Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016 - (Page 16)

Everything has a price - a transfer price I find it astonishing that a subject as important as BEPS and the new transfer pricing rules has not caused much more of a stir in the world of treasury. It is as if BEPS did not exist. It is, however, essential to review transfer pricing strategies for treasury transactions to ensure we comply. Whether we like it or not, it is a reality that treasurers will have to live with, and they will need to adapt to become a profit centre. LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE - N°94 - JUL / AUG / SEP 2016 BEPS, the story is only just beginning 16 Whether we like it or not, BEPS recently became a reality with the first European Directive adopted by the Commission on 12 April 2016. The rest will soon follow with transposition of most of the OECD's actions. From a taxes point of view, the "country by country" report seems to us to be of only minor interest. Conversely, the impending fiscal measures as a whole, in combination with each other, will create a real headache for tax managers. People are talking about a tax paradigm, of the revolution of the century and of total upheaval. The much sought-after fairness in tax will come at the price of unending difficulties. To point the finger at just one difficulty, we could start with the restriction on deducting interest (see BEPS action #4). Interest will be deductible only if it is below 30% of EBITDA (with a de minimis threshold of €1 million). This might create situations in which entities that are struggling or loss-making will no longer be able to deduct interest, and will therefore be even harder hit. We could also cite Exit Taxation, the switchover clause, the General Anti-Abuse Rule, hybrid mismatch (see BEPS action #2), the revision of the AEOI Directive (mandatory automatic exchange of information for taxes + disclosures), and finally and perhaps the worst, the wholesale extension of the German "CFC" (Controlled Foreign Company) rules (see BEPS action # 2). This last measure will, right from the outset, generate a whole wodge of demands and attempts to tax anything that may not have been taxed. Finding out where you stand and what your taxes are in this can of worms of tax correctives will be an almost impossible task for tax managers. The aim is to move from preventing double taxation to rooting out double non-taxation. The crisis in public finances requires this new global framework to ensure fairness in tax. Every country is trying to claim its "fair share" of the tax cake. The main idea of BEPS is to align the taxable base with value creation. It has three main watchwords: Consistency, Substance and Transparency. Against which, you could argue that transfer pricing rules already existed long before BEPS. It is just a matter of applying them in the future. Some countries have already started to ask ever more searching questions to justify the "fair" transfer price. A major principle of taxation, that of choosing the option that costs the least in tax, has now been called into question. To summarise, BEPS will involve very much more complexity, and will make it essential for operational personnel and tax people to get together to align and agree on their strategies. Finally, one of the most important points in our view, BEPS and transfer pricing will involve much more documentation and a review of prices charged between subsidiaries. The 5 key Transfer Pricing (TP) questions Five key questions need to be asked if treasury management is handled centrally: what, how, why, where, and who? 1. WHAT types of treasury activity does Group Treasury (GT) handle centrally and recharge to affiliates? 2. HOW is GT organized to serve its affiliates and how can treasury management add value? 3. WHY are treasury activities handled centrally? 4. WHERE is the GT function located? 5. WHO takes and bears the financial risks? The last question is crucial: who, ultimately, will end up bearing the risk. For instance, who bears the loss if the borrower subsidiary goes bust? Who is responsible if the guarantee issued by central treasury is called? Etc. Based on this question, you can work out the margins to be applied. "No more free lunches with TP" In transfer pricing, one principle comes to the fore: "everything has its price" (its transfer price). The problem arises when you try to set this price and to calculate it. Everything has to have a price, but that price must be "fair". Will the CBS "The price is right" become the treasurers' television show? This is no game, sadly, but a reality, BEPS or no BEPS. This principle also means that loans can no longer be granted without interest, without documentation and that loans cannot be waived without due justification, and that finally asymmetrical loans can no longer be granted (for example 100% loans by one single shareholder, unless again the margin on this can be justified). The transfer pricing rules must henceforth be applied more fully and more punctiliously. From the basic principle set out above, we can derive two sub-principles: "nothing is free in terms of transfer pricing between two entities of the same group" (even if they are sister companies). The concept of family counts for nothing in tax. The second principle is that taking things to extremes undermines the transfer and is no longer acceptable. If the group's internal bank issues a guarantee in favour of a subsidiary, it cannot be issued without charge. But neither can it be charged at 500 basis points, which would be

Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016

Cover
Table of contents
EDITORIAL
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW Philippe Gelis - Kantox - Fintech and the future of banks
FOCUS
Lost in transformation
Everything has a price – a transfer price
Treasury Survey - an unprecedented picture of treasury activities in Luxembourg
FORUM
The impact of negative rates on Treasury and Risks Management Systems
Towards reporting harmonisation?
Understanding the Treasury impact of BEPS
Impacts of Single Resolution Mechanism and Bail-in for European Banks
Supply chain? Not concerned?
Collateral management and the Corporate Treasury function.
Efficiently Managing Cross-Border Payments in Turbulent Times
CORPORATE FINANCE
How Mid-Market Companies Can Efficiently Manage Enterprise-wide FX Risk as they Grow
Investing surplus cash in repos
A wind of technology changes in the treasury management world
Invoicing can be fun….?
Comment améliorer la performance des fonds de pension européens
15 MINUTES WITH O2Finance
THE FINANCIAL RISK OBSERVATORY
NEWS
LIFE BEYOND NUMBERS

Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016