By Ursula Conterno
Tax changes will keep cash and liquidity managers on their toes in 2015 and beyond.
Global liquidity structures are directly influenced by business practices, legal structures and inter-company relations. In the current environment, where tax is becoming an even hotter issue and tax authorities have a renewed interest in tapping into MNCs profit pools across the globe, we can expect many changes to come to the current tax rules.
Regardless of tax changes being implemented right away or still being contemplated, they are certain to keep treasury managers busy as they evaluate the effects or potential effects of new rules on global liquidity structures and how to better adjust these structures to maximize shareholder value.
What’s all the fuss about taxes?
MNCs are coming under fire for their tax planning strategies on a global basis. As companies shift profits overseas to lower effective tax rates, voices in the US are calling for a tax reform that stops the profit leakage.
Internationally, OECD is leading a base erosion and profit shifting (BEPS) initiative to eliminate double non-taxation (see table next page). The initiative includes a number of non-OECD G20 countries, 44 in total. The OECD is moving surprisingly fast on this project, having reached agreement on almost half of the initiative’s actions. (It’s also raising concerns in Congress). Some of the actions are guidelines that can be implemented faster, while others will require the signatures of other stakeholders in order to be implemented.
And that is not all—Switzerland is working on “Tax Reform III.” The reform should allow the country to remain attractive from a tax perspective on the face of the BEPS initiative, although there may be an implementation gap between the two of them.
“Treasury Managers face no shortage of challenges, but we believe taxes will be top of mind in the year to come and beyond.”
Meanwhile, the EU is pressuring tax-friendly countries like Ireland, Luxembourg and the Netherlands to look into their tax practices, and is investigating tax agreements between companies and those countries to ensure the agreements did not equate to “state aid.”
In this environment, Ireland has already announced the elimination of the “double Dutch“ loophole, while maintaining its low tax rate. And the recent leak of tax agreements between Luxembourg and many MNCs has just added fuel to the fire. And in Asia, China recently fined a company, signaling that the country is going to follow global transfer pricing standards more actively.
The tax changes are just beginning, but are certain to get more complex. And as they come and companies adjust to the new reality, there will not only be implications on taxes paid but also on the way companies manage operations and move cash globally.
What to do in this changing landscape?
Treasury Managers face no shortage of challenges, but we believe taxes will be top of mind in the year to come and beyond. In that context, our recommendations are:
- Be ready! Whether tax changes are imminent or are still being explored, stay ahead of the curve. Engage tax and legal counterparties and start contingency planning to potentially move liquidity structures as legal structures and intercompany relations change in response to regulatory changes. This is the time for exploring all alternatives and making sure that the final structure is one that maximizes value from a business perspective. The key is to come up with a cross-functional solution instead of one that just takes tax implications into account.
- Look on the bright side. While delving into contingency plans, companies have the opportunity to completely overhaul their current cash and liquidity structures. Even just patching up a structure to make it fit into a new reality is quite the undertaking, so a better use of resources would be to implement the most efficient structure. While working with tax and legal, this is the time to engage vendors and banking partners to reevaluate regional/global pooling structures, in-house banks, etc. Also, it maybe the time to look into more complex structures like “pay-on-behalf-of” or “receive-on-behalf-of,” as they usually require intense coordination with legal and tax.
- Benchmark, benchmark, benchmark. And just in case… benchmark again. Even though there will not be a “one solution fits all,” there is significant value on engaging peers during this process.
As different structures are evaluated and prepared for implementation, leveraging peer knowledge can save time and resources as well as help treasurers steer projects away from common mistakes.
The OECD/G20 BEPS Initiati ve
What is BEPS?
BEPS refers to tax planning strategies that uses gaps
and mismatches in tax rules of different countries to shift profits to low or no-tax locations, resulting in a lower effective tax rate.
BEPS has caught the attention of the OECD and G20 Leaders—as well as many other governments and tax authorities—because of the perceived harmful effects of BEPS practices. As result, the G20 in 2012 called on the OECD for a coordinated action to address the practice.
What is the OECD/G20 BEPS Initiate?
National tax laws have gaps that can be exploited to generate double non-taxation. OECD is developing fifteen specific actions to equip governments with the domestic and international instruments needed to address double non-taxation. The first set of measures and reports were released in September 2014. The work will be completed in 2015. For the first time ever in tax matters, non-OECD/G20 countries are involved on an equal footing.
When will it come into effect?
The measures will apply upon implementation, either in domestic laws or in the network of bilateral tax treaties. OECD is developing a mandate to call an international conference to develop a multilateral convention that would amend the network of existing bilateral tax treaties at one time.
Based on information taken from OECD website.