Melissa Cameron:  At the 30,000-foot level, the OECD and other countries that have joined in the BEPS Project are seeking a global tax reset. The initiative consists mainly of recommendations on 15 topics, with the goal of these "actions" being implemented by taxing authorities around the world. The recommendations have a common theme of preventing shifts in the corporate income tax base away from the tax jurisdictions where the activity that generated the income occurred.

T&R:  Are these recommendations binding?

MC:  The BEPS Project, or BEPS for short, provides a framework that helps local tax authorities around the world decide how best to align their policies with the initiative's principles. Now it's up to each of the countries that were part of the BEPS initiative, plus others that would like to join, to go forth and legislate. So of course we're going to see different timing by different countries, and it's unlikely that every country will legislate identically.

The complexity for corporate treasuries and tax teams comes when the company has international operations for selling products and services around the world. There will be changes afoot over the next 12-plus months, as individual countries legislate and companies interpret what it means for them, for selling to customers, for the way in which they've organized their affairs, and so on. These are not insignificant considerations to think through.

T&R:  How will BEPS affect the treasury functions of multinational companies?

MC:  A multinational typically comprises a group of separate entities, each with its own function within the worldwide group. Aligning the debt they owe with the operations of the multinational business will be a key concern post-BEPS.

As corporate treasurers actively manage cash and deploy it throughout the world, BEPS may complicate the task and alter the tax consequences of their decisions—particularly the BEPS recommended limits on interest deductibility and the anti-"hybrid" proposals. It will not, however, diminish the real need to periodically harvest cash from one source within the group and strategically employ it elsewhere in the group. Treasury will still need to do that as efficiently as possible, including from a tax perspective.

Debt and debt servicing will still need to be matched with the operating arms of the group and the revenues they generate. BEPS will present yet another demand on treasury's attention and focus when performing these fundamental tasks.

T&R:  How will BEPS affect companies that have a foreign in-house bank?

MC:  Multinationals that have in-house banks need to consider BEPS in light of proposals that require a tighter alignment of profits and functions; in-house banks are clearly a part of this. The difficulty is that every company is set up slightly differently. So while we can give some general lists of activities to look at, really this is a time for the treasury team, with their internal or external tax and treasury consulting teams, to sit down and go through what the specific BEPS actions mean for their organization.

Figure 1 (at right) shows some risk factors that relate to Base Erosion and Profit Shifting from a treasury perspective. So, for example, the first one: Does the group provide cross-border financial services remotely? If so, you may want to consider whether your company has a mismatch between the substance of operations and profitability.

T&R:  So, BEPS requires that an in-house bank actually be run in the taxing jurisdiction where the entity is legally located?

MC:  Whether operating through a branch or corporate form, the BEPS recommendations do increase the importance of having substance and decision-makers located in the jurisdictions where tax treaties are utilized and profits are earned.

My colleagues overseas who work in tax are telling me that when local tax authorities come into companies, they are starting to interview the treasury professionals. They're asking, 'After you've made your cup of tea or coffee in the morning, what do you do in a typical day?' They're trying to make sure the pattern of their day-to-day activities relates properly to the tax results in that country, and for the subsidiaries it may support.

I will also say, for companies that have a foreign financing company in one country and their treasury team in another country, that structure may pose a challenge. Because one could ask why the financing company is located where it is.

T&R:  So, is the key issue that if decisions are actually being made in the U.S. and executed in a foreign entity, it may look like the reason for that structure is to get a lower tax rate?

MC:  The individual units of a multinational enterprise that conducts business throughout the world have different profiles—some with excess cash and some with funding needs—and the differences in these profiles need to be responded to. Financing is an involved activity, and operating a treasury function efficiently requires a consideration of direct tax, indirect tax, withholding tax, and many other items.

Many companies have placed their financing entities in certain jurisdictions because of their extensive networks of treaties for reducing withholding taxes. They've been very thoughtful about where they've located those entities. But the substance needs that a company may have had in the past are likely to be increased with the new BEPS rules. Supply chain and ERP [enterprise resource planning] systems may need to be overhauled if a treasury team implements changes in response to BEPS changes in law.

T&R:  In which area is BEPS most likely to impact corporate treasuries? Staffing?

MC:  For some of the risk factors in Figure 1, there's a broader business impact. You might be saying, 'Are we going to stay with the current way in which we do business, or is there another way for us to operate moving forward?' BEPS will affect financing and cash management activities, but there are also collateral treasury consequences, and BEPS will affect the supply chain management function and deployment of IP [intellectual property], both of which drive the treasury function.

For example, risk factor number 9: 'Does the group operate any sales principal/commissionaire structures?' If the company decides to change its sales principal/agent structure to a buy-sell structure, then that would not only potentially lead to changes in the location in which revenue is derived, but would also have implications beyond tax.

Cash forecasts and currency forecasts may require changes in the way in which cash is redistributed to other parts of the company. So in the future if you wanted to refer back to your legacy cash forecasts for trend analysis, the trends would not hold true because the income would be redistributed. Also, local country personnel would need to be trained, ERP systems would need to be reconfigured, and many supply chain and IP-deployment considerations would need to be addressed.

As part of the BEPS Project, the OECD estimated that corporate tax revenues are reduced globally by 4 to 10 percent as a result of "tax planning"—although not all of that is characterized in the estimate as "base erosion and profit shifting." To the extent that BEPS counteracts this type of tax planning, effective tax rates may rise as a result of new tax laws, so treasury teams now have to look at where their organization's effective tax rate may end up. They need to consider that expectation in their liquidity forecasts, in the way they think about capital, and in their wiggle room in financial covenants. Things like that.

T&R:  What about intercompany loans? What should a treasurer's primary concerns be when evaluating intercompany loans for BEPS compliance?

MC:  The BEPS proposals recommend limits on the deductibility of interest expense, and treasurers need to make sure that the debt they take on going forward is tax-efficient. Also, where there is tax arbitrage between lender and borrower due to differences in the tax regimes faced by the two parties, treasurers need to consider whether BEPS proposals to neutralize the differences will create a need to restructure.

T&R:  So, in what areas do you think corporate treasuries are most likely to need to change in order to comply with BEPS-related legislation around the world?

MC:  The biggest change will be rethinking their assumptions about the tax efficiency of their past strategies and operations in light of countries' efforts to more tightly align the location of taxable profits with value creation.

T&R:  What types of technology changes do you think the typical company will need to make?

MC:  To the extent a company has to change its business model—for example, due to the tightening of the taxable presence ("permanent establishment," or "PE") standards—it may need to evaluate and modify its ERP systems.

For companies that don't have a treasury management system, but are reporting on their in-house cash balances, intercompany loans and external financing, intercompany and third-party interest income or expense, exposures and corresponding derivatives, FX gains and losses, and investment gains and losses—at not only an aggregated level but also a country level—BEPS makes life a whole lot harder.

So I think that this will cause some companies that haven't invested in their treasury systems to go ahead and make that leap. And those that already have treasury systems will need to focus on making sure they have the right data and they have all the information they need to support the company's financial reporting.

T&R:  With all of this in mind, what are steps should a treasurer should take to prepare for BEPS?

MC:  Figure 2, below, shows a framework of action items Deloitte has come up with for companies to address their BEPS exposure. To start, the company has to do some form of impact analysis, and this shouldn't involve just the tax people. They might point out the issues that are problematic given the way the company is organized. But there's a knock-on effect. The minute they start questioning the sales principal company, for example, that has implications for how the company is going to make its supply chain work: What are the important value-creating functions, who performs them, and where are they located?

Likewise, the impact analysis should include the treasury team looking at actions the company might take to address BEPS risk factors and how those actions would impact the treasury function. It's going to start with the tax team identifying the gaps they want to go after. And then the treasury team, along with other teams, is going to say, 'Well, what do we now need to redesign—where we have our in-house bank, where we hire people to support that activity, or what data we need to be able to report back up to help the tax team's global reporting? And what technology do we need so that we can scale this and repeat this for regular reporting cycles?'

So there's a design element here, and then there's a build, test, and go-live. Those components cover both the business operations elements and how to update technologies so that the company isn't relying on data sources that might be out-of-date or subject to error.