EURO Currency

36
EURO CURRENCY

description

A Complete Presentation on EURO.

Transcript of EURO Currency

Page 1: EURO Currency

EURO CURRENCY

Page 2: EURO Currency

PRESENTATED BY :

SOUMITA PATRA 67DIPTAKSHYA BANARJREE 76AVIJIT BHATTACHARYYA 91SOUMALYA SEN 120SREEJI S NAIR 100

Page 3: EURO Currency

INTRODUCTION

Euro is the official currency of the European Union.

Eleven member states have adopted it collectively known as Eurozone.(Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, etc.)

Taking official estimates of 2007 GDP, the Eurozone is the 2nd largest economy in the world.

The euro was introduced to world financial markets as an currency in 1999 and launched coin and Banknote on 1st, January 2002.

All nations that have joined the EU since the 1993 implementation of the Maastricht Treaty

The euro sign (€) is the currency sign used for the euro the official currency of the European Union(EU).

The design was presented to the public by the European Commission on 12th December , 1996.

The international three-letter code (according to ISO standard ISO 4217) for the euro is EUR

Page 4: EURO Currency

MAASTRICHT TREATY

Also known as Treaty on European union

Signed on 7 February 1992 between members of European community

Led to the creation of EURO.

Page 5: EURO Currency

EUROPEAN MONETARY UNION

EMU is the agreement among the participating member states of the European Union to adopt a single currency and monetary system.

Eleven countries have been selected as the members of EMU. As part of the EMU, these eleven countries now make up the world's second-largest economy, after the United States

Greece and Sweden, failed to meet the convergence requirements in time to join the EMU in the first round. Sweden failed to satisfy two of the conditions:

laws governing Sweden's central bank were not compatible with the Maastricht Treaty and the currency exchange rates in Sweden were not sufficiently stable for the previous two years. Greece failed to meet all of the requirements

Page 6: EURO Currency

EUROPEAN MONETARY INSTITUTE:

The European Monetary Institute (EMI) was the forerunner of the European Central Bank(ECB).

It encouraged cooperation between the national banks of the member states of the EU

Further budget constraints are required in countries ( Italy and Belgium) meet the requirements of the pact.

 

Page 7: EURO Currency

CONVERGENCE CRITERIA

Price stability: Inflation rate should not exceed 1.5% that of three best performing member state.

Annual government deficit: the ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3%

Government debt: the ratio of gross government debt to GDP must not exceed 60% at the end of the preceding financial year.

Long-term interest rates. In practice, the nominal long-term interest rate must not exceed by more than 2 percentage points that of, at most, the three best-performing Member States

Page 8: EURO Currency

SWITCH TO THE EURO AT VARYING SPEEDS

Banking for individuals will probably switch to Euros at a last stage • Done largely in local currency up to final changeover• Corporate banking may well start using earlier

Adoption of Euro in corporate sector• Plan of large companies to adopt euro as company currency• Expected their customers and suppliers to use Euros in transactions• Internationally oriented medium sized companies will probably also turn

quickly to new currency in many of their functions• Smaller domestically oriented companies, self employed and households

will keep more or less to national currency until euro coins or notes and coins are introduced

Page 9: EURO Currency

Public sector in Germany brings up rear

•German public sector didn’t planned to switch to euro until end of 2001•Possible to make non cash payments in Euro ex. tax

•Companies were particularly concerned to pay income and corporation tax returns in DEM until 2001

•Preferred to use Euro right earlier

Shortening of cash changeover phase in Germany•In order to minimize the burden on the retail sector

•Banks and retailers continue to give out DEM coin they receive as can be used for any vending machine

Page 10: EURO Currency

THE LEGAL FRAMEWORK FOR THE CURRENCY CHANGEOVER Based on two regulations First regulation

•Based on article 235 of the EC treaty took effect on June 20th ,1997 applied to all EU countries

•The existing contracts will remain in force with all rights and obligations provided no other agreement has been made after the advent of new currency

•Neither investors nor debtors holding long term contracts will enjoy advantage or suffer disadvantage through changeover of currency

Page 11: EURO Currency

Second regulation

•Based on article 109 of the treaty-on the introduction of the euro was passed during the May 1998

•Established principle that who wants to use the euro can but no one can be forced to

•Determines the legal status of euro vs. the national currencies

•Euro EG opened company,stock exchange,accounting&currency law to the Euro

•Paved way for changeover on the financial markets & exchangesthat lead companies to adjust their accounts,equity capital structures

Page 12: EURO Currency

THE EUROPEAN CENTRAL BANK

EUROPEAN ECONOMIC AND MONETARY UNION (EMU):

EMU consists three stages

1ST Stage(1 July 1990 to 31 December 1993):The Treaty of Maastricht in 1992 establishes the completion of the EMU as a formal objective and sets a number of economic convergence criteria, concerning the inflation rate, public finances, interest rates and exchange rate stability. The treaty enters into force on the 1 November 1993.2nd stage(1 January 1994 to 31 December 1998):The European Monetary Institute is established as the forerunner of the European Central Bank

Page 13: EURO Currency

On 16 December 1995, details such as the name of the new currency (the euro) as well as the duration of the transition periods are decided.

New exchange rate mechanism (ERM II) is set up to provide stability between the euro and the national currencies of countries that haven't yet entered the eurozone

The 11 initial countries that will participate in the third stage from 1 january 1999 are selected.

On 1 June 1998, the European Central Bank (ECB) is created

3rd Stage(1 January 1999 and continuing) From the start of 1999, the euro is now a real currency, and a

single monetary policy is introduced under the authority of the ECB.

Page 14: EURO Currency
Page 15: EURO Currency

ECB FUNCTIONING MECHANISM

ECB working procedures are segregated into three parts:

1. GOVERNMENTAL 2. EXECUTIVE SECTION 3. GENERAL BODY

Page 16: EURO Currency

FUNCTIONS OF EUROPEAN CENTRAL BANK (ECB)

To maintain Price stability Implement the Monetary policy Issuance of euro banknotes

ECB’S MINIMUM RESERVE SYSTEMThe main features of the minimum reserve system, which was

specified in November 1998 are: The reserve base will comprise bank deposits, debt

securities issued and money market paper. Repos, deposits and debt securities with a maturity of more than two years will not be subject to minimum reserve requirements.

The reserve ratios will be in the range of between 1.5% and 2.5%.

Page 17: EURO Currency

REASON BEHIND MINIMUM RESERVE The ECB expects a stabilization of money market rates,

with the help of reserves Minimum reserve are seen as a means to create a structural

liquidity shortage thus strengthening the role of the ECB as a supplier of liquidity.

Minimum reserves are intended to improve the control of monetary expansion by increasing the interest-rate elasticity of money demand.

THE DISTRIBUTION OF ECB PROFIT 80% profit distributed to the participating central bank 20% allocated to the ECB’s reserves.

Page 18: EURO Currency

IMPLICATION OF FINANCIAL MARKETS

Consequences for the bond markets

• Outstanding bonds denominated in currencies of participating countries, in ECU.• Bonds issued by governments, banks, company and other issuers.• It will be equivalent to 50% of the dollar bond market and 130% of yen bond market• Scope for financing and investment provide new opportunities for market participants• The three largest country make up more than three-quarters of the aggregate bond market• Growth of overall market being neglected as the countries continue to consolidate the government finances.

Page 19: EURO Currency

Yields not uniform• Highly liquid segment maintained by a single borrower compared to the U.S bill market• Yields determined by monetary and fiscal policy• The development of economy and international capital flows due to inflation expectations• Yields differential between sovereign issuers will small• Countries were expected to revalue were rewarded with lower yields• EMU having no currency risk and credit standing will be the main risk factor• Individual countries have no longer control on their own money supply

Page 20: EURO Currency

Benchmark bonds• Highly liquid at the lowest possible yields• Appropriate yield premium• Existence of highly developed future market• Issue of trading bonds and coupons separately• Pre-announcement of issues in a regular calendar and low tax rates

New issuers and market segments• Debt Issuance by states government• Public Sector issuers• Supranational institutions and foreign issuers• Sovereign borrowers from emerging economies

Corporate bonds• France is only which has corporate bonds• There is no difficulties for European investors • Increased Demand from Institutional investors

Page 21: EURO Currency

Currency changeover in the bond markets• ECU claims and liabilities will be converted to euros at the rate of 1 ECU= 1 euro

New reference interest rates• EURIBOR is replaced by FIBOR, PIBOR and EONIA• ECB calculates overnight rate(EONIA) charged by references bank

Consequences for the equity markets• Second largest equity market all over the world• Japan is leading country• Pronounced differences in accounting, legal and tax regulation

A “big bang” in asset allocation• Households, institutional investors and public institutions have already begun to change• Rising of capital and increase in occupational pension funds

Page 22: EURO Currency

The changeover in the equity markets• Share capital and the par value of share redenominated in euros• Public company’s should have share capital of at least 50000 euros• Convert par value share into euros

Consequences for the futures and options markets• Existing will modernized and new ones will be launched• Products become more standardized and transparent• Liquid and trading volume increase and costs will fall• Electronic trading is the another benchmark

Competition between the financial centers • “Home” currency will disappear and national regulatory system come under pressure• London Stock Exchange and Deutsche Borse AG announced an alliance which will allow customers to trade on both exchanges

Page 23: EURO Currency

OPPORTUNITIES OF MONETARY UNION

Broader Investment & Financing Opportunities Greater Role in International Currency System Doesn’t Affect Purchasing Power No Bail-Out of Member States Boost Growth & Employment in the Long Term Easier Travel & Money Transfer in EU Companies to Benefit in Multiple Ways Political Stability

Page 24: EURO Currency

EURO’S INTERNATIONAL ROLE

No Hedging Costs within EU Euro v/s USD Investment & Reserve Currency

Page 25: EURO Currency

ONE EUROPE ONE TAX

FORMATION OF A COMMON TAX BASE IN THE EUROPEAN UNION

Page 26: EURO Currency

HARMONISATION CORPORATE INCOME TAX IN THE EU

The European Commission’s plan to submit the proposal is the outcome of a working program launched in 2004 and which represents the conclusions drawn from the findings of an extensive study published in 2001.

The European Commission has launched several platforms for comprehensive harmonization solutions starting from 1962 till date.

The Commission’s certain moves are described in the following reports: Neumark Report (1962) Programme for harmonization of Direct taxes(1967) Van den Tempel Report (1972) Proposal for a Directive to harmonize Corporation Tax (1975) Ruding Report (1992) Bolkestein Report (2001)

Page 27: EURO Currency

PROBLEMS IN TAXATION

Different Measures of Tax Burden  Macro-economic parameters vs. company specific

data  Actual parameters vs. Notional parameters

High Compliance Cost Economic Distortion Political Issues 

Page 28: EURO Currency

ROADS TO REFORM

Evaluations of any proposal on the harmonization of corporate income tax or its assessment base will differ depending on the objectives of taxation reform and on what it is supposed to deliver.

  The objective of tax neutrality i.e., efficient and incentive-neutral taxation,

is a general requirement of any regime. Investment decisions should not be distorted. And it is equally important to avoid double taxation or no taxation of incomes.

Indirectly linked to this is the aim to ideally simple and transparent taxation. This should involve the minimum possible compliance costs for companies and the minimum possible administrative costs for the tax authorities. Moreover, in order to determine the basis of taxation for the Member States involved, intra-group transactions within the corporate groups have to be simulated by means of transfer pricing systems.

It is also necessary to secure to the states, appropriate share of the tax base and guarantee them tax revenues. For each State uses the part of its tax receipts to provide public goods that companies also use.

Page 29: EURO Currency

THEORETICAL SOLUTION TO THE PROBLEM ?

Source Principle: When a State levies taxes only on income obtained within its jurisdiction, it is the Source Principle

  Residence Principle: When a State taxes the worldwide income of a

taxpayer resident within its jurisdiction, we use the term Residence Principle.

  Consistent implementation of the residence principle combined with the

imputation of subsidiaries’ income to the parent company would theoretically be a possible alternative to CCCTB.This option would retain the separate calculation of profits , and differences in the tax rates would not give rise to distortions in Investment decisions.

 

Page 30: EURO Currency

COMMON CONSOLIDATED CORPORATE TAX BASE (CCCTB)

THE COMMON CONSOLIDATED CORPORATE TAX BASE ( CCCTB)

  Basic Concept: It is a proposal comprises creation of

a uniform EU-wide tax base permitting the consolidation of profits and losses. So far the European Commission envisages offering companies the CCCTB as an additional option, enabling them to choose between the previous national system and the new regime. The total profit calculated this way would then have to be allocated by means of an apportionment system.(i.e., with reference to certain key variables)to the Member States were the corporation is active.

Page 31: EURO Currency

STARTING EFFECTS OF CCCTB 

1.The European Commission plans to submit a proposal by the end of 2008 on harmonizing the corporate income tax base. Helps the multi jurisdictional corporations as they can apply it as an alternative Taxpaying scheme.

  2. The Companies could potentially cut their tax compliance ( as per certain accepted

standards) cost.

  3. CCCTB involves a considerable curtailment of the Member States Tax autonomy

(independence).

- This requires unanimity among the member states 4. The CCCTB concept is not a self-contained approach; rather, it allows various

methodological designs.

  5. The CCCTB requires an allocation mechanism with which to ‘share out’ an

enterprise’s consolidated tax base among Member States.

  6. An apportionment formula involves incentive effects for both companies and

Member States.  7. It safeguards the principles of taxation at source.

Page 32: EURO Currency

ALLOCATION MECHANISM: THE MOST TRICKIEST PORTION

The European Union wants to fairly divide the tax base among the Member States.

It is necessary to apportion the tax base because companies operating under a CCCTB regime combine the profits of all their subsidiaries. Since this will enable full offsetting of profits and losses, all else being equal, overall tax revenues are likely to fall.

VARIOUS ALLOCATION APPROACHES:

1. Benefit Factor Formula- Profits should be allocated to relative use of public services provided by the State

2. Factor Location Formula- Apportionment of Profits should be based on the where Physical Factors of Production are located.

3. Source of Profits Formula- Apportion Profits based on where the economic activities has taken place.

Page 33: EURO Currency

MACRO- VERUS- MICRO FACTORS

MACRO FACTORS- CONSUMPTION & GROSS DOMESTIC PRODUCT

MICRO FACTORS- CAPITAL, PAYROLL & TURNOVER/ SALES

Both alternatives have their advantages and drawbacks. The European Commission gives preference to an apportionment formula based on MICRO-FACTORS following the UNITED STATES & CANADA as the role models for the Tax System.

Page 34: EURO Currency

LIMITATIONS OF CCCTB

High Administrative costs for the Participating Countries- Have to administer two system in tandem.

Third Country regulations impose heavier administrative burden- Parallel Use of Different System

No incentive-neutral taxation

Tax Competition intensifies

Real impact on tax revenues are in vague

Restriction on the Member States’ Autonomy

Page 35: EURO Currency

CONCLUSION :

The concept for a CCCTB is a good idea, provided the Member States are prepared to accept the loss of their autonomy.

The main problem is with the international taxation i.e. the equitable sharing of tax revenues among the Member States.

Achieving a consensus between 27 Member Countries for the common tax base will be difficult

Tax legislation is subject to constant changes and developments. Ideas for new products and innovative technologies creates a need to adjust taxation systems.

Last but not the least, it is to be seen that how corporate income tax is integrated into Income tax in general

Page 36: EURO Currency

THANK YOU