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Home > Cash Flow Management Best Practice > How Taxation Impacts on Liquidity Management

Cash Flow Management Best Practice

How Taxation Impacts on Liquidity Management

by Martin O’Donovan

Making It Happen

  • Taxation considerations should be built in at an early stage in the planning of liquidity management structures and processes.

  • The best location for a cash management center will often be within a country with an extensive network of tax treaties and with no WHT on interest or dividends.

  • Intra-group financial transactions should be priced at market prices (including margin where appropriate), and there should be contemporaneous independent documentation in place to support the prices used (for example, Reuters, Bloomberg, or the Wall Street Journal ). Justification of margin can be more subjective. Possible comparators might be alternative facilities offered by banks locally or perhaps bond spreads, or credit default spreads (from Markit for instance).

  • Where there is a central treasury operation or an in-house bank, borrowing rates and other terms and conditions should be formalized in the same manner as they would be with an external commercial bank.

  • The same applies where a parent company is obliged to guarantee a subsidiary as a means of securing the subsidiary a lower borrowing rate. The parent should charge a guarantee fee.

  • Structures such as “shared service centers,” where a centralized group resource provides services to affiliates, also attract particular attention from tax authorities. Pricing and service levels should be similar to those that might be offered by a third-party provider.

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