Group Financing - How to support your operations in a post-BEPS world
The treasury function has experienced an enormous change in its profile and responsibilities. Often considered as back-office functionality in the past, it has emerged for many corporates and companies in other sectors into a key function responsible for managing liquidity through cash pooling and other advanced treasury arrangements, intermediating short-term and long-term financing in the group, raising external financing, investing excess funds and providing additional services such as guarantees, factoring or foreign-exchange hedging.
In addition, the OECD Base Erosion and Profit Shifting (BEPS) initiative has fundamentally changed the international tax landscape since 2015. Many jurisdictions are now in the process of revising their domestic tax regulations and treaty framework that will affect treasury arrangements.
Luxembourg also started formalizing its transfer pricing (TP) regime by transposing the latest OECD guidance and principles outlined by the OECD TP Guidelines (including an increased focus on TP documentation).
Current challenges for treasury functions from a tax perspective include:
- The overlap of the discussion on organizational and economic substance and financial capacity to bear risk;
- Impact of BEPS and key court cases on the appropriateness of existing TP policies and approaches for cash pooling arrangements regarding the determination of interest rates/spreads for withdrawals and deposits based on comparable data;
- Approaches to credit ratings for short-term financing arrangements and consideration of creditworthiness of both participants and cash pool leaders;
- Consideration for negative interest environment in the Euro-zone;
- Remuneration of cash pool leader in light of its functional (substance) and risk (refinancing and FX) profile, potential cross-guarantees and strategic considerations;
- Splitting of cash pool benefits and redistribution strategy;
- Consistency of short-term and long-term financing activities and treatment of imbalanced or de-facto long-term positions;
- Transfer pricing treatment of advanced treasury arrangements including payment-on-behalf-of (POBO), collection-on-behalf-of (COBO) and virtual cash management (VCM)
- Tax audit environment and documentation/defense.
How Deloitte can support
Deloitte has supported a broad range of clients in the corporate and other sectors on engagements including:
- Transfer pricing planning and policy setting for new treasury arrangements;
- Benchmarking and economic analysis to determine arm`s length interest rates/spread and approaches for ex-post distribution of cash pool benefits;
- Transfer pricing risk reviews and BEPS assessments;
- Restructurings and transfer of activities (e.g. related to Brexit);
- Operationalization of new policies including legal structuring;
- Transfer pricing documentation; and
- Defense of transfer pricing policies towards tax authorities in tax audits.
Cross-border debt pricing strategies – How to support your interest rates
One of the mail challenges in a post-BEPS world remains the sustainability of interest rates applied on long-term intra-group debt financing strategies. Beyond stringent rules on limitations of deductibility introduced in a post-BEPS world, tax authorities continue to focus on the sustainability of the rates based on the arm’s length principle, what calls for solid defense strategies and transfer pricing documentation for the taxpayer.
Our services with respect to pricing inter-company debt range from establishing an arm’s length interest late on plan vanilla loans to valuation of complex instruments incorporating conversion options. Our transfer pricing team works closely with our capital markets team to provide state-of-the-art transfer pricing solutions for inter-company debt. We support our clients in assessing and sustaining the arm’s length nature of interest rates on existing funding arrangements, as well as setting up pricing policies covering multiple loans on a go-forward basis. Our team has extensive experience in centrally running debt-pricing projects covering a large number of cross-border loans, coordinating with local country transfer pricing specialists and ensuring consistency of approach and results, as well as various cost efficiencies.
Long term Group financing - specifics of the New Group Financing Circular
Make sure it is not a mere back to back
Corporates and investment firms operating Luxembourg companies that provide loans to affiliated entities that are refinanced by debt are expected to align on a new Circular of the tax authorities addressing the transfer pricing aspects of group financing activities. The Circular, effective 1 January 2017, focuses on substance and robust transfer pricing analysis as factors of critical importance for supporting the legitimacy of inter-company financing arrangements.
Our services with respect to the operational substance requirements of the Group Financing Circular include support with ensuring the right type and level of functionality for a Luxembourg company providing inter-company loans, allowing the company to evidence control over risk if scrutinized by the tax authorities. Operational substance is crucial for managing tax risks, including beneficial ownership risks potentially arising in countries where the funding is ultimately dispatched. Our transfer pricing team works closely with our corporate governance and management-consulting experts to provide tailor-made operational substance solutions. Whether we advise on specific employee matters or undertake a full-scale review of corporate processes and documentation, we constantly strive for the most efficient solution in line with our client’s business model and practices.
Computing minimum equity and arm’s length remuneration
We compute the minimum level of equity that a group financing entity should maintain in accordance with the Group Financing Circular based on best practices of conducting financial risk analysis. We also compute the correct arm’s length remuneration of the company consistently with Luxembourg’s legislation and the practices of the Luxembourg tax authorities, as well the OECD Transfer Pricing Guidelines. We document the analysis and computations in a transfer pricing report to be used in support of tax returns in Luxembourg or as a defense file in case of queries by the tax authorities. Our approach and deliverables are designed to achieve reliable protection while maximizing cost efficiencies in the particular business set-up of our clients.