Tax is tax, and treasury is treasury, and never the twain shall meet. With apologies to Rudyard Kipling, this phrase might well apply to the corporate view of two different functions that in the past may not have spent much time in each other’s company. This is not how it should be.

The taxation of international corporates is big news in the popular press at the moment. Companies seeking to legitimately minimise their tax outlay use a number of methods made available to them by individual jurisdictions in isolation and in combination. The action taken in this respect does not always sit well with public – and indeed political – perception of what is right (as opposed to legal) but it is nonetheless the duty of the corporate body to be as tax-efficient as it can be, and, as such, the subject of taxation should now be a shared concern for most business functions.

There is no doubt that treasurers are – or should be – a key part of the equation when it comes to providing the most accurate and timely information to the tax department to facilitate the most efficient tax response. Finance function costs have decreased by around 40% over the last decade, according to PwC benchmarking research carried out earlier this year for its ‘Tax function of the future’ series. Although many manage to operate on slender cost-levels, the research results show that the pressure nonetheless continues for all concerned – including treasury – “to do more with less”. The concern that PwC raises in this respect is that whilst finance functions are transforming to keep ahead of the curve, most initiatives continue to take place without the involvement of the tax function. This, it argues, misses an opportunity.

A meaningful relationship

Streamlining and incorporating the tax function into financial transformations has many long-lasting benefits, it seems. PwC cites increased regulation, notably generated by the OECD’s 15-point BEPS action plan (of which more later), and additional international tax reporting procedures as requiring “an increasingly symbiotic relationship between the tax and finance function”.

Treasury should take precedence when deciding the most appropriate action for the company, argues David Golden, the Head of EY’s International Tax Services Global Treasury practice. “Tax considerations, in my view, come in after treasury decides that there is a particular exposure that needs to be hedged or there is a new operation that requires financing,” he says. “But then in order to execute that business transaction most effectively, treasury should bring the anticipated business transaction to the tax department or the external tax advisor at the earliest opportunity so that they in turn can present treasury with the appropriate options.”

This is today’s ideal. A decade or so ago, Golden says treasury and tax simply didn’t “play nicely” with each other. “The dynamic was that when the treasury function needs to do something, it usually needs or wants to do it rapidly. Tax on the other hand is usually much more deliberate.” Whilst the fundamental difference in approach to planning had caused something of a “disconnect” between the two functions, which to an extent still exists, Golden happily reports that today this is more the exception than the rule. The relationship between the two roles “is getting better”.

Catalysts for change include recognition by the CFO, and even the board, that both treasury and tax have a much higher profile today. This is largely due to the increasing complexity of the markets and regulatory regimes. The reasons for the observable union of these functions are readily apparent, says Golden. Current FX volatility, for example, has resulted in financial statement consequences that have gained the attention of the boardroom, the concern cascading down the line to CFOs and henceforth to treasury and tax, amongst others.

The argument for co-operation is strong. Treasury transactions potentially have a significant impact on a group’s overall tax liabilities, particularly in jurisdictions where debt financing is raised or there is inter-group financing flow. In addition, different jurisdictions often have very different tax rules. For example, interest payments may be subject to a withholding tax. In addition, FX can be treated on a realised or unrealised basis.

For Lara Okukenu, Financing and Treasury Tax Director at Deloitte, the aim is not so much about minimising tax costs as it is to ensure as far as possible that treasury transactions are not causing any inefficiencies. “It has been well publicised that one of the ways some multinational groups have historically been able to manage their effective tax rate is through inter-group cross border financing,” she notes. “But BEPS and other changes in the global tax environment are setting new boundaries to focus on commercial lending.” She believes that the focus has now evolved into an overarching risk management approach, including navigating the “complex global web of tax legislation” that treasury transactions are now exposed to.

Teamwork thus really is the order of the day in this respect and Dino Nicolaides, Director in Corporate Treasury Services at Deloitte, notes a trend to bring tax and treasury into the same office (along with other functions such as pensions and insurance) to allow greater co-ordination and co-operation. Commonly in the US and increasingly in Europe, the Tax Director and the Treasurer are one and the same. By bringing both under the remit of a single role, the most effective level of communication and oversight is enabled at group level.

Getting connected

Where the functions remain discrete, an ad hoc association is unlikely to yield a sufficiently strong transfer of information in either direction; a closer formal tie will be more beneficial. In this instance, technology can be a performance aid, especially around the timely sharing of data. “Again, with increasing complexity in both functions, real-time information is becoming more important,” notes Golden.

Where treasury-related data naturally tends to be in a TMS or ERP it will typically be uniform across an organisation, giving one type of information for all operations, regardless of location. “This is an issue because jurisdictional boundaries, while not usually so important for treasury activities are in fact critical for the tax function,” explains Golden. Having the ability to capture data more granularly is very important for tax purposes.

In many cases, the tax department needs bespoke functionality to capture and manipulate data but most enterprise-wide systems – such as an ERP or TMS – require manual intervention in order to achieve this. As new systems are being purchased and as add-ons are being deployed, he states that the tax department “would appreciate that treasury consults with it to see, without too much additional cost and effort, whether or not tax-specific information can be made more readily available”. With the business case for new technology often difficult to build but the desire for shared information clearly apparent (and the will for increased efficiencies more so), the sharing of internal budget allocations to acquire the right system may even be on the cards, suggests Golden.

Learning to survive

Areas of tax legislation that impact treasurers are many and include withholding tax, stamp duty, thin capitalisation and other limitations on interest expense deductibility, transfer pricing, and rules on Permanent Establishment and Controlled Foreign Companies, as well as the impact of double taxation treaties on local law rules. Each will have its own characterisation and thus will require its own data set. If the tax department has some advance notice of treasury’s intention to, for example, hedge FX, it can advise on the most efficient techniques or instruments to use and what kind of designations or identifications to make. But Golden believes that it is incumbent upon the treasurer to at least have a general knowledge of these matters. If treasury does consult with the tax function “early and often” – which in today’s complex dynamic environment he argues really ought to be the case – then a general grasp of principles can kick-start more detailed discussions with the tax function on regimes where advantageous or disadvantageous treatments are applied. This can prove to be a valuable conversation, especially where treasury is contemplating doing something new and different that could raise a tax issue.

The raised level of dialogue between functions may be complemented by deeper discussions at an advisory level with banking partners. A conversation should also take place with incumbent systems providers (and certainly with any prospective vendors) to ensure each has the capability to deliver timely and accurate reporting of relevant data, and to explore whether core systems need to be updated or replaced to deliver that required flexibility. For treasurers, being able to support the tax function (and other departments) in this way may add to the business case for a move to straight through processing (STP).

Current concerns

It is worth at this point considering in more detail a few areas that are currently attracting particular attention in terms of determining the right approach to taxation. A cash pooling and sweeping structure, for example, can be a means of optimising cross-border cash management, helping to fund cash-negative operations through the cash-positive, to manage cyclical cash flows or assist in jurisdictions where high finance costs exist. Generally, cash pooling structures will result in third-party or intercompany lending, dependent on whether it is a notional or physical structure.

The tax consideration here focuses on inter-company lending and will, for example, look at whether the interest applied is going to be deductible or whether there will be withholding tax on payments of interest, explains Okukenu. “Given that cash pooling is becoming more prevalent in global treasury management, we have also seen that there has been an increase in scrutiny from tax authorities.” This attention, she adds, is particularly acute as the emphasis shifts to transfer pricing (where two companies within the same group transact) and how pool participants are remunerated or charged. It is a common misconception that transfer pricing only applies to physical cash pools; it applies to notional cash pools too, she warns. “There have been recent case law developments for both physical and notional cash pools which have rejected bank deposit rate comparables, resulting in adverse interest rate adjustments for tax purposes to reflect an arms-length rate.”

Another area where regular and continuous tax and treasury dialogue is important is around FX. Whilst the group may be hedged from an FX perspective at a consolidated accounts level, this does not necessarily mean it is always hedged from a tax perspective. The problem, Okukenu explains, is that in many countries, such as in the UK, companies are taxed on an entity-by-entity basis. Unless there are certain hedge accounting options or tax rules that apply, this can lead to cash tax volatility. “It is worthwhile for the treasurer and the tax department to discuss, for example, group hedging policy,” she says. “This should include consideration of inter-group transactions which might otherwise be ignored at a group level but which are still relevant from a tax perspective.”

BEPS is after your job

Perhaps the most interesting new tax development in current contemplation is the OECD’s BEPS initiative. As countries implement some or all of the 15 recommendations into their domestic legislation, there will inevitably be shifts in tax policy, in addition to the transfer of resources and operations, noted Robert Sledz of Thomson Reuters’ Tax & Accounting business in a recent BEPS impact report issued by the firm. More as a general warning, MNCs, he stated, “risk reputational damage and tax adjustments that can affect their future earnings if they do not heed this changing tax landscape”.

Certainly the guidance provided on taxation for MNCs has potential to affect a broad range of activities, with many of the points covered by BEPS having some impact on corporate treasury. “A number of the action items potentially limit the deductibility of group interest expense; obviously this directly impacts treasury because it may, on an after-tax basis, increase the cost of funding certain activities with debt,” notes Golden. A broader area of impact for treasury will be the increased reporting requirement, he notes.

As part of the ‘Guidance on Transfer Pricing Documentation and Country-by-Country Reporting’, a new standardised disclosure form, which has already been implemented by a number of jurisdictions, will require companies to file, along with their annual tax returns, additional quantitative and qualitative tax-related information for each jurisdiction in which they do business. This obliges them to identify the legal entities and ‘Permanent Establishments’ within the group (in most countries, income tax is only levied on foreign entities once a permanent establishment exists), where they are incorporated, tax residencies, principle business activities, even the number and location of key personnel (which would of course include treasury and finance).

Further BEPS actions will change the way transfer pricing is viewed from a treasury perspective. As groups move to embed tax risk management policy into treasury policy, increased scrutiny internally of the tax implications of how and where the treasury function is managed is inevitable, says Nicolaides. This should certainly be the case if treasury is looking to set up treasury functions or a shared services centre in another geography. Indeed, in organisations where treasury is intended to be a profit centre, paying attention to the tax implications is vital, he says.

Given that cash pooling is becoming more prevalent in global treasury management, we have also seen that there has been an increase in scrutiny from tax authorities.

Lara Okukenu, Financing and Treasury Tax Director, Deloitte

Historically, this set-up has been viewed as a capital provider from a transfer pricing perspective. This means that as long as the capital provider is adequately capitalised, and returns on that capital are based on ‘arms-length’ rates (based on what would typically be attainable in a normal relationship between a company and its bank), it would be respected under existing taxation rulings.

Under BEPS recommendations, Golden notes that the fundamental concept of arms-length pricing of intra-group services is seeing the focus shift away from the return on capital, and heading instead towards a return on the function of personnel; the focus here being on the pricing of the real intellect being provided to other group members, and ensuring that profits align to the economic reality of that value creation.

For Golden, this section in part translates as an enquiry as to the physical location of, for example, the cash manager or treasurer. “In the medium term, if and when local countries begin implementing the various BEPS action items, it may require the treasurer to shift the location of personnel,” he warns. As a worst-case scenario, a cash manager or perhaps even a treasurer working from the head office may need to relocate to wherever the in-house cash centre entity is situated. Relocating to a low-cost labour location may not be popular and it may therefore see the low-cost cash centre shifting back to the headquarters, with all the cost implications that this has.

“How far the principles discussed in BEPS Action 8-10, for example around cash boxes, can be applied to intra-group financing more widely is an evolving question. In particular, given the OECD Action 4 guidance on the transfer pricing of financing transactions is not now expected till 2017,” comments Okukenu. “We are already seeing instances where groups are reviewing their group structure and looking to where value is being created to make sure that it is in line with transfer pricing rules on where profit is being allocated.”