Intercompany financing facing new challenges. EY Africa Tax Conference September 2014

Transcription

1 Intercompany financing facing new challenges EY Africa Tax Conference September 2014

2 Panel Moderator Ide Louw International Tax EY South Africa Panel Joseph Pagop Noupoue EY Jemimah Mugo EY Kenya Michael Hewson EY South Africa Craig Whitley White & Case Patrick Oparah EY Nigeria Page 2

3 Agenda Challenges to intercompany financing Debt pricing Treasury companies Page 3

4 Challenges to intercompany financing Page 4

5 Global tax risk More risk Change in the global tax risk landscape Behavior and attitude to tax risk has changed Global tax risk assessment by territory HQs: global and regional Hub Co Main Op Cos Response strategies Understanding risk: CBCR Unilateral domestic law changes proliferate: GAARs Interest and royalty deductibility Anti-treaty abuse Tax authorities have access to more information: Exchange of information CBCR Fiscal authority challenges are increasing: Aggressive tax assessments Tax fraud allegations UN vs. OECD divergence: Transfer pricing Emerging markets PE threshold Generalized increase in source taxation Hub Co rulings and APAs require full value chain transparency Rate drivers Group capital structure: External debt Hybrid financing Finance and treasury centers Trading model: TP policy Principal companies Other significant Hub Cos: IP holding Tangible assets Captive risk management Repatriation management strategies Assessing potential change drivers HQ: CFC Effective management Holdco substance: Dividend withholding tax Hub Co: Tax haven No treaty 0% rate Exempt branch Discretionary ruling Statutory tax incentive: Intragroup financing rendered less effective due to anti-beps measures Patent box Notional interest deduction Low rate Source territory: Profit attribution Deductibility of payment Withholding tax: BEPs risk assessment Overall risk reduction: TP policy and documentation upgrade PE risk management policy upgrade TP and PE training Removal of tax haven entities Use of unilateral and bilateral APAs Use of private letter rulings and clearances Prioritize transparency and cooperative compliance and accelerated settlement of legacy issues Specific risk reduction: Restructure finance structures impacted by BEPs measures Rebalance capital structure vs. supply chain Revisit Hub Cos: Treaty access Substance Location Form of local tax shelter Revisit and renew rulings Less risk Page 5

6 Latest OECD developments Developing countries and international organizations identify key relevant BEPS issues including: Base erosion caused by excessive payments to foreign affiliated companies Profit shifting through supply chain restructuring Difficulties in obtaining the information needed to assess and address BEPS issues, and to apply their transfer pricing rules Treaty abuse Tax incentives with little demonstrable benefit Page 6

7 Thin capitalization in Africa Heat map Thin Capitalization rules No Thin Capitalization rules Page 7

8 East Africa Page 8

9 West Africa Page 9

10 Francophone Africa Page 10

11 South Africa Page 11

12 Legal and regulatory Page 12

13 Debt pricing Page 13

14 Debt pricing The following steps need to be undertaken when pricing an intragroup financing arrangement: Purpose of the loan Source of the financing Benchmarking Page 14

15 Treasury companies Page 15

16 The evolution of treasury Global treasury center Regional treasury center Global payment factory for accounts payable and accounts receivables In-country cash management Decentralized model for commercial and treasury flows Arm s-length treasury Regional model with overlay solution Centralized treasury operations, i.e., FX hedging and intercompany funding Multi-bank electronic banking Regional model with integrated structure Centralized commercial flows, i.e., netting or reinvoicing center Centralized transaction flows, i.e., shared service center Automated treasury flows (sweeping and pooling) Global in-house bank for accounting, funding and investments Global liquidity structures Multi-currency investment portfolio Off-balance sheet investments Page 16

17 Response More risk Change in the global tax risk landscape Behavior and attitude to tax risk has changed Global tax risk assessment by territory HQs: global and regional Hub Co Main Op Cos Response strategies Understanding risk: CBCR Unilateral domestic law changes proliferate: GAARs Interest and royalty deductibility Anti-treaty abuse Tax authorities have access to more information: Exchange of information CBCR Fiscal authority challenges are increasing: Aggressive tax assessments Tax fraud allegations UN vs. OECD divergence: Transfer pricing Emerging markets PE threshold Generalized increase in source taxation Hub Co rulings and APAs require full value chain transparency Rate drivers Group capital structure: External debt Hybrid financing Finance and treasury centers Trading model: TP policy Principal companies Other significant Hub Cos: IP holding Tangible assets Captive risk management Repatriation management strategies Assessing potential change drivers HQ: CFC Effective management Holdco substance: Dividend withholding tax Hub Co: Tax haven No treaty 0% rate Exempt branch Discretionary ruling Statutory tax incentive: Intragroup financing rendered less effective due to anti-beps measures Patent box Notional interest deduction Low rate Source territory: Profit attribution Deductibility of payment Withholding tax: BEPs risk assessment Overall risk reduction: TP policy and documentation upgrade PE risk management policy upgrade TP and PE training Removal of tax haven entities Use of unilateral and bilateral APAs Use of private letter rulings and clearances Prioritize transparency and cooperative compliance and accelerated settlement of legacy issues Specific risk reduction: Restructure finance structures impacted by BEPs measures Rebalance capital structure vs. supply chain Revisit Hub Cos: Treaty access Substance Location Form of local tax shelter Revisit and renew rulings Less risk Page 17

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