Constant Change: Optimizing Treasury for Asia s Evolving Regulatory & Market

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1 Treasury and Trade Solutions Constant Change: Optimizing Treasury for Asia s Evolving Regulatory & Market March 2016

2 Table of Contents Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices 2 Key Tax changes affecting Liquidity Management & Treasury Practices 5 A Broader Look at Notional Pooling, China & India 19

3 Today s agenda Michael Velten Southeast Asia ( SEA ) FSI Tax Leader Deloitte & Touche LLP, Singapore Ann Lin Khoo Asia Market Manager, Liquidity Management Citibank, Hong Kong Topics Key Tax changes affecting Liquidity Management & Treasury Practices A broader look at Treasury Center Initiatives in Asia: Singapore, Hong Kong, Thailand & Malaysia Base Erosion Profit Shifting (BEPS) Transfer Pricing Topics Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices A broader look at Basel III Notional Pooling : Still an effective liquidity management tool? Case Study - China and the RMB Internationalization Liquidity Management in India 1

4 Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices

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6 Key Asia Regulatory & Market Changes Treasury related Tax Incentives Thailand International Headquarter (IHQ) Incentive including : Concessionary tax rate for qualifying income received from affiliates within Thailand Hong Kong Corporate Treasury Center (CTC) incentive including: Reduction in profits tax for specified treasury activities to be announced in 2016 Malaysia Treasury Management Center (TMC) incentive including: Reduction in profits tax for specified treasury activities Singapore FTC Initiative: Tax Concessions for qualified companies Up for renewal in March, 2016 Mandatory Use of Indonesian Currency: Indonesia Transactions performed by residents and non-residents, cash and non-cash transactions Language for documentation: Any agreements/documents where one of the contracting party is an Indonesian entity (either client, bank or both) must be made in bilingual (English and Indonesian) China & The RMB Internationalization Allow for cross border movements of funds Geographic expansion of the Shanghai Free Trade Zone (SFTZ) Establishment of the Free Trade Zone Accounting Unit (FTU) within SFTZ More Free Trade Zones announced in Tianjin, Guangdong and Fujian Others. India Relaxations on Inter-company lending laws Changes to the Companies act to allow for inter-entity related party transactions for private entities Negative Interest rates Continued interest rate cuts BEPS Basel III implementation Dodd-Frank FACTA. And many more.. 3 Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices

7 Basel III Implications in Asia Global guidelines with varying degree of implementation in Asia as well as across banks. Treasurers will have to manage across differing practices and different treatment of bank deposits Liquidity Liquidity Coverage Ratio (LCR) Net Stable Fund Ratio (NSFR) HQLA 30D Net Cash O/F Available Stable Funding Required Stable Funding Liquidity Leverage Ratio Basel III/ Supplementary Leverage Ratio (SLR) Tier 1 Capital Average Assets Tier 1 Capital Total Leverage Exposure Liquidity coverage ratio implementation across APAC Countries Asia-Pacific BCBS China Hong Kong Taiwan Australia Singapore Indonesia Malaysia Thailand Philippines India Korea Japan New Zealand Introduction 15-Jan 14-Jan 15-Jan TBD 15-Jan 15-Jan TBD TBD TBD TBD 15-Jan 15-Jan TBD TBD Initial Phase-in % 60% 60% 60% TBD 100% 60% TBD TBD TBD TBD 60% 60% TBD TBD 100% compliance 19-Jan 19-Jan 19-Jan TBD 15-Jan 19-Jan TBD TBD TBD TBD 19-Jan 19-Jan TBD TBD Sources: 1 Moody s, national regulators *For systemically important institutions, 100% compliance is required from January 2015 Implications on Bank Deposits Implications on Liquidity Structures Interpretation that banks may not be able to net off loans with deposit positions Distinction between core operating deposits and non-operating deposits (i.e. liquidity value). Overlay Pool Operating Accounts Operating Accounts Pool increased costs, or legal reviews of existing structures LCR Friendly Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices

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10 Key Tax changes affecting Liquidity Management & Treasury Practices Navigating the changing tax landscape Michael Velten, 10 March Key Tax changes affecting Liquidity Management & Treasury Practices

11 Introduction Tax trends Tax has been front page news for most of the past 4-5 years; and a focus of public attention and domestic and international political action (and reflects continued revenue pressures on Government) According to the Lloyd s Risk Index 2013, tax uncertainty was the greatest fear for global businesses following public and political exposure and debate A result has been a rewrite of important aspects of the international tax rules via the OECD s BEPS project and for instance a move towards global tax transparency (i.e. CRS) Google, Amazon, Starbucks: The rise of tax shaming [BBC News Magazine 21 May 2013] Everything these companies are doing is legal. It's avoidance and not evasion. But the tide of public opinion is visibly turning. Even 10 years ago news of a company minimising its corporation tax would have been more likely to be inside the business pages than on the front page. In Asia we continue to see domestic tax reforms (e.g. GST/VAT) and increased tax audits and enforcement; although often that is balanced against incentivising investment (e.g. RTC) and/or certain activities (e.g. R&D). Challenges in tax law development and administration remain in some locations The response to this has been an increased focus on tax as a risk by MNC s; including governance and tax risk management (esp. operational taxes) 2016 Deloitte & Touche LLP 7 Key Tax changes affecting Liquidity Management & Treasury Practices

12 Treasury centres Incentives 2016 Deloitte & Touche LLP 8 Key Tax changes affecting Liquidity Management & Treasury Practices

13 Tax incentives for treasury centres in Asia Malaysia and Thailand: Available incentives Malaysia Corporate tax rate: 24% Treasury Management Centre ( TMC ) Incentive: 70% tax exemption for 5 years for qualifying treasury services rendered to related companies Also: withholding tax, stamp duty and personal tax incentives Application period: 8 October December 2016 Market observations: Very few TMC s have been approved Extension of TMC incentive unclear Thailand Corporate tax rate: 20% International Headquarters ( IHQ ) Incentive: Qualified activities include: treasury centre services 0%/ 10% CIT rate (for 15 years) on qualifying income Also: Business tax and withholding tax exemption and15% personal tax rate for expatriate employees Market observations: Bank of Thailand approval needed for a treasury centre At least one approval is understood to have been granted 2016 Deloitte & Touche LLP 9 Key Tax changes affecting Liquidity Management & Treasury Practices

14 Tax incentives for treasury centres in Asia Hong Kong: Corporate Treasury Centre ( CTC ) Regime Historic tax limitations Recent developments No tax concession for corporate treasury activities, unlike competitors in the region (such as Singapore) Asymmetric tax treatment of interest income and interest expense Limited (comprehensive) tax treaty network e.g.: 1 in 2003; 5 in total in 2008 Singapore Budget 2016: The Singapore FTC incentive is due to expire on 31 March 2016 An extension to the FTC incentive is anticipated in the Singapore Budget to be delivered on 24 March 2016 CTC regime proposed in Hong Kong Budget 2015: Concessionary tax rate of 8.25% on qualifying corporate treasury profits Interest payable to non-resident associated companies to be deductible, subject to conditions The Inland Revenue (Amendment) (No.4) Bill 2015 is being read by the Legislative Council; and is pending enactment (HKMA targets to have the bill passed and enacted as law in mid 2016; subject to LegCo) Current tax treaty network: now Deloitte & Touche LLP 10 Key Tax changes affecting Liquidity Management & Treasury Practices

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16 Tax incentives for treasury centres in Asia Key tax drivers: A recap Home country considerations e.g.: CFC rules, participation exemption etc. Interest withholding tax leakage Net corporate income tax expense in RTC location GST/VAT leakage (e.g. non-recoverable GST) BEPS impacts (e.g. restrictions on interest deductibility) Total tax cost modelling is important; RTC headline concessionary rates are only part of the analysis 2016 Deloitte & Touche LLP 12 Key Tax changes affecting Liquidity Management & Treasury Practices

17 BEPS Status and impact on treasury 2016 Deloitte & Touche LLP 13 Key Tax changes affecting Liquidity Management & Treasury Practices

18 BEPS actions: Impact on Treasury Action item 1 Digital economy 2 Hybrid mismatch arrangements 3 Controlled foreign company rules 4 Interest deductions 5 Harmful tax practices 6 Preventing tax treaty abuse 7 Avoidance of permanent establishment status 8 TP aspects of intangibles 9 TP aspects of risk and capital 10 TP for high risk transactions 11 Methodologies and data analysis 12 Disclosure rules 13 TP documentation 14 Dispute resolution 15 Multilateral instruments Deloitte & Touche LLP 14 Key Tax changes affecting Liquidity Management & Treasury Practices Recommendations for changes to domestic law, as well as double tax treaties, to address hybrid instrument mismatches. Will affect the after-tax cost of hybrid financing. Certain arrangements in US groups may be unintentionally impacted (e.g. if hybrid entities are involved) Recommendations will limit interest deductions based on either group attributes, fixed economic ratios or both. Number of countries who will adopt these Action 4 recommendations is uncertain Many groups are reviewing internal financing structures and simplifying financing arrangements Key changes in BEPS recommendations: Decreased importance of contractual allocations of risk; rather control of risk determines risk allocation. Focus is on managing and controlling risk Emphasis on where functions are carried out and where people are located rather than legal location of risk Transaction should be respected if it has the fundamental economic attributes of an arrangement between unrelated parties and commercial rationality One example concludes that when borrowing from an affiliate and a 3rd party and the 3rd party loan price reflects an implicit group credit support, the related party loan should be priced commensurate with the 3rd party loan, i.e. no group synergy should be factored into the i/c interest rate Recommendations propose new 3-tier approach to TP documentation: Country by country report - Key financial information on MNC affiliates on an aggregate country basis with an activity code for each affiliate Masterfile - Key information about the group`s global operations including a focus on 3rd party and intercompany funding arrangements Local file Detailed local analysis of the transactions

19 BEPS actions: Movement in Asia Country Australia Peoples Republic of China Japan South Korea India Hong Kong Taiwan Singapore Indonesia Malaysia Philippines Thailand Vietnam Type First mover First mover First mover First mover Fast follower Slow follower Slow follower Slow follower Slow follower Slow follower Slow follower Slow follower Slow follower 2016 Deloitte & Touche LLP 15 Key Tax changes affecting Liquidity Management & Treasury Practices

20 BEPS: Implementation Singapore: Position on key actions Action Singapore s position 1 Digital economy Unclear, may consider GST on e-services 2 Hybrids Not expected to adopt recommendations 3 CFC No change expected 4 Interest Unclear, unlikely to adopt in short-term 5 Harmful tax practices Singapore tax incentives to be examined as follow on work in Government believes incentives are all substance based, to be seen whether OECD agrees. On transparency, taxpayer agreements will be shared via AEOI from Treaty abuse Minimum standard likely to be adopted. Singapore has preference for Principal Purpose Test 7 PE status Unlikely to actively push to adopt, but have indicated that the new version of the PE article may start to find its way into Singapore s treaties in the future over time 8-10 Transfer pricing To consider adoption of updates to OECD TP Guidelines on case-by-case basis 11 Monitoring Government considers this as important 12 Mandatory disclosure Unclear 2016 Deloitte & Touche LLP 16 Key Tax changes affecting Liquidity Management & Treasury Practices

21 BEPS: Implementation Singapore: Position on key actions (cont.) Action 13 CbC, master / local file Singapore s position No public announcement on CBCR yet, but Government is consulting widely and appears to generally be in favour of adoption. Possible that a consultation document may be released following private/closed consultations Assuming consultation proceeds as expected, Singapore would likely look to adopt CBCR in OECD prescribed format once sufficient OECD/G20 countries adopt, potentially from 2017 Concerns about use of taxpayer data by other tax authorities to initiate profit grabs / disputes TP documentation requirements updated in January Dispute resolution Will adhere to minimum standard, considering mandatory binding arbitration 15 Multilateral instrument Actively participating In general, an increased focus on BEPS in Singapore: More proactive interactions from Government with taxpayers and interested parties Ministry of Finance appear to be taking a more active role at the OECD (e.g. on the multilateral instrument) Media interest growing 2016 Deloitte & Touche LLP 17 Key Tax changes affecting Liquidity Management & Treasury Practices

22 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte s more than 220,000 professionals are committed to making an impact that matters. Deloitte serves 4 out of 5 Fortune Global 500 companies. About Deloitte Southeast Asia Deloitte Southeast Asia Ltd a member firm of Deloitte Tohmatsu Limited comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam was established to deliver measurable value to the particular demands of increasingly intra-regional and fast growing companies and enterprises. Comprising 270 partners and over 7,300 professionals in 25 office locations, the subsidiaries and affiliates of Deloitte Southeast Asia Ltd combine their technical expertise and deep industry knowledge to deliver consistent high quality services to companies in the region. All services are provided through the individual country practices, their subsidiaries and affiliates which are separate and independent legal entities. About Deloitte Singapore In Singapore, services are provided by Deloitte & Touche LLP and its subsidiaries and affiliates. Disclaimer This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte network ) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. Deloitte & Touche LLP (Unique entity number: T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A) Deloitte & Touche LLP 18 Key Tax changes affecting Liquidity Management & Treasury Practices

23 A Broader Look at Notional Pooling, China & India

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25 A look at Notional Pooling Structures Notional Pooling has traditionally been a popular cash and liquidity management technique. In recent years, evolving regulatory, tax and accounting issues have resulted in tightening requirements around notional pooling and therefore incremental costs and administration burdens on the corporate end users. Top Tips for Corporate Treasurers Consider: Do the costs now outweigh the benefits of having a notional pooling program? (BASEL III) Are there inconsistencies between how banks treat notional pooling programs? (IAS 32 vs. US GAAP) Are you facing incremental questions on where the participants in the pool are incorporated? Leverage Alternative Liquidity Programs to achieve the same centralization objectives (e.g. Physical Cash pooling, Payment / Receive on behalf (POBO)) Select the most suitable Header company and Location for the Notional pool Review participants involved in a Notional pool structure consider using Single entity structures Use one bank as a holistic cash and liquidity management provider 20 A Broader Look at Notional Pooling, China & India

26 Case Study : RMB Cross Border Pooling Global pool In House Bank USD/ EUR Funding A/Cs FX where required The Company Fortune 500 company with successful manufacturing & consumer franchise in China Global In House Bank (IHB) managing global cash flows and Payment on Behalf (POBO) including China Header entity is registered in the SFTZ China outside SFTZ Automatic Sweeping Excess cash positions*, repayment Domestic TBA Sub A/C 1 In House Bank Offshore RMB (CNH) A/C RMB Special A/C RMB General A/C (Domestic Concentration Header A/C) Domestic TBA (concentration) Domestic TBA Sub A/C 2 Domestic Pool *Services are subject to regulatory restrictions and market Amt. matched to POBO req Domestic TBA Sub A/C 3 Hong Kong China The Solution RMB Cross Border Pooling was implemented allowing for cross border bi-directional intercompany loans between the IHB and its China subsidiary These liquidity flows were integrated with the Domestic CNY POBO solution managed by the China subsidiary Funding for Domestic Pool managed globally for Just in time funding into China The Benefits Minimal cash buffers left in local subsidiary accounts* Full utilization of cash flow globally, with exact funding Assurance that funds reach China the same day via Citi s automated sweeping program 21 A Broader Look at Notional Pooling, China & India

27 Liquidity Management in India Lack of visibility still #1 challenge for corporates in India Taxation and Companies Act related laws necessary, but continue to be a challenge Source: Deloitte, 2015 India Corporate Treasury Survey Source: Deloitte, 2015 India Corporate Treasury Survey Liquidity Management Landscape Best in Class Solutions Companies Act law* being further relaxed Fragmented Cash, Multiple Banking Partners SWIFT not widely used between banks Cash reporting requires manual efforts Increased operating costs from localizing global platforms Multi-bank Solutions Multi-entity Cash Concentration Solutions Source: Deloitte, 2015 India Corporate Treasury Survey * Some relaxation for private entities to conduct intercompany transactions 22 A Broader Look at Notional Pooling, China & India

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