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Singapore’s sling, good COP bad COP and Russia and Ukraine’s battle of Britain

Policy preview: Singapore’s sling
The Organisation for Economic Co-operation and Development (OECD) and G20 agreement to implement a global minimum 15% corporate tax faces a long road to implementation, particularly as governance standards for policing adherence remain undefined. Singapore is likely to prove a key test case. It has a 17% corporate tax, but offers an array of incentives that can reduce this significantly for many corporate residents, including those tech giants who operate regional headquarters from the city-state or the investment managers based there.

Prime Minister Lee Hsien Loong acknowledged as much earlier this month, noting that the city state will have to see how its current tax incentives “will have to be modified”. Singapore is not a member of the OECD, unlike many other alleged ‘tax havens,’ or the G20, but has signalled support for the effort for years now, and members of its government have called out the “artificial shifting of profits” to minimise their tax bills in the past, even as others have accused Singapore of profiteering off such practices.

Singapore remains well-positioned as a corporate hub outside tax competition, but it is nonetheless still likely to ensure that its business environment is as attractive as possible for the multinationals and other businesses that make their home there. It is set to benefit from concerns about the political environment in Hong Kong as well as its membership in the Regional Comprehensive Economic Partnership (RCEP), due to come into effect next year.

Singaporean authorities have indicated that they will seek to take action aimed at making Singapore an even friendlier business environment, including by offering incentives to hire locals and lowering requirements for leasing government-owned office space, a considerable portion of Singapore’s commercial property stock.

However, the temptation for tax adjustments may prove too great – particularly as its strident COVID-19 regulations and increased requirements for permanent residency visas have raised concerns about the quality-of-life and employment advantages it has long held.

Singaporean authorities may state they do not intend to continue to compete on a tax basis, but such declarations have been made in the past with little follow-through. The extent to which it is possible to enforce and regulate the OECD-G20 agreements is likely to be evidenced by Singapore’s corporate tax adjustments.

Power play: good COP bad COP
COP26 has set the stage for a new series of measures to stimulate private markets for climate financing.

British Prime Minister Boris Johnson used the conference to renew a longstanding goal, first agreed at the 2009 iteration of the COP conference, to provide US$100bn of climate finance – intended to enable developing countries’ attempts to mitigate and adapt in the face of climate change – annually by 2020.

One year beyond the deadline this target has not been met. Latest OECD estimates show climate finance amounted to some US$80bn in 2019, three-quarters of it provided on a state-to-state basis. Announcements made during COP26 suggest the target will not be met until 2023. Diplomats and negotiators are hard at work trying to pull together enough public and private finance to make the target. Building on Germany and Japan’s positions as the largest providers of climate finance in 2019, we have seen new commitments in recent weeks from the UK, Italy, and Denmark, while US climate envoy John Kerry is confident that the total will be met in 2022. So far, so good?

It is not so simple – what is meant by ‘climate finance’ is itself contested. There are a range of definitions, accounting for the financial instruments used (such as loans or grants), whether contributions are from the private or public sector, and the favourability of interest rates or notice periods. The OECD’s definition of climate finance is broad, encompassing grants, loans and export finance credits from both public and private sectors.

Many developing countries find this definition overly generous, arguing that it obscures how useful and beneficial climate finance might be. For instance, many contributions focus on development projects with only a partial focus on climate goals, and very often governments do not meet their fair share of climate finance contributions.

This contributes to the anger and mistrust felt by developing nations. The founder of a Nairobi-based climate charity, said that the missed US$100bn in 2020 had “hugely damaged” trust in the UN climate summit process, while the Gambia’s energy minister has said that the consequences for developing nations would be grave: “It would be catastrophic because we need those resources”.

This widespread feeling that developed countries cannot be trusted to pull their weight is a challenge to negotiations at COP26, where talks are being held to determine target levels of climate finance beyond 2025. Geopolitical pressure on wealthy countries to deliver is growing. The bulk of climate finance at present is public, but given the political headwinds we can expect to see OECD countries lean on the private sector to find the environmentally and politically necessary levels of finance.

“We [the world’s least-developed countries] bear the biggest brunt of the impact of climate change and we would like to see the commitment that was taken by the developed countries be fulfilled” Lamin B Dibba, The Gambia’s Environment Minister

Dollars and sense: Russia and Ukraine’s battle of Britain

Moscow and Kyiv have been locked in war in eastern Ukraine for some seven years now. Casualties remain a weekly occurrence on the frontlines, even as life goes on largely unaffected in both capitals. The bitter falling out between the erstwhile close allies has had ramifications for international gas markets, NATO, and much more. One front of the conflict has even struck into the heart of Britain, which while not a violent threat, could have major ramifications outside the scope of the conflict.

On 11 November, the UK Supreme Court is due to hold its final hearing in a lawsuit between the two sovereign states, as Kyiv claims that Moscow foisted a US$3bn bond loan on the former, disgraced, government of President Viktor Yanukovych (whose ouster in large part sparked the war) in 2013. Subsequent Ukrainian governments have refused to repay, arguing duress. Russia for its part argues that though the loan was structured under UK laws, that these arguments are not justiciable in the UK.

Ultimately, Kyiv’s bar for a ‘victory’ is lower than Russia’s – if the Supreme Court merely orders a full trial on the merits of any of the various legal arguments Ukraine has made (legal scholars have labelled its approach a ‘kitchen sink strategy) then a series of further appeals by Russia can be expected and the bond will remain outstanding.

The British government has in the past indicated it does not approve of Russia’s approach to the bond, though suggestions that it legislate in support of Kyiv have been dismissed as unworkable – and caused concern this could undermine London’s position as a key market for selling emerging market debt. London and New York have long been the preferred markets for doing so, with their respective legal regimes providing comfort to investors.

Anything other than a ruling in favour of Russia, however, risks affecting London’s attractiveness as a market for such debt – if there is an argument of coercion, this will likely be picked up by activists from groups like the Jubilee Debt Campaign. As is so often the case, much will be determined by the messaging around the ruling and whether Russia seeks to engage in a public relations effort over the judgement. This should be expected; British banks and investors should be prepared for Moscow engaging in its own effort to disparage the standards of English law for such contracts in the event of an adverse ruling.

“Is it really incomprehensible that such an unprecedented policy of double standards could open a Pandora’s box, cause enormous damage to global finances and generally undermine confidence in international financial institutions”

former President of Russia, Dmitry Medvedev
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Double Irish surprise, small-town hero? Corporate income tax a la française

Policy preview: double Irish surprise
Ireland’s political economy is set to undergo a rather momentous shift. As a result of the 8 October agreement brokered by the Organisation for Economic Co-operation and Development (OECD), states are to set out a global corporate tax regime that will see a minimum 15% tax on corporate earnings instituted for multi-national enterprises. Ireland had been a hold out to the pact when it was first teased earlier this year but was reportedly brought on board by a commitment that this rate would not be later increased. Nevertheless, for an economy that has attracted numerous multinationals over the last two decades precisely due to its 12.5% corporate tax rate, though often even a fraction of that because of Irish rules around ‘patriating’ foreign earnings, this marks a potential significant departure.

The Irish government has acknowledged as much in its budget, presented by Finance Minister Paschal Donohoe on 12 October. Corporate taxes will indeed rise from 15% for large corporations, albeit only from 2023. Given Ireland has so long been a jurisdiction of choice for multinationals, rather than necessity, the Finance Ministry warned that move that Ireland has warned will cost at least £800m in tax revenues – imply what you will about what this says about the ministry’s confidence in the 15% minimum tax actually being globally enforceable.

Although the government has not directly tied the two tax shifts to another, Donohoe’s budget announcement did include a new tax that should be able to fill this gap in the budget; a zoned land tax, also due to come into effect in 2023. It is nominally instead meant to replace a vacant sites levy and similarly designed to address a national shortage of homes, but in reality sets a platform for local authorities to radically revisit Ireland’s zoning practices. The rate will be 3% but the power for local authorities to reclassify major swathes of the country as having the potential for development will see the land tax base expand significantly.

The move may well ultimately be successful in raising tax revenues and spurring new development in Ireland. But it is not the first time that Ireland has relied on a mix of land development and tax incentives to expand government spending. A similar mix fuelled the Irish real estate bubble that so dramatically burst in the global financial crisis – one would hope this serves as enough of a warning to ensure the same mistakes are not repeated. Irish debt to national income soared to 108% in 2020, but Donohoe has pledged the new budget will see it fall to 99% in 2022. Whether this bears out may well prove a significant bellwether, or early warning sign.

“Tax competitiveness has brought our country the only prosperity we’ve known”. Bono

Power Play: Small-town hero?
Central Europe is experiencing a wave of political change -the last week has seen the erstwhile wunderkind of Austrian politics Sebastian Kurz resign his premiership amid a corruption probe and in the neighbouring Czech Republic, populist billionaire Andrej Babis’ premiership has also apparently come to an end with an opposition coalition forming after the 10 October elections in the country. Both departures stand in contrast to the relatively orderly ongoing departure of Germany’s Angela Merkel. All three moves, however, hang heavy over the future of Europe’s second-longest serving leader after Merkel, Hungary’s Viktor Orban.

Orban has faced repeated corruption scandals, much like Kurz, though so far has been impervious. He has reshaped Hungarian politics to solidify his Fidesz party’s grip on power, shifting the parliamentary system and engaging in gerrymandering that has outraged liberal opponents – something Babis tried, but failed, to do. However, Hungary’s opposition has finally begun to unify after over a decade of repeated splits. Much as the Social Democrats, Greens, and liberal Free Democrats in Germany are now holding coalition talks that have the potential to put Merkel’s Christian Democratic Union in opposition for the first time in 15 years, Orban’s political opponents have shown a willingness to cross traditional ideological divides in an effort to ‘reset’ Hungarian politics.

Hungary’s opposition has even organised a primary contest to choose a united nominee for prime ministership in the election due to be held next spring. But in a shock turn of events, the contest’s most prominent figure – Budapest Mayor Gergely Karacsony – withdrew from the race on 8 October. Karacsony has built a name for himself at home and abroad as the driving force behind the ‘Pact of Free Cities’ an alliance between mayors across central and eastern Europe that has often challenged their more nativist governments in recent years. Yet in withdrawing, he endorsed the conservative Peter Marki-Zay, mayor of the small town of Hodmezovasarhely.

Marki-Zay had finished behind Karacsony in the first-round of the opposition primary, but the pair are united by a belief that Klara Dobrev, a left-leaning MEP who edged out Karacsony, will be unable to defeat Orban in the national election. The second round is already underway, with votes due by 16 October but Marki-Zay is seen as the favourite. There is precedent in the region for a small-town mayor to upset a political stalwart, in neighbouring Romania Klaus Iohannis did just that in 2014, defeating Prime Minister Victor Ponta in a race for the presidency in 2014. Marki-Zay will be hoping he can likewise make his mark on the region’s politics.

“To tell the truth, I have always seen the 20 years between 2010 and 2030 as a unified era” Hungarian Prime Minister Viktor Orban

Dollars and sense: corporate income tax a la française
Emmanuel Macron is not often hailed for his successes. He has been pilloried from the left and the right domestically, while he has had little success in winning over France new allies internationally – and has arguably further strained relations with both the UK and fellow EU members. His self-perception and actions have earned him the sniggering sobriquet Jupiter. Yet four years into his presidency he has one unalloyed success on which he should be proud to rest his laurels: France’s effective top-end corporate income tax rate has fallen from 44.4 per cent to 28.4 per cent.

The tax is set to fall even further to an effective top rate of 25.8 per cent in 2022. Although the COVID-19 pandemic has strained France’s finances just as it has for so many other economies, Macron has steadfastly insisted that he will maintain the cut plan. This is in contrast to many of his would-be rivals, with Paris Mayor Anne Hidalgo coming out in favour of renewed higher taxes (in particular the ‘wealth tax’ on the highest earners that Macron also abolished). The far-right’s perennial candidate of the last decade, Marine Le Pe, is also in favour of a higher tax rate, though it is unlikely to be a major area of her campaign. Those vying for the nomination of the Republican party, the latest iteration of France’s traditional centre-right party, have been critical of Macron’s debt binge, but hesitant to call for further tax rises out right.

Yet despite the headline success, Macron is not expected to make the tax cuts a key feature of his 2022 presidential campaign. Macron is reportedly wary of being seen as too business friendly, least this shift votes to a more left-leaning candidate such as Hidalgo in the first round of the election, or cause the left to stay home in a potential run-off against Le Pen.

But rumours have been circulating that a second Macron presidency would seek to plug the gap in the French budget through a one-off corporate tax, enabling Macron to avoid an embarrassing permanent reversal of his signature success. Macron has already shown himself willing to engage in such taxation accounting fudges – in 2017 the very year he began his cut agenda, a one-off tax of 10.7 per cent on firms with revenues over €250 million. Plus ça change, plus c’est la même chose.

“Can a people tax themselves into prosperity? Can a man stand in a bucket and lift himself up by the handle?”

Winston Churchill
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London listings, Rayner’s Labour and VAT’s back

Policy Preview: London Listings
“The world clings to its old mental picture of the stock market because it’s comforting; because it’s so hard to draw a picture of what has replaced it; and because the few people able to draw it for you have no interest in doing so.” Michael Lewis

The London Stock Exchange (LSE) has had a turbulent past few years. European regulators blocked its merger with Deutsche Börse in 2017 for the third time, and though it pivoted to a data provider model with the purchase of Refinitiv in January, the LSE’s own share price has struggled.

While the business model of competing with other data providers will likely prove significant to the LSE’s long-term prospects, some of the poor performance the exchange has seen in recent years is due to a slowdown in new listings, partially due to Brexit uncertainty and partially due to the LSE lagging other major exchanges in innovation. 2021, however, has shown the signs of a turnaround are already in place – with more 50% listings in the first six months of 2021 than in all of 2020.

Arguably the most significant LSE listing this year – in terms of its own business model – was the July trading debut of the fintech firm Wise, which specialises in international monetary transfers. Notably, the listing was not an IPO but rather a direct listing in which existing shares are entered into the market rather than new issuance as typically occurs in the former. Such listings, which typically enable existing investors to cash out more quickly, have grown in popularity in the US tech sector in recent years but the LSE had heretofore largely been reticent.

Wise’s debut was seen as a success and the firm is now the largest in the UK tech space by market capitalisation. London has prided itself on developing a wider fintech scene in recent years and there are a number of other expected listings, such as those of challenger bank Revolut or payments firm Klarna, that the LSE will be keen to secure.

To that end, last November the UK government launched a review of its listing regime, with a split emerging between advocates of continued high regulatory standards and those in favour of loosening listing rules, in particular to attract fintech listings. The LSE seems to have firmly come down on the side of the latter, most emphatically the requirement that a minimum of 25% of a firm’s shares be sold in an initial listing. It also gave softer backing to calls to allow firms with dual class shares to be treated as ‘premium listings’ and thus eligible for the FTSE 100 index. For example, Wise’s CEO Kristo Käärmann has enhanced voting rights shares, meaning Wise will not enter the FTSE 100.

These rules are overseen by the Financial Conduct Authority (FCA), which is conducting its own review, off of which it has proposed reducing the free float requirement to as little as 10%, and to allow certain forms of dual class share structures to be included as ‘premium listings’. An overhaul of listing rules along these lines is likely to be signed off by year’s end.

Power Play: Rayner’s Labour
“Finding the right alchemy that will woo the older and socially conservative voters of the Red Wall whilst keeping on board the younger, more educated, and socially liberal voters elsewhere has become Labour’s quest for the Holy Grail.” Professor Eunice Goes

Angela Rayner’s position of prominence is secure within the Labour Party. Following its disappointing results in the early May elections, Keir Starmer and his allies attempted to side-line her, failing when Rayner refused to accept what she regarded as a significant demotion. Instead, with backing from party allies, she negotiated retaining her position as Deputy Leader and exchanging her roles as party chair and national campaign coordinator for positions as Shadow Chancellor of the Duchy of Lancaster and a newly-created post of Shadow Secretary of State for the Future of Work.

This is symptomatic of two things – firstly, Keir Starmer’s weakness at the head of the party, unable to reshape his frontbench to his liking. Secondly, it demonstrates that the left-of-centre, though less radical than the left under Jeremy Corbyn, still has some residual strength within Labour. For the time being, Rayner is able to stay in position as Deputy Leader, consolidating her own power base.

What does this mean for Labour? The party’s attention will soon be turning to the next general election, which could come as soon as May 2023. Labour will be keen to stem the flow of so-called ‘red wall’ voters deserting Labour. Some within the party may feel that as a Stockport-born former trade unionist, Angela Rayner may be better able to connect with voters across the North of England and the Midlands than Sir Keir Starmer QC.

There may not be much time for Labour to effectively set out their message, if the election is just two years away. A non-trivial proportion of that time will still be politically dominated by the pandemic, and Labour will need to offer a positive vision of the future, rather than criticise the government’s perceived failings during the pandemic.

The party will continue to position itself as tough on crime and social issues, playing to Starmer’s prosecutorial experience. The Conservatives will always be more credible on law-and-order issues, however, and Labour will need to seek to shift the economic debate onto terms in which it is most comfortable.

Rather than being painted as the party of fiscally irresponsible tax-and-spend, in her newly appointed brief handling the Future of Work Rayner will seek to frame the nature of the post-pandemic recovery as being an opportunity for more socially-just economy rebalanced towards workers. We have already seen the beginnings of this with pledges for a ‘new deal for workers’, with Rayner calling for an enshrined right for workers to work from home.

Although the Opposition’s policy influence is necessarily limited, we can expect Labour to continue to influence policy debates by positioning itself as more socially conservative yet with an economic policy characterised by more targeted interventions in the interests of workers.

Dollars and Sense: VAT’s Back

“Happiness is not in money but in shopping”

Marilyn Monroe

Since the start of 2021, the United Kingdom no longer offers tourists and visitors refunds to the value added tax (VAT) that they pay on UK bought goods. Formerly known as the Retail Export Scheme, similar VAT refunds are available across the European Union and they have proved a boon to growth for big retailers.

Such refunds not only bring in tourist spending – helping drive the development of commercial shopping centres such as the UK’s Bicester Village – but also have provided a fresh income stream to retailers and logistics businesses, who typically take a small portion of the refund in exchange for handling the relevant paperwork. The end of the Retail Export Scheme will not totally end this business, as UK exports shipped directly abroad will still be VAT-free.

Yet certain retailers are likely to be particularly impacted, from famous London outlets that have long been magnets for tourism to the smaller luxury stores and shopping centres in Manchester that have seen high-end spending driven by VAT-free purchases from tourists largely from India, the Middle East and China, in recent years.

The COVID-19 pandemic, resulting lockdowns, and travel limitations have far overridden the impact of the VAT refund’s abolition on retail. However, as the post-pandemic recovery continues and travel slowly opens up with the rollout of global vaccinations efforts, the VAT refund scheme’s abolition risks seeing the UK retail recovery lag behind that of other sectors and even retail in Europe.

Yet the government has so far shown no signs that it plans to reinstate the Retail Export Scheme, or some variety thereof. Simply put, foreign tourists are not a particularly politically salient constituency and the government is wary of being seen as handing valuable tax receipts to retailers in a post-pandemic environment.

Nonetheless, a potential middle ground with benefits to all exists – the digitisation of tax receipts raises the possibility of reinstating at least certain refunds for goods whose export status can thereby more easily be verified. The government has put tech at the forefront of other customs arguments – recently raising the idea again in relation to policing the Irish border – similar arguments about the future of UK retail recovery follow naturally.

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Charging growth, a red herring between the Pacific and Atlantic and a one-tax world

Dollars and sense: charging growth
“Lithium is common. (The) hard part is turning Lithium salt or clay into extremely pure LiOH”. Elon Musk

Far from the headline news around Brexit and its aftermath – so centred on the Northern Ireland protocol, governance and rules for the financial services industry, customs declaration (or the lack thereof) and British-EU travel as the COVID-19 pandemic appears to be waning – Brussels and Westminster have been competing fiercely on an issue less headline-grabbing but likely at least as important to their economic futures: the development of a European battery industry.

This importance of this competition can be best summed up in Nissan Motor’s 1 July announcement that it would spend some £1 billion pounds developing a new battery plant at its hub in Sunderland alongside Chinese partner Envision AESC. It will also produce a new all-electric crossover vehicle, the details of which have yet to be announced, at the plant, where its legacy Qashqai crossover and its all-electric LEAF are already produced.

The announcement marks a stark reversal from electric car industry stalwart Tesla’s 2019 announcement that it would invest US$4.4 billion in a battery production plant outside Berlin, a cost that has since risen to closer to US$7 billion. It also marks a stark turnaround from 2016, when Tesla first announced it was exploring such an investment, and when Nissan warned it could pull out from the UK entirely if voters backed Brexit.

Nissan’s investment is being generously supported by subsidies; at least €100 million from the government, plus further support from Sunderland City Council. However, the ultimate difference between producing new electric car batteries in the UK versus on the Continent comes down to refining lithium, a matter that may prove familiar to long-term readers of Hawthorn Horizons as in November we covered the challenge facing the Portuguese government in the first-half of 2021, namely whether and how to push ahead with a Lithium mining and refining project in its far north that had attracted considerable local opposition.

Lisbon proved unwilling to do so, and in April scrapped plans to develop the site. In contrast, the UK’s British Lithium has made strides towards launching a lithium mine in Cornwall, as has Cornish Lithium, by securing UK government backing. In a sign of growing confidence, start-up Green Lithium announced last week that it had secured seed funding for a lithium refinery (on the back of a government-backed investment in April).

As things stand, lithium appears set to charge British growth – while a lack thereof could seriously damage Europe’s auto industry.

Policy preview: a red herring between the Pacific and Atlantic
“I’m a big fan of bitcoin…regulation of money supply needs to be depoliticised” Al Gore, former US vice president

El Salvador recently became the first country that set to accept Bitcoin, with President Nayib Bukele approving legislation in early June that mandated that businesses and individuals accept Bitcoin as payment effective 7 September. Just days earlier, he had announced the move at a conference in Miami that more closely resembled the ongoing of a nearby nightclub than the IMF summits in Washington D.C. or central bank summits in Jackson Hole, Wyoming, where monetary policy announcements are more frequently made.

Bukele’s new law unsurprisingly contains a major loophole, namely that all El Salvadorean firms and individuals who lack the technology to process Bitcoin transactions – well over 99% of each – will be automatically exempt from the regulation requiring they accept it. Nonetheless, the move has been hailed by many crypto-advocates as the first example of Bitcoin supplanting the US dollar – El Salvador does not have its own currency, and has been dollarised for quite some time. Bitcoin’s most ardent believers also argue that the move therefore helps restore some of El Salvador’s sovereignty, though the reality is that were Bitcoin ever to become the country’s de facto currency, El Salvador would still lack the ability to set an independent interest rate.

El Salvador’s central bank nonetheless has a significant role to play in the new crypto-friendly country, namely Bukele has tasked it with overseeing a fund that is responsible for ensuring convertibility between the dollar and Bitcoin. This effectively forces it to take on price risk, and as bitcoin’s significant volatility this year has shown, that may well prove to be quite the daunting task. It is made all the more concerning by the fact that El Salvador is currently in negotiations with the International Monetary Fund (IMF) for US$1 billion in desperately-needed hard currency funding.

The IMF has suspended negotiations as a result of El Salvador’s decision, concerned that El Salvador’s bitcoin regulations could see it effectively become a hub for those seeking to convert Bitcoin to dollars, and it is unwilling to see disbursed funds go to this market. For all the fanfare that El Salvador has received, the move is likely to be dashed, at least in practice by the IMF’s demands and US opposition.

It would not be the first time such an experiment has failed – then-Ohio Treasurer Josh Mandel announced in 2018 that the state would accept bitcoin to pay state taxes. His successor, Robert Sprague, shut the programme down in October 2019 citing procurement irregularities. It processed fewer than 10 transactions during its 11-month lifespan.

Cryptocurrency may be here to stay, but it will not be displacing the dollar anytime soon, even in El Salvador.

Power play: a one-tax world


“With deregulation, one sector of the economy after another is liberated to capital’s unominotred authority”

Economist Herbert Schiller

The G7’s June embrace of a global minimum tax proposal advocated by US Treasury Secretary Janet Yellen brought the campaign out of the shadows and into global headlines. We first discussed the issue in Horizons in March and noted that Washington was likely to use the Federal Reserve’s currency swap lines instituted at the onset of the COVID-19 pandemic as a sweetener to bring +EU nations on board. It has indeed done so, announcing just after the Carbis Bay meeting that it would extend the lines until the end of the year.

The Federal Reserve also concurrently extended swap lines to other central banks – including Brazil, Mexico and Australia’s. At the start of July, the Organisation for Economic Cooperation and Development (OECD) announced that its members too had backed the proposal, a far more significant move than the G7’s endorsement as the OECD has the ability to shape policy not just among the G7 but far beyond, even if it has long been reticent to use its legally-enforceable decisions to pressure member states.

So far only nine states have opted out – most notably Ireland but also Barbados, Estonia, Hungary, Kenya, Nigeria, Peru, Saint Vincent & The Grenadines, and Sri Lanka. Dublin’s reticence will remain a major sticking point, but the OECD, unlike the G7, has notably already agreed to exempt most financial services from the tax, which may ultimately be extended in a manner that allows Ireland to remain an attractive base for multinationals.

The global minimum tax is still a far way, likely at least a couple of years, away from becoming a reality. But as it appears on the horizon, it is important to consider how states will look to compete, and who may be poised to gain. One potential beneficiary is Canada, and its model may soon be adopted by others.

Canada has long made itself an attractive destination for corporates, particularly in the commodities sector. While its regulatory environment was shaped by its own mining sector, miners from Kyrgyzstan to Brazil to Indonesia have long seen Toronto and its stock exchange as their preferred destination.

The Canadian model leaves securities regulation and oversight to its Provincial governments, meaning it does not have a federal equivalent of the US’ Security and Exchange commission or the UK’s Financial Conduct Authority. They do have an umbrella organisation, the Canadian Securities Administrators (CSA), which aims to harmonise regulation.

In late May, the CSA announced a series of proposed amendments on continuous disclosure obligations, effectively reducing them by combining a set of three disclosure and filing requirements into one annual disclosure statement.

The institution of a global minimum tax will spur further such moves, as regulatory competition will supplant tax-rate competition for attracting multinationals.

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The fate of Brazil’s petrol taxes, the key to Britain’s hydrogen agenda and the core of OPEC+

Policy preview: the fate of Brazil’s petrol taxes
“Brazil, Land of the Future and always will be!” Stefan Zweig

Brazil is not set to hold its next presidential election until October 2022, but the campaign is very much already in full swing with incumbent President Jair Bolsonaro, a right-wing firebrand, facing a stern challenge from former president and Workers’ Party (PT) leader Lula da Silva, a left-wing firebrand. The pair are all but certain to face one another in the second round (Brazil’s presidential elections include a run-off between the two most popular candidates if no one receives a majority in the first round). There are ample tales, told elsewhere, about both candidates’ alienation of the centre ground, but at this stage one can bank on one theme uniting them: changes to Brazil’s unpopular PIS/COFINS taxes.

The PIS/COFINS taxes are among the most important in the Americas, essentially serving as Brazil’s equivalent of a European-style value-added tax (VAT). As with all tax matters, they are actually significantly more complex, but distilled most simply the two duties amount to a 9.25% levy on the price of end-stage goods that is used to finance the country’s societal programmes and welfare system.

Both Lula and Bolsonaro are populists, and neither will campaign for a reduction of the programmes PIS/COFINS is used to finance. But Bolsonaro has already made clear that he desires to eliminate the applicability of the two taxes to fuel prices. Indeed, he unilaterally suspended the taxes on diesel for March and April and said that he would remove it from household gas bills. The suspension of the tax on diesel has been a demand of the country’s truck drivers strike movement, which brought much of Brazil to a halt in the months before the 2018 presidential election after oil prices were liberalised.

Lula is also likely to campaign on such a policy, though he has not formally announced it yet. During his first term as president, he passed and signed legislation making not just key food staples such as rice and beans exempt from PIS/COFINS, but also key agricultural inputs such as fertilisers and seeds. Lula must win back those voters who abandoned his PT following the corruption scandals under his successor, Dilma Rousseff, who was ultimately impeached and removed from office. Their defection to Bolsonaro put him over the top in 2018 and Lula knows winning them back will be key to his electoral hopes. Pledging to lift the PIS/COFINS taxes on all retail petrol sales may well be his play to do so.

Bolsonaro plugged the hole caused by his temporary suspension of the tax on petrol by raising bank taxes, something Lula himself would approve of were it not for the country’s highly polarised political environment. Fuel taxes may well be set to vanish from Brazil’s landscape, but what replaces them is unlikely to be preferable to most investors.

Dollars and sense: The key to Britain’s hydrogen agenda

“Water will one day be employed as fuel, that hydrogen and oxygen which constitute it, used singly or together, will furnish an inexhaustible source of heat and light, of an intensity of which coal is not capable.”

Jules Verne

With the UN Climate Change Conference that the UK is set to host, better known as COP26, beginning on 1 November, speculation is rising as to how UK Prime Minister Boris Johnson aims to set the stage. The conference offers the opportunity to turn the page on the Brexit debate and the COVID-19 pandemic, with a new launchpad for the government’s agenda of ‘levelling up’ the north and laying out a framework for how the economy can grow robustly while making the progress necessary to make the target of net-zero emissions by 2050 feasible.

If the Ministry of Business, Energy and Industrial Strategy (BEIS) is to be believed, hydrogen will be at the fore of the UK’s push into the new green economy.

On 8 April, BEIS Secretary of State Kwasi Kwarteng announced a partnership between Norway’s Equinor and Britain’s SSE to explore building a hydrogen-powered power station at a cluster of new sites – known as the Humber Renewable Energy Super Cluster Enterprise Zone – outside Hull in northern England. The announcement undoubtedly raised a few eyebrows, given that there are no commercially viable hydrogen power plants in operation anywhere in the world.

Nevertheless, SSE and Equinor are not alone in exploring hydrogen’s promise, with Scottish Power announcing on 12 April that it is seeking to build a renewables-powered facility to produce hydrogen, on the outskirts of COP 26’s host city, Glasgow. A number of other firms have stated their intention to explore the market as well.

Hydrogen has long been seen as a potential balm to the emissions issues of energy generation. The argument has been boosted by the development of infrastructure to transport and implement liquefied natural gas (LNG) for power generation over the last decade, largely displacing far more polluting coal. However, hydrogen is significantly more expensive than LNG, and the export of LNG has been effectively subsidised by a number of countries as they squabble for market share.

What then is driving the economics behind Scottish Power considering producing hydrogen, and SSE and Equinor considering building a power plant powered by the stuff? Much the same solution, subsidies, in the form of ‘contracts for difference’ (CfDs).

CfDs are essentially pledges to maintain a stable price to the generator. Given hydrogen power plants’ cost of generation is likely to be above the prevailing market price until the sector is developed, CfDs would provide security to the developers of such power plants that they can recoup their investment. CfDs have already been used to fund other green investments in the UK. Their use will need to expand significantly to develop a hydrogen market, but if COP26 is to mark a new page for both the UK economy and the global climate challenge, the launch of such a policy is precisely what to expect.

Power play: the core of OPEC+
“Now we have a chance not just to produce and sell as much as we need to, but to throw American shale overboard. Our budget is much more stable than Saudi Arabia, and is ready for low oil prices, unlike the Kingdom’s.” Dmitry Kiselyov, Head of Russian State Media, February 2020

Russia and Saudi Arabia are the two countries with the most at stake in the global crude markets. True, the United States has produced more barrels of crude for much of the last decade – driven by the shale boom – but its economy is more diversified and better able to resist the volatility seen in crude prices in recent years. This logic is not new – it underlined the 2016 agreement for Moscow to effectively join the Saudi-led cartel, the Organisation of Petroleum Exporting Countries (OPEC), in a structure known as OPEC+. The partnership undergoes regular spats, and there were genuine concerns it would rupture until the COVID-19 pandemic again put oil prices in a tailspin at the start of 2020.

As the pandemic appears to be receding in the face of the global vaccination programme, however, the chafing is very much back. When OPEC+ agreed its latest continued cuts at the beginning of March, Russia received a small increase to its output limit, some 130,000 barrels per day (bpd). The partnership is not necessarily set for immediate rupture: Russian oil officials have quietly said they will be willing to extend cuts further, if another small increase in Russian production is allowed.

But the release of a report on the country’s oil industry from the Russian Ministry of Energy (MinEnergo) this month highlights that it is not long for this world.

Put simply, Russia has had too little investment in new oil production over the last decade. Its efforts to expand into deep-offshore and shale drilling have been stymied by US sanctions imposed on such activity since 2014. While state oil company Rosneft has grown into one of the world’s largest producers (second on a bpd-basis behind Saudi Aramco), this has largely been through consolidation of the domestic Russian oil industry’s existing ‘brownfield’ sites rather than development of new ‘greenfield’ oil resources.

The MinEnergo report notes that Russian oil production is currently set to peak in 2027-2029, and rapidly decrease from there on. While the OPEC+ deal continues for now, Moscow will be looking to Saudi Arabia’s own wind-down of its further voluntary cuts, which will see 1 million bpd come back online by July. Russia is therefore unlikely to be able to fight for market share in the short term, let alone the medium and long-term. On the other hand, the importance of the fight for oil market share is growing to the Saudi leadership, as a possible lever to respond to the Biden Administration’s calls for human rights reforms.

OPEC+ is not necessarily set for an immediate end – it may stumble on to deal with the pandemic a while yet. But Moscow and Riyadh are ultimately likely to again compete for market share, a move that could effectively constrain oil prices over the long term.

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Washington’s weapons in tax treaty fight; Tobin tax’s latest turn and Madrid’s Diaz Ayuso

Policy preview: Washington’s weapons in tax treaty fight
“If the U.S. came down on tax havens in the same way they come down on countries that trade with Iran and Cuba, we’d have no tax havens in the world.” Professor Ha-Joon Chang, University of Cambridge.

US Treasury Secretary Janet Yellen is looking to work with finance ministers from around the world to agree on a global minimum tax rate for multinational corporations. This quiet effort has only just begun, but if successful it could prove among the most significant foreign policy and regulatory moves since the end of the Cold War.

This move is not without its challenges, and comes on the back of a round of recent competition by states to lower their corporate tax rates, which surprisingly saw France cut such levies under President Emmanuel Macron. Yet Britain has announced plans to buck this trend. The European Union has sought to restrict its own internal tax havens, and ensuring that technological multinationals pay their ‘fair share’ is a policy popular with all flavours of government from Canberra to Ottawa.

Perhaps the most underappreciated feature of the discussion thus far, however, is the carrots that the US can offer to other countries for their support for such an effort. The potential sticks – sanctions, tariffs and regulatory restrictions – are far better known, though at least until recently Washington has been hesitant to use these tools to target those it accuses of violating international business norms. It is unlikely that the Biden Administration will use such threats at this stage, though the precedent set by Trump’s actions on China means it cannot be ruled out that Washington will eventually use these tools for such purposes.

The key carrot also results from the US’ central role in international trade and financial markets. More significantly, Washington has already made ample, but quiet, use of the carrot over the last year. Specifically, the US Federal Reserve has offered ‘swap lines’ to key allies since last April, initially an effort to mitigate against the risk that the COVID-19 pandemic would cause a global debt crisis.

Historically, only very few countries – such as the UK – had access to such swap lines and they were only used to respond to the 2008 financial crisis. Today South Korea, Mexico, Singapore, and Brazil are among the biggest beneficiaries. If the US were to withdraw these lines, which would essentially mean that the Fed would treat local currency state debts as fungible with US debts, it would risk prompting a debt crisis. As a former Fed chair herself, Yellen is keenly aware of this.

Expect the US to offer making such swap lines permanent, in exchange for a global tax treaty.

Dollars and sense: Tobin tax’s latest turn
“This idea (of a financial transaction tax) has been around for a long time…I think frankly the experiences are mixed”. Former US Treasury Secretary Timothy Geithner, 2009

Discussions of so-called Tobin taxes once dominated considerations of how states should respond to the Global Financial Crisis and Eurozone Crisis. A few years later, they again turned heads in response to the rise of high-frequency traders, which entered the mainstream with Michael Lewis’ 2014 book Flash Boys. The Tobin tax is also known as a financial transactions tax (FTT) and is essentially a levy charged on a securities trade, either a fixed charge or as a percent of the value of the security. The debate appears to be returning again.

Although France did enact such a tax in 2012 – charging 0.3% of the value of certain stock trades, and some high-frequency trades at the lower 0.01% rate – Europe has not followed suit, with only Finland instituting a similar tax. The United States continued to oppose such a policy as well, under both the Obama and Trump Administrations.

However, the Tobin tax has recently received some attention once again, due to the high-profile Game Stop market madness. This saw a small US video games’ retailer’s stock become among the most volatile financial assets in recent months, driven by day-trading users on increasingly popular share trading applications and platforms. These in turn are dependent on selling their order flow to high-frequency traders, who some blamed for causing massive losses for small retail investors when trading in Game Stop shares was first suspended in late January.

In February, the Chair of the Financial Services Committee, Maxine Waters (D-CA), said she was willing to consider such a move. The Congressional Budget Office’s prediction that a 0.1% securities transactions tax could raise as much as $777 billion over 10 years has helped it garner further support. House Democrats are now expected to propose exactly such a tax.

However, such a proposal has little-to-no-chance of advancing in the Senate. The Biden Administration is unlikely to spend political capital on such proposals. Coverage of the tax will only grow through the rest of this year as budget debates and structural economic reforms dominate in Washington. But as with previous proposals, this game too will soon peter out and stop.

Power play: Madrid’s Diaz Ayuso

“It bothers me enormously to lose, I can’t stand it. And I’ve spent many years, with some friends, devoting almost all of our political activity to thinking about how we can win”

Pablo Iglesias, Head of Podemos

Isabel Diaz Ayuso was little heralded when she assumed the presidency of the community of Madrid, the governorship of the greater capital region, in August 2019. She had to hobble together a coalition between her centre-right Popular Party (PP), and the then-rising centrist Ciudadanos faction, as well as the nationalist Vox party. In the election held that May, she led PP to win just 30 of 132 seats in the Chamber, finishing behind the Socialist Party (PSOE), and with Ciudadanos securing 26 seats. The result was the PP’s worst performance in Madrid’s regional elections since the fall of the Franco dictatorship.

A little over 18 months later, Diaz Ayuso has called snap elections that will now be held on 4 May. Nearly 35% of voters plan on backing her PP in the vote, up from 22.23% in 2019. She said she called the vote to prevent Ciudadanos from switching to an alliance with the PSOE. Meanwhile Ciudadanos, which won 19.46% last time around, is polling on the verge of falling below the 5% electoral threshold.

Diaz Ayuso’s likely success tells the story not just of her masterful management of Madrid’s politics, but also of her prominent public opposition to the national minority government of PSOE leader Prime Minister Pedro Sanchez. Sanchez ousted the PP government in 2018 in a series of parliamentary no-confidence votes and won the most votes in the two general elections held in 2019. However, the PP has never been able to form a majority coalition and remains dependent on left-leaning Catalan independence parties for support.

With pro-independence parties winning a majority of votes in Catalonia’s 11 February elections this year, but chafing at the PSOE’s first-place finish, it is more-likely-than-not that that another election will have to be called before December 2023. Pablo Casado, PP’s national leader, has failed to capitalise on Sanchez’s troubles, particularly his regular spats with his leftist coalition ally, Deputy Prime Minister Pablo Iglesias of the Podemos party.

Iglesias announced this week he will step down to lead Podemos in the Madrid elections, vowing to challenge Diaz Ayuso. He may be able to lift Podemos above the 5% threshold it appears at risk of falling below, but it will be Diaz Ayuso who uses the election as a platform to raise her national profile. She may well lead the PP ticket by the time the next general election is called.

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