n previous articles I have looked at securing tax relief for financing costs, tax issues associated with debt restructuring and opportunities for structuring intra-group lending. Whilst these are undoubtedly important issues each article focuses on what amount to stand-alone/single financing transactions. So in this article I want to take a broader look at the Treasury function and how it moves cash around the group.
The Primary Role of the Treasury Function
In looking at the Treasury function it seems to me that its primary role is that of the Group Bank, acting as lender of choice, managing risk(s) and minimising the group’s cost of funds.
So at its simplest level what the Group Bank does is to manage group liquidity with a view to ensuring that cash is available when and where it is needed and manages this on a group/holistic basis.
But if we take a look behind this high level analysis what we find is a much more complex position made up of a myriad of intra-group loans/balances and involving a large number of entities located in many jurisdictions.
What this means in practice is that, whilst the Group Bank may have plenty of cash available within the group, in terms of employing the cash within the various businesses it isn’t necessarily in the right place and so consideration has to be given as to how to move cash between legal entities.
But this should be relatively straightforward I hear you say?
Well it might be.
As a starting point many multi-national groups operate “regional” e.g. European, US, AsPac cash pooling/cash sweeping arrangements. These are a common tool for moving cash around a group and so securing the efficient management of the group’s day-to-day working capital requirements.
But whilst such arrangements may be relatively straightforward from a banking and commercial perspective, they do give rise to a range of tax issues including transfer pricing, thin capitalisation and related party rules relating to the deductibility of interest. In particular, as I mentioned in my article on Issues with Securing Effective Tax Relief for Financing Costs (article link please), achieving tax neutrality for the intra-group balances that will be created with cash sweeping cannot be guaranteed.
What are the Options?
So what options are there for moving cash around a group outside of cash pooling/cash sweeping arrangements?
Well if the funds do happen to be located in the centre i.e. Group Bank then the most common technique will be one step on from cash pooling i.e. the making of longer term loans and the tax issues here should be broadly as outlined above for intra-group balances arising from cash sweeping. Whilst funding may also be provided to a group company in the form of equity, this isn’t typically undertaken by the Group Bank and so is outside the scope of this article.
But what if, as is more often the case, the funds aren’t located in the Group Bank? What if, as is often the case, the funds are located in an offshore Special Purpose Entity (“SPE”)? How do I move the funds out of the SPE?
Well the starting point is having the SPE lend the funds either to the Group Bank or to the group company requiring the funds. This can however give rise to adverse tax consequences e.g. irrecoverable withholding taxes, restrictions on relief for financing costs etc. if the SPE is tax resident in an “unfavourable” jurisdiction.
The "Other Half" of the Balance Sheet
Next we look to the “other half” of the balance sheet and consider if we can move/extract cash via equity based transactions. So, for example, can we extract the funds by paying a dividend or by repaying share capital? Again, whilst both are viable options consideration does need to be given to the tax consequences with two of the initial issues to consider being:
- How much tax will the recipient be payable on the dividend? Will the payer of the dividend have to deduct withholding tax from the payment?
- Will the repayment of share capital give rise to a tax charge? Could the receipt be taxed as a capital gain in the hands of the holder of the share capital?
The key point to note here is that if there is any taxation arising from such equity based transactions then a significant amount of the cash may have been lost to the group. So whilst equity based transactions may represent a good alternative to debt funding, in that it removes the funds from the entity permanently, the associated tax cost may be prohibitive.
And where do we go after intra-group debt and equity based transactions?
Well it then becomes much more complex, both from a tax perspective and a commercial perspective with some of the options being.
- Migrate the tax residency of the SPE to a jurisdiction where debt and equity based transactions are more tax efficient
- Have the existing SPE create a new funded SPE located in a jurisdiction where debt and equity based transactions are more tax efficient.
- Have the SPE acquire some income generating assets from within the group e.g. via repo or stock lending arrangements.
- Engage in third party structured finance transactions.
The key point to note here is that, to seriously consider implementing one of these options, both the amount of funds involved and the potential tax charge being mitigated will need to be considerable as such transactions will undoubtedly involve significant costs.
So to summarise, in this article I have taken a high level look at how cash can be moved around the group and considered some of the tax issues that could arise when doing so. The key message for Treasury & Finance professionals is that moving cash around the group can be a complex and costly issue from a tax perspective and, furthermore, there are many pitfalls to be avoided. If however advice is taken upfront then in most cases the pitfalls can be avoided or alternatively another technique employed or transaction implemented.
Martin Bardsley, Senior Director with Alvarez & Marsal Taxand UK, serves as head of the firm's Treasury & Financing Tax practice and also leads Taxand's Global Financing service line. Taxand is a global network of leading tax advisors from independent firms in nearly 50 countries.
Martin brings over 20 years of experience in providing corporate and international tax advice to a wide range of multi-national clients and has significant experience in advising on Treasury and Financing transactions, both in the corporate and financial industry sectors. Prior to joining Alvarez & Marsal, Martin spent 17 years with the tax groups of PricewaterhouseCoopers and KPMG, 13 of which were spent in London focusing on Treasury and Financing Tax. Martin also completed a long-term secondment to a major FTSE 100 multinational firm during 1998 and 1999 where he was tax adviser to the Treasury, Corporate Finance and Asset Management teams.
For more information contact Rob Stephenson, Managing Partner of Maven Partners on 0207 061 6421