Reducing income tax

I BELIEVE that the path to economic recovery in Europe and for the rest of the world will be a very long journey this time.

It needs all sorts of new ideas to test and try, as old ideas used previously to boost the economy may not work this time, as you still hear some countries considering another round of quantitative easing and financial bailouts.

Perhaps certain administrative policies of these countries may have to be tweaked but they have not done so.

One aspect that I wish to discuss here is the taxation policy, which Malaysia can reap benefits from and put itself on a level playing field with Singapore and Hong Kong.

The taxation policy of a government can impact the level of disposable income of households (i.e. after-tax income).

A tax increase will reduce household income, as it takes more money out of household.

A tax decrease, on the contrary, will increase disposable income, because it leaves households with more money.

Disposable income is the main factor driving consumer demand and thereafter, pull a sluggish economy out of recession.

Despite this knowledge, some countries in Europe had begun raising tax rates, especially on value added tax/sales tax on products and services.

Recently, I read that France is planning to increase the top tax rate for individual income tax to 75%. That is to say, the more you earn there, the less money you can take home after paying your taxes.

Individuals are also consumers. As consumers have less money to spend (since most of the money is used to pay tax), they are likely to cut down on spending.

As a result of “careful” consumer spending, businesses (which are also paying taxes) will derive lesser income and thereafter, pay lesser tax.

This is because the income that is subject to tax is less, therefore, the tax amount will also be less.

So, instead of the intended effect of higher tax revenue from tax hikes, the tax revenue will go down instead.

So, what is the solution?

The answer – major reduction of individual income tax rates.

Let people pay less tax and have higher take-home pay (after tax) and encourage them to spend more.

In the case of Malaysia, a major reduction in individual income tax rates should slow down the effect of brain-drain of our talented individuals to overseas countries and help the country to retain the “tax base” or “tax-paying individuals”.

KEVIN TEO Singapore

Related post:

Time to reform Malaysia's tax system?

Time to reform Malaysia's tax system?

Comprehensive review timely as Malaysia is driving its transformation programme

RECENT developments in parts of Europe have sparked a debate in the eurozone on austerity and growth. Those who argue for austerity or “fiscal prudence” claim that debt management is key to restoring investor confidence and, therefore, long-term prosperity.

Borrowing more is not an acceptable response to a crisis caused by over-borrowing and over-spending. In contrast, those who prefer greater stimulus claim that, without further investment, growth will simply not return, and without some Government stimulus, no economy can pull itself out of recession to achieve long-term stability and growth.

Whilst there is no clear “right” answer, there is one aspect of Government policy that is absolutely central to this taxation. Governments must ensure a balanced system of taxation that provides the right incentives to business and citizens, while enabling the Government to meet its debt and spending obligations. Getting this balance right can drive increased confidence among the investor community and stimulate economic activity, international competitiveness and long-term growth.

A new approach

In the past, many countries have relied on the support of international bodies and other inter-governmental assistance to begin the process of tax reform in respect of designing the tax system itself and in improving the ability to collect taxes. In the post “credit-crunch” world, it has become apparent that the operational ability to increase tax revenues is somewhat limited. A new hands-on approach is required to assist the public sector, generating increased tax revenues and driving corporate activity without raising taxes or damaging international competitiveness.

Malaysia has never had a comprehensive review of its tax system

 

Like any business, a Government has costs and it has revenues. A framework is required to help Governments optimise their tax revenue and balancing this need with the creation of the right incentives for citizens and businesses to stimulate the economy. To achieve this, our experience in working with Governments is typically structured around three core work streams:

● Tax reform design - Modeling the economy and designing a new system of taxation appropriate for the jurisdiction, with the emphasis on simplicity, fairness, participation and economic stimulus;

● Tax compliance - Building the taxpayer base to ensure all taxpayers have paid the correct amount of tax under the law and will continue to do so and;

● Tax operational improvements - underpinning both streams, identifying and delivering detailed operational improvements, ensuring transparency of data and processes within the tax administration, across Government departments and with taxpayers.

Malaysia has never had a comprehensive review of its tax system. The setting up of a Tax Review Panel a few years ago basically focussed on the proposed Goods & Services Tax and has done some good work in this area but the focus on income taxes was limited and too restrictive. A comprehensive review is now timely given that Malaysia is aggressively driving its transformation programme towards achieving developed nation status by 2020.

Tax reform design

A tax system is at its best when it is at its simplest, levying the minimal number of taxes, thus making compliance easy for taxpayers and the tax authorities. Headline rates should be minimised, often in exchange for the removal of reliefs or deductions. In addition, it is essential to improve the quality of the taxpayer base. Finally, international trends are to shift the burden of taxation towards indirect taxes to ensure participation in the tax system, improve the reliability of collections and increase fairness.

An effective communications strategy is critical to the success of any tax reform project. To succeed, these projects require a proactive approach to ensure that stakeholders are aware of their progress.

Tax reform projects should have four key phases:

Understand - Work closely with the Government and external bodies to gather and verify data. Quickly establish a detailed understanding of the current tax system and understand the issues from a number of different perspectives. At the same time, model the economy and current tax collections, benchmarking them against other jurisdictions.

Model - Develop an outline model for the proposed tax system, meeting regularly with stakeholders to develop and test ideas and model alternative taxation methods. Produce a detailed proposal for the new tax system, including clear legislative and operational proposals, for political approval.

Implement - Bring the approved model to life. This can include taking a lead drafting new legislation and guidance. A highly operational approach, working to ensure systems, processes and controls are best-in-class and fit-for-purpose is essential at this stage.

Roll-out - Roll out the new system to the various groups of taxpayers and stakeholders and train the Tax Administration teams, including training on tax technical and operational / systems issues.

Tax compliance

In many developing economies, the incidence of tax evasion is certainly not small. Broadening the taxpayer base and ensuring current taxpayers are paying the correct amount of tax under the law helps keep taxes low. Economic and forensic analysis must be applied to identify areas of the economy requiring particular attention. A range of techniques is typically required to provide a complete picture of the tax-paying community.

To deliver real change for the tax administration, forming a single team to identify taxpayers, initiating assessments, managing taxpayer responses and building IT databases is key. Enhancements to processes and systems also drive improved service levels to taxpayers (whether this be speed or quality), which is vital to gain support for the tax system and for improving participation.

Tax operational improvements

Real operational improvements are essential to the successful delivery of any tax reform project. This may include improvements to existing IT systems to automate processes and controls and improve the way data is managed. This applies both to the tax administration's systems and the way it interacts with other Government departments. For example, the tax administration should automatically be informed whenever a new business registers with the Companies Commission.

On a practical basis, it is essential to ensure new tax documents and forms are produced where required, both in paper and electronic form. It makes sense to consider these as part of a wider programme of improving taxpayer interaction, for example, with the implementation of a new website or the ability to file tax returns online. Key to the success of any new document is simplicity both for the tax administration to review and process and for the taxpayer to understand.

Conclusion

The post credit-crunch world has generated a renewed focus on how a Government raises its revenue the right balance of fiscal prudence and stimulus is difficult to achieve. However, with a clear view on what taxes are levied, who pays them and how they are administrated, jurisdictions can drive real improvements in tax collections, real efficiency gains and, in doing so, drive the participation of the taxpaying community. This, in turn, can provide assurance for the investor community, enable the Government to meet its obligations and drive long-term growth for the wider economy, its businesses and citizens.

It is timely that Malaysia announces a comprehensive fiscal reform which is wide-based and wide-ranging and puts into place a long-term plan to mould a world class tax system that will be comparable to the leading developed nations in the world. It is time to let go of the ad-hoc approach of tinkering with the tax system let us get on with it!

By Dr Veerinderjeet Singh and Andrew Burman

● Dr Veerinderjeet is chairman of Taxand Malaysia and Andrew Burman is senior director at Alvarez and Marsal Taxand in the United Kingdom. Both entities are part of the Taxand Global Organisation. They can be contacted at vs@taxand.com.my and aburman@alvarezandmarsal.com respectively.

World Competitive Rankings defy logic

The WEF may have its own method of measuring the competitiveness of each country but its rankings defy the stark reality of what is going on in the world.

BANGKOK: The World Economic Forum (WEF) has just issued its Global Competitiveness Index 2012-2013 rankings.

Thailand’s competitiveness ranking has improved slightly to 38th spot this year, while Switzerland has edged out Singapore to become the most competitive nation on earth.

The WEF has its own formula in ranking the competitiveness of each country. However, the WEF’s ranking does raise some eyebrows.

According to the WEF, Spain is more competitive than Thailand because its overall ranking is 36th. This ranking is questionable.

Spain is planning to seek a full bailout from the European Union. The European Central Bank is about to monetise its debt. It has received €100bil (RM393.7bil) in bailout funds already. Some €75bil (RM295.3bil) in deposits have fled the Spanish banking system.

Spain is in a similar situation to Thailand in the first part of 1997 before Thailand sought a bailout from the International Monetary Fund. By this measure, Spain should not get a ranking higher than Thailand.

Switzerland, ranked No.1, will not enjoy its position as an oasis of peace and prosperity in Europe for too long in the event of a euro implosion. Swiss banks’ assets, which are tied to the European banking crisis, are more than 300% of the country’s GDP.

The United States has slipped to 7th in the rankings. The US economy is in big trouble. Some 46 million Americans are on food stamps. There are 10 million Americans unemployed, including another 12 million who are doing odd jobs.

Some 18 million American households are having a tough time making ends meet. The banking system is in shambles. The US national debt has hit US$16tril (RM49.7tril), or about 100% of the GDP. The budget deficit is chronic. The country is years away, if ever, from being able to balance its budget.

Most important, the Federal Open Market Committee will meet on Sept 12 to determine whether it will go ahead with a bond-buying programme, or QE3, to further prop up the financial system. US finances are in very bad shape indeed.

Japan is ranked in 10th spot. Does it deserve this position? The whole world knows that Japan has the world’s largest public debt at more than US$12tril (RM37.3tril), or 230% of its GDP. Japan’s debt is largely financed by domestic bonds. But with an ageing society, Japan will face higher interest costs from its borrowing, which will put the health of its finances into further question.

The Japanese economy is far from recovering from its crisis of the 1990s. Japan is facing sluggish growth and also high energy costs in the aftermath of the Fukushima nuclear plant disaster.

Its export sector is feeling the pinch from the strong yen. If the consumer markets in Europe or US were to slacken even more, Japan’s export machines will wobble. Foreign exchange earnings will plunge, while domestic demand has been in a weak state all along.

Saudi Arabia, ranked at 18th, is the world’s largest oil exporter. But a Citibank report issued last week said Saudi Arabia might have to import energy by 2030 if the current pace of domestic consumption and exports continues.

Israel is ranked 26th, though it is facing off against Iran in the Middle East. A war could break out between the two countries at any time, given the tensions between their leaders.

China is ranked 29th, although it is the richest country in terms of foreign exchange reserves. Its reserves stand at US$3tril (RM9.3tril). China is the world’s production factory. Its economy is the world’s second largest after the United States. It is improving fast in technology and innovations.

Moreover, China is also building up its military and has nuclear weapons in store. Apparently, China does not deserve this relatively low ranking.

This also applies to other Brics countries such as Russia (67th), Brazil (48th) and India (59th). How is it possible that the Philippines musters at 65th, two notches higher than Russia, which is still a superpower, rich with resources? The Philippines is vulnerable to food price increases and also to natural disasters.

The WEF may have its own method of measuring the competitiveness of each country. But its rankings defy common sense and the stark reality of what is going on in the world.

From a group of leading Asian newspapers working towards improving coverage of Asian affairs
http://www.asianewsnet.net/

China, Russia sound alarm on world economy at APEC summit

By Timothy Heritage

VLADIVOSTOK, Russia

(Reuters) - China and Russia sounded the alarm about the state of the global economy and urged Asian-Pacific countries at a summit on Saturday to protect themselves by forging deeper regional economic ties.

Chinese President Hu Jintao said Beijing would do all it could to strengthen the 21-member Asia-Pacific Economic Cooperation (APEC) by rebalancing its economy, Asia's biggest, to improve the chances of a global economic recovery.

Russian President Vladimir Putin said trade barriers must be smashed down as he opened the APEC summit which he is hosting on a small island linked to the Pacific port of Vladivostok by a spectacular new bridge that symbolizes Moscow's pivotal turn to Asia away from debt-stricken Europe.

"It's important to build bridges, not walls. We must continue striving for greater integration," Putin told the APEC leaders, seated at a round table in a room with a view of the $1 billion cable-stayed bridge, the largest of its kind.

"The global economic recovery is faltering. We can overcome the negative trends only by increasing the volume of trade in goods and services and enhancing the flow of capital."

Hu told business leaders before the summit the world economy was being hampered by "destabilizing factors and uncertainties" and the crisis that hit in 2008-09 was far from over. China would play its role, he said, in strengthening the recovery.

"We will work to maintain the balance between keeping steady and robust growth, adjusting the economic structure and managing inflation expectations. We will boost domestic demand and maintain steady and robust growth as well as basic price stability," he said.

Hu spelled out plans for China, whose economic growth has slowed as Europe's debt crisis worsened, to pump $157 billion into infrastructure investment in agriculture, energy, railways and roads.

Hu steps down as China's leader in the autumn after a Communist Party congress, but he promised continuity and stability for the economy.

Putin, who has just begun a new six-year term as president, said on Friday Russia would be a stable energy supplier and a gateway to Europe for Asian countries, and also pledged to develop his country's transport network.

RUSSIA LOOKS EAST

The relative strength of China's economy, by far the largest in Asia and second in the world to the United States, is key to Russia's decision to look eastwards as it seeks to develop its economy and Europe battles economic problems.

APEC, which includes the United States, Japan, South Korea, Indonesia and Canada, groups countries around the Pacific Rim which account for 40 percent of the world's population, 54 percent of its economic output and 44 percent of trade.

APEC members are broadly showing relatively strong growth, but boosting trade and growth is vital for the group as it tries to remove the trade barriers that hinder investment.

The European Union has been at odds with both China and Russia over trade practices it regards as limiting free competition. Cooperation in APEC is also hindered by territorial and other disputes among some of the members.

Putin, 59, limped slightly as he greeted leaders at the summit. Aides said he had merely pulled a muscle. Underlining Putin's good health, a spokesman said he had a "very active lifestyle."

Discussions at the two-day meeting will focus on food security and trade liberalization. An agreement was reached before the summit to slash import duties on technologies that can promote economic growth without endangering the environment.

Breakthroughs are not expected on other trade issues at the meeting, which U.S. President Barack Obama is missing. He has been attending the Democratic Party convention and Washington is being represented by Secretary of State Hillary Clinton.

U.S. officials say Clinton's trip is partly intended to assess Russia's push to expand engagement in Asia, which parallels Washington's own turn towards the Asia-Pacific region.

Also missing the summit was Australian Prime Minister Julia Gillard. Putin said she had dropped out because her father had died.

(Additional reporting by Gleb Bryanski, Andrew Quinn, Katya Golubkova, Douglas Busvine, Denis Pinchuk and Andrey Ostroukh; Editing by Janet Lawrence)

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The Libor fuss!

The story behind the Libor scandal

Logos of 16 Banks Involved in Libor Scandal - YouTube

SINCE the outbreak of the Libor scandal, readers' reaction has ranged from the very basic: What's this Libor? to the more mundane: How does it affect me?

Some friends have raised more critical questions: Barclays appears to have manipulated Libor to lower it; isn't that good? The problem first arose in early 2008; why isn't it resolved by now? By popular demand to demystify this very everydayness at which banks fix this far-reaching key rate, today's column will be devoted to going behind the scandal starting from the very basics about the mechanics of fixing the rate, to what really happened (why Barclays paid the huge fines in settlement), to its impact and how to fix the problem.

What's Libor

The London Inter-Bank Offered Rate (Libor) was first conceived in the 1980s as a trusty yardstick to measure the cost (interest rate) of short-term funds which highly-rated banks borrow from one another. Each day at 11am in London, the setting process at the British Bankers' Association (BBA) gets moving, recording submissions by a select group of global banks (including three large US banks) estimates of the perceived rates they would pay to borrow unsecured in “reasonable market size” for various currencies and for different maturities.

Libor is then calculated using a “trimmed” average, excluding the highest and lowest 25% of the submissions. Within minutes, the benchmark rates flash on to thousands and thousands of traders' screens around the world, and ripple onto the prices of loans, derivatives contracts and other financial instruments worth many, many times the global GDP. Indeed, it has been estimated that the Libor-based financial market is worth US$800 trillion, affecting the prices that you and me and corporations around the world pay for loans or receive for their savings.

A file photo showing a pedestrian passing a Barclays bank branch in London. Barclays has been fined £290mil (US$450mil) by UK and US regulators for manipulating Libor. — EPA

Indeed, anyone with a credit card, mortgage or car loan, or fixed deposit should care about their rate being manipulated by the banks that set them. In the end, it is used as a benchmark to determine payments on the global flow of financial instruments. Unfortunately, it turns out to have been flawed, bearing in mind Libor is not an interest rate controlled or even regulated directly by the central bank. It is an average set by BBA, a private trade body.

In practice, for working purposes, Libor rates are set essentially for 10 currencies and for 15 maturities. The most important of these relates to the 3-month US dollar, i.e. what a bank would pay to borrow US dollar for 3 months from other banks. It is set by a panel of 18 banks with the top 4 and bottom 4 estimates being discarded. Libor is the simple average (arithmetic mean) of what is left. All submissions are disclosed, along with the day's Libor fix. Its European counterpart, Euro Interbank Offered Rate (Euribor), is similarly fixed in Brussels. However, Euribor banks are not asked (as in Libor) to provide estimates of what they think they could have to pay to borrow; merely estimates of what the borrowing rate between two “prime” banks should be. In practice, “prime” now refers to German banks. This simply means there is in the market a disconnect between the actual borrowing costs by banks across Europe and the benchmark. Today, Euribor is less than 1%, but Italian banks (say) have to pay 350-40 basis points above it. Around the world, there would similarly be Tibor (Tokyo Inter-Bank Offered Rate); Sibor and its related SOR (Swap-Offered Rate) in Singapore; Klibor in Kuala Lumpur; etc.

What's wrong with Libor?

Theoretically, if banks played by the rules, Libor will reflect what it's supposed to a reliable yardstick to measure what it cost banks to borrow from one another. The flaw is that, in practice, the system can be rigged. First, it is based on estimates, not actual prices at which banks have lent to or borrowed from one another. They are not transactions based, an omission that widens the scope for manipulation. Second, the bank's estimate is supposed to be ring-fenced from other parts of the bank. But unfortunately walls have “holes” often incentivised by vested-interest in profit making by the interest-rate derivatives trading arm of the business. The total market in such derivatives has been estimated at US$554 trillion in 2011. So, even small changes can imply big profits. Indeed, it has been reported that each basis point (0.01%) movement in Libor could reap a net profit of “a couple of million US dollar.”

The lack of transparency in the Libor setting mechanism has tended to exacerbate this urge to cheat. Since the scandal, damning evidence has emerged from probes by regulators in the UK and US, including whistle blowing by employees in a number of banks covering a past period of at least five years. More are likely to emerge from investigations in other nations, including Canada, Japan, EU and Switzerland. The probes cover some of the largest banks, including reportedly Citigroup, JP Morgan Chase, UBS, HSBC and Deutsche Bank.

Why Barclays?

Based on what was since disclosed, the Libor scandal has set the stage for lawsuits and demands for more effective regulation the world over. It has led to renewed banker bashing and dented the reputation of the city of London. Barclays, a 300-year old British bank, is in the spotlight simply because it is the first bank to co-operate fully with regulators. It's just the beginning a matter of time before others will be put on the dock. The disclosures and evidence appear damaging. They reveal unacceptable behaviour at Barclays. Two sorts of motivation are discernible.

First, there is manipulation of Libor to trap higher profits in trading. Its traders very brazenly pushed its own money market dealers to manipulate their submissions for fixing Libor, including colluding with counter-parties at other banks. Evidence point to cartel-like association with others to fiddle Libor, with the view to profiteering (or reduce losses) on their derivative exposures. The upshot is that the bank profited from this bad behaviour. Even Bob Diamond, the outgoing Barclays CEO, admitted this doctoring of Libor in favour of the bank's trading positions was “reprehensible.”

Second, there is the rigging of Libor by submitting “lowered” rates at the onset of the credit crunch in 2007 when the authorities were perceived to be keen to bolster confidence in banks (to avoid bailouts) and keep credit flowing; while “higher” (but more realistic) rates submission would be regarded as a sign of its own financial weakness. It would appear in this context as some have argued that a “public good” of sorts was involved. In times of systemic banking crisis, regulators do have a clear motive for wanting a lower Libor. The rationale behind this approach was categorically invalidated by the Bank of England. Like it or not, Barclays has since been fined £290mil (US$450mil) by UK and US regulators for manipulating Libor (£60mil fine by the UK Financial Services Authority is the highest ever imposed even after a 30% discount because it co-operated).

Efforts at reform

Be that as it may, Libor is something of an anachronism, a throwback to a time long past when trust was more important than contract. Concern over Libor goes way back to the early 2008 when reform of the way it is determined was first mooted. BBA's system is akin to an auction. After all, auctions are commonly used to find prices where none exist. It has many variants: from the “English” auction used to sell rare paintings to the on-line auction (as in e-Bay). In the end, every action aims to elicit committed price data from bidders.

As I see it, a more credible Libor fixing system would need four key changes: (i) use of actual lending rates; (ii) outlaw (penalise) false bidding bidders need to be committed to their price; (iii) encourage non-banks also to join in the process to avoid collusion and cartelisation; and (iv) intrusively monitor the process by an outside regulator to ensure tougher oversight.

However, there are many practical challenges to the realisation of a new and improved Libor. Millions of contracts that are Libor-linked may have to be rewritten. This will be difficult and a herculean exercise in the face of lawsuits and ongoing investigations. Critical to well-intentioned reform is the will to change. But with lawsuits and prosecutions gathering pace, the BBA and banking fraternity have little choice but to rework Libor now. As I understand it, because gathering real data can often pose real problems especially at times of financial stress, the most likely solution could be a hybrid. Here, banks would continue to submit estimated cost, but would be required to back them with as many actuals as feasible. To be transparent, they might need to be audited ex-post. Such blending could offer a practical way out.

Like it or not, the global banking industry possibly faces what the Economist has since dubbed as its “tobacco moment,” referring to litigation and settlement that cost the US tobacco industry more than US$200bil in 1988. Sure, actions representing a wide-range of plaintiffs have been launched. But, the legal machinery will grind slowly. Among the claimants are savers in bonds and other instruments linked to Libor (or its equivalent), especially those dealing directly with banks involved in setting the rate. The legal process will prove complicated, where proof of “harm” can get very involved. For the banks face asymmetric risk because they act most of the time as intermediaries those who have “lost” will sue, but banks will be unable to claim from others who “gained.” Much also depends on whether the regulator “press” them to pay compensation; or in the event legal settlements get so large as to require new bailouts (for those too big to fail), to protect them. What a mess.

What, then, are we to do?

Eighty years ago banker JP Morgan jr was reported to have remarked in the midst of the Great Depression: “Since we have not more power of knowing the future than any other men, we have made many mistakes (who has not during the past five years?), but our mistakes have been errors of judgement and not of principle.” Indeed, bankers have since gone overboard and made some serious mistakes, from crimes against time honoured principles to downright fraud. Manipulating Libor is unacceptable. So much so bankers have since lost the public trust. It's about time to rebuild a robust but gentlemanly culture, based on the very best time-tested traditions of banking. They need to start right now.

WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who speaks, writes and consults on economic and financial issues. Feedback is most welcome; email: starbizweek@thestar.com.my. 

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Put an end to patent battle

An early settlement of the dispute between Samsung and Apple would benefit consumers and the global mobile device industry as a whole. 

An Apple Inc. iPad 2 and iPhone 4S smartphone, left, and a Samsung Electronics Co. Galaxy Tab 10.1 tablet computer and Galaxy S III smartphone are arranged for a photograph in Seoul, South Korea, On Tuesday. (Bloomberg)

SEOUL: Samsung Electronics has suffered a crushing defeat in a landmark patent battle against Apple Inc. A US jury last Friday found that the Korean smartphone maker infringed upon a number of patents held by Apple, while the American tech giant did not violate any of its Korean rival’s intellectual properties.

The jury’s judgement is widely criticised here as unfair. But it is highly likely to be upheld by the California court, dealing a serious blow to Samsung, the world’s largest mobile device producer. Samsung accounted for 32.6% of the global market in the second quarter against Apple’s 16.9%.

The nine-member jury ordered Samsung to pay US$1.05bil (RM3.28bil) in damages to Apple. The damages – much larger than expected – could be doubled or even tripled by the judge overseeing the trial, given the jury’s scathing verdict that Samsung “willfully” infringed on Apple’s coveted patents.

Samsung also faces a US sales ban on its mobile devices. Following the trial win, Apple presented to the judge a list of Samsung products it wants barred. Apple identified eight Samsung smartphone and tablet models but did not include Samsung’s new flagships, the Galaxy S3 and the Galaxy Note. Consequently, the sales ban, even if accepted by the court, is unlikely to have a serious impact on Samsung.

The US court’s ruling could also negatively affect patent battles between the two under way in nine countries over four continents. Unfavourable rulings in these countries would pour cold water on Samsung’s ambition to cement its global market leadership.

Furthermore, the jury seriously wounded Samsung’s pride by slamming it as a copycat. This is an insult hard to swallow, as Samsung has worked hard to secure leadership in mobile technology.

Given the high stakes involved, it is only natural that Samsung has decided to file post-verdict motions to overturn what it saw as the jury’s one-sided judgement. It plans to take the case to the court of appeals if its motions are rejected.

This suggests that the patent war will not end any time soon. Samsung is determined to continue the legal battle to make its case that Apple did encroach upon its hard-won patents for mobile technologies.

At the same time, Samsung is seeking to turn the tables in the next round of the battle by utilising its patents for fourth-generation technologies called “long-term evolution.”

Samsung is betting that it would be able to use some of its LTE patents as weapons against its rival because they have not been made open as industry standards. It is wondering how Apple can produce its next-generation model, the iPhone 5, without using its patented LTE technologies.

In light of Samsung’s technological prowess and deep pockets, the company will be able to overcome the grave challenge it is facing now.

For instance, it won’t have much difficulty paying the US$1.05bil (RM3.28bil) damages set by the jury, given that its net profit amounted to US$4.5bil (RM in April-June alone.

Yet Samsung should learn a lesson from the costly patent war. It is imperative for the company to transform itself from a fast follower to a first mover. It needs to go back to the drawing board to make its products truly innovative both in design and functions. It might want to risk a radical design that can differentiate its products from others.

Apple, emboldened by last Friday’s triumph, may be tempted to expand the patent war to collect royalties from other smartphone makers that rely on Google’s Android operating system. Yet it should realise that no company has ever succeeded in establishing market leadership through patent litigations. A company can only become a market leader through competition in the marketplace.

Apple also needs to know that any attempt to drive Android-based smartphone producers into a corner could backfire in the long term, as it will spur their efforts to become more innovative. With their survival at stake, they will be compelled to change the game as they cannot beat Apple at its own game.

In this regard, we urge Apple and Samsung to reach a deal that can benefit both. Apple could set royalties for Samsung at a level that would not undermine the Korean company’s earnings too much. An early settlement of the dispute would also benefit consumers and the global mobile device industry as a whole.

 
By EDITORIAL DESK

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Pitching for the Asean 10

Asean countries are still developing because there is still much to do, and much to learn about how to do it.

IF Asean is sometimes accused of being a talking shop, it also vividly demonstrates the value and virtues of some talking shops.

Officials’ meetings at various levels are legion, growing in number and scope over half a century until they average a few a day for every day of the year.

Between these are the summits, being more prominent in comprising heads of governments. Besides the content of the proceedings, the frequency of the summits themselves may indicate the state of the South-East Asian region.

When leaders from Indonesia, Malaysia, the Philippines, Singapore and Thailand met in Bangkok in 1967 to found Asean, that was somehow not considered a summit. So the “first” summit came only in 1976 in Bali, with the “Treaty of Amity and Cooperation in South-East Asia” and the “Declaration of Asean Concord.”

The second summit came the following year in Kuala Lumpur, coinciding with an Asean-Japan dialogue. Although this was only one year after the first, it was a whole decade after Asean’s founding and would be another full decade before the next.

The third summit (Manila, 1987) decided to hold summits every five years. By the seventh (Bandar Seri Begawan) it would be every year, then after skipping 2006 the Philippines hosted the 12th in Cebu amid local protests.

The 14th summit slated for 2008 in Thailand was postponed to early 2009 over domestic disturbances, then put off for another two months in the broken Pattaya gathering. From then on, summits would be biannual affairs.

Between and beyond the summits, whether or not local scandals and protests add to the news value of Asean gatherings, the original five member nations seem to attract more attention if not also more interest. This is anomalous since Asean membership confers equal status on all members regardless of size, age, clout or political system.

The newer members can actually be quite pivotal in their own way, as Vietnam and then Cambodia had been, and as Myanmar may be now. And several of the older members need not be particularly significant to the Asean 10 as a whole, much less beyond.

With such issues in mind, Malaysia’s Foreign Policy Studies Group last week held another roundtable conference in Kuala Lumpur on how relations between Malaysia and the CLM countries (Cambodia, Laos, Myanmar) can contribute to Asean consolidation.

An earlier roundtable comprised delegates from Indonesia, Thailand and Vietnam in assessing how their countries’ relations with Malaysia could progress in the same vein. Vietnam, as the largest and most developed of Asean’s newer CLMV members, had also introduced reforms earliest to qualify to join the earlier dialogue with some of the original members.

Other CLMV countries have progressed on other fronts on their own. It is now 20 years since Cambodia, for example, reached agreement with Malaysia on visa-free travel.

Laos is another country that Malaysia has assisted, with the establishment of bilateral relations (in 1966) even before Asean was founded. Since then, relations have flourished, particularly after Malaysia worked to welcome Vientiane into Asean.

Myanmar today is still undergoing a transition, and therefore also very much a focus of world media attention. Its people now have a greater sense of nationhood following a raft of reforms, mindful of the national interest from economic priorities to the prerogative of rejecting foreign military bases on its soil.

A Malaysian delegate said that the US, following news reports last Sunday, was now looking for a suitable site for a new “missile shield” system in the region. The US and China were the two proverbial “elephants in the room”, and the geopolitical rivalry between them very much an issue for all delegates.

No individual, organisation or country at the roundtable, whether officially or unofficially, was left undisturbed by major power rivalry contaminating the Asean region. This was the more so when preparations abroad tended to centre around a military build-up, with the US “pivot to Asia” involving stationing 60% of its military assets in the Asia-Pacific.

According to one recent analysis, at current and anticipated rates China’s economy could surpass the US’ as early as 2016, and US overall decline could become evident by 2020. Ironically, as with its former Soviet adversary before it, the decline would be underscored by excessive military expenditure and a warlike mindset.

Given these scenarios, it is important to be reminded of some pertinent underlying issues. These may be framed by some telling questions that must be asked, for which answers are vitally needed.

First, are the CLM countries necessarily more dependent on a regional superpower-as-benefactor like China economically, compared to Asean’s older and more developed members. Not so, especially when considering that the latter, with larger economies, have more at stake in dealing with a rising China.

Second, is China even likely to consider challenging US dominance in the region? Despite occasionally dire pronouncements by some there is no evidence of that, indeed quite the reverse: beyond assertions of its old maritime claims, Beijing’s relations with all countries in the region have been progressing and progressive.

US military dominance in the Asia-Pacific is often credited with keeping the regional peace, particularly in the high seas. Is this assumption merited if piracy and terrorism are not included in the calculus, since there may not be any other military force out to wreak havoc in the region post-1945?

Fourth, how much value is there still in the assumption that the US military posture is and will remain the status quo entity in the region? The status quo is helping China’s economy grow, with secure shipping and harmonious development, while the US economy is continually taxed by its large and growing military presence.

Fifth, and by extension, how much pulling power is there today in US efforts at soliciting allies? The problem with enlisting in an alliance for other countries is that to be identified as an ally of a major power is also to identify as an ally against another major power.

Dividing the region in Cold War fashion does not help anyone, and never did. To enlist with a (relatively) declining superpower creates further problems of its own for such allies.

Sixth, can China’s reported flexing of its muscles in the South China Sea and the East China Sea in any way be a show of strength? Since it only gives Beijing a negative image just as it needs to look good, without any gain in return, it is instead a point of weakness.

Seventh, can US efforts to contain China ever work? There is no shortage of instances that verify containment, a situation confirmed by official denials.

So, eighth, why try to contain China at all when in the process the US only loses goodwill before losing face? Perhaps old habits die hard, but more likely the military-industrial complex dies harder.

Smaller countries in Asean and elsewhere have much to learn from the major powers, notably the US and China. Sadly, the lessons are just as much what not to do as they are about what to do.

BEHIND THE HEADLINES By BUNN NAGARA sunday@thestar.com.my

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The rising K-economy in Asia

HOW big is the impact of the Internet potential on Asia, including the impact on development of the knowledge economy in Asia?

We all have a sense that the Information and Communications Technology (ICT) industry has transformed social media, education and the way business is done. But we are not sure what is the best way to use the Knowledge economy to propel our future growth.

In 1973, American sociologist Daniel Bell predicted the arrival of the Post-Industrial Society by 2000 with a world dominated by service industry, high value professional and technical employment and innovation driven by scientific research.

In 2000, the number of global Internet users was only 360 million, rising to 2.3 trillion with an annual growth rate of 528% between 2000-2011, of which 45% reside in Asia. The highest penetration of Internet is in North America (78.6%), whereas penetration in Asia is only 26.2%, pointing towards huge potential for Asian growth.

According to Internet World Statistics, the top Internet country in Asia is China, with 513 million users, followed by India (121 million), Japan (101 million) and Indonesia (55 million).

Within Asia, the highest penetration is South Korea (82.7%), Japan (80%), Singapore (77.2%), Taiwan (70%) and Hong Kong (68.7%). China has 38.4% Internet penetration.

However, the highest number of Facebook users in Asia is India (45 million), Indonesia (43 million) and the Philippines (27 million). Asia has 195 million Facebook users as at March 2012, or 23.3% of 835 million worldwide, compared to 44.8% penetration in Internet usage. The reason is of course Facebook is not used in China, but even then, there are 447,000 recorded users, less than the number in Cambodia (449,000).

Did you realise that 26.8% of Internet users are English-speaking (565 million), and 24.2% are Chinese speaking (510 million). The third most important language is Spanish (165 million). The Malay language, which is common to Indonesia and Malaysia, is not counted yet among the top 10 languages, mainly because the penetration of the Internet in Indonesia (245 million people) is only 22.4%.

Malaysia has a web usage rate of 61%, with over 17 million people online. The Post-Industrial Society has already arrived in the advanced countries, with the service sector accounting for 76.7% of US GDP, compared with only 1.2% for agriculture and 22.1% in industry. Employment in the service sector already accounted for 77% of total employment in the United States, with the increase in the service sector employment driving employment growth in the coming years.

Within the service sector, three sectors - education services, healthcare and professional and business services (all knowledge industries) are expected to grow at double the speed of employment of the US employment as a whole. In contrast, manufacturing employment is only 10% of total employment in the United States, compared with 28% employed in manufacturing in China. But the service sector in China accounts for only 43% of GDP, compared with 55.2% for India.

What is the relationship between information, knowledge and value creation?

In 1991, one of the pioneers on information theory, Robert Lucky, argued that the information value chain is a pyramid, with the bottom data having no value, classified data becoming valued information, with applied knowledge (technology) having more value, and wisdom, the highest value, being learnt, experienced and useful not only to understand but perhaps predict events.

What the Internet revolution has achieved is to distribute information and knowledge very quickly to the masses across the world. Indeed, the main benefit of the Internet is that it broke down “silos” of specialised information and data that could be shared and used by everyone with access to it.

Indeed, the Internet has enabled “Wiki-knowledge production”, which has produced a huge public good, available to all, with free input by thousands of anonymous volunteers. Public goods are no longer produced by governments, universities or firms, but by the collaboration of thousands of empowered individuals.

There is no doubt that as Asia ponders its own Post-Industrial Society, how it adapts to the new knowledge economy will make a difference between future success or failure.

Leading economies like Singapore and South Korea have devoted tremendous resources into education, research and development in key areas. South Korea even revived its Five-Year Plans to transform itself into a high growth, high knowledge green economy.

Both the Chinese and Indian 12th Five-Year Plans have ambitions to become creative and innovative economies.

In this regard, it is useful to compare and contrast the IBM way towards innovation and value creation versus the Indian approach. In the IBM book Making the World Better (2011), it uses a methodology insiders call SMUBA, an acronym for Seeing, Mapping, Understanding, Believing and Acting.

It is a process to master complex systems and to move from data, analytics and implementation.

Multinationals like IBM now realise that it is impossible to innovate alone by having centralised research laboraties the work is shared and done through key research labs spread throughout the world, through connecting research to product development, academic and government collaboration, internal collaboration across departments and labs, collaboration with clients, innovation by acquisition and open innovation.

In contrast, the Indian model of innovation and value creation is distinct in three ways producing frugal, affordable solutions for the masses without compromising quality, innovation in organisational and process models that improve quality and service delivery, and innovations in the process of innovation (frugal cost solutions through frugal cost of innovation).

The race is already on to produce Asian multinationals and create products to compete with Apple, Amazon, Google or Facebook.

The setback that Samsung faced recently will probably accelerate that process of innovation and competition across Asia.

THINK ASIAN By ANDREW SHENG

Tan Sri Andrew Sheng is president of Fung Global Institute.

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Apple patent claims stifling innovation; Japan court rules in favour of Samsung

Is Apple stifling innovation?

A US jury decision against Samsung and a Japanese court decision for the Korean conglomerate raise questions over the entire patent issue

WOULD anyone have expected the Apple-Samsung case to be decided in favour of Samsung by a US court in a jury verdict and against Apple, which is by now even more American than apple pie? I certainly didn’t.

But there is an appeal on the cards and it is still anyone’s guess if Apple will be allowed to claim such things as shape and “pinch to zoom out” as its right. But if it is, then that’s a big setback for other smartphones.

Samsung, however, scored a victory in a Tokyo court which ruled yesterday that the Korean electronics giant, and supplier to Apple, did not violate any patents. That victory will no doubt raise questions as to how fair the US jury was in making an award in favour of Apple, including US$1bil in damages.

The US decision means eventually consumers there may have to pay more for Apple’s iPhone, iPod and devices because others may not be able to emulate features that may have made their devices a success. That will have repercussions on prices elsewhere as well.

In the motor industry there have been many trends in shape over the years, moving from angular to rounded designs. If some car company had decided to sue every other car manufacturer for a similar look and feel and succeeded, car shapes may have had great difficulty evolving.

But the best manufacturers of cars did not. In fact some of them deliberately did not register safety patents just so that others could use the innovations to increase passenger safety.

If Samsung is said to have infringed on shape, then there are a number of other manufacturers who are in trouble too. Rectangular faces with rounded edges are a natural evolution in the mobile phone industry. Certainly, other manufacturers are going to hope there will be a reversal on appeal.

Apple did not invent the touch screen. Thus, it seems strange that it has a patent to “pinch to zoom” which is basically one way of many ways to use a screen. That’s like patenting a particular method of driving a car!

Apple has already followed up on its US victory, seeking an injunction to prevent Samsung from selling eight of its smartphones in the United States including some in the best-selling Galaxy range.

However, hearing of the injunction will only be in December and some of Samsung’s models may be phased out by then, which offers some consolation for Samsung.

Some US commentators view the case as a proxy war against another US company Google which makes the Android operating system used in Samsung, HTC and other smartphones.

An article in the San Francisco Chronicle says that the late Apple chief executive Steve Jobs was once a friend of Google’s co-founders but considered Google’s move into mobile a betrayal that demanded revenge.

“I’m going to destroy Android, because it’s a stolen product,” he told his biographer Walter Isaacson. “I’m willing to go thermonuclear war on this.”

But despite the nice rhetoric, revenge from the grave it is not. Apple’s strategy seems quite clear cut. Patent everything. Then tie up competitors in court if there is any semblance of product infringement and keep its competitive advantage intact as long as possible.

Reports put its profit margins on its iPhone at as high as 50%, a huge mark-up in a cutthroat market which it has been able to achieve by parlaying an excellent product with some very deft marketing and public relations.

That made it the biggest company in the world. Many would say that the product, however, is not necessarily the best anymore if ever it was, especially since competitors are fast catching up with their own nifty designs and features. And marketing and PR too – Galaxy is getting a name for itself and no doubt the cases around the world will help.

Thus it makes much economic sense for Apple to prolong this by any legal means it can for as long as possible. Does Apple care that it may be stifling innovation, raising costs and hurting consumers in the process?

Probably not. And why should it? It is a company based on the profit motive. But it needs to remember that all publicity is not good publicity and if it gets a reputation as a bully, its entire image and that of its products could change.

American companies can carry this patent thing too far and they have. Recall a few years ago when some of them tried to patent the production of pesticides from neem trees. For thousands of years, extracts from the leaves of the neem have been used for precisely that.

The American jury system cannot but be expected to favour a US icon such as Apple which is seen as brash, innovative and successful, the very image of the US itself. But that’s not going to be the case in the rest of the world. And even in the US, if learned judges make the decisions instead of a jury, the results may well be different.

Really, no one is going to benefit and there may well be detriment, if we allow patents to get the better of us and stifle innovation and hinder the development of new products and services at lower costs.
It would be a travesty of sorts and ironic indeed if Apple is now seen as a technology inhibitor instead. Beware!

A QUESTION OF BUSINESS By P. GUNASEGARAM starbiz@thestar.com.my

P Gunasegaram is an iPhone user but only because the service provider gave such a good deal.

 Japanese court rules for Samsung over Apple

In this Aug. 25, 2011 file photo a lawyer holds an Apple iPad and a Samsung Tablet-PC at a court in Duesseldorf, Germany. The Duesseldorf state court ruled Tuesday, Jan. 31, 2012, that neither the South Korean company‘s Galaxy Tab 10.1 nor the Galaxy Tab 8.9 could be sold in Germany because they were in violation of unfair competition laws. A German appeals court has upheld a decision prohibiting Samsung Electronics Co. from selling two of its tablet computers in Germany, agreeing with Apple Inc. that they too closely resemble the iPad2. (AP)

Samsung wins one battle in the multinational conflict over patent and innovation

By Jeong Nam-ku, Tokyo correspondent

A Japanese court has ruled in favor of Samsung over Apple in a patent lawsuit. In the August 31 verdict, Tamotsu Shoji, the Tokyo District judge, declined Apple’s claim that “8 models of Samsung Galaxy series infringed on Apple’s patents.”

Apple had sued Samsung for infringing on its synchronization of music and other data with remote servers. It asserted that “Samsung’s products use Apple’s technologies of synchronization, which constitutes patent infringement,” and demanded both compensation of 100 million Japanese Yen (around US$1.27 million) and a block on eight Samsung products.

According to Jiji Press, judge Tamotsu stated, “Samsung’s products are technologically distinct from Apple and can’t be considered infringements.”

As a first trial, this does not hold much importance beyond being an indication of what the final verdict might end up being. However, because the verdict ordered a ‘dismissal’ on Apple’s injunction, there is only a slight possibility for an overturn in the final verdict.

Apple has also sued Samsung for infringing on its ‘bounce back (technology that springs back when the document has reached the end)’ patent, a claim that is still ongoing.

This verdict is the first ruling out of the 9 lawsuits Apple and Samsung Electronics have against each other. Samsung also filed lawsuits against Apple in April and October of 2011, arguing that Apple also infringed on 6 of Samsung’s patents.

Samsung and Apple have ongoing lawsuits in different 10 countries. In the US, a judge ruled that Samsung had infringed Apple patents, ordering the Korean electronics giant to pay $1.05 billion in damages.  

Translated by Yoo Hey-rim, Hankyoreh English intern

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Apple's rot starts with its Samsung lawsuit win

Just like Microsoft, Apple's evolution from smart tech company to global uber-brand contains the seeds of its own destruction

The risk for Apple is that it focuses more and more on intellectual property rights – filing patents and litigating – than it does on product innovation. Photograph: Ahn Young-Joon/AP

Apple came close to destroying its business in the late 1980s by pursuing a suit against Microsoft claiming that Windows infringed the look and feel of the Mac desktop metaphor. Apple focused its hopes and business future on this lawsuit, while its market share dwindled. Rather than competing, it litigated. And lost.

Last week, it litigated against Samsung over its iPhone design and won.

The first justifiable conclusion might be that big companies get their way. The second might reasonably be that Apple doesn't change much: its business model remains aggressive self-righteousness. The third is what everybody knows: patent rules and philosophy are all screwed up.

As for the first point, Apple is not just a big company, but the biggest. And it is not just the biggest American company, but the most American company. It has entered a rarefied brand status in which it is now almost synonymous with American virtue: American as Apple. Its good design sense has become a major point of American pride, if not nationalism.

The brand is a national asset. Apple is AT&T in its pre-break-up from; it's GM, in its what's-good-for-General-Motors-is-good-for-the-country stage; it's United Fruit when it made US foreign policy; it's Microsoft when desktop computing was transforming the world.

 Commercial omnipotence

This is about as close to commercial omnipotence as it gets. Its unassailability, its right to be preternaturally aggressive, is built into its share price. We believe in Apple. So let us briefly consider the chance for a Korean company defending itself against (or, perish the thought, challenging) the greatest American company of the age in the eyes of an American jury.

And then, there's the self-righteousness. Apple is one of the most aggressive intellectual property litigators of all time. Its major moves have not been about protecting precise technical innovations, but about claiming the much softer zone of look and feel.

It sues for brand rather than engineering. It has pioneered a new modern sensibility: taste is what's most valuable; identity is king. It's sued about the lower case "i"; it's sued about the word "pod"; it's sued New York City over the "big Apple"; it's sued over using the words "app store".

This fierce defensiveness might be rightly understood in a psychological sense: Apple itself is based on stolen iconography. There was first the Beatle's Apple and there was Xerox PARC's desktop design.

Apple's self-righteousness masks its guilt. (It may be sheepish, too, about being more of a marketing organization than a technology company.) What's more, it knows better than anybody that if you relax your vigilance, somebody can easily walk off with what you've done – and improve it.

And then, in the algebra of Samsung's loss and Apple's victory, there's patent hell. Or absurdity.

 System of litigation

Patents are, arguably, no longer a system of protection; they are a system of litigation. Great numbers of patents are now filed, in an over-burdened system, to protect not innovations but the right to litigate over innovations. Indeed, any patent of value will ultimately be litigated.

What's more, as the system has become ever more over-taxed, as technology itself has become more complex, the ill-equipped and under-trained bureaucracy has increasingly taken to giving patents to wide-ranging abstractions.

Design concepts, behavior adjustments, and new approaches to problem solving are all patentable innovations. The system itself assumes that litigation is the check on the system. Which means, fundamentally, that the litigant with the most resources and greatest status wins.

But let us not argue the case that all this quite obviously impedes innovation and is part of a new unreal property land grab – not about technology at all, but about intellectual property: an effort to privatize much of what was once understood to be shared and public (indeed, not ownable, like the shape of the iPhone). But rather, for a moment, let's look at this as a form of hubris that has inevitable consequences.

The Apple that has won against Samsung is the same Apple that lost against Microsoft. In other words, it is the kind of company that, through sheer willfulness, discipline, and perfectionism, can achieve brand hegemony of a singular type. But it is, too, the kind of company – the exact sort of company – that becomes, perhaps inevitably becomes, the bete noire of consumerists, regulators and, of course, most of all, its competitors.

This is the story between the lines of its great victory and its further share price surge. On the one hand, there is this seemingly golden company. On the other hand, there is anybody with any sense of history knowing this is going to end badly.
  
American capitalism

Companies that acquire the nation's imprimatur often, if not invariably, over-reach. It is a characteristic of American capitalism: the price of getting really big and overbearing is that you incur an inverse reaction. In the early 1990s, an ambitious department of justice (a Republican administration DOJ at that) commenced its assault on Microsoft.

For better or worse, by the time the feds were finished, the company, with its rotten operating system, besieged and beleaguered, had become just one of many not-very-adept players in the space – an unimaginable outcome if you remember the once God-like power and scorched-earth wrath of Microsoft.

Apple, and its rotten phone, have a ways to go. But karma should not be underestimated as a factor in this game.

• • By Michael Wolff
  • guardian.co.uk

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