Risk Management

Political risk for market dominance

A recent article on the New York Times about the political costs that Google is facing due to its market dominance, and their strategy to reduce those costs, caught my interest:

Google has begun this public-relations offensive because it is in the midst of a treacherous rite of passage for powerful technology companies — regulators are intensely scrutinizing its every move, as they once did with AT&T, I.B.M., Intel and Microsoft. Some analysts say that government opposition, here or in Europe, could pose the biggest threat to Google’s continued success.

Google’s SEC filings make repeated mentions of the high level of competition the company faces in their business. Microsoft and Yahoo are specifically named as the two biggest competitors, and Google notes that Microsoft has more cash and employees, and both companies have longer relationships with advertisers.

I find it interesting that Google is taking the strategy of talking about the “formidable competition” they face as a risk to their business instead of (or in addition to) the risk posed by increased government regulation as a result of their perceived market dominance.

In the section where they talk about government regulation and the risk it poses to their business, they discuss issues like privacy laws, copyright infringement and even net neutrality. But I couldn’t find mention of the risk presented by regulation due to the perception of unfair competition.

Does your business face political risks like Google and other tech companies?

Accounting Standards

IASB and FASB can’t get on same page

The international and US accounting standards bodies are both adjusting their mark-to-market rules in favour of politicians and bankers. FASB did it last month. IASB is working on it as quickly as they can. And yet, the two cannot agree on just how far they should bend over backward for the special interests.

After pressure from European Union finance ministers, the International Accounting Standards Board (IASB) has agreed to revise its fair value rule faster so it starts taking effect by year end.


“We desire to get to a common good answer with the IASB and we will make best efforts to do so, but some of the directions we are currently headed in are not to the liking of our board,” FASB chairman Bob Herz [said].

I think this boils down to the IASB wanting to delay reform of the impairment rules around financial instruments, and FASB believes any reform should include impairment changes right away. The IASB’s plans are to alter the rules around measurement and classification first before tackling the biggest issue with the standard.

I don’t think the rules need changing but if you’re going to do it anyway, you should include impairment. That being said, maybe the sluggish bureaucracy will allow cooler heads to prevail, at least for IFRS, while there’s still time.


Ten principles of sound tax policy

The Tax Foundation’s Ten principles of sound tax policy are a must-read for those influencing tax policy. I think the list can be further refined down to about half that, but maybe they wanted to get an even ten.

For instance, maintaining the neutrality of the system (#2) will result in broad bases (#3). It’s when the system gets less neutral (i.e. favours certain groups or behaviours) that the base is narrowed. Various special interest deductions put in place to encourage desirable behaviour or punish undesirable behaviour have narrowed the base and caused rates to be kept high unnecessarily.

Harmonization of federal, state/province and local/municipal taxes (#10) is part and parcel with creating a simple tax system (#4). The provincial government has been criticized recently about its reluctance to harmonize Ontario’s sales tax with the Federal GST. The premier’s misguided reasoning for the reluctance? It would place a tax on certain exempt items, thus eliminating some of the complexity and non-neutrality in the tax.

Tax stability (#5) is important because it makes them predictable, which is also aided when there is no retroactivity (#6). When politicians can make changes to taxes retroactive, tax is not predictable. The Canadian government announced recently the retroactive increase in the Basic Personal tax credit. You’re unlikely to hear anyone complain about this, but nonetheless it isn’t ideal tax policy.

Transparency (#1) is important no matter what government initiative we’re talking about, and an open process (#9) is one manifestation of this requirement. All the workings of a democratic government must be open to its citizens and open to criticism and debate. Tax is no different from anything else in this respect.

So I humbly put forward my own principles of sound tax policy: simplicity, neutrality, transparency, and predictability. I think that basically covers it at a more abstract level than the Tax Foundation’s ten.


Experts weigh in on interest deductibility issue

The Globe and Mail, a Canadian daily, has a feature on their website today where three tax experts from Couzin Taylor LLP and Ernst & Young LLP answer questions from readers about the interest deductibility “feature” of the Federal government’s budget.

Caribbean beachI’ve blogged about this complicated topic a couple of times now but never really felt I understood the issue as clearly as I could’ve. I think I made that apparent to my readers! The discussion on the Globe really helped me get the gist of this situation better than my rudimentary research before.

Some highlights:

The government has ignored the adverse macroeconomic impact of the proposals. The measure has specifically targeted double-dips that reduce foreign taxes. Reducing foreign taxes increases Canadian wealth and enhances Canadian companies’ ability to compete abroad. There is no benefit to Canada or hard working Canadians from the measure announced today, which increase foreign taxes.

Seems pretty counterproductive to hurt Canadian companies and think this is going to have any kind of positive impact on our country. This will reduce jobs here and abroad in Canadian multinationals and will not increase federal tax revenue here (but it will abroad).

In practice, companies headquartered in countries like the US and UK will have a competitive advantage as they are able to reduce their foreign taxes and thereby reduce their cost of capital, relative to Canadian companies. The budget materials suggest that other countries are considering adopting similar policies, but that remains to be seen. No other country of which we are aware has compromised the international competitiveness of its own multinationals to this extent.

Why are we enhancing the competitive advantage companies already have over our companies? Because those other countries have looked at the same measure in their own tax laws, but have yet to implement them? Sometimes it’s better not to be ahead of the curve.

The proposal as drafted encourages Canadian companies to deduct interest in the highest tax jurisdiction. In this regard, Canada has among the highest marginal tax rates in the industrialized world. In addition, there is often additional complexity and cost associated with obtaining a foreign interest deduction. Most companies will forgo trying to get a foreign interest deduction for these reasons, and will instead just take the Canadian deduction. This will increase foreign tax revenues and reduce Canadian tax revenues.

Wow. I guess a pretty important question is whether there was anyone in the Finance department warning the Minister of these very serious drawbacks to his plan, or whether they were just being ignored. This whole thing is approaching debacle status.


An alternative view of Khodorkovsky and Yukos

At least one person is defending Putin’s actions against Yukos and its former president, Mikhail Khodorkovsky, but it was this that caught my eye (emphasis mine):

Russian oligarchs were taking control of the entire Russian economy. These people had a strangle hold on every aspect of Russia and were basically out of reach of the government. … Russia’s key industries and natural resources were being used to secure massive personal wealth for a few, and for many years the ones suffering were the people. Now I am a free market conservative, but I also understand there must be limits on how much power can be horded into unelected hands.


I have no doubt this is a sugar coated version of events that deliberately overlooks much of the crimes this man may have committed. The richest man in Russia running for President? Do we want Bill Gates for President? He controls a major chunk of our economy already – would we trust him as he oversaw a justice department that is charged with enforcing corporate monopoly laws? Where is the representative of the people?

Which reminded me of a recent post by Dilbert creator Scott Adams, where he makes the argument that Bill Gates would be a great president:

For my president I want a mixture of Mother Teresa, Carl Sagan, Warren Buffet, and Darth Vader. Bill has all of their good stuff. His foundation will save more lives than Mother Teresa ever did. He’s got the Carl Sagan intelligence and rational mind. He’s a hugely successful businessman. And I have every reason to believe he can choke people just by concentrating in their general direction. You can’t tell me that wouldn’t be useful at a summit.

He’s got a point doesn’t he?