Treasurers will face challenges while implementing the revisited Transfer Pricing (TP) principles

While implementing TP principles addressed by OECD 15 actions and ATAD’s Directives transcription into national law, treasurers are facing many different issues and problems. It is interesting to try to determine what are the main ones.

The major challenges corporate treasurers will face while implementing the revisited TP principles will be of different types. There are (1) IT, (2) administrative, (3) technical, (4) economic and (5) legal or tax issues to be addressed. It is essential to keep them in mind to properly implement BEPS principles at the treasury department level and to be compliant with the new tax rules in a post-ATAD’s world.

IT issues:

Treasurers will have to document the transfer pricing financial operations and store them for periods from 5 to 10 years (for tax purposes). That’s one of the first reason for defining an IT tools adapted to this requirement. However, the credit risk assessment and the determination of spreads to be applied also require an ad hoc tool like those of S&P, Moody’s, Bloomberg or other similar figure crunching tools. Another issue is the forecasting of EBITDA in coming year to anticipate the potential interest deduction limitation restrictions. By anticipating the EBITDA you will generate you can optimize your interest deduction and avoid negative impacts of interest deduction limitation and potential double taxation. Treasurers also need a robust and developed TMS to store and document all financial intercompany transactions, including cash-pooling and scale of interest. The benchmark documents collected to justify margins and spreads must also be stored somewhere in a way to retrieve information when requested. Eventually, it can be useful to get tools for managing derivative transactions and determine spreads applied by Group Treasury (GT).

Administrative issues:

The respect of TP principles implies to document all transactions, to justify spreads and margins, to determine credit ratings of affiliates, to keep records of similar transactions which can help justifying margins applied in similar situation. BEPS and TP implementation and annual (or more frequent) reviews are time-consuming. They require resources, internally and potentially externally.

Building this enormous documentation and keeping it updated is a great challenge. We need to compile evidences of all types of the margins and spreads applied. You’ll never be sufficiently documented. Here, the principle is clear: the more the better! Let’s take the example of FX dealing spread calculation and evidencing, it is a very difficult one. Fortunately, for tax authorities it is also tough to contest and to detect the excessive margins taken. The fact that for financing arrangements we must apply a case-by-case approach complexifies the whole project.

Technical issues:

What will be the GAAP used for the interest limitation deduction? The answer is not yet fully defined. In some cases, the reports that could be required are not available and need to be set-up into IT systems (e.g. TMS, dash-boarding tool, ERP, dealing platform, etc…). One of the critical issue is on margins to be applied on negative rates for cash-pooling, for example, or “flooring” of intercompany transactions to mirror capital markets and banks funding deals.

Economic issues:

As mentioned in the technical issues paragraph, the major economic issue is the negative interest rates in some currencies, which cause several problems with the cash-pooling, where charging interests on deposits (i.e. long positions) remains difficult to “sell” even towards fully controlled affiliates. Cash-pooling arrangements are often set-up by GT, which plays a coordination or agent role. They should be remunerated as such or, if better remunerated, they should give back to all participants accordingly benefits from pooling.

The value creation is an important element to always consider. In each transaction we must define the added-value generated to justify the spreads applied.

Legal/tax issues:

Even if the OECD has published a Discussion Paper (to be finalized) with guidance and principles. It is an interesting and useful document, although long and not always very clear. It is a basis for treasurers to determine approaches and strategies for financial TP. All these new rules or “revamped TP rules” remain rather new for most treasurers. They need more distance and feed-backs to adapt and adjust possibly. BEPS 15 actions issued are “principle-based” and therefore remain subject to interpretation. When you have room for interpretation, it can drive you to very different results and ways to apply the rules. It is positive somehow and negative as it creates uncertainties for treasurers.

The interest deduction limitation (maximum 30% of EBITDA) is the major difficulty treasurers will face. It requires tax and EBITDA planification, capital structure optimization and a more longer view. By anticipating future cash-flow and EBITDA contribution of affiliates, GT can better adjust financing arrangements and equity injected into subsidiaries.

The CFC will be the second main problem. It will generate a lot of questions from inland revenues which will try to track whether taxes have been properly charged by other countries. No one has a clue yet of what it could mean in practice and how heavy the exercise will be. There again, it will depend on each State decision on how to apply CFC rules. 

No one knows, at this stage, how the controls will be done and how far they will go in terms of documentation required. It is highly recommended to be prepared and to store documentation that can be requested years after the operations launching.

With such directives, we never know how they will be translated into national law. It remains partly at the entire discretion of each State. We already know that some will play it soft and other will play it hard(er). We need more time to properly analyze the different situations which could encourage or push to change jurisdiction and GT location, potentially. In some countries tax losses carried forward could be limited in time. That’s another possible element to contemplate.

Opportunities offered by BEPS TP principles

If you are fair with these new tax rules, you must admit that they give you an opportunity to revisit the treasury and corporate finance organization and financial processes. It enables treasurers to potentially maximize or optimize further their tax situation and to bring more substance into the In-House Bank or group treasury. It clearly demonstrates the value treasury can bring to the whole group. Treasurers will have to set-up new tax reports and dash-boards. Eventually, they will be obliged to determine, measure and quantify the added-value they generate for the company. Things which are equally bad, are also equally good. Try to look at the bright side of things and the opportunities offered by new regulations.

“If you don’t know the value of money, go and try to borrow some” (French proverb)

Fran?ois Masquelier, Vice-Chair EACT