Tuesday, August 19, 2014

European Dependence on Russian Energy

From: New York Times

Classic dilemma for IR and IPE students.

Who has the power in this situation?

In the short-term it seems clear that the Russians have power (no pun intended) given the dependence of many countries on Russian energy supplies. Over the longer-term, however, it seems likely that the switch away from Russian energy supplies could be disastrous for the energy export-dependent Russian economy.

The sanctions on Russia do not involve stopping the import of Russian energy, but other sanctions could lead to retaliation from the Russians in terms of energy exports or imports. Indeed the Russians have banned food imports from major Western countries. This will undoubtedly punish those exporters to Russia, but will also lead to food shortages in Russia itself. According to this report from the NYT, Russian bans on food  imports will advantage Chinese producers.

Thursday, August 14, 2014

Importing Chinese Tourists as Exports

Australia has been exporting large quantities of resources to China in recent years. I would like to say it has transformed our economy, but in reality it has accentuated pre-existing attributes of the Australian economy. Indeed, although the policy framework shaping Australia's economic interactions has been transformed, Australia remains reliant on resources to pay our way in the world.

In the 1980s, Japanese demand for resources was followed by a significant increase in Japanese investment and tourists. This is now happening with China and the prospects for further increases in Chinese tourism are high. 

Our importing of Chinese nationals to visit Australia is registered in the national accounts as an export as is the spending of Chinese students. 

Alan Kohler canvasses the potential numbers:
In June about five Boeing 747 loads of seasonally adjusted Chinese tourists arrived in Australia every day. For the year to June, the total was 769,000 -- a record number -- and second only to New Zealanders. More importantly, Chinese tourists stay the longest and spend by far the most: $5.1 billion in the year to March, according to Tourism Australia data, or $7,343 each -- double what the Kiwis spend. 
Apparently only 5 per cent of Chinese actually own a passport so there is a fair bit of upside potential there, although it's important to note that most Chinese are still poor. Despite China's rapidly growing economy over recent years, overall China is still a poor country, ranking 82nd in the world for Gross National Income per Capita (measured in US dollars) according to the World Bank. This puts it just above Namibia, but below Iraq and Turkmenistan. Australia ranks third.

In the case of tourism, purchasing power parity rankings of economic weight (see here for explanation) have less purchase than exchange rate measures (local currencies converted to US Dollars) because going overseas requires you to convert your money and pay higher prices. I'm not sure that poor Chinese will be visiting expensive rich countries any time soon.  Of course, with a population as large as China's, this is not really the point as long as the middle class keeps expanding and decides to spend some of its new found wealth on coming to Australia.

According to The Economist: 
Nearly one in ten international tourists worldwide is now Chinese, with 97.3m outward-bound journeys from the country last year, of which around half were for leisure. Chinese tourists spend most in total ($129 billion in 2013, followed by Americans at $86 billion) and per tax-free transaction ($1,130 compared with $494 by Russians). More than 80% say that shopping is vital to their plans, compared with 56% of Middle Eastern tourists and 48% of Russians. They are expected to buy more luxury goods next year while abroad than tourists from all other countries combined.
Supposedly, the number of Chinese tourists will double by 2010 and their spending will triple, although there is no indication how these numbers were arrived at. It's China so anything I suppose is possible.

Tourism Australia reports that there were "6.6 million visitor arrivals for year ending June 2014, an increase of 7.9 per cent relative to the previous year". China ranked second behind New Zealand with the UNited Kingdom third.

The Australian Bureau of Statistics compares 2013-14 with 2003-04 to see how short-term visitor arrivals have changed. Seemingly, the Japanese are less interested than they once were in Australia.

New Zealand numbers have increased by over 30 per cent, but the number of Japanese visits has fallen from 718,600 to 323,700, a fall of 55 per cent. Chinese visits have increased by nearly 230 per cent, while Indian visits have increased by nearly 250 per cent.

It is not just short-term visitor numbers that interest Australian authorities. In recent years, Australia has introduced 'significant investor visas', which enable people to buy their way into Australia. According to a recent report, the scheme "has reaped a total $1.7 billion to date", awarding 343 residency visas as at the end July 31. The Abbott government accelerated the scheme after concerns that the program begun in 2012 was not attracting investors. Accordingly "six hundred and two additional applications had been made at July 31, and $3.05 billion in investment pledged in return

Australia has been in a good location to take advantage of Asia's booming economy, although we should be careful about assuming that these numbers will continue to expand, just because Japan and China have large populations. Australia will continue to depend on the economic growth of East Asian countries with China increasingly important for all countries in the region. A slowing China will affect all other countries in Asia and in turn have a negative affect on Australia.   

Wednesday, July 30, 2014

Australia's Economic Vulnerabilities

Interesting comments from Australian OECD economist Adrian Blundell-Wignall.

He argues that the export-led model of many developing economies is not sustainable, especially over time as developing economies account for a greater share of global GDP (see here for analysis).

Not all countries can be exporters at any point in time exports must match imports so unless we start trading with another planet, not every country can have a trade surplus.

He then goes on to skewer the banks:
"If you go back to 1980 the earnings of the financial sector of the S&P 500 companies was less than 10 per cent."
He says the proportion of Wall Street earnings by finance stocks is now more than 30 per cent, having risen above its share when the GFC hit.
"The financial sector is supposed to be the sector that intermediates between real savers and real investors. That's what greases the wheels of capitalism," he said.
"Where do we get off thinking that the financial sector can just rip one third of the earnings for themselves?
"People want to understand why investment is a problem ... there's no inflation and the recovery is very problematic everywhere.
"Monetary policy can only do so much and you need an investment cycle to follow. And the investment cycle really isn't following."
He also warns of the danger of a slowing China for Australia and the potential for problems if the US dollar rises and has an impact on commodity prices.

New Defence Issues Paper

The New Paper outlines the following areas of concern for the future:

  • What are the main threats to, and opportunities for, Australia’s security?
  • Are Defence’s policy settings current and accurate?
  • What defence capabilities do we need now, and in the future?
  • How can we enhance international engagement on defence and security issues?
  • What should the relationship be between Defence and defence industry to support Defence’s mission?
  • How should Defence invest in its people, and how should it continue to enhance its culture?
It'll be interesting to see what the government does with the new White Paper given the extensive ambition of the last 2 WPs under Labor and their significant underfunding. 

One of the biggest issues remains whether Australia should build military hardware itself or buy it 'off the shelf' from other countries. 

If we are going to build things ourselves we still need to provide competitive pressures to avoid cost overruns, delays and incompetence. 

On the first point it will be interesting how the WP deals with the issue of China. 

Monday, July 28, 2014

The 2014 Human Development Index

The World Bank has released its 2014 Human Development Index. Australia ranks second behind Norway. Just imagine if we increased the level of taxation on our 80 foreign owned resource sector and redistributed some of the profits, how well we might do.

The HDI attempts to provide a broader measure of progress than GDP by including life expectancy, literacy, education and GDP per capita.  For a range of ways to measure economies see How Big, How Rich and How Developed? The State of Play in the World Economy

Monday, July 14, 2014

The Double Irish Dutch Sandwich

The tax arrangements of Google explained. Facebook, Apple and other corporate tax dodgers do similar things. 

Treasury official Rob Heferen in a speech entitled Implications of Digitisation for the Australian Tax System argues that such arrangements might undermine the willingness of all of us to pay tax because we might increasingly see tax systems as fundamentally unfair.

I think this is true for a lot of issues wider than tax, including globalisation in general. If economic integration is associated with increasing inequality it is likely that it will be blamed. The benefits of openness need to be spread by appropriate government policies and effective taxation is integral to this. This is of course one reason why we needed to develop an effective mining tax earlier in the boom.

So how does the Double Irish Dutch sandwich work.  Heferen explains:
The notion of Base Erosion and Profit shifting or “BEPS”, has recently entered the public policy lexicon around the world. BEPS relates chiefly to instances where the interaction of different tax rules leads to double non-taxation or less than single taxation. It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place. It is squarely on the G20’s agenda and the OECD is well into a two-year work program in this area. 
In recent years, intangibles have been the source of some very high profile and sophisticated tax planning techniques. These have significantly elevated concerns about BEPS. I’m sure many of you would have heard of one such technique that has come to worldwide attention called – the Double Irish Dutch Sandwich. A structure reportedly approved by the IRS. 
The basic set up goes something like this. We have a US parent company whose employees developed, over many years, some intellectual property. Let’s say it’s the IP used to deliver internet advertising services. The Parent sells the rights to exploit the IP outside the United States, to its subsidiary company Ireland Holdings. Ireland Holdings is managed and controlled from another jurisdiction – say, Bermuda 
Ireland Holdings licences all the rights in the IP to a subsidiary company in the Netherlands – for a royalty fee. The Dutch company sub-licences the IP to Ireland Operations, who is the retailer of internet advertising. 
Customers wishing to place ads enter into contracts with Ireland Operations on its website. This could be an Australian business wanting to advertise to its local customers.
As a result of this complex arrangement, we ask, where is the tax paid? 
The cost of advertising for the customer is reported as income in Ireland Operations. Its taxable income is substantially reduced by the tax deduction it receives on the royalty payment to Dutch Holdings. Under EU law, withholding tax can’t be applied to the royalty payment from Ireland to the Netherlands. 
Similarly, the Dutch subsidiary pays a small amount of corporate tax on the difference between royalties received and paid, with no withholding tax on the payment of royalties.
You would think that the royalty payment received by Ireland Holdings would be taxed in that country, but it is not. This is because of the interaction between Ireland’s residency rules, Bermuda’s tax haven status and the US’ check-the-box rules. 
But let’s focus on Australia now. Under this arrangement, the profit on sale of advertising into Australia is not taxable in Australia. But should it be? 
Some of questions that run through my head include, is the sale of the advertising, in substance, really a service provided by Ireland to Australia. Does it really look like an import? The complex nature of this structure gives the impression that it is artificial; and more generally it doesn’t pass the sniff test.  
Are genuine activities and value-add services conducted in Australia? If so, then conceptually some of the profit should be taxed in Australia and current law says it should. 
Given Australia's reliance on corporate taxation at a much higher rate than the rest of the OECD making these corporations pay tax on Australian operations probably matters a lot.

Some other relevant sources

Digital Economy Chokes on Online Giants’ Low-Tax Sandwiches

Twitter Follows Apple, Google And Facebook To Irish Holy Grail

To reduce its tax burden, Google expands use of the “Double Irish”