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The Added Value of Centralised Cash Management under BEPS What would be the correct price (i.e., the arm’s length transaction) of a cash transaction under BEPS (Base Erosion Profit Shifting) Actions 8-10? That’s a key question which every treasurer of an international group needs to address.

The Added Value of Centralised Cash Management under BEPS

The Added Value of Centralised Cash Management under BEPS 

By François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman, EACT

What would be the correct price (i.e., the arm’s length transaction) of a cash transaction under BEPS (Base Erosion Profit Shifting) Actions 8-10? That’s a key question which every treasurer of an international group needs to address. The right answer is far from easy to apply, but the guide currently being finalised for issue by the OECD helps to provide a clearer view and specifies what needs to be done.

The ‘right price’ for a cash transfer

Under the latest BEPS guidelines, an appropriate and fair transfer price also applies to all cash transfer operations. In practice, however, working out this ‘fair price’ is not always straightforward, and there  is still a risk of seeing the operation reclassified. Some treasurers have not changed their modus operandi one iota and believe there is no problem with their as-yet unchallenged approach. It would seem apposite, however, to ask the question for every funding operation, especially as a guide is currently being finalised by the OECD in order to help treasurers determine the right margin to apply and the criteria to be factored into the equation. 

It’s frequently forgotten, but the first major principle is to align the transfer price (TP) with the amount of value creation. Sections C, D & E of the guide specifically address cash pooling, intra-group funding, hedging, guarantees and reinsurance captives. When abstractions are made from the legal or fiscal rules, the capital debt ratio of an entity of a multinational company (MNC) should be the result of purely commercial considerations and left to the discretion of the group itself. The question is whether an independent entity operating in the same circumstances would benefit from the same borrowing conditions. The idea is to verify that the rate applied is well and truly ‘at arm’s length’ or whether it should in fact be regarded as a sort of payment or capital contribution. Each country can apply its own capital structure before considering the question of the acceptability of the level of the transfer, so this guide should be taken for what it is, an indication only. However, it’s fair to assume that the tax authorities will draw inspiration from it and alignment with them can only be a good thing. But each operation still needs to be analysed separately on its own merits rather than as a whole with others, and this involves more documentation and individual analysis. 


Key Points

It is therefore highly advisable to read the guide issued by the OECD itself, as it provides a framework and principles in terms of transfer pricing. It’s very likely that the tax authorities in different countries will draw inspiration from the guide and apply these recommendations for what is a very tricky practice. Eventually, a body of ‘case law’ will be built up and comparables will become established for defining the method for pricing a financial operation appropriately.


An individual and sectoral approach

The OECD has acknowledged the difference between activities and the need to take the sectoral aspect into account. A group’s overall approach to TP should be guided by an overall funding strategy that is the starting point for all consultation. Each transaction should be the subject of a preliminary identification of its economic characteristics and the commercial and financial relations between the parties, including the circumstances of these relations such as the contractual terms and conditions, the market and the economic situation (e.g., indicators such as the right to impose repayment, financial covenants, guarantees, option for the borrower to obtain bank loans, fixed repayment dates, term extension clauses, etc.). The risk is therefore twofold: if the margin is too high compared to a transaction between independent parties, it would then be revised downwards, or if the operation could not be justified, it would then be reclassified as an injection of capital. The issue is therefore considerable and merits cautious handling, all the more so as the difficulty stems from the lack of any frame of reference for the treasurer. 

The OECD appears to take a stringent approach in terms of the comparables to be considered for fixing the margin and size of a loan. The obvious advice for treasurers would be to compile the information and the comparables, along with any other element which helps demonstrate that the tested operation is ‘acceptable’ and ‘defendable’ in comparison with a theoretically similar transaction with a third party. So we shouldn’t baulk at retaining as much data as possible, including the banks’ ratings on bond issues and syndicated loans. However, this individual test is easier to prescribe than to perform. For instance, less common or non-standard currencies offer fewer comparables, while the entire analysis can be falsified by particularities of the sector or zone. 

Documentation is essential

The second key tip is to document such operations with detailed contracts and framework contracts. Here too, the absence of a minimum level of documentation or the mere confirmation of a loan will be fatal to the entire operation. Many MNCs don’t have the required minimum documentation or any description of their funding and TP strategy as a whole, and yet the operations’ characteristics and the functional analyses are important: who bears the ultimate risk? How is the loan monitored and possibly reviewed? And how often? Has the other party’s credit status changed and is it regularly reviewed in order to adjust the margin? What is the lender’s rank? These are all essential questions which the treasurer needs to address in order to achieve fiscal compliance. Each operation should have its characteristics and attributes clearly defined in advance, in order to facilitate assessment of the suitability of the price proposed (e.g., level of seniority and subordination, collateral provided or not, amount and currency, location of the borrower, sector, purpose of the loan, repayment schedule, timing of the operation, etc.). 

It’s essential  to adjust to economic circumstances which are fluctuating today more rapidly than ever before. The test can’t simply be done once at the start, as it’s vital to be able to demonstrate that it remains adjusted and tailored to the market. A good example is the phenomenon of ‘flooring’ imposed on any loan (e.g., floor at 0%, 0.5% or 1%).  If you want to do things by the book, this is an element that must be considered to adjust your loans. It should also be noted that negative interest rates on certain currencies including the euro have only complicated the situation, particularly with cash-pooling.  


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