Today s key challenge in Treasury Transfer Pricing & Treasury

Transcription

1 Today s key challenge in Treasury Transfer Pricing & Treasury

2 Content The word of the President Virtual reality of Treasury Overview - Treasury operations Intercompany financing Cash pooling Guarantees Documentation requirements Key Takeaways s role

3 Key facts and methodology All industries and areas of service 24 countries Conduct between July and October 2016 The "virtual reality" of treasury Long and short questionnaires interviews completed Want to download the full report? Please visit our website: rate-treasury-solutions Treasurers and Chief Financial Officers Financial Transactions The "virtual reality" of treasury April

4 Key Findings High on the agenda for treasurers: The agendas of the treasurer and the CFO should be better aligned True focus on cash flows forecasting may provide a quick return Treasurers need to take action to safeguard assets with rising cybersecurity threats Treasury s scope continues to expand and is now a company-wide process it no longer operates as a single department. With treasury processes becoming increasingly virtual, treasurers need to collaborate more with the business, shared services and banks and raise their game in IT security, valuation and financial risk management to succeed in today s environment. Treasurers need the means to truly make treasury resilient and effective Base Erosion and Profit Shifting (BEPS) will bring tax and treasury closer together Base Erosion and Profit Shifting (BEPS) will bring tax and treasury closer together New fiscal legislation means substance and transfer pricing will take centre stage. This may have a material impact on the location of treasury activities, distribution of decision power and configuration of systems. As a result, treasury will need to work more closely with tax to assess the impact and properly prepare their organisations. Financial Transactions The "virtual reality" of treasury April

5 BEPS, became a reality in EU Tax paradigm or revolution of the century, but fairness in tax at the price of unending difficulties Examples: Restriction on interest deduction (interest deductible only if < 30% of EBITDA with threshold of 1m situations in which entities loss-making will no longer be able to deduct interest), Exit Taxation, Switch-over clause, General Anti-Abuse Rule, Hybrid mismatch and extension of Controlled Foreign Company rules generating whole wodge of attempts to tax anything that may not have been taxed New framework: everyone claims its "fair share" of the tax cake Main idea is to align TAXABLE BASE with VALUE CREATION. 3 main watchwords: (1) Consistency, (2) Substance and (3) Transparency Treasurers could argue TP rules already existed long before Some countries already started to question to justify the "fair" TP Major principle ( choosing the option that costs the least in tax ) has now been called into question

6 5 key TP questions: what, how, why, where and who? WHAT types of treasury activity does Group Treasury (GT) handle centrally and recharge to affiliates? HOW is GT organized to serve its affiliates and how can treasury management add value? WHY are treasury activities handled centrally? WHERE is the GT function located? WHO takes and bears the financial risks? Last question is crucial: who, ultimately, will end up bearing the risk. For instance, who bears the loss if the borrower subsidiary goes bust? Who is responsible if the guarantee issued by central treasury is called? Based on this question, you can work out the margins to be applied

7 The 10 TP commandments are

8 Be BEPS compliant "If you would know the value of money, go try to borrow some (French Proverb) More ironically, we might say: "In business, the lower the price, the bigger the sticker" (even between sub s of the same group)

9 Overview - Treasury operations Focus on the aggregate business results Short- term debt management Long- term debt management Establishing global financing in a territory where substance can be maintained Excess cash management Working capital management TYPICAL TREASURY SERVICES PROVIDED INTRA- GROUP Other (ancillary) services Investment management (i.e. asset acquisition) Hedging (i.e. FX/currency) External funding optimization Risk management, incl. acknowledgement of financial risk More globally and regionally integrated business units

10 Intercompany financing Main focus areas Assess the creditworthiness of the borrowing entities Define the functional and risk profile of the entities involved Assess the arm s length intra-group interest rate - can we rely on the yield curves only?

11 Intercompany financing ParentCo Related party financing Why is the entity borrowing? What is the borrower s credit rating? Do internal / external comparables exist? Do comparability adjustments need to be performed? Rationale for borrowing Debt capacity Arm s length interest rate Interest payments SubCos Based on debt/equity ratios / projections, could the entity borrow?

12 Intercompany financing Factors influencing interest rates Impact on interest rate Higher Bullet Pre-payment Long term Mezzanine On maturity Unsecured Higher risk currency Unguaranteed Nonconvertible Junior Lower Capital & Interest Call Guaranteed Short term Senior Quarterly (regular) Secured Lower risk currency Convertible Impact of covenants Commercial & Economic Rationale Impact on Fixed Vs. Floating loans

13 Intercompany financing Interest rate setting options Complexity Higher Lower Entity Credit Risk Premium Ratings per entity Segmentation into ratings buckets Combination of ratings and credit limits Notching only (potentially with credit limits) Country Risk Premium Countryspecific spreads Key country premia/discounts, with regional segmentation for rest Regional segmentation only Limited consideration of country risk, as exception Applicable Fees Transactional fee benchmarking Benchmarking for key services only Cost(plus) based remuneration (service spread) Considered as stewardship or immaterial Risk of Challenge Technically Strongest Practical and Defensible Subject to adjustment

14 Cash pooling Main focus areas Create a netting system used for intercompany payments and receipts Assess the arm s length remuneration for the cash pool header Determine the relative contributions of the various participants Allocate the cash pool advantages amongst the participants

15 Cash pooling Factors influencing cash pooling Lending Rate Base Rate + Entity Credit Risk Premium + Country Risk Premium + Cash Pool Service Fee + Cash Pool Facility Fee SHORT-TERM FUNDING NEEDS The spread between the two rates represents the additional remuneration for the cash pool leader EXCESS CASH Deposit Rate Base Rate - Deposit Rate Spread - Cash Pool Service Fee Reduce the MNE s total external funding costs Help manage certain risks such as liquidity or foreign exchange Help obtaining more favourable borrowing conditions Management of volatility of the group's liquid cash resources Decision-making for financing is centralised

16 Cash pooling TP considerations Selection of appropriate TP Method Taking care of additional tax considerations Long term cash position PE, Thin Cap, VAT implications Key transfer pricing aspects: credit risk synergies Considering individual facts and circumstances Type of cash pooling Functions and risks Substance Contractual framework Nature and scope of realized synergies How to measure the cash pool advantage?

17 Cash pooling Types of cash pools Zero Balanced cash pool vs. Notional cash pool

18 Guarantees Main focus areas Implicit versus explicit guarantees Determine the creditworthiness of the borrowing entities Assess the arm s length intra-group guarantee fee

19 Guarantees Benefits Increase the borrowing capacity of related entities. Allow the beneficiary to tap resources that it could not access in the absence of a guarantee. By ensuring fulfilment in case of performance failure, an intercompany guarantee may provide better contractual terms also in relation to commercial transactions. FINANCIAL GUARANTEE Purpose: reduce risk to lenders Main benefits: Access to credit borrowing Substitution for capital in the subsidiary Cheaper access to credit decreasing the risks assumed by the third parties involved The reliability of the guarantor is passed to the related entity resulting in more beneficial terms and conditions for the transaction SUPPLY CHAIN GUARANTEE Purpose: reduce risk to customers of recipient Main benefits: Secure payment The seller can obtain advance payment Secured compensation for nonfulfilment of any important obligations

20 Guarantees Determining a range of arm s length guarantee fee bps Above the top red threshold, a guarantee recipient would not be willing to pay for obtaining the guarantee Yield Savings Approach Applicable only in cases where the guarantee is a means to reduce the associated financing costs Return on Capital Approach Applicable for Supply-chain / Performance Guarantees 0 bps Below the bottom red threshold, an external (independent) guarantor would not be willing to provide the guarantee Transfer price Cost approach Represents the minimum a guarantor would accept to provide a guarantee.

21 Guarantees Factors influencing the guarantee pricing Credit quality assessment Terms of the underlying debt / transaction Impact on the pricing Higher High PD High rate Long term High LGD On maturity Higher risk currency Fees Lower Low PD Low rate Short term Low LGD Quarterly (regular) Lower risk currency

22 Documentation requirements Main focus areas OECD BEPS Action 13 Align transfer pricing outcome with value creation

23 Documentation requirements OECD Base Erosion and Profit Shifting Action Item 13 - three-tiered approach Provides aggregated financial and tax data by tax jurisdiction to facilitate risk assessments Detailed information relating to specific intercompany transactions. Assures compliance with arm s length principle in material transfer pricing positions impacting a specific jurisdiction Complete picture of MNE s global operations, including analysis of profit drivers, supply chains, intangibles, and financing

24 Documentation requirements The importance of a proper TP documentation Action 13 - The Masterfile should include: - A general description how the group is financed, including important financing arrangements with unrelated parties - The identification of any members of an MNE group that provide a central financing function for the group, including the country under whose laws the entity is organised and the place of effective management of such entities - A general description of the MNE s general transfer pricing policies related to financial arrangements between associated parties Treasury operations with appropriate substance What is sufficient substance? Functional analysis Does this differ for holding and financing activities? What would best in class look like? Acknowledgement of financial risk Entity having personnel with ability to evaluate, decline risk, and / or manage risk Entity having capital to bear such risk

25 Documentation requirements Where to start? Identify Take an inventory of your intercompany financial transaction Quantify Check the materiality of each transaction Document Have discussion with treasury personnel to understand how these transactions are currently priced and what support may be on file Determine whether transfer pricing documentation already in place is current Evaluate and support your intercompany financial transactions Do not ignore them!

26 Key Takeaways Wrap-up Treasury operations optimizing the MNE s financial structure (e.g. cash / working capital management) Substance requirements align functional and risk profiles with value creation Transfer pricing outcome need for contemporaneous documentation How can we help?

27 s role We can bring to bear s wealth of service offerings and experience to your organization in the following areas Accounting and controls Treasury and risk technology Treasury organization and strategy Cash and liquidity management Financial risk management Accounting and disclosure (Lux GAAP and IFRS) Tax implications of treasury transactions Regulatory compliance External and internal audit support Policies, procedures, and controls Technology vision and strategy Requirements definition and system selection System design and implementation Reporting solutions Leading practice assessments and performance benchmarking Governance structure and organizational design Treasury strategy, planning, and budgeting Training and change management Cash forecasting Debt & investment management Working capital solutions (A/P, A/R, inventory) Investment portfolio management Interest rate Foreign exchange Commodity Counterparty/credit

28 Your contact at Luxembourg Christophe Hillion Partner, Transfer Pricing Philippe Förster Director, IFRS & Treasury Leader Thomas Campione Senior Manager, IFRS & Treasury

29 Thank you 2017 PricewaterhouseCoopers. All rights reserved. In this document, "" refers to PricewaterhouseCoopers, Société coopérative (address: 2, rue Gerhard Mercator, B.P. 1443, L-1014 Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.