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Intercompany financing facing new challenges EY Africa Tax Conference
September 2014
Page 2
Panel
Joseph Pagop Noupoue
EY
Panel Ide Louw
International Tax
EY South Africa
Jemimah Mugo
EY Kenya
Moderator
Michael Hewson
EY South Africa Craig Whitley
White & Case
Intercompany financing facing new challenges
Patrick Oparah
EY Nigeria
Page 3
Agenda
► Challenges to intercompany financing
► Debt pricing
► Treasury companies
Intercompany financing facing new challenges
Page 4
Challenges to intercompany financing
Intercompany financing facing new challenges
Page 5
Global tax risk
More risk
Less risk
Change in the global tax risk landscape
Behavior and attitude to tax risk has
changed
Unilateral domestic law changes
proliferate:
► GAARs
► Interest and royalty deductibility
► Anti-treaty abuse
Tax authorities have access to more
information:
► Exchange of information
► CBCR
Fiscal authority challenges are
increasing:
► Aggressive tax assessments
► Tax fraud allegations
UN vs. OECD divergence:
► Transfer pricing
► Emerging markets
► PE threshold
Generalized increase in source
taxation
Global tax risk assessment by territory
Rate drivers
Group capital structure:
► External debt
► Hybrid financing
► Finance and treasury centers
Trading model:
► TP policy
► Principal companies
Other significant Hub Cos:
► IP holding
► Tangible assets
► Captive risk management
Repatriation management strategies
Assessing potential change drivers
HQ:
► CFC
► Effective
management
► Holdco
substance:
► Dividend
withholding
tax
Hub Co:
► Tax haven
► No treaty
► 0% rate
► Exempt branch
► “Discretionary ruling”
► Statutory tax incentive:
► Patent box
► Notional interest
deduction
► Low rate
Source territory:
Profit attribution
► Deductibility of
payment
► Withholding tax:
Response strategies
Understanding risk:
► CBCR
► BEPs risk assessment
Overall risk reduction:
► TP policy and documentation upgrade
► PE risk management policy upgrade
► TP and PE training
► Removal of tax haven entities
► Use of unilateral and bilateral APAs
► Use of private letter rulings and clearances
► Prioritize transparency and cooperative
compliance and accelerated settlement of
legacy issues
Specific risk reduction:
► Restructure finance structures impacted by
BEPs measures
► Rebalance capital structure vs.
supply chain
► Revisit Hub Cos:
► Treaty access
► Substance
► Location
► Form of local tax shelter
► Revisit and renew rulings
HQs: global and regional
Hub Co
Main Op Cos
Intragroup financing rendered less effective due to anti-BEPS measures
Hub Co rulings and APAs require full value chain transparency
Response strategies
Intercompany financing facing new challenges
Page 6
Latest OECD developments
► Developing countries and international organizations
identify key relevant BEPS issues including:
► Base erosion caused by excessive payments to foreign
affiliated companies
► Profit shifting through supply chain restructuring
► Difficulties in obtaining the information needed to assess
and address BEPS issues, and to apply their transfer
pricing rules
► Treaty abuse
► Tax incentives with little demonstrable benefit
Intercompany financing facing new challenges
Page 7
Thin capitalization in Africa Heat map
Intercompany financing facing new challenges
Thin Capitalization rules
No Thin Capitalization rules
Page 8
East Africa
Intercompany financing facing new challenges
Page 9
West Africa
Intercompany financing facing new challenges
Page 10
Francophone Africa
Intercompany financing facing new challenges
Page 11
South Africa
Intercompany financing facing new challenges
Page 12
Legal and regulatory
Intercompany financing facing new challenges
Page 13
Debt pricing
Intercompany financing facing new challenges
Page 14
Debt pricing
The following steps need to be undertaken when pricing an intragroup financing
arrangement:
► Purpose of the loan
► Source of the financing
► Benchmarking
Intercompany financing facing new challenges
Page 15
Treasury companies
Intercompany financing facing new challenges
Page 16
The evolution of treasury
Intercompany financing facing new challenges
► Decentralized model for
commercial and treasury flows
► Regional model with overlay
solution
► Centralized treasury
operations, i.e., FX hedging
and intercompany funding
► Multi-bank electronic banking
► Regional model with
integrated structure
► Centralized commercial flows,
i.e., netting or reinvoicing
center
► Centralized transaction flows,
i.e., shared service center
► Automated treasury flows
(sweeping and pooling)
► Global payment factory for
accounts payable and
accounts receivables
► Global in-house bank for
accounting, funding and
investments
► Global liquidity structures
► Multi-currency investment
portfolio
► Off-balance sheet investments
Arm’s-length treasury
Regional treasury center
Global treasury center
In-country cash
management
Page 17
Response
Intercompany financing facing new challenges
More risk
Less risk
Change in the global tax risk landscape
Behavior and attitude to tax risk has
changed
Unilateral domestic law changes
proliferate:
► GAARs
► Interest and royalty deductibility
► Anti-treaty abuse
Tax authorities have access to more
information:
► Exchange of information
► CBCR
Fiscal authority challenges are
increasing:
► Aggressive tax assessments
► Tax fraud allegations
UN vs. OECD divergence:
► Transfer pricing
► Emerging markets
► PE threshold
Generalized increase in source
taxation
Global tax risk assessment by territory
Rate drivers
Group capital structure:
► External debt
► Hybrid financing
► Finance and treasury centers
Trading model:
► TP policy
► Principal companies
Other significant Hub Cos:
► IP holding
► Tangible assets
► Captive risk management
Repatriation management strategies
Assessing potential change drivers
HQ:
► CFC
► Effective
management
► Holdco
substance:
► Dividend
withholding
tax
Hub Co:
► Tax haven
► No treaty
► 0% rate
► Exempt branch
► “Discretionary ruling”
► Statutory tax incentive:
► Patent box
► Notional interest
deduction
► Low rate
Source territory:
Profit attribution
► Deductibility of
payment
► Withholding tax:
Response strategies
Understanding risk:
► CBCR
► BEPs risk assessment
Overall risk reduction:
► TP policy and documentation upgrade
► PE risk management policy upgrade
► TP and PE training
► Removal of tax haven entities
► Use of unilateral and bilateral APAs
► Use of private letter rulings and clearances
► Prioritize transparency and cooperative
compliance and accelerated settlement of
legacy issues
Specific risk reduction:
► Restructure finance structures impacted by
BEPs measures
► Rebalance capital structure vs.
supply chain
► Revisit Hub Cos:
► Treaty access
► Substance
► Location
► Form of local tax shelter
► Revisit and renew rulings
HQs: global and regional
Hub Co
Main Op Cos
Intragroup financing rendered less effective due to anti-BEPS measures
Hub Co rulings and APAs require full value chain transparency
Response strategies
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