THE INTERSECTION OF TAX & TREASURY 1
INTRODUCTIONS Denise Magyer Senior Vice President, Allied Irish Bank BEATRIZ SALDIVAR MBA & CTP Consultant & Member of the Federal Reserve Faster Payments Task Force 2
AGENDA Starting Point Treasury Operations Models Key Tax Challenges Facing Treasury Bank Accts & Cash Pooling Structures Reg & Tax Reform Legal Entities Reg 385 BEPS 3
AGENDA Case study Conclusion 4
TREASURY OPERATIONS MODELS How is treasury structured in your company? Hybrid Source: Key Differences 5
TREASURY OPERATIONS MODELS Where are your treasury operations located? Source: AFP 6
STARTING POINT Tax Treasury Controllership Collaboration 7
KEY TAX CHALLENGES FACING TREASURY OPERATIONS Structure Legal Entity Branch? No Need for Separate Legal Entity Taxed At Corporate Tax Rate Beneficial 8 Source: AFP, LET S TALK TREASURY, EY, DELOITTE
KEY TAX CHALLENGES FACING TREASURY OPERATIONS Structure Legal Entity Group? Requirements Impact Examples 9 Source: AFP, LET S TALK TREASURY, EY, DELOITTE
KEY TAX CHALLENGES FACING TREASURY OPERATIONS CAD EUR GBP Master Accounts MXN USD Treasury / In-House Bank Cash Pooling Physical Notional Single Legal Account Reference Account Multicurrency LE - USA USD EUR GBP MXN LE - Canada CAD USD MXN EUR LE - France EUR GBP USD TRY 10 Source: AFP, Let s Talk Treasury, Treasury Today
BANK ACCOUNT & CASH POOLING STRUCTURES Issues Regulations / Tax Reforms Considerations Monitoring Tax Rules Source: Let s Talk Treasury, IRS, EY, Deloitte, AFP 11
FINANCIAL REGULATION 385 Originated to Prevent Corporate Tax Inversions Enacted as part of the Tax Reform Act of 1969, P.L. 91-172. Sec. 385(a). On April 4, 2016, Treasury proposed regulations under Sec. 385 in an effort to combat earningsstripping transactions Source: Tax Adviser 12
FINANCIAL REGULATION 385 Why Is Reg 385 Important for Treasurers? Oct. 21, 2016 Final and temporary regulations contain a scaled-back version of proposed regulation New Regulations Organized into four (4) main sections Source: Tax Adviser, AFP, Bloomberg 13
FINANCIAL REGULATION 385 Why Is Reg 385 Important for Treasurers? 1 st General Rules & Definitions 2 nd Documentation Rules 3 rd Set of Transaction Driven Rules 4 th Consolidated Groups & Recast Rules Source: Tax Adviser, AFP, Bloomberg 14
Debt Instruments Excluded Expanded Group FINANCIAL REGULATION 385 Significant Scope Regulations & Limitations Issued by U.S. Domestic Corporations Treasurers Welcome These Exclusions Important to Define Source: Tax Adviser, AFP, Bloomberg 15
FINANCIAL REGULATION 385 What Is Required & How Does It Work? Documentation Rules Recast Rules Specific Documentation Indebtedness Factors Debt Issued After 1/1/18 Debt / Enumerated Transactions Two Rules: General & Funding Most Controversial six-year per se period Source: Tax Adviser, AFP, Bloomberg 16
FINANCIAL REGULATION 385 5 General Themes Every Company Needs To Know The regulations have many exceptions, permitted reductions, and permitted exclusions Cash pooling and complex treasury arrangements Foreign corporate investees need to diligently review intercompany trade payables U.S.-Based multinationals will still be affected Source: : Tax Adviser, AFP, Bloomberg Foreign investors into the U.S. MUST reevaluate traditional funding structures 17
BASE EROSION & PROFIT SHIFTING (BEPS) What Is BEPS? Tax planning strategies that exploit gaps and mismatches in tax rules that artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. Stated simply, BEPS arises because under existing rules, it is possible for companies to artificially separate taxable profits from economic activities and value creation Raffaele Russo, Head of BEPS project Source: OECD 18
WHAT IS BEPS ALL ABOUT? Source: EY 19
WHAT BEPS IS NOT ABOUT? Not directed against a low tax rate. Not seeking to harmonize tax policy Not directed against tax competition between countries i.e. each country has the autonomy to set up its own corporate tax system Source: EY 20
WHAT BEPS IS NOT ABOUT? Source: EY No or low taxation is not a cause for concern unless associated with other factors such as: No / low effective tax rate A regime ring fenced from the local economy A lack of transparency on the operation of the regime A lack of effective information exchange with other counties in the regime 21
BASE EROSION & PROFIT SHIFTING (BEPS) OVERVIEW OF ACTION PLAN Action 14: Making dispute resolution mechanisms more effective Action 15: Develop of a multilateral instrument for amending bilateral tax treaties Action 11: Establish methodologies to collect and analyse data on BEPS and actions addressing it Action 12: Require taxpayers to disclose their aggressive tax planning arrangements Action 13: Re-examine transfer pricing documentation Source: EY and International Tax Review Action plan on Base Erosion and Profit Shifting (BEPS) Action 8: Consider transfer pricing for intangibles Action 9: Consider transfer pricing for risks and capital Action 10: Consider transfer pricing for other high-risk transactions Action 1: Address the tax challenges of the digital economy Action 2: Neutralise the effects of hybrid mismatch arrangements Action 3: Strengthen CFC rules Action 4: Limit base erosion via interest deductions and other financial payments Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance Action 6: Prevent treaty abuse Action 7: Prevent the artificial avoidance of permanent establishment status 22
BEPS IMPACT ON TREASURY "While traditionally taxation issues have not been considered one of the primary focuses of treasury management, all financial aspects which have an impact on business ultimately also concern treasury. Intercompany Financing Transactions Transfer Pricing Country By Country Reporting BEPS --the next regulatory challenge Source: OECD, The Role of BEPS for Treasury Management Written by Martin Bellin. Posted in Treasury & Tax Management 23
BASE EROSION & PROFIT SHIFTING (BEPS) OVERVIEW OF ACTION PLAN Action 14: Making dispute resolution mechanisms more effective Action 15: Develop of a multilateral instrument for amending bilateral tax treaties Action 11: Establish methodologies to collect and analyse data on BEPS and actions addressing it Action 12: Require taxpayers to disclose their aggressive tax planning arrangements Action 13: Re-examine transfer pricing documentation Source: EY Action plan on Base Erosion and Profit Shifting (BEPS) Action 8: Consider transfer pricing for intangibles Action 9: Consider transfer pricing for risks and capital Action 10: Consider transfer pricing for other high-risk transactions Action 1: Address the tax challenges of the digital economy Action 2: Neutralise the effects of hybrid mismatch arrangements Action 3: Strengthen CFC rules Action 4: Limit base erosion via interest deductions and other financial payments Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance Action 6: Prevent treaty abuse Action 7: Prevent the artificial avoidance of permanent establishment status 24
BASE EROSION & PROFIT SHIFTING (BEPS) OVERVIEW OF ACTION PLAN Action 14: Making dispute resolution mechanisms more effective Action 11: Establish methodologies to collect and analyse data on BEPS and actions requirements addressing it Action 12: Require taxpayers to disclose their aggressive tax planning arrangements Action 13: Re-examine transfer pricing documentation Source: EY Double taxation due to conflicting Action 15: Develop of a multilateral instrument for amending jurisdictions? bilateral tax treaties Increased reporting & audits Action plan on Base Erosion and Profit Shifting (BEPS) Transfer pricing calculations; impact on Action 8: Consider transfer pricing for intangibles Action 9: Consider transfer pricing for intercompany risks and capital financings Action 10: Consider transfer pricing for other high-risk transactions Impact sales tax Action 1: Address the tax challenges paymentsof the digital where economy collected and paid Action 2: Neutralise the effects of hybrid mismatch arrangements Interest deductions & Withholding tax calcs; Req. for substance and shift of trading activity Action 3: Strengthen CFC rules Action 4: Limit base erosion via interest deductions and other financial payments Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance Action 6: Prevent treaty abuse Action 7: Prevent the artificial avoidance of permanent establishment status 25
KEY TAX TAXES CHALLENGES FACING TREASURY OPERATIONS Regulation & Tax Reform Risk Source: 26
CASE STUDY: TREASURY, BEPS AND IRELAND A Message From Ireland s Finance Minister: Ireland is committed to the BEPS project Country by Country reporting has been implemented Transparency: Committed to the highest international standards Review of Ireland s tax code in 2017 budget Source: Address by Minister Michael Noonan TD to Irish Times International Tax Event 1/24/17 27
CASE STUDY: TREASURY, BEPS AND IRELAND Impacts Ireland likely to be the go-to jurisdiction since it already requires substance and has a competitive tax rate. Ireland s Knowledge Development Box was created in accordance with the OECD guidelines. Multi-national companies operating in different jurisdictions will have increased compliance costs. Source: 28
CASE STUDY: TREASURY, BEPS AND IRELAND Key Attributes of Ireland s Tax Regime Open and transparent tax system 12.5% corporation tax rate on trading profits (EU approved) Attractive holding company regime Source: 29
CASE STUDY: TREASURY, BEPS AND IRELAND Key Attributes of Ireland s Tax Regime Participation exemption from Irish capital gains on disposal of certain subsidiaries Dedicated IP regime, refundable 25% R&D tax credit and new OECD compliant patent box Tax exemption for Irish source dividends & effective exemption for foreign source dividends Source: 30
CASE STUDY: TREASURY, BEPS AND IRELAND Key Attributes of Ireland s Tax Regime Limited transfer pricing rules applicable only to trading transactions Extensive treaty network and EU Membership allowing access to EU Directives No CFC or thin capitalization rules Source: 31
CASE STUDY: TREASURY, BEPS AND IRELAND IRELAND AS AN IP LOCATION Ireland has a very favorable IP regime with a number of large MNE s already choosing to locate their non-us IP in Ireland. Tax amortization available for acquired IP Extensive tax treaty network & EU Directives 25% refundable R&D tax credit Source: EY The royalty income received should be taxable at the 12.5% provided the company has substance in Ireland is actively carrying on an IP type trade. A deduction for tax amortization on acquired IP and interest on borrowings also available which can reduce the company s cash tax rate below the standard 12.5% rate and 0% rate is possible. Currently seeing a huge amount of interest in Ireland as an IP location. 12.5% on IP trading profit WHT exemption on outbound royalties payments Tax free exit available on migration Credit available for WHT on inbound royalties Interest deduction on borrowings used to acquire IP New OECD compliant patent box No stamp duty on the acquisition of IP 32
CASE STUDY: TREASURY, BEPS AND IRELAND IRELAND AS A TREASURY LOCATION Ireland also represents a very attractive and sustainable solution as a corporate treasury center/ group bank. Transparent tax regime aligned to BEPS Extensive tax treaty network & EU Directives Dedicated securitization regime Source: EY The taxation of interest / treasury income at 12.5% is not targeted by BEPS. Ireland is not a hybrid haven. The taxation of interest / treasury income at 12.5% rate should meet minimum taxation level of unilateral interest base erosion measures. 12.5% on treasury trading profit WHT exemption on interest & dividends No CFC or thin capitalization rules OECD based transfer pricing regime No capital duty on shares / loan issuances Unilateral credit for foreign withholding taxes Published guidance on treasury activities 33
Access to the European market Industry Clusters REASONS FOR SETTING UP TREASURY OPERATIONS IN IRELAND 86% believe that access to Europe was critical or important SEPA 34 countries, 1 payment area Over 1,000 companies call Ireland home Bio- Pharma/Pharma Financial Services Medical Devices Technology Manufacturing Engineering Source: Why Choose Ireland? AIB 34
REASONS FOR SETTING UP TREASURY OPERATIONS IN IRELAND OTHER CONSIDERATIONS: Brexit The Apple Case Ease of Doing Business 35
TREASURY DECISIONS IMPACT TAX TOO. It s Important to Have a Vision for Your Business Initial expansion planning decisions can have long-term impacts Each business decision drives tax consequences and opportunities What are my financial & regulatory requirements How will I mange foreign currency issues What do I do with cash builtup off-shore How will I distribute finished goods What are my income/indirect tax obligations Treas Cash AP Risk AR How will I sell & conclude sales outside the US Legal Global Business Model Mfg What location(s) should I be in Proc IT Sales Acctg How/where will I bill and collect from clients Fin What should my legal structure be If/where/how should I manufacture products How do I exploit my Intellectual property How do I fund ongoing R&D Anticipating and planning for each decision may help avoid unfavorable default decisions which may negate benefits on an after-tax basis 36 Source:LGCD
CONCLUSION Treasury, tax, and controllership assure an optimal legal entity, bank account & cash pooling structure. Treasury remains vigilant with the ongoing financial regulations (e.g., Reg 385), compliance, and possible U.S. tax reform. THE INTERSECTION OF TAX & TREASURY is apparent when faced with global competition and international expansion. Source:Allied Irish Bank, Let s Talk Treasury,AFP, Bloomberg, Tax Advisory 37
Thank You! Denise Magyer Senior Vice President Allied Irish Bank Denise.Magyer@aibny.com BEATRIZ SALDIVAR MBA & CTP Consultant & Member of the Federal Reserve Faster Payments Task Force beasaldivar@letstalkreasury.com 38