Regional outlook 2019 – What’s on the horizon?
Numerous political uncertainties characterised the global economy in the past 12-months. From trade dispute developments between the U.S. and China, ongoing Brexit negotiations, extensive changes to budgetary policies in Italy, economic and political unrest in Turkey, the currency crisis in Argentina and digital tax dilemmas aplenty – to name a few. So, what will 2019 bring? Will economic growth cool further? Will trade tensions persist? How many interest rate rises can we anticipate? Are there any silver linings? If so, where?
This time of year there’s lots of noisy commentary and media speculation going on, making it easy to lose sight of the real issues that can affect the clients served by Praxity member firms.
Given that the Alliance has more than 47,600+ people on the ground across the globe, several people recently elected to the Praxity Board and Governing Council share the challenges and opportunities on their regional radar for 2019 and beyond.
Read the full feature below...
Harnessing people’s innovative talents
The strong pace of growth looks unlikely to continue. A GDP of 2.8 percent at most has been mooted. It could be closer to 2017’s 2.2 percent suggest some analysts. Most expect inflation during the year to stay subdued.
Ted Dickman, CEO of BKD, sums up the greatest challenge facing North American business as uncertainty. “This is probably the over-arching issue. The current uncertainty about trade relations with various important economies globally as well as uncertainty around fiscal policies that impact interest rates and inflation are probably the top of the list.”
The start of 2019 has brought an increased level of economic uncertainty, brought on by declines in economic indicators in certain countries, along with trade disputes between countries and the uncertainty over Brexit, flags Matt Snow, CEO of DHG. “Our clients are focused on how they can anticipate the impact of these factors, while continuing to optimize on what has been a strong, lengthy economic cycle.”
Tax and global support are service areas where Matt is anticipating heightened demand. He explains: “There remains a lack of clarity on a number of areas in U.S. tax reforms introduced in 2018. Our clients are looking to firms for advice and counsel. We will continue to uncover issues and opportunities and navigate tax reform in 2019, supporting clients to implement the changes.”
Delivering a consistently strong client experience, regardless of geographic location, is another top client priority says Matt. “Global service delivery is a key focus area for DHG clients. They desire the same consistent level of service and quality, so working alongside our Praxity peers to deliver this will be increasingly imperative.”
“Additionally, North American businesses continue to feel great pressure to innovate and use emerging technologies in a manner that allows them to be market leaders,” suggests Ted.
The drive for all businesses to learn how to harness technology more effectively and efficiently will be critical to innovation, suggests Ted. It requires an investment in people in order to keep pace with technology advances—be it data analytics, robotics, machine-learning, blockchain, drone technology, etc. “One quality that can’t be suppressed is our people’s enthusiasm and strong sense of competition to be ‘the first to market.’ People are the requisite for innovation,” adds Ted.
Matt Snow concurs that the impact of technology and how these developments impact on client strategies is likely to be challenging during 2019. “As the pace of change accelerates in business driver areas like technology, clients may need to rethink their approach to change management,” suggests Matt.
He expands: “Clients increasingly need help separating the hype from reality in terms of what technology is actually capable of accomplishing today. I don’t know that this is unique to North America but it is definitely an area of focus at DHG.”
Data privacy is another topical issue that Matt notes is not unique to North America. “Regulations and social norms regarding data privacy differ from country to country. Ensuring compliance presents our clients and the industry with unique challenges.”
How all this information is handled and stored means that cybersecurity and the legal complexities will continue to dominate in 2019 and beyond, stresses Matt.
Accommodating demographic shifts
Changing age demographics is another noteworthy trend in the U.S., and across the board DHG has observed heightened demand for succession planning support among clients. Addressing inclusion and diversity falls within this demographic focus area, making it another top priority for clients.
Matt explains: “Demographics continue to be a topical trend as our population becomes more diverse. The demographics of our client base continues to evolve and so too must our teams.”
DHG has approached this by taking the time to truly understand the demographics of its clients and the firm is developing teams to mirror these.
According to IMF’s regional outlook report, the economic outlook for Asia and the Pacific remains strong, and the region continues to be the most dynamic of the global economy. Growth in Asia is forecast at 5.6 percent in 2018 and 2019, while inflation is projected to be subdued. Rising trade tensions however remains a sticking point for long term growth, with policymakers warning of a potentially pronounced and protracted slowdown that could hit the economy hard.
For clients operating in Asia Pacific, protectionism remains a key challenge, cautions Nick Hatzistergos Managing Director of William Buck. With daily reports emerging of slumped shares and rising recession risks, Nick forewarns that: “The effects of conflict between U.S and China’s trade war will start to trickle down throughout local economies, posing significant risk to overall economic growth, consumer spending and investments.
“As the 90-day ‘cease-fire’ window shuts, it’s likely the trade war will accelerate from January. Moving forward, with China being such a dominant player in the Asia -Pacific region, their economic performance will dictate local progress across the whole value chain. Particularly for commodity-exporting nations such as Australia who face increased vulnerability to a growth slow-down.”
Increased regulatory pressures
For multinational clients operating in the region, keeping pace with cyber security will need to be top-of-mind.
Nick clarifies: “Many countries in Asia-Pacific are increasing privacy legislation and implementing data breach reporting.
In Australia, the full wrath of non-compliance for mandatory Data Breaches will take effect in February 2019, with the initial 12-month grace period ending. Not only will these changes impact on the systems and processes within organizations, non-compliance could see notable companies facing fines of up to AU$1.8 million.”
Additionally, the spill out of the Panama papers will continue to heighten regulation across Asia- Pacific, with the aim at curbing tax avoidance and financial crime. “This will involve the enforcement of the tax regulations in each country to ensure everyone gets their fair share of receipts on income generated by large multinationals,” comments Nick.
Increased sophistication in compliance tools and more collaboration between local tax authorities and corporate regulators is also expected to gain momentum in 2019.
There will be increased reporting and greater transparency measures. Among them a clampdown on money laundering, with new directives targeting more industries in addition to more surveillance and sharing of information on the movement of money.
It’s also highly likely that specific tax measures for entities operating in the digital space will be targeted by new legislation in Australia over the next 12 months.
Navigating political landscapes
As is often the case with Africa, politics tends to determine economics in frontier markets, says Kariem Hoosain, Mazars Africa Middle East Board member. Given that there are a number of elections planned for 2019 - notably South Africa, the Democratic Republic of the Congo (DRC) and Nigeria - uncertainty continues to dominate industry attitudes towards growth, which flit between optimistic to ambivalent depending on the extent of structural reform on the horizon in some of the larger African economies.
“The greatest challenge in the region remains politics and there’s little we can do to change political instability, unrest and to an extent currency volatility,” emphasises Kariem.
He continues: “Realistically, Africa is an extensive and fragmented continent, with relatively disparate economies.
Entering 2019, Africa is now having to deal with the full implications of the U.S. attitude towards Africa, in addition to significantly reduced funding for developing nations. Combine this with the potential trade fallout from Brexit on former colonies, businesses are naturally concerned.”
That said, there are some common positive themes emerging, including investment in education and infrastructure. Furthermore, there are encouraging signs that trade between African countries and with the Middle East is picking up, says Kariem. “In order to invigorate growth and navigate political uncertainty, Mazars is no stranger to assisting clients with alternative strategies and identifying the opportunities in different jurisdictions,” he adds.
Opening up regional trading corridors
Foreign direct investment - most notably from China - has helped Africa to open up greater trading links with the world. However, until recently, Africa’s greatest economic opportunity - trading and doing business with itself - has often been overlooked.
Yet Kariem has observed a definite trend among Mazars’ clients for Franco and Anglo businesses trading across the continent. “Barriers for regional trade integration are most certainly falling and as a result we are looking to support clients by opening up local offices.”
One of the greatest tax challenges for the continent has been introducing common and stable Transfer Pricing regimes. However, as Africa continues to grow and become more integrated with the global economy, and with more businesses being challenged on their cross border activities, more African nations are implementing TP rules.
“The general thinking is that by introducing internationally recognised standards multinational companies perceive there are less risks. This consequently increases foreign direct investment,” explains Kariem.
Much of Africa’s regulatory policies tend to follow international trends, affirms Kariem. The introduction of mandatory firm audit rotations in South Africa by 2023 is testament to this. “This presents independent firms that make up the Praxity Alliance with a real opportunity to bid for more audit assignments and support our global strategy of performing cross border multinational audits,” adds Kariem.
Beyond Brexit, bill blocking and backstopping
In December the European statistics office, Eurostat, confirmed that the 19-member region grew at its slowest pace in four years in the third quarter of 2018. In its latest economic outlook report, the IMF also cautioned that the uncertainty over the UK’s departure from the EU is also a risk to the European economy. It’s a fraught period, that’s for sure.
While it’s easy to keep banging on about Brexit, the region faces other equally large challenges. Including the sovereign debt crisis, political friction in Italy, the Sino-U.S. trade conflict. Among analysts, the general economic outlook is subdued, although most don’t predict a recession in 2019.
“There remain a number of pressures that European clients are dealing with day-to-day, including ever-evolving legislative changes and a world where tax rules are yet to be harmonised,” points out Ton Tuinier, Managing Partner of Mazars Netherlands. “This often leads to double taxation claims as well as the increased compliance burdens while doing business internationally.”
In this era of globalisation, the greatest headache for most clients is the increasingly stricter disclosure rules, with multinationals having to navigate the Foreign Account Tax Compliance Act (FATCA), Common Reporting Standards (CRS), Country by Country Reporting (CbCR) and the EU Mandatory Disclosure Directive (MDR). “These are leading to increased scrutiny by taxation authorities and higher numbers of tax disputes and litigation,” reports Ton.
Less talk … more action
There’s also been a tendency for European countries to leapfrog decisions and implement local regimes. This is resulting in different caveats, conflicting guidance, and client confusion.
Ton explains: “Rather than waiting for harmonised EU or OECD tax rules, some countries are implementing or pushing for their own. Although understandable, it leads to many issues.”
For example, after EU-wide efforts stalled, France started to push ahead with its own tax for big technology firms. Right now talks for a EU-wide levy remain ongoing.
Another example was the introduction this January of the Profit Diversion Compliance Facility by the UK HMRC. Some critics regard this as an unjustified extra-territorial taxation.
Others regard it as a more rigorous form of transfer pricing.
“As with all of these initiatives, however, it’s brings a new angle, consideration and disclosure duty to multinational clients. Anything that is subject to greater scrutiny requires resourcing,” Ton highlights.
Commenting on the role Praxity firms can play, Ton adds: “Swiftly disclosing the relevant information to taxation authorities in a correct, systematic and consistent way is key to addressing the increasingly stricter disclosure rules.
Building upon the quality of the Praxity Alliance will assist clients in obtaining, processing and filing such information. Being compliant without reputational damage to our clients is critical and they need Praxity firms to assist them here.”
Even with new EU regulations and the shake up of the audit market, rotations continue to be debated. A law that was supposed to improve quality and choice has, it appears, to have diluted public trust “There are concerns in the UK and Netherlands relating to the structure and governance of audit, and that the auditors and watchdogs are too closely associated.”
Ton anticipates that EU Audit regulations will be further strengthened, with the Monitoring Group reviewing the governance standard-setting process. “Given that there was a penalty issued recently to a firm for non-compliance with the independence rules, further clarification is clearly needed,” says Ton.
It was a tough 2018 for the Latin American economy, with the two largest economies - Mexico and Brazil - electing Presidents. Elections look set to dominate the region further in 2019, with a general election in Argentina, as well as presidential and legislative elections in Uruguay - possibly resulting in a change of government and more business driven political leadership.
For Argentina, the aftershocks of the currency crisis and IMF bailout package during 2018, combined with plummeting domestic demand, means that uncertainty is likely to persist for some time. Austerity measures are beginning to kick in, creating further social unrest.
All of this political upheaval could further delay much-needed fiscal reforms, slowing economic growth. The latest regional IMF report suggests an uneven recovery in the next 12 months, although now the US-Mexico-Canada Agreement (USMCA) has been agreed, there should be fewer headwinds.
“Political events on this scale not only make the markets jittery, but can halt wider regional growth,” says Luis Martínez, Managing Partner, Mazars Uruguay. Many analysts attribute this to the domino effect, with uncertainty in Brazil, for example, destabilising neighbouring economies Argentina, Paraguay, Uruguay, and Bolivia, and even Chile, which has been regarded as Latin America’s jewel in the crown lately.
“Like Brazil, Uruguay is at risk of having its credit rating downgraded due to big rises in debt. High continuous inflation (around 8%) is also a big concern,” highlights Luis.
It was hoped that the introduction of MERCOSUR in Uruguay would stimulate trade by lowering tariffs. “Despite these expectations, MERCOSUR hasn’t delivered and has lost support. In part this is because the country hasn’t been able to progress trade talks with China and Europe by itself,” explains Luis. Uruguay is currently in the process of obtaining permission from MERCOSUR partners to assess new trade agreements.
Fraud and corruption are undoubtedly more prevalent in the region than other areas of the world. Yet, heightened awareness due to the intensification of enforcement actions arising from recent investigations in Brazil and throughout the region, are helping to shape new laws and introduce more robust controls to tackle money laundering and corruption. Brazil, Mexico and Argentina have enacted specific anti-corruption laws. Chile too has broadened and tightened its anti-corruption legislation, with Uruguay following suit in 2019.
For a more comprehensive picture of the economic and tax situation in countries across the globe, Praxity has teamed up with the International Bureau of Fiscal Documentation (IBFD) to produce more than 100 country-specific guides.
Alongside rigorously researched data and guidance on business investment, individual and corporate rates and regulations, the user-friendly booklets also feature background information about the socio-demographics, economy, culture and distinctive business characteristics of each country. To request copies to share with clients by follow the link below.