How the OECD's BEPS recommendations will affect your treasury activity.
An obvious area of concern outside of the tax department is Treasury: for many groups the BEPS recommendations will likely lead to increased costs of capital, which will need to be quantified and built into forecasts. These costs will be driven by various factors. For example, a group may no longer get the same level of tax deduction for its interest expenses due to domestic law restrictions, and the internal provision of funds through intra-group cross-border financing may become less efficient.
For organisations with significant UK activity, the BEPS proposals in relation to interest deductibility could have a profound impact. The UK Government has announced that it will adopt the OECD’s recommendations for an interest restriction based on a group’s earnings, and from 1 April 2017 the UK will be implementing a new regime to restrict deductions to 30% of EBITDA. This is a radical departure from the current regime which instead relies on an arm’s length test supplemented by various anti-avoidance provisions. Coupled with the anti-hybrid rules (effective 1 January 2017) this will, for many groups, fundamentally change the tax profile of their intra-group financing.
The finer details of the new interest deductibility regime are yet to be set out (a consultation period is expected to start in May 2016). However, if the UK regime closely follows the OECD’s recommendations we would expect that those groups which centralise their financing (rather than “pushing down” debt to operating companies) will be more acutely affected by the changes. This would have the effect of fundamentally challenging the financing structure of many international groups which currently centralise their treasury activity to realise commercial benefits (for example, access to more competitive (external) banking arrangements, operation of cash pooling arrangements, reliance on Top Company guarantees). Furthermore, in many instances there can be prohibitive restrictions on pushing debt down into local territories.
The effect of BEPS on treasury activity will, without proactive management, impact a group’s effective tax rate. This in turn could affect earnings per share and other key financial metrics. In order to limit the impact, it will be critical that treasury teams work closely with their tax colleagues to properly understand how the BEPS recommendations relating to financing activity are being implemented in all material jurisdictions.
Finally a practical matter: implementation of the OECD’s recommendations will happen to different timescales and interpretations, and in the short to medium term the treasury function will need to be flexible and agile to keep on top of the changing landscape.
Our international tax and treasury team understand the impact of the BEPS proposals on financing transactions and treasury functions. We work closely with our debt advisory colleagues to provide commercial and appropriate advice to tax and treasury teams. We have experience of applying the theory of the BEPS recommendations to the day to day reality of managing an international group’s financing needs.
Who to speak to?
Robin Walduck, Michael Bird, Kashif Javed