Cash Pooling - Are you Managing the Tax Issues?

London, 12th January 2010

Cash pooling tools, such as notional pooling and zero balancing, are used to move cash around a group and manage working capital, but different tools have different tax implications that treasurers need to be aware of.

In my previous article Moving Cash Around the Group: Are You Tax Efficient?http://www.mavenpartners.co.uk/recruitment_news/moving_cash_around_301109.html, I took a high level look at how groups move cash around and the associated tax consequences.

In terms of the techniques available, I referred to cash pooling/cash sweeping arrangements, stating that these are common ways for both moving cash around a group as well as securing the efficient management of the group’s day-to-day working capital requirements

While 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

But isn’t cash pooling was straightforward from a tax perspective? Well, it may be.

Ultimately the complexity from a tax perspective depends on both the type of cash pooling arrangement and the jurisdictions involved. While there are many variations, in essence there are two main forms of cash pooling: notional pooling and zero balancing.

Notional pooling

In the case of notional pooling, the debit and credit balances kept by the various members of the pool are added up and interest is calculated on basis of the net result. The balances themselves are, however, not transferred to one separate central entity, but remain with the individual member companies of the pool.

Zero balancing

In the case of zero balancing, also known as sweeping, the balances of the pool members are physically transferred (i.e. swept) to one central entity (the pool leader). At the time of the sweep (normally at the end of the day), positive balances will be transferred to the pool leader. The pool leader will also provide the necessary cash to those entities that are in an overdraft position resulting in the individual companies having a zero balance at the end of the day.

Notional Pooling Versus Zero Balancing

While economically the same, these two forms of cash pooling have substantially different tax aspects. In this regard, the key point from a tax perspective relates to the fact that while with notional pooling the pool members retain their existing balances, with zero balancing intra-group balances are created between the pool members and the pool leader.

What this means in practice is that with notional pooling issues relating to interest deductibility, thin capitalisation and withholding tax remain the same. While some consideration does need to be given to such issues as the interest rates applied within the pool and the transfer price for any financial guarantees, in general notional pooling is relatively straightforward from a tax perspective

With zero balancing, however, new intra-group balances are created and so the rules relating to interest deductibility, thin capitalisation and withholding taxes will all have to be revisited. This is firstly because the rules for intra-group funding may be different from those applying to external funding and secondly because a previously in-jurisdiction balance may have become a cross-border balance. Consideration will also need to be given to the transfer pricing consequences of any financial guarantees associated with the zero balancing arrangements

In summary, therefore, the tax consequences associated with zero balancing are complex and could adversely effect a previously neutral tax position

Conclusion

Cash pooling arrangements exist in many forms and in this article I have focused on:

1. Notional pooling, or interest compensation, where there is no physical transfer of funds and where banks will require a legal right of off-set
2. Zero balancing, where funds are physically transferred and each member of the pool has only one counterparty - the pool leader

The key message for treasury and finance professionals is that there will always be tax issues associated with both the establishment of a new cash pool and the addition of new members to an existing cash pool.

From a tax perspective, the most important piece of initial information your tax colleagues will need will relate to the type of arrangements being used, i.e. notional pooling or zero balancing, as this will determine both the nature and extent of the tax issues that need to be addressed

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.

The Taxation Recruitment Market 2009/2010

London, 5th January 2010

Financial News reports that "The first decade of the 21st century has been marked by excess, instability and increased risk". As the decade draws to a close I wanted to give you an insight into my view of the taxation market over the last 12 months and hypothesise about what 2010 might bring.

Without doubt it has been a tough year for candidates looking for a role, for clients attempting to obtain sign off to recruit and (of course) for recruiters. I feel the frustration of candidates who have witnessed roles that come to market only to be withdrawn in short order. I also feel the frustration of clients with a clear need to add resource but no budget to do so. We did not see the expected post summer pick up in roles and the market is certainly not free and flowing at the moment. There are still a number of interesting in-house roles currently being fulfilled by Big 4 secondees.

RSM Tenon has come into existence creating the UK's 7th largest accountancy firm. This seems to be a good move for Tenon in creating a better geographical balance.

In terms of recruitment, the Big 4 have generally been very quiet with only one of the firms consistently recruiting throughout the year. The hottest area within the profession is tax technology/tax transformations. We remain very keen on talking to candidates that have implemented SAP or Oracle from a taxation perspective. Private Client tax is another specialism that has been in demand at the Partner level.

We have also seen law firms recruiting transfer pricing professionals with Freshfields and CMS Cameron McKenna both making senior hires this year. We expect this trend to continue.

What will 2010 bring?

The CBI recently commented that "The outlook is brightening as the global economy finds its feet, although we need to keep our nerve during early 2010". I think that this is also applicable to the recruitment market in general. We will likely see a number of new mandates come to the market in Q1. We also expect some movement between the banks post bonus round with potential higher base salaries tempting professionals to make a move. We expect candidates with financial services tax experience to be in demand in 2010. Also, in talking to my contacts within the Big 4, the transactions tax groups are starting to get busier. There may be some demand at the manager level for professionals with private equity experience. Within industry and commerce we are aware a number of roles that are expected to come to the market early in the New Year. With confidence generally improving we expect this to be a more active market than that of 2009

It is also possible that we may see more consolidation amongst the accounting firms with plenty of rumours flying around at the moment!

Rob Stephenson | Managing Partner | Maven Partners +44 (0) 20 7061 6421 robstephenson@mavenpartners.co.uk

Tax Opportunities Associated with Intra-group Lending

Treasurers need to consider what tax techniques are available, such as standalone technologies or treasury centres, to enhance intra-group lending.

Best practice

When addressing the tax issues associated with intra-group lending, the key considerations are ensuring that: first, the tax relief is obtained for the financing costs; and second, any costs associated with withholding taxes on interest are minimised.

And in many cases this is where the story ends - the company treasurer believes that they have secured full relief for their financing costs, suffered no withholding tax costs and feel happy that they have achieved their overall objective of minimising the group's post-tax costs of funds.

But have they actually achieved that objective?

Depending on the group's approach to tax planning, the answer could be "no" as there a whole range of opportunities for using tax techniques to enhance intra-lending for example taking an interest receipt out of the charge to tax.

Some treasurers may say "Never again!", as they are reminded of the complicated structures their group has implemented involving chains of entities going through various jurisdictions and all to take an interest receipt out of the charge to tax. And then a month after implementation, the tax director walks into the treasurer's office and tells them that something has changed somewhere so the structure no longer works.

Does it need to be this hard? In my opinion, the answer to this question is no.

Looking at what's happening across Europe today, it is clear that groups are still undertaking tax planning in the intra-group financing arena with the planning being based around both standalone technology and treasury centres.

Standalone Technology

Take into consideration the standalone technology currently around: one of the more popular opportunities in Europe involves using the Belgian notional interest deduction regime. This regime allows a Belgian (finance) company to claim an interest rate based deduction, which is computed by reference to the equity of the company. Therefore, in essence an equity-funded company with otherwise taxable receipts becomes, for tax purposes, a debt funded company taxed on only a small interest margin.

This is not complex technology, but is relatively easy to implement and expected to be around for a number of years to come.

Another popular area for intra-group funding involves Luxembourg, where the regime governing the tax treatment of hybrid instruments makes it a useful location for (European) inbound financing. In essence, the Luxembourg company acts as a "transformer" between two jurisdictions, for example US as lender and UK as borrower, and thus enables a tax mismatch to be created between those jurisdictions

While such opportunities are more complex than the Belgian notional interest deduction, the complexity derives from the features of the hybrid instrument rather than other factors such as multi-entity or multi-jurisdictional

The Netherlands has always been a key player in terms of intra-group financing technology. While some would say that the Netherlands has "quietened down", there remains much talk, particularly in terms of the proposals that would exclude intra-group interest, both receivable and payable, from the charge to tax. If enacted, a new regime along these lines would be an interesting alternative to the Belgian notional interest deduction.

The technologies outlined above offer a broad flavour of what's currently around in the European financing arena, and so it is always worth considering what's available, taking into account, of course, a group's specific facts and circumstances.

Treasury Centres

The key point is that establishing a treasury centre will give rise to significantly more commercial issues than standalone opportunities, given that it will involve moving at least some of a group's treasury activities.

The extent of any commercial issues will, however, depend on the nature of the activities to be transferred, for example using a treasury centre solely for intra-group lending will be much more straightforward than using it for cash pooling or hedging activities. And this is also the case when it comes to tax - the more activities transferred, the more complicated the tax analysis will be.

This being said, the use of treasury centres for intra-group financing has become increasingly popular in recent years. When measured against some of the more complex standalone technologies, using a treasury centre is likely to be more straightforward. For example, the treasury centre makes plain vanilla loans to group companies with the tax benefit being derived from the tax rate arbitrage between the treasury centre and the group borrower. As a result, low tax jurisdictions such as Switzerland and Ireland are popular locations for treasury centres.

Conclusion

There are still plenty of opportunities around which will enable a group to enhance its intra-group lending, whether this be using standalone technology, a treasury centre, or a combination of the two.

While enhancing intra-group lending via tax techniques has become more challenging in recent years, treasurers and finance professionals should always consider when make new intra-group loans what enhancement opportunities are available to help them further reduce their group's post-tax cost of funds.

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.