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Treasury and Trade Solutions
March 2016
Constant Change: Optimizing Treasury for Asia’s
Evolving Regulatory & Market
Table of Contents
Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices 2
Key Tax changes affecting Liquidity Management & Treasury Practices 5
A Broader Look at Notional Pooling, China & India 19
Today’s agenda
Topics
Key Tax changes affecting Liquidity Management &
Treasury Practices
A broader look at
– Treasury Center Initiatives in Asia: Singapore, Hong
Kong, Thailand & Malaysia
– Base Erosion Profit Shifting (BEPS)
– Transfer Pricing
Michael Velten
Southeast Asia (“SEA”) FSI
Tax Leader
Deloitte & Touche LLP,
Singapore
Topics
Key Regulatory and market Changes affecting
Liquidity Management & Treasury Practices
A broader look at
– Basel III
– Notional Pooling : Still an effective liquidity
management tool?
– Case Study - China and the RMB
Internationalization
– Liquidity Management in India
Ann Lin Khoo
Asia Market Manager,
Liquidity Management
Citibank, Hong Kong
1
Key Regulatory and market Changes affecting
Liquidity Management & Treasury Practices
Key Asia Regulatory & Market Changes
Treasury related Tax Incentives
Thailand International
Headquarter (IHQ) Incentive
including :
• Concessionary tax rate for
qualifying income received from
affiliates within Thailand
Malaysia Treasury
Management Center (TMC)
incentive including:
• Reduction in profits tax for
specified treasury activities
Hong Kong Corporate Treasury
Center (CTC) incentive including:
• Reduction in profits tax for
specified treasury activities
• to be announced in 2016
Singapore FTC Initiative:
• Tax Concessions for qualified
companies
• Up for renewal in March,
2016
Indonesia
Mandatory Use of Indonesian
Currency:
• Transactions performed by residents
and non-residents, cash and non-cash
transactions
Language for documentation:
• Any agreements/documents where
one of the contracting party is an
Indonesian entity (either client, bank or
both) must be made in bilingual
(English and Indonesian)
India – Relaxations on Inter-company
lending laws
• Changes to the Companies act to
allow for inter-entity related party
transactions for private entities
China & The RMB Internationalization
• Allow for cross border movements of funds
• Geographic expansion of the Shanghai Free Trade Zone (SFTZ)
• Establishment of the Free Trade Zone Accounting Unit (FTU) within
SFTZ
• More Free Trade Zones announced in Tianjin, Guangdong and
Fujian Others….
• Negative Interest rates… Continued interest rate cuts
• BEPS
• Basel III implementation
• Dodd-Frank
• FACTA….
And many more……………………..
3 Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices
Basel III Implications in Asia
Global guidelines with varying degree of implementation in Asia as well as across banks.
Treasurers will have to manage across differing practices and different treatment of bank deposits
Liquidity
Liquidity Coverage Ratio
(LCR)
Net Stable Fund Ratio
(NSFR)
HQLA
30D Net Cash O/F
Available Stable Funding
Required Stable Funding
Liquidity
Leverage Ratio
Basel III/ Supplementary
Leverage Ratio (SLR)
Tier 1 Capital
Average Assets
Total Leverage Exposure
Tier 1 Capital
1http://www.stamfordadvisory.com/wp2/wp-content/uploads/2014/10/Basel-III-and-Asia-REVISED.pdf
Asia-Pacific BCBS China
Hong
Kong Taiwan Australia Singapore Indonesia Malaysia Thailand Philippines India Korea Japan New Zealand
Introduction 15-Jan 14-Jan 15-Jan TBD 15-Jan 15-Jan TBD TBD TBD TBD 15-Jan 15-Jan TBD TBD
Initial Phase-in % 60% 60% 60% TBD 100% 60% TBD TBD TBD TBD 60% 60% TBD TBD
100% compliance 19-Jan 19-Jan 19-Jan TBD 15-Jan 19-Jan TBD TBD TBD TBD 19-Jan 19-Jan TBD TBD
Sources: 1Moody’s, national regulators *For systemically important institutions, 100% compliance is required from January 2015
Liquidity coverage ratio implementation across APAC Countries
Implications on Bank Deposits Implications on Liquidity Structures
Operating Accounts
• Interpretation that banks may not be able to net off loans with deposit
positions
• Distinction between core operating deposits and non-operating deposits
(i.e. liquidity value).
Overlay Pool
Operating Accounts
increased costs, or legal
reviews of existing structures “LCR Friendly”
Pool
4 Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices
Key Tax changes affecting Liquidity Management &
Treasury Practices
Key Tax changes affecting Liquidity
Management & Treasury Practices
Michael Velten, 10 March 2016
Navigating the changing tax landscape
6 Key Tax changes affecting Liquidity Management & Treasury Practices
Introduction
Tax trends
• Tax has been front page news for most of the past 4 - 5 years; and a
focus of public attention and domestic and international political
action (and reflects continued revenue pressures on Government)
• According to the Lloyd’s Risk Index 2013, tax uncertainty was the
greatest fear for global businesses following public and political
exposure and debate
• A result has been a rewrite of important aspects of the international
tax rules via the OECD’s BEPS project and for instance a move
towards global tax transparency (i.e. CRS)
• In Asia we continue to see domestic tax reforms (e.g. GST/VAT)
and increased tax audits and enforcement; although often that is
balanced against incentivising investment (e.g. RTC) and/or certain
activities (e.g. R&D). Challenges in tax law development and
administration remain in some locations
• The response to this has been an increased focus on tax as a risk
by MNC’s; including governance and tax risk management (esp.
operational taxes)
© 2016 Deloitte & Touche LLP
Google, Amazon, Starbucks: The rise of
‘tax shaming’ [BBC News Magazine 21
May 2013] “Everything these companies are doing is legal.
It's avoidance and not evasion. But the tide of
public opinion is visibly turning. Even 10 years ago
news of a company minimising its corporation tax
would have been more likely to be inside the
business pages than on the front page.”
7 Key Tax changes affecting Liquidity Management & Treasury Practices
Treasury centres
© 2016 Deloitte & Touche LLP
Incentives
8 Key Tax changes affecting Liquidity Management & Treasury Practices
Tax incentives for treasury centres in Asia
Malaysia and Thailand: Available incentives
Malaysia
• Corporate tax rate: 24%
• Treasury Management Centre (“TMC”) Incentive:
− 70% tax exemption for 5 years for qualifying
treasury services rendered to related companies
− Also: withholding tax, stamp duty and personal
tax incentives
• Application period: 8 October 2011 – 31 December
2016
• Market observations:
− Very few TMC’s have been approved
− Extension of TMC incentive unclear
© 2016 Deloitte & Touche LLP
Thailand
• Corporate tax rate: 20%
• International Headquarters (“IHQ”) Incentive:
− Qualified activities include: treasury centre
services
− 0%/ 10% CIT rate (for 15 years) on qualifying
income
− Also: Business tax and withholding tax exemption
and15% personal tax rate for expatriate
employees
• Market observations:
− Bank of Thailand approval needed for a treasury
centre
− At least one approval is understood to have been
granted
9 Key Tax changes affecting Liquidity Management & Treasury Practices
Tax incentives for treasury centres in Asia
Hong Kong: Corporate Treasury Centre (“CTC”)
Regime Historic tax “limitations”
• No tax concession for corporate treasury activities,
unlike competitors in the region (such as Singapore)
• Asymmetric tax treatment of interest income and
interest expense
• Limited (comprehensive) tax treaty network – e.g.: 1
in 2003; 5 in total in 2008
© 2016 Deloitte & Touche LLP
Recent developments
• CTC regime proposed in Hong Kong Budget 2015:
− Concessionary tax rate of 8.25% on qualifying
corporate treasury profits
− Interest payable to non-resident associated
companies to be deductible, subject to conditions
− The Inland Revenue (Amendment) (No.4) Bill
2015 is being read by the Legislative Council; and
is pending enactment (HKMA targets to have the
bill passed and enacted as law in mid 2016;
subject to LegCo)
• Current tax treaty network: now 34 Singapore Budget 2016:
• The Singapore FTC incentive is due to expire on
31 March 2016
• An extension to the FTC incentive is anticipated
in the Singapore Budget to be delivered on 24
March 2016
10 Key Tax changes affecting Liquidity Management & Treasury Practices
• Home country considerations – e.g.: CFC rules, participation exemption etc.
• Interest withholding tax “leakage”
• Net corporate income tax expense in RTC location
• GST/VAT leakage (e.g. non-recoverable GST)
• BEPS impacts (e.g. restrictions on interest deductibility)
Tax incentives for treasury centres in Asia
Key tax drivers: A recap
© 2016 Deloitte & Touche LLP
Total tax cost modelling is important; RTC “headline” concessionary rates are
only part of the analysis
12 Key Tax changes affecting Liquidity Management & Treasury Practices
BEPS
© 2016 Deloitte & Touche LLP
Status and impact on
treasury
13 Key Tax changes affecting Liquidity Management & Treasury Practices
• Recommendations will limit interest deductions based on either group attributes,
fixed economic ratios or both. Number of countries who will adopt these Action 4
recommendations is uncertain
• Many groups are reviewing internal financing structures and simplifying financing
arrangements
BEPS actions: Impact on Treasury
. © 2016 Deloitte & Touche LLP
Action item
1 Digital economy
2 Hybrid mismatch arrangements
3 Controlled foreign company rules
4 Interest deductions
5 Harmful tax practices
6 Preventing tax treaty abuse
7 Avoidance of permanent establishment
status
8 TP aspects of intangibles
9 TP aspects of risk and capital
10 TP for high risk transactions
11 Methodologies and data analysis
12 Disclosure rules
13 TP documentation
14 Dispute resolution
15 Multilateral instruments
Recommendations for changes to domestic law, as well as double tax treaties, to
address hybrid instrument mismatches. Will affect the after-tax cost of hybrid
financing. Certain arrangements in US groups may be unintentionally impacted (e.g.
if hybrid entities are involved)
• Key changes in BEPS recommendations:
• Decreased importance of contractual allocations of risk; rather control of
risk determines risk allocation. Focus is on managing and controlling risk
• Emphasis on where functions are carried out and where people are
located rather than legal location of risk
• Transaction should be respected if it has the “fundamental economic
attributes of an arrangement between unrelated parties and commercial
rationality”
• One example concludes that when borrowing from an affiliate and a 3rd party
and the 3rd party loan price reflects an implicit group credit support, the related
party loan should be priced commensurate with the 3rd party loan, i.e. no group
synergy should be factored into the i/c interest rate
Recommendations propose new 3-tier approach to TP documentation:
• Country by country report - Key financial information on MNC affiliates on an
aggregate country basis with an activity code for each affiliate
• Masterfile - Key information about the group`s global operations including a
focus on 3rd party and intercompany funding arrangements
• Local file – Detailed local analysis of the transactions
14 Key Tax changes affecting Liquidity Management & Treasury Practices
BEPS actions: Movement in Asia
Country Type
Australia First mover
Peoples Republic of China First mover
Japan First mover
South Korea First mover
India Fast follower
Hong Kong Slow follower
Taiwan Slow follower
Singapore Slow follower
Indonesia Slow follower
Malaysia Slow follower
Philippines Slow follower
Thailand Slow follower
Vietnam Slow follower
© 2016 Deloitte & Touche LLP
15 Key Tax changes affecting Liquidity Management & Treasury Practices
Singapore: Position on key actions
BEPS: Implementation
© 2016 Deloitte & Touche LLP
Action Singapore’s position
1 Digital economy Unclear, may consider GST on e-services
2 Hybrids Not expected to adopt recommendations
3 CFC No change expected
4 Interest Unclear, unlikely to adopt in short-term
5 Harmful tax practices Singapore tax incentives to be examined as follow on work in 2016. Government believes
incentives are all substance based, to be seen whether OECD agrees. On transparency, taxpayer
agreements will be shared via AEOI from 2018
6 Treaty abuse Minimum standard likely to be adopted. Singapore has preference for Principal Purpose Test
7 PE status Unlikely to actively push to adopt, but have indicated that the new version of the PE article may
start to find its way into Singapore’s treaties in the future over time
8-10 Transfer pricing To consider adoption of updates to OECD TP Guidelines on case-by-case basis
11 Monitoring Government considers this as important
12 Mandatory disclosure Unclear
16 Key Tax changes affecting Liquidity Management & Treasury Practices
Singapore: Position on key actions (cont.)
BEPS: Implementation
© 2016 Deloitte & Touche LLP
Action Singapore’s position
13 CbC, master / local
file
No public announcement on CBCR yet, but Government is consulting widely and appears to
generally be in favour of adoption. Possible that a consultation document may be released
following private/closed consultations
Assuming consultation proceeds as expected, Singapore would likely look to adopt CBCR in
OECD prescribed format once sufficient OECD/G20 countries adopt, potentially from 2017
Concerns about use of taxpayer data by other tax authorities to initiate “profit grabs” / disputes
TP documentation requirements updated in January 2015
14 Dispute resolution Will adhere to minimum standard, considering mandatory binding arbitration
15 Multilateral instrument Actively participating
In general, an increased focus on BEPS in Singapore:
• More proactive interactions from Government with taxpayers and interested parties
• Ministry of Finance appear to be taking a more active role at the OECD (e.g. on the multilateral instrument)
• Media interest growing
17 Key Tax changes affecting Liquidity Management & Treasury Practices
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18 Key Tax changes affecting Liquidity Management & Treasury Practices
A Broader Look at Notional Pooling, China & India
A look at Notional Pooling Structures Notional Pooling has traditionally been a popular cash and liquidity management technique. In recent years, evolving
regulatory, tax and accounting issues have resulted in tightening requirements around notional pooling and therefore
incremental costs and administration burdens on the corporate end users.
Top Tips for Corporate Treasurers
Leverage Alternative
Liquidity Programs to
achieve the same
centralization objectives
(e.g. Physical Cash
pooling, Payment /
Receive on behalf (POBO))
Select the most suitable
Header company and
Location for the Notional
pool
Review participants
involved in a Notional
pool structure – consider
using Single entity
structures
Use one bank as a
holistic cash and liquidity
management provider
Consider:
• Do the costs now outweigh the benefits of
having a notional pooling program?
(BASEL III)
• Are there inconsistencies between how
banks treat notional pooling programs?
(IAS 32 vs. US GAAP)
• Are you facing incremental questions on
where the participants in the pool are
incorporated?
20 A Broader Look at Notional Pooling, China & India
Case Study : RMB Cross Border Pooling
Header entity is
registered in the
SFTZ
China outside
SFTZ
In House Bank
Offshore RMB (CNH) A/C
RMB Special A/C
Domestic
TBA
Sub A/C 2
Domestic
TBA
Sub A/C 1
Domestic
TBA
Sub A/C 3
RMB General A/C
(Domestic Concentration Header A/C)
Hong Kong
China
Domestic Pool
Automatic
Sweeping
Domestic TBA
(concentration)
Amt. matched to
POBO req
FX where
required
Excess cash
positions*,
repayment
*Services are subject to regulatory restrictions and market
The Company
• Fortune 500 company with successful manufacturing
& consumer franchise in China
• Global In House Bank (IHB) managing global cash
flows and Payment on Behalf (POBO) including
China
The Solution
• RMB Cross Border Pooling was implemented
allowing for cross border bi-directional intercompany
loans between the IHB and its China subsidiary
• These liquidity flows were integrated with the
Domestic CNY POBO solution managed by the
China subsidiary
• Funding for Domestic Pool managed globally for Just
in time funding into China
Global pool
In House Bank
USD/ EUR Funding A/Cs
The Benefits
• Minimal cash buffers left in local subsidiary accounts*
• Full utilization of cash flow globally, with exact funding
• Assurance that funds reach China the same day via
Citi’s automated sweeping program
21 A Broader Look at Notional Pooling, China & India
Liquidity Management in India
Source: Deloitte, 2015 India Corporate Treasury Survey Source: Deloitte, 2015 India Corporate Treasury Survey
Lack of visibility still #1 challenge for corporates in
India
Taxation and Companies Act related laws necessary, but continue
to be a challenge
Source: Deloitte, 2015 India Corporate Treasury Survey
Best in Class Solutions
Multi-bank Solutions
Multi-entity Cash
Concentration
Solutions
Fragmented
Cash, Multiple
Banking Partners
SWIFT not widely
used between
banks
Cash reporting
requires manual
efforts
Liquidity Management Landscape
Increased
operating costs
from localizing
global platforms
Companies Act law* being further
relaxed
* Some relaxation for private entities to conduct intercompany transactions
22 A Broader Look at Notional Pooling, China & India
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