BEPS… Everything has a (transfer) price…

François Masquelier, Chairman ATEL

TAX PARADIGM or REVOLUTION, but fairness at the price of unending difficulties

e.g. Restriction on interest deduction (deductibility only if < 30% of EBITDA with threshold of €1m entities loss-making will no longer be able to deduct interest); Exit Taxation; Switch-over clause; General Anti-Abuse Rule; Hybrid mismatch and extension of “Controlled Foreign Company” rules generating whole wodge of attempts to tax anything that may not have been taxed

New framework: everyone claims its "fair share" of the tax cake be prepared to be challenged

Main idea is to align TAXABLE BASE with VALUE CREATION.

Watchwords: (1) Consistency, (2) Substance and (3) Transparency

Treasurers could argue TP rules already existed long before … however some countries already started to question to justify the "fair" TP

Major principle (“choosing the option that costs the least in tax”) has now been called into question

BEPS, became a reality - Context

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WHAT types of treasury activity does Group Treasury (GT) handle centrally and recharge to affiliates?

HOW is GT organized to serve its affiliates and how can treasury management add value?

WHY are treasury activities handled centrally?

WHERE is the GT function located?

WHO takes and bears the financial risks?

Key question: who, ultimately, will end up bearing the risk?

Who bears losses if borrower subsidiary goes bust?

Who is responsible if the guarantee issued by GT is called?

Based on this question, you can work out the margins to be applied

5 key questions to raise and to answer to

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Problem arises when trying to set this “fair price”

Everything has to have a price, but that price must be "fair"

Loan can no longer be granted without interest, it cannot be waived without due justification, and asymmetrical loans can no longer be granted (unless again the margin can be justified)

“Nothing is free in terms of TP between 2 entities of the same group“

Concept of family counts for nothing in tax

e.g. if IHB issues a guarantee in favour of a sub, it cannot be issued without charge, but neither can it be charged at 500 bps, which would be right for making it as tax efficient as possible

It is a "case-by-case" (incl. counterparty, sector, country and parent support)

Everything needs to be documented to justify what has been charged

Paradoxically, therefore, it is more

complicated to trade goods/services

between sub’s of the same group than

with 1/3 parties

“No more free lunches with TP”

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The 10 TP commandments are…

5

Treasurers never think of their GT as a “Profit Centre“ (PC)

In practice, no or few centres operate in this form as aim is to mitigate risks

When it comes to TP, things work differently: GT must apply a margin to all financial services/transactions, especially if it bears the ultimate underlying risk (in the event of default by the counterparty)

GT has more than one role (advisory/IHB) and is more than a “service centre”

Change of approach: reason why treasurers can no longer operate without charge, or (obviously) overcharge, when invoicing for services

Keeping things simple (i.e. not invoicing to ensure they do not charge a price that would be seen as not being fair) is not anymore possible

All services must be invoiced: not invoicing will be seen as giving an unfair advantage to a sub, which would be re-categorised as taxable

Treasurers must get used to the idea that they are operating a “PC“… a real revolution for treasurers although it may not sound much

Central Treasury Structure

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Main trends and expected changes

► Political environment: Corporate tax rates – “race to the bottom”?

► Some examples:

► Hungary - 9%

► United Kingdom – 19% as from April 2017 and proposed as from April 2020 to reduce to

17% - further reduction possible?

► United States – Tax rate reduction as announced by Donald Trump – 15%?

► Ireland has already a very low corporate tax rate 12,5%

► Other countries to follow?

► Additional complexity in the international tax environment caused by OECD Base

Erosion and Profit Shifting (BEPS) project and EU Anti-Tax Avoidance Directive (ATAD

I&II)

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• BU X has been controlled by Belgian tax authorities (i.e. ISI) with specific questions on Cash-Pooling TP and margins applied

• BU Y has negotiated an Advanced Thin Capitalization Agreement (ATCA) with the UK tax authorities. Needs for respecting tax financial covenants for thin cap rules (e.g. if Interest Cover Ratio = at least 2,75:1 and Net Debt to EBITDA Ratio = less than 4:1, interests on the debt fully deductible)

• BU Z in Germany has been challenged by the tax authorities which raised questions on treasury fees and description of services rendered by

Substance over form principle… as for IFRS

Context: stronger focus from Tax Authorities on TP

“… transactions between the parties can be disregarded for transfer pricing purposes, if [part of] the transaction does not process the commercial rationality of arrangements that would be agreed between independent parties.”

(Article 7 draft law TP Luxembourg 12th Oct. 2016)

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• This can entail the following adverse consequences:

1. Additional tax costs: Interest may not be tax deductible at the borrower level anymore but will remain taxable at the level of the lender! This could have cash tax implications at the borrower level and can also have a negative impact on the group’s effective tax rate (ETR).

2. No uniform standard: The interest deduction limitation rule of the ATAD needs to be implemented by the EU Member States as a minimum standard with effect as from 2019, but Member States can also choose to provide for stricter rules. That will result in a inconsistent variety of rules within the EU!

3. Predictability/monitoring issue: Due to an EBITDA-based limitation on future interest deductions, annual effect of the new rules can only be assessed on the basis of EBITDA forecastswhile the final amount of deductible interest depends on how realistic the forecasts have been. In addition, the effect needs to be analyzed annually on an entity-by-entity basis, resulting in practice in a significant monitoring effort and predictability issues!

Ex cursus interest deUpcoming EU interest deduction limitation rule

rule

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EBITDA based interest limitation rule

The below minimum standards will lead to inconsistent situations among EU Member States

Net financial expense limited to maximum 30% of taxable EBITDA (i.e. countries can implement lower ratios, e.g. 20%, 10% or 0%)

Limits deductions on both internal and external debt

Applies to each entity within EU and needs to be analyzed separately for each legal entity

De minimis deduction of EUR 3M could be implemented

Group asset/equity ratio escape rule may be implemented

Carry-forward possibility of excess interest may be implemented

Grandfathering of certain debt concluded before 17 June 2016?

Specific (temporary) exemptions apply for financial undertakings

Ex cursus interest deInterest deduction limitation rulelimitation rule

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Circular LIR nº56/1-56bis/1

Effective date: from 1 January 2017

Key concepts:

Commercial rationality/value creation of structure

Substance over form (i.e. qualified personnel, control risks, equity)

Functions, risks and assets analysis

Repeals APAs and ATCs dealing only with remuneration of financing activities

Qualified personnel performing risk control/ management functions (Board / employee)

Board members / Employee should have skills/expertise to take final decisions

Majority of Luxembourg resident directors to the board of directors

Key Entrepreneurial Risk-Taking functions (“KERT”)

Origin of the transaction

Management of the transaction

Transfer Pricing Framework in Luxembourg

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► Cash Management and intra-group financing (from GT to affiliates) + depositmanagement (from affiliates to GT)

► Guarantees (i.e. corporate and bank guarantees issued on behalf of affiliates)

► Interest Rate management (i.e. hedging)

► FX management (i.e. hedging)

► Other financing: e.g. leasing, factoring, …

► Bank Relationship Management

► Compliance and reporting requirements (e.g. EMIR, MiFID, ISDA, FATCA,…) as well as IFRS reporting and postings and Mark-to-Market valuations on behalf of affiliates

► Access to IT solutions managed centrally including maintenance (e.g. TMS, Payment Factory, Cash Flow Forecast tool, etc.)

► Piece of advice on any treasury and financing matters

Source: EACT Technical guide 2009

WHAT are the types of central treasury activities and recharges to affiliates?

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HOW GT’s are organized to serve their affiliates?

TYPES

F

E

A

T

U

R

E

S

ROLE Advisory Agency In-House bank

RISK RESPONSE Cost CentreCost saving Centre

/ Service CenterProfit Centre

AUTHORITY Decentralized Centralized Balanced

STRUCTURE Elementary Intermediate Advanced

= trends in modern treasury as central organization

Objectives, roles and organizational structure will differ depending on businessesAgency, Advisory and IHB are 3 widely used labels for distinguishing between different types of treasury

Agency: Control of treasury decisions at the local level but all the external financial transactions are centralized

Advisory: Most major financial decisions are taken elsewhere in the organization Decentralized organization

In-House-Bank: The group treasury functions as the sole bank with which subsidiaries can deal

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Example of strategy adopted

Objectives of GT to MANAGE TREASURY CENTRALLY and to act on qualitative and quantitative element in order to bring :

Costs down

Efficiency up

Risks down

Quantifiable value creation is generated by centralizing of treasury services (synergies):

Cost of funding

Control win-win for GT and for all Affiliates

Bank (loan) conditions

Return on cash surplus

Estimate of gains generated should be assessed

HOW to add value in Treasury Management?

Additional Value

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HOW to document Transfer Pricing operations?

Service (Level)Agreement

► Access to group (more favourable) bank conditions and key banks

► Accounting Posting under IAS 39 / IFRS 9 + ad hoc report (e.g. MtM)

► Financial reporting IFRS / regulations (e.g. EMIR / FATCA / …)

► Support on negotiation of bank terms and conditions

► Piece of treasury / financial advice on bank and corporate finance operation

► Access to IT system (e.g. TMS, PF, Forecasting tool, etc.,…)

► Others

► Credit limits

► IR margins/spreads

► General terms & conditions of credit facilities

MasterAgreement

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Need to first assess credit risk of counterparty (i.e. Probability of Default) by crunching

figures and in order to give an internal rating

Need to apply a spread at arm’s length (with evidences and comparable transactions)

Arm’s length = independent party transaction price + value of differences on conditions

GT needs to analyze potential external solutions

However compilation of documents and evidence for current transactions and review of

spreads where necessary to fully comply with TP principles (e.g. bank credit offer, existing

comparable 1/3 party deal, market similar transactions, references indices, etc.,…)

HOW to produce evidences of spreads applied?

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Treasury expertise in 1 team (instead of duplicating functions across the group):

concentration of expertise in 1 location (at HQ level)

In order to benefit from volumes and from netting of exposures (long versus short

positions), which means cost reduction and risk mitigation

To better control key financial activities and get better visibility

To ensure efficiency in bank relationship management

To directly benefit from better Credit Rating of parent company

To benefit from state-of-the-art IT tools (i.e. 1 tool to serve several entities)

If it is a RISK CONTROL FUNCTION and a DECISION-MAKING ROLE, terms and conditions should be similar to banks’

WHY deciding to centralize treasury activities?

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• GT gets benefits from volumes, expertise and credit rating while dealing

• Sharing part of advantage with its affiliates, meaning win-win for both parties

• At the end of the day, affiliates pay less than on a stand-alone basis

WHY deciding to centralize treasury activities?

Price could obtain (thanks to its rating

e.g. BBB+)

Price offered to affiliate by

GT

Price affiliate could obtain on a stand-alone basis

Best price because of

credit risk and volume dealt

Price offered with mark-up

Price deteriorated

as the affiliate has a lower

intrinsic rating

Price obtained w/o Mother support (Stand-alone)

Price obtained from Mother

Example: Short term loan interest rate

Affiliate Bank

Mother Cy(Margin:100 bp)

Bank

Affiliate 1

Affiliate 2

Affiliate X

1,25%

WIN - WIN

Margin/Spread

Gain in pricing

2,25%

2,50%

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► For FX hedging deals, HQ takes the risk (i.e. non-delivery) in case of default of its affiliate. It means if counterparty defaults, HQ bears the risk of variance between current price and forward price negotiated

► For funding, HQ takes the risk in case the affiliate defaults (including cash-pooling). In case of default of one of the cash-pooled affiliates, none would bear the risk of defaulting one, apart from HQ

► For guarantee issuances, HQ bears the risk of default of the counterparty. It could be called as guarantor to supplement defaulting affiliates (i.e. for corporate guarantees) or be debited by the bank (i.e. for bank guarantee)

WHO takes the risks in a centralized treasury organization?

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► For IT services and access to IT solutions, the risks of break-downs, problems, non-access, etc., are borne by HQ (i.e. the supplier) and ruled by the SLA

► For compliance services (e.g. EMIR), HQ (i.e. the service provider) bears all risks related to absence or wrong reporting to Supervisors (e.g. for EMIR to TR and to ESMA), as ruled by SLA signed with affiliates

► For all other advisory services, risks are relatively limited apart from risks related to financial reporting (i.e. IFRS). In case of error, delayed reporting, absence of report, etc., the consequences would be covered by HQ (i.e. service supplier)

WHO takes the risks ?

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Nowadays it is common to centralize some of TM functions

GT manages important activities incl. d-t-d control of cash and bank accounts, raising finance, investing liquid funds and hedging against currency, IR or other risks

There are many legitimate reasons to centralize those activities such as:

To centralize the banking relationships

To improve coordination (maximization of liquidity and minimization of external borrowings)

To better follow-up the contractual risks and therefore better management of a boarder diversification

To reduce financial charges (reduced spreads and margins) thanks to economies of scale

To manage agency risks

Ideally to apply general theory of TP to intra-group funding transactions. In EU, price paid on a transaction should comply with the OECD Arm’s Length Principle. It takes into account the risk-return balance as well as the notion of fair distribution of benefits within MNC’s. The OECD guidelines require comparability analysis and provide detailed descriptions of various TP methods (e.g. CUP - Comparable Uncontrolled Price or re-sale price or even cost-plus methods). These methods’ objective is to substantiate the margin choice

Classic central treasury organization for funding?

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General Treasury Fees

Yearly fees paid by affiliates to HQ for treasury and corporate finance advisory and services. These fees calculation is based on a “cost plus” margin (6-7%)

Payment Factory FeesYearly fees paid by affiliates to HQ for implementation, maintenance and support of

payment factory project with separate fees based on a “cost plus” margin (6-7%)

Margin on financial operations dealt on behalf of affiliates

Margins apply on FX Hedging, Cash-Pooling, Funding, Guarantees issuance

OECD has listed in its best practices few methods for TP:• For treasury activities, COST+ and CUP (Comparable Uncontrolled Price) seem to be

the most appropriate• COST+ is usually used for advisory or IT services, for assistance and support• CUP (Benchmark) is used for financing and hedging transactions

Types of fees/margins to be generated by GT

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Treasury fees aim at complying with (new) TP principles (all services should be chargedconsistently at arm’s length and no free services allowed under BEPS)

The objective is to cover 100% of functional budget and to apply a “Cost Plus” margin of [6-7%]

GT budget consists of all charges of related to IT Licenses and maintenance (e.g. Bloomberg,TMS, Payment Factory, 360T, etc. ), labor cost of its X FTE’s team and corporate centerbuilding rental charges

GT calculates its fees and allocates them to affiliates according to:

Working time spent for each affiliate, volumes of financial operations deals/handled foraffiliates and services rendered (e.g. advisory, reporting, posting, bank relationship,…)

Use of IT system(s) by affiliate

How GT currently determines Treasury Fees?

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Assessment of spread to be applied – Benchmark Method

• « A comparability between conditions made or imposed between associated enterprises and those which would have been made between independent enterprises »

• Attributes or « comparability factors » that may be important when determining comparability include:

1. Characteristics of transaction

2. Functional analysis

3. Contractual terms

4. Economic circumstances

5. Business strategies

How to determine spreads on funding?

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To determine appropriate spreads to be applied to a term loan, need to assess the Credit Risk and therefore the PD, which will drive the range of spreads to be used in order to be at arm’s length and in line with market practices for similar stand-alone risk

Furthermore, need to document spreads applied and to give evidences for tax authorities in case of control a posteriori

E.g. a 5Y loan to XYZ won’t be charged the same as the same 5Y loan to UVW or to ABC.

Why? (1) Financials of the affiliates are different

(2) Sector risk could differ and eventually

(3) Country risk impact spreads

NB: parent support has also to be assessed (if any)

By assessing these 3 elements, we would be able to determine spread to be applied to the affiliates

For such complex credit risk assessment and tax documentation, GT (and Taxes) will probably need an IT tool (e.g. S&P IQ Capital, Moody’s Risk Calc, Bloomberg, etc.)

How to assess Probability of Default (PD) of affiliates?

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There are providers to assess credit risk and define applied yield. However, there are issues too…

Credit risks of holding companies are often difficult to assess –alternative to assess one by one the portfolio… but how to weight them then?

Risks must be assessed (i.e. company, sector, country) but also rate to be applied to the determined rating

Easy solutions in terms of figure crunching to be tested

Parent support issue: how to address it and what is a « parent support »?

Minimum period covered is 1Y although current accounts and pooling are often based on ST or EONIA

IR suggested could vary especially between « investment grade » and « sub-investment grade » and even sometimes market assesses risks differently… not a science but an indicator and a « relative » evidence to be ideally cross-checked

Sources of benchmark are multiple

Brand new issues, not a lot of good support and clear answers

Tips on IR determination and existing solutions

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IFRS 9 ECL

• Assessment of counterparty risk (i.e. A/R -> creditworthiness evaluation)

• To check in case overdue A/R amount to be impaired

• Vis-à-vis customers (external)

• Accounting rules

• Forward looking model

• Moving toward economic reality

• Principle-based rules

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Parallel between IFRS 9 ECL and TP ruleswhich both address credit risk

TP RULES*

• Assessment of counterparty risk (i.e. affiliates -> creditworthiness evaluation)

• To determine spread to be applied to funding transactions

• Vis-à-vis Affiliates (internal)

• Tax rules

• Backward looking model

• To be in line with effective economic risk taken

• Principle-based rules

* Intercompany loans will also be affected by IFRS9 impairment

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IFRS 9 Expected Credit Loss Calculation

Expected loss is a statistical measure used to reflect expectations of future losses based on historical data

The three primary components are derived based on observation, empirical evidence and expert judgment

The objective is to quantify loss expectations over a 12 month forecast

• Probably of default for an asset over the next year

• PD represents an average expectation over the course of an entire business cycle (through-the-cycle) as opposed to specific current expectations (point-in-time)

• Loss given default based on losses resulting from default over the next 12 months

• Ideally the LGD will be separated for secured and unsecured portions of an exposure

• LGD is a prudent parameter based on an assumed downturn in the economic conditions

• Expected exposure represents the amount an entity stand to lose in the event of a default event

EL PD LGD EE= x x

• TP in treasury is not as easy as it looks like

• Be prepared and get IT tools or solutions to provide Inland Revenue sufficient evidences to justify margins applied

• Forecasting of cash-flows and proper capitalization will be important to avoid situation where interests aren’t deductible

• At least it will push GT to revisit their processes and organization

• Substance is key

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Conclusions and comments

Be BEPS compliant…

"If you would know the value of money, go try to borrow some“ (French Proverb)

More ironically, we might say: "In business, the lower the price, the bigger the sticker" (even between sub’s of the same group)

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• François Masquelier

• ATEL

• 43, bld Pierre Frieden

• L-1543 Luxembourg

• Tel +352 621 278094

• Email francois.masquelier@rtlgroup.com

Thank you!

Twitter: @FrancoisMasquel

Blog: https://mytreasurer.wordpress.com

LinkedIn: ATEL group

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APPENDICES

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OECD BEPS Action Plan Public perception / media reports

► Public perception of ‘tax nowhere’ and ‘tax haven’ entities

► Moral obligations?

Transparency initiatives

► Exchange of ruling information

► Public country-by-country reporting?

EU state aid investigationsTax authorities scrutiny

► Budget issues

► Reputation

► More disputes

EU Anti-Tax Avoidance Package

► Anti-Tax Avoidance Directive

► Country-by-country reporting

► Recommendation on treaty abuse

► External communication

The end of the tax world as we know it ?

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Potential future development BEPS – OECD action plans : changes to the international tax landscape

► Action 1: Address the tax challenges of the digital economy

► Action 2: Neutralise the effects of hybrid mismatch arrangements

► Action 3: Design effective CFC rules

► Action 4: Limit base erosion involving interest deductions and other financial payments

► Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance

► Action 6: Prevent the granting of treaty benefits in inappropriate circumstances

► Action 7: Prevent the artificial avoidance of permanent establishment status

Action plan on BEPS

► Action 14: Making dispute resolution mechanisms more effective

► Action 15: Develop of a multilateral instrument to modify bilateral tax treaties

► Action 8-10: Aligning transfer pricing outcomes with value creation

► Action 11: Measuring and monitoring BEPS

► Action 12: Mandatory disclosure rules

► Action 13: Guidance on transfer pricing documentation and country-by-country reporting

Exceeding borrowing costs < 30% of EBITDA

If interest deduction is limited to 30% of EBITDA (could be even less on national level), it means some costs of borrowing could be excluded from tax deduction

An affiliate facing difficulties and requiring additional funding on top of low or negative EBITDA, interest won’t be deductible except for the de minimis exception (if any)

The paradox is that the more funding you need and difficulties you encounter, the lower the amount of interest deduction allowed. Better to recap affiliates then!

Example: Affiliates XYZ made an EBITDA of EUR 20m (from 72m in Y-1) given bad economic situation. It therefore required additional funding. However the cost of funding of 7m is > 30% of EBITDA interest deductibility limited to 6m (above de minimis amount) and if EBITDA negative no deduction at all (apart from de minimis amount)

Need for accurate EBITDA forecasting per PC to adjust properly interco funding

Consequences of interest deduction limitation

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Should interco’s transactions be « floored » too?

Floor features in floating rate agreement are nothing new but standard now with low and negative IR in order to ensure a minimum yield to the banks

It means that if IR < zero, you pay the spread on 0%

All bank facilities and funding instruments (e.g. Schuldschein) are nowadays all « floored ». It means that even when IR are negative, the rate applied equals to the spread (e.g. EONIA at –0,35 + 0,85 of spread means 0,85% for a bank). The issue is: should we apply the same for interco transactions?

If external credit facilities aren’t floored, interco could also be unfloored

IR are now all « floored » by Banks

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Current Negative IR context with current accounts at zero %

Given negative IR environment, it is difficult or impossible to apply « normal » group transfer price margins (as usually done in the past)

When interest rates are significantly negative as EONIA (i.e. currently at – 0,33%), the usual margin of 0,25% normally deducted from affiliate’s deposits cannot be applied anymore. If applied, the proposed deposit rate would be even more negative (while current accounts are still remunerated at 0% at the moment)

All-in margins generated are therefore reduced in such a negative rate environment

Furthermore, with non fully-controlled affiliates, GT must be « more aggressive » in terms of pricing to attract deposits

Key issue: should we apply negative rates on deposits from affiliates?

Practical examples and TP commentsBank current accounts are at zero percent until now

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Term/Loan deposit

For term loan and deposit the Master Agreement defines that the terms and conditions will be determined in the confirmation of the transaction.

Example : a term loan for a subsidiary with USD as functional currency

Libor USD 1Y + 1%The margin is based on the rates a bank could use for a similar transaction (at same conditions)

On a daily basis affiliates inform GT of their needs and thus are allowed to borrow or deposit within the credit line limit mentioned in the Master Agreement.

The conditions applied may change in case the amount is above the limit

Example of a term loan granted to an affiliate

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SHORT LONG

Based on CREDIT RISK ASSESSMENT MODEL

Constant for all

* Upon Intrinsic Credit risk

Example : 1 year loan on BB subs

► 1Y swap = 0,80 %► Spread BB 1Y = 185 bps► Interest rate = 2,65%

Given low Interests rates Spreads have been adjusted * 25 basis points in “normal” conditions

WHEN

Ref Index value Interest rate

If Eonia [+oo , 0,11] Eonia – 10 bps

If Eonia [0,10, -0,30]

0 flat

If Eonia [-0,31, -oo ] Eonia + “Gradualmargin”

However

Spreads to be applied to Sub’s under BEPS

Ref Index + Spread (Margin)* Ref Index + Spread (Margin)*

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Summary of EU legislative developments

► Political environment: Corporate tax rates – “race to the bottom”?

► Some examples:

■ Hungary - 9%

■ United Kingdom – 19% as from April 2017 and proposed as from April 2020 to reduce to 17% - further reduction possible?

■ United States – Tax rate reduction as announced by Donald Trump – 15%?

■ Ireland has already a very low corporate tax rate 12,5%

■ Other countries to follow?

► Additional complexity in the international tax environment caused by OECD Base Erosion and Profit Shifting (BEPS) project

and EU Anti-Tax Avoidance Directive (ATAD)

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Existing Article 56 ITL

Effective date: 1 January 2015

Key concepts:

Applicable to any commercial activity

Domestic and foreign transactions

Comparability analysis

No dynamic interpretation of Article 9 OECD MC

Upward and downward adjustment

Transfer Pricing Framework in Luxembourg

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Based on the new Article 56bis ITL, the following intercompany transactions are subject to transfer pricing documentation:

Deposits

Term loans

Cash pooling

Current account

Swaps

Guarantee

Operating or financial leasing

Royalties

Services

Transfer Pricing Framework in Luxembourg

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Main trends and expected changes

► Need for “SUBSTANCE” – Why?

► To defend access to treaties under new Principle Purpose Test (PPT) resulting from Multilateral

Instrument (MLI) (effective probably 2019)► PPT: Is it reasonable to conclude that obtaining a tax benefit was one of the principal purposes?

► To defend against potential General Anti Avoidance rule (GAAR) application in EU Parent-

Subsidiary directive (PSD) and Anti-Tax Avoidance Directive (ATAD), i.e.:

► Arrangement(s):1. “Put into place for the main purpose or one of the main purposes of obtaining a tax advantage

that defeats the object or purpose of the law/PSD”, and

2. “That is/are “not genuine”, i.e., not put in place for valid commercial reasons that reflect economic

reality.”

► To comply with BEPS Actions 8-10► Generally requires control of risks by local, qualified personnel able to take key decisions

► Allows outsourcing of certain functions, under conditions

► Country-by-Country Report requires reporting of number of local employees

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For example, in Luxembourg, at HQ level for different reasons

Internal reasons:

Parent company has a longstanding expertise of treasury with a team of X FTE’s.

There are skilled corporate treasurers servicing affiliates across the world.

External reasons:

Further, Luxembourg offers a highly-qualified degree of expertise:

Banks (More than 150 international banks and first wealth management center in Eurozone)

Largest international accounting firms (Audit, tax, consulting, advisory, legal services)

Corporate service providers (Treasury and financing services are offered by banks)

Tax system very stable in Luxembourg and presents attractive conditions for setting up

AAA rating of Luxembourg

WHERE centralizing treasury activities? centralizing

treasury activities?

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More information on BEPS and TP (published by TMI Magazine)

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