Corporate taxforum

Belgian Corporate Tax Reform: How does it impact your Belgian Finance company

30 May 2012, Diegem

Seminar Organised for ATEBPeter Moreau – Andy NeuteleersGuest Speaker Veronique Tai, President of the Belgian ruling Commission

Agenda

► Introductions and welcome► Recent trends in the European tax landscape► Relevant Headlines of the Belgian Tax Reform 2012► Introduction of the Belgian Ruling Commission► Impact tax reform on Belgian Finance and Treasury

company - Selected topics► Closing and Cocktails

Recent Trends in the European Tax Landscape ► Governments seek additional revenue through tax increase and/or broadening

of the tax base.► Introduction of more strict thin capitalisation rules► Introduction of other interest deduction limitation rules

► EBITDA interest limitation► Limitation in interest deduction for acquisition of shares

► Stricter (application of) anti-abuse rules - focus on “substance”► EU and OECD focus on double non-taxation through mismatches (e.g. hybrid)

– “code of conduct”► Limitation on use of tax losses► More exchange of information ► More tax and TP controversy – more aggressive tax audits► Aggressive tax planning under scrutiny – media coverage► Introducing NID (Italy) ► Lowering tax rate and making tax regime more attractive (UK)

Relevant Headlines of the 2012 tax reform

► Notional interest deduction

► Thin capitalization rules

► Anti-abuse legislation

Notional interest deduction

Notional Interest Deduction (NID)

► Introduced in 2005 (applicable Tax Year 2007) to “replace” BCC regime► Deemed deduction on qualifying Belgian GAAP equity (reduced by items

such as financial fixed assets, foreign branch equity, ...)► Deduction linked to 10 year OLO but capped to 3.8 % for tax years 2011

and 2012, for tax year 2012 NID rate is 3.425 % (3.925 % for SMEs)► Full carry forward (C/F) but limited to 7 years► Can not be used against abnormal or benevolent income ... (circular)► Budget Impact :

► Tax year 2010 NID : used16.3 Bio € with 2010 C/F: 12.6 Bio € (PV-QP 25/07/2011),

► Estimated total NID equity 2010 : minimum 330 Bio € (applying 4.973% on NID used)

► Unique measure? No! The Netherlands, Luxembourg, Switzerland, Italy, ... have similar measures

► Many other financing regimes & alternatives (EU & non-EU) exist

Notional Interest Deduction (NID)

Loan

- + -

NID and foreign tax credit

(Interest

Interest

Loan)

-

Parent

(Foreign) Op CoBelgian NID Co

Notional Interest Deduction (NID) – New Rate Cap► Maximum NID rate is still based on 10 year OLO but capped

► Reduction NID cap to 3% as of taxable year 2013 (accounting years > 30/12/2012) (as from taxable year 2015: NID rate will be determined by law) - 3.5% NID for SMEs

► Would have been +/- 4.2% based on average 2011‘12 month’ 10 year OLO

► Law of 28 December 2011 (Belgian official Gazette 30/12/2011)

► Expected income … 1,620 Mio € (+/- 45.6% tax measures)

Notional Interest Deduction (NID) – New Carry Forward abolished► Third program law relating to 2011 budget, still to be voted, but

approved at government level► All non-used NID for accounting years > 30/12/2012 (taxable

years 2013) is “lost” – abolishment of article 205 quinquies ITC going forward - no more carry forward

► Companies with an existing “stock” of unused NID “C/F" for accounting years 31/12/2011 or accounting years ending < 31/12/2012 (taxable year 2012 and before) can still carry forward that stock, but subject to certain limitations ! (1 MIO € / 60-40)

► These limitations are immensely complex to apply in practice and will result in a considerable amount of calculation work for the years to come ! – Impact on deferred tax assets !

Basic principles to be applied for “C/F” stock NID – Accounting years < 31/12/2012► The calculation of the NID “C/F” to be applied in a particular year

becomes a complete “separate operation” of the tax return. It becomes its last operation, and will thus be effected “AFTER” the deduction of any tax loss “C/F" (a reversal of the two operations, first NOLs and thereafter NID “C/F” thus vice-versa compared to the past)

► The NID “C/F” to be used will be a function of (1) the existing 7 year limitation following the year the NID was created (2) a % of residual profit and/or the 1 Mio €-rule, the residual profit being the taxable profit left before the last operation (the imputation of the NID “C/F”)

► NID “C/F” can always be applied on the first 1 Mio € of residual profit

► The residual profit left after imputation of the first 1 Mio €, can only be reduced by NID “C/F” to a maximum of 60% - 40% remains taxable basis.

Next ...carry forward ?

► The 7 year limitation continues to exist, meaning that NID C/F can not be used after 7 years beyond its year of inception, However“If part of the NID “C/F” that could have normally been used under the former law within the 7 year limitation cannot be used in a particular year as a result of the application of the 60/40 limitation, that part of the NID C/F becomes C/F “indefinitely”, that is without limitations in time”

► On the other hand, if because of the reversal of the operations, the use of existing tax loss carry forwards (NOLs) prevent the timely use of NID “C/F” within the normal 7 year limitation, that part of the unused NID “C/F” is lost forever, thus affecting tax deferred assets if periodic income previsions do not foresee the use of NID “C/F” before expiry of the NOLs

Thin cap rules

Thin capitalization - General► To prevent tax avoidance by excessive leveraging, many countries

have introduced rules to prevent thin capitalization (Thin Cap)► Two existing rules in Belgium ‘7/1’ (‘1/1’) ► Under the current legislation, a specific 7/1 Thin Cap applies where

the beneficial owner of the interest is a person who is not subject to tax or if the income is subject to a tax regime that is significantly more advantageous compared to the Belgian tax regime (Art 198,11° ITC)

► Current Thin Cap almost never applies, because of a “too narrow beneficial ownership concept (direct-indirect)” & EU/treaty context

► The new thin cap is estimated to generate 100 Mio € income ► Change of thin cap ratio from ‘7:1’ now to ‘5:1’ and broaden scope► Referral to an ‘annex to the budget’ – with reference to PPL structures

Thin capitalization - New art. 198, 11° ITCProgram Law of March 29th 2012Dutch“onverminderd de toepassing van de artikelen 54 en 55, de betaalde of toegekende interesten van leningen indien, en in de mate van die overschrijding, het totale bedrag van deze leningen, andere dan obligaties of andere gelijksoortige effecten uitgegeven door een openbaar beroep op het spaarwezen en andere dan leningen toegekend door instellingen bedoeld in artikel 56, § 2, 2°, hoger is dan vijf maal de som van de belaste reserves bij het begin van het belastbare tijdperk en het gestort kapitaal bij het einde van dit tijdperk, wanneer de werkelijke verkrijgers ervan :► hetzij, niet onderworpen zijn aan een

inkomstenbelasting of, voor die inkomsten, onderworpen zijn aan een aanzienlijk gunstigere aanslagregeling dan die welke voortvloeit uit de bepalingen van gemeen recht van toepassing in België;

► hetzij, deel uitmaken van een groep waartoe de schuldenaar behoort”

French« sans préjudice de l’application des articles 54 et 55, les intérêts d’emprunts payés ou attribués si, et dans la mesure de ce dépassement, le montant total desdits emprunts, autres que des obligations ou autres titres analogues émis par appel public à l’épargne et autres que les emprunts octroyés par des institutions visées à l’article 56, § 2, 2°, excède cinq fois la somme des réserves taxées au début de la période imposable et du capital libéré à la fin de cette période, lorsque les bénéficiaires effectifs de ceux-ci :► soit, ne sont pas soumis à un impôt sur les

revenus ou y sont soumis, pour ces revenus, à un régime de taxation notablement plus avantageux que celui résultant des dispositions du droit commun applicables en Belgique;

► soit, font partie d’un groupe auquel appartient le débiteur »

English (free translation)“notwithstanding the application of the articles 54 and 55, any interest paid or attributed on loans, if, and in so far they are excessive, the total amount of these loans, other than bonds or similar securities which are issued to the public, et other than loans granted by institutions aimed by art. 56, § 2, 2°, exceeds five times the sum of the taxable reserves at the beginning of the taxable period and of the paid-in capital at the end of that period, where the beneficial owner of these:► either is not subject to income tax or, for these income, is subject to a far more beneficial regime on interest income than in

Belgium;► either is part of a group to which belong the debtor”

► The scope of existing thin cap rules will be broadened► Change of thin cap ratio from 7:1 to 5:1► Not only for loans with beneficiaries in tax havens but also for intra-group loans,

irrespective of tax treatment of interest► Debt includes all loans, with the exclusion of bonds, other publicly issued borrowing

instruments and loans granted by financial institutions► In case of indirect loans or guaranteed loans, the determination of the beneficial

owner will be crucial

► Not applicable for:► Companies engaged in leasing of movable goods► Companies mainly engaged in factoring and real estate leasing, provided

► They’re part of financial sector, and ► Loans are effectively used for factoring / leasing

► Companies mainly engaged in execution of projects of public-private cooperation

Thin capitalization – New


► How to calculate:► Qualifying equity : taxed reserves at the start of the financial year + paid-up capital

(incl. share premium) at the end of the financial year

► What if threshold is exceeded:► Interest expense on exceeding part is not tax deductible ► To be calculated on pro rata basis

► Preliminary assessment of new rules► Thin cap rules are less strict than in other EU / OECD countries► In case of substantial leverage in Belgium, it will be necessary to check the

qualifying debt/equity ratio to verify whether equity needs to be reinforced → definition of equity provides opportunity for planning


► Entry in force is postponed► Date will be determined by the King► At the latest at 1 July 2012► Problem of cash-pooling/intra-group financing companies/factoring

should be solved by then

Thin capitalization – New - Regulation Scoping – Interest & loan► No longer limited to interest paid to beneficial owner, subject to no

income tax or a far more beneficial regime for interest income► Also for intra-group loans (irrespective of tax treatment of interest at

the level of the beneficiary)► Definition of group companies in accordance with Art. 11

Companies Code► Connected, related companies (concept of control)► Consortia (companies under central management)↔ Initial version: (broader) BCC definition

► Excluded: loans contracted by► Leasing companies (RD55) under supervision of BNB/NBB and

FSMA insofar the loans relate to leasing activities► Factoring companies under supervision of BNB/NBB and FSMA

insofar the loans relate to factoring activities► Companies primarily active in the field of public-private

cooperation

Thin capitalization – New - Regulation Scoping – Debt & equity

► Change of thin cap ratio from 7:1 now to 5:1► Debt ► All relevant “loans”, with the exclusion of

► Publicly issued bonds► Other publicly issued or comparable borrowing instruments ► Loans granted by certain financial institutions (banks, insurance

companies and other types of financial institutions listed in Art. 56, §2, 2° ITC 92)

► Equity = fiscal equity► The sum of the taxable reserves at “the beginning of the taxable

period” and the paid-in capital “at the end” of the taxable period ↔ Initial version: accounting equity

► Special provision neutralizing the decrease of taxed reserves in case of parent-subsidiary restructurings (merger goodwill)

Thin capitalization – New - Debt & equity –Exemptions based on the creditor

► “Other than loans granted by... institutions meant in ITC 56 § 2, 2°ITC”. These are:

1. Regulated Belgian or EU credit institutions2. National Bank of Belgium3. Herdisconterings- en Waarborginstituut4. Regulated Belgian or EU mortgage companies5. Regulated Belgian or EU consumer credit companies6. Regulated Belgian or EU insurance companies7. FPIM and regional investment companies

Thin capitalization – New - Debt & equity –Exemptions based on the debtor

► “Not applicable on loans received by...”

1. Regulated movable asset leasing companies2. Companies of which a) the principal activity consists of factoring or

immovable asset leasing and this b) within the financial sector and c) to the extent that the received funds are effectively used for leasing and factoring activities. STRICT!!

3. Companies of which the principal activity consists of executing public-private cooperation projects

Thin capitalization – New – Indirect loans & guaranteed loans – Look THROUGH !► In the case of loans guaranteed by party x or loans whereby a party x

has provided the lender with the proceeds to finance & whereby party x partially or fully bears the risk, then party x will be considered the beneficiary owner, unless the guarantee or the indirect funding did not have “tax avoidance” as its principal motivation

► Concept of guaranteed loans to include in I/C debt, is “extremely soft” as it’s easy to evidence lower cost of funding ≠ other jurisdictions ≠ plantation patterns (US law)

► Indirect funding (B to B) comparable to old “anti-channeling” provisions

Thin capitalization – NewNo Netting ?► Future of Belgium as location for financing centers?► Future of cash pooling and intercompany factoring?

► No netting (no Dutch 10d-type rule)► Factoring/leasing exclusion: too restrictive scope of application► No tax consolidation (double taxation)

► Legislative change in progress to ► Introduce netting (only on excess of interest-out vs. interest-in)► For interests paid/received as part of a centralized treasury group

agreement

Thin capitalization – Amendments for Treasury Centers (1)► A special provision (exception) is inserted for central treasury &

financing companies to the extent they are involved in daily treasury activities or treasury management (cash pooling), within a group (as defined under Article 11 Companies Code)

► As regards such financing (daily cash pooling & others) as part of a central treasury management within a group (Article 11 Companies Code), the amount of interest considered paid & attributed for purposes of the thin cap is calculated as the difference between:► Interests paid (expensed) to group companies (not being financial

institutions)► Interests received from group companies as part of a central

treasury agreement (not being financial institutions)

Thin capitalization – Amendments for Treasury Centers (2)► When calculating this positive difference, interests relating to group

companies that are not subject to tax or not subject to a foreign tax similar/comparable to Belgian tax or based in a country where the common tax regime is considerable more advantageous regime (EEA countries being excluded from the latter), are not taken into account

► The companies concerned need to clarify their used financing & treasury group model in a treasury agreement (raamovereenkomst/convention cadre) concluded between group members

Thin capitalization – Amendments for Treasury Centers (3)► In this interco agreement the group co’s explain the used financing

model and the activities qualifying within central treasury management. This document is required for the tax audit of the netting exception. The agreement a.o. needs to explain:► The treasury model as regards the investment/placement or

redistribution of excess cash of certain group co’s with other group co’s

► The treasury model as regards the guaranteeing of third party loans with group co’s

► The way “netting” is achieved between incoming/outgoing group debt/receivables

► The principles & modalities applied for remunerating the model► In other words “Transfer Pricing” & a solid interco agreement become

very relevant => APA’s are best considered

Thin capitalization – Amendments for Treasury Centers (4)► Central treasury management is considered to be the management of

“Daily” treasury transactions or short-term treasury management and even exceptionally long-term treasury management in order to account for specific circumstances applicable under normal treasury management

► Transactions not qualifying under these circumstances are subject to the general Thin cap rule, then the netting rule does not apply

Thin capitalization – Amendments for Treasury Centers - Example

B/S (in -000-)

Receivables LT 125 Equity 125

Receivables ST 1,000Group Co’s 700Non-group Co’s 300

Debt ST 1,000Group Co’s 800Third parties 200

1,125 1,125

P/L “only related to central treasury agreement”

Fin. Costs 4,000Group Co’s

Fin. Income Group Co’s 3,000

Fin. costs 1,000others

Fin. Income 300SHT Tax haven

Bank 500 Fin. Income 200Related banks

Fin. Income 2,000Other

5,500 5,500

Ø Normal Thin cap: 4,000 * 800 – (5 * 125) = 875

ØNew Thin cap: (4,000 – 3,000) * 800 – (5 * 125) = 218.75

800

800

New anti-abuse legislation

2012 Tax reformNew anti-abuse legislation

► “Right to choose least tax way” (Brepols doctrine)

► Original provision (art 344 §1) adopted in 1993► Recharacterization of transaction(s), when aim of legal

characterization of the parties opted for is tax avoidance► Taxpayer may prove legitimate needs of a financial or economic

nature for the chosen legal characterization► Limited application in practice due to strict legal approach adopted

in case law of Supreme Court : need for similar legal consequences (impossible for one-step transactions and difficult for step-by-step transactions unless (near-)simulation)

2012 Tax reformNew anti-abuse legislation

► Modification of the general anti-abuse provision :► Abuse of tax law

► Avoidance of the application of provisions of ITC 92 or RD/ITC 92 (taxation vs. tax benefit)

► Through legal and non-simulated legal acts► Approximating to taxable acts vs. acts not benefiting from a tax benefit► Not in line with the objectives of the tax provision► Avoidance of Belgian income tax as sole material purpose

Comparing Old vs. New

Old provision New provisionObject A legal act or separate legal acts

establishing the same operationA legal act or set of separate legal acts establishing the same operation

Non-opposability Characterization of legal act(s) Legal act(s)

Burden of proof tax authorities

Tax avoidance of characterization Abuse of tax law

Counterproof of the taxpayer

Legitimate financial or economic needs Other motives than income tax avoidance

Consequence Re-characterization in an act with identical or similar legal consequences

Restore the tax basis and tax calculation in accordance with the purpose of the tax provision as if there was no abuse

2012 Tax reformNew anti-abuse legislation► Modification of the general anti-abuse provision :► Inspiration in ECJ case law – aimed at wholly artificial

arrangements► Not pursuant the economic goals of the tax provision; or► Not pursuant the economic reality; or► Not at normal economic or financial conditions

► Entry into application► Tax year 2013► Tax year 2012 if accounting period is closed on or after 6 April 2012

(date of publication)► Similar provisions for registration duties and inheritance tax

► Action points: ► Assess impact of extended reclassification on structures and

operations► Substance and business rationale

Introduction of the ruling commission

Impact on Belgian Finance and Treasury Company

Impact on Belgian Finance and Treasury company : General

► Lower NID rate and no more carry forward – increase in effective tax rate ?

► Thin capitalization limitations – increase in effective tax rate ?

► Anti-abuse legislation - impact on tax-effective financing ?

Why is this hot in transfer pricing?

► EY’s 2010 Global Transfer Pricing Survey

► Our in-the-field experience confirms this trend

Impact on Belgian financing NID► NID is still a sustainable and effective financing/tax planning

instrument and attractive for ‘low yield’ financing; mainly short-term EUR or USD funding, cash-pooling, factoring or sub-financing of a main group treasury center

► NID is one of the options for Belgian finance companies who must revisit their intra-group financing due to the new thin cap rules

► Key will be to revisit the treasury policy and to forecast the taxable spread

► Alternatives exist when the intercompany interest rate is above 3% or particularly volatile (see infra) : for example ► PPL/PPS with Netherlands / Luxembourg► Luxembourg finance branch

► Controversy against improper use► Administrative circular letters and guidelines► Recently targeted fiscal controls to NID

Impact on Belgian Finance and Treasury company : Topics

► Equity funded Finance company : Plain NID

► Hybrid financing instruments - Profit Participating Loans

► Foreign Finance Branch

► Tax Effective Treasury

► Cash pooling

► The Halo Effect

► What works in other countries ?

Financing Plain NID company

Strategy► Use of an equity financed Belgian company (“BelCo”) to

provide intercompany group financing► The NID at the level of Belco provides decreases in the

taxable basis and leads to a low effective tax rate

Assessment

► The financing is relatively straightforward to be implemented and maintained. Tried and tested since the introduction of NID

► If foreign withholding is applicable, up to 15% foreign tax credit could be claimed in such an equity funded Belco

► NID is still very attractive for low yield financing, even after capping the NID rate at 3%

► If the interest income exceeds the NID rate, the effective tax rate increases quite rapidly. As an example, an interest income of 5% leads to an effective tax rate of 13,6%. With 6% interest income, the effective tax rate is 17%

► If the interest income is below the NID rate, the unused NID cannot be carried forward and a potential tax asset is permanently lost (no negative ETR possible)

► In particular this strategy may be very effective to provide short term financing with arm’s length yields around 3% directly to operational companies or to another group treasury company

Loan

Interest

OpCoBelCo

Parent

Equity

2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00%ETR -17,0% -6,8% 0,0% 4,9% 8,5% 11,3% 13,6% 15,5% 17,0%

-20,0%-15,0%-10,0%-5,0%0,0%5,0%

10,0%15,0%20,0%

Intercompany Financing Rates

Note that negative ETRs are no longer possible, but are shown here to indicate trend.

OpCo’s

Strategy► The use of a hybrid financing instrument creates a

tax-deduction in the debtor’s country (Belgium), while it results in tax-exempt income in the recipient country, where the instrument qualifies as equity

► Belgium on lends the funds realizing an arm’s length taxable spread

► Could be implemented with a Netherlands or Luxemburg resident PPL subscriber (Holdco)

► Equity component should generate NID

Assessment

► The financing is more complex to be implemented and maintained (compared to plain NIDco)

► Rulings are required in multiple jurisdictions ► The use of a PPL/PPS is very attractive for high yield

financing and only increases slowly with increased interest rates

► With the proposed thin cap rules, Belco should respect the 5 to 1 debt equity

► As an example, an interest income of 5% leads to an effective tax rate of 2,98%. With 6% interest income, the effective tax rate is 3,42%. With 10% interest income the effective tax rate would be 4,3%

► Since the precise language of the proposed law are not yet available, the Belgian Ruling commission is awaiting clarity before issuing new rulings

PPL/PPS subscription

Deductible Interest

Exempt dividend

FinancingProfit Participating Loan/Security

Parent

Holdco

Belco

Deductible Interest

Taxable interest

2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00%ETR -1,06% 0,28% 1,18% 1,82% 2,30% 2,68% 2,98% 3,22% 3,42%

-1,5%-1,0%-0,5%0,0%0,5%1,0%1,5%2,0%2,5%3,0%3,5%4,0%

Intercompany Financing RatesNote that negative ETRs are no longer possible, but are shown here to indicate trend.

FinancingFinance Branch

Strategy► Use of an equity financed Belgian company (“BelCo”) to

provide intercompany group financing► The equity is allocated to a foreign finance branch which

provides group financing► The branch is low taxed following the tax rules of the

branch country► The income generated by and allocated to the finance

branch is exempt in Belgium under the applicable double tax treaty between Belgium and the branch jurisdiction

► The equity and income allocated to the Belgian head-office is low taxed because of the NID

► Multiple branch locations can be considered

Assessment

► The financing is more complex to be implemented and maintained (compared to plain NIDco)

► Rulings are required or recommended in multiple jurisdictions

► No changes in Belgian tax law are currently envisaged to make this financing ineffective

► The effective tax rate may vary between 1,5% and 2,5% although this depends and varies based on the branch location and the allocation

► The finance branch is tried and tested and is a good addition to an existing NID finance company

Parent

SubsFinance Branch

Belco

Loan

Interest

2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00%ETR 2,02% 1,62% 1,35% 1,40% 1,43% 1,46% 1,49% 1,51% 1,52%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%


FinancingComparison Effective Tax Rates

2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00%ETR NID -17,0% -6,8% 0,0% 4,9% 8,5% 11,3% 13,6% 15,5% 17,0%ETR PPL -1,06% 0,28% 1,18% 1,82% 2,30% 2,68% 2,98% 3,22% 3,42%ETR Branch 2,02% 1,62% 1,35% 1,40% 1,43% 1,46% 1,49% 1,51% 1,52%

-20,0%

-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

20,0%

ETR


NID

PPL

Branch

Note that negative ETRs are no longer possible, but are shown here to indicate trend.

What if an arm’s length rate falls below the NID rate?

► Potential problem area► Assume full equity financing, with NID deduction at 3.00%► Assume outbound financing transactions ‘at arm’s length’ lead to

an interest rate below 3.00%, for example due to:► Superior credit rating► Short term funding► Specific options

► Potential solutions► Minimum taxable base ruling?► What if stock of excess NID exists?

The Belgian Tax Effective Treasury Center

► Key concepts► Optimize planning for Belgian NID-regime

► Whereby NID-rate is a proxy for the risk-free rate (‘RFR’)► Whereby NID-rate changes annually (difficult to plan for)

► Remunerate treasury center in line with its functional risk profile based on Transactional Net Margin Method:► For the combined of its activities,

and accordingly all transactions► Characterization is that of

routine profit center► Entrepreneurial counter-

party/ies needed (yet flexible)► on Return On Equity basis

= RFR + (low) premium (~D:E)► Pragmatic update policy

%

Y

Reported return (pre-NID)

NID-rate 3.0%

The Belgian Tax Effective Treasury Center (2/2)

Pure cost center Pure profit center► Treasury is characterised as the provider of

routine services, arranging financial transactions on behalf of affiliates, either with external or internal financial sources

► As a pure cost center, the treasury center does not assume risks in respect of its equity, and hence acts as a pure service provider.

► Typical policy: Cost Plus

► Treasury is characterised as an entrepreneurial in-house financial institution, doing business independently with affiliates on the same basis as one would expect an external bank to offer

► The treasury profit center’s goal will be typically limited to profit maximization.

► Typical policy: entrepreneurial profits or losses (for the transactions it engages is).

Routine profit center► Treasury is characterised as a routine in-house financial institution, doing business under a

service level agreement with the parent company or group as a whole, whereby its goal of profit making is expanded to e.g. providing liquidity to group members.

► Typically routine treasury centers are supplied with sufficient equity to perform its roles including taking routine market risks.

► Typical policy: Arm’s length range on a net profit basis compared to its equity at risk –Return on Equity for its role and responsibilities on the aggregate of activities/transactions

CONTINUUMCONTINUUM

The transfer pricing approach to cash pooling (1/2)

► Key TP considerations:► Division of benefits amongst cash pool participants, after remunerating

the cash pool leader in accordance with its functional risk profile► Irrespective of notional or

target balancing pooling► True and fair assessment of

assumed risks by all► Structural financing vs. cash

positions► Pragmatic approach on

assessing outside options► Budget vs. actuals

► Key TP questions and methods► Remuneration cash pool participants: Residual profit split method► Remuneration cash pool leader: cost plus – return on equity at risk

Benefit of Cash Pooling

Pre-cash

pooling

Post-cash

pooling

Inte

rest

exp

ense

Benefit of

cash pooling

The transfer pricing approach to cash pooling (2/2)

► Example:

Incorporating the HALO – effect in interest rate benchmarking, or not? (1/2)

► General interest rate benchmarking approach► STEP 1 – Assess the credit score of the loan

► Credit worthiness of the borrowing entity► Credit rating adjustment due debt instrument type

► STEP 2 – Benchmark the straight loan interest rates► Direct ‘CUP’ analysis► Use of Fair Market Yield Curves

► STEP 3 – Adjust for embedded options and for currency and/or coupon structure► Embedded options like early prepayment and early demand► Currency Swaps► Fixed-to-floating Swaps

HOT TOPIC

Incorporating the HALO – effect in interest rate benchmarking, or not? (2/2)

► Our current approach► Step 1: Quantitative and qualitative analysis of borrower

► Develop industry specific (quantitative and qualitative) criteria for classifying subsidiaries based on S&P/Moody classification:► CORE SUBSIDIARY à Group rating► STRATEGICALLY IMPORTANT à Notching/In-between► OTHER SUBSIDIARIES à Stand-alone rating

► Step 2: Use CreditScore software to assess credit worthiness of borrowing entity in accordance with classification

► Step 3: Thoroughly document position taken that the framework applies (burden of proof), and how it applies (or not) on the borrowers reviewed► Explain congruence with the interpretation of the arm’s length principle► Make use of market references that apply the framework

What works in other countries ?

► Branch financing – Switzerland-Luxembourg-Hungary► Back to Back financing with low/untaxed entity► Transfer Pricing based - excess profit (Netherlands,

Luxembourg) ► Tax Holiday – Special Regimes (Switzerland, Malta,

Cyprus, Hong Kong, Singapore …)► Use of hybrid loans – Use of hybrid entities► Finance rulings financing with a low/untaxed entity► Traditional Luxembourg-Dutch finance rulings► Use of a hybrid entity (for example CV-BV)

► Use of hybrid loans

OpCo’s

Strategy► The use of a hybrid entity in the Netherlands allows the

same advantages as the PPL loan, namely that only a spread of about 12,5 bp is taxed

► CV is a transparent partnership in the Netherlands but a company (CFC) for US tax purposes, consequently ‘subject to Subpart F’ rules the low taxed interest income is not picked up

► Could be implemented with Luxemburg SNC as well► Could also be considered in Belgium, combination of a

BVBA-SARL & a Maatschap

Assessment

► Very powerful Finco, covered by a Dutch or Luxembourg APA

► Alternative for NID, since allowing higher interest rates► Spread is limited to a cost + ► Low ETR► Tested

Deductible Interest

Non taxed interest

Example : Dutch CV-BV

US-Parent

FincoCV

BV

Financing (2)

Financing (1)

Deductible Interest

Closing

Key Messages

► Review Thin Cap Impact – conclude framework agreement► Review alternatives► Differentiate if needed► Discuss with the ruling commission► Review intercompany pricing model ► Transfer pricing documentation and APA► Economic and Business Rationale - No wholly artificial finance

structures

Questions?

Contact Details

Peter MoreauPartner – International Tax ServicesOffice: +32 (0)2 774 9187Mobile: +32 (0)477 78 78 [email protected]

Andy NeuteleersSenior Manager – Transfer PricingOffice: +32 (0)2 774 9941Mobile: +32 (0)476 977 [email protected]

mailto:[email protected]

mailto:[email protected]

Thank you for attending !

The above information does not constitute advice and cannot be used for those purposes

Corporate taxforum

Business

Transcript of Corporate taxforum