The Year’s Top Takeaways

A look at the treasury trends and priorities that shaped 2015. 

This year’s edition of the key takeaways from The NeuGroup’s 2015 meetings have been categorized by the top major challenges treasurers faced, including those involving investments, the dollar, cash, regulations, taxes, and bank relationships as well as several others. Under these categories, The NeuGroup’s peer group leaders, bringing to bear their many years of experience as treasury practitioners and the intelligence they’ve gathered from this year’s 30-plus meetings, have offered what they felt were the year’s top takeaways.  

Banking Relations

(GCBG) Basel III has impacted corporate relationships with banks. Corporates are holding more cash than ever in an environment in which too much cash reduces their negotiating power. The previously sticky cash management business is becoming unattractive. This means that cash managers cannot use this business to reward banks. According to the GCBG research survey, 50 percent of members reported being charged for deposits, while another 28 percent reported having avoided the charge by taking action to reduce cash or negotiating an alternative solution with their bankers. Some of the actions taken were moving cash into money markets/investment accounts or swapping-out currencies. Also, some members used time deposits or call deposits to avoid the LCR 30-day limit. Other companies opened additional bank accounts to spread cash and stay within certain limits negotiated with banks.

Corporates must take measures to deal with a situation that is expected to last. However, it is critical to also understand where your bank is coming from to improve your negotiating position and achieve a mutually accommodating solution. In the short term, some recommendations are to improve cash-forecasting capabilities, implement cash structures to reduce idle cash, look at alternative investments or negotiate ERCs. It is also recommended to revisit the share-of-wallet approach and investment policies to keep up with the current market environment. Long term, corporates should re-evaluate their liquidity structure and banking partners. Under the new paradigm and anticipated changes in tax regulations, is your liquidity structure still the best fit? And, as banks look to streamline relationships, will you still have some negotiating power with your current bank group or do you need to reshuffle too?

(GCBG) Banks’ level of commitment is critical when assigning business, as long as the price is right. The length of a relationship and strength of support are the first things corporates look at when deciding how to fairly split their business among their banks. But if a bank does not have the right capabilities at the right price, all bets are off the table in this very cost efficiency–driven environment.

(GCBG) Put yourself in your bank’s shoes. Although a difficult exercise, it is interesting to try to understand the value that you bring as a client to your banking partners beyond calculating a share-of-wallet. It helps to understand when a business is becoming too unprofitable for your bank or when a credit commitment is too high, so you can strategize about bringing in a replacement and what to do next. It is especially critical in the current environment in which banks are becoming more selective regarding which companies to work with.

Cash And Investment Challenges

(T30) Cash no longer the Big Kahuna. New regulations mean the days of simply stashing idle cash in bank deposits and money market funds are gone, and companies must devise more creative ways to capture some return while still retaining adequate liquidity. Sweeps into separately managed accounts (SMAs) are one option, and repurchase agreements and other off-bank-balance sheet products are likely to see increased corporate use.

(TIMPG, TIMPG2) Time to cross the bridge. Money market reform was announced in 2014 for implementation in October of 2016. The success of prime funds is largely attributable to their being a simple solution—not anymore. Regulation is in place to make the funds more transparent and conservative; prime funds will also have to use a floating net asset value. Members spent 2015 planning for a less simple solution crossing the money market fund bridge.

(TIMPG, TIMPG2) Fees and gates are the big concern. As a result of new regulations, money market funds will need to hold liquidity buffers significantly above the threshold for implementation of new fees and gates rules. If a fund’s weekly liquid assets were to fall below 30 percent, a prime fund’s board (municipal funds, too) can either charge a liquidity fee of up to 2 percent on shareholder redemptions or impose a halt (the so-called gate) on all redemptions for no longer than 10 days.

(T30) Good deposits/bad deposits. Prior to the financial crisis, banks supported and profited from technology-intensive transaction banking services by reinvesting corporates’ excess balances. Now banks may not want those deposits, at least in size, because regulators say only some are sticky, long-term operating cash and the rest could quickly fly away, leaving banks short on liquidity and too long on leverage.

(T30) Bank creativity abounds. A 30-days-or-more term deposit is the simplest, most straightforward solution (to banks not wanting your non-sticky cash), but the new requirements have prompted bankers’ creative juices to flow, so treasury executives should expect a wave of pitches for alternative short-term investment products, that are “stress compliant,” that is, they satisfy Basel III concerns, especially about deposit run-off in stress scenarios. A perpetual evergreen facility that remains compliant until it is called may be one (e.g., a time deposit that converts to demand when called); pools with contributions from multiple client accounts that continually roll through a series of maturities may be another. Tri-party repurchase agreements (repos), likely to increase in popularity because they’re fully collateralized and thus not subject to the new requirements, allow corporates to choose their counterparties, type of acceptable collateral and investment term. The latter will also be part of a range of off–balance sheet products that transaction banks offer as part of liquidity management sweep structures.

(Tech20) NIRP is making yield-seeking on cash investments hypercompetitive. Negative interest rates in Europe have created an environment where investors seeking positive returns have to go out into long-term assets or be willing to invest in less familiar asset classes. Moreover, everyone with excess cash is under pressure to do this, because to pay for liquidity you don’t need is different from just incurring opportunity cost on basis points you have not earned. This ups the ante on the need for members to have flexible enough policies and delegation of authority to act decisively, albeit well-informed about the risks, when positive return opportunities for cash investment present themselves. The opportunities start with lowly deposits: for instance, you might see (but not for long; see Basel 3 adoption point above) time deposits in places like Denmark, where you may have to pay -20bps, whereas in Spain you could see +80bps—it is all about risk/reward with location and the bank. But they extend from there to repo solutions, to commercial paper, to corporate bonds, to supply-chain finance with master trust structures and to dual currency placements, just to cite the examples provided by Bank of America Merrill Lynch’s EMEA Investment Solutions Officer, François Antoine.

(TIMPG, TIMPG2) Liquidity risk management in the new cash paradigm. Regulators are driving the cost of liquidity onto investors. As a result of the Dodd-Frank and Volker rules, brokers are carrying lower inventories, partly due to new regulations paring down market makers’ interest in maintaining large inventories from an economic standpoint, and because brokers recall the excesses leading up to the financial crisis and don’t want to return there. A consequence of these inventory levels is wider bid/ask spreads. Also thinner volumes will mean higher volatility.

The eventual cost of the liquidity drain will be higher transaction costs, more volatility, higher liquidity buffers and more demand for liquid bonds. Liquidity will get more expensive to keep and as a result, members are going to have to think about their needs harder than they have in the past. Electronic trading is picking up steam, similar to the equity market a decade ago, and this type of trading could improve liquidity, as it will allow buyers and sellers to bypass the dealers and conduct peer to peer trading. Although it is still too early to understand what the future of short-term cash investing will bring, one thing is for sure: liquidity risk is becoming an increasing risk concern.

(GCBG) Cash forecasting is as critical as ever… and still more of an art than a science. Cash-forecasting accuracy has been long sought after but rarely achieved. As per results of the GCBG research survey, more than 64 percent of members were able to predict very accurately their next-day cash. However, this accuracy decreased dramatically for those attempting to forecast cash for longer terms. The cost of inaccuracy has become more evident as banks refuse or limit deposits or charge negative interest rates on them. Cash-forecasting processes have not followed the automation trend other processes have, largely remaining in Excel spreadsheets. Although there are better tools to analyze/categorize actuals and extrapolate trends, these tools cannot yet capture the business and “tribal” knowledge needed to generate accurate forecasts.

(GCBG) Bank account management processes are still a pain-point. This is one of those areas in which treasury managers have not been able to fully embrace technology. There are different standards and requirements not only by country, but also by banks in each country to manage bank accounts, open or close bank accounts, manage signatories and handle compliance. Some members are trying out options to at least have electronic repositories for signatories, which could possibly help with FBAR requirements. Some corporates manage through this complexity by constantly or periodically rationalizing their number of bank accounts and minimizing the number of signers. However, in the current banking environment in which banks are constantly reassessing their profitability and commitment to certain markets, it may pay to have back-up bank relationships/accounts in those markets.

(T30, T30-2) The fast and furious. Activist campaigns continue to increase across all market capitalization levels and the playbooks of the activists are becoming more aggressive and contentious. Steady M&A volume, record levels of cash on corporate balance sheets, fewer structural defenses such as poison pills, and companies’ stocks trading below the sum of their parts, are all driving factors. Even the largest companies are now vulnerable.

Activist shareholders now manage more than $200 billion in assets, much of it coming from state pension funds. There is a marked increase in the level of support from institutional investors, and activists are publicly launching campaigns with little or no notice to the company, with much more of a “wolf- pack attack” mentality. Activists have unprecedented firepower and their ability to raise funds very quickly is clear with Trian having raised $2 billion throughout the course of 2014 and Third Point’s fundraising of $2.5 billion in two weeks in September of 2014. These guys have money and can get access to additional funds very quickly.

China and Emerging Markets

(ACFO) Near-term uncertainty prolongs planning and budgeting. Few, outside of their risk scenario planning, had anticipated the extent of the downturn in growth and the financial market volatility China experienced at the end of the summer. Member firms on a non-calendar budget cycle noted that budget planning had been extended in an effort to account for the uncertainty. Still, while the year was down relative to five year planning cycle expectations, many still saw growth. The question is, to what extent will the trend line pick up to where it had been? For some sectors, such as automotive, 2015 will be a lost year of growth, but the expectation is to swing quickly back to prior growth trajectories next year.

(ACFO) Simplification, optimization and efficiency. Many in the group noted the silver lining in the pause of frenzied growth, in that it allowed them to focus on process change, optimization and efficiency initiatives that should have been done, but which they had no time for while trying to keep pace before. One member noted implementing a supply chain finance program, as an example, and because the growth slowdown found suppliers more readily willing to be on-boarded as their access to working capital got drier.

(ACFO) FCPA, China style. A meeting participant from PwC began his presentation by noting that China has implemented its own version of the US’s Foreign Corrupt Practices Act (FCPA). Everyone has read of China’s intense crackdown on corruption within its own government ranks, with many of the guilty going to prison. Clearly anti-corruption is a key focus within the country at the highest levels. But with corruption having been so pervasive for so long it will be a while before the message is heard clearly in all corners of business.

PwC noted that companies can be cited for simply having weak controls in place even if no corruption has been identified.

(ACFO) There are many dark corners. PwC highlighted a sample of 17 common examples of where and how corruption and fraud are most likely to occur, including sales, invoicing processes, RFPs, agents and distributors, foreign site visits and ghost employees. These examples are anchored in a culture that relies heavily on relationships in business, gift giving, hospitality and an influential supervisor/subordinate relationship.

(LATMPG) Argentina: Keep your banking options open. Having fewer bank accounts to manage is more operationally efficient, but can bank account consolidation go too far? It may be good to keep some doors open, especially in highly volatile markets. This is especially important after experiencing the troubles of banks in Argentina and the exit of HSBC from Brazil. Also, keep in mind that you will need to offer alternative business to your banks if you want them to take on your cash management business. This business is becoming less profitable and banks will most likely only provide it to customers they already have a relationship with, as some corporates have experienced.

(LATMPG) Argentina: very dim light at the end of the tunnel. The market is expecting the dire Argentinean economic situation to turn a corner after a new government is elected. However, with a currency that is approximately 40 percent overvalued, virtually no central bank reserves, negative trade balance and no access to international markets, the road to recovery will be bumpy. Also, the probability of a successful recovery varies depending on who is elected on the run-off elections.

The incumbent party’s candidate supports a gradual adjustment and no negotiations with bondholders to gain access to international markets. The opposition candidate supports a one-time adjustment and negotiating with bond holdouts. Historically Argentina has only been able to adjust the currency imbalances via an abrupt weakening of the currency rather than via a gradual approach. Under a gradual approach, the government might need to maintain or harden the FX controls, maybe through smaller daily limits or trading blackout periods. Also, if a solution cannot be reached with bond holders, HSBC experts expect that the government might create a second FX market to relieve some of the pressure via multiple FX rates.

(LATMPG) Counterparty risk management in the region. Some companies have a global approach to counterparty risk, looking at the overall risk. Other companies look at it at the regional level. That translates into very restrictive policies regarding which banks to use and amount limits for cash deposits and investments at the country level. In certain countries where cash accumulates, namely Argentina and Venezuela, this means having to constantly use exceptions.

Dollar Strength

(AT30) The strong dollar is here for a while. Meeting sponsor Citi expects USD strengthening to continue for the next 3 to 6 years, and here’s why. The strong dollar is a result of four key factors: (1) a strong US economy and tighter monetary policy vs. the opposite in Europe and Japan; (2) political and military instability associated with Russia and Ukraine; (3) idiosyncratic factors related to Greece, Brazil and China, but the most significant tenet being (4) the dramatic drop in commodity prices. Further, many countries are deliberately trying to weaken their currency to benefit their own economies. Over the six months prior to the AT30 meeting, the dollar strengthened against every currency except for three: Guatemala, Costa Rica and Ghana (which appreciated more than 8 percent). These factors aren’t expected to change soon, so the impact on the dollar will remain.

(T30) Adapt or get whacked. Fully 78 percent of T30 member companies have been negatively impacted by the strong USD, and 56 percent have instituted new foreign-exchange (FX) hedging approaches while 44 percent now hedge a higher percentage of exposures. Some have shifted to options, and other changes include borrowing in FX currencies, multi-year hedging, and changing to long-haul from critical-terms match. According to Deutsche Bank, the USD is halfway through a strengthening cycle, more currencies are becoming free floating, and the volatility of emerging-market currencies is on the rise. Based on what the bank is seeing from its clients, companies have adopted dynamic, rules-based hedging strategies, more actively managed FX risk on M&A deals, and at times switched to nonconventional hedges, often in the form of economic hedges.

(T30-3) But what if the buck doesn’t stay strong? Build-in flexibility. Of course, there are risks to the dollar outlook. USD current account deteriorations have halted dollar rallies in the past; the USD has rapidly gone from undervalued to overvalued according to commonly used valuation models; and—with a US interest-rate increase somewhat priced-in already—history has shown the USD to fall in the period immediately following the first rate hike.

With these risks to the outlook, it is prudent to allow more flexibility in the choice of instruments (options and option combinations over forwards) to protect the downside, while allowing upside if the dollar rally reverses, temporarily or not. Options are also beneficial when hedging acquisition deals that may or may not close, or bid-to-award risk.

(Tech20) Board communication on FX and risk. A few Tech20 members noted how board interest in FX and risk management continues to grow. Often their questions and recommended actions are fueled by a misunderstanding of what other companies actually do. This promotes the value of peer exchange and benchmarking to present to directors who may sit on others’ boards a clearer picture of corporate risk management practices with data and examples from peer companies. However, as one member asked the group, when you are tasked to present FX to the finance committee, what are the key questions to address and how deep do you go? The consensus was that the whole board may be interested in just what the program is designed to do and what the results are relative to its stated objective. Powerpoint presentations to the finance or audit committee, on the other hand, because of the Dodd-Frank end-user exception review, create an opportunity to review the program in a bit more detail. Members with FX steering committees start with the full deck for those meetings, then shorten and simplify it for the board.

(FXMPG2) Proactive FX messaging becomes imperative. After a long time of little to no explanation to external stakeholders necessary (or desirable) as a weakening dollar benefited them, dollar appreciation requires proactive messaging and metrics to show that the underlying business is performing, so investors don’t penalize the company’s stock unfairly for factors outside its control. Proactive messaging helps, especially if you are different from your industry peers. One company added metrics on FX impact on EPS growth rate to its guidance messaging in 2014 and it has been well received by the Street; one reason was that it is more international than some of its key competitors so it needs to be able to explain the difference FX makes in a way that resonates. By holding the FX rate constant, it can show EPS growth would have been affected if, for example, 2014 results had occurred at 2013 FX rates, including the effective hedge rate achieved in both years.

(EUROTPG) Get the board to sign off on your FX hedge KPIs. In managing risks, a key consideration is how successful management is defined in the company. What is the acceptable level of risk the company is willing to take on?; and for the hedged portion, what is the metric treasury should focus on? No matter the goal of program (manage earnings volatility, for instance), Yuri Polyakov of Lloyds bank recommended getting the relevant KPIs—not just the hedge policy itself— reviewed and approved at the board level (and framing them to hang in your office). This should eliminate the disconnect that sometimes exists between what the board and treasury focuses on in the arena of risk management.

(FXMPG) Legacy approach under review as dollar reversed. One member’s legacy approach for reducing earnings volatility was to layer-in hedges over a three-year period, most of it front loaded in year 1 for the next year and with smaller additional layers for years 3 and 4. The company’s treasury performed significant back-testing to examine YoY earnings volatility and USD equivalent of foreign-denominated operating income and concluded that another layering mix resulted in the most volatility reduction, and an effective hedge rate that wouldn’t be so weighted toward the prevailing FX rate in the previous fiscal year. With the risk to earnings coming from a stronger dollar, it paid for this company to aggressively layer-in earlier rather than later in a dollar-strengthening cycle. Depending on the flexibility in existing policies, this type of change in pacing the layers may or may not require a policy review and adjustments.

Regulatory Impacts

(GCBG) In a low interest rate environment, accepting deposits has become expensive for banks as Basel III jacks up the price. Basel III introduced new Liquidity Coverage Ratio (LCR) requirements to ensure banks have enough liquidity to manage a cash run-off in a 30-day period. This means that the expected run-off rate will need to be offset by the bank holding low-return High Quality Liquid Assets (HQLA). The run-off rate varies depending on the industry sector of the depositor (corporates vs. financial institutions), the term of the deposit (under 30 days vs. over 30 days) and the usage of the funds (operating vs. non-operating), with little clarification on how to define the latter, which in turn leads to different interpretations from bank to bank.

Also, Basel III introduced a new leverage ratio to prevent banks from over-leveraging their balance sheet. Although not fully implemented yet, both changes increase the banks’ cost of holding deposits and providing financing in the long-term, and banks are already preparing for that.

Under these circumstances, banks are less interested in the now less-profitable cash management business and manage it in the context of a larger business relationship with the client. Also, overlay notional pooling structures are becoming too expensive to offer and are being analyzed in the same context.

(T30, T30-2) Stuck like glue. Under the Basel III guidelines, banks are required to hold liquid assets to meet outflows of cash over a 30-day stress period. They must hold reserves of 40% against certain corporate deposits and 100% against some hedge fund deposits. Banks want sticky deposits, not the highly liquid in/out deposits that corporates have traditionally used the bank deposits for. Deposits over 30 days are more appealing to banks. Most foreign banks and especially foreign non-depository banks, still favor cash.

(GCBG) And notional pooling is one of the affected offerings. Notional pooling will not go away, but banks will evaluate it in the context of the overall business relationship, since this service can be less efficient or more expensive. In the aftermath, banks might come up with new products and offerings to provide alternatives to clients.

Technology/Cyber

(T30, T30-2) No longer just an IT problem. Cyber risk has morphed over the last year or two into an enterprise-level risk issue, driven by boards, regulations and the C-suite, since attacks can result in lost funds as well as lost client trust. Cross-functional teams are emerging to deal with cybersecurity, including representatives from internal audit, business units, IT and finance. CFOs and general counsels are now taking active roles. Corporate executives increasingly see that the risk is not restricted just to their organization but extends to the company’s broader ecosystem, from supply-chain vendors down to end-customers.

(T30, T30-2) More SaaS, more security. Meeting participants noted their increasing reliance on Software as a Service (SaaS) providers, whether for functions in treasury or elsewhere in the company, and questioned that trend from a security perspective. Turns out, the session leaders replied, that SaaS providers tend to have more security than the average company, often hiring experts from the CIA, FBI and other top government agencies. Still, companies must scrutinize just what kind of expertise SaaS providers employ, their business continuity plans, how they protect customers, their crisis leadership team and response plan, and their insurance coverage (since possessing cyber coverage means they have satisfied the due diligence testing of insurers).

(T30, T30-2) Plan a better crisis. It was agreed that the effort of trying to eliminate cyberattacks is a bit like trying to fly a kite in a hurricane and that time is better spent on making sure your organization’s crisis protocols are as up-to-date and robust as possible. Having robust crisis protocols in place ensures your organization is ready for the “when” and not the “if” of cyberattacks. What are your first-response actions when you are made aware of a cyberattack? How quickly and efficiently can you contain the attack? Are your global systems affected or have you walled-off the threat? These are the types of questions that should be addressed as part of your crisis protocol.

(GCBG) Improving efficiency by leveraging technology is still at the top of the list. Whether looking at new systems, rolling out a TMS or complementary systems, managing an upgrade/migration or evaluating their current IT support model, most members are involved in an IT-related project that will impact the way they operate. This speaks to the fact that efficiency and straight-through processing are still long-term priorities on the operational side, so cash managers can free up time to focus on more strategic or pressing matters, such as evaluating a new liquidity structure, improving cash-forecasting accuracy or looking for creative alternatives to invest cash.

Treasury Organization (Centralization, Decentralization, IHBs, M&A)

(GCBG) Regional centralization is one tool to help manage through change. Centralizing operations in a regional treasury center allows companies to have better cash visibility, efficiently deploy excess cash, reduce transaction costs and hedge more effectively. This is possible in part because of the adoption of regional/global regulations and industry initiatives that allow for standardizing treasury processes, as described by HSBC. The expectation is that long term, more regions will feel the need to move towards more standardized payment types.

(LATMPG) Beware of cultural differences as you centralize treasury operations in an RTC. Relieving local finance directors of managing bank relationships and accounts, among other responsibilities, is a delicate matter. Emphasize that centralization is a way to gain efficiencies and liberate resources locally rather than a way to reduce local business units’ influence.

(GCBG) OBO structures are all about efficiency. When contemplating a “collect-on-behalf-of” or “pay-on-behalf-of” structure, your main objective should be finding efficiencies and cost savings. Yes, you will also increase your controls and visibility among many other benefits but the cost/benefit analysis will show that OBO is an efficiency play as well as a risk mitigation play. They are not a tax play, nor do they aim to simplify your legal structure. In fact, it is very important to make that point clear across the organization when creating the OBO business case, and bring legal and tax on board as soon as possible, given that “tax and legal due diligence” is considered by members the main challenge in implementing these structures.

(Tech20) Spins are no time for idealism. Despite hopes to optimize to the extent possible, two main takeaways from a Tech20 meeting panel of members was that the urgency of their timelines requires decisive actions that don’t wait for democratic consensus and that don’t let optimization get too much in the way. All of the member panelists urged the creation of an empowered separation committee with a strong chairman/leader, but also clearly delegated authority to prevent too much escalation, in order to keep the project moving. They also endorsed the mantra: “Separate quickly, optimize later.”

(ATPG) Moving out of one’s comfort zone. For some treasurers, the main obstacle to career advancement is the fear of leaving one’s comfort zone after being in an area of specialization (e.g., treasury) for many years. To courageously try out new roles to broaden one’s skill set and leadership experiences takes a huge leap of faith into the unknown.

One former member of the ATPG shared her experiences in her new role in information technology, acting as Chief Information Officer (CIO) for a business unit with a global manufacturer. This member spent 4.5 years as regional treasurer in Asia, and all her roles prior to this were in finance or treasury. When she planned to head back to the US it was originally with the expectation of taking on another US treasury role. During her stint as Asia regional treasurer, she worked in strong partnership with the information technology (IT) team on the China treasury system project, a team with which she was not impressed. The Global IT team within the company was looking for a CIO who could drive partnerships between the IT team and business units, and the position was offered to her.

This was a particularly intimidating role given her lack of technical knowledge. However, she was encouraged to take it on because the need was for management skills and leadership, areas where she excelled. This member lacks IT skills, so she has built up a team of strong technical experts to support her, surrounding herself with IT persons who are good at what they do, while her drive and passion to support the business keeps her focused on her team’s strategic purpose. She plans to stay in this current CIO role for three years, before exploring other options.

Taxes

(T30) It’s not regulation, but it sure will prompt it. BEPS or Base Erosion and Profit Shifting, the Organisation for Economic Co-operation and Development’s name for tax planning strategies that exploit gaps and mismatches in tax rules, arose from the financial crisis, which for many governments quickly became a fiscal crisis prompting them to look for ways to increase tax revenue. Corporates can count their blessings that the United Nations or the IMF—often siding with developing economies—didn’t take up the cause. The goal is to eliminate the zero-tax rates achieved by MNCs, mostly from the US, but requirements for corporates to report key country-by-country financial metrics will likely prompt governments to increase audits. “If 20 percent of your operations and employees are in our jurisdiction, why aren’t 20 percent of the taxable profits?” The OECD’s recommendations will be enacted through a multilateral instrument to increase efficiency and reduce the risk of double taxation. One participant asked whether that means the US is ceding authority over tax policy to multi-governmental institutions. Michael noted that the OECD can’t make law; instead, the instrument will facilitate amendments to existing bilateral tax treaties.

(T30) State aid investigations ramp up. Perhaps spurred by BEPS, but with more teeth, the European Commission’s state aid investigations explore whether national tax authorities are permitting certain MNCs to understate their taxable income by using favorable calculation methods—“hidden subsidies.” Apple and Ireland were among the first unlucky couples; Amazon and Fiat Finance have been pinpointed in Luxembourg; and Starbucks in The Netherlands. One of the scary elements of this is that non-tax officials are second-guessing decisions by tax authorities, saying “you may think those are good transfer prices, but we don’t.” Plus, where the IRS may collect back taxes going back three years, state aid investigations may push tax authorities to calculate back taxes going back a decade and then apply interest over that period.

(T30, T30-2) Transfer pricing is a big deal. With global transfer pricing guidelines expected to be most impactful under the BEPS Action Plan, many members are taking time now to review their current methodologies to ensure future compliance with proposed BEPS guidelines.

(T30, T30-2) 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. While the spark for these investigations appears to have been the “Luxleaks” scandal in December of 2014, they are also launching formal proceedings against Belgium as it relates to the “excess profits” rulings for multinationals. Companies will want to be confident that their arrangements with EU governments can pass the State aid scrutiny.

(ACFO) Local tax incentives are going away—or are they? At the top of the list is Circular 62 from the State Council that is eliminating “unauthorized financial incentives.” Local governments in China compete for major companies to set up operations in their jurisdictions. As in the US, one of the tools they use is tax incentives in the form of subsidies. In China, local tax authorities are responsible for giving a portion of their tax revenue to the national government.

The national government has taken the view that local decisions to give incentives to businesses are cutting into the national revenue, and they want that to stop. However, many local officials are communicating that they will find “alternative” means to incentivize business to enter into and grow in their jurisdiction. But this is only verbal and is putting CFOs in the awkward position of having to negatively adjust budgets where those subsidies have been planned for but now may go away. Further, Alan notes that any moves from local authorities to continue the practice will likely wait a bit as the issue is currently too sensitive. Beijing has taken this position in response to the economic slowdown. The move also applies to all companies, both local and foreign.