T30 members weigh US tax reform implications, the unfolding applications of robotic process automation and blockchain technology’s future relevance to treasury.
The Treasurers’ Group of Thirty met March 14 in Teaneck, N.J., to analyze the initial impact of US tax reform and learn how robots and blockchain are likely to change treasury. Executives from host Cognizant Technology Solutions explained where robotic process automation (RPA) stands today and the process to determine how to use it. A tutorial on blockchain conveyed that, despite cryptocurrency concerns, it is here to stay and will affect corporates in a variety of ways. Here are the meeting’s key points:
1) The Age of Robotic Process Automation Has Arrived. “Bots” don’t replace major business systems but rather fill in gaps between them that now require human intervention. Efficiency gains may be less than hyped, but are still worthwhile. Financial institutions were RPA pioneers, followed by insurers, and recently other industries have seen the light. Where is your company on the RPA implementation spectrum?
2) Whatever Happened to Simplifying the Tax Code? An overall boon to corporates, tax reform has created a hybrid territorial system and complicated formulas to ensure US multinationals pay a minimum tax on overseas earnings. Guidance is still to come. Are you ready for queries about where repatriated cash is going?
3) It’s a New Blockchain World. The technology behind bitcoin is sound and should increase efficiencies in a variety of areas. It is being tested in different use cases, but so far those applications lack scalability. Early blockchain explorers will help shape the services that emerge. How might blockchain affect your company?
The Age of Robotic Process Automation Has Arrived
Cognizant executives told members that companies have shifted from testing RPA—in which bot software captures and interprets existing applications for processing transactions, manipulates data, triggers responses and communicates with other systems—to “industrializing” its use across the enterprise. Bots fill the gaps between existing software systems, replacing humans doing that work, potentially freeing them up for more value-added tasks. Banking and financial companies were the first to pursue RPA, followed by insurance. In the last six months, Cognizant said, it’s been manufacturing, retail and energy.
KEY TAKEAWAYS
1) Don’t believe the hype, though. The 12-week implementation time frame touted by platform providers is a best-case scenario. The 80% efficiency gain they promote doesn’t include the implementation investment, and therefore will be significantly reduced, especially for highly fragmented systems. Nevertheless, “even at 30% to 40% after investment, that’s a significant efficiency gain, so it hasn’t slowed down the push to automate,” Cognizant’s expert said.
2) Humans still important. RPA’s goal has been to reduce head count and increase efficiency. Cognizant customers increasingly see it improving productivity: “Take the bot out of the human, and let the human do tasks only humans can do,” the company said. Easier work will always go to robots; humans will focus on exceptions.
3) Robots aren’t the whole automation solution. System modernization, process transformation and the use of machine learning are also key to pursuing automation. Most bots today are limited by what they’re programmed to do, but Cognizant has already implemented bots capable of learning; for example, machines that can be taught to recognize and read differently formatted invoices.
4) Questions to address to prep for automation:
- Who is responsible for automation?
- What is the impact on the entire enterprise?
- How does automation affect culture, people and workforce management?
- What are the risks to reputation and compliance; how can they be managed?
- How can the company identify processes fit for automation?
- What capabilities must be built to effectively pursue automation?
- How does the company develop and articulate a business case for automation?
SocGen’s New Tool to Optimize Debt Duration
Issuing short-term debt repeatedly is generally cheaper than issuing long-term debt. But as every treasurer knows, it’s a risky strategy if rates rise or liquidity dries up. To measure how risky, SocGen bankers developed a model that discounts rates on a range of bond tenors, while keeping credit spreads and underwriting and counsel fees unchanged. It compares a 10-year bond vs. two five-year bonds, three 10-years vs. a 30-year, and multiple other combinations.
By comparing and discounting cash flows, the model identifies a breakeven to understand how risky the multiple short bonds strategy is vs. one long bond. And the model provides a benchmark against which to measure whether a company is optimizing duration in its bond portfolio, prompting Ed Scott, the T30 group lead and former treasurer of Caterpillar, to note how beneficial it would have been to have had such a tool when thinking about rates. “You know what you’re giving up and what you’re gaining,” he said.
T30 participants noted the heightened relevance today of capital structure. The new tax law’s implications for corporates repatriating cash and investing in M&A and capital expenditures, as well as the anticipation of rising rates, make analyzing and optimizing a company’s capital structure particularly important.
OUTLOOK
Only 6% of T30 members report implementing RPA in treasury functions, with another 6% implementing some, 12% still viewing RPA options, and 76% with no robot plans yet. T30 members report using RPA for AP, AR and cash applications, and researching it for shared services providing AR and AP functions. Cognizant suggested a much broader array of uses (see sidebar on page 10).
Whatever Happened to Simplifying the Tax Code?
Robert Shapiro, SocGen’s head of tax for the Americas, reassured T30 participants that their uncertainty regarding tax reform effects is widespread, and likely will last through 2018. The law’s most fundamental shift was slashing the corporate tax rate to 21%. Then the complications begin. A true territorial tax system taxes only domestic earnings, but US companies will face a complicated hybrid system. For example, Subpart F “passive income” remains taxable under the new law. The new law’s Global Intangible Low-Tax Income (GILTI) regime makes US companies’ other foreign earnings currently taxable. However, in some instances, especially in jurisdictions where US multinationals pay relatively high taxes, it may be preferable to be subject to Subpart F, since GILTI puts an 80% limit on foreign tax deductions. In addition, “there’s base erosion to make sure the US gets a minimum level of tax,” Mr. Shapiro said. “So it’s not a pure territorial system.”
KEY TAKEAWAYS
1) GILTI or not? GILTI and Subpart F bring different portions of controlled-foreign-corporation (CFC) earnings into taxable income, except for a deemed fixed 10% return on the company’s offshore, depreciable tangible assets. A foreign tax credit up to 80% for foreign taxes paid and a 50% deduction allowed for GILTI inclusions effectively bring the GILTI rate down from 13.5% to as low as 10.5%. A foreign effective tax rate of at least 13.125% should avoid any residual tax on GILTI income. “GILTI was primarily intended to pick up low-tax countries like Ireland, where the rate is very low, and where many companies have operations that receive royalty streams,” Mr. Shapiro said.
2) BEAT and related-party payments. The only good news regarding the base-erosion anti-abuse tax (BEAT), Mr. Shapiro said, is that it allows for the exemption of certain cost-of-goods-sold (COGS) payments by a US subsidiary to its head office. The BEAT tax has a mechanical threshold: If BEAT payments exceed more than 3% (2% for banks) of total expenses, a tax-paying corporate will be subject to it. The BEAT tax rate for nonfinancial corporates will be approximately 5% in 2018 and 10% after that. “If you’re a US multinational with net operating losses and you’re not paying regular tax, then you’re susceptible to BEAT,” Mr. Shapiro said.
3) Guidance still to come. Congress pushed through fundamental tax reform in record time, resulting in lots of errors and questions. A “bluebook” describing Congress’ intent in the law’s major legislative sections, and rulings by the Treasury Department on the GILTI and base-erosion provisions should arrive sometime this year, perhaps followed by regulations. For corporations, “it’ll be a challenge to compute estimated taxes with unclear tax law,” Mr. Shapiro said.
Calm Before the Activist Storm
Activist investors invariably will want to see some benefit from all the freed corporate cash that’s been trapped overseas. Over half of T30 members, 56%, expect to repatriate cash, with a plurality of those, 43%, planning to feed the beast by repurchasing stock. Paying down debt and M&A tied for second, at 36% each, and dividends ranked third, at 22%. Capex picked up only 14% of the votes, followed by increasing employee compensation and benefits, and funding defined-benefit plans. M&A might have been more popular six or seven years ago, noted a SocGen banker, but now it’s “harder to find accretive investments.”
T30 treasurers cited paying down bank debt and reducing debt across the yield curve, a third each, as the priorities, followed by reducing CP balances and debt with short-term maturities. “The interest benefit from taking out high-coupon debt is the gift that pays for many years,” said one T30 member. The vast majority of members, 75%, anticipated holding less invested cash outside the US. As of mid-March, T30 members had yet to feel pressure from major shareholders, bondholders, rating agencies or activist investors, and most had not yet communicated specific plans for the cash. “But once the first companies become more specific, others will follow,” one member said.
OUTLOOK
The law has left many unknowns. SocGen pointed to some likelihoods:
- S&P anticipates ratings changes impacting less than 10% of issuers, since most extra funds will go to shareholder returns, M&A and capital investments. Moody’s gross-debt approach is starting to worsen corporate financial ratios, but so far no indications of a ratings impact.
- A preferential tax rate for income derived by US corporations serving foreign markets, known as FDII, may face WTO challenges.
- Tax-free spinoffs may be less attractive due to the lower corporate rate.
It’s a New Blockchain World
Cognizant provided attendees with its assessment of blockchain technology: Lots of hype today but benefits are coming, and early adopters may have an edge. Cognizant specialists in blockchain and distributed ledger technology (DLT) explained how the technology works and its strengths and weaknesses. The concept of a digital ledger shared by users is sound, they said, and the risk lies with the safekeeping of users’ keys to access the ledger. Scalability remains a challenge, so blockchain applications today are still in the pilot stage. Cryptocurrencies such as bitcoin, which first applied the blockchain concept, are more hindrance than help in terms of furthering blockchain/DLT adoption by corporates. However, Cognizant provided several corporate-friendly use cases.
KEY TAKEAWAYS
1) It’s not just a fad. Cognizant surveyed 3,000 customers about the technology, more than half financial institutions, and 85% of respondents agreed blockchain technology would impact them. For nonfinancial corporates, that impact may be indirect as service providers use the technology to improve services.
2) Blockchain revolutionizes value transfer. Cognizant believes blockchain technology offers a way to safely transfer value, whether of currencies, assets or data, over unsecured, distributed networks in a peer-to-peer manner, and without needing a “trusted party” intermediary charging a fee. “What the internet did for information, blockchain will do to value transfer,” Cognizant said.
3) The SWIFT threat. Ripple and other blockchain-based services are threatening to replace SWIFT. Given how entrenched the payment network is, Cognizant said, this will likely push SWIFT to become more efficient. “But they’re definitely pressuring intermediaries like SWIFT to adopt the technology,” the expert said.
4) No winners yet. Major financial institutions such as JPMorgan and Goldman Sachs have left consortiums developing blockchain technology to pursue their own initiatives. And for nonfinancial applications, there are arguments for using the public blockchains open to everyone, or permissioned, private ones. Scale usage is still some ways off, but Cognizant describes the infrastructure change blockchain will bring as foundational. Today it may be difficult to make a business case, but “initial adopters that moved for strategic reasons will have a bigger influence on how networks are formed and rules are written,” Cognizant said.
Putting Robots to Work
As a major provider of technology operations and consulting services, Cognizant is well-positioned to assess where companies can put robotic process automation (RPA) to work. Potential areas it has identified include:
- Manual payments–Downloads invoices from email, validates details and processes payments in bank website.
- Invoicing–Receives information in a standard template, validates the information and processes it to create an invoice.
- Reconciliations–Matches information on bank statements to the invoices.
- Journal entries–Creates a record to maintain all accounting transactions, including crediting, debiting to clients and the general ledger activity of various departments.
- Intercompany accounting–Records transactions between different legal entities within the same parent company.
- Management reporting–Produces information that is used within an organization by managers and employees, and in legally required financial reports.
OUTLOOK
The future of cryptocurrencies such as bitcoin remains uncertain. However, organizations that are pillars in the US economy and financial system, such as Walmart, Cargill and the Depository Trust & Clearing Corp., are pursuing distributed ledger initiatives, often to record and access information more efficiently.
Sponsored by: