Executive Summary
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Efficient cash and liquidity management will involve centralizing cash within a single entity, on a country, regional, or even global basis.
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The movement of cash between entities and between countries will create complex tax considerations, so that all loans and rates of interest applied must be at arm’s-length pricing.
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The cash centralization is normally arranged with the group’s bankers who can offer a notional pooling or a physical movement of cash.
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Interest payable on the balances arising from the cash centralization or from the overall funding structure of the group can be subject to withholding tax (WHT), which may be reduced to zero by tax treaties or may be reclaimable through a variety of mechanisms.
The Basis for Taxation
Taxation is highly dependent on the specifics of the companies concerned and the tax jurisdictions to which they are subject. Nonetheless, there are sufficient structural similarities between countries so that background generalizations can be made, although the specific rules and tax rates vary over time and will need to be verified with local tax experts.
Tax is initially assessed on the basis of each legal entity in isolation, but various allowances exist that enable operations to be examined from a group or subgroup perspective.
The legal grouping of companies, the managerial grouping, the accounting grouping and taxation group may each be on a different basis.
Taxable profit is not calculated in the same way as accounting profit. The latter may be generated using IFRS (International Financial Reporting Standards) or local GAAP (Generally Accepted Accounting Principles) using cash accounting or some taxation specific rules.
Efficient liquidity management for an international group involves making best use of the cash resources existing or being required or generated across the group.
In order to manage the daily flows of cash across the group there are normally efficiencies to be gained by centralizing cash flows within a central entity for each country or region, or, if practical, globally. The consequent movement of cash around the group, whether buying and selling goods between companies, or lending cash backward and forward, have significant tax consequences, made complicated by the interaction of different national and international rules.
Tax is therefore a major issue in the selection of a treasury center location. Areas set up specifically to attract treasury may be located in tax environments where local taxes are low and where there is special treatment of foreign earnings. They will be located in countries with extensive tax treaties, and there will be no WHT on interest earned or paid, or on income from dividends. These locations should also enable the repatriation of profits without tax deductions. Note, however, that in common with many business decisions, tax is not the only factor. Issues over staff availability and retention, proximity to management and major investors (for example, in London) are equally important factors.
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