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#CMU - Three years after the launch of the Capital Markets Union progress made - but a long way to go

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The Association for Financial Markets in Europe (AFME), in collaboration with nine international organizations and trade associations representing global and European capital markets stakeholders, has today (24 September) published a new report tracking the progress to date of the European Commission’s flagship Capital Markets Union (CMU) project through seven Key Performance Indicators (KPIs).

The report was authored by AFME with the support of the Climate Bonds Initiative (CBI), as well as European trade associations representing: business angels (BAE, EBAN), fund and asset management (EFAMA), crowdfunding (ECN), retail and institutional investors (European Investors), stock exchanges (FESE), venture capital and private equity (Invest Europe), and pension funds (Pensions Europe).

The report entitled, ‘Capital Markets Union Key Performance Indicators: Measuring progress and planning for success', is the first publication in what will be an annual series which will regularly review developments in the CMU project and identify what further work needs to be done. The report is also the first country-by-country comparison of individual EU member state progress against the CMU’s objectives.

AFME Chief Executive Simon Lewis said: “Three years on from the launch of the Capital Markets Union Action Plan, and with the end of the Juncker Commission approaching, this report provides a timely opportunity to review the progress that has been made to date on achieving the CMU’s vital aims. Our findings show that the CMU will be a long-term project; it is not about hitting targets in the short-term but about ensuring that this important project is fit for purpose. With a myriad of challenges currently facing Europe’s capital markets, we must not lose sight of the importance of an effective CMU for the future of Europe.”

The seven KPIs assess progress in the following CMU policy priority areas:

  1. Market Finance indicator: how easy it is for companies to enter & raise capital on public markets;
  2. Household market investment indicator: to what extent retail investment is being fostered;
  3. Loan transfer indicator: to what extent banking capacity is supporting the wider economy;
  4. Sustainable Finance indicator: to what extent long-term investments in infrastructure and sustainable investment are being made;
  5. Pre-IPO Risk Capital indicator: how well start-ups and non-listed companies are able to access finance for innovation;
  6. Cross-border finance indicator: to what extent cross-border investment is being facilitated;
  7. Market depth indicator: measuring the depth of EU capital markets.

 Among the report’s key findings:

  • Europe continues to over rely on bank lending

European companies continue to over rely on bank lending, with 86% of their new funding in 2017 coming from banks and only 14% from capital markets.

  • The availability of pools of capital in Europe has shown encouraging improvements in most EU countries in recent years

The amount of household savings invested in capital markets instruments (i.e. equity shares, investment fund shares, bonds, insurance and pensions) has increased from 108% of GDP in 2012 to 118.2% of GDP in 2017. However, Europe still lags behind US on investing savings in capital markets. The average EU household accumulates savings at around twice the rate as the US, but the stock of household savings held in capital markets instruments represent 1.18 times the annual income (as measured by GDP), compared with 2.9 times the annual GDP in the United States.

  • Europe is a global leader in sustainable finance

Over 2% of Europe’s bonds (government, municipal, agency, corporate, securitizations, and covered bonds) issued in 2017 were labelled sustainable, up from 0% just five years ago and compared with less than 1% in the US in 2017.

  • There is more risk capital available for European SMEs to finance their growth

The annual amount of pre-IPO risk capital investments into SMEs by venture capital and private equity funds, business angels and through equity crowdfunding has increased in Europe from €10.6bn in 2013 to €22.7bn in 2017. However, risk capital investments remain low relative to GDP and there is still a significant gap compared with the US (€132.4bn in 2017, or 0.8% of GDP vs 0.15% of GDP in the EU).

  • European capital markets are showing an encouraging trend towards greater integration

since the aftermath of the financial crisis after the repatriation of some market activities and funding to home countries. Our indicators show growing intra-EU activity between EU Member States in private equity, M&A transactions, debt issuance, and cross-border holdings of portfolio assets. However, intra-EU integration remains below pre-crisis levels suggesting there is more progress is needed towards a fully integrated capital market.

  • Fewer loans are being converted into capital markets instruments

Recent years have shown a decline in the transformation of loans into tradeable securities like covered bonds, securitisation, or loan portfolio transactions. Issuance of securitised products in Europe remains subdued, although 2018 year-to-date placed issuance volumes are encouraging.

  • Market depth in Central and Eastern European (CEE) has improved slightly

Central and Eastern European (CEE) capital markets are converging with those of the rest of Europe, but at a slow pace.

EU-28 Country performance

A comparison of the 28 EU member states and their individual performance against each indicator was conducted. Among the key findings:

  • The UK and Ireland lead the EU countries in terms of providing new funding for non-financial corporations (NFCs) with over 25% of total new funding raised from markets. Meanwhile, Slovenia, Slovakia, Malta, Cyprus, and Bulgaria had no NFC bond or equity issuance in 2017.
  • Denmark has improved the most among all EU countries in the last five years in terms of the accumulation of household savings in capital markets instruments, due to greater pension coverage and higher savings rates.
  • Germany, Luxembourg and Austria meanwhile have comparably higher savings rates than the rest of the EU, but households invest savings in conservative non-capital markets instruments such as cash and bank deposits.
  • Spain, Italy, Ireland, Greece, and Portugal (high-NPL countries) are in the top seven EU nations in the loan transfer index in 2017, suggesting an encouraging trend towards using market instruments to dispose distressed assets.
  • The Netherlands, France and Sweden are the leading EU nations in sustainable finance with over 3% of bonds issued in 2017 classified as sustainable. Lithuania had the highest indicator value in 2017 of almost 10%, but this reflects a single bond.
  • Estonia, Denmark and the UK lead by availability of risk capital for SMEs. Estonia has a prominent amount of business angel investment, while Denmark and the UK have more diversified sources of risk capital from private equity and venture capital.
  • Luxembourg, the UK, and Belgium rank as the most interconnected capital markets with the rest of the EU. Luxembourg’s lead is due to its fund and bond issues held within the EU, and a prominent share of their total private equity activity invested in companies in other EU countries.
  • The UK and Luxembourg are the most globally interconnected European capital markets. The UK has a particularly prominent role in intermediating global flows of FX and derivatives trading, cross-border holdings of equity shares, and facilitating public equity raising by non-EU companies.
  • The Czech Republic is the deepest capital market in CEE. In 2017, the Czech Republic was the second-most active primary market for equity and bonds in CEE after Poland; it had the highest recovery rate for business insolvency; and was among the top 3 CEE countries with the largest accumulation of savings in market instruments (as % GDP).

Corporate tax rules

Big-tech companies to be given historical changes to their international tax agreements

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Recently, some of the richest landmarks and countries of the world, have come to an agreement concerning the closing of international tax loopholes that have been endorsed by the biggest multinational corporations. Some of these tech companies have the largest share prices within the stock market, such as Apple, Amazon, Google and so on.

While tech taxation has long been an issue that international governments have had to agree on between themselves, betting too shares similar problems, especially due to its increase in popularity and allowed legalisation globally. Here we have provided a comparison of new betting sites which follow through on the correct taxation laws and legalities necessary for international usage.

During the G7 summit- which our last reports spoke about the topic of Brexit and trade deals, representatives of the United States, France, Germany, United Kingdom, Canada, Italy and Japan, came to a unified agreement to support the global corporation tax rates of at least 15%. It was in agreement that this should happen as these corporations should pay taxes where their businesses are in operation, and to the land they operate in. Tax evasion has long been propagated using initiatives and loopholes found by corporation entities, this unanimous decision will put a stop to hold tech companies responsible.

This decision is believed to be years in the making, and the G7 summits have long wanted to reach an agreement to make history and reform the global taxation system for the rising innovation and digital age that is on the horizon. Making companies like Apple, Amazon and Google take accountability, will keep taxation in check for what is estimated to be the surge of their developments and involvement overseas. Rishi Sunak, the United Kingdom’s Chancellor of the Exchequer, has mentioned that we are in the economic crisis of the pandemic, companies need to hold their weight and contribute to the reformation of the global economy. Reformed taxation is a step forward in achieving that. Global tech companies such as Amazon and Apple have massively increased in shareholder prices for each quarter after the major drop last year, making tech one of the most sustainable sectors to obtain taxes from. Of course, not all would agree on such comments, being that taxation loopholes have long been a thing and issue of the past.

The deal agreed upon will put massive pressure on other countries during the G20 meeting that is to occur in July. Having a base of agreement from the parties of G7 makes it very likely that other countries will come to an agreement, with nations such as Australia, Brazil, China, Mexico etc. who are to be in attendance. Lower tax haven countries like Ireland will expect lower rates with a minimum of 12.5% where others may be higher depending. It was expected that the 15 percent tax rate would be higher at the level of at least 21%, and countries who agree with this believe that a base level of 15% should be set with possibilities of more ambitious rates depending on destination and region that multinational companies operate and pay taxes from.

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Corporate tax rules

Big countries' tax deal to reveal rift in Europe

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European Competition Commissioner Margrethe Vestager wearing a protective mask leaves the EU Commission headquarters in Brussels, Belgium July 15, 2020. REUTERS/Francois Lenoir/File Photo

A global deal on corporate tax looks set to bring to a climax a deep-seated European Union battle, pitting large members Germany, France and Italy against Ireland, Luxembourg and the Netherlands. Read more.

Although the smaller EU partners at the centre of a years-long struggle over their favourable tax regimes, welcomed the Group of Seven deal on June 5. for a minimum corporate rate of at least 15%, some critics predict trouble implementing it.

The European Commission, the EU's executive, has long struggled to get agreement within the bloc on a common approach to taxation, a freedom which has been jealously guarded by all its 27 members, both large and small.

"The traditional EU tax holdouts are trying to keep the framework as flexible as possible so that they can continue to do business more or less as usual," Rebecca Christie of Brussels-based think tank Bruegel said.

Paschal Donohoe, Ireland's finance minister and president of the Eurogroup of his euro zone peers, gave the G7 wealthy countries' deal, which needs to be approved by a much wider group, a lukewarm welcome.

"Any agreement will have to meet the needs of small and large countries," he said on Twitter, pointing to the "139 countries" needed for a wider international accord.

And Hans Vijlbrief, deputy finance minister in the Netherlands, said on Twitter that his country supported the G7 plans and had already taken steps to stop tax avoidance.

Although EU officials have privately criticised countries such as Ireland or Cyprus, tackling them in public is politically charged and the bloc's blacklist of 'uncooperative' tax centres, due to its criteria, makes no mention of EU havens.

These have flourished by offering companies lower rates through so-called letter-box centres, where they can book profits without having a significant presence.

"European tax havens have no interest in giving in," Sven Giegold, a Green-party member of the European Parliament lobbying for fairer rules, said of the prospects for change.

Nevertheless, Luxembourg's finance minister Pierre Gramegna welcomed the G7 accord, adding that he would contribute to a wider discussion for a detailed international agreement.

Although Ireland, Luxembourg and the Netherlands welcomed the long-fought for reform, Cyprus had a more guarded response.

"The small EU member states' should be acknowledged and taken into consideration," Cyprus's Finance Minister Constantinos Petrides told Reuters.

And even G7 member France may find it hard to completely adjust to the new international rules.

"Big countries like France and Italy also have tax strategies they are determined to keep," Christie said.

The Tax Justice Network ranks the Netherlands, Luxembourg, Ireland and Cyprus among the most prominent global havens, but also includes France, Spain and Germany on its list.

Europe's divisions flared up in 2015 after documents dubbed the 'LuxLeaks' showed how Luxembourg helped companies channel profits while paying little or no tax.

That prompted a clampdown by Margrethe Vestager, the EU's powerful antitrust chief, who employed rules that prevent illegal state support for companies, arguing that such tax deals amounted to unfair subsidies.

Vestager has opened investigations into Finnish paper packaging company Huhtamaki for back taxes to Luxembourg and investigating the Dutch tax treatment of InterIKEA and Nike.

The Netherlands and Luxembourg have denied the arrangements breach EU rules.

But she has had setbacks such as last year when the General Court threw out her order for iPhone maker Apple (AAPL.O) to pay €13 billion ($16bn) in Irish back taxes, a ruling which is now being appealed.

Vestager's order for Starbucks to pay millions in Dutch back taxes was also rejected.

Despite these defeats, judges have agreed with her approach.

"Fair taxation is a top priority for the EU," a spokesperson for the European Commission said: "We remain committed to ensuring that all businesses ... pay their fair share of tax."

The Netherlands in particular has underscored a willingness to change after criticism of its role as a conduit for multinationals to move profits from one subsidiary to another while paying no or low taxes.

It introduced a rule in January taxing royalties and interest payments sent by Dutch companies to jurisdictions where the corporate tax rate is less than 9%.

"The demand for fairness has grown," said Paul Tang, a Dutch member of the European Parliament. "And now it is combined with a need to finance investment."

($1 = €0.8214)

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Economy

Global Europe: €79.5 billion to support development

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The EU is set to invest €79.5 billion on development and international cooperation in neighbouring countries and further afield by 2027, Society.

As part of its 2021-2027 budget, the European Union is overhauling how it invests outside the bloc. Following a landmark deal with EU countries in December 2020, MEPs will vote during June's plenary session in Strasbourg on establishing the €79.5bn Global Europe fund, which merges several existing EU instruments, including the European Development Fund. This streamlining will allow the EU to more effectively uphold and promote its values and interests worldwide and respond more swiftly to emerging global challenges.

The instrument will finance the EU's foreign policy priorities in the coming seven years and support sustainable development in EU neighbourhood countries, as well as in sub-Saharan Africa, Asia, the Americas, the Pacific and the Caribbean. Global Europe will support projects that contribute to addressing issues such as poverty eradication and migration and promote EU values such as human rights and democracy.

The programme will also support global multilateral efforts and ensure the EU is able to live up to its commitments in the world, including the Sustainable Development Goals and the Paris climate accord. Thirty percent of the programme’s overall funding will contribute to achieving climate objectives.

At least €19.3bn is earmarked for EU neighbourhood countries with €29.2bn set to be invested in sub-Saharan Africa. Global Europe funding will also be set aside for rapid response action including crisis management and conflict prevention. The EU will boost its support to sustainable investment worldwide under the European Fund for Sustainable Development Plus, which will leverage private capital to complement direct development assistance.

In negotiations with the Council, Parliament ensured MEPs’ increased involvement in strategic decisions regarding the programme. Once approved, the regulation on Global Europe will retroactively apply from 1 January 2021.

Global Europe is one of 15 EU flagship programmes supported by the Parliament in the negotiations on the EU's budget for 2021-2027 and the EU recovery instrument, which collectively will allow the Union to provide more than €1.8 trillion in funding over the coming years.

Global Europe 

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