Tatiana Andrade, Director at Kreston KBW Brazil, is a seasoned professional with expertise in advanced English, accounting, tax management, and consultancy. With a strong background in auditing, she excels in leading teams, supported by an MBA in human development for managers. Tatiana’s commitment to excellence ensures top-tier service delivery in the complex financial landscape.
Investing in Brazil: Beating analyst’s expectations
March 13, 2024
Tatiana Andrade, Partner of Kreston KBW Auditores, shares that investing in Brazil will see economic growth, driven by market reform and ESG, attracting international and local business optimism.
Brazil’s economic growth outlook
Brazil’s economic activity expanded by 2.45% in 2023, surpassing initial forecasts that growth would be tepid in the face of high interest rates. At the beginning of last year, private economists estimated that the economy would grow by less than 1%, whereas current forecasts indicate an expansion of 2.9%, according to a weekly survey conducted by the Brazilian central bank.
Investing in Brazil opportunities
This makes Brazil the most successful Latin American economy. With a new government focus on market and tax reform and a strong emphasis on ESG, local firms are predicting a boom year, as international clients flock to its shores.
“Particularly in the second half of 2023 and in the first two months of 2024, we saw a significant increase in the demand for foreign companies wanting some type of assistance to set up or increase their business volumes in Brazil,” said Tatiana Andrade, Partner of Kreston KBW Auditores. “This shows an excellent medium and long-term scenario. As an example, the search for new international clients in our office increased by around 40% compared to the same period of the previous year, a significant increase for our international area.”
Within Kreston KBW Auditores, Andrade has noticed that the services sector is the one with the most demand for consultancy skills, particularly technology and digital marketing.
Complexities of Brazilian tax reform
The Brazilian tax system has long been complicated and frustrating, and while reform has been promised, it is still a long way away. In 2023, the Brazilian Congress approved a major tax reform that had been held up for voting for many years. However, the approved proposal will take around 10 years to be fully implemented and divides opinion among tax experts as to how much benefit it will bring to businesses.
Andrade believes that when reform does come, it will not bring much in the way of simplification and that the increase in the tax burden will go from the current 20% to approximately 28%. But that is good news for the local office.
“We have been fielding a lot of enquiries, from national and especially international clients, who are very eager to see how much this will impact their operations,” said Andrade.
The international market is an important one for Kreston KBW Auditores, as this is where it can add the most value. International clients count on complete assistance from the opening of the company and the geographic location strategy, to assistance with tax planning. The founding partners have extensive experience in the national and international market and all came from auditing multinationals, including the Big Four.
Consulting services and ESG focus
With a new left-wing government in power that is keen to work with foreign investors, a maturing business environment and an aggressive push for corporate transparency to aid ESG reporting, Andrade is expecting 2024 to be a successful year.
“Our strategy is to grow by 20% in relation to revenue,” she said. “We have been strengthening our team with some major hires in 2023 and now we are feeling the effects of these new hires. An interesting moment for our office is the increase in demand for ESG, our partner in the sustainability area will have a great challenge ahead. We believe that the ESG area will grow by more than 100% compared to previous years.”
ESG is an important driver for Brazilian companies as they seek corporate transparency. It means skills such as auditing will become even more important, as auditors will be key to ensuring the quality of ESG information from audited companies to investors, stakeholders and regulators.
“In Brazil, companies listed on the stock exchange must disclose in their financial statements the effects of ESG on their operations,” said Andrade. “Although it is not mandatory for all Brazilian companies, many funds only invest in those who have a well-defined ESG policy, so companies, even if they are not obliged, have sought us out to help implement ESG in Brazil.”
Technology and R&D investment
Technology has had a huge impact on the way accountancy firms do business and the Brazilian office now sets aside a portion of revenue to be spent keeping abreast of new developments.
“A minimum of 3% of revenue must be for investment in technology and R&D,” said Andrade. “In previous years we have surpassed the 5% mark of our revenue, but I think that has had a direct result on our annual growth, which always exceeds two digits.”
As Brazil blossoms under a new government, there is no reason why new entrants to the market cannot ride this wave of optimism.
For more information on doing business in Brazil, click here.
News
ESG in Brazil: Carbon market to transfer pricing challenges
Discussions about ESG strategies have been becoming increasingly common on a global scale, with ESG in Brazil actively developing its own initiatives. A complex and strategic move that is shifting dynamics in the global economy, the culture of environmental, social, and corporate governance brings a myriad of issues that warrant careful analysis.
ESG in Brazil legislation
On the legislative front, the House of Representatives in Brazil passed PL 2148/15, which proposes the regulation of the carbon market in the country and the establishment of the Brazilian System of Greenhouse Gas Emissions Trading (SBCE), which sets emission caps and establishes a market for the sale of credits. For now, we are waiting for the proposal to undergo analysis and approval by the Senate.
Besides establishing unprecedented regulations in Brazil, initiatives like this significantly influence the national business environment, not only concerning domestic aspects.
Reporting ESG in Brazil
In this scenario, there is optimism for Brazil and for Latin America. According to information from the UNCTAD‘s World Investment Report 2023 – United Nations Conference on Trade and Development – foreign direct investments in Latin America and the Caribbean increased by 51%, reaching $208 billion in 2022. In Brazil, the increase was 70% ($86 billion).
According to the report, international investments in SDG sectors and activities – which relate to the Sustainable Development Goals established by the UN – also increased in 2022, resulting in the growth of projects in infrastructure, energy, water, sanitation, agricultural systems, health, and education.
The carbon offset market’s structure
Firstly, PL No. 2,148/2015 establishes a limit for greenhouse gas emissions within the corporate scope. Thus, it proposes that companies surpassing pollution levels must offset their emissions by buying credits, while those falling short of emission caps receive quotas that are tradable in the market.
The purpose is to create incentives in a way that can curb emissions and consequently the climate impacts caused by companies.
In a second stage, the regulated market of offset credits and generation of credits based on the level of greenhouse gas emissions, linked to the SBCE, comes into play. The proposal suggests a system in which Brazilian emission quotas (CBE) and certificates for verified emission reduction or removal (CRVE) can be traded.
Regarding regulation, studies already indicate that it could lead to positive economic shifts: according to research from Banco BV (BV Bank), the regulated carbon market could generate R$ 48 billion annually for the country.
Challenges
In addition to encouraging new practices in business operations, the implementation of a market guided by an ESG vision brings forth debates and initiatives in the tax aspect of organisations as well. In recent years, there has been discussion about the adoption of carbon taxes in Brazil and their potential consequences in terms of economic, financial, and social aspects.
However, a point that is not always recalled and brings with it particular challenges involves transfer pricing within the context of globalised markets or even in the transfer of goods and services between companies of the same group but headquartered in different countries.
On top of the requirement that the arbitrated price complies with RFB regulations in the case of Brazilian companies–responding to the pillars of corporate and tax governance–the new adoption of ESG indicators influences the macroeconomic dynamics between countries/multinationals themselves.
Therefore, the challenging aspects related to transfer pricing from an ESG perspective encompass everything from the costs of the value chain to a more detailed analysis of a company’s risks and its transfer assets concerning sustainable practices from an organisational standpoint.
Sustainable investments
Finally, in Brazil, the investment sector is one of the drivers of ESG practices in the market. Recent studies indicate, for example, that investors in Brazil also base their decisions on ESG disclosures from companies.
Thus, paying attention to the new economic paradigms that are moving towards sustainability has become imperative for companies, not just in terms of rhetoric, but especially to remain attractive and competitive in markets where sustainability is no longer a distant goal.
For more information on doing business in Brazil, click here.
News
Herbert M. Chain
Shareholder, Mayer Hoffman McCann P.C, Deputy Technical Director, Global Audit Group, Kreston Global
Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance. Herb is a member of MHM’s Attest Methodology Group and serves as Deputy Technical Direct of Kreston Global’s Global Audit Group.
Auditing standards: Unpacking SAS 143 and SAS 145 updates
March 12, 2024
In his comprehensive overview, Herbert M. Chain from MHM explores the recent updates to SAS 143 and SAS 145, which signify significant milestones in auditing standards. Read the full article here, or the summary below.
Overview of SAS 143 and SAS 145
The issuance of SAS No. 143, focusing on Auditing Accounting Estimates and Related Disclosures, and SAS No. 145, centered on Understanding the Entity and Its Environment and Assessing Risks of Material Misstatement, represents a significant advancement in auditing standards. These standards offer auditors extensive guidance for testing accounting estimates, particularly those involving fair value, and outline essential requirements for grasping the entity’s internal control system. This is crucial in navigating the complexities of the contemporary economic, technological, and regulatory accounting environment.
SAS 143: Auditing accounting estimates
Effective for audits of periods ending on or after Dec. 15, 2023, SAS 143 mandates a deeper examination of uncertainties in accounting estimates, focusing on potential management bias. This involves a thorough evaluation of assumptions, especially for significant judgments like fair value measurements. The standard necessitates a detailed risk assessment tailored for complexities in auditing accounting estimates, providing guidance on responsive audit procedures, including assessing the suitability of valuation models and data integrity for fair value estimates. SAS 143 aims to enhance transparency and accountability in fair value estimation, ultimately improving the quality and reliability of these estimates for increased stakeholder trust.
Key changes from SAS 143
Key changes to auditing standards in SAS 143 include a heightened emphasis on auditors addressing estimation uncertainty and exercising professional skepticism in evaluating fair value estimates. The standard mandates a more detailed risk assessment process tailored for complexities in auditing accounting estimates, particularly fair value estimates. Additionally, auditors must assess the reasonableness of accounting estimates within the financial reporting framework, ensuring compliance with permitted methods, assumptions, and data.
SAS 143impacts
SAS 143 brings substantial changes to the audit process in assessing fair value estimates. The focus now shifts to understanding factors and assumptions behind estimates, demanding greater transparency and accountability from management. Auditors, in response, perform the following procedures:
Method Assessment: Evaluate if the method aligns with the financial reporting framework and remains consistent. Changes prompt scrutiny for potential bias.
Significant Assumptions: Ensure suitability of assumptions within the financial reporting framework, considering both positive and negative outcomes. Evaluate consistency with prior periods and other business activities, considering potential bias.
Data Evaluation: Assess data reliability, understanding sources and consistency with prior periods. Verify relevance in the context of the chosen method and assumptions, addressing potential bias.
Management’s Point Estimate: Scrutinise alternative outcomes and assumptions when management opts for a precise value (point estimate), evaluating potential bias.
Enhancing controls with SAS 145
SAS 145, also effective for audits for periods ending on or after Dec. 15, 2023, revises aspects of the risk assessment process, focusing on an entity’s internal control system. Notably, it enhances auditor responsibilities related to evaluating the design and implementation of controls, including IT general controls (ITGC). The standard recognises the increasing significance of an entity’s IT environment, requiring auditors to identify and assess ITGCs, categorised into four domains:
Security and Access: Controls ensuring appropriate user access, segregation of duties, and ongoing authorisation for IT applications and cloud providers.
Systems Change: Controls over designing, testing, and migrating changes into a production environment, with segregation of access to prevent unauthorised changes.
System Development: Controls over initial IT application acquisition, development, or implementation, including data conversion and creation of new reports.
Computer Operations: Controls monitoring financial reporting program execution, ensuring backups, and enabling timely data recovery in case of outages or cyberattacks.
While not all domains may be applicable annually, SAS 145 mandates evaluating design and implementation for relevant ITGCs within the applicable domain for each identified significant IT application. The standard also introduced the concept of a continuum of inherent risk as well as other changes.
If you are interested in doing business with Kreston Global, contact us here.
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Ganesh Ramaswamy
Partner at Kreston Rangamani and Associates LLP, Global Tax Group Regional Director, Asia Pacific
Ganesh has extensive experience of more than 30 years in providing specialist tax services, particularly to large privately owned groups, with particular strengths in the property, retail, healthcare and hospitality industries. He has supported various entities with specialist advice on tax-effective structures and restructures, cross-border transactions on account of outbound and inbound India investments, mergers, acquisitions and divestments. Ganesh has also worked with stakeholders across businesses to deliver solutions such as tax due diligence, tax consolidation and restructuring of large family businesses in the Middle East, Asia, and Singapore.
Biodiversity standard of GRI gets an update
March 11, 2024
The Global Reporting Initiative (GRI) has published a biodiversity standard update which will help Corporates to provide information and analysis on the biodiversity impacts.
Overview of GRI’s biodiversity standard update
The standard GRI 101 – “Biodiversity 2024” has been updated to support Corporates around the world to disclose their significant impacts on biodiversity which comes out of their business operations and supply chain management.
GRI has agreed to support the use of the above standard over the next two years, with Corporates expected to mandatorily follow it from 2026. This revised standard builds on key global developments in the biodiversity field such as UNFCCC Kunming Montreal Global Biodiversity Framework, The Science Based Target Network (SBTN) and The Taskforce on Nature Related Financial Disclosures.
Key features and requirements of GRI 101
The updated GRI standard sets new rules for reporting through transparency on biodiversity impacts. The standard suggests location specific reporting, both within the organisations’ operations and its supply chain functions. This is aimed at enabling the stakeholders to correctly assess the organisation’s impact on biodiversity.
In detail, the biodiversity standard focuses on achieving the following objectives:
Covering the areas where significant impacts on biodiversity gets poorly reported especially in supply chain management.
Location specific reporting on impacts including all places where impacts are felt with detailed information of the place and site where the impact has been felt.
Disclosure norms on biodiversity loss covering the areas of land misuse, climate change, pollution and over exploitation.
Reporting the impacts on society including those on communities and indigenous people.
Corporate responsibilities in addressing biodiversity loss
The Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services has come out with an assessment report which sends a warning that 50% of the global economy is under threat due to biodiversity loss. The GRI update on Biodiversity standards has come up against this background.
Corporates need to take immediate steps to reverse the biodiversity loss, restore nature to its glory, respect the rights, roles and contributions to sustain biodiversity along the supply chain. When these actions of the Corporates are validated and communicated in the form of a report brought out by GRI, all the stakeholders in the system will definitely end up benefitting from this transparency.
For more information on Kreston Global’s sustainability hub, click here.
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Frank Sánchez Ruiz, CPA, CMA, CIA, CGFM, CGMA,
Managing Partner at Kreston PR
Investing in Puerto Rico: Low tax jurisdiction for investors
March 7, 2024
Investing in Puerto Rico has proven lucrative, experiencing an 11% growth in its economy since 2019, despite the challenges felt globally from COVID-19, a global recession and increasing supply chain challenges. So far in 2024, the International Monetary Fund records the island as having the highest GDP per capita in the Caribbean.
Puerto Rico (PR) can claim several advantages that can be attributed to this growth. It is a strategic Caribbean geographic location, offering political stability, modern infrastructure, and a highly skilled bilingual workforce (Official languages are Spanish and English). It is the main air and sea access hub in the Caribbean, with multiple flight options to and from the major cities of the United States, Latin America, and Europe.
Unincorporated United States territory
Secondly, Puerto Rico enjoys the United States constitutional, legal, financial, and regulatory protection, including among others, intellectual property, Homeland Security matters, and banking system. The U.S. dollar is also the official currency, and no passport is required for U.S. citizens.
Recent tax incentives
Thirdly, Puerto Rico enjoys fiscal autonomy and has a number of tax incentives to attract investment. Puerto Rico recently published legislation designed to boost remote PR workers. The governor, Pedro Pierluisi, signed the new act into law on January 17, 2024. This legislation builds on Act 52-2022, targeting the enhancement of the foreign private sector’s remote work force in PR.
Tax incentives for local and foreign companies and individuals
During 2019 PR enacted legislation to compile all previous PR tax exemption laws into Act 60, that has attracted foreign and local businesses, and non-resident high net worth individuals who relocate to PR, contributing to the overall economic health of the island. The benefits cover a number of industries attractive to investors, most notably:
Export of Goods and/ or Services–Act 60- 2019 (Formerly Act 20)–Available to businesses established in Puerto Rico that offer services or sell goods to customers or clients outside Puerto Rico.
Manufacturing, Research and Development – Act 60-2019 (Formerly Act 73) – Available for manufacturing, R&D and high-tech industries that invest in the island. Manufacturing, Research and Development – Act 60-2019 (Formerly Act 73) – Available for manufacturing, R&D and high-tech industries that invest in the island.
Creative Industries – Act 60-2019 (Formerly Act 27) – Available for entities engaged in film production, postproduction, and similar creative projects.
Green Energy – Act 60-2019 (Formerly Act 83-325) – Incentive is available for entities engaged in the production/sale of green energy, sale of equipment, assembly, or installation of green energy equipment.
Visiting Economy (Tourism – Formerly Act 74) – Available for businesses engaged in tourism activities.
Income Tax rate
Among its benefits, Act 60 grants a reduced income tax rate from 37.5% to 4% on eligible activities as well as 100% exemption on distributions from earnings and profits on those activities, designed to stimulate growth in key industries and attract investors to the country. The tax decree also provides exemptions on indirect taxes (municipal license, property taxes, excise tax, among others) that ranges from 50% to 100% of exemption, making investment even more appealing to local and foreign businesses.
Individual resident investor and other tax incentives
Non-resident high net worth individuals who relocate to Puerto Rico also benefit from additional tax grant benefits under Act 60. Also, there are other tax incentives for those engaged in providing highly skilled medical professional services (physicians), professional researchers or scientists, small and medium enterprises (PYMES), young entrepreneurs, public porters of air transportation, maritime transport services, infrastructure investment and agriculture.
Low tax jurisdiction
This legislative update is a key component of Puerto Rico’s strategy to stimulate economic growth, attract global talent, and encourage the development of a diverse and resilient economy, emphasising the significance of investing in Puerto Rico.
If you would like to speak to someone about doing business in Puerto Rico, please get in touch.
News
Pretino Albury
Partner at Kreston Bahamas
Pretino Albury, Partner at Kreston Bahamas, brings over a decade of expertise, serving clients in The Bahamas, Caribbean, and the USA. As a CPA, he specialises in management consulting, risk advisory, public accounting, and auditing across diverse industries.
Understanding BEPS implications with crypto-clients
Dealing with decentralised cryptocurrencies in the absence of global tax standards is challenging. With the worldwide rollout of the OECD’s BEPS framework, advisers and clients must collaborate to formulate an effective strategy. Robust policies aligning with international standards are essential to ensure compliance and minimise risks in cryptocurrency transactions. Below are critical considerations for crafting such policies.
Implementing robust policies
Understand BEPS implications for cryptocurrency transactions by familiarising yourself with OECD guidelines, particularly Actions 10, 13, 5, and 15. Consult with clients to gather information on their cryptocurrency business activities, transactions, and risk appetite. Conduct thorough risk assessments, addressing transfer pricing and cross-border transactions. Implement a transparent transfer pricing model and design policies to handle hybrid mismatches in cross-border cryptocurrency transactions. Establish a BEPS-compliant KYC process for crypto transactions, including identity verification, beneficial owner identification, risk assessments, and ongoing customer activity monitoring. Mandate proper disclosure, robust record-keeping, and precise procedures for identifying, reporting, and paying taxes on cryptocurrency-related income.
Risk mitigation strategies
Integrate risk mitigation into policies by developing strategies to identify and counter suspicious activity, protecting against fraud, theft, and regulatory sanctions. Include clear procedures for reporting suspicious activity, robust anti-money laundering programs, and legal expertise to prevent asset seizure. Implement cybersecurity measures to safeguard against cyberattacks and unauthorised access.
Educate client personnel comprehensively on the newly implemented cryptocurrency policies to ensure an understanding of requirements and risks. Provide training on the rationale behind each approach and their role in implementation and adherence.
Continuous compliance monitoring
Continuously check and review compliance by establishing a system to monitor adherence to the BEPS-compliant cryptocurrency policy. Stay updated on evolving regulations and tax laws, regularly reviewing and updating client policies to ensure ongoing compliance with changing rules and standards.
Tech-tools for efficient monitoring
Utilise tech tools for efficiently monitoring cryptocurrency transactions, employing advanced technologies and analytics to trace transaction history and identify potential risks like money laundering and tax evasion. These tools can detect anomalies, assign risk scores, and enable real-time monitoring for immediate identification and recording of suspicious activity. Additionally, technology aids in staying updated on evolving rules and regulations across jurisdictions, ensuring accurate and timely tax calculations, payments, and reporting through AI, blockchain, and cloud systems.
Collaboration with tax authorities
Maintain open communication and collaboration with tax authorities to align cryptocurrency policies with expectations, preventing unforeseen issues and demonstrating commitment to compliance.
Building BEPS-compliant cryptocurrency policies is an ongoing process, requiring continuous collaboration and adaptation to the evolving cryptocurrency landscape. Advisers must partner effectively with clients for the long term, implementing and maintaining robust policies. By following these steps, advisers can navigate the complexities of cryptocurrency taxation, minimize BEPS risk, and strengthen client relationships in a landscape with an estimated 420 million crypto users worldwide.
Experts in our ESG committee assess the development of ESG in North America, examining the effects of new legislation and how it is changing doing business in the region during the early months of 2024.
SEC proposed rule–The enhancement and standardisation of climate-related disclosures for investors
In March 2022, the SEC proposed rules to enhance and standardise climate-related disclosures for investors that would apply to all SEC registrants. Issuance of the final rule has been delayed multiple times due to the large amount of critical feedback received during the comment period, and is now expected by April, 2024.
Climate-related disclosure
Disclosures included in this new section on Form 10-K would address:
Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions (based on the Greenhouse Gas Protocol).
Climate-related risks and opportunities.
Climate risk management processes.
Climate targets and goals.
Governance and oversight of climate-related risks.
Footnotes to the audited Financial Statements
Disclosures in the in a footnote to the financial statement would provide financial statement metrics for climate-related events (e.g., severe weather) and transition activities (e.g., efforts to reduce GHG emissions). Such disclosures would also be subject to a registrant’s internal control over financial reporting (ICFR) and external audit.
SEC proposed rule–Human capital management disclosures
Included on the SEC’s Rule Agenda for October 2023 is a proposed rule to enhance registrant disclosure regarding human capital management and is expected to explain what information companies need to include in Form-10K when discussing topics such as safety and diversity.
SEC–Corporate Board diversity proposed rule
Included on the SEC’s Rule Agenda for April 2024 is a proposed rule to enhance registrant disclosure about the diversity of board members and nominees.
Proposed climate disclosure rule for federal contractors
Under the proposed rule by the Federal Acquisition Regulation, federal contractors would be required to disclose their greenhouse gas (“GHG”) emission levels and set science-based reduction targets. There is no set date for the final rule; it could potentially be late 2023 or early 2024.
Contractors receiving between $7.5MM and $50MM in federal contracts (significant contractors) will be required to disclose their Scope 1 and 2 GHG emissions. Compliance timeline for reporting is one year from the final rule effective date.
Contractors receiving more than $50MM in federal contracts (major contractors) will be required to disclose their Scope 1 and 2 emissions and “relevant” Scope 3 emissions. Compliance timeline for reporting Scope 1 and Scope 2 emissions is one year from the final rule effective date and for Scope 3 emissions, two years from the final rule effective date. Additionally, major contractors will be required to disclose its climate-related financial risk factors and to develop science-based emissions targets. Compliance timeline is two years from the final rule effective date.
California climate disclosure bills
California issued three pieces of legislation into law in October 2023 that imposes climate-related disclosure obligations on companies with certain ties to California.
Voluntary Carbon Market Disclosures Act (AB 1305)
AB 1305 is focused on voluntary carbons offsets (“VCOs”) and related net zero claims. AB 1305 applies to entities that operate and make emissions claims within California or buy/sell VCOs within California, regardless of size or revenues.
Companies making claims regarding net zero emissions or carbon neutral status will be required to disclose how it determined the accuracy of such claims.
Companies making emissions claims and buying or using VCOs will be required to disclose detailed information about the VCOs.
Companies marketing or selling VCOs will be required to disclose details regarding the carbon offset project.
The effective date of AB 1305 is January 1, 2024, with information updated at least annually.
Climate Corporate Data Accountability Act (SB 253)
SB 253 is focused on greenhouse gas (“GHG”) emissions reporting in compliance with the Greenhouse Gas Protocol (“GHG Protocol”). SB 253 applies to public and private U.S. companies with total annual revenue, regardless of where the revenue was generated (including revenue generated outside the United States) greater than $1 billion that “do business in California”.
Scope 1 and Scope 2 emissions
Companies will be required to publicly disclose its annual Scope 1 and Scope 2 GHG emissions in 2026 (on prior fiscal year information, i.e., 2025). Limited assurance is required initially, and reasonable assurance is required for 2029 information (filed in 2030).
Scope 3 emissions
Companies will be required to publicly disclose its annual Scope 3 GHG in 2027 (on prior fiscal year information, i.e., 2026).
Scope 3 emissions reporting will not be due until 180 days after Scope 1 and Scope 2 information is publicly disclosed. Limited assurance on Scope 3 emissions will be required beginning in 2030 (on 2029 information) but is subject to change pending further guidance.
SB 261 is focused on climate-related financial risk reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures. SB 261 applies to public and private U.S. companies with total annual revenue, regardless of where the revenue was generated (including revenue generated outside the United States) greater than $500 million that “do business in California”.
Companies meeting the reporting requirements of SB 261 are required to biennially prepare and publicly disclose a report detailing climate-related financial risks and measures adopted to mitigate climate-related financial risk.
There are no assurance requirements for SB 261. A company must make its report publicly available on its website by January 1, 2026, and biennially thereafter.
The practitioner’s guide to the OECD Multilateral Convention
January 18, 2024
Multinational firms leverage intangible assets in the rapidly changing digital landscape, posing challenges to outdated tax regulations. The OECD addresses this with a two-pillar solution, highlighting the crucial role of the Multilateral Convention in swiftly implementing the subject tax rule (STTR) to reshape global taxation for fairness and efficiency.
Challenges in international taxation amid digital transformation
In the digital transformation era, multinational enterprises (MNEs) exploit intangible assets like intellectual property and data to reap substantial profits across borders without a physical presence. Outdated international tax rules struggle to cope with this virtual reality, enabling MNEs to circumvent taxes through “nexus” and “profit allocation” tactics.
The OECD’s Two Pillar solution
The Organisation for Economic Cooperation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has devised a Two Pillar Solution to address this. This initiative aims to establish global consistency and transparency, ensuring MNEs pay a minimum level of tax on their global profits, regardless of where they are generated.
The first pillar involves the establishment of a global minimum tax, requiring legislative changes in jurisdictions with tax rates below the minimum. The second pillar, Subject to Tax Rule (STTR), closes loopholes in intragroup payments, preventing profit shifting to low-tax jurisdictions.
Catalyst for fair taxation and global consistency
In October 2023, the OECD introduced the Multilateral Convention, a crucial STTR implementation tool. This convention allows source jurisdictions to “tax back” certain intra-group payments, promoting fair taxation and protecting the tax base of developing countries.
The STTR’s swift implementation is facilitated by the Multilateral Convention, offering a streamlined process through simultaneous tax law modifications across multiple nations. This unified approach becomes effective from 1 January, 2025, benefiting companies with a fiscal year aligning with the calendar year.
While the speedy implementation of the STTR is a positive step, it has progressed ahead of other Pillar Two rules. The benefits of the Multilateral Convention include:
ensuring quick STTR implementation
levelling the playing field for developing countries
providing a fair framework for reclaiming taxing rights
In summary, the Multilateral Convention plays a crucial role in accelerating the implementation of STTR regulations, ensuring a fair and efficient global tax landscape for multinational enterprises.
Julius Cincala is a partner at Kreston Slovakia, leading risk advisory and management consulting practices.
Zuzana Siderova
Tax Manager, Tax Advisor and Transfer pricing specialist, Kreston Slovakia
Zuzana, a Slovak accounting specialist, manages tax advisory and compliance projects, has expertise in financial audits, corporate and personal taxation, international taxation, value-added taxation, and transfer pricing across diverse business domains.
EU Sustainability Regulations
January 12, 2024
Central Europe’s manufacturing sector is being reshaped by EU Sustainability regulations, impacting countries like Slovakia, Romania, and Hungary. The aftermath of the Ukraine war and Germany’s reevaluation of its reliance on China have disrupted supply chains, driving up power costs and prompting a shift towards cleaner energy sources.
EU sustainability regulations impact on Central European manufacturing
Central Europe has traditionally played a smaller role in global manufacturing figures than other European neighbours. However, since the outbreak of the Ukraine war and Germany’s pre-Covid reliance on China, broken supply chains have driven up power costs.
Higher prices and new carbon reduction regulations favourably reposition countries like Slovakia, Romania and Hungary who have some of the highest shares of electricity from clean sources well above the West European average.
As the European Union grapples with balancing new environmental standards and maintaining its competitive edge on the global market, ambitious countries like Slovakia are becoming test beds for the new sustainability-focused landscape. With the advent of carbon emissions reporting within the EU, will listed and large companies relocate in droves to save money and carbon?
Driving carbon emissions down and costs up
The EU’s commitment to environmental sustainability is not without its challenges. Činčala believes that it will be easier to relocate manufacturing outside of Europe, rather than deal with the complexity of carbon emission reporting, while the process is being established,
“Slovakia has always been an industrial country. However, the higher power costs have seen companies seek to relocate manufacturing operations to China. We see this with our clients now. They are freezing operations as transforming their business to meet carbon emissions far outweighs any cost saving or carbon saving they receive from being in Slovakia.
Tax on imports
Although alarming, Činčala has been advising the Slovak government on dealing with these challenges for over 25 years, so has a clear view on the options available to the EU.
“If we want higher investments in green energy and business transformation we have to invest more in education, people, and transformation models. Currently, products that are manufactured outside of the European Union are cheaper because they’re not subject to the same level of regulation and transformation costs we face in the EU. This is why we need to find a way to fortify ourselves and our market. For example, by introducing new tax regulations on products made in third countries and imported into the EU.”
Transfer pricing compliance
With some unrest in the region, Činčala’s colleague, tax expert Zuzana Sidorová, has advice for any businesses moving operations around Europe, specifically into Slovakia,
“In recent months, a number of companies have approached us to transfer their business from Ukraine territory to Slovakia or to another European country.”
In Slovakia, any company that does transactions within its group, either locally or across borders, must follow transfer pricing rules, in line with the OECD (Organization for Economic Co-operation and Development) guidelines.
Common Transfer Pricing challenges in Slovakia
In Slovakia, many international companies are considered “limited risk,” like manufacturers, distributors, or service providers. These companies often report losses despite having little decision-making power. Sidorová has clear advice for companies with limited risk businesses in satellite European countries;
“From a transfer pricing perspective, they shouldn’t be reporting losses. Tax authorities often investigate these loss-reporting, internationally-owned companies, leading to lengthy and difficult tax audits. These audits can result in extra corporate taxes and can be extended to cover multiple tax periods.”
Transfer Pricing benchmarks
Sidorová advises her clients making cross-border or local (Slovak) intra-group transactions needs to review and update its transfer pricing file on a yearly basis. The benchmarking analysis must be prepared every three years, with annual financial updates of comparables (compliance with OECD transfer pricing guidelines).
Staying competitive
As the EU intensifies its sustainability focus, companies in Slovakia must adapt quickly. Success hinges on embracing green technology and understanding local tax and transfer pricing rules. It’s essential for businesses to align their operations with EU environmental goals, not just to comply with regulations, but to stay competitive and sustainable in the long run. Keeping up to date with any rapid tax updates in response to competitive markets is vital to maintain the viability of companies based in Slovakia. This strategic alignment by Slovakian companies is not only crucial for their own sustainability but also serves as a model for the wider European Union, demonstrating how economic resilience and environmental responsibility can coexist and drive progress across the continent.
Sharon Omer-Kaye, a taxation specialist with 30+ years of experience, started her career at HMRC in 1989 and later transitioned to private practice in 1991. Armed with qualifications from the Chartered Institute of Taxation, Association of Taxation Technicians, and Society of Trusts & Estate, she excels in navigating tax complexities. Additionally, her affiliation with the Personal Finance Society/Chartered Insurance Institute highlights her expertise in personal finance and insurance.
Investing in the United Kingdom
Sharon Omer-Kaye, a partner at James Cowper Kreston, shares her insights on the challenges and opportunities for investing in the United Kingdom.
Investment landscape: a delicate balance
As economic uncertainties loom over the UK, the investment landscape has witnessed a delicate balance between risk appetite and caution among HNWIs. Sharon Omer-Kaye notes, “It’s a balance. People have a widespread investment appetite, and some are more comfortable taking a degree of risk.” While some investors seek perceived safer options, enticed by higher interest rates on cash returns reaching up to 6%, a more sophisticated perspective recognises elevated inflation’s impact on such returns’ attractiveness.
Government gilts, particularly appealing to those subject to higher tax rates, have emerged as a short-term strategic option, offering a potential compound return of over 8%. Meanwhile, investment managers appear to be tactically diverting funds towards commodities, such as gold and silver, to hedge against equity downturns amid market volatility.
In the equities space, the volatility in the FTSE is viewed as an opportunity for investments in undervalued UK companies. The property market undergoes a distinctive transformation, with a division in investor sentiment. While some divest from property portfolios anticipating a decline, others view the correction as an opportunity to acquire properties at discounted rates, especially in the residential market facing a correction in the imbalance between wages and property prices.
Restoring confidence and stability
Amid the challenging economic environment, the focus shifts to factors that HNWIs seek to restore confidence and stability. Omer-Kaye emphasises the importance of recognising the broader global challenges, extending beyond the UK. Political stability becomes a critical factor influencing market sentiment, with frequent changes in leadership creating market nervousness.
She notes, “Achieving political stability and clarity is essential to calming the markets.” Lack of clarity creates a void in decision-making and restoring confidence hinges on resolving uncertainty about the future landscape and regulatory framework.
Mitigating risks
In navigating risks associated with the UK’s economic challenges, HNWIs adopt strategic approaches, assessing the current climate for potential investment opportunities. Omer-Kaye highlights the importance of a holistic view, considering exposure to cash, various investments, and tax-efficient instruments.
The strategic examination of the tax landscape becomes a crucial avenue for risk mitigation. Leveraging tax wrappers such as ISAs, EIS, and VCT investments provides a framework for strategic tax planning, aligning with the UK’s favourable tax regime for investing in high-growth companies.
Uncertainty: challenges and opportunities
Addressing the question of whether uncertainty is chasing away investors, Omer-Kaye suggests that the situation is nuanced. While some individuals may find the risks unappealing, uncertainty can create opportunities for confident investors. Political uncertainty contributes to hesitation, but the speaker dismisses the idea of investors being chased away, emphasising a wait-and-see approach.
The fluidity of the situation is acknowledged, with high-net-worth individuals exploring options without an immediate exodus. Commitment to the UK is highlighted, focusing on planning to navigate potential changes rather than an immediate departure.
A cautious optimism
High-net-worth individuals are encouraged to approach change flexibly, recognising that economic, political, and personal landscapes constantly change. In the face of uncertainty, innovation and adaptability become the guiding principles for navigating the economic landscape, demonstrating high-net-worth individuals’ resilience and strategic acumen in challenging times.
Sharon states, ‘As doors close, others open, prompting a need for innovative thinking and adaptability.’
Investing in Romania is attracting budget-focused businesses eyeing expansion in Eastern Europe. Eduard Pavel from Kreston Romania sheds light on the current economic trends, investment climate, and the opportunities that Romania presents to the global business community.
2022 FDI Surge
In 2022, Romania witnessed a rise in foreign direct investment (FDI), marking a phase of steady economic growth. Despite this progress, Pavel points out a significant gap when compared to Germany’s FDI inflows. He states, “Romania did experience growth in 2022, but the amount is still significantly less than that of Germany.” This observation highlights Romania’s growing, yet comparatively modest, position in the European investment landscape.
A Cautious Perspective on Investment Trends
After a shift in investment patterns, Pavel provides a cautious assessment of the general trend towards diversifying supply chains, a direct pivot from China to Europe, specifically Romania, isn’t definitively established.
“We cannot confirm that [clients] have shifted away from China and towards European suppliers.”
The Role of Green Energy
Romania’s green energy initiatives, while not the primary attractor, are influencing business decisions. According to Pavel, these initiatives are a contributing factor, albeit not the main reason behind multinational corporations’ interest in Romania. “The country’s green initiatives do play a role in attracting businesses,” he notes, indicating that Romania’s environmental commitments are resonating with the global business ethos. “Despite the emphasis on green energy, there hasn’t been a significant increase in inquiries from multinationals looking to relocate or start businesses in Romania due to these initiatives.”
Digitalisation and automation
One of the most pronounced trends observed in the past year is the shift towards automation and digitalisation. Pavel attributes this change to the pandemic, which has altered business practices globally. “Clients are paying more attention to automation and digitalisation,” he remarks, highlighting a broader trend that is influencing business strategies in Romania and beyond.
Outlook for 2024
Looking ahead to 2024, Eduard Pavel offers practical advice for international businesses considering expansion into Romania. He emphasises the importance of understanding local market dynamics and the regulatory environment. “Make sure to research the market, understand the legislation, and pay attention even to the nuances,” Eduard advises, underlining the need for a well-informed approach. He also stresses the significance of building long-term relationships in Romania’s relationship-driven business culture.
Rezar Llukaçej, Founder and Managing Partner of Kreston Albania, boasts over 20 years of extensive experience in the financial services industry. Throughout his career, he has diligently cultivated a vision aimed at establishing a distinctive company within the market, fueled by a commitment to excellence and the inheritance of core values.
Investing in Albania
Investing in Albania is driving the transformation of the nation into a hub for foreign investments in the heart of the Balkans. Central to this shift is the strategic repositioning of Albanian resorts, like Ksamil, as cost-effective alternatives to well-known European destinations.
Rezar Llukaçej, managing partner at the Kreston Albania office in Tirana, provides a comprehensive local perspective on the evolving economic landscape, shedding light on the factors that are establishing the groundwork for Albania’s EU accession.
Regulatory advancements fueling growth
Albania’s investment appeal has been significantly bolstered by proactive regulatory developments in the past year, offering preferential changes to some sectors they are keen to see grow. Rezar Llukaçej stresses that these sectors have seen the adoption of special legislation aimed at encouraging strategic investments, crucial for the nation’s economic development, “Albania maintains a liberal foreign investment regime to attract Foreign Direct Investment (FDI). The FDI flow in 2022 exceeded EUR 1.37 billion, thanks to the government prioritising sectors like tourism, manufacturing, energy, agriculture, oil and mining, and ICT.”
Albania’s FDI safeguards
Llukaçej identifies the key to the success of these improvements has been special legislation aiming to encourage and incentivise strategic investments.
“It calls for important capital investments that are implemented in key economic sectors, strategic for the development of the country.”
“The Law on Foreign Investment provides comprehensive safeguards for foreign investors,” Llukaçej says. He explains that it permits 100% foreign ownership in most industries, with only minor restrictions in areas like air transport and television broadcasting. He further highlights the pivotal role of the Albanian Investment Development Agency (AIDA), which guides foreign investors through the application process and confers the status of strategic investment/investor.
Llukaçej highlights it is not all smooth sailing, but the Albanian government has not taken its eye off the ultimate goal,
“There is always a demand for improvement in the regulatory framework and the government is actively working in that direction of maximising the opportunities to attract investors in the country due to the twining transition impact in the economy and industrial transformation.”
Sector-specific trends: Energy, tourism, real estate, and construction opportunities
Llukaçej notes significant growth in energy and tourism, “Albania has worked on various energy projects to diversify and improve its energy infrastructure, developing the potential to improve its energy efficiency. There has been an increase in interest from investors regarding solar and wind projects, plus the development of hydropower projects, as Albania has significant hydroelectric potential. The country has also worked on interconnection projects with neighbouring countries to increase energy security.”
Tourism, has also seen remarkable development. “The Bank of Albania has even announced recently that in the first 6 months of 2023, the expenses of foreigners who travelled to Albania reached a total of EUR 1.55 billion. This is the highest figure recorded after the 1990s. Due to this interest from investors continues to be high, as the need for new accommodation structures will enable investors to explore new investments in this sector.”
Llukaçej paints a picture of a country on the cusp of a tourism boom. “The plan for large infrastructure projects is not just about enhancing tourist experience but also about consolidating growth in this sector,” he explains.
In parallel, the real estate and construction sectors are buzzing with potential. Llukaçej’s insights reveal a nuanced investment climate, particularly appealing due to Albania’s favorable legislation for property investment. “There’s an intriguing interplay between the opportunities for foreign investors in real estate, whether it’s through leasing agricultural land or the strategic purchase of commercial properties,” he notes. This sector’s growth is intricately linked to the burgeoning tourism industry, creating a symbiotic relationship between the two.
Business development support: Skills, SMEs, and digital transformation
Llukaçej also touches on the growing importance of business skills training and education. The demand for programs focusing on business management, corporate governance, and navigating the challenges of green and digital transformations points to a burgeoning market in educational services. “This is about preparing the workforce for the future, aligning skills with the evolving demands of our economy,” he asserts.
Support for small and medium-sized enterprises (SMEs) is another key focus. Llukaçej envisions a landscape where digital and social media platforms play a crucial role in promoting and inspiring SMEs. “There’s immense potential in empowering SMEs, driving innovation and growth through digital engagement,” he observes. This trend speaks to the broader digital transformation underway in Albania, emphasising the country’s commitment to embracing technology and innovation.
Looking forward, Llukaçej anticipates continued government engagement in enhancing the attractiveness for foreign investments. “There’s a marked focus on streamlining processes for investors, particularly in strategic sectors,” he notes. Digital transformation across various industries is a key trend, with companies increasingly adopting digital marketing, e-commerce, data analysis, and robotic process automation.
“Digital skills development is targeting not only the supply side, the ICT sector, but also the demand side, the different economic sectors, to tap into the opportunities of digitalisation.”
Unsurprisingly, the impact of ESG movement in Europe is profound, according to Llukaçej. “International organisations and businesses are integrating ESG standards into their development strategies,” he states. He emphasises the government’s commitment to green transition, digital transformation, and energy security as part of its broader economic strategy.
Llukaçej discusses the evolution in social corporate governance. With a global movement towards sustainable and ethical business practices, Albania is no exception. “We’re witnessing a shift towards a more competitive and resilient business environment,” he states. This trend indicates a growing demand for advisory services in corporate governance and ESG compliance, aligning Albania with international standards of business conduct.
With a smaller, more agile economy able to put digital, environmental and economic policies into practice more quickly, the IMF recently upgraded the 2023 economic growth forecast to 3.6%. A similar growth forecast for 2024, and an EU accession status that seems on track to happen at the beginning of the next decade, both suggest that the Albanian economy could deliver well on any investments.
Kreston Pedabo celebrates 25 years with rebranding
November 28, 2023
Congratulations to Kreston Pedabo in Nigeria, that recently celebrated its 25 anniversary with an Anniversary Symposium. The event was celebrated with clients and attended by Kreston Global Chief Executive, Liza Robbins, virtually. Kreston Pedabo marked its 25th anniversary in November 2023 with a strategic rebranding to expand its international services. Comprising 10 partners and 150 staff across three Nigerian locations, Kreston Pedabo specialises in audit, tax compliance, financial advisory, and more.
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Jenny Reed
Director of Quality and Professional Standards at Kreston Global
Jenny oversees the onboarding process of prospective member firms as well as the ongoing development of training and resources. She will be working with member firms to identify priority areas for professional development and training, as well as working with Kreston’s ESG Advisory Committee.
Herbert M. Chain
MBA, CPA (USA), Director, CBIZ Marks Paneth, and Shareholder, Mayer Hoffman McCann P.C.
Herbert Chain is a highly experienced author is a financial expert with 40 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance, and experience with SPACs.
Quality without borders: Quality management in a global network of firms
November 24, 2023
Quality management is crucial to maintain and enhance a global network’s reputation, protect the public interest, ensure client satisfaction, attract and retain top talent, and build a network’s competitive edge. It is also required by regulators and professional bodies.[1] Additionally, the International Standards on Quality Management (ISQM) provide a globally recognised framework for quality management in the accounting and auditing profession. Adhering to the ISQM requirements is essential for global networks to demonstrate the commitment of their member firms to delivering high-quality services.
For global networks, dispersed across countries and regions, and composed of independent firms, maintaining consistency and excellence presents unique challenges. A commitment to quality by global and firm leadership is essential to set the standard, demonstrate a tone at the top, and encourage (and require) appropriate behavior.
Critical elements of quality management
Culture, culture, culture
Leadership must emphasise the importance of quality at all levels of the network, develop a culture of quality, and communicate expectations for behavior. It must also encourage a culture of continuous improvement. This means creating an environment where staff feel comfortable identifying and reporting problems and where there is a process for addressing those problems.
It also requires those in authority within the firm to “walk the talk” (i.e., “tone from the top”) and not to ignore those who either believe themselves to be exempt from the standards that apply to others, or whose moral compass does not point to true north. Such inaction is very visible to staff and will undermine the effectiveness of a firm’s stated and/or documented policies and procedures, however good they may be.
2. Overcoming resistance to change
For most organisations, global or domestic, resistance to change can hinder the successful implementation of any initiative, including a quality management system. To overcome this, the organisation and its leadership must foster a change management culture by involving stakeholders at all levels and at all stages in the process, providing clear communication about the benefits of the new system(s), and demonstrating its positive impact on quality, firm success ad reputation, and client satisfaction.
3. Standardisation and harmonisation
One of the key factors in promoting effective quality management across a global network of independent firms is the establishment of standardisation and harmonisation protocols. Developing a set of standardised processes, methodologies, and best practices ensures uniformity in service delivery, documentation, and work performance. This can be achieved through the implementation of a global quality management system, which outlines the framework for quality objectives, procedures, and responsibilities. It should also encompass continuous improvement initiatives, regular performance reviews, and quality audits. While non-standardised methodologies and policies can still result in quality performance of services, standardisation permits effective resource sharing, scalability of operations, and consistent documentation frameworks.
In a diverse network of independent firms, there will always be aspects of quality management that need to be firm-specific for maximum effectiveness, but alignment of policies and procedures will often be beneficial and cost effective. The introduction of ISQM1 has helped accelerate this process for global firm networks.
4. Training and development
Investing in comprehensive training and development programs is vital to enhancing the capabilities and competencies of professionals within the network. Providing regular training sessions, workshops, and certifications not only strengthens technical skills but also cultivates a culture of continuous learning. Additionally, sharing knowledge and best practices among member firms through online platforms and collaborative forums fosters innovation and improvement across the network.
A focus on efficiency through these types of training and collaboration initiatives can also indirectly contribute towards audit quality. Streamlining processes and cutting out unnecessary work and/or documentation frees up staff to focus their time and effort on more important (i.e., riskier) matters.
5. Key Performance Indicators (KPI)
KPIs, sometimes known as Audit Quality Indicators (AQIs), play a vital role in measuring and monitoring quality across the network. It is important to define meaningful KPIs that align with the organisation’s overall objectives and values. These indicators should include both qualitative and quantitative metrics, such as client satisfaction ratings, adherence to industry standards, results of inspections or quality reviews, and employee training and development.
6. Client engagement and feedback
Quality management should extend beyond internal processes to include effective client engagement and feedback mechanisms. Regular communication channels should be established to capture client expectations, needs, and satisfaction levels. Implementing client feedback surveys, conducting post-engagement reviews, and actively seeking client input helps identify areas for improvement and enhances client relationships. This feedback loop is crucial for maintaining high-quality services and driving continuous improvement efforts.
7. Technology and automation
Leveraging technology and automation tools plays a vital role in streamlining processes, minimising errors, and maximising efficiency. Implementing next-generation accounting and auditing software systems (including artificial intelligence applications), data analytics tools, and workflow automation platforms can significantly improve the ability to analyze data, reduce work times, and enhance the quality of work performed. For example, dashboarding tools such as Caseware Sherlock can automatically measure and report on KPIs such as time to lock down the file, number of review points raised etc.
Regularly assessing and adopting emerging technologies ensures that the network remains at the forefront of industry advancements and accesses effective and efficient methodologies for performing engagements.
8. Monitoring and review
The network must have a system for monitoring and reviewing the quality of its work. This system should identify areas where improvement is needed and permit the network to take steps to address those areas.
Collaboration and peer review processes foster a culture of accountability and continuous improvement. These encourage cross-firm and cross-border collaboration, and allow firms to learn from one another, share best practices, and review each other’s work. Implementing robust peer review mechanisms helps identify areas for improvement, rectify errors, and ensure adherence to quality standards. The feedback received from these reviews should be used to refine processes, address gaps, and strengthen the overall quality management system.
Whilst the main objective of a global quality review program will always be to ensure that member firms can refer their clients to other member firms with confidence, the program should also aim to provide objective, constructive and friendly advice and recommendations to firms based on the reviewer’s own experience and best practices seen elsewhere within the network.
Constraints and overcoming the challenges
While pursuing quality management objectives, several constraints may arise. Identifying and overcoming these challenges is essential. Here are some common constraints and suggested approaches to overcome them:
Geographical and cultural diversity
The global nature of networks may introduce variations in language, cultural practices, and legal frameworks. Overcoming this constraint requires promoting cross-cultural understanding, establishing clear communication channels, and conducting regular cultural training sessions. Adaptation to local regulatory requirements while maintaining global quality standards is also crucial.
While a baseline framework is essential, it must be flexible enough to accommodate variations arising from local regulations, industry practices, and cultural norms. Encouraging local participation in the development of quality standards ensures that the quality management system is adaptable and relevant to different contexts.
Whilst challenging, diversity within the network can also have a positive benefit, providing firms with new perspectives and insights from those firms who take a different approach. Collaborating internationally can generate ideas and ways of thinking that can unlock innovative solutions to problems and challenges.
Resource allocation
Unequal distribution of resources and varying levels of expertise among member firms can hinder quality management efforts. Addressing this constraint involves developing resource-sharing mechanisms, fostering collaboration, and conducting knowledge transfers among firms, recognising that when accomplished, the network as a whole is stronger and all benefit. Centralised resource pools, mentorship programs, and secondment (i.e., outsourcing) opportunities can help balance expertise and optimise resource allocation.
Compliance and regulatory challenges
Different countries may have different compliance requirements and regulatory frameworks, making it challenging to maintain consistent quality practices. Overcoming this constraint necessitates establishing an understanding for such differences and incorporating them into the design of any quality management system. Standardising core compliance processes while allowing for necessary local adaptations ensures compliance while preserving quality standards.
With a global network also comes the requirements to monitor services provided to clients across the network to minimise the risks of breaches of the independence rules on financial interests, mutuality of interest, and scope of services. This has been a significant emphasis on the part of the largest global firms and their networks, especially as related to their public clients, but it also is important for mid-sise networks and even associations. These risks can be overcome by effective communications among network member firms, awareness of services being provided by member firms, and, as often practiced by the larger global networks, the designation of a lead client relationship partner for the client whose responsibilities include monitoring and improving services to be provided by the network before engagement. Firms have also made significant investments in technology to track global services being provided by member firms.
Technology maturity of firms
Unequal technological infrastructure and varying levels of technological maturity can impede effective quality management. Overcoming this constraint involves providing adequate technical support, training, and access to essential technologies, providing standardised tools and systems while allowing flexibility to accommodate local IT infrastructure and preferences. Encouraging knowledge-sharing among member firms regarding technology implementation and providing incentives for adopting new tools can drive technological advancement throughout the network.
Conclusion
Developing, implementing, and enforcing a quality management system for independent firms within a global network is a daunting, yet achievable, task. With the support of senior leadership and the board, and the support and will of the leadership of member firms, however, it is doable – and will maintain and enhance the network’s reputation, protect the public interest, ensure client satisfaction, attract and retain top talent, and build a competitive edge.
[1] Note the recent enforcement actions by the U.S. Public Company Accounting Oversight Board and Securities Exchange Commission, the UK’s Financial Reporting Council, and other regulatory bodies against public accounting firms relating to lapses in their engagement performance and firm-level quality management systems.
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Kreston NBB Saudi Group announces Kreston NBB Cluster Advisory
Saudi Arabian Kreston member firm, Kreston NBB Saudi Group, today announced the establishment of a new advisory organisation, Kreston NBB Cluster Advisory, to meet the growing need for advisory services to clients in the region.
Kreston NBB Cluster Advisory offers a wide range of management consulting services designed for a range of client types. These include corporate governance, risk and compliance services, corporate restructuring, financial advisory services, accounting services, internal audit, and forensic accounting services.
Founded by Kreston NBB Saudi Group Managing Partner Nefal Barrak, the new firm is branded as Kreston NBB Cluster Advisory to take advantage of the extensive global reach of the Kreston Global network. The advisory firm has an ambitious growth strategy and is focused on building a solid quality-led national, regional, and international offering, strengthened by extensive training expertise, to ensure clients can achieve maximum potential. Two of the firm’s partners, Nefal Barrak and Samer J. Yamin, are ex “Big 4“ corporate finance and deal advisory specialists, and are looking forward to working in an entrepreneurial environment with ambitious growing clients.
Nefal Barrak, Managing Partner at Kreston NBB Cluster Advisory, said:
“The establishment of our advisory practice is to meet increasing client demand for specialist consulting services which we are seeing in both Saudi Arabia and the Middle East as a whole. We know the international market is a key growth area here in Saudi Arabia, and Kreston’s Middle East region is highly active and well-connected. As a firm looking to build a strong sustainable future, being able to take advantage of the Kreston Global network is key thanks to its dynamic, ever-growing community of firms serving their clients with dedication and commitment. We are excited to be able to offer a truly multi-disciplinary service to local and international clients.“
“It is always exciting to see firms expand their portfolio and grow and I’m looking forward to watching Kreston NBB Cluster Advisory and their colleagues across the Middle East collaborate on national and international clients in the region.”
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Nefal Barrak
Managing Partner, Kreston NBB Saudi, Saudi Arabia
Nafal Barrak brings extensive experience in consulting, accounting, and management from his time at Deloitte and BDO Saudi Arabia, including Dr. Mohamed Al-Amri & Co. Currently, he holds the position of Managing Partner at Kreston NBB Saudi, where he has facilitated the establishment of a culture of innovation and collaboration, contributing to significant company growth.
Investing in Saudi Arabia: Vision 2030 a catalyst for change
October 20, 2023
Against the backdrop of fluctuating foreign direct investment (FDI), Saudi Arabia, with a formidable GDP of approximately $833 billion, is pioneering economic revitalisation through its ambitious Vision 2030 initiative. Smart businesses are moving quickly positioning themselves to ride the wave of regulatory changes as the Kingdom moves forward to rejuvenate FDI with Vision 2030.
We spoke to Nefal Barrak Beneyyah, Managing Partner at Kreston NBB Saudi about how the vision is affecting doing business and investing in Saudi Arabia.
Understanding the impact of vision 2030 on investing in Saudi Arabia
The Kingdom experienced a significant FDI drop in 2022, making the Vision 2030 initiative, launched by Crown Prince Mohammed Bin Salman in 2016, even more critical. With aspirations to attract over $100 billion annually in FDI by 2030, Saudi Arabia is diversifying investments across sectors, including chemicals, real estate, fossil fuels, automobiles, tourism, plastics, and machinery, drawing interest from countries like France, Japan, Kuwait, Malaysia, Singapore, the UAE, and the USA.
Nefal believes the use structural reforms have supported the rapid change, “Since the launch of Vision 2030, Saudi Arabia has succeeded in implementing many initiatives, for example, privatisation, to enable economic transformation in the Saudi market. Under Vision 2030, Saudi Arabia has taken impressive steps to improve the business environment, attract foreign investment and create private-sector employment and maximised its investment capabilities by participating in large international companies and emerging technologies from around the world. Interestingly, the number of small and medium enterprises (SMEs) registered in Saudi Arabia has also grown since the launch of Vision 2030.”
The Line: A futuristic investment opportunity in Saudi Arabia
As a pillar of Saudi Arabia’s Vision 2030, The Line is part of an ambitious strategy by Crown Prince Mohammad Bin Salman, reflecting the country’s aspiration to diversify away from oil dependency and reshape its economy. A selfdescribed “cognitive city” 170 kilometres long and only 200 metres wide, stretches from the mountains of NEOM to the Red Sea.
With an estimated investment of $500bn, The Line is part of the NEOM mega-development, which focuses on developing sectors such as energy, water, and advanced manufacturing, positioning itself as a global hub for trade and innovation. However, the project faces challenges in securing concrete investments and navigating the sociopolitical landscape, marked by controversies and the need for healthy relations with neighboring countries. The megacity’s progress, buoyed by the Crown Prince’s commitment, hinges on the realisation of FDI dreams, with the first phase of construction potentially completed by 2025.
Funding this ambitious venture is the Saudi Arabian Public Investment Fund (PIF) and a range of local and international investors. The PIF, bolstered by collaborations with Blackstone Group and SoftBank, is pivotal in supporting various sectors within NEOM, such as renewable energy, advanced manufacturing, and biotechnology. The city’s listing, set to follow Aramco’s IPO, aims to draw investments from diverse fields.
Boosting FDI with strategic investment initiatives in Saudi Arabia
To bolster FDI, Saudi Arabia launched the Special Economic Zone (SEZ) programme and established the Investment Law Business Regulations Zone (ILBZ) in Riyadh. These initiatives, coupled with far-reaching legal reforms, including the new Foreign Investment Law. Under the draft law in Saudi Arabia, foreign investors will experience neutral treatment, enjoying freedoms to manage and operate their projects, including property ownership, contract conclusion, company acquisitions, and funds transfer. Both local and foreign investors will adhere to identical sectoral requirements for licenses, registrations, and certain economic activities, supported by facilitated procedures from Saudi authorities. Violations of the law may result in SR500,000 fines, cancellation of registration or licenses, and revocation of investment facilities, while confiscation or expropriation of investments is restricted and subjected to fair compensation.
These changes are pivotal in fostering a conducive investment environment. The ILBZ, offering attractive incentives such as a 50-year tax exemption and 100% business ownership rights, and the SEZ’s focus on nonconventional sectors, are instrumental in attracting quality FDI.
Streamlining foreign investing in Saudi Arabia’s securities market
In a recent move, Saudi Arabia’s Capital Market Authority (CMA) announced new regulations for foreign investment in its securities market on 2 May 2023. This legislation governs qualified foreign investors’ (QFIs) operations in the Saudi capital market and consolidates measures into a comprehensive document, including provisions for QFIs, disclosure requirements, and continuous obligations. The amended legislation reduces differences between QFIs and other investors and simplifies QFI requirements, including allowing investments in main market securities through discretionary portfolio management.
Kreston NBB Saudi: Navigating the opportunities of investing in Saudi Arabia
Aligned with Saudi Arabia’s evolving economic landscape, Kreston NBB Saudi offers a diverse service portfolio, ensuring adaptability and readiness to navigate the complexities of Vision 2030 and the newly introduced market legislations. Nefal is clear the firm’s commitment to quality, governance standards, and high-quality training underscores its strategic alignment with the Kingdom’s ambitious economic goals,
“Initially, our priority will be to fully support major multinational and national companies, which have already gained a leading market share, by providing them with our quality services regionally and globally starting from Phase I “Selecting the proper legal status” to Phase III, especially in the fields of assurance, tax consultancy/ planning, advisory service, and value-added tax compliance services. We also seek to support local and multinational companies with promising growth opportunities so they could develop into new regional and global leaders.”
Saudi Arabia’s ascent in the World Bank’s Doing Business report and impressive GDP growth of 8.7% in 2022 highlight its promising economic trajectory. The Kingdom’s transparent regulatory framework, strategic initiatives like the SEZ programme and ILBZ, and continuous regulatory reforms, including the recent securities market legislation, are driving forces making Saudi Arabia a dominant and attractive investment destination in the MENA region.
As Saudi Arabia endeavors to realise Vision 2030 through leveraging strategic initiatives, regulatory reforms, and newly introduced securities market regulations. Nefal observes, “Saudi Arabia is a future forward economy, offering untapped potential and unique business opportunities to national and international businesses.”
Mohamed Mamdouh is Director at Ahmed Mamdouh & Co. Kreston Egypt. He is also a committee member of Kreston Global Middle East.
Investing in Egypt: IMF backing, BRICS and reform attract investors
In 2022, Egypt doubled its 2021 Foreign Direct Investment (FDI) figure, bolstered by an International Monetary Fund (IMF) loan and a slew of regulatory reforms. The loan, awarded on December 17 2022 by the IMF, is a 46-month arrangement under the Extended Fund Facility worth $3 billion for the nation, conditional on the Government of Egypt (GoE) implementing a range of structural reforms. We spoke to Mohamed Mamdouh in the region to find out more about doing business in Egypt.
Egypt’s resilience as a top destination for Foreign Direct Investment (FDI)
Egypt attracted over $11 billion of inward investment in 2022, according to a 2023 report by UNCTAD (United Nations Conference on Trade and Development) in addition to the IMF funding agreement. The IMF’s backing aims to encourage Egypt in adopting a flexible exchange rate, implementing the State Ownership Policy to encourage privatisation, and lifting import restrictions imposed in the spring of 2022.
In line with this, Egypt has enacted several regulatory reforms like the Investment Law (Law 72 of 2017), a “New Company” law and a Bankruptcy law in 2018, and a new Customs Law in 2020, to optimise its business climate. In August 2023, Egypt also announced it was due to join trade coalition, BRICS, to help shore up the IMF investment and attract more FDI.
Sustainable development and climate readiness in Egypt: A growing priority
Additionally, Egypt’s engagement in global climate negotiations has been underscored by its hosting of the United Nations Climate Change Conference (COP 27) in November 2022, signalling a growing awareness of sustainable development.
Egypt’s economy is undergoing substantial transformations, thanks in part to a raft of governmental reforms targeted at foreign investments and broader economic development. This has led to increased demand for specialised auditing and accounting services, a need that Kreston Egypt is wellplaced to meet.
“Egypt has taken several initiatives over the last year, particularly focused on adapting to changes in the external environment,” remarks Mohamed Mamdouh, an expert in the Egyptian accounting and auditing sector. Among these initiatives are efforts to encourage foreign direct investment and bringing previously closed firms onto the stock exchange. “This has allowed auditing firms like Kreston Egypt to play a pivotal role in enhancing financial transparency and performance,” Mohamed observes.
Adapting to the changing tax landscape in Egypt: Implications for investors
In addition to these economic shifts, accounting regulations for domestic businesses have been revised, affecting areas such as currency exchange treatment and insurance firm standards. According to Mohamed, “Our local expertise, bolstered by the Kreston Global network, positions us to offer a full suite of auditing, accounting, and advisory services.” The firm specialises in a range of areas, including financial statement auditing, tax planning, transfer pricing and M&A due diligence, giving the team a broad understanding of the impact the reforms are having on clients.
Diversified investment opportunities in Egypt’s growing sectors
Changes to Egypt’s taxation laws aim to align with international norms, including The Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Sharing (BEPS) guidelines. “New regulations have emerged, covering a broader definition of Permanent Establishment, the use of e-invoicing, and a unified tax rate for gains,” Mohamed advises.
Beyond traditional financial matters, the regulatory environment in Egypt is also adapting to include ESG factors. “We are seeing a greater focus on ESG within the regulatory framework, states Mamdouh. Artificial Intelligence and blockchain are other key areas witnessing regulatory development. “The country is developing a stance on Artificial Intelligence, anticipating its role in enhancing business efficiency,” says Mamdouh. Regarding cryptocurrency and blockchain, he notes, “While the rules are still in development, there’s a clear interest in these technologies, indicating future regulatory action.”
Investment landscape
Opportunities for investing in Egypt are aligning with its new policy directions, offering potential in sectors like financial services, renewable energy, and technology. Kreston Egypt is ready to assist companies in navigating this evolving environment. “As the economy and regulatory landscape change, we are committed to guiding our clients through these complexities, contributing to their long-term success,” Mamdouh concludes.
Egypt is laying significant foundations to attract FDI, for businesses contemplating entry into the Egyptian market in 2024, the dynamic regulatory transformations underscore the importance of securing knowledgeable local expertise for effective navigation and compliance.
Kreston Global has been doing business in the Middle East since the first member firm joined the network in Turkey in 1996. Since then, Kreston Global Middle East has been on a trajectory of expansion and innovation. Today, our network has over 800 expert staff stationed in 43 offices, across 12 countries.
This extensive reach in the Middle East makes Kreston Global positioned to offer a wealth of services tailored to the complex financial landscapes of the region. Our localised insights coupled with global best practices put Kreston Global in the top 10 largest accounting networks in the region.
In this issue of Doing Business in the Middle East, we explore how Egypt and Turkey are keeping up with the growth of oil-producing countries in the Middle East, and how Saudi, Qatar and the UAE are making material changes to visions for the future that reduce reliance on oil-based GDP.
Ravishanker Vengathattil is a seasoned tax expert currently serving as a Senior Manager at Kreston Menon in Dubai since February 2023. With over a decade of experience, he held managerial positions at BSR & Co. LLP in Bengaluru and was previously a Partner at K B Nambiar and Associates for nearly six years. His journey in finance started as an Articled Assistant with K. B. Nambiar and Associates and Tata AIG.
Transfer pricing in the UAE: Adapting to the new regulations
Alongside the landmark introduction of corporate tax in the UAE comes the implementation of new transfer pricing rules. These aim to prevent taxpayers from distorting or reducing a business’s profits to avoid tax by placing certain requirements on the transactions made between related parties, or payments made to connected persons.
Arm’s length pricing
Broadly speaking, this includes payments to directors, shareholders, owners, key management, and other group companies with common shareholding or control. The UAE transfer pricing rules dictate that any such transaction or payment needs to be made at ‘arm’s length’ or ‘open market’ value. Companies that enter into these transactions must maintain adequate documentation and submit a transfer pricing disclosure form at year-end, alongside their corporate tax return.
We spoke to Ravishanker Vengathattil, Senior Manager of Audit and Taxation at Kreston Menon, to find out more about the rules and how they are affecting businesses in the UAE.
“This is a major change in the economy,” says Ravishanker. “In an emerging tax environment, transfer pricing comes with its own challenges – especially in a place where there was previously no tax at all.” The compliance requirements themselves are relatively straightforward, he adds, and may even feel fairly simplistic for multinational companies that already have a mechanism for handling transfer pricing in place. But for businesses based in the UAE, Ravishanker foresees some challenges as they move into a more formally structured business environment.
“We speak to a lot of businesses whose general practices have been quite informal. For instance, sharing of resources is a common practice among group companies. This arrangement sometimes does not get as much attention or formal documentation as would be required going forward.”
Under the new rules, those businesses must treat each company and each owner as a separate entity – a shift from the current paradigm in the UAE, especially for businesses where audits were not mandated. For example, the VAT regime, which was introduced in 2018, allows for companies to be treated as a single group when filing VAT returns if they have a common shareholder, which is different from the tax grouping mechanism prescribed under corporate tax. Now, businesses must formally recognise the distinctions between different entities and keep proper records regarding any transactions between them.
In terms of corporate tax as a whole, Ravishanker suggests there are two main areas that UAE businesses should focus on: transfer pricing and documentation.
Compliance ahead of the new financial period
The corporate tax rules, including transfer pricing, apply to financial years starting on or after 1 June 2023. Companies that are not compliant with the rules risk incurring the following general penalties, amongst other specific penalties:
• AED 10,000 (AED 20,000 in each case of repeated violations within 24 months) for each record-keeping violation and other information specified in the law.
• Penalty of 14% per year, levied monthly in case of a tax pending settlement.
• Loss of 0% tax incentive for a free zone company – this applies not only within the tax year that the company is non-compliant, but for five years altogether.
Over the past six months, Ravishanker has been working with UAE companies to understand the corporate tax rules and identify questions or challenges early on. Where problems arise that are not clearly communicated in the legislation, he encourages clients to use the process of private clarification to present their case to the Federal Tax Authority.
“There’s no need for us to make interpretations or take extreme tax positions when this option is available,” he explains. “It takes time, but when large amounts are at stake, I don’t think we should leave room for any sort of risk.”
The type of support that businesses need to comply with the new rules depends on their size and location. Larger multinationals, which often have in-house teams, need to adapt their existing transfer pricing mechanisms to comply with the UAE rules. UAE-based businesses, meanwhile, essentially need to start from scratch.
“Right now for the larger UAE businesses, what we are trying to do is get the structure in place so that they can hire the right people, establish the right policies, and get documentation, including transfer-pricing agreements, set out. Once the team is trained, the annual compliance will follow.
Most smaller and medium businesses are looking for a retainer, or maybe quarterly consultancy, to review their transactions regularly. They may not see merit in having an in-house team, and sometimes it’s not warranted.”
Businesses can also benefit from using the right accounting software to collect and process large amounts of data required for transfer pricing analysis. There is even potential for AI to play a role in analysing that data, with solutions in this area developing rapidly.
Corporate structure considerations
As we heard in our previous interview with Jadd Shalak at Averyx group, many companies are also reconsidering their structure to reduce their tax and administrative burden as a result of the changes.
“The talk about restructuring is very valid, especially from a transfer pricing perspective,” says Ravishanker. “As I mentioned, a lot of the businesses in UAE are structured very informally. They have one shareholder who holds multiple companies; it’s not a holding-and-subsidiary relationship. Under the corporate tax regime, businesses consisting of multiple companies are subject to separate transfer pricing evaluations for every transaction between those entities.
They also need to maintain separate records and filing. As a result, many businesses are considering establishing a holding company and subsidiary structure, consolidating the entities and effectively removing the need for transfer pricing analysis for transactions within the group.
Each business will need to consider this decision carefully. One major downside of forming a single tax group is that the corporate tax threshold (currently AED 375,000) would apply to the entire group’s profits, rather than to each company individually. On the other hand, it allows for much simpler management and fewer administrative requirements.
Challenges and evolving rules
As a new law, transfer pricing presents some specific practical challenges to UAE businesses and tax agents. One of those, Ravishanker notes, is the availability of comparable data:
“To compare with my previous experience in India, I always had a database available for comparability. If I was doing a transfer pricing study for, let’s say, an automobile manufacturer, I was able to get very relevant and comparable data from the largest automobile manufacturers in India, because there were service providers who had collated the database. In UAE, or GCC in general, we do not have that yet. Right now, we would have to leverage the data that is available for similar companies in the Asia Pacific, Europe and other parts of the world.”
The Law has not restricted the use of global databases, he explains, but neither has it prescribed it. The OECD also allows for this practice where region-specific comparable data is not available. So far, the UAE has also not prescribed the specific criteria to arrive at an acceptable arm’s length range, such as using the interquartile range or other percentiles.
Similarly, the question of whether companies can use multi-year data or single-year data in transfer pricing studies remains unanswered. In general, though, the UAE government has indicated that companies can follow OECD principles.
Apart from these questions about the specifics of the rules, there are a few areas that differ from the way transfer pricing rules apply in other countries. For instance, while many jurisdictions exclude tax-neutral companies (i.e. where the same tax applies to each) from transfer pricing, this is not the case in the UAE.
There is also no internal threshold on transaction amounts that transfer pricing rules apply to. The only exemption given to smaller businesses is a reduced requirement for documentation, as those with a turnover under AED 200 million and who are not part of a Multinational Enterprise group (a group whose consolidated turnover exceeds AED 3.15 billion) do not have to maintain a master file and local file.
Aside from this, transfer pricing rules and basic documentation requirements apply to small and large businesses alike – but it remains to be seen how this might change in the future.
“Over the past ten months, a lot of things have changed. It’s an evolving law, so there may be more changes going forward,” says Ravishanker. “As it stands now, the rules apply to all businesses. Accordingly, it is important that small businesses, who may not have adequate in-house resources, avail timely assistance to ensure compliance.”
Time is of the essence
The implications of new transfer pricing regulations are far-reaching and complex, adding layers of compliance and record-keeping to an economy previously unburdened by taxation. For UAE-based businesses, this is a significant departure from their existing working practices, and they’ll need to remain vigilant and adaptable as the law develops. Multinational corporations with experience in dealing with transfer pricing will also have to recalibrate their existing systems to align with the new norms.
With the financial year starting in January 2024 on the horizon, the clock is ticking. Companies must act now to mitigate risks and fully comply with the new transfer pricing regulations to avoid costly penalties and secure their position in the UAE’s rapidly evolving economic landscape.
Sudhir Kumar, with over 30 years of business acumen in the domains of Management and Consulting in the UAE market is the primary resource behind the successful positioning of Kreston Menon as one of the leading Superbrand in the region. He works closely with all the market segments including Government, Corporate Sector, Free Zones as well as Financial Institutions. He spearheads the CSR initiatives of the organization along with his branding and corporate communication responsibilities.
Investing in the Middle East: Economic outlook for 2023/4
October 19, 2023
The Middle East economy is still attracting inward investment in 2023, despite a slowing global economy. The IMF and World bank are predicting GDP growth in the Middle East and North Africa (MENA) in 2023 to land somewhere between 2.4% and 3.1%.
Oil dependency and market dynamics
While oil and gas remain crucial for the Middle East’s economic landscape, especially for the Gulf Cooperation Council (GCC) states, there is a clear and evidenced interest in reducing this dependency by diversifying into other sectors to build more resilient, stable, and sustainable economies. Many regions have developed an ambitious tourism strategy, particularly Oman and United Arab Emirates (UAE), with Saudi Arabia’s flagship tourism investment opportunity NEOM picking up pace and The Line, Saudi’s planned 170km, $500 billion new city, due to be complete in 2039.
Diversification for economic stability
Oil and gas remain pivotal when investing in the Middle East. The EIU (Economist Intelligence Unit) notes that GCC states will particularly benefit from strong global demand and high prices for energy exports. The organisation expected oil prices to remain above $90 per barrel until at least mid-2023, echoing the International Monetary Fund’s (IMF) warning about rising oil prices due to global turbulence. (OPEC+) countries are unlikely to increase production despite pressure from the U.S. and Europe, focusing instead on price levels.
Inflation is another key concern, particularly for troubled states like Lebanon, Syria, Yemen, Iran, as well as Egypt and Turkey. According to the EIU, these countries are bracing for another year of double-digit annual consumer price inflation, with hyperinflation in Lebanon and Syria. This dovetails with the IMF’s report, highlighting inflation rates in some Middle Eastern countries.
Both the EIU and the IMF highlight the increasing focus of major Middle Eastern countries like Saudi Arabia, the UAE, and Iran on Asia for trade and investment. The EIU expects this “look East” policy to continue in 2023.
Promising tourism developments
Tourism is showing signs of recovery across the region, with the EIU anticipating international arrivals returning to pre-COVID levels by the end of 2023. This is due in part to major events like the FIFA World Cup in Qatar and efforts to promote tourism across Middle Eastern countries.
Business conditions in the GCC states are expected to be the most favourable in the region, per the EIU. These countries will see high oil and gas revenues spilling over into nonenergy sectors, helped by state-backed investments in diversification.
Challenges and opportunities investing in the Middle East
Both the World Bank and the EIU emphasise downside risks, including global shocks that could affect economic growth, stability, and social cohesion. Upside risks are limited and mostly hinge on external factors like a quick resolution of the war in Europe or stronger demand from China.
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