Where client data is shared across borders, provision for data protection will need to be investigated in every jurisdiction. Other regulatory issues may arise, not least the possible requirement for a banking licence; although in most European countries this is not necessary, in the Americas it may well be a requirement (for example, Argentina and Brazil require a licence and in Canada one is required for a central collections operation).
At an individual local entity level, where other bank accounts are retained, treasury will need to establish if the OBO structure infringes any individual banking covenants that may exist for those relationships (such as the removal of all or most funds to a central location).
Taxation is never far from view. Conversion to an OBO model using an IHB effectively creates an inter-company position which requires the preparation of a combined or consolidated financial statement for tax and reporting purposes.
Corporates must investigate whether withholding tax and thin capitalisation rules are applicable for a proposed OBO operation. Issues around transfer-pricing, Controlled Foreign Companies legislation (designed to stop companies from reducing tax in one jurisdiction by diverting profits to tax shelters and ‘preferential’ regimes), VAT and stamp duty may also impact the feasibility of an operation or the entities it covers.
Whereas the underlying bank account for POBO is normally viewed as an ordinary operating account, a COBO account is in most jurisdictions considered to be a trust account for tax purposes. Where these are established, their operation, documentation and reporting must be considered in the light of local tax law. Such accounts may have some downstream impact on existing liquidity and credit matters; the corporate’s cash management banks should be consulted to see what, if anything, this means.
There may be detrimental tax treatments of inter-company lending applied to OBO structures – all Asian and American markets require a close look at this, and around half of all European jurisdictions require detailed review in this respect too.
Cost of change
Undertaking a significant change to one of the most fundamental aspects of a business’ operating model will almost certainly come with a price tag. Prior to implementation it will be necessary to undertake feasibility studies around tax, legal, regulatory and market matters (including banking, vendor, customer and supplier relationships) for the proposed location of the POBO/COBO site and how these elements may impact each entity targeted to join the structure. These elements require continual reassessment due to their constantly evolving nature – the level of understanding needed represents a significant outlay.
Perhaps the main cost for corporates seeking the advantages of OBO, as recognised by Deutsche Bank’s white paper, will be technological: implementing and managing IT interfaces, workflows, system configurations, internal and external reporting and reconciliation processes.
In terms of business case, direct costs can be heavily influenced by the cost of IT implementation and integration but other costs, both direct and indirect, should not be underestimated. These can include considerations of the impact on people, organisational structure and the cost of running the programme.
Careful consideration should be given to the implementation approach to control cost and manage implementation risk. All centralised operations will be judged by their ability to execute flawlessly – there is normally no ‘honeymoon’ period in an ‘on behalf of’ model.
Is migration an option?
The decision by a large corporate to migrate to an OBO operation is far from obvious. The set-up process requires considerable effort, not least with the legal, tax and regulatory investigations that must take place in advance of that decision and thereafter to keep pace of any developments – for each and every country involved. The need to develop and maintain the IT infrastructure, enabling continued connectivity between the relevant entities and the IHB/OBO facility, is essential. Process automation (including reconciliation) requires standardisation as far as possible if bottlenecks are to be avoided and any resistance by local teams to let go of their client relationships must be tackled sensitively.
However, once in place, an OBO structure can deliver a number of benefits for corporates including bank account consolidation, lower account, transaction and FX fees, re-focus by local entities on value-added work, lower longer-term IT costs and, perhaps the leading driver, improved visibility over working capital. Economies of scale can, and indeed do work – but not before a lot of hard graft has been put in to prepare the ground.