Running a Best-in-Class Treasury Practice in a Complicated Region

Latin America presents no shortage of challenges, from the continuing deterioration in access to hard currency in Argentina and Venezuela, to significant tax changes and economic slowdown in other countries. 

The Latin American Treasury Managers’ Peer Group’s winter 2015 meeting in late January explored the challenges of running a best-in-class treasury practice in the region with a look at the current macroeconomic environment and expectations for 2015 and beyond, taking an in-depth look into Argentina and Venezuela. At the HSBC-sponsored meeting, the group was also updated on new tax regulations and implications. Meeting highlights included:

1) Argentina and Venezuela in depth. Argentina and Venezuela continue to take up proportionately more time and effort for less-than-proportionate rewards. Converting local currency to dollars is the crux of the problem, resulting in stalled business and unwanted management attention to translation losses.

2) Tax Environment and Impact on Treasury Operations. The way a country runs its tax regime affects the treasurers who manage cash for the company. This is a particularly important area as tax authorities globally are taking a close look at corporate tax strategies.

3) Optimal Organizational Structure for LatAm. LatAm treasury is predominantly centralized to HQ or a regional treasury center for most of the member companies; centralization allows the regional treasurer a more strategic focus.

4) LatAm Banking and Treasury Update. Sponsor HSBC gave members an overview of its operations and strategy in the region and an update on the state of managing cash and payments.

Sponsored by:

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Argentina and Venezuela Roundtable

During this roundtable on Argentina and Venezuela, members discussed options for dealing with a deteriorating business climate and burdensome FX regulations.

KEY TAKEAWAYS

1) It don’t come easy. Don’t expect that it will become easier to get cash out of Argentina anytime soon. Reinforcing member sentiment in a conference call held in October 2014, most members, most members are finding it more difficult to repatriate cash. The Central Bank is trying to protect reserves by delaying USD payments:

• There have been fewer import authorizations and additional controls around paying for them. There are approvals for pre-paid imports.
• There are very limited authorizations to pay dividends and payments are often spread over time.
• Royalty payments are usually authorized only when owed to a third party.

2) Informal restrictions continue in Argentina. The myriad of unwritten practices are only increasing. These practices not only add instability and uncertainty for MNCs but also make day-to-day operations harder to manage. As one member put it, Argentina is harder to manage than Venezuela, in that in Venezuela at least you know what the rules are.

3) Keep using your leverage. In Argentina, there is still opportunity to net FX payments against exports or capital infusions. Also, payments for new capital goods have a better chance of getting approved—the key word being “new”—especially if they are tied to a letter of credit.

4) And keep evaluating alternatives to protect your Argentine assets as they keep changing. Besides making every effort to hit the $150,000 daily limit to buy USD, it is critical to be creative in your approach to protect your assets and to stay ahead of the curve.

• Some months ago, MNCs were using pre-paid imports, but that alternative is no longer available.
• They still can pay USD loans and replace them with local debt or investing in USD-indexed bonds/loans, but most prefer using I/C loans. However, that option only works if the MNC owns two Argentine entities and for a maximum of 150 days.
• Real estate investment as a means to protect assets has not picked up in Argentina as it did in Venezuela—maybe because MNCs are still hoping for change after the next elections.

OUTLOOK

There is no silver bullet when dealing with Argentina and Venezuela. Even though prospects are a little better in Argentina, change is not expected to happen during 2015. Members need to constantly evaluate when the business prospects outweigh the risks and when enough is enough.

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Tax Environment and Impact on Treasury Operations

A country’s tax regime has great influence on treasury operations, especially if it restricts treasurers’ ability to move cash. In this session, two tax pros from PwC updated the group on key new tax regulations adopted during 2014, or taking effect in 2015.

KEY TAKEAWAYS

1) Partner with your tax department to understand recently enacted tax reforms that may affect your treasury operations in LatAm. The discussion highlighted the need for tax and treasury to partner to make decisions early on, even when treasury seems not to be affected by changes upfront. Also, keep in mind long-term implications of your decisions. For example, members discussed debt forgiveness as a tax-effective way to capitalize an Argentine entity, but if debt is forgiven based on inability to pay, how would that affect any other outstanding or future loans? Facts and circumstances are important, as is consistency of approach.

2) Be on the lookout for outcomes of OECD’s BEPS initiative. Although still in the works and far from being implemented, the outcome of the OECD’s BEPS (base erosion and profit shifting) initiative could impact your current regional pooling strategies. Some countries, like Mexico, can choose to enact more restrictive policies to reduce use of base erosion and profit shifting (aka transfer pricing) strategies in advance of the final OECD resolutions. Be prepared for more scrutiny of transfer-pricing arrangements.

3) Beware of changes in the corporate income tax regime in Chile. Chile has announced a change by which companies need to pick one of two calculation methods for corporate income tax in advance. Although one seems cheaper from the get-go, the best choice could be different if a Chilean entity pays dividends to a non-Chilean entity that resides on a non-tax-treaty country. Since the effect would not be evident until it is time to pay dividends, it is critical to discuss entity relationships and cash flows with tax before choosing one methodology over another so as not to impair the ability to pay dividends in the future.

4) Look for a new wealth tax and CREE extension in Colombia. The new wealth tax is calculated based on equity. Although it is too late for 2015, consider looking at your debt/equity ratio going forward. Also, the government extended the CREE tax and kept the rate at 9 percent; keep in mind that it is questionable whether this tax is creditable for US tax purposes.

OUTLOOK

This session highlighted the need to partner with tax proactively so that overarching corporate objectives are clear, because treasury’s and tax’s objectives sometimes conflict. There are more tax-related changes ahead and the more involved treasury managers are up front, the better the chances to maximize value for shareholders when complying with these changes.

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Optimal Organizational Structure for LatAm

The pre-meeting survey showed that most members have a centralized treasury organization, either at HQ or at the regional level. Treasury organizations are lean, with activities moving away from operational tasks that can be automated toward strategic objectives and projects. Also, treasury organizations continue to expand their influence internationally, mainly driven by (i) complexity of local regulations and practices; and (ii) the need to support the business’s international growth.

KEY TAKEAWAYS

1) Have clear separation of roles and responsibilities. A key step is a clear definition of what is and is not a treasury responsibility, especially if a regional treasury and shared-service center are co-located. Also, have a clear definition of what are local, regional and central responsibilities and associated reporting lines.

2) Be inclusive, but have clear limits. Another delicate matter is relieving local finance directors of managing bank relationships and accounts, among other responsibilities. While giving up some responsibilities may be welcomed by local finance teams, losing others can be viewed as losing status and importance. It is critical to get buy-in from local teams and to emphasize that centralization is a way to gain efficiencies and liberate resources locally rather than a way to reduce local business units’ influence. However, make sure that your bank resolutions and powers of attorney reflect changes in responsibilities to avoid conflict.

3) What about local employees doing treasury work? As a rule of thumb, employees performing treasury activities should report into treasury. As companies roll out RTCs, many of these employees get absorbed into the treasury organization or their activities get transferred to the RTCs. Whatever the approach, it is a good idea to take inventory of what activities are being performed where and have a detailed transition plan. This can also help identify processes that can be standardized along the way.

OUTLOOK

As more companies explore opportunities for efficiencies, RTCs offer a viable alternative to eliminate redundancies and standardize processes. They also offer opportunities to more closely align with the business objectives. Having said that, a detailed transition plan and clear communication is critical to ensure buy-in from all parties involved and eventual success.