EY Africa Tax Conference September · PDF fileEY Africa Tax Conference September 2014 . Page 2 Panel ... Transfer pricing ... investments Global liquidity

Intercompany financing facing new challenges EY Africa Tax Conference

September 2014

Page 2

Panel

Joseph Pagop Noupoue

EY

Panel Ide Louw

International Tax

EY South Africa

Jemimah Mugo

EY Kenya

Moderator

Michael Hewson

EY South Africa Craig Whitley

White & Case

Intercompany financing facing new challenges

Patrick Oparah

EY Nigeria

Page 3

Agenda

► Challenges to intercompany financing

► Debt pricing

► Treasury companies


Page 4

Challenges to intercompany financing


Page 5

Global tax risk

More risk

Less risk

Change in the global tax risk landscape

Behavior and attitude to tax risk has

changed

Unilateral domestic law changes

proliferate:

► GAARs

► Interest and royalty deductibility

► Anti-treaty abuse

Tax authorities have access to more

information:

► Exchange of information

► CBCR

Fiscal authority challenges are

increasing:

► Aggressive tax assessments

► Tax fraud allegations

UN vs. OECD divergence:

► Transfer pricing

► Emerging markets

► PE threshold

Generalized increase in source

taxation

Global tax risk assessment by territory

Rate drivers

Group capital structure:

► External debt

► Hybrid financing

► Finance and treasury centers

Trading model:

► TP policy

► Principal companies

Other significant Hub Cos:

► IP holding

► Tangible assets

► Captive risk management

Repatriation management strategies

Assessing potential change drivers

HQ:

► CFC

► Effective

management

► Holdco

substance:

► Dividend

withholding

tax

Hub Co:

► Tax haven

► No treaty

► 0% rate

► Exempt branch

► “Discretionary ruling”

► Statutory tax incentive:

► Patent box

► Notional interest

deduction

► Low rate

Source territory:

Profit attribution

► Deductibility of

payment

► Withholding tax:

Response strategies

Understanding risk:

► CBCR

► BEPs risk assessment

Overall risk reduction:

► TP policy and documentation upgrade

► PE risk management policy upgrade

► TP and PE training

► Removal of tax haven entities

► Use of unilateral and bilateral APAs

► Use of private letter rulings and clearances

► Prioritize transparency and cooperative

compliance and accelerated settlement of

legacy issues

Specific risk reduction:

► Restructure finance structures impacted by

BEPs measures

► Rebalance capital structure vs.

supply chain

► Revisit Hub Cos:

► Treaty access

► Substance

► Location

► Form of local tax shelter

► Revisit and renew rulings

HQs: global and regional

Hub Co

Main Op Cos

Intragroup financing rendered less effective due to anti-BEPS measures

Hub Co rulings and APAs require full value chain transparency

Response strategies


Page 6

Latest OECD developments

► Developing countries and international organizations

identify key relevant BEPS issues including:

► Base erosion caused by excessive payments to foreign

affiliated companies

► Profit shifting through supply chain restructuring

► Difficulties in obtaining the information needed to assess

and address BEPS issues, and to apply their transfer

pricing rules

► Treaty abuse

► Tax incentives with little demonstrable benefit


Page 7

Thin capitalization in Africa Heat map


Thin Capitalization rules

No Thin Capitalization rules

Page 8

East Africa


Page 9

West Africa


Page 10

Francophone Africa


Page 11

South Africa


Page 12

Legal and regulatory


Page 13

Debt pricing


Page 14

Debt pricing

The following steps need to be undertaken when pricing an intragroup financing

arrangement:

► Purpose of the loan

► Source of the financing

► Benchmarking


Page 15

Treasury companies


Page 16

The evolution of treasury


► Decentralized model for

commercial and treasury flows

► Regional model with overlay

solution

► Centralized treasury

operations, i.e., FX hedging

and intercompany funding

► Multi-bank electronic banking

► Regional model with

integrated structure

► Centralized commercial flows,

i.e., netting or reinvoicing

center

► Centralized transaction flows,

i.e., shared service center

► Automated treasury flows

(sweeping and pooling)

► Global payment factory for

accounts payable and

accounts receivables

► Global in-house bank for

accounting, funding and

investments

► Global liquidity structures

► Multi-currency investment

portfolio

► Off-balance sheet investments

Arm’s-length treasury

Regional treasury center

Global treasury center

In-country cash

management

Page 17

Response


More risk

Less risk

Change in the global tax risk landscape

Behavior and attitude to tax risk has

changed

Unilateral domestic law changes

proliferate:

► GAARs

► Interest and royalty deductibility

► Anti-treaty abuse

Tax authorities have access to more

information:

► Exchange of information

► CBCR

Fiscal authority challenges are

increasing:

► Aggressive tax assessments

► Tax fraud allegations

UN vs. OECD divergence:

► Transfer pricing

► Emerging markets

► PE threshold

Generalized increase in source

taxation

Global tax risk assessment by territory

Rate drivers

Group capital structure:

► External debt

► Hybrid financing

► Finance and treasury centers

Trading model:

► TP policy

► Principal companies

Other significant Hub Cos:

► IP holding

► Tangible assets

► Captive risk management

Repatriation management strategies

Assessing potential change drivers

HQ:

► CFC

► Effective

management

► Holdco

substance:

► Dividend

withholding

tax

Hub Co:

► Tax haven

► No treaty

► 0% rate

► Exempt branch

► “Discretionary ruling”

► Statutory tax incentive:

► Patent box

► Notional interest

deduction

► Low rate

Source territory:

Profit attribution

► Deductibility of

payment

► Withholding tax:

Response strategies

Understanding risk:

► CBCR

► BEPs risk assessment

Overall risk reduction:

► TP policy and documentation upgrade

► PE risk management policy upgrade

► TP and PE training

► Removal of tax haven entities

► Use of unilateral and bilateral APAs

► Use of private letter rulings and clearances

► Prioritize transparency and cooperative

compliance and accelerated settlement of

legacy issues

Specific risk reduction:

► Restructure finance structures impacted by

BEPs measures

► Rebalance capital structure vs.

supply chain

► Revisit Hub Cos:

► Treaty access

► Substance

► Location

► Form of local tax shelter

► Revisit and renew rulings

HQs: global and regional

Hub Co

Main Op Cos

Intragroup financing rendered less effective due to anti-BEPS measures

Hub Co rulings and APAs require full value chain transparency

Response strategies

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EY Africa Tax Conference September · PDF fileEY Africa Tax Conference September 2014 . Page 2 Panel ... Transfer pricing ... investments Global liquidity