EU-Apple tax case

The European Commission made a decision that Apple should pay $15 bn of corporate income taxes (plus interest) to Ireland as reimbursement of illegal state aid. Apple sells Chinese-made products all over Europe.
Apple's US parent owns the intellectual property (IP) that is the primary value driver in these products. Apple's Irish affiliates have rest-of¬world rights to that IP. So Apple's EU affiliates pay royalties to its Irish affiliates that reduce their taxable income in countries where sales were made. The upshot is that the only country left to tax EU sales income is Ireland, which is a tax haven. In 1991, and again in 2007, Apple struck deals with Ireland.
In exchange for a very low corporate tax rate, Apple agreed to base its European operations on the island member of the European Union (EU). The deal was legitimised through a "comfort letter," a ruling provided by tax authorities giving certain company clarity on how its corporate tax will be calculated. Apple has created thousands of jobs in Ireland in the 25 years since it first struck a deal with Irish tax authorities. By 2015, it had 5,000 employees in the country. When the headquarters in Cork opens, another 1,000 jobs are planned. Apple is growing its presence in Ireland because of low tax rates. It is a big taxpayer in Ireland too.
Ireland made a special deal with Apple — a transfer pricing ruling called an advance pricing agreement — under which Apple's Irish affiliates paid far less than the 12.5 per cent rack rate. For the years 2003 to 2014, Apple's Irish affiliates paid less than one per cent tax on this income. Flow did they do that? The ruling allocated much of their income to imaginary remote head office expenses — as if executives in Cupertino were remotely managing Irish operations. So most of the EU sales income was taxed nowhere.
Apple in Ireland is the fourth large company required to pay back tax, , following Starbucks in the Netherlands, and Amazon and Fiat in Luxembourg. Caught red-handed, Ireland and Apple are seeking to reverse the 13-bn-euro ($15 bn) back payment ordered by the European Court of Justice, but they stand little chance before the court. Contrary to the Irish finance minister's claim, the decision will have no effect on the fiscal sovereignty of member states. Although Apple has a net worth of $600 bn, the loss of $14.5 bn is still a colossal amount of money for the company. It is just under twice as much as Apple's profit from the last quarter ($7.8 bn).
Over the long term, the single European market needs to develop a single tax system that sets the same conditions for people and companies. This, however, is something member states are far from creating; instead they sometimes use their tax rates to compete with one another.

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Scorpene submarine leak

As the Indian Navy prepares for Golden Jubilee celebrations next year to commemorate the induction of its first submarine in 1967, it has been struck by a story in an Australian newspaper which disclosed that 22,400 pages of documents pertaining to its Scorpene submarine programme, codenamed Project-75, had been leaked. This has caused quite a stir in defence circles around the globe and raised many pertinent questions related to management of major projects in increasingly technical environments.
The leak of highly sensitive documents relating to the six Scorpenes being built at the Mazagon Dock Limited by French company DCNS has dealt another blow to India's defence preparedness. There are worries that the leak has the potential to expose the combat and stealth capabilities of these submarines, particularly if they fall into the hands of India's strategic rivals in the Indian Ocean: China and Pakistan. With data pertaining to Scorpene sales to Malaysia and Chile also figuring among the leaks, it is believed that the theft occurred on the French side.
But the vulnerability that has always existed when dealing with private defence companies and arms dealers has gained another dimension with the data theft. The leak has happened just after DCNS snapped a $38-bn deal to build Australia's next generation of submarines. It has been speculated that the leak has been engineered by rival companies who lost the Australian deal to DCNS. If true, the perpetrators were seeking to sabotage the deal through undermining the French company's trustworthiness. After all, disguising the stealth capabilities and their parameters is what makes the submarine such a potent weapon.
But companies have only themselves to blame when they fall victims to hackers and corporate espionage. DCNS had entrusted the design documentation to consultants and sub-contractors for various aspects of the $3.5-bn deal like traniSlating documents from French to English, finalising the specifications, and procuring supplies of equipment and parts. It is hardly surprising then that DCNS lost the plot and its ability to keep tight control over who could access the documents.
Perhaps more important than the question of what has been leaked is how it was leaked. Based on the evidence so far, it can be reasonably assumed that the source of the leak was DCNS. Corporate rivalry is seen as the most likely reason. The fact that one individual was able to access such a large trove of documents covering all the major sub-systems when most such organisations work on the "need to know" principle, needs to be enquired into by the French govt. By completing the enquiry at the earliest, punishing the guilty and fixing the loopholes, France will be able to satisfy the concerns of India. Any exercise limited only to damage control will do disservice to India's national security.

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Whim Shah report on water resources

India's stressed water economy faces a turbulent future, as per a recent expert panel chaired by Mihir Shah, formerly with the Planning Commission. The report is categorical that if current trends continue, about half the demand for water would remain unmet by 2030. The reforms panel has called for a 'paradigm shift' in water management with the involvement of professionals from social sciences, management and many other specialised disciplines, citing this as one of the main reasons for recommending the restructuring of engineer-heavy Central Water Commission (CWC) and Central Ground Water Board (CGWB).
The seven-member panel headed by Mihir Shah has recommended that CWC and CGWB be disbanded and a new multidisciplinary National Water Commission be created in their place. It has called for a shift away from engineering solutions - creating big dams — to water management and towards a "more people-centred approach" that leads to rejuvenation of of rivers and aquifers.
The Shah committee was set up last year to recommend ways to restructure the CWC, which develops surface water projects, and the CGWB, which monitors ground water use and contamination. Its report is the third major report that has been issued on the restructuring of CWC since 2000. It calls for much better managing of our water resources for irrigation, tackling attendant overdependence on groundwater, overhauling sewage and water supply in urban areas, and economising on industrial usage. While our cities produce about 40,000 mn litres of sewage daily, barely 20 per cent of it is treated. Worse, only 2 per cent of our urban areas have both sewerage systems and sewage treatment plants, which is scandalous. We need subventions and realistic user charges to fill this gap.

As India urbanises, our rivers cannot be allowed to become, in effect, polluted open drains: There's a growing gap between irrigation potential created and that utilised. The report estimates that 35 mn hectares nationally, almost a third of today's coverage, can hdve irrigation "at very low cost" if we focus on command area development, canal systems -and their operations and maintenance with water user associations.

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Reliance Jio launched

Reliance Jio has been grabbing headlines ever since it started the commencial trial of its services in Dec 2015. It finally announced the full commercial roll-out of its LTE services on 1 Sep 2016 during its AGM (Annual General Meeting). Long-Term Evolution (LTE) is a standard for high¬speed wireless communication for mobile phones and data terminals. Jio presented some highly disruptive offers including: the cheapest LTE data rates in the world; zero roaming; and free lifetime voice calling. The announcements were seen as sufficiently disruptive to wipe almost $2 bn from its competitors' shares.
The response on social media was strongly positive. Moreover, with the welcome offer providing users unlimited services until Dec 31, 2016, it seems likely that mobile number portability (MNP) will enable rapid subscriber migration to Reliance Jio. Jio also announced that it aimed to be one of the fastest ever operators to reach I 0,) mn subscribers — a landmark that only China Mobile has achieved until now.
Initial market response to Jio suggests it might achieve that milestone even faster than China Mobile, which took 14 months. Reports indicated Jio had already surpassed 5 mn users within its first week of launch with an activation run rate of half a mn per day. Assuming no slowdown in that run rate, which is plausible as it rolls the service out more widely, it is likely to achieve the target in 6-7 months. This will mean Jio will join the Chinese operators in entering the big league and push itself ahead of Verizon Wireless. Consumers will gain and so will the Internet start-up ecosystem.
From an India perspective, Bharti Airtel, with 51 months of LTE operations, has fewer than 7 mn LTE subscribers and ranks outside the top 50 worldwide in LTE subscriber rankings. Other big operators among the top 10 like AT&T, NTT Docomo and T-Mobile are unlikely to leapfrog to 100 mn users anytime soon due to saturated market dynamics in theif
countries of operation. 1
From all accounts, Reliance Jio be burning a lot of cash to conduct a sustained price war. Most experts aver that it will be a few years before Reliance Jio generates cash profits. Having invested Z1.5 lakh cr, interest burden itself shook theoretically be close to 215,000 cr. I will have to generate profits after servicing its debt. Currently, the healthy RIL balance sheet, with cash generated from oil, gas and petrochemical business, is funding the price war launched by Jio. The question is how long the RIL shareholder will subsidise Jio's "loss leadership" in the telecom business.
Some analysts say Reliance Jio can pull off a coup and sustain itself if if grabs 100 mn customers by end of 2017. But that is easier said than done because the total smartphone market is no more than 220 mn. Jio will have te grab nearly 50 per cent of this marker within a year. This seems like a tall order.

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PCI initiates UPI

The way money transactions in India are taking place is all set to change extensively with the introduction of the Unified Payment Interface (UPI), which intends to move the coultry towards a cashless model. It has b.,,en developed by the National Payments Corporation of India (N PC1), and is expected to change the face of mobile banking. UPI is a payment solution that empowers a recipient to initiate the payment request from a smartphone. It facilitates virtual payment address (VPA) as a payment identifier for sending and collecting money and works on single-click two-factor authentication.
The biggest draw for the UPI is its ability to make payments seamless and instant by requiring the payee to only remember a VPA, much like sending an email. UPI has been launched to take forward the RBI's vision of migrating towards a "less-cash" and more digital society. RBI in its Payment System Vision Document (2012-2015) had mentioned the use of UPI for attaining its objective of a lower-cash-intensive society and financial inclusion of the latest technology.
UPI is a gateway built on IMPS (Immediate Payment Service) to enable online payments. It aims to provide anyone with a bank account to create a number of VPAs in an easy and swift manner, and use them to make or receive payments and funds. This will also permit customers to transfer or receive funds using Aadhar number. With this, customers will have the ease of accessing any bank application that has been certified by NPCI, and create a VPA for any bank account. Multiple bank accounts can be linked to this virtual address. The most important aspect of the UPI is its open architecture. The user interface is fully flexible and banks are free to create the most intuitive interface.
The success of the UPI is dependent on the adoption of the platform by all banks. Further, the user needs to have a smartphone to make transfer and hence. the potential us base will be restricted to around 24 mn people currently. On the acquirint front, there needs to be an aggressivt push from payment service providers (PSPs) to maximise newer merchant to popularise UPI as a payment option India continues to have low ad' card penetration and low debit ca activation leading to a poor reach of electronic payments — still in single digits. With debit cards mostly used al ATMs to withdraw cash, it is clear thA they are being used more like substitute for cash than as a true payment instrument. UPI could be that master stroke that turns the tide ie favour of electronic payments in India. In the future, we mtly see a burst of new technologies in the form of contactless payments, host card emulation technology, and tokenisation that can make payment'. simple for consumers withou compromising security.

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Challenges before Urjit Patel

When Raghuram Raj an became the RBI Governor in Sep 2013, the worry was that the tapering of monetary easing in the US would lead to capital flight from India, and the rupee would fall sharply. The central bank managed to halt the slide by intervention and by taking steps to augment reserves using other means. One wonders whether Urjit Patel's first problem could be exactly the opposite: strong capital inflows appreciating the rupee further in both nominal and real terms.
Advanced industrial economies are in the midst of low to negative interest rates and growth. Equities are perhaps fully priced and sovereign bonds are offering return-free risk: when interest rates go up to normal levels, investors will face a huge loss. Large institutional investors such as pension funds and life insurance companies are already worried. In sharp contrast, some emerging market economies (EMEs) are experiencing both high interest rates and growth, and should look attractive to foreign investors in terms of the risk–return trade-off.
On the fiscal front, the new Goods and Services Tax (GST) rules prevent the govts from tinkering with taxes. But their social responsibilities and promises to the electorate won't lessen. They may take recourse more and more to off-balance-sheet financing, which governor Patel may have to speak against. More immediately, Patel has to steer the forex and debt markets through the months of Oct and Nov when the FCNR deposits flow out. He will probably keep adequate liquidity in that phase. But come Dec and he will have to decide whether he can keep liquidity as easy, while moving the inflation target to 4 per cent.  And finally and most importantly, he will have to set the rules for the new Monetary Policy Committee. Here he treads new ground and will have the responsibility to set good conventions and precedents. Of course, he has the backdrop of sound macros, stable politics and a substantial forex kitty. Unli)ce Rajan, he doesn't take over in a crisis.
The inflation challenge looms large. The CPI-based inflation has already crossed 6 per cent, the upper limit permissible. Of course, henceforth the rate will be decided by the Monetary Policy Committee, and not by the Governor alone. It is also true that since a big component of inflation is due to food items, it is beyond the immediate influence of interest rates. Nevertheless, the central bank can't be seen as cutting rates while the inflation rate is climbing. Also, with high consumer inflation, the depositors earn a negative return, if rates are cut too aggressively. This causes depositors to flee the financial sector, away from bank deposits to gold and real estate. Patel already has the reputation of being an "inflation warrior", thanks partly to the committee report that he chaired. Hence a sharp focus on inflation should be second nature to him.

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RBI reforms for corporate bond market

The measures RBI announced for the development of corporate bond and currency markets cover all three areas of market development: a) market regulations and institution support, b) market participants, and c) instruments. The measures, along with the `bankruptcy law', augur well for developing an alternative to bank financing — the corporate bond market. Until now, only govt bonds could be pledged to borrow money from the RBI, and masala bonds were restricted to companies, NBFCs and housing finance companies (HFCs). To deepen the corporate bond market and encourage quality investors into the market, the RBI will allow banks to pledge their corporate bonds to tide over temporary liquidity shortfalls and raise rupee-denominated masala bonds to fund infrastructure projects.
A corporate bond repo is the market where a permitted borrower like a company or a bank pledges corporate bonds with another company or bank to raise money. The pledger agrees to repurchase the bonds at a specified price after one day. As a policy for future, the RBI has revealed that it is considering corporate bonds as collateral in its famous Liquidity Adjustment Facility. Another suggestion by the RBI is to make transactions in the corporate repo market under electronic trading. This will multiply participation as transaction will be quickened. Most of the govt/bank transactions are now under electronic trading platform under the Negotiated Dealing System (NDS).
Now on, brokers authorised by banks will be allowed to participate in the corporate bond market helping them meet their funding requirement. Foreign portfolio investors will also be allowed to undertake direct trading in corporate bonds without intermediaries like the brokers. Even the retail participation in the bond market will be liberalised with the RBI planning to remove the remaining restrictions on seamless transfer of govt securities between depositories and the RBI. Participation in corporate bond repos is restricted to entities like banks, primary dealers, mutual funds, insurance companies, etc. To encourage market activity, brokers authorised as market makers will be allowed to participate in the corporate bond repo market. This is expected to meet their funding and securities requirement arising out of market-making activities. The RBI also proposed to allow listed companies to lend money to banks through repo market mechanism, essentially overnight money, something that can have wide-ranging ramifications for cal), money rates, short-term money market rates and banking system liquidity.

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