International Taxation Rules, Negative Interest Rates Force Changes for MNCs

FX hedging, capital planning, and working-capital management top the list of high priorities for members in 2015. Longer-term, structural changes to the financial, business and liquidity footprint of US MNCs will be part of the solution. 

T30-2 members at the spring 2015 meeting in Atlanta discussed a range of topics, including the unique market situation that makes euro issuance especially attractive but creates FX pain as part of the bargain. Members also contemplated what liquidity structure was best to pursue now in light of changes that may be required because of negative interest rates in Europe, tax and transfer-pricing changes related to OECD BEPS, and alterations being made to enterprise platforms. In this context, T30-2 treasurers considered whether they wanted to pursue an in-house bank, for example, or, if they had one already, whether their in-house bank was “fully functional” to take advantage of their current treasury operating environment.

1) Tax-Effective Strategies Under Attack. As mandated by the G20, the OECD has created a 15- step action plan aimed at addressing many of perceived issues with current international tax rules. Rule changes are being made now in real time and will take effect very soon, with the new Country-by-Country Reporting Implementation Package most likely to have the earliest (and perhaps largest) impact on US MNCs.

2) Capital Markets Update – The Latest in Global Funding Strategies. Favorable European technicals, including the movement in currency rates, have increased US issuers’ appetite in the EUR market to record levels. With 33 percent of year-to-date investment grade EUR corporate volume having come from US issuers, US MNCs are encouraged to plan their European roadshows ASAP, as many believe this is a unique market situation that is limited and will soon be pushed back toward normalization.

3) Is Your In-House Bank Fully Functional? In light of changes coming to banking services, tax planning and transfer pricing and to further develop cost-savings initiatives, this is a good year to assess the current stage of evolution you have reached toward achieving the goal of a “fully-functional” in-house bank (IHB).

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Tax-Effective Treasury Strategies Under Attack

MNC tax structures, often overlapping with treasury structures, have come under increasing review by tax authorities worldwide. A variety of tax and transfer-pricing initiatives, including the OECD BEPS Action Plan, point to a changing global tax landscape that is evolving rapidly in a direction that will be disruptive to global treasury platforms. Here is the latest status of the OECD’s Action Plan and what treasurers should be focused on as their top priorities.

Key Takeaways

• No one wants to be a headline. US MNCs are following global tax rules, but the media has portrayed them as avoiding paying their fair share, and this has caused enhanced tension with shareholders and the potential increase in the number of activist campaigns. The OECD project is not so much about enforcement as it is about the general view that rules need to be refreshed and that the current international standards are outdated and do not adequately address modern business models in the digital age.
• That train has left the station. As mandated by the G20, the OECD has created a 15-step action plan aimed at addressing many of the perceived issues with current international taxation rules. The BEPS Country-by-Country Reporting rules, which is a set of new transfer pricing reporting standards, could be particularly intrusive for MNCs, as tax authorities nose around the ways in which they structure their operations.
• Transfer pricing is a big deal. With global transfer-pricing guidelines expected to have the most impact under the BEPS Action Plan, many members are taking time now to review their current methodologies to ensure future compliance with proposed BEPS guidelines. Based on member discussions, many expect increasingly more stringent audits with a higher degree of scrutiny and pushback.
• The approved may be unapproved. Another outcome of the BEPS Action Plan is the potential for prior APA cases that have been reviewed and approved to be reopened and reexamined. In February of 2015, the European Commission announced its investigation of tax rulings for breach of state aid rules, which could have major implications for the companies involved. If the Commission concludes that state aid is present, it is tax-paying companies and not member states that will bear the consequences.

Outlook

As the OECD continues to roll out its BEPS Action Plan, US MNCs are encouraged to focus on several proposals that have already gained significant traction. These include transfer-pricing guidelines and documentation, tax practices that have been deemed “harmful” (i.e., scrutiny of Patent Box regimes), hybrid mismatches that currently treat taxability differently (i.e., deduction/non-inclusion and double deduction), artificial avoidance of permanent establishment status, and interest deductibility.

Capital Markets Update – The Latest in Global Funding Strategies

With the expectation of the Fed easing rates later in 2015, Rob Gelnaw, managing director of Global Banking and Markets and head of North America Debt Origination, and Mike Bieber, managing director of Leveraged and Acquisition Finance from HSBC, discussed the latest trends in USD and global funding strategies.

Key Takeaways

• Plan your European road show. Meeting sponsor HSBC mapped out the best-practice template for a European road show, involving a trip to London, Frankfurt, Amsterdam, and Paris to seal interest in a longer-dated EUR issue, which will likely see strong demand. Using one T30-2 member’s recent landmark EUR issue as a case study, members heard from the company’s treasurer of the surprising high-level interest in its bonds, which allowed the company to price aggressively and size up. Low yields of 1.65 percent on 20-year debt helped make the Euro market attractive, but it was also important for ALM and bond-holder diversification purposes.
• Non-deal road shows are good too. As a further offshoot of the EUR issuance discussion, members also talked about their recent involvement in non-deal road shows as a way to test the market for potential deal acceptance and get an early indication of investor appetite. The results of these types of road shows have been very positive, both from the corporate and investor perspectives.
• US high-yield market is also strong. HSBC summarized the HY market as more volatile with higher spreads despite the fact that absolute levels remain at near-historic lows. Issuances have remained strong with M&A/LBO activity becoming a significant component of the issuance calendar. In 2015, more than 50 percent of the issuances fell within the BBB/BB to BB/B rating category.
• HY market is robust. One group member discussed his recent senior note offering, which brought strong demand from both high-yield and investment-grade investors, with an extremely diversified investor book of more than 165 accounts. The transaction was significantly oversubscribed and continues to see strong demand in the secondary market, trading at 101.625 to yield 4.736 percent.

Outlook

Favorable European technicals, including the movement in currency rates, have increased US issuers’ appetite in the EUR market to record levels, with 33 percent of the YTD IG EUR corporate volume coming from US issuers. With the Fed’s focus on four key factors that include stagnant labor growth, inflation consistently below the Fed goal, increased impact of the strong USD and GDP growth, these favorable conditions may continue a bit longer and many US MNC treasurers are considering groundbreaking issuances in the European markets.

Is Your In-House Bank Fully Functional?

In light of changes coming to banking services, tax planning and transfer pricing, and to further develop cost-savings initiatives, this is a good year to assess the current stage of evolution you have reached toward achieving the goal of a “fully functional” in-house bank (IHB). Several members have made substantial upgrades to their IHB platforms in anticipation of SEPA or in contemplation of its next-generation outgrowths for pay-on-behalf-of and receive-on-behalf-of (POBO/ROBO) arrangements. In this session members heard from Ian Blackburn, regional head of Commercialization Europe at HSBC on the assessment of current frameworks and what changes might lie ahead.

Key Takeaways

• SEPA has been a catalyst. As expected, the rollout of SEPA has been a catalyst for further consolidation of global treasury activities. Standardization and automation are key, and both SEPA and XML have helped move the needle on the centralization of payments and collections.
• Centralization can be expensive in the beginning. Based on member comments, many agreed that the costs associated with centralization may be more in the first few years as systems and structures are created, but, thereafter, the cost savings continue to grow as processes and systems are consolidated. In addition to the synergies associated with centralization, the added benefit of increased oversight and control often adds to the argument for moving forward with the setup of an in-house bank.
• Virtual accounts add even more automation and processing efficiencies. Although the initial set up of a virtual account structure takes a lot of work up front, the benefits are long lasting; and it can become bank-agnostic, which allows for even longer-term benefits. Many new international jurisdictions are approving virtual accounts, which are expected to increase in popularity and may eventually replace the traditional cash-pooling structures we use today.
• Consider BEPS when choosing your location. The location and mandate of the IHB entity is very important, especially based on the early discussions regarding potential BEPS impacts. It is critical to show substance of the entity to ensure that the activities of key treasury professionals driving IHB operations belong to the legal entity that hosts the IHB, and also ensure that all rates used within the IHB structure can be substantiated as arm’s-length rates in support of the transfer-pricing policy.

Outlook

The creation of an in-house bank has always been seen as a way to centralize operations and bring an increased level of standardization to the tactical operations performed there. The level of sophistication of treasury activities being performed at these centers continues to increase as US MNCs continue to look for ways to optimize operations. With the pending BEPS regulations in sight, many treasurers are taking extra time now to review structures to ensure substance and arms-length relationships between the IHB entity and the subsidiaries served therein.