tax and treasury operations in africa - ey - united...

Tax and treasury operations in Africa

Moderator Panel

Rendani

Neluvhalani Thuto Shomang Nervin Chetty Michel Verhoosel

Director

International Tax

Services

EY South Africa

Corporate Treasury

MTN Group

Johannesburg

Treasury and Trade

Solution

Citibank Africa

Johannesburg

Senior Manager

EY South Africa

Panel

Africa Tax Conference™ 2015

► Introduction

► What is a financing and treasury company?

► Current trends in international treasury management

► Cash management and pooling

► Key tax issues for financing and treasury operations

► Transfer pricing(TP)


Agenda

Introduction


EY 2010 global TP survey

► Increased susceptibility of financial intercompany

transactions to audits conducted by fiscal authorities

► Increasing focus of tax audit on intercompany financing

structures (significant rise from 7% in 2007 to 42% in

2010)

Multinational (MNE) perspective Actual tax authority activity


EY 2013 global TP survey

MNE opinion:

44% of parent companies identified transfer pricing of intragroup financial arrangements as

their most important area of controversy.


EY 2012 global TP tax authority survey

Tax authority opinion:

Financial transactions identified as TP focus area by two-thirds of tax authorities surveyed

Europe, Middle East, India and Africa (EMEIA) countries with TP focus on

financial transactions

Specific focus

No specific focus

Other countries with TP focus on financial transactions

Specific focus

No specific focus


► Since the last survey in 2012, there has been an increasing focus on financial

transactions, the arm’s length nature of intercompany loans and other

financing arrangements from tax authorities, both in terms of quantum and

pricing.

► Financial services attract particular attention.

► There has been a substantial increase in tax authority TP resources, including

those specializing in financial transactions, leading to an increase in the

number of tax inquiries and audits.

► An increasing number of tax authorities acquire access to tools and databases

for auditing financial transactions.

EY 2014 global TP tax authority survey


Substance

Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Sharing (BEPS) project

Coherence

Action 1: Digital Economy

Action 15: Multilateral Instrument

Transparency

Action 2:

Hybrid mismatch arrangements

Action 4:

Interest Deductions

Action 3:

Controlled Foreign Company (CFC)

Rules

Action 5:

Harmful Tax Practices

Action 6:

Preventing Tax Treaty Abuse

Action 8:

TP Aspects of Intangibles

Action 7:

Avoidance of PE Status

Action 9:

TP/Risk and Capital

Action 11:

Methodologies and Data Analysis

Action 13:

TP Documentation &

country-by-country reporting

Action 12:

Disclosure Rules

Action 14:

Dispute Resolution Action 10:

TP/High Risk Transactions


Actions relevant for financial transactions

What is a financing and treasury company?


► Typically, a centralized treasury management function

► May be structured as a separate legal entity within the group, or a

branch of an existing group company

► Provides financing and treasury services to other group companies

► Usually located in a tax-efficient environment

What is a financing and treasury company?


Typical functions of a financing and treasury company

Cash

management

Bank

relations

Interest rate

management Accounts

payable/

receivable

Foreign

Exchange

management

Payment

factory

In-house

bank

Central financing

and treasury

Corporate

finance


Current trends in international treasury: Management


► Reflecting on the future: a study of global corporate treasuries1

► 40% of treasurers interviewed felt that financing (including refinancing) was one of

the most important issues their treasury function had dealt with in the past 12

months.

► Liquidity management was a key concern, with companies looking to diversify their

funding sources.

► Cash forecasting was another major concern. Centralization of payments and the use

of payment factories, facilitate liquidity and good cash management, and investment

in payment factories are examples that tend to pay off.

1 Reflecting on the future – a study of global corporate treasuries (conducted via face-to-face

interviews with 101 treasurers of leading international companies, covering 14 countries and 21

industry sectors).

Current trends in international treasury management


Current trends in international treasury management

Regional Model – Step 2

Global model

Regional Model – Step 1

Decentralized Model

► Global payment factory

► Global in-house bank/investments

► Netting, pooling, sweeping structures

► Regional re-invoicing center

► Regional payment factory

► Active treasury and risk management role

► Regional funding concentration/investments

► In-country accounts

► Basic payments/receivables

► In-country liquidity management

Global

level

Regional

level

Regional

level

Country

level

Entity

level

Global

treasury

center

Regional

liquidity

options

Regional

risk

management

Regional

treasury

centers

Regional

shared

services

centers

Active

treasury

management

In-country

liquidity

management

Finance

solutions

Payables

outsourcing

Cash flow

projections

Receivables

outsourcing

Building blocks


Multinational cash pooling


Zero balancing

► Is the concentration of funds within a company, or a group of companies, into one account (cash pool

leader)

► The balances of the sub-accounts are physically transferred to the top account at the end of each

business day with original value days.

► The top account hold the overall net cash position of the company or group of companies.

Notional cash pooling

► The fictive consolidation of account balances-no real movements of funds between the accounts.

► The credit and debit balances on the accounts concerned are notionally brought together and offset

to establish a net position for the calculation of interest.

Multicurrency cash pooling

► Offsets credit and debit balances on a multicurrency basis between various legal entities.

Multinational cash pooling Some important definitions around cash pooling


Case study

► Cash pool leader ► Company 1 and Company 2 act as cash

pool members (Sub accounts) ► Zero balancing cash pooling ► The cash pool is managed by a bank ► Excess cash from the sub-accounts of

Company 1 and Company 2 are physically transferred to the top account

► In case of cash need, cash will be transferred from top account to sub-account


Implications on the cash pool leader and the cash pool members ► Tax:

► Corporate tax ► Value-added tax (VAT) ► Exchange control Regulations

► Transfer Pricing

Implications in different areas


Main tax aspects to be managed: ► Withholding tax on interest payments

and certain remuneration for pool services

► Limited deductibility of interest expenses

► CFC legislation and anti-avoidance provisions impacting planning

► VAT on interest payments and on remuneration

Tax Important aspects


Substance of the cash pool leader ► Establishing economic ownership:

► Equity

► Function

► Competent employees

VAT ► Interest margin: no VAT ► Service fees: VAT, depending on

the nature of the service

Tax Important aspects


Transfer pricing


Transfer pricing Example (netting benefit)


► Condition for applicability:

► No affiliate should be worse off from

the participation in the cash pool.

► Usually, the cash pool leader (CPL)

is able to negotiate better interest

terms with the cash pool bank(s)

than the individual cash pool

participant on a stand-alone basis.

► Cash pool benefit (netting benefit)

arises when liquidity supply and

demand are matched within the

group through the cash pool.

Transfer pricing Transfer pricing aspects of cash pooling

Benefit of cash pooling

Pre-cash

pooling

Post-cash

pooling

Inte

rest e

xp

en

se

Benefit of

cash pooling


► Functionality and actual operation of the cash pool will depend on: ► Type of cash pool (notional vs. physical cash pool, zero balance versus excess

balance) ► Outsourced to a third-party bank/internal cash pool ► Ability of CPL to take on risks (credit risk, foreign exchange risk, market risk,

operational risk) ► Additional functionality beyond mere “passing on” of cash: hedging strategies (IRS,

forward contracts and hedging strategies), bank negotiations, trading, etc. ► The functionality of the CPL will determine its remuneration ► Administrative services provider vs. in-house bank cost plus versus spread

debate

Transfer pricing Functionality will determine remuneration


Characterization

► Treasury serves as a routine service provider

► Arranges financial transactions for other affiliated

companies

► Significant risks and opportunities are not borne by the

treasury but the other affiliated companies

Transfer pricing implications

► Treasury functions are typically remunerated on a cost-

plus basis

► Only low profits are allocated to treasury

► Only intercompany loans and (less commonly)

guarantees are priced according to market conditions

Characterization

► Treasury serves as an in-house bank

► Organizes financial transactions with affiliated

companies, similar to external financial service

providers

► Treasury has significant know-how and financial power

that allows for assuming and managing significant

financial risks

Transfer pricing implications

► The role of a hub is associated with significantly higher

profits, since the hub assumes and manages significant

risks

Admin division - cost center In-house financial hub – profit center

Transfer pricing Cost center vs. profit center


EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2015 EYGM Limited. All Rights Reserved. EYG no. DL1439 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

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