Organizational and Tax Issues in Managing Global Treasury Global Cash Management Ltd. Grant Thornton International Demands of Managing a Global Treasury Managing Treasury on a global basis requires a tax driven focus in order to set up the most effective structure for managing liquidity and risk worldwide.. Grant Thornton International 1 1
Objectives for Today Today we will cover selected treasury issues and the related tax implications with a specific focus on: Structure Liquidity & Risk Management Grant Thornton International 2 STRUCTURE Grant Thornton International 3 2
Structure Operational Framework Present situation => requirements Setting Up key tax considerations How, options & issues Centralized vs. Decentralized Treasury Definitions, locations & activities Reporting Tax & Treasury Issues Grant Thornton International 4 Operational Framework Numerous overseas operations Sales offices Manufacturing facilities Warehousing & distribution centers Joint ventures Requirements Further centralize liquidity & risk management Address reporting & information needs Grant Thornton International 5 3
Operational Framework Branch? Sub? Reporting? Locations Organization Holding Co.? Tax regime? Treaties? Offshore Finance Co.? Banking Needs? Treasury Center Grant Thornton International 6 Setting Up - Tax Considerations & Options Tax structure is key before treasury planning can take place. Holding Company? Joint Ventures? Subsidiary? Branch? Local Tax jurisdictions? Grant Thornton International 7 4
Branch vs. Subsidiary? US-MNC Profits immediately taxable in US Deferral Branch Office Primarily sales; Usually smaller Subsidiary local taxation; Manufacturing etc. Grant Thornton International 8 Holding Companies/Joint Ventures Holding Companies Tax consolidation Domestic vs. cross border Banking efficiencies Joint Ventures Corporate vs. non Corporate Control issues => Treasury Credit exposure Grant Thornton International 9 5
Local Tax Jurisdictions Capitalization requirements Entity selection Corporate tax regime Treaties in place Repatriation Withholding tax issues Grant Thornton International 10 Centralized vs. Decentralized Treasury Definitions What does centralized really mean? Location(s) US only Regional Treasuries Activities Tax consequences Grant Thornton International 11 6
Definitions (1) A Centralized Treasury should have: Oversight responsibility for all global banking Interface and coordination with corporate tax Centrally developed guidelines and procedures for local borrowing & investments FX policy in place Grant Thornton International 12 Definitions (2) A Centralized Treasury may have: Centralized liquidity and risk management Regional Treasury operations Decentralized day-to-day cash management Local collections & disbursements Dotted line reporting only Grant Thornton International 13 7
Stages of Treasury Centralization Treasury Center or Corp Level 2. TC or Corp interface with markets Invest/Borrow 3. TC takes on A/P transactions Disburse Invest/Borrow 4. All purchase, distribution, A/R etc. at central level Collect/Disburse Invest & Borrow Decentralized Centralized Liquidity Fully Centralized Collect/Disburse Invest & Borrow 1. All sales, purchasing and treasury @ sub level Collect/Disburse 2. Subs still manage operations Collect 3. Sub collects, but all excess can go to TC Sales only Subsidiary Level 4. Only good for simple product sales, no manufacturing Grant Thornton International 14 Locations - US-based Treasury Only Organization/reporting Regional responsibilities Infrastructure in place Reporting lines clearly defined Treasury Center Offsetting FX gains/losses Tax implications Grant Thornton International 15 8
Locations Regional Treasuries Existing overseas operation(s) Major manufacturing location Management/marketing center Warehouse/distribution point Finance Company or specific tax structure Tax jurisdiction/implications Charging structure - restrictions Substance capitalization Grant Thornton International 16 Oversight/consulting Intercompany netting Liquidity management Financing Investing FX trading Tax implications Management fees? Transfer pricing Activities Grant Thornton International 17 9
Reporting Treasury Issues Treasury Issues Direct vs. dotted line Rare to have direct reporting from foreign subsidiaries to Treasury Political considerations Information requirements Frequency Level of detail Grant Thornton International 18 Reporting Tax Issues Deferral vs. Consolidation Functional currency The reporting package central vs. decentralized access points US GAAP vs. US tax GAAP vs. Foreign GAAP Check the box options Subpart F anti-deferral issues US earnings and profits issues Grant Thornton International 19 10
Liquidity & Risk Management Grant Thornton International 20 Liquidity & Risk Management Financing Investing Intercompany Cash Flows Specialized Treasury Vehicles and Arrangements FX Risk Management Grant Thornton International 21 11
Financing (1) Funding foreign operations Debt vs. Equity financing Thin capitalization issues Is interest deferred or lost under thin capitalization restriction? Is interest on cash or accrual on related party debt? Withholding tax issues Grant Thornton International 22 Financing (2) Access to credit markets and costs Use of overdraft lines Impact on centralized debt facilities and loan covenants Offset between surplus and deficit positions Notional pooling vs. ZBAs Tax implications Grant Thornton International 23 12
Financing (3) Interest on related party debt Parental guarantees Arm s Length Requirement 956 issue (deemed dividends) 90 day grace period Grant Thornton International 24 Investing Mechanics Banking arrangements/costs Locations Withholding tax/reserve requirements Currencies and FX management Interest Subpart F High tax kickout Grant Thornton International 25 13
Intercompany Flows (1) Intercompany sales & payables Terms 90 day rule Opportunities for liquidity & risk management Opportunities for bilateral offset or multilateral netting? Transfer pricing - strategies Pricing in relation to - Goods or services Leases or licenses Debt? Grant Thornton International 26 Intercompany Flows (2) Dividends Rate averaging between high/low rate countries To the US To intermediate foreign holding companies Deductions of dividends vs. interest Dividend imputation systems Split rate systems and the dividend issue Withholding tax Subpart F implications Grant Thornton International 27 14
Intercompany Flows (3) Foreign Tax Credits Withholding taxes and the direct foreign tax credit Indirect foreign tax credit The global foreign tax credit limitation baskets Required expense allocations and apportionments Excess foreign tax credit positions Grant Thornton International 28 Intercompany Flows (4) Subpart F Implications of intermediate dividend receiving holding companies Subpart F high tax kickout exception for dividends Subpart F same country exception for dividends 956A in intercompany pooling/centralized offshore investing Grant Thornton International 29 15
Specialized Vehicles Financing companies Use of B.Vs Offshore Trading companies Offshore Treasury Center Coordination centers IFSC Dublin Docks Licensing companies Commissionaire arrangement Grant Thornton International 30 Offshore Finance Companies US-MNC Foreign subs Lend Lend Direct access = w/h tax & Income tax disadvantages Borrow Offshore Finance Co. Borrow Non domestic Financing Sources In right location no w/h tax on interest (i.e - B.V.) Grant Thornton International 31 16
Offshore Trading Company Exporter pay invoice Ship goods Trading Company invoice Importer pay Grant Thornton International 32 Offshore Treasury Center Ability to defer TC profits from US tax; 0/low tax on interest US - MNC Favorable Tax Regime Foreign Op. units Treasury Center IFSC Consolidation of FX +/- at the TC BCC BV SAFI OHQ Grant Thornton International 33 17
Licensing Companies MNC (Licensor) pay license Licensing Company license Licensee pay Grant Thornton International 34 Commissionaire Arrangements * to local a/c or a/c in TC bank location Local Customer 3) Ship/title passes Treasury Center or Warehouse 4)Pay direct to TC/WH* 6) pay local expenses 1) Sale 2) Order Local Sub 5) Commission on sale Grant Thornton International 35 18
FX Risk Management Determine functional currency (FC) of foreign business units Type of business activity (i.e. manufacturing for export) Country high inflationary environment? FC changes and changes in accounting method Grant Thornton International 36 FX Risk Management Tax View Translation exposure Can trigger FX +/- when funds are remitted Remittances Foreign Branch US Parent No translation exposure Dividends are at Spot rate, no FX +/_ Dividends Foreign Sub Assume FC is non USD Grant Thornton International 37 19
FX Risk Management Tax View FX gains & losses Mark to market - US vs. Foreign jurisdiction Passive vs. Active - the underlying transaction Qualified foreign hedging exception (subpart F issues) Qualified foreign hedging exception with US corporations Foreign subsidiaries & the active business needs exception Foreign tax credit limitations The P&L method vs. DASTM (net worth) method Grant Thornton International 38 FX Risk Management Treasury View Parent Co Translation exposure Parent Co Transaction Exposure US Parent Business Unit Transaction Exposure Foreign Business Units receivable payable Assume FC is non USD 3 rd party vendor or customer Assume non Business unit currency Grant Thornton International 39 20
FX Risk Management Treasury View Protect profit/shareholder value Natural offsets Policy & Procedures Accountability Hedging Objectives/philosophy Centralizing risk Mechanics Offset of FX +/- Grant Thornton International 40 Treasury Summary + Tax Grant Thornton International 41 21
Summary Tax planning impacts how Treasury will Manage cash flows Structure financing & credit facilities Interface with foreign operations Ongoing coordination with tax ensures Logical set up of specialized vehicles Tax effective solutions for liquidity management challenges Grant Thornton International 42 22