BEPS Everything has a price a Transfer Price F R A N Ç O I S M A S Q U E L I E R, C H A I R M A N A T E L E A C T M E E T I N G - D U B L I N

Transcription

1 BEPS Everything has a price a Transfer Price F R A N Ç O I S M A S Q U E L I E R, C H A I R M A N A T E L E A C T M E E T I N G - D U B L I N

2 BEPS and TP

3 Everything has a price a Transfer Price (TP) Astonishing: a subject as important as BEPS and the new TP rules has not caused much more of a stir in the world of treasury?!? It is as if BEPS did not exist However it is essential to review TP strategies for treasury transactions to ensure you comply Whether we like it or not, it is a reality that treasurers will have to live with, and they will need to adapt to become a Profit Centre

4 BEPS, the story is just beginning (1/2) Became reality with the 1st EU Dir / other Actions will soon be transposed Impending fiscal measures as a whole, in combination with each other, will create headache for taxmen 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, creating 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, Revision of mandatory automatic exchange of information for taxes Directive and extension of Controlled Foreign Company rules generating whole wodge of attempts to tax anything that may not have been taxed New framework required to ensure fairness: everyone tries to claim its "fair share" of the tax cake

5 BEPS, the story is just beginning (2/2) 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 - just a matter of applying them in future 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 Essential for Operations and Tax to align their strategies TP means much more doc and review of prices charged between sub s

6 The 5 key TP questions 5 key questions need to be asked if treasury management is handled centrally: what, how, why, where, and who? WHAT types of treasury activity does GT handle centrally and recharge to affiliates? HOW is Group Treasury (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 TP for the dummies

8 No more free lunches with TP Everything has its TRANSFER price" Problem arises when trying to set and to calculate this price Everything has to have a price, but that price must be "fair" Will the CBS "The price is right" become the treasurers' television show? A loan can no longer be granted without interest and doc, it cannot be waived without due justification, and asymmetrical loans can no longer be granted (unless again the margin can be justified) TP rules must be applied more fully and more punctiliously 2 sub-principles: "nothing is free in terms of TP between 2 entities of the same group. The concept of family counts for nothing in tax AND taking things to extremes undermines the transfer and is no longer acceptable Example: if IHB issues a guarantee in favour of a sub, it cannot be issued without charge, but neither can it be charged at 500 bps, which would be right for making it as tax efficient as possible Fair price for the specific case must be applied: major rule is the "case-by-case" Everything needs to be documented to justify what has been charged and why Paradoxically, therefore, it is more complicated to trade goods and services between the sub s of the same group than with 1/3 parties

9 At arm s length principle

10 In summary, the 10 TP commandments are

11 Central Treasury Structure Treasurers never think of their GT as a Profit Centre (PC) For "traditional" treasurers, PC s are centres intended to generate profit by trading financial products without necessarily having underlying risks In practice, no or few centres operate in this form as aim is to hedge risks or to mitigate them However, when it comes to TP, things work differently. GT must apply a margin to all financial services/transactions, especially if it bears the ultimate underlying risk (in the event of default by the counterparty) GT has more than one role (advisory, agency, IHB) and is more than a service centre Change of approach: reason why treasurers can no longer operate without charge, or (obviously) overcharge, when invoicing for services Keeping things simple (i.e. not invoicing to ensure they do not charge a price that would be seen as not being fair) is not anymore possible All services must be invoiced: not invoicing will be seen as giving an unfair advantage to a sub, which would be re-categorised as taxable Treasurers must get used to the idea that they are operating a PC a real revolution for treasurers although it may not sound much

12 Structure of GT under BEPS

13 Tee-Pee?

14 Fair Price", the trickiest exercise of all (1/2) Trick consists in deciding on and justifying margin/fees applied Case-by-case analysis needs to be carried out by assessing the finances of the counterparty entity (either in-house or using a service such as S&P/Moody's, which in addition offers specially designed doc), the country risk, the sector risk all need to be taken into account and eventually existence of any implicit parent company guarantee (which might be rock-solid or not so rock-solid) these 4 factors make the exercise relatively difficult Essential to document relationship with the sub s by means of a MA s covering all dealings and SLA s Such doc usually exists, but is often inadequate or out of date Good time to revisit it and make sure it is complete These doc s must be comprehensive and accurate

15 Fair Price", the trickiest exercise of all (2/2) Margins must be at "arm's length", justifiable and properly documented, based on a stand-alone price, an appropriate margin must be added (or deducted) accordingly Ideally, benefit should be shared between GT and sub s Few examples explain the margins taken but these margins are determined by the implicit counterparty rating (i.e. sub s) Advisory" content is not the highest in terms of cost, but more difficult to assess in terms of price (e.g. GT performs reporting and accountancy work for IFRS, EMIR, FATCA, CRS, MiFID, on behalf of the sub s Everything should be properly laid down to satisfy foreign tax authorities asking questions (whether there is an APA "Advance Pricing Agreement" in place or not)

16 Examples

17 Margins applied with negative interest rates We need to tackle the subject of negative interest rates, which complicate the task of deciding on the margins to apply to loans made to subsidiaries, and to subs deposits In the examples (next slide), we have seen where these abnormal market conditions might lead us For example, with deposits, we might apply a reverse spread if we wanted to guarantee at least the zero interest rate that each subsidiary can still obtain on a current account (for how long, that is the question)

18 A win-win deal ideally

19 Reviewing TP may be a tax optimisation opportunity For treasurers, focus on Actions 4, 8, 10 and 15 Imposes a sort of tax health check, which is always salutary GT often apply constant margins or apply varying margins using unsophisticated methods or charge fixed fees that are completely inflexible By calculating margins individually, opportunity to increase them, if ultimate risk is left with GT Allow to maximise deductibility of margins, particularly if GT under more favourable tax regime Golden opportunity to revise TP strategy from top to bottom The spur to improving consistency of approach, to being closer to substance in some cases, and undoubtedly to improving transparency Since all transactions must be invoiced properly, GT becomes a PC (modest and not excessive profits) For some activities (e.g. advice, admin, dealing with banks, ) need for reasonable fees For financial transactions, a reasonable margin and for providing information systems, the traditional "cost plus" principle Are all doc in place and can you justify everything? If not, hurry up and make sure you're ready by 2017 Don't rely on banks to set your benchmark and find the doc reference material for TP d

20 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)

21 Two articles on BEPS published by TMI

22 22 Thank you! F R A N Ç O I S M A S Q U E L I E R A T E L 4 5, B L D P I E R R E F R I E D E N L L U X E M B O U R G T E L E M A I L F R A N C O I S. M A S Q U E L I E R T L G R O U P. C O M Blog: LinkedIn: ATEL group