Each approach raises tax issues that companies must consider carefully:
9. Stamp, capital, and other duties. In certain territories, financing arrangements are subject to special forms of tax or duty.
A guest post from Abbas Sadak, specialist in international tax and transfer pricing in the London office of True Partners Consulting UK LLP.
8. Controlled foreign companies (CFCs). An increasing number of jurisdictions tax the profits of an offshore group company that is not carrying on an active trading business. An offshore treasury company in a comparatively low-taxed jurisdiction providing cash pooling may well fall into this category.
10. VAT and other indirect taxes. Direct financing costs, such as interest, are often exempt or outside the scope of VAT, but other, more indirect, costs may be within the charge.
Tax rarely affects whether a group adopts cash pooling arrangements, but it frequently influences how the arrangements are established and managed. Early identification and evaluation of potential tax issues can influence decisions around the design of the structure, when changes can most easily be accommodated. Keep in mind that structures that optimize the banks’ position may not suit your organization’s commercial or tax requirements.
4 Thin capitalization. Many territories have complex rules restricting the amount of interest that’s deductible for tax purposes when a company is funded by related parties, or from third parties under a related-party guarantee. The restrictions may be based on objective criteria — for example http://nbajerseys.altervista.org, relief is denied for interest on borrowings in excess of a designated “safe harbor” — or they may be more subjective sunglasses hut, e.g., by reference to the amount and terms on which the tax authorities believe the company would have borrowed from an independent third party.
5. Withholding taxes. Interest is often liable to tax at source, especially when it’s paid cross-border. This can lead to withholding taxes. If tax is withheld sunglasses hut, companies can recover it by refund or offset against tax payable in the recipient jurisdiction.
Corporate treasurers http://nbajerseys.altervista.org, finance directors, and CFOs face the challenge of how best to manage liquidity in an international group. They typically use one of two major types of approach. The first involves physically transferring cash to a single account so that interest is calculated by reference to the balance on that account. In the second approach, there are no actual cash transfers, but the bank looks at the notional total of the balances of each participating member when calculating interest.
7. Foreign exchange. When companies enter into cross-currency arrangements, it becomes important for tax purposes to understand in what denomination any resulting intercompany balances will be carried, which exchange rates are being used (e.g., spot or forward), and how and where foreign exchange differences will arise.
Regardless of whether you choose a netting or a pooling structure sunglasses hut, proactive tax planning and controls can enhance the value of your organization’s global cash management function.
6. Transfer pricing. While many transfer pricing rules are generally based on OECD principles, some territories do have specific requirements of their own. Make sure that you satisfy the requirements of all relevant tax authorities when establishing, documenting, and maintaining your cash management structure.
1 Location. The location of the pool leader — the central account for any cash concentration — is important. Companies often choose to locate the pool leader in a territory with a broad treaty network. But it may be preferable to locate it in a low-tax jurisdiction, as long as a significant amount of pooling benefit can be retained within appropriate transfer pricing arrangements.
2 Residence. It’s important to be clear about whether the pool leader is acting as a principal or an agent with respect to the various bank accounts. Where the pool leader acts as agent, its activities could give the operating company a permanent establishment — a taxable presence — in the pool leader’s territory. If such risks are properly managed, however, they can be eliminated.
3 Interest deductibility. You’ll need to understand the rules governing the taxation of interest, including anti-avoidance provisions, in each territory. Interest that’s not deductible may be reclassified as a distribution for tax purposes.
This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. ###
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