Although the Markets in Financial Instruments Directive II (MiFID II) was implemented at the start of the year, work for the financial services industry to comply with this new regulation is far from over. Still remaining are a number of uncertainties, with multiple milestones and deadlines for specific requirements set throughout 2018 and beyond.

Hailed as one of the biggest overhauls of the financial services industry in decades, MiFID II introduced 1.4m paragraphs of rules and a number of new obligations for firms operating in the sector. These included new and extended transparency requirements, new rules on payments for research, increased competition in trading and clearing markets and guidelines to promote financial stability. With many of these rules being delayed or their introduction staggered over the course of the year, there is still a challenging path for the industry to navigate.

Below, Matt Smith, CEO of compliance tech and data analytics firm SteelEye, explains for Finance Monthly the key steps financial organisations should take over the course of the year to ensure they are meeting MiFID II’s demands.

Q2 2018: Best execution under RTS27 and 28

MiFID II has two major “best execution” requirements which must be met by financial services firms – regulatory standards RTS27 and 28. As part of their obligations, RTS28 mandates that firms report their top five venues for all trading. With a deadline of April 30, the purpose of RTS 28 is to enable the investing public to evaluate the quality of a firm’s execution practices. Firms are required to make an annual disclosure detailing their order routing practices for clients across all asset classes.

Obligations include extracting relevant trade data, categorising customers and trading activity, formatting the data correctly in human and machine readable formats, adding analytical statements and placing all of this information in a publicly available domain.

Limiting disclosure to five trading venues makes complying with these obligations relatively simple for small firms with straightforward trading processes. As a firm’s activity increases in complexity, however, so does its reporting obligation and managing RTS28’s data component could become a significant burden, as compliance departments spend time classifying trades, normalising data, formatting reports and completing administrative tasks.

RTS28 is followed soon after by RTS27, which will hit the industry on June 30. RTS27 requires trading venues to provide quarterly best execution reports, free of charge and downloadable in machine readable format, and is intended to help investment firms decide which venues are most competitive to trade on. All companies that make markets in all reportable asset classes that periodically publish data relating to the quality of execution will be required to comply with RTS27.

The necessary publication of these reports requires the gathering and analysis of a significant quantity of data, which must detail price, costs, speed and likelihood of execution for individual financial instruments. Investing in the right technology ahead of the June deadline will ensure firms have the solutions needed to help digest such data and analyse it to inform their trading decisions. As we move through 2018 and 2019 however, analysis of this data, rather than being an additional burden, should help firms refine their best execution processes and generate a competitive business edge.

Q3 2018: Increasing transparency under Systematic Internalisers

One of MiFID II’s main aims was increasing transparency in the financial services industry in an attempt to avoid repetition of the 2007-2008 financial crash. In order to do this, a number of new rules attempting to regulate ‘dark pool’ trading were implemented, allowing regulators to police them more effectively and bring trading onto regulated platforms.

This system of increased transparency is designed to be effected through MiFID II’s new expanded Systematic Internaliser (SI) regime, the purpose of which is capturing over-the-counter trading activity to increase the integrity and fairness of industry trading and reduce off-the-book trades. For a firm to become an SI, they must trade on their own account on a ‘frequent and systematic basis’ when executing client orders. However, it is currently unclear what precisely ‘frequent and systematic’ means and as a result, many in the industry have been left without the necessary guidance to be able to implement these new rules correctly.

In August 2018, ESMA is set to publish information on the total number and volumes of transactions executed in the EU from January to June 2018. Any firm that has opted in under the regime or that meets the pre-set limits for ‘frequent and systematic’ basis will thereafter be classified as an SI under MiFID II.

The deadline for SI declaration follows shortly afterwards in September, which is when investment firms must undertake their first assessment and, where appropriate, comply with the SI obligations, which will become a quarterly obligation from then on.

Firms’ reporting obligations will increase considerably should they be classed as an SI. They will be required to notify their national competent authority; make public quotes to clients on request for their financial instrument; publish instrument reference data, post-trade data, and information on execution quality; and disclose quotes on request in illiquid markets. Adopting an effective pre- and post- trade transparency solution can help any firm set to be classified as an SI in September meet their obligations well ahead of the deadline in four months’ time.

Q4 2018: The impact of the pricing of research

Another major change under MiFID II is the regulation’s new rules on payment for research, which had previously been distributed to fund managers, effectively free of charge, but paid for indirectly through trading commissions. The provision of equity research is now considered to be an inducement to trade and the sell-side is only able to distribute their research to fund managers that pay for it. Moreover, an extra burden of red tape and reporting is being introduced as, by the end of 2018, investment firms must have provided clients with detailed information related to the costs and associated charges of providing investment services.

Research has effectively moved from an unpriced to a priced model and fund managers are now having to find a budget for research, with most firms electing to absorb that cost, which will inevitably impact their bottom line. The sell-side meanwhile will have to grapple with how to price their research, an unenviable task, given JPMorgan’s strategy to grab market share from smaller rivals by charging $10,000 for entry-level equity research.

Even before the aggressive pricing strategy adopted by the investment banking behemoth, the sell-side was facing consolidation and significant analyst job losses as the shrinkage of overall payments for research services to investment banks continues and asset managers become increasingly selective about the products and services they procure from investment banks. What is already certain is that the pricing and quality of investment research will be subject to closer scrutiny than ever before, driving up competition among research providers and triggering fragmentation and innovation in the marketplace.

Q1-2 2019: The UK’s departure from the European Union

While the FCA has stated that Brexit – at least currently – will not have an impact on their enforcement of MiFID II rules, the UK’s departure from the EU still leaves considerable uncertainty for those in the market. One recent survey found that 14% of surveyed compliance professionals had no idea how Brexit would affect their compliance requirements.[1] There is speculation that the UK could opt for ‘MiFID II-lite’ in all or some areas in order to better align it with the UK’s financial markets. This could mean that, while the industry must comply with MiFID II for this next year, after April 2019 a whole host of new rules and amendments could come into force.

As one of the core architects of the MiFID II rules, including many of its record-keeping and reporting principles, the FCA is unlikely to favour watered-down standards that could see London regarded as a less safe or transparent marketplace. However, with so much still up in the air, preparations should be made in order to ensure a swift transition once Brexit comes into force.

The strength of the UK’s regtech and fintech offering means the City should be well-placed to adapt to whatever shape MiFID II takes post-Brexit. To help prepare, strategy teams should work on plans for various post-Brexit scenarios in order to help weather the challenges that the UK’s EU departure will bring. UK players will undoubtedly emphasise their strengths in financial talent, product development, AI, fintech and regtech, helping the UK retain its leading position in the European financial market.

[1] https://www.thetradenews.com/uk-compliance-managers-predict-mifid-ii-exemption-post-brexit/

The UK’s festival season is getting underway and although Glastonbury is absent from the scene this year, music fans still have plenty to choose from. Festivals have become big business, with ticket prices ranging from under £60 to hundreds of pounds, depending on the level of luxury. Equifax outlines ticket and travel costs for festival goers to help people know how much to budget.

According to a latest survey, the average UK festivalgoer spends £354.54. Equifax’s own research shows that it’s easy to spend hundreds on a festival, before even considering food and drink for the weekend. However, despite the cost, 82% of festival goers think it is good value for money.

For instance, hard rock and heavy metal festival Download offers a weekend arena-only ticket for £175 or £200, including three nights of camping. Meanwhile, the Isle of Wight Festival offers a weekend adult ticket for £209, whilst the student ticket is £175. However, festival goers have to factor in an extra £31 per person for the ferry. On top of the ticket, music fans need to budget for travel – coaches to various locations can range from £37 to £97, depending on the distance. Train costs are usually higher.

Alternatively, music fans can cut costs if they live near a city and choose one of the city park festivals, such as Manchester’s Parklife or TRNSMT in Glasgow. Parklife offers day tickets for £65 or a weekend pass for £109.50. TRNSMT is £59.50 for a day pass or £155 for three days.

More and more festivals are now offering luxury and VIP or experience ticket options, which really push the price up. For those who don’t like roughing it, ‘glamping’ options include more luxurious bell tents, which are already erected and include lavish furnishings, such as sheepskins and even plugs and hair straighteners. The prices range from a pre-pitched tent at £13.63 per night at Bestival, up to £481.50 per night for their bell tents and tipi experiences.

In addition, families have more choice of kid-friendly festivals. However, it’s worth considering that teens get a reduced rate, and children get in for free at some festivals, whilst others charge for kids as young as four, so it’s worth doing some research.

Lisa Hardstaff, credit information expert at Equifax, comments, “Music festivals have become a big part of the British summer, with new ones cropping up often. The prices of tickets go up every year. The cost of the entry ticket is just the start, with travel and extras such as parking or camping access all adding to the total cost.

“Once people are at a festival, they need to consider the costs of food and drink, which add a considerable amount to what they end up spending. The average main meal could cost around £10 from a festival catering venue – this can add up over three or four days. We suggest setting a budget and estimating the overall costs, including travel and daily spending on food, drink and optional extras – such as glitter face paint, clothes or souvenirs. With a bit of planning, people can look back on a festival of happy memories, rather than counting the cost weeks or even months later.”

(Source: Equifax)

With current trade ‘talks’ with China, the US in a not in a great position money wise. According to Congressional Budget Office the US is heading for an annual budget deficit of more than $1 trillion (£707bn) by 2020, on the back of tax cuts and higher public spending.

Although these measures may bring ease to the current economic climate, it’s predicted they will exacerbate long term debt. The Congressional Budget Office believes such debt could amount to similar historical depths, such as World War II and the financial crisis.

This week Finance Monthly asked the experts Your Thoughts on the prospects of long-term debt in the US, and here’s what you had to say.

Andy Scott, leading UK serial entrepreneur and property developer:

With growth and confidence at record highs, unemployment low, and at best guess being mid-point through the economic cycle, Trump should be fixing the roof of his house while the sun is shining for the benefit of his children's generation and beyond. The temptation to focus on voter incentives to win a second term in November 2020 and to try out his unproven trickle-down policies for the few, seems short sighted from the President.

With a trade war underway, it appears banking on increased growth and mass job creations from tax cuts, whilst not tightening the already loose belt elsewhere, and not paying as you go, seems at best optimistic and at worst, reckless.

Deficits are nothing new, having run one every year since 2002. However, what should concern those of us with hopefully 30-40 years left on planet Earth is that even the most upbeat forecasts - taking into account no impact from any external factors (which seems highly unlikely given the confrontational leadership style) - show that not only are we heading for the trillion dollar deficits, but they are likely here to stay, and become the norm over the next decade. A legacy surely no one wants to be remembered by?

The US should think more long term otherwise the next generation will be burdened with more debt meaning lower growth, more tax, reduced services, higher inflation and ultimately fewer employment opportunities.

Josh Saul, Investment Manager, The Pure Gold Company:

Whilst there are clear and obvious benefits to having tax cuts with higher spending such as driving economic growth over the short-term, the question we should ask is, at what cost? the problem is that we are kicking the can down the road.

The Pure Gold Company has seen a 74% increase in US nationals investing in gold this year compared to the same period last year citing fears that escalating US debt will in the long run make the US and it’s economy vulnerable to fiscal shock. Our clients are concerned that given the high debt to GDP ratio, the US may have problems paying back its loans and this could increase the interest that the US will have to pay for the amplified possibility of default. The issue here is that the US having to pay more interest further accelerates the debt problem and with the dollar in the firing line – repeat problems like the current trade war with China put the US on the back foot. Our clients who are currently purchasing gold are concerned that over the next 20 years the social security trust fund won’t cover retirement benefits and the US will have to raise taxes and curtail benefits in order to cover various short-term monetary requirements. Incidentally this notion of escalated debt has doubled since 1988 and if you look at the gold price – that’s increased by 200%.

Our clients do not necessarily look at their investment having grown by 200% but instead it takes more currency to purchase the same ounce of gold. Therefore, our clients purchase gold to maintain their dollar’s purchasing power and with the US debt being the highest in the world they are not merely looking at the next 4 years but instead the next 10 – 20 years.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

Budgeting is a highly necessary and mandated task for any business, with an extremely structured process in most cases. But as budgeting expands to include a broader scope within companies, how can we work towards a collaborative budget? Chris Howard, Vice President of Customer Experience, Centage, explains for Finance Monthly.

I’ve yet to speak to anyone involved in the budget modeling process who didn’t wish for an Excel feature that somehow made budget collaboration easier. And I speak to a lot of people.

The folks responsible for creating the ‘master’ budget models, often CFOs, don’t have an easy time of it. They need to gather input from numerous people within their organizations (most of whom have no background in corporate finance) and then validate the data they receive. All too often, they rely on managers to put together entire budgets based on higher level numbers, guidelines and goals they provide.

Once that’s done, they need to piece together a myriad of spreadsheets and apply complex formulas and macros to arrive at projections. This last bit typically occurs late into the night.

But here’s the thing: Excel was never meant to be a collaborative tool. It simply wasn’t designed to farm out files and to collect and manage the input of multiple users. That means even the most advanced power user can’t deliver the level of collaboration finance teams need.

Beyond input consolidation, the CFO’s I speak to say they have an urgent need for automated rigor in their budget models to ensure accuracy. It’s not uncommon for a CFO (or another budget contributor) to find that an error – such as a broken link or formula – which causes a costly displacement in the budget. The result is a lot of discomfort.

Given needs and constraints of budget modeling, what does a truly collaborative budget look like? How does it work? Based on what I’ve heard from CFOs in the mid-market, here’s what I think are the requirements of a collaborative budget model:

Bottom-Up vs. Top-Down Management

Although it’s the finance team’s responsibility to manage a budget, the budget itself belongs to every department within the organization. It’s the CMO who determines how to spend the marketing budget, and the CTO how to best manage IT investments. This means that budgets must be managed from the bottom up, rather than top down, and that buy-in is essential. But when a CFO is forced to control the budget model via a master spreadsheet, those models are, by definition, managed from the top down. This results in a disconnect between the model and the day-to-day activities of an organization. Monitoring performance vs. plan becomes impossible.

Role-Based Security

Budgets are filled with highly sensitive information, personnel data, salaries and the like. A collaborative budget should prevent the wrong users from accessing data that’s not directly related to their roles in the organization. For this reason, a collaborative budget model should have role-based security with an interface that’s customized to the user’s function. What the VP of Marketing sees should be very different from what the CFO sees. Needless to say, this is far outside the realm of Excel’s capabilities.

Financial Integrity Safeguards

In a true bottom-up collaborative budget, most of the contributors will have no background in corporate finance, and little understanding of the differences between a balance sheet, cash flow or P&L statement. How do you ensure that input from these contributors is correctly tied to the right outputs, and is fully compliant with US GAAP accounting rules?

Collaborative budgets need some kind of built-in rigor that protects the financial integrity of the outputs, allowing non-finance team members to enter data without breaking things. In other words, data entered by facilities management is automatically tied to the correct outputs without that user even realizing it.

Self-Serve Reporting

Finally, a collaborative budget must promote self-sufficiency, especially when it comes to reporting. Every CFO I speak to tells me his or her goal is to create reports once – with financial rigor firmly in place to ensure integrity – and then hand over the reins to the CEO or Board. This is the only way a CEO is free to monitor performance vs. plan, cash flow or P&L on a monthly or even a weekly basis on their own, and without the CFO’s constant involvement.

In order to turn over the reins, the entire budget needs access to the data in real-time, otherwise the CFO will be forced to update the reports manually (hardly the level of self-sufficiency they’re looking for).

Why a Truly Collaborative Budget is Worth Working Towards

A truly collaborative budget model will, by definition, require finance departments to jettison their budgeting spreadsheets – a painful exercise given that most of them have been working with Excel since their pre-college days. But the payoff will be huge.

A budget model that combines historical information with real-time data is the only way to spot trends, threats and business opportunities. And it will be “board ready,” meaning it will allow teams to respond with accuracy to the Board of Directors when they ask about ramifications of any number of business changes on the P&L, balance sheet and cash flow statement.

Put another way, it’s time to say goodbye to that monster spreadsheet your team just finished creating. Instead, implement a budget that lets you combine data from multiple sources to present a single version of the truth. You’ll get a living, evolving document that significantly improves the quality of information you deliver throughout the year.

As anticipation for President Donald J. Trump's first budget release in the next few weeks reaches a crescendo, there is much debate about whether cutting the deficit should be a priority for the administration. Apparently most American voters think it should be. In a unique survey in which respondents made up their own Federal budget, majorities proposed a combination of spending cuts and revenue increases that would reduce the deficit for 2018 by at least $211 billion. There were partisan differences, but Republicans and Democrats did agree on $86 billion in deficit reductions.

In the survey, which was conducted by the University of Maryland's Program for Public Consultation (PPC), a representative sample of 1,817 voters were presented discretionary spending for FY 2017 (broken into 31 line items), and sources of general revenues, actual and proposed. They were then given the opportunity to modify both spending and revenues, getting feedback as they went along about the effect of their choices on the projected deficit. Respondents were not instructed to reduce the deficit, and were able to both increase or decrease spending or revenues.

Overall, majorities cut spending a net of $57 billion. While both Democratic and Republican members of Congress are planning for increases in spending on national defense for 2018, this was the area that received the biggest cut from the public-- majorities cut it by $39 billion. Other significant cuts were for subsidies to agricultural corporations ($5 billion), intelligence agencies ($4 billion), homeland security ($2 billion), the State Department ($2 billion) and the space program ($2 billion), plus smaller trims in other areas. The one area to be increased was the development of alternative energy and energy efficiency, which was increased by $2 billion (a 100% increase).

The biggest changes, though, were on the revenue side, which were increased a total of $154.2 billion. The biggest source of revenues ($63.3 billion) arose from increases in personal income taxes for higher earners. Those with incomes over $100,000 saw their taxes go up 5%, while those with incomes over $1 million had increases of 10%.

"Clearly Americans are concerned about the deficit and are ready to make some tough choices to bring it down—more than Congress is even ready to consider," said PPC Director Steven Kull.

Other major increases came from an increase in taxes on capital gains and dividends from 23.8% to 28% ($22 billion), a new transaction fee on financial transactions of 0.01% ($20 billion), a 5% increase on corporate taxes ($17 billion), a tax on sugary drinks of $.05 an ounce ($9 billion), an increase in the estate tax ($7.8 billion), a tax on alcohol ($7 billion), a fee to banks who have large amounts of uninsured debt ($6 billion), and repeal of the 'carried interest' tax break for fund managers ($2.1 billion).

There were significant partisan differences. Republicans only cut $5 billion from defense, while Democrats cut $91 billion. Republicans cut $9 billion from education, while Democrats increased it $3 billion. Republicans cut environmental spending by $6 billion, while Democrats raised it by $1 billion. Most Republicans did not join in on increases to corporate taxes, estate taxes, and taxes on sugary drinks.

Nonetheless, Democrats and Republicans did converge on $86 billion in deficit reductions, including $69.2 billion in revenue increases and $17 billion in spending cuts.

Overall, Democrats made the largest reductions to the deficit of $306.5 billion, with $96 billion in net reductions to spending and $210.5 billion in revenue increases. Republicans made total deficit reduction of $134.2 billion, with $65 billion in spending reductions and $69.2 in revenue increases.

(Source: Voice Of the People)

Canada’s Budget 2017 has given voice to a number of matters, but among the chaos of themes and numbers, it can be hard to keep track of the big picture. Here Joy Thomas, MBA, FCPA, FCMA, C. Dir. President and CEO of the Chartered Professional Accountants of Canada, talks to Finance Monthly about the uncertainty surrounding this year’s budget aims and tailors an overview for our readers.

Budget 2017 aims Canada toward economic renewal but does not offer a firm timetable for bringing an end to annual deficits.

The current budget plan would see the deficit peak at $28.5 billion in fiscal 2017-2018 and drop to $18.8 billion in fiscal 2021-2022.

But the deficit reduction plan stops there. Setting a target date for a return to balanced budgets would have helped guide the government in its financial planning going forward. Knowing the ultimate destination would help promote business confidence, ensure funding for essential programs, and ease the impact on future generations.

Sustaining Prosperity

Of course, sustaining a prosperous economy needs more than strong fiscal management. The budget outlines several measures to help Canadians, their families and their businesses flourish. There are investments in training, innovation and infrastructure and a recognition of the importance of lifelong learning and youth employment.

Additional support is offered to help Canada’s workforce remain competitive amid automation and technological change. CPA Canada supports the government’s focus to address how Canadians deal with the effects of these broad economic forces. Canada’s future prosperity will be directly linked to the competitiveness of its workforce.

Fighting Tax Evasion

On the tax compliance side, the budget builds on earlier announced efforts to combat tax evasion and to improve compliance. An additional $523.9 million is being invested over five years to support the Canada Revenue Agency’s crackdown on tax cheats. The CRA will use the funds to increase its verification work, improve investigations targeting criminal tax evaders, and beef up its business intelligence infrastructure and risk assessment systems.

The CRA also will hire more auditors and specialists to focus on the underground economy, a widespread problem that cost the Canadian economy some $45.6 billion in 2013, according to Statistics Canada. CPA Canada works to help the government address under-the-table dealings through our representation on the Minister of National Revenue’s Underground Economy Advisory Committee.

Altogether these measures are expected to raise an extra $2.5 billion in tax revenues over five years, for an estimated return on investment of five to one.

The government reiterated its commitment to work with international partners to ensure a coherent and consistent response to fight tax evasion. CPA Canada is dedicated to supporting the government in this effort. The government’s commitment to strengthening compliance reinforces Canada’s determination to protect the public interest.

The budget also notes that the federal government will work with the provinces to implement strong standards for corporate and beneficial ownership transparency to provide safeguards against money laundering, terrorist financing, tax evasion and tax avoidance.

Tax System Review is Long Overdue

Several budget measures resulted from a review announced in 2016 of federal tax expenditures, which the new fiscal blueprint suggests will continue. For efficiency and simplicity, this budget streamlines some personal tax credits and cuts a handful of others. Tax incentives for scientific research and experimental development will be reviewed as part of a broader review of government support for innovation.

Tax preferences for private corporations will be studied further, with a white paper promised in the coming months. The government is concerned that strategies involving private corporations are being used to inappropriately reduce the personal taxes of high-income earners. These strategies include using private companies to split income among family members and to convert investment income to lower-taxed capital gains.

At the same time, the government plans to examine whether aspects of the current taxation of private corporations adversely affect genuine business transactions involving family members. Presumably this includes tax measures that impede transfers of family businesses from one generation to the next. This will be especially important in the coming years given the high number of businesses changing hands as the Baby Boomers retire.

These limited assessments are a positive step forward but a more comprehensive review is what Canada truly needs. An extensive review can identify areas that would help in redesigning the tax system so it not only enhances efficiencies for Canadians and the business community but also plays a role in cultivating long-term, sustainable economic and social growth. This represents the Canadian ideal of good business – an equitable system that focuses on both business and social development in creating a stronger Canada.

Adapting to Climate Change

Budget 2017 includes a range of measures addressing climate change adaptation, from managing health risks to increasing resources for First Nations and Inuit communities to assessing risks to federal transportation infrastructure. Among these measures, the budget devotes $2 billion for a Disaster Mitigation and Adaptation Fund that will support the infrastructure Canada needs to deal with the changing climate’s impacts.

What’s missing, however, is a National Adaptation Plan that would coordinate these and other public and private sector initiatives. CPA Canada has urged the government to develop such a plan in consultation with Canadian businesses.

It’s Time for Action

With the current economic uncertainty south of the border, some suggest the government should take a “wait-and-see” approach. I disagree. We cannot afford to have the federal government become paralyzed in its decision making. Successful Canadian businesses must always navigate change. So too must the Canadian government, with a continued focus on strategies and measures that ensure Canada remains competitive and is able to attract and retain top talent.

Following last week’s announcement of the Canadian Budget 2017, Trevor Parry, M.A., LL.B, LL.M (Tax), President of the TRP Strategy Group, provides Finance Monthly with specialist insight into the impact of the announcement and potential outlooks for the next budget.

Despite active rumours that dramatic changes were coming in the 2017 Canadian federal budget, the document as tabled in the House of Commons on March 22^nd contained virtually none of the controversial elements budget-watchers had feared—such as an increase to the capital gains inclusion rate or changes to the taxation of employee stock options.

Instead, Finance Minister Bill Morneau brought forward a status quo document that reads more like a budget update than a true or full budget; while nevertheless clearly and directly signaling the Trudeau government’s appetite to eat away at particular tax benefits “as soon as the time is right.” In the wake of the budget announcement, rumours are now circulating that like his (Conservative) predecessor Jim Flaherty in 2011—which saw federal budgets in March and then again in June, although separated by an election—a second federal budget may be tabled in a single calendar year, with pundits suggesting fall (October?) for a possible additional 2017 budget.

Status quo with adjustments at the margins

The 2017 budget tabled on March 22^nd and entitled “Building a Strong Middle Class” is organized around five main themes*:

1. Skills, Innovation and Middle Class Jobs

The Government is proposing to invest an additional $4 billion over the next five years in such areas as developing “superclusters” (dense areas of business activity) to spur innovation; the creation of a strategic innovation fund; funding and promotion of clean technologies; and growing Canada’s advantage in artificial intelligence.

2. Investing to Create Jobs and Strong Communities

The government has announced plans to accelerate implementation of the Canada Infrastructure Bank; modernize Canada’s transportation system; work with the Provinces and Territories to invest in green infrastructure; support families through early learning and child care; improve indigenous communities; and build a new National Housing Strategy. While these programs account for almost $21 billion in expenditures over five years, they will be funded by reallocating current budget dollars.

3. A Strong Canada at Home and in the World

Included under this “theme” is new investment in home care and mental health; creating healthier First Nations and Inuit communities; providing greater support for veterans and their families; and enhancing the security and safety of Canadians. It is of interest that some of the additional funding for these initiatives will come from the reallocation of almost $1 billion that had previously been set aside for defence funding of large scale capital projects.

4. Tax Fairness for the Middle Class

This theme focuses on ensuring that the tax system is fair in both design and implementation. This is to be accomplished by closing tax loopholes; cracking down on tax evasion and combatting tax avoidance with an additional investment of $500 million over the next 5 years; eliminating ineffective and inefficient tax measures; and providing greater consistency in the tax treatment of similar types of income. Specific initiatives are outlined in greater detail below, with the government estimating these programs will increase tax revenues by almost $5 billion over five years.

5. Equal Opportunity

In the 2016 Fall Economic Statement the Government committed to completing and publishing a gender-based analysis of budgetary measures starting with Budget 2017. Included in Budget 2017 is a discussion on how specific proposals will have a positive impact by addressing gender inequality.

“Tax fairness for the middle class” means coming tax punishment for high income-earners

So why such a milquetoast effort from Morneau’s sophomore effort? Speculators conclude that Trudeau et al. are waiting and watching on actions south of the border before making any bold strokes here at home. What this means for the Canadian high income-earner, business owner or entrepreneur is a continuing requirement to remain vigilant and engage in defensive tax planning for the upcoming months.

What could be on the chopping block for the next budget round (whenever it comes)? Everything from income sprinkling from a testamentary trust to holding passive investments within a corporation to tightening the rules that allow family members to share income (a common strategy used by family-owned businesses). Thus when the Liberals decide to move back above the treetops to mount their full assault as they have telegraphed in their actions to date—and as reinforced by the threats contained in the March 2017 budget announcing “further study” of various issues—Canadians would do well be prepared with effective countermeasures.

(*with files from “CALU”, the Conference for Advanced Life Underwriting.)

The theme of the Budget, as articulated by the Finance Minister, is to transform and energise the country and the economy - as well as a much cleaner economy. How the year ahead will play out will depend on the growth in the major economies, fresh investment by Indian companies, and spending by consumers and the government.

The Budget laid emphasis on digitization of tax administration, use of IT systems to reduce human intervention and e-assessment ensuring transparency and timeliness.

Ultimately, the Budget turned out to be in line with the government's vision and policies so far. It had several announcements impacting startups directly and indirectly. Analysis of such provisions as made by Neeraj Bhagat, Chartered Accountant and Founder of Neeraj Bhagat & Co. are as under:

Amendments having direct impact:

1. Reduced corporate income tax

Reduction in corporate tax for MSME to 25%: The government has decided to reduce the corporate income tax from FY 2017-18 onward to 25% from the current rate of 30% for all companies that had a turnover or gross receipts up to Rs. 50 crore in FY 2015-16. This would mean that small and medium scale companies having a turnover of up to Rs. 50 crore till FY 2015-16 and also the new companies can claim the benefit of this section. However, this benefit is available only to domestic companies. Foreign companies and other forms of businesses like LLP and partnership firms are not eligible for this reduced rate. Even individuals and HUFs are required to pay income tax @ 30% for income above Rs. 10 lakh. The idea is to promote private limited companies, which is a more structured form of business organization. This is a very welcome step for all startups and small and medium enterprises functioning under the company form. This matches our Budget expectations penned earlier.

2. Relief for small traders and businesses opting for presumptive taxation and having non-cash receipts

As announced during the demonetization period, the government has reduced the requirement u/s 44AD for declaring a minimum presumptive tax profit margin to 6% from the existing 8% in cases of non-cash receipts and turnover. This was already announced by way of a press circular and was much anticipated. Also, the threshold limit for maintenance of books of accounts for individuals and professionals has been increased to Rs. 2.5 lakh from Rs. 1.2 lakh and the limit for tax audit u/s 44AB has also been increased to Rs. 2 crore from the current limit of Rs. 1 crore for the individual/HUFs opting for presumptive taxation u/s 44AD.

3. Extension of time period for availing income tax benefits under Startup India Initiative

The startups recognized under the Startup India policy can now claim tax benefits in three out of the first seven years under Section 80-IAC of the Income-tax Act, 1961. Earlier, it was three out of the first five years. The government had received several representations that startups rarely earn profits in the first few years of their operations. This is again a welcome step and shall encourage more startups to register themselves under the government's Startup India initiative. This also matches our budget expectations penned earlier.

4. Carry forward of losses for companies whose shareholding has changed considerably

Section 79 of the Income-tax Act, 1961 allows carry forward of losses of a company for seven years and then set-off against profit of future years. However, there was a restriction wherein the carry forward and set-off were not allowed in case 51% shareholding didn't remain intact in the year of loss and in the year of set-off. With the startup ecosystem's changing environment and more investments and buyouts happening, the government has allowed carry forward and setting-off of losses even if majority shareholding has changed hands. However, this benefit is available only for startups recognized under the Startup India policy and eligible to claim benefits of Section 80-IAC (NIL income tax in three out of the first seven years).

5. No capital gains on conversion of preference shares to equity shares

Earlier, the conversion of preference shares into equity shares was considered a transfer and thus attracted capital gains tax. The government has exempted conversion of shares from preference to equity and otherwise from the definition of 'transfer' and given a big relief to startup investors who prefer buying convertible preference share. This is a very good step on the part of the government to boost the investments in startups.

6. Extension of time limit for use of MAT credit

The existing tax laws have a provision of MAT (Minimum Alternate Tax) at approximately 19% on book profits of all the companies, who may otherwise be not be paying corporate income tax due to some deductions or exemptions available under the Income-tax Act. However, credit of MAT was available for 10 years to be set off against normal income tax liability, when the taxes under normal income tax provisions exceeded MAT. Startups exempt from income tax under Section 80-IAC discussed above are also liable to pay MAT. For simplification, in the long run, the government is targeting reduced corporate income tax rate, reduced exemptions, and abolishment of MAT. However, for the time being, the government announced its inability of abolish MAT and rather extend the time period for availing MAT credit to 15 years from the current limit of 10 years. This will benefit startups claiming tax exemptions u/s 80-IAC but paying MAT and shall also benefit the companies who have huge MAT credit lying unused.

7. Penalty for late filing of income tax returns

After the end of each financial year, September 30 is the due date for income tax return filing for companies and assessees covered under tax audit. For others, the due date is July 31. Earlier, there was no or optional penalty for delay in return filing up to a certain date. However, now the government has prescribed a late filing fee of Rs. 5,000 for delay up to December 31 and Rs. 10,000 for further delay. However, the penalty has been limited to Rs. 1,000 in cases where the taxable income is up to Rs. 5 lakh. Many startups and startup founders do not take return filings within due date seriously. This is a wake-up call to all such startups and their founders. Also, this penalty is payable before filing of tax returns, along with other tax and interest liability.

Amendments towards 'ease of doing business':

1. Tax on indirect transfer in case of certain foreign portfolio investors

Section 9 of the Act deals with cases of income which are deemed to accrue or arise in India. Sub-section (1) of the said section creates a legal fiction that certain incomes shall be deemed to accrue or arise in India. Clause (i) of said sub-section (1) provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. The said clause provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India, shall be deemed to accrue or arise in India.

The Finance Act, 2012 inserted certain clarificatory amendments in the provisions of Section 9. The amendments, inter-alia, included insertion of Explanation 5 in Section 9(1)(i) w.e.f. April 1, 1962. Explanation 5 clarified that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. In response to various queries raised by stakeholders seeking clarification on the scope of indirect transfer provisions, the CBDT issued Circular No 41 of 2016. However, concerns have been raised by stakeholders that the provisions result in multiple taxations. In order to address these concerns, it is proposed to amend the said section so as to clarify that Explanation 5 shall not apply to any asset or capital asset mentioned therein being investment held by non-resident, directly or indirectly, in a foreign institutional investor, as referred to in clause (a) of the Explanation to section 115AD, and registered as Category-I or Category II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992, as these entities are regulated and broad based. The proposed amendment is clarificatory in nature.

This amendment will take effect retrospectively from April 1, 2012, and will, accordingly, apply in relation to assessment year 2012-13 and subsequent years.

2. Provisions relating to domestic transfer pricing have also been relaxed, so as to cover only those companies which who are claiming profit-linked deductions or exemptions.
3. FIPB or the Foreign Investment Promotion Board has been done away with, leading to more emphasis on foreign direct investment (FDI) through the automatic route.

Amendments to boost digital economy and curb black money:

1. Cash payment for expense or acquisition of asset of Rs. 10,000 or more not allowed

Earlier, cash payment in a day of Rs. 20,000 or more was not allowed as an expense in the books of the company. Now the limit u/s 40A has been reduced to Rs. 10,000. Over and above this, the provision now also covers capital expenditure. If payment against a capital expense of Rs. 10,000 or more is done in violation of Section 43, the cost of such an asset would not get added to the total asset value, which would mean that no depreciation can be claimed on such assets and also the cash value would not form part of the cost of such asset, which will also increase the capital gains amount in case of any future sale.

2. Cash receipt of Rs. 3,00,000 or more would attract 100% penalty

A new Section 269ST has been proposed, to bar cash receipt or Rs. 3 lakh or more in a single day, or against a single bill or against a single occasion or event, attracting a penalty of the same amount.

(Source: Neeraj Bhagat & Co.)