Politics and Treasury: How the New Administration May Impact Treasury in 2017

May 9th, 2017

Politics & Treasury: How the New Administration May Impact Treasury in 2017

2© 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL.

Russell HoffmanDirector, Market & Treasury RiskKPMG LLP

[email protected]

Today’s Speakers

Bob StarkVP, Strategy

Kyriba Corporation

[email protected]

@treasurybob

Justin WeissPartner, WashingtonNational Tax KPMG [email protected]

mailto:[email protected]



© 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 3

Agenda

Today’s Discussion

The Trump Administration’s Tax Reform – Section 385 and Intercompany Strategy

Cash Repatriation: what treasury needs to know

Impact on USD and currency markets

Interest rate environment

Questions and Answers


How has your organization responded to potential administration policy changes?

a) wait and see approach

b) preliminary scenario planning

c) limited stakeholder discussion

d) implemented changes in anticipation

Polling Question


Polling Question

The Trump Administration and Tax Reform

7

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.The information contained herein is of a general nature and based

on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Notices

8

Speaker of the House Paul Ryan was a driving force behind the development of the House GOP “Blueprint on Tax Reform” released in June 2016

Donald Trump’s campaign tax plan borrowed heavily from the Blueprint’s concepts

On April 26th, 2017, the Trump Administration released its principles for tax reform which, although very high level, largely echo the Trump campaign plan. A full budget may be released as soon as June

Tax Reform – the State of Play

For the first time since 2006, the Republican Party (GOP) controls the House, Senate, and White House simultaneously.

In the intervening decade, the urgency for tax reform, long a GOP priority, has increased for a number of reasons:

Gross domestic

product (GDP) growth

continues to lag behind historical averages

The U.S. manufacturing

sector continues to

decline

Corporate inversions

further erode the tax base

and raise questions of

fairness

The United States now has the highest statutory corporate rate in the Organisation for Economic Co-operation and

Development (OECD)

Base erosion and profit

shifting (BEPS)

recommendations

puts effective rate pressures

on U.S. multinationals

Significant migration of

business income into partnerships

and other passthroughs

has eroded the U.S. tax

base

9

Go BigThe House BlueprintRevenue Losing Tax Reform (i.e., tax cuts)Corporate Integration (DPD, Flow-thru, Shareholder Ordinary Income Treatment)Worldwide Taxation (incl Minimum Tax proposals)Political Orphans – Camp 2014, VAT, Carbon Tax

Go SmallRepatriation (mandatory or voluntary) OnlyRate Cuts?Small business & individual?Other?

The Universe (?) of Options

10

Comparison of Key Proposals – Business

President Trump

(April 26, 2017)House blueprint Camp bill

Corporate rate 15% 20% Reduce to 25% (over several years)

Individual owners of

passthroughs and

proprietorships

15% rate, possibly limited to

“small” and “medium”

passthrough businesses (with

unspecified anti-abuse rules)

“Active business income” of owners of

passthrough entities capped at 25%

ordinary income rate. Backstopped

by “reasonable compensation”

requirement for owner-operators

Qualified domestic manufacturing generally

taxed at no higher than 25%. Owners who

materially participate treat 70% of combined

compensation and distributive share as subject

to employment taxes. Other changes to Sub K.

Cost recovery Not mentioned

Full and immediate expensing for

investments in tangible property and

intangible assets, but not land

Replace MACRS with system that lengthens

recovery lives and indexes depreciable basis

for inflation. Extend amortization period for

acquired Code section 197 intangibles. Caps

on expensing. Other.

Interest expense Not mentioned

Net interest expense not deductible

but carried forward indefinitely—with

unspecified special rules for financial

services companies

No broad rule, but limits amount of deductible

interest expense that could apply to a U.S.

corporation shareholder with one or more

foreign corporations in some cases

11

Comparison of Key Proposals – Business (cont’d)

President Trump


NOLs Not mentioned

Carry forward indefinitely and indexed

for inflation, but no carry back.

Carryforwards limited to 90% of the

net taxable amount for the year

Limit deduction to 90% of taxable income.

Repeal some special NOL carryback provisions

as well as limitation on the carryback of excess

interest losses attributable to CERTs

Corporate AMT Not clear Repeal Repeal (with unused AMT credits refundable

over several years)

Research credit Not mentioned Keep, with unspecified modifications Keep, with modifications

Last in, first out (LIFO) Not mentionedSuperseded by expensing of non-

imported inventoryRepeal

Selected revenue raisersEliminate unspecified tax

breaks for “special interests”

Eliminate various unspecified “special

interest” deductions and credits,

including section 199 (but not R&D

credit)

Numerous raisers specified

12

Comparison of Key Proposals – International

President Trump


Destination based cash

flow system, with border

adjustments

Not mentioned in one-page

summary document

Move towards a destination-based tax

system, with border adjustmentsNot included

Territorial systemMove to territorial system. No

details.

Territorial tax system, with 100%

exemption for dividends received from

foreign subsidiaries. Repeal most of

current subpart F regime, but retain

foreign personal holding company

rules for passive foreign income.

U.S. corporate shareholder gets 95% deduction

for foreign sourced portion of dividends

received from certain foreign subsidiaries.

Complex provisions to prevent offshore shifting

of profits. Minimum tax of 15% on CFC’s

foreign earnings. Modify active financing

exception

Repatriation of existing

earnings and profits (E&P)

Foreign earnings accumulated

under old system taxed; rate

determined in consultation with

Congress

Foreign earnings accumulated under

old system repatriated by paying tax

of 8.75% to the extent held in cash or

cash equivalents or 3.5% otherwise

(payable in installments over 8

years)

Foreign earnings accumulated under old

system repatriated by paying tax of 8.75% to

the extent held in cash or cash equivalents or

3.5% otherwise (payable in installments over 8

years)

13

1.Assessment

- Review the company’s risks and opportunities under Tax Reform

- Modeling for domestic and cross-border impacts

2.Influencing

- Consider alternative channels and transition proposals

3.Mitigation

- Consider steps to reduce taxes in the transition to tax reform

4.Adaptation

- Changes to the value chain to optimize tax structures under a reformed U.S. system

Tax Reform - Coming Up with a Plan

Mandatory Repat Impact Assessment

Stakeholder coordination (tax, treasury/finance,

accounting, etc.)

Understand Scope and Nature of Likely

Repat Proposals

Identify and Quantify Relevant Tax Attributes and

Data (e.g., E&P, Foreign Cash, FTC Position)

Modeling associated with mandatory repatriation tax cost

Identification and implementation of planning opportunities

Readiness (tax accounting perspective), as the tax impact will be reflected in the financial statements in the period that includes the date of enactment (e.g., existing APB 23 liability assertion, deferred tax liability, etc.)

Treasury and cash mobilization objectives (tax and non-tax)

14

Structuring operations in a tax-efficient manner can reduce risk and often reduce costs.

Treasury Transformation: Tax Considerations

Standard Leading practice

Significant

tax friction in

intercompany

Treasury

operations

“Do no harm”

Approach

Global tax

efficiencies

Permanent tax

savingsTax deferral

Other effective

tax rate benefits

Reduced

non-income

taxes

Quantitative benefits

Improved

complianceReduced risk

Qualitative benefits

15

Goal of treasury function is to access cash efficiently through intercompany loan

programs, cash pooling, and regular dividend management

Tax rules can complicate an organization’s ability to meet this objective when not

proactively considered and managed, for example:

Deemed dividends (subpart F)

Withholding on interest

Interest deduction limitations

Section 385 regulations documentation and recast rules

Case Study: Treasury vs. Tax considerations for Cash Pooling

16

Misconceptions

Some causal observers still believe that short-term debt and cash pooling are

exempt from the section 385 regulations, however…

There are no specific exceptions for such transactions in the documentation rules.

In fact, as such transactions often happen more frequently and automatically in many cases (i.e.,

sweeps), documentation can be more challenging.

(Temporary) Regulations provide certain relief with respect to the recast rules for

“qualified short-term debt instruments,” but:

These rules contain many unique qualification requirements that would need to be structured

into and monitor, if utilized.

There may be significant limitations when compared to current practice.

Cash Pooling and Short-Term Intercompany Loans

17

Overview: covered debt instrument must be a demand deposit received by a

qualified cash pool header pursuant to a cash management arrangement

Section 385 Cash Pooling “Exception”

Qualified Cash Pool Header

Cash Management Agreement

Member of an expanded group, controlled partnership, or QBU described in §1.989(a)-1(b)(2)(ii) that is owned by an expanded group member, that has as its

principal purpose managing a cash-management arrangement for participating expanded group members, provided that an amount equal to the excess (if any)

of funds on deposit with the expanded group member, controlled partnership, or QBU (header) over the outstanding balance of loans made by the header (that

is, the amount of deposits it receives from participating members minus the amounts it lends to participating members) is maintained on the books and records

of the cash pool header in the form of cash or cash equivalents or invested through deposits with, or acquisition of obligations or portfolio securities of, persons

who are not related to the header (or in the case of a header that is a QBU described in §1.989(a)-1(b)(2)(ii), the QBU’s owner) within the meaning of section

267(b) or section 707(b).

An arrangement the principal purpose of which is to manage cash for participating expanded group members. For purposes of the preceding sentence,

managing cash means borrowing excess funds from participating expanded group members and lending funds to participating expanded group members, and

may also include foreign exchange management, clearing payments, investing excess cash with an unrelated person, depositing excess cash with another

qualified cash pool header, and settling intercompany accounts, for example through netting centers and pay-on behalf-of programs.

18

Cash Pooling and Short-Term Intercompany Loans – Example

OpCos

Captive Ins.

Co

OpCo

U.S.

U.S.

U.S.

CA

NL

EUGB

European HoldCo

DREOpCos

Banks/

Exchanges

US ParentAmericas

Physical Cash

Pool

Cash

pool

sweeps

Sweep of excess cash from Americas pool to European

pool

3rd party derivatives

3rd party loans

3rd party loans

European

Notional

Pool

Cash Pool

Sweeps

19

Cash Pooling and Short-Term Intercompany Loans – Example

Banks/

Exchanges

US Parent

U.S.

U.S.

U.S.

U.S.

QBU-Header

Captive Ins.

Co

OpCos

OpCo

CA

Investment

Assets

Net Cash Pool Deposits

Net Cash Pool Draws

1.

2.

1. 2

.

2.

Term

Loan

Americas Physical Cash Pool

3rd party loans

and derivatives

IC A/P

20

“Qualified Cash Pool Header” Must be a regarded entity or QBU

Principal purpose of the header entity/QBU must be managing cash-management arrangement

for EG members

Operating company as header?

How much non-cash-management arrangement related activity is permissible?

“Cash Management Arrangement” Seems to focus only on internal cash management and does not make any mention of borrowing

from third-parties…

Impact for funding centers or “QBU” treasury departments?

What about treasury center / cash pool leader that primarily functions as a hedging center and

cash pooling is secondary or tertiary function?

Cash Pooling “Exception” (Cont’d)


How has your organization decided to use any of the repatriated cash?

a) Share repurchase

b) Repayment of debt

c) Capex / Business expansion

d) Undecided

Polling Question


Polling Question

Cash Repatriation


Tax reform is expected to result in significant repatriation of cash by US corporations

“…David Kostin, Goldman Sachs’ chief US equity strategist, estimates that corporate America will repatriate about $200bn of its foreign cash stash, and plough $150bn of this into ramped-up stock buyback programs.”(1)

Cash Repatriation – an Opportunity for Treasurers

(1) Where will corporate America’s overseas cash pile go? DECEMBER 5, 2016 by: Robin Wigglesworth


Boards and Management will be asking questions: How much new cash will be generated? Of this cash, how much will be available domestically vs.

overseas? How much of our existing overseas cash can we repatriate? What is our best use of cash after it is repatriated?

Treasury is clearly in the best position to respond –creating an opportunity to deliver strategic insight



“…David Kostin, Goldman Sachs’ chief US equity strategist, estimates that corporate America will repatriate about $200bn of its foreign cash stash, and plough $150bn of this into ramped-up stock buyback programs.”(1)


Share repurchase Repay third party debt

Payment of special dividends Fund investments (e.g. CAPEX)

Expand business in the US M&A

How corporations are thinking about using this cash

(1) Where will corporate America’s overseas cash pile go? DECEMBER 5, 2016 by: Robin Wigglesworth


Treasury needs to understand the repatriation implications:

Cash Repatriation Implications

Is there sufficient global cash visibility? How does this impact treasury’s current structure?

Do we have an accurate global forecast? What are the effects on internationalpooling and investments?

Have we developed a hedging strategy for non-USD cash?

Do we have sufficient staffing in treasury?

What is our short term strategy for managing cash immediately after repatriation?

How will working capital strategies for subsidiaries be impacted?

USD and Currency Markets


According to an article by Andrea Wong1:

– The bulk of the cash held overseas is already in U.S. currency

– The last tax holiday had a limited effect on the greenback: JPMorgan

– "All else being equal, there shouldn’t be direct impact on the dollar.” - Richard Lane, a senior analyst at Moody’s Investors Service. "

Repatriation Implications on the Currency Markets

(1) A $2.6 Trillion Myth: For the Dollar, Trump Tax Holiday Is a Dud, by Andrea Wong, November 16, 2016


If repatriation won’t affect USD, what will?

1) Interest Rates

2) Strong US economy (=> inflation => rate increases)

3) Political/macroeconomic uncertainty overseas



If USD continues to strengthen:

Impact of strong USD on revenues/expenses:– Financial KPIs– Growth plans; willingness to invest in new markets

Driver for more or less hedging?

Effect on those that haven’t hedged

What about interest rates in other markets (e.g. Canada, EU, APAC) to stabilize their currencies vs. USD



The economy anticipates higher interest rates

According to a Financial Times article1:

“US companies have rushed to renegotiate their loans at the start of the year…”

“The robust activity reflects investors anticipating higher interest rates in the coming year in light of forecasts of a stronger US economy under the incoming administration of Donald Trump.”

Interest Rate Outlook

(1) Financial Times, February 16, 2017


Policy changes => economic growth => rate increases (to cool inflation)

Higher rates affect treasury activities:– Short term borrowing– Long term borrowing and planning (extend maturities?)– Investments– Idle cash– Supplier Financing programs

Interest Rate Outlook


Concluding Remarks

Initial tax proposal offers treasury much to consider– Intercompany strategies and compliance– Repatriation of cash– Suitability of treasury structures

Interest rates and currency scenarios require proactive planning

Ideal opportunity for treasury teams to offer strategic insight


Additional Resources

eBook: 5 Questions CFOs Should Ask Themselves to Maximize Growth

Get PDF at: info.kyriba.com/5-CFO-Questions-eBook

eBook: Taking Treasury from Reactive to Proactive

Get PDF at: info.kyriba.com/Proactive_eBook-KDC

http://info.kyriba.com/5-CFO-Questions-eBook

http://info.kyriba.com/5-CFO-Questions-eBook

http://info.kyriba.com/Proactive_eBook-KDC.html

http://info.kyriba.com/Proactive_eBook-KDC


Thank You for Attending

facebook.com/kyribacorp

twitter.com/kyribacorp

linkedin.com/company/kyriba-corporation

youtube.com/kyribacorp

slideshare.com/kyriba

kyriba.com/blog

Economy & Finance

Politics and Treasury: How the New Administration May Impact Treasury in 2017