans-Pacific Partnership (TPP) are ultimately more successful in helping the economy to compete more successfully with cheaper, rival Asian economies.”

Within Europe, UHY point out that Slovakia, the Czech Republic and Romania have been very effective in taking advantage of the opportunities presented by the single market.  Meanwhile, Spain, pulled out of recession in the third quarter of 2013 thanks to export growth, and could potentially see its trade position improve in the future.   Georg Stöger of AUDITOR, UHY member firm in the Czech Republic and Slovakia said: “Slovakia in particular has been very effective in making the most of its EU membership and still relatively low labour costs.  Its government has pursued a liberalisation agenda, and thanks to its traditional strengths in manufacturing, it’s becoming an increasingly important location for international businesses.” 

“Currently countries like the Czech Republic, Romania and Slovakia all benefit from fairly low labour costs.  As they continue to build up their skills base, improve infrastructure and reduce local bureaucracy they could become formidable competitors, especially if they are able to make the transition from trading within the EU to trading globally.”

Would-be Chinese and American multinationals held back by tax policy

While China did far better overall than the USA, with an overall score of 4.6 out of 10, both of the world’s two largest economies’ scores – were also brought down by the high taxes their governments impose on corporates ‘repatriating’ overseas profits. 

UHY says that these taxes reduce the incentive for businesses to set up subsidiaries overseas, particularly for SMEs for whom the costs of setting up international operations would be proportionately more expensive.  Just under half of the countries in the study imposed no tax on repatriated dividends at all.

Rick David added: “American firms are household names around the world but actually our taxation system is very poorly geared towards encouraging US companies from growing overseas, with the highest tax on ‘repatriated’ profits of any country in the study.”

Rankings showing 27 countries’ ability to take advantage of future globalisation of trade

Notes:

Countries’ overall scores are based on their rankings for the detailed measures included in the study.

Data drawn from: the World Bank, World Trade Organisation, International Labour Organisation and national governments.

For additional information about this article please download the PDF below.

How well placed are rival economies to take  advantage of growing globalisation?

“Who would have imagined a decade ago that China’s influence in Africa would be so swiftly mirrored into Western culture?”

Film-makers who trekked for days to reach a remote mountainous village in Peru found the community divided. The older generation didn’t want a mountain pass built into their village for fear that ‘bad’ men may come and destroy their way of life. Among the ‘bad’ they included people looking to profit from building homes, schools, hospitals and roads – people who would destroy their environment.

The younger generation wanted the mountain pass: it was time, they said, that their community was opened up to the world beyond; they wanted opportunities like other young people, rather than having to leave their community to find their futures. They wanted to encourage developers, and offer them bigger and better incentives (such as bamboo spears) than their neighbours may offer in another village community higher in the clouds.

For nations further along the evolutionary line, foreign direct investment (FDI) can be no less controversial – such as when foreign companies take control of what has been a traditionally national-led enterprise.

But, in 2014 and the foreseeable future, as at least half the globe looks to jumpstart renewed GDP growth and escape high unemployment among younger generations, governments are warmly welcoming foreign investors – and offering them significant incentive packages to get them aboard.

Think FDI, think China. Who would have imagined a decade ago that China’s influence in Africa would be so swiftly mirrored into Western culture? Chinese overseas merger & acquisition (M&A) investment has more than doubled in the last five years. In the first 11 months of 2013, Chinese companies announced 107 deals worth USD 43.7 billion – compared to just 45 deals worth USD 17.3 billion in the whole of 2007.

China’s increasing appetite for Western assets – and the West’s preparedness to receive Chinese investment (while drawing less attention to issues such as intellectual property) – appears hampered only by the Chinese themselves: they have a 25-30% annual staff turnover in Chinese financial services firms, and the way they currently engage in M&A deals is different from practices employed by their Western counterparts.

The Chinese want to meet the deal-maker’s entire management team several times before a deal is warmed up; Western financial advisers and private equity firms allow six months for this process. And, so far, very few Chinese companies have experienced more than one overseas M&A acquisition. But attitudes are converging, the size of deals is increasing – and Chinese M&A deals accounted for the most outbound FDI transactions in the first half of 2013, according to one of the Big Four accountancy firms. In the latest official rankings from the United Nations Conference on Trade and Development (UNCTAD), China comes a strong second, currently behind the US, for FDI received (see table below).

FDI global climate

Certainly, China and other cash-rich FDI investors have plenty to choose from. Investors, it seems, are prepared to accept greater risk in the aftermath of the global financial downturn, and the world is awash with FDI opportunities – both in countries beginning to modernise (despite a cooling of the love affair with emerging nations), and in richer developed nations seeking growth.

Take, as an example, the UK, stronghold of the global financial services industry. A glut of international M&As, and the relaxation of ownership rules, has resulted in 53.2% of the UK’s £1.8 trillion stock market being owned by international investors, according to the UK Office for National Statistics.

Companies that dominate the UK’s FTSE 100, the top tier companies, are often London-listed but not London-based. Of the £935.1 billion stake owned by foreign investors, North Americans own the biggest slice, worth £451.9 billion, followed by Europeans, who own £241.3 billion – and that is despite plunging investment in UK pension funds (down to an all-time low of 4.7% in 2012, from 21.7% in 1998, blamed on equity volatility), which has traditionally soaked up foreign investment.

It’s no coincidence that, as nations step up their FDI campaigns, the inauguration of the first-ever global association, devoted entirely to promoting cross-border investment and corporate expansion, took place in Shanghai, China, during a ‘Global
FDI conference’.

The FDI Association’s primary aim is to represent corporate decision-makers in their global expansion and development activities, connecting leaders from globally expanding companies with executives from private- and public-sector bodies around the world. It aims to “offer networking and relationship-building, and will create opportunities that spur global investment”.

An international study by UHY member firms at the end of 2013 shows that the world’s developing economies are taking a bigger share of global FDI than developed economies. 

However, there are massive regional differences: China alone receives more investment than the entire continent of Africa.  FDI inflows into China in 2012, at USD 121 billion, were not far behind the USD 168 billion worth of FDI into the US. However, the US’s mature economy made a far bigger input into global FDI flows than did China, contributing USD 329 billion into global FDI flows during 2012, nearly three times China’s USD 84 billion worth of investment in other countries over the same period.

FDI defined

FDI – an investment made by a company or entity based in one country, into a company or entity based in another country – typically involves a significant degree of influence and control over the company into which the investment is made. The accepted threshold for an FDI relationship, as defined by the OECD (Organisation for Economic Co-operation and Development) is 10% – the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company.

The investing company may make its overseas investment by:

•  Setting up a subsidiary or associate company in the foreign country

•  Acquiring shares of an overseas company

•  Creating a merger or joint venture.

FDI trends

Open economies with skilled workforces and good growth prospects tend to attract larger amounts of FDI investment than closed, highly regulated economies.

According to OECD, the countries with the greatest share of FDI inflows as a percentage of GDP (in order, 2012 figures) are:

Luxembourg         Czech Republic

Ireland                  Israel

Chile                     Portugal

Hungary               Australia

Estonia                 Iceland

Luxembourg is way ahead of all other countries in the list because it is a base for many international companies, such as ArcelorMittal S.A, which has mining interests in several African countries – which therefore indirectly benefit from FDI inflows.

When economies are ranked by total FDI received, the latest UNCTAD official rankings are:

USD (billion)

United States                      168

China                                    121

Hong Kong (China)             75

Brazil                                    65

British Virgin Islands           65

UK                                         62

Australia                               57

Singapore                             57

Russia                                   51

Canada                                 45

These 10 countries together received more than half of all global FDI; and the US and China accounted for more than 20% of it.

Several of these countries do not have significant natural resources; the real draw for FDI is the size of their populations and lower shipping costs.

Government incentives

Most countries increase FDI inflow by creating a business climate that makes foreign investors feel that their capital is safe. Obtaining a good ranking in the World Bank’s Doing Business Report and staying out of the Transparency International’s Corruption Perceptions Index help countries attract FDI.

Government incentives include:

•  Low corporate tax and individual income rates

•  Other tax incentives and concessions, such as tax holidays

•  Preferential tariffs

•  Special economic zones and export processing zones

•  Bonded warehouses – a building or secured area in which dutiable goods may be stored, manipulated, or undergo manufacturing operations without payment of duty

• Employment incentives

• Protection of private property rights

• Providing guarantees for repatriation of investment and profits

• Access to ‘soft’ loans

• Infrastructure subsidies

• Research & development support

• Derogation from regulations.

Examples of incentives among countries ranked in the top 10 for total FDI inflow are here: 

CHINA

The Shanghai Free Trade Zone is expected to generate still more inbound FDI in China. The government allows companies in Special Economic Zones to have more free market-oriented economic policies and flexible governmental measures than companies in the rest of mainland China.

The government has also launched Qianhai Equity Exchange, in She-nzhèn, its biggest-to-date, over-the-counter (OTC) exchange, aimed at delivering easier finance to small and medium-sized enterprises.

China’s population of 1.3 billion (19% of the world’s population) has a vast potential for consumption and in the last few years the purchasing power of the Chinese has also increased dramatically, making the republic a draw for investment in chemicals, drinks, household electrical appliances, cars, electronics and pharmaceuticals.

The availability of land, relatively low-cost labour and natural resources are key to attracting still more investors. And immense development in infrastructure greatly influences the investors’ decision.The more highways, railways and transport waterways are adjusted to the size of each province, the more FDI flows in. Improved telecommunications also play a major role.

Relaxation of restraints; reductions in national and local income taxes, land fees, import and export duties; and priority treatment in obtaining basic infrastructure services all contribute to the government’s FDI incentive.

The Russian Federation has enjoyed significant FDI inflows (and outflows) in recent years, despite much-publicised political disincentives over corporate ownership. In 2012, total inflows were USD 51.4 million and total outflows USD 51.06 million. Just a year before, Russia enjoyed FDI growth of 22%, reaching an accumulative total of USD 53 billion, the third highest level ever recorded globally. (Source: UNCTAD)

By sector ranking, most FDI projects into Russia supported the automotive sector, followed by food, machinery, chemicals and non-metallic mineral products.

The potential in Russia is still strong.
For example, 40% of the telecommunications infrastructure was reported to be ‘not established’ in Russia in 2013; there was a 45% opportunity in education; and 37% of transport and logistics infrastructure was in need of investment. (Source: Russia Attractiveness Survey)

Tax incentives (such as tax holidays, benefits for research & development and reduced social insurance contributions) are available to investors in Russian Federation special economic zones and in regional government industrial parks. Some regional governments offer reduced tax rates on their share of profits. The government has also set up more than 20 Free Customs Zones to increase exports. Investors in these zones receive tax incentives.

UHY Eccona LLP
Contact: Elena Sedavkina
Email: eka-audit@mail.ru

An integrated series of incentives and programmes has been tailor-made to welcome investors into Singapore. These developments have earned Singapore the reputation for being the world’s easiest place to do business, as well as the most competitive Asian economy.

SPRING Singapore is the enterprise development agency for growing innovative companies and fostering a competitive SME sector. It aids start-up enterprises in financing, capabilities and management development, technology and innovation, and access to markets. It is also the national standards and accreditation body.

Financial incentives are offered to investors ready to expand their businesses, covering areas from equipment and technology, to business development, R&D and intellectual property, headquarters management, and industry development.

UHY Lee Seng Chan & Co
Contact: Lee Sen Choon
Email: senchoon.lee@uhylsc.com.sg

UHY Diong
Contact: Albert Chin
Email: tarcsg@singnet.com.sg

Terence James ‘Jim’ O’Neill, retiring chairman of Goldman Sachs Asset Management and a British economist, was responsible for the acronym BRIC for emerging markets (Brazil, Russia, India, China) which over time was extended to BRICS to incorporate South Africa.

So, now that investors have apparently cooled their love affair with emerging economies, we can thank him or blame him for whatever has befallen us during those years of perceived opportunity versus reality.

But you can never keep an optimist down, and now Jim has come up with another acronym to tempt our attention: ‘SMIT’ countries are the new growth markets of South Korea, Mexico, Indonesia and Turkey.

In Jim’s defence, in 2013 Brazil, China, India and Russia accounted for a quarter of global output, a figure that is forecast to rise to about one-third by the end of the decade. So what are the prospects for the SMITs and will investors warm to them so readily as the BRICS, now that the International Monetary Fund (IMF) has cut its growth forecasts?

After years of talking up the BRICS, the IMF now admits that these countries have either exhausted their catch-up growth models or run into the time-honoured problems of supply bottlenecks and bad governance.

With one swipe, IMF has slashed its forecast for developing economies by 0.5% to 4.5% in 2013, and by 0.4%
to 5.1% in 2014.

India: down 1.8%. Russia: down 1%. Mexico, one of the new SMITs, is forecast to be down by 1.7% – all compared with IMF forecasts just six months previously. Similar damage is expected for SMIT starlets Turkey and Indonesia (not to mention the likes of Ukraine and others with big trade deficits).

In what commentators say amounts to a mea culpa, the IMF has hinted that it has long been blind to festering problems in the BRICs and smaller emerging economies – resulting in its downward revisions: IMF forecasts for Brazil, China and India are now 8% to 14% lower for 2016 than it had forecast two years ago.

The BRICs’ malaise, their poorer pace of economic growth, implies “serious structural impediments”, says the IMF. Time is running out, it says, even for kingpin China’s growth model (driven by a world-record investment rate of 50% of GDP), which is afflicted by excess capacity and diminishing returns. China has picked “the low-hanging fruit” of catch-up growth, relying on mass migration of cheap labour from the countryside, yet the “reserve army” of peasants in the interior will have disappeared by 2020 and wages will be forced skywards.

The IMF now predicts “disappointment everywhere” for investors in emerging markets and that, as a result, global growth will remain in low gear for the foreseeable future.

As a result, net capital flows to emerging markets have inevitably taken a tumble. But, for the less faint-hearted, the IMF digs deep to predict that emerging markets will muddle through. And growth among emerging markets will still settle near 5.5%, far higher than in the 1980s and early 1990s.

So, what do the SMITs have to offer?

Mexico

Profile

Mexico has a free market economy in the trillion dollar class. It contains a mixture of modern and outmoded industry and agriculture, increasingly dominated by the private sector. Recent administrations have expanded competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution and airports. Per capita income is roughly one-third that of the US.

Since the implementation of the North American Free Trade Agreement in 1994, Mexico’s share of US imports has increased from 7% to 12%, and its share of Canadian imports has doubled to 5.5%. Mexico has free trade agreements with more than 50 countries including Guatemala, Honduras, El Salvador, the European Free Trade Area, and Japan – putting more than 90% of trade under free trade agreements.

In 2012, Mexico formally joined the Trans-Pacific Partnership negotiations and formed the Pacific Alliance with Peru, Colombia and Chile.

Following 3.9% growth in both 2011 and 2012, in 2013 the economy will only grow slightly above 1%. However, a return to 4% economic growth is expected in 2014. 

Since November 2012, Mexico’s legislature has passed several structural reforms which include a comprehensive labour reform, telecoms reform, competition reform and an energy reform, all of which prioritise structural economic reforms and competitiveness.

Indonesia

Profile

Indonesia still struggles with poverty and unemployment, inadequate infrastructure, corruption, a complex regulatory environment, and unequal resource distribution among regions. The government faces the ongoing challenge of improving Indonesia’s insufficient infrastructure to remove impediments to economic growth, labour unrest over wages, and reducing its fuel subsidy programme in the face of high oil prices.

Yet, Fitch and Moody’s upgraded Indonesia’s credit rating to investment grade in December 2011.

Indonesia has an increasingly industrial and services economy (47% and 39% respectively of GDP). Industrial production grew by 5.2% in 2012.

As a result, the country has a healthy export trade with Japan (15.9%), China (11.4%), Singapore (9%), Republic of Korea (7.9%), US (7.8%), India (6.6%) and Malaysia (5.9%) (2012 figures) in products and services including petroleum and natural gas, textiles, automotive, electrical appliances, apparel, footwear, mining, cement, medical instruments and appliances, handicrafts, chemical fertilisers, plywood, rubber, processed food, jewellery, and tourism.

Indonesia grew more than 6% annually in 2010-12. During the global financial crisis, Indonesia outperformed its regional neighbours and joined China and India as the only G20 members posting growth in 2009.

The government made economic advances under the first administration of President Yudhoyono (2004-09), introducing significant reforms in the financial sector, including tax and customs reforms, the use of Treasury bills, and capital market development and supervision. The government has promoted fiscally conservative policies, resulting in a debt-to-GDP ratio of less than 25%, a fiscal deficit below 3%, and historically low rates of inflation.

THE REPUBLIC OF KOREA

Profile

In 2004, The Republic of Korea joined the trillion dollar club of world economies, and is currently the world’s 12th largest economy.

Throughout 2012 the economy experienced sluggish growth because of market slowdowns in the US, China and the Eurozone.

The incoming administration of 2013 faces the challenges of balancing heavy reliance on exports with developing domestic-oriented sectors, such as services. Long-term challenges include a rapidly ageing population, inflexible labour market, and heavy reliance on exports, which comprise half of GDP.

The Republic’s export-focused economy was hit hard by the 2008 global economic downturn, but quickly rebounded in subsequent years, reaching 6.3% growth in 2010. The US-South Korea Free Trade Agreement was ratified by both governments in 2011 and came into effect in 2012.

Over the past four decades the Republic has demonstrated significant growth and global integration to become a high-tech industrialised economy. Back in the 1960s, GDP per capita was comparable with levels in the poorer countries of Africa and Asia. 

The Asian financial crisis of 1997-98 exposed longstanding weaknesses in the Republic’s development model including high debt/equity ratios and massive short-term foreign borrowing. GDP plunged by 6.9% in 1998, and then recovered by 9% in 1999-2000. The Republic adopted numerous economic reforms following the crisis, including greater openness to foreign investment and imports. 

“The IMF now predicts “disappointment everywhere” for investors in emerging markets and that, as a result, global growth will remain in low gear for the foreseeable future.”

Turkey

Profile

Turkey’s largely free-market economy is increasingly driven by its industry and service sectors, although its traditional agriculture sector still accounts for about 25% of employment. An aggressive privatisation programme has reduced state involvement in basic industry, banking, transport and communication, and an emerging cadre of middle-class entrepreneurs is adding dynamism to the economy and expanding production beyond the traditional textiles and clothing sectors.

The automotive, construction and electronics industries are rising in importance and have surpassed textiles within Turkey’s export mix. Oil began to flow through the Baku-Tbilisi-Ceyhan pipeline in May 2006, marking a major milestone that will bring up to 1 million barrels per day from the Caspian to market. Several gas pipelines projects also are moving forward to help transport Central Asian gas to Europe through Turkey, which over the long term will help address Turkey’s dependence on imported oil and gas to meet 97% of its energy needs.

Growth dropped to approximately 3% in 2012. Turkey’s public sector debt to GDP ratio has fallen to about 40%, and at least one rating agency upgraded Turkey’s debt to investment grade in 2012. Turkey remains dependent on often volatile, short-term investment to finance its large trade deficit. The stock value of foreign direct investment (FDI) stood at USD 117 billion at year-end 2012. Inflows have slowed because of continuing economic turmoil in Europe, the source of much of Turkey’s FDI. Turkey’s relatively high current account deficit, uncertainty related to monetary policy-making, and political turmoil within Turkey’s neighbourhood leave the economy vulnerable to destabilising shifts in investor confidence.

After Turkey experienced a severe financial crisis in 2001, Ankara adopted financial and fiscal reforms as part of an IMF programme. The reforms strengthened the country’s economic fundamentals and ushered in an era of strong growth – averaging more than 6% annually until 2008. Global economic conditions and tighter fiscal policy caused GDP to contract in 2009, but Turkey’s well-regulated financial markets and banking system helped the country weather the global financial crisis and GDP rebounded strongly to 9.2% in 2010 (levelling out to 8.5% in 2011), as exports returned to normal levels following the recession.

UHY has member firms operating business centres in the SMIT countries:

Mexico
UHY Glassman Esquivel y Cía S.C.
Contact: Oscar Gutiérrez Esquivel
Email: oge@uhy-mx.com

Indonesia
KAP Hananta Budianto & Rekan
Contact: Hananta Budianto
Email: hananta@hananta.com

Republic of Korea
UHY Seil Accounting Corp
Contact: Sam-Won Hyun
Email: cpahn@hanmail.net

Turkey
UHY Uzman YMM ve Denetim AS
Contact: Senol Çudin
Email: uzman@uhy-uzman.com.tr