There are many factors to consider when determining a treasury structure. To what extent will centralisation benefit operations, or will a regional structure be more appropriate? Is a treasury centre to be established, and if so, where should it be? What are the pros and cons?

Treasury organisation is generally dictated by the company’s strategy, structure and underlying business model; however the trend over recent years has been increasingly for treasuries to centralise their operations. This gradual shift towards centralisation has been encouraged by technological advances that have made it easier and cheaper to centralise, and also by governance regulations, such as the US Sarbanes-Oxley Act, which require a high level of transparency across an organisation. Initiatives like the Single Euro Payments Area (SEPA) also favour centralised structures, and more recently, the global economic crisis has also pushed companies to revisit their existing structures as they seek to maximise efficiencies and increase visibility across the business.

The structure of treasury operations and, in particular, the chosen level of centralisation will have a major impact on the company’s cash management structures. Generally speaking, the centralisation of treasury activities enables companies to develop more efficient cash management structures and benefit from greater efficiencies in other parts of the company. It is therefore important to determine, and to re-evaluate periodically, the degree of centralisation that is both desirable and practical from the company’s point of view. An important factor in this review is technology, as advances in systems and communication have made it easier and cheaper to centralise treasury operations in recent years.

Degrees of centralisation

Broadly speaking there are three different levels of treasury structure. These are:

• Decentralised.

  Treasury policy-making, decisions and activities are conducted by each subsidiary with a small team retained at group level to provide advice.

• Partially centralised.

  Treasury policy is defined by group treasury, which may also advise or instruct subsidiaries on investment or hedging activity etc. Back-office operations may be centralised, but subsidiaries retain responsibility for executing deals with local banking partners.

• Fully centralised.

  Treasury policy-making, decisions and most banking and financial activities are undertaken at group or regional treasury level, which might offer a 24-hour service for the subsidiaries.

Although a fully centralised environment may appear to be the most suitable structure for multinational corporations, in reality this is not necessarily the case – many end up with a hybrid or decentralised arrangement, simply because it is impractical to operate in any other way.

Decentralised

In a decentralised structure subsidiaries have stand-alone local bank arrangements and may organise their own funding. Cash management is handled locally, including short-term borrowing and investments, although payments to and from the parent will still occur.

Partially centralised

Companies may choose to set up a partially centralised model in order to improve efficiencies in some areas of the treasury function. In these situations, group treasury will usually define treasury policy and may give advice to, or even instruct, individual subsidiaries. However, the subsidiaries retain responsibility for executing the deals themselves via their local banking partners. Back office operations may be undertaken at local level or they may be centralised, delivering more control while enabling subsidiaries to maintain a degree of autonomy within the front office function.

Regional model

One of the most popular approaches to partial centralisation is the regional model. With treasurers rethinking their approach to banking and funding since the financial crisis, the one-bank approach is no longer seen as a viable option. So, with treasurers giving more consideration to regional banking relationships, a regional treasury model is also being mooted as an equally prudent option.

Centralised

In the centralised treasury model, policy-making, decisions and most, if not all, activities are undertaken by a global treasury or regional centres on behalf of subsidiaries across a specific region or across the group. These may offer a 24-hour service to ensure round-the-clock coverage for all subsidiaries.

Treasury centres

A treasury centre is a centralised treasury management function, which is legally structured as a separate group entity or branch. This entity is normally located in a tax-efficient location. A treasury centre provides financial management and transaction services for the other group entities. Its most typical functions include:

• Managing liquidity and reducing interest payments through cash pooling.

• Providing internal (intragroup clearing or netting) and external (payment factory) payment services.

• Setting rules for reinvoicing within the group and externally, offering factoring services for the group companies’ third party receivables, or structuring asset-backed securities programmes (ABS).

• Negotiating group-wide leasing arrangements.

• Structuring, monitoring and financing the capital requirements of group companies as well as co-ordinating and managing external borrowings.

• Providing group companies with vendor financing.

• Providing asset management services for any surplus funds, pension funds or similar liquidity.

• Providing exchange and interest rate risk management services to group entities, such as advising, monitoring and managing their exposures, concentrating the group’s exposure within the treasury centre, internal dealing and managing the risks externally with appropriate financial instruments.

• Providing financial markets research and risk management analysis.

• Optimising the group’s global tax position and controlling the repatriation of funds through the group via dividends and interest payments etc.

It is important to be aware that not all countries where group companies may be located will necessarily permit the concentration of all these activities. The capabilities and activities of a treasury centre, therefore, need to be defined per each individual case.

Advantages

The treasury centre structure has many benefits and can lead to improvements on three different levels, as follows:

• Governance.

  • The use of a co-ordinated and central database.

  • Standardised treasury and risk management procedures.

  • More accurate group-wide reporting.

  • Know-how pooling.

  • Greater focus on core competencies within the group.

• Costs.

  • Reduced payment and transaction costs through higher volumes and fewer individual transactions.

  • Reduced financing costs and financing requirements.

  • Reduced hedging costs.

• Tax.

  • Allocation of financial profits in a low tax country, when allowed.

  • Tax-efficient cash management and financing structures.

As mentioned, not all the elements of a fully centralised treasury are available in all countries, nor are they suitable for every company. In addition, the process of centralising treasury functions is likely to be taken in steps moving through different levels of centralisation.

How to organise a treasury centre

Once the different possibilities of centralisation have been considered, the organisational structure and location of the treasury centre must be determined. Depending on the group’s management philosophy, the treasury centre has a choice of two models to adopt:

1. The treasury centre acts as central agent, operating all financial transactions for the group companies in their name, compensated on a cost plus basis.

2. The treasury centre acts as the group’s central in-house clearing bank, either on a shared service centre basis (which means that the group entities have direct relations with the treasury centre) or in competition with third party banks.

Both models centralise the treasury know-how of the group. In addition, the in-house bank operates the group’s financial management as its own business. Cost savings, as well as additional income earned, arise at treasury centre level.

If a treasury centre is organised according to an in-house banking model and is competing with other third party banks, it will usually operate as a profit centre. The group companies’ financial needs are met on a price level applicable to a third party.

The question of whether a treasury centre operates as a cost, service or profit centre has a direct impact on where the treasury centre is located. Indeed, a treasury centre acting as a profit centre has a clear advantage if operating in a low tax jurisdiction.

Choosing a location: a checklist

Does your chosen location meet the following external requirements?

• Good banking facilities.

• Easy access to major stock exchanges.

• Professional expertise.

• Availability of trained personnel.

• Stable communication network.

• Liberalised capital market.

• Political stability and favourable regulations.

Have you considered the following tax aspects of your chosen location?

• Tax on the profits allocated to the treasury centre and its capital.

• Withholding tax on interest, dividend and royalties.

• Thin capitalisation rules with regards to profit, capital gains tax and withholding tax.

• Stamp taxes: the establishment of a subsidiary usually triggers stamp tax consequences. Furthermore, securities transactions may be subject to stamp tax.

• Value added tax (VAT): according to the laws of most countries, VAT is not due on certain financial transactions. The activities of a treasury centre are usually only in part subject to VAT.Double tax treaty network and, depending on the head office’s locations, controlled foreign companies (CFC) rules.