Treasury's Biggest Tax Impacts

Multinationals' tax teams are well aware that BEPS is on the horizon, but unfortunately, many treasury professionals are not. In fact, many corporate treasurers are unfamiliar with the tax implications inherent in various treasury strategies that they are considering, or even strategies that they already have in place, such as multicurrency cash pools and in-house banking structures.

International cash pools.  International cash pools are extremely sensitive from a tax and accounting perspective; the treasury team's decisions around structuring a global cash pool will have significant tax consequences for all entities within the pool.

One example is the decision about whether to implement notional pooling, which requires cross-guarantees between participants, or physical pooling (zero balancing), a structure in which transfers are considered to be intercompany loans. In any pooling structure, there is an account designated as the lead, or "header." If corporate headquarters actually owns the header account, the interest between entities is deemed as intercompany. If, on the other hand, corporate headquarters is managing the header account, acting as agent on behalf of the pool participants, then the interest is considered bank interest.

This is a very important distinction because the way in which interest is defined dictates how it is treated for tax purposes. In a thin-cap scenario, one or more of the entities in the pooling structure is consistently in a debit position, and so is perpetually borrowing from pool participants that are flush with cash. If the pool is physical, interest on these intercompany loans is usually deductible from the borrower's taxable income, but in some countries the interest paid to non-banks (corporate entities) is not deductible, or only partially deductible.

In order to prevent excessive interest deductions on such loans, thin-cap regulations require that loans be offered on an "arm's-length" basis. They must use an interest rate that is considered commercially reasonable—i.e., no below-market interest rates are allowed between entities in the pool. It's also worth noting that most foreign governments do not impose taxes on intercompany loans but do tax dividends paid to a parent company in another country. 

Another reason multinationals need to closely monitor all interest payments on intercompany loans is that withholding tax may be due in certain countries that have participant entities in the pool. Europe seems an ideal location for establishing a cash pool, since the advent of the euro made a much broader population of countries available to easily participate from a treasury-operations perspective. However, the individual subaccounts in a Eurozone cash pool are still subject to local tax regulations and levies. Conversely, if a U.S. company that owns a France-based subsidiary participates in a pool headed by a Netherlands account, then the French subsidiary may be subject to withholding tax in the Netherlands, even if it is owned by a U.S. entity. Because tax treaties exist between many countries allowing pooling arrangements, companies can typically recover withholding tax, but it may take time to receive the refund.

In-house banking structures.  Likewise, setting up an in-house banking (IHB) structure can have tax consequences if the structure incorporates a cross-border cash pool. According to Ernst & Young, the typical functions that could be centralized in an in-house bank include corporate funding, intercompany financing, cash and liquidity management, financial risk management, the establishment of an intergroup netting system, and a payment factory.

A variety of factors determine whether a particular company would be better off setting up accounts with regional banks, partnering with a single global bank, or adopting a hybrid solution. This decision may dictate whether the in-house bank can manage foreign exchange rates, certain types of local payments, and attendant tax issues.

Keep in mind that the interest derived from the IHB or liquidity structure will be taxed in the jurisdiction where it is located. This is why so many header accounts are located in more favorable tax jurisdictions, such as London, Luxembourg, and the Netherlands.

Before establishing any global liquidity structure—including an in-house bank—treasury needs to partner closely with tax. The primary purpose of the structure should be to streamline treasury operations, improve liquidity management, and/or serve another demonstrated business purpose. However, it's also important to consider both regulations and withholding-tax impacts when choosing a location for an in-house bank. In contrast with favorable tax environments in Europe, Asia and Latin America are more difficult jurisdictions due to currency restrictions, regulatory environments governing resident versus non-resident accounts, and country risk.

Treasury and Tax Must Collaborate

Smart treasury strategies around cash pooling, netting, and payment factories can help improve an organization's liquidity and working capital management. But they can also have significant tax implications, which will only deepen if countries start to pass laws requiring BEPS compliance.

Corporate treasury teams should enlist the help of their partner banks when making decisions about how to implement treasury tools across borders. It is also crucial for treasury professionals to coordinate closely with their colleagues in the tax function anytime they're building and implementing treasury strategies that might have tax implications. In addition, treasury professionals must take responsibility for staying abreast of macroeconomic tax issues and changes in every tax jurisdiction in which the company operates.

Though there is a trend toward including both tax and treasury teams in strategic discussions early on, especially in conjunction with merger or acquisition activity, from an organizational standpoint the functions typically both report up to the CFO. Generally, treasury does not report to tax, nor does tax report to treasury.

A treasurer with a tax background is ideal, because that means the leader of treasury is equipped with expertise in both areas. In some instances, the treasurer is also head of the tax function—both roles are combined into a single position, which ensures collaboration between the functions. Regardless of whether a company has a global presence, merging tax and treasury roles could be a best practice for any treasury operation. If the roles are not combined, regular meetings between these stakeholders are essential on an ongoing basis, not only when a company enters a new market.

Specific Steps to Make Collaboration Work

Coordinating closely with tax colleagues and a trusted banking partner, treasury teams should take the following five steps to integrate tax considerations into their day-to-day treasury activities and their treasury strategy:

1. Draw a map of your organizational structure.  Treasury and tax teams need to have a firm understanding of their organizational and legal structure and accounts, in order to fully understand the tax implications. Drawing a high-level organizational chart is a helpful first step in understanding the tax implications of specific strategies and decisions.

Treasury and tax should work together to create this map, identifying each legal entity, the accounts and cash flows associated with each entity, and the funding flows between entities (e.g., intercompany loans). Large companies may have more than 400 bank accounts globally, so this exercise may take some time. But it's important to invest the effort to get the organizational chart right.

As tax and treasury work together to describe the company's legal entities and the cash flows among them, they should also review the treasury solutions the company has in place, such as cash pooling structures, and map out the tax implications of all these treasury solutions.

2. Look for opportunities to automate and centralize.  Once treasury and tax have jointly developed the organizational chart, they are ready to look for opportunities across that chart to increase automation and to centralize functions such as reporting. Many jurisdictions require central reporting for transactions including tax, and those requirements will only intensify with the advent of BEPS.

Enterprise resource planning (ERP) systems and online portals facilitate visibility and control, enabling companies to gather, consolidate, and report on information more efficiently and seamlessly. A company's banking partners need to easily interface with its ERP system and provide reporting of global bank balances and transaction activity that is as close to real time as possible. From an accounting perspective, the ERP system must be able to track cash sweeping activity, as well as intercompany loans and associated interest, so that funds are allocated properly to entities and the tax reporting and assessments can be properly recorded.

Multinationals typically also need to address central banks' reporting requirements. Many large multinational organizations charge their subsidiaries licensing or management fees in order to justify to the subsidiaries' local government the flow of funds to the parent company located offshore. Frequently, these fees are negotiated with the government prior to the company locating its subsidiary in that country. This means the standardization of information and ease of access to information by all stakeholders are crucial components of any ERP deployment—ultimately leading to increased workflow efficiencies.

Treasury and tax should collaborate on selecting and implementing a new cash management, treasury management, or ERP system. Opportunities to innovate are plentiful; a recent survey of tax professionals revealed that very few tax departments have automated their tax reporting process, with many still relying on complex Excel spreadsheets. Several treasury management systems on the market today offer robust functionality around managing risks related to tax, hedging, and forecasting. These systems offer the corporate treasurer significantly enhanced capabilities in global liquidity and cash management reporting, as well as payment factory management.

3. Seek thoughtful, holistic cash management advice.  Given increasing pressures and resource constraints on both treasury and tax professionals, and the increasingly complex global tax environment, partnering with a bank that takes a holistic approach to cash management is a helpful way to help ensure you have the right insights and are asking the right questions about the tax implications of your organizational structure and treasury strategy.

A bank can work with a treasury team to conduct bank account rationalization. This includes reviewing the company's global bank account structure, pinpointing the purpose of each account, and identifying those that the company needs to keep. A bank can also offer guidance on the appropriate treasury solutions to meet specific business objectives, while keeping tax considerations integral to the strategy.

Although there is a trend toward the standardization of file formats—including SWIFT, which has gained a strong foothold with companies interested in bank-agnostic formats—many corporations require their banking partners to accommodate proprietary file formats, as well as multiple currencies and transaction types, and they may not have a single ERP instance. The company's treasurer and accounts receivable/accounts payable staff need to work closely with their banks to ensure the banks fully understand their cash management and reporting needs.

4. Understand the implications of possible BEPS requirements on your treasury strategy and resources.  The BEPS action plan may not take effect until 2017, but it may require companies to begin reporting a range of data to tax authorities during 2016. Corporate treasurers need to discuss with their tax colleagues and external tax experts the operational impact BEPS could have on the treasury team. The result of this discussion may include allocating additional headcount for data reporting or positioning treasury team members in other markets to work alongside regional business leaders.

5. Maintain close coordination between treasury and tax teams.  Within many organizations, leadership sets the tone for an environment of collaboration. It is the CFO's responsibility to guide alignment between the treasury team and their tax counterparts. A close partnership between the treasury and tax functions is more essential now than ever before, particularly with potential BEPS changes looming.

Treasury teams need to collaborate closely with tax teams when implementing new cash management solutions to ensure a full understanding of tax structure considerations, local regulations, withholding tax impacts, and more. Through his or her senior sponsorship, the CFO can ensure that both functions engage in regular dialogue, and have equal visibility and voice in any major finance initiative—ensuring optimal profitability for the organization.

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Amy Beninato is a director and regional sales manager at Bank of the West. In this role, she is responsible for leading a team that develops and maintains successful cash management business relationships with corporate clients, and creates business development strategies in line with market advances. Beninato previously held senior sales positions in global cash management with JP Morgan Chase, HSBC Bank, ABN AMRO, and Bank of America.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Bank of the West. Companies should always consult with their tax professional for guidance on tax implications.