11th Annual Domestic Tax Conference. 17 May 2016 Chicago

Transcription

1 11th Annual Domestic Tax Conference 17 May 2016 Chicago

2 Current issues in Treasury risk management

3 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2016 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

4 Today s presenters Paul DeCrane Ernst & Young LLP Principal, Global Treasury Services Tim Kerr Ernst & Young LLP Senior Manager, National Tax Department, Capital Markets Tax Rob Royall Ernst & Young LLP Partner, Financial Accounting Advisory Services Tim Wichman Ernst & Young LLP Partner, National Tax Department, Capital Markets Tax

5 Ever-changing economic, regulatory, and tax environments make it imperative for treasury, accounting, and tax to be coordinated.

6 Agenda Current challenges faced by Treasurers Current issues in risk management Current issues in cash management Current developments in tax Prop. Reg Impact of Base Erosion and Profit Shifting (BEPS) on Treasury Examples Additional EY resources

7 Current challenges faced by Treasurers Evolving role of treasury Market forces and global economic conditions Financial market volatility currency, interest, commodities, credit, and liquidity Slowly rising USD interest rates vs. declining non-usd interest rates Weak non-usd currencies and commodity prices Liquidity constraints and credit risk Market trends and other developments Profound tax changes to intra-group financial transactions Centralization of treasury activities and functions Net investment hedging for U.S. Generally Accepted Accounting Principles (GAAP) Hedging negative (or the prospect of) negative benchmark rates for GAAP ASC 606 revenue recognition and changes in hedging approach for GAAP

8 Current issues in risk management Efficient treasury risk management vs. GAAP hedging vs. U.S. tax hedging Treasury Managing net aggregate risks of the worldwide organization GAAP hedging Managing qualifying risks on an operating or reporting unit basis U.S. tax hedging Managing qualifying risks on a taxpayer or consolidated U.S. tax group basis Different objectives may require strategic trade-offs Managing economic exposures may create financial statement volatility Managing financial statement volatility is burdensome (and still might not be effective) Managing economic exposures may create tax asymmetries Tax gains and losses on hedges and the underlying hedged items may not offset in the same period Centralized treasury centers consider hedge qualification and tax elections Anticipated exposure draft would make hedge accounting easier for GAAP

9 Current issues in cash management Cash pooling and similar arrangements Consider applicability of proposed section 385 regulations Consider impact of Basel III increased cost for notional pooling Consider impact of BEPS Excess cash where and how to invest Consider controlled foreign corporation and transfer pricing rules Consider whether there is increased risk for double taxation Consider impact on effective tax rate (ETR) Intercompany lending Consider impact of proposed section 385 regulations Consider impact of BEPS

10 Current developments in tax Prop. Reg (REG , released April 4, 2016) Prop. Reg documentation and information requirements for debt (i) Unconditional and legally binding obligation to pay a sum certain (ii) Creditor s rights to enforce terms (iii) Reasonable expectation of ability to repay as of the date of issuance (iv) Actions evidencing a genuine debtor-creditor relationship Satisfaction of the -2 requirements does not ensure debt treatment Scope Applicable instrument includes debt created by revolving credit agreements, cash pools, open accounts, and trade payables Issued and held by members of an expanded group Generally effective for instruments issued after finalization, but rules represent a distillation of case law

11 Current developments in tax Impact of BEPS on Treasury Operational considerations Treasury Operations Business Operations Risk Management Intercompany Centers of excellence & shared service centers Cash forecasting revisions Cash accumulation & repatriation Funding & liquidity management Working capital Improved substance Location, management, & administration Cash forecasting revisions Local office services Business flows Pay on behalf of and receive on behalf of Exposure identification & aggregations Foreign exchange, interest rate & commodity risk management Financial instruments used Loan structures & subsidiary debt Interest deductions Exposure identification & aggregations Documentation

12 Examples

13 Cash pooling Treasury Center (TC) with Controlled Foreign Corporation (CFC) and Qualified Business Unit (QBU) USP Types of pooling Physical (e.g. zero balancing) 200 Notional CFC TC Hybrid Operational and tax considerations Functional currency determinations Location of pool leader CFC QBU zt Characterization / Prop. Reg and 988 Bank Appropriate interest rate(s) and terms Allocation of pool benefit

14 FX hedging Net investment in CFC :$ forward or debt USP Bank $ CFC Treasury goal manage translation risk from changes in EUR/USD FX rate Financial accounting considerations Generally, eligible for hedging treatment Gain/loss reported in other comprehensive income to the extent effective U.S. federal income tax considerations Generally, ineligible for tax hedging treatment 1256 Forward may be marked-to-market, accelerating gains 1092 Losses may be deferred if unrecognized gain in offsetting position Actual or deemed repayment of debt Reportable loss disclosure requirements

15 FX hedging of foreign receivables Back-to-back hedge with CFC USP A/R :$ external forward $ CFC $ :$ internal forward Bank Treasury goal manage balance sheet risk from changes in GBP/USD FX rate Potential administrative and regulatory challenges and inefficiencies Financial accounting considerations Generally, eligible for hedging treatment U.S. federal income tax considerations U.S. parent level 1256 and 1092 potential timing mismatch unless documented properly CFC level Net FX gains on A/R and internal forward are foreign personal holding company income (FPHCI) unless business needs exception applies

16 FX risk management - Treasury center Managing risks of CFC, subsidiary, and a QBU USP $ USTC $ CFC USS $ A/R Debt QBU Treasury goal centralize and manage net and exposures Financial accounting considerations Functional currency determinations Hedge accounting considerations US federal income tax considerations Functional currency determinations Character Timing Subpart F Source Tax identifications and elections

17 Additional EY resources On-demand webcast replays Offerings and other resources Capital Markets Tax Treasury Tax Workshop, Capital Structure Review, Treasury Audit Program Global Treasury Services - Integrated Treasury Offerings Foreign currency risk and hedging: Treasury, GAAP, and tax perspectives BEPS is broader than tax: considerations for the treasury team Advisory-Services/EY-global-treasury-services-services#TT Financial Accounting Advisory Services To the Point

18 11th Annual Domestic Tax Conference 17 May 2016 Chicago