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Organizational and Tax Issues in Managing Global Treasury
Global Cash Management Ltd. Grant Thornton International
Global Cash Management Ltd..Grant Thornton International 1
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…..
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Global Cash Management Ltd..Grant Thornton International 2
Objectives for Today
Today we will cover selected treasury issues and the related tax implications with a specific focus on:
• Structure
• Liquidity & Risk Management
Global Cash Management Ltd..Grant Thornton International 3
STRUCTURE
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Global Cash Management Ltd..Grant Thornton International 4
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
Global Cash Management Ltd..Grant Thornton International 5
Operational Framework
• Numerous overseas operations– Sales offices– Manufacturing facilities– Warehousing & distribution centers– Joint ventures
• Requirements– Further centralize liquidity & risk management– Address reporting & information needs
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Global Cash Management Ltd..Grant Thornton International 6
Operational Framework
LocationsOrganization
Banking Needs?Tax regime?
Treaties?
Holding Co.?
Offshore Finance Co.?
Branch?Sub?
Reporting?
TreasuryCenter
Global Cash Management Ltd..Grant Thornton International 7
Setting Up - Tax Considerations & Options
Tax structure is key before treasury planning can take place….
Subsidiary?
Branch?
Local Tax jurisdictions?
Holding Company?
Joint Ventures?
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Global Cash Management Ltd..Grant Thornton International 8
Branch vs. Subsidiary?
US-MNC
Profits immediately taxable in US
Branch OfficePrimarily sales; Usually smaller
Subsidiary – local taxation;Manufacturing etc.
Deferral
Global Cash Management Ltd..Grant Thornton International 9
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
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Global Cash Management Ltd..Grant Thornton International 10
Local Tax Jurisdictions
• Capitalization requirements • Entity selection• Corporate tax regime• Treaties in place• Repatriation• Withholding tax issues
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Centralized vs. Decentralized Treasury
• Definitions– What does “centralized” really mean?
• Location(s) – US only– Regional Treasuries
• Activities– Tax consequences
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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
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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
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Stages of Treasury “Centralization”
Decentralized Fully CentralizedCentralized Liquidity
Collect/Disburse Collect/Disburse
Invest & Borrow
Invest/Borrow
Collect
Treasury Centeror Corp “Level”
Subsidiary “Level”
Disburse
Invest/Borrow Invest & BorrowCollect/Disburse
Sales only
1. All sales, purchasingand treasury @ sub level
4. All purchase,distribution,A/R etc.at central level2. TC or
Corp interfacewith markets
2. Subs stillmanage “operations”
3. TC takes on A/P transactions
3. Sub collects,but all “excess”can go to TC
4. Only good for“simple” productsales, no manufacturing
Global Cash Management Ltd..Grant Thornton International 15
Locations - US-based Treasury Only
• Organization/reporting– Regional responsibilities– Infrastructure in place– Reporting “lines” clearly defined
• “Treasury Center” – Offsetting FX gains/losses – Tax implications
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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
Global Cash Management Ltd..Grant Thornton International 17
Activities
• Oversight/consulting• Intercompany netting• Liquidity management
– Financing– Investing
• FX trading• Tax implications
– Management fees?– Transfer pricing
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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
Global Cash Management Ltd..Grant Thornton International 19
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
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Liquidity & Risk Management
Global Cash Management Ltd..Grant Thornton International 21
Liquidity & Risk Management
• Financing • Investing• Intercompany Cash Flows• Specialized Treasury Vehicles and
Arrangements• FX Risk Management
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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
Global Cash Management Ltd..Grant Thornton International 23
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
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Financing (3)
• Interest on related party debt • Parental guarantees
– Arm’s Length Requirement– 956 issue (deemed dividends)– 90 day grace period
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Investing
• Mechanics– Banking arrangements/costs
• Locations– Withholding tax/Reserve requirements
• Currencies and FX management • Interest
– Subpart F
– High tax kickout
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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?
Global Cash Management Ltd..Grant Thornton International 27
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
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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
Global Cash Management Ltd..Grant Thornton International 29
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
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Specialized Vehicles
• Financing companies– Use of B.Vs
• Offshore Trading companies• Offshore Treasury Center
– Coordination centers– IFSC – “Dublin Docks”
• Licensing companies• “Commissionaire” arrangement
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Offshore Finance Companies
US-MNC
OffshoreFinance Co.
Non domesticFinancing Sources
Direct access = w/h tax &Income tax disadvantages
Borrow
Foreign subs
Borrow
LendIn right location – now/h tax on interest (i.e - B.V.)
Lend
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Offshore Trading Company
Exporter Importer
Trading Company
Ship goods
invoice
invoic
e
pay
pay
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Offshore Treasury Center
US - MNC
Treasury CenterForeignOp. units
Consolidation of FX +/- at the TC
FavorableTax Regime
Ability to defer TC profits from US tax; 0/low tax on interest
IFSCBCCBV SAFIOHQ
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Licensing Companies
MNC(Licensor)
Licensee
Licensing Company
license
licen
se
pay
pay
Global Cash Management Ltd..Grant Thornton International 35
* to local a/c or a/c in TC bank location
Treasury Center orWarehouse
Local Sub
3) Ship/title passes
1) Sale 2) Order
4)Pay direct to TC/WH*
5) Commission on sale
LocalCustomer
6) pay localexpenses
Commissionaire Arrangements
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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
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FX Risk Management – Tax View
US Parent
Foreign Branch Foreign Sub
Translation exposure –Can trigger FX +/-when funds are remitted
No translation exposureDividends are at Spot rate, no FX +/_
Remittances Dividends
Assume FC is non USD
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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
Global Cash Management Ltd..Grant Thornton International 39
FX Risk Management –Treasury View
US Parent
Foreign Business Units
Assume FC is non USD 3rd party vendoror customer
receivable
Parent CoTranslation
exposure
Parent CoTransaction
Exposure
Business UnitTransaction Exposure
payable
Assume nonBusiness unit currency
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Global Cash Management Ltd..Grant Thornton International 40
FX Risk Management –Treasury View
• Protect profit/shareholder value• Natural offsets• Policy & Procedures
– Accountability• Hedging
– Objectives/philosophy• Centralizing risk
– Mechanics – Offset of FX +/-
Global Cash Management Ltd..Grant Thornton International 41
Summary
+
Treasury
Tax
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Global Cash Management Ltd..Grant Thornton International 42
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