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Treasury and Tax: A Strategic Partnership

How finance directors may effectively develop good collaboration between the business treasury and tax departments.


The function of the corporate treasurer has evolved over the course of many years, as multinational corporations have confronted increasingly complex issues as a result of the desire to generate growth and enhance profits amidst severe market volatility and unpredictability. Treasurers are increasingly expected to play a more strategic role in their organisation and manage increasingly complex risks in order to enhance the competitiveness of their company. A component of this strategic objective is keeping abreast of the continually changing corporate tax landscape.


The possibility that the Base Erosion and Profit Shifting (BEPS) programme could result in changes to tax rules in jurisdictions around the world magnifies the significance of tax as a risk for multinational corporations. The BEPS proposal is a comprehensive set of tax ideas recently accepted by G-20 finance ministers. It outlines 15 initiatives, including minimum standards on country-by-country reporting intended to provide governments with a worldwide view of multinationals' operations and amended transfer pricing recommendations.


The objective of the BEPS project is to radically reshape the corporate tax landscape by enhancing transparency and reducing multinational corporations' tax avoidance. The reality is that BEPS-related legislation may have a considerable impact on every business that engages in international activities. The project is anticipated to have a significant impact on businesses that engage in cross-border cash pooling and/or intercompany loans, or that operate an in-house bank for corporate groups in multiple tax jurisdictions.



Treasury Tax Collaboration - Extax


Enhanced Fiscal Impacts of Treasury


Unfortunately, many treasury professionals are still waiting to figure out how BEPS affects their functions, while the overloaded tax departments of multinational corporations are still leaving company-wide training as a last priority. In fact, many corporate treasurers are unaware of the tax implications of the treasury initiatives they are contemplating or even those they have already implemented, such as multicurrency cash pools and in-house banking arrangements.


International liquidity pools International cash pools are highly sensitive from a tax and accounting standpoint; the treasury team's judgments on the structure of a global cash pool will have major tax ramifications for all firms inside the pool.


One such decision is whether to implement notional pooling, which needs cross-guarantees between participants, or physical pooling (zero balancing), a system in which transfers are regarded as intercompany loans. In any pooling structure, one account is designated as the "header" or "lead." If the corporate headquarters is the true owner of the header account, the interest between the companies is considered intercompany. If, however, corporate headquarters is managing the header account on behalf of the pool participants, then the interest is bank interest.


This is a crucial issue, as the definition of interest determines its tax treatment. In a thin-cap scenario, one or more businesses in the pooling structure are continually in a debit position and, as a result, continuously borrow from pool participants who are cash-rich. If the pool is tangible, the interest on these intercompany loans is typically deductible from the borrower's taxable income. However, in certain countries, the interest paid to non-banks (corporate entities) is not deductible or is only partially deductible.


In order to prevent excessive interest deductions on such loans, thin-cap regulations mandate that loans be made on an "arm's length" basis. They must utilise a commercially appropriate interest rate; below-market interest rates are not permitted amongst firms in the pool. Notably, the majority of foreign governments do not charge taxes on intercompany loans, although they do tax dividends to a foreign parent company.


A further reason why multinational corporations must rigorously monitor all interest payments on intercompany loans is that withholding tax may be required in some jurisdictions where participating firms exist. Europe appears to be an ideal site for building a cash pool, as the introduction of the euro has enabled a significantly larger number of countries to engage in treasury operations. Individual subaccounts inside a Eurozone cash pool are subject to local tax legislation and charges. In contrast, if a U.S. firm that owns a France-based subsidiary participates in a pool led by a Netherlands account, the France-based subsidiary may be subject to withholding tax in the Netherlands, even if it is controlled by a U.S. entity. Due to the existence of tax treaties between numerous nations that permit pooling agreements, businesses can often recover withholding tax, however, it may take some time to get a refund.



Internal bank structures. Similarly, establishing an in-house banking (IHB) structure that includes a cross-border cash pool may have tax implications. Ernst & Young identifies corporate finance, intercompany financing, cash and liquidity management, financial risk management, the construction of an intergroup netting system, and a payment factory as typical operations that could be centralised in an in-house bank.


Multiple criteria decide whether a company would be better off opening accounts with regional banks, working with a single global bank, or implementing a hybrid solution. This decision may determine whether the in-house bank is capable of managing international currency rates, specific forms of local payments, and tax difficulties.


Keep in mind that the jurisdiction in which the IHB or liquidity structure is based will tax the interest received from it. This is why so many header accounts are domiciled in tax jurisdictions with more favourable tax rates, including as London, Luxembourg, and the Netherlands.


Before building any global liquidity structure, including an in-house bank, the treasurer must collaborate closely with the tax department. The structure's principal objective should be to streamline treasury processes, enhance liquidity management, or provide another established business benefit. When selecting a location for an in-house bank, it is essential to carefully consider regulatory and withholding-tax implications. Asia and Latin America are more problematic locations because to currency limits, regulatory regimes managing resident versus non-resident accounts, and country risk, in contrast to Europe's favourable tax environments.




Treasury and Tax Departments Must Work Together



Treasury solutions involving cash pooling, netting, and payment facilities can improve the liquidity and working capital management of a business. However, they can also have considerable tax ramifications, which will intensify if governments begin to enact Base erosion and profit shifting legislation.


When deciding how to apply treasury tools across borders, corporate treasury teams should solicit the assistance of their partner banks. When developing and implementing treasury initiatives that may have tax ramifications, it is equally essential for treasury professionals to collaborate closely with their tax function colleagues. Moreover, treasury specialists are responsible for keeping current of macroeconomic tax issues and changes in each tax jurisdiction where the organisation operates.


Although there is a tendency towards early inclusion of tax and treasury teams in strategy talks, particularly in combination with merger and acquisition activity, the functions normally both report to the CFO. Generally speaking, neither treasury nor tax report to the other.


It is preferable to have a treasurer who is also familiar with taxes at the helm, as this will ensure that the department is being led by someone who is well-versed in both areas. It is common practise to combine the duties of treasurer and head of the tax function into a single post, which facilitates communication and cooperation between the two departments of an organisation. Merging tax and treasury functions could be a best practise for any treasury organisation, regardless of whether the business has a global presence. If the roles are not integrated, regular meetings between these stakeholders are required not only when a company enters a new market but also on an ongoing basis.


Collaborating with Tax Advisers - Extax



Defining a Template for Effective Collaboration between Tax and Treasury




To integrate tax concerns into their day-to-day treasury activities and treasury strategy, treasury teams should adopt the following five steps in close coordination with tax colleagues and a trustworthy banking partner:




Tracking the Evolution of The Organisational Structure Diagram.


Treasury and tax teams must have a comprehensive understanding of their legal and organisational structure and accounts in order to comprehend the tax implications. The first step in comprehending the tax implications of particular tactics and actions is to create a high-level organisational chart.


Treasury and tax should collaborate to construct this map, identifying each legal entity, its associated accounts and cash flows, and the inter-entity funding flows (e.g., intercompany loans). This might be a time-consuming process for large corporations with hundreds or even thousands of bank accounts around the world. However, it is essential to make the necessary effort to create an accurate organisational chart.


The tax department and the treasury department should collaborate to define the firm's legal entities and the cash flows between them, as well as to analyse the treasury solutions the company has in place, such as cash pooling arrangements, and to map out the tax consequences of all these treasury solutions.




Automate and centralise whenever possible.


After developing an organisational structure together, treasury and tax can start looking for ways to streamline processes and consolidate data across departments. With the onset of BEPS, central reporting requirements for transactions, including tax, will grow in many jurisdictions.


Enterprise resource planning (ERP) systems and online portals offer visibility and control, allowing businesses to easily collect, integrate, and report on information. The banking partners of a corporation must seamlessly interact with its ERP system and give near-real-time reporting of worldwide bank balances and transaction activity. Accounting-wise, the ERP system must be able to track cash sweeping activities, as well as intercompany loans and associated interest, so that funds can be distributed to the correct companies and tax reporting and assessments can be recorded accurately.


Typically, multinationals must also comply with central bank reporting criteria. Numerous large multinational corporations charge their subsidiaries licence or management fees in order to legitimise to the local government of the subsidiary the flow of funds to the parent firm, which is headquartered overseas. Typically, these costs are agreed with the government before a corporation establishes a subsidiary in a foreign nation. This implies that the standardisation of information and ease of access to information by all stakeholders are essential components of any ERP implementation, ultimately resulting in greater workflow efficiencies.


Treasury and tax should work together to select and execute a new cash management, treasury management, or enterprise resource planning (ERP) system.

A recent poll of tax experts indicated that very few tax departments have automated their tax filing process, with many still relying on sophisticated Excel spreadsheets. Multiple treasury management systems on the market now provide sophisticated capabilities for managing tax, hedging, and forecasting-related risks. These solutions provide the business treasurer with vastly improved worldwide liquidity and cash management reporting and payment factory management capabilities.





Seek cash management counsel that is thoughtful and holistic.



Given the increasing pressures and resource constraints on both treasury and tax professionals, as well as the complexity of the global tax environment, partnering with a bank that takes a holistic approach to cash management is a helpful way to ensure you have the right insights and are asking the right questions regarding the tax implications of your organisational structure and treasury strategy.


A bank can collaborate with a treasury team to rationalise bank accounts. This involves examining the company's global bank account structure, determining the function of each account, and identifying those that must be maintained. A bank can also provide advice on the most suitable treasury solutions to accomplish specific business objectives, while keeping tax concerns at the core of the plan.


Although there is a trend towards the standardisation of file formats, including SWIFT, which has gained traction among companies interested in bank-agnostic formats, many corporations require their banking partners to accommodate proprietary file formats, multiple currencies, and transaction types, and they may not have a single ERP instance. The treasurer and accounts receivable/payable personnel must collaborate closely with their banks to ensure that the banks properly comprehend their cash management and reporting requirements.





Recognize the effects of BEPS requirements on your treasury strategy and resources.



The BEPS action plan may not take effect until 2017, but corporations may be required to begin disclosing a variety of information to tax authorities in 2016. The operational ramifications of BEPS on the treasury team must be discussed by corporate treasurers with their tax colleagues and external tax experts. This conversation may result in the allocation of additional personnel for data reporting or the placement of treasury team members in other markets to collaborate with regional business executives.




Maintain strong cooperation between the treasury and tax departments.


In many businesses, leadership sets the tone for a collaborative workplace. It is the job of the CFO to ensure alignment between the treasury and tax teams. With potential BEPS reforms on the horizon, solid cooperation between the treasury and tax departments is more important than ever before.


When deploying new cash management solutions, Treasury teams must work closely with tax teams to establish a comprehensive grasp of tax structure concerns, local rules, withholding tax consequences, and more. Through his or her sponsorship, the CFO may guarantee that both functions engage in regular interaction and have equal visibility and voice in each major finance effort, so assuring the organization's maximum profitability.




To find out more about how you can implement a Tax and Treasury collaboration blueprint customised to your organisation, contact us.

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