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Treasury and Trade Solutions

March 2016

Constant Change: Optimizing Treasury for Asia’s

Evolving Regulatory & Market

Table of Contents

Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices 2

Key Tax changes affecting Liquidity Management & Treasury Practices 5

A Broader Look at Notional Pooling, China & India 19

Today’s agenda

Topics

Key Tax changes affecting Liquidity Management &

Treasury Practices

A broader look at

– Treasury Center Initiatives in Asia: Singapore, Hong

Kong, Thailand & Malaysia

– Base Erosion Profit Shifting (BEPS)

– Transfer Pricing

Michael Velten

Southeast Asia (“SEA”) FSI

Tax Leader

Deloitte & Touche LLP,

Singapore

Topics

Key Regulatory and market Changes affecting

Liquidity Management & Treasury Practices

A broader look at

– Basel III

– Notional Pooling : Still an effective liquidity

management tool?

– Case Study - China and the RMB

Internationalization

– Liquidity Management in India

Ann Lin Khoo

Asia Market Manager,

Liquidity Management

Citibank, Hong Kong

1

Key Regulatory and market Changes affecting

Liquidity Management & Treasury Practices

Key Asia Regulatory & Market Changes

Treasury related Tax Incentives

Thailand International

Headquarter (IHQ) Incentive

including :

• Concessionary tax rate for

qualifying income received from

affiliates within Thailand

Malaysia Treasury

Management Center (TMC)

incentive including:

• Reduction in profits tax for

specified treasury activities

Hong Kong Corporate Treasury

Center (CTC) incentive including:

• Reduction in profits tax for

specified treasury activities

• to be announced in 2016

Singapore FTC Initiative:

• Tax Concessions for qualified

companies

• Up for renewal in March,

2016

Indonesia

Mandatory Use of Indonesian

Currency:

• Transactions performed by residents

and non-residents, cash and non-cash

transactions

Language for documentation:

• Any agreements/documents where

one of the contracting party is an

Indonesian entity (either client, bank or

both) must be made in bilingual

(English and Indonesian)

India – Relaxations on Inter-company

lending laws

• Changes to the Companies act to

allow for inter-entity related party

transactions for private entities

China & The RMB Internationalization

• Allow for cross border movements of funds

• Geographic expansion of the Shanghai Free Trade Zone (SFTZ)

• Establishment of the Free Trade Zone Accounting Unit (FTU) within

SFTZ

• More Free Trade Zones announced in Tianjin, Guangdong and

Fujian Others….

• Negative Interest rates… Continued interest rate cuts

• BEPS

• Basel III implementation

• Dodd-Frank

• FACTA….

And many more……………………..

3 Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices

Basel III Implications in Asia

Global guidelines with varying degree of implementation in Asia as well as across banks.

Treasurers will have to manage across differing practices and different treatment of bank deposits

Liquidity

Liquidity Coverage Ratio

(LCR)

Net Stable Fund Ratio

(NSFR)

HQLA

30D Net Cash O/F

Available Stable Funding

Required Stable Funding

Liquidity

Leverage Ratio

Basel III/ Supplementary

Leverage Ratio (SLR)

Tier 1 Capital

Average Assets

Total Leverage Exposure

Tier 1 Capital

1http://www.stamfordadvisory.com/wp2/wp-content/uploads/2014/10/Basel-III-and-Asia-REVISED.pdf

Asia-Pacific BCBS China

Hong

Kong Taiwan Australia Singapore Indonesia Malaysia Thailand Philippines India Korea Japan New Zealand

Introduction 15-Jan 14-Jan 15-Jan TBD 15-Jan 15-Jan TBD TBD TBD TBD 15-Jan 15-Jan TBD TBD

Initial Phase-in % 60% 60% 60% TBD 100% 60% TBD TBD TBD TBD 60% 60% TBD TBD

100% compliance 19-Jan 19-Jan 19-Jan TBD 15-Jan 19-Jan TBD TBD TBD TBD 19-Jan 19-Jan TBD TBD

Sources: 1Moody’s, national regulators *For systemically important institutions, 100% compliance is required from January 2015

Liquidity coverage ratio implementation across APAC Countries

Implications on Bank Deposits Implications on Liquidity Structures

Operating Accounts

• Interpretation that banks may not be able to net off loans with deposit

positions

• Distinction between core operating deposits and non-operating deposits

(i.e. liquidity value).

Overlay Pool

Operating Accounts

increased costs, or legal

reviews of existing structures “LCR Friendly”

Pool

4 Key Regulatory and market Changes affecting Liquidity Management & Treasury Practices

Key Tax changes affecting Liquidity Management &

Treasury Practices

Key Tax changes affecting Liquidity

Management & Treasury Practices

Michael Velten, 10 March 2016

Navigating the changing tax landscape

6 Key Tax changes affecting Liquidity Management & Treasury Practices

Introduction

Tax trends

• Tax has been front page news for most of the past 4 - 5 years; and a

focus of public attention and domestic and international political

action (and reflects continued revenue pressures on Government)

• According to the Lloyd’s Risk Index 2013, tax uncertainty was the

greatest fear for global businesses following public and political

exposure and debate

• A result has been a rewrite of important aspects of the international

tax rules via the OECD’s BEPS project and for instance a move

towards global tax transparency (i.e. CRS)

• In Asia we continue to see domestic tax reforms (e.g. GST/VAT)

and increased tax audits and enforcement; although often that is

balanced against incentivising investment (e.g. RTC) and/or certain

activities (e.g. R&D). Challenges in tax law development and

administration remain in some locations

• The response to this has been an increased focus on tax as a risk

by MNC’s; including governance and tax risk management (esp.

operational taxes)

© 2016 Deloitte & Touche LLP

Google, Amazon, Starbucks: The rise of

‘tax shaming’ [BBC News Magazine 21

May 2013] “Everything these companies are doing is legal.

It's avoidance and not evasion. But the tide of

public opinion is visibly turning. Even 10 years ago

news of a company minimising its corporation tax

would have been more likely to be inside the

business pages than on the front page.”


Treasury centres


Incentives


Tax incentives for treasury centres in Asia

Malaysia and Thailand: Available incentives

Malaysia

• Corporate tax rate: 24%

• Treasury Management Centre (“TMC”) Incentive:

− 70% tax exemption for 5 years for qualifying

treasury services rendered to related companies

− Also: withholding tax, stamp duty and personal

tax incentives

• Application period: 8 October 2011 – 31 December

2016

• Market observations:

− Very few TMC’s have been approved

− Extension of TMC incentive unclear


Thailand

• Corporate tax rate: 20%

• International Headquarters (“IHQ”) Incentive:

− Qualified activities include: treasury centre

services

− 0%/ 10% CIT rate (for 15 years) on qualifying

income

− Also: Business tax and withholding tax exemption

and15% personal tax rate for expatriate

employees

• Market observations:

− Bank of Thailand approval needed for a treasury

centre

− At least one approval is understood to have been

granted



Hong Kong: Corporate Treasury Centre (“CTC”)

Regime Historic tax “limitations”

• No tax concession for corporate treasury activities,

unlike competitors in the region (such as Singapore)

• Asymmetric tax treatment of interest income and

interest expense

• Limited (comprehensive) tax treaty network – e.g.: 1

in 2003; 5 in total in 2008


Recent developments

• CTC regime proposed in Hong Kong Budget 2015:

− Concessionary tax rate of 8.25% on qualifying

corporate treasury profits

− Interest payable to non-resident associated

companies to be deductible, subject to conditions

− The Inland Revenue (Amendment) (No.4) Bill

2015 is being read by the Legislative Council; and

is pending enactment (HKMA targets to have the

bill passed and enacted as law in mid 2016;

subject to LegCo)

• Current tax treaty network: now 34 Singapore Budget 2016:

• The Singapore FTC incentive is due to expire on

31 March 2016

• An extension to the FTC incentive is anticipated

in the Singapore Budget to be delivered on 24

March 2016


• Home country considerations – e.g.: CFC rules, participation exemption etc.

• Interest withholding tax “leakage”

• Net corporate income tax expense in RTC location

• GST/VAT leakage (e.g. non-recoverable GST)

• BEPS impacts (e.g. restrictions on interest deductibility)


Key tax drivers: A recap


Total tax cost modelling is important; RTC “headline” concessionary rates are

only part of the analysis


BEPS


Status and impact on

treasury


• Recommendations will limit interest deductions based on either group attributes,

fixed economic ratios or both. Number of countries who will adopt these Action 4

recommendations is uncertain

• Many groups are reviewing internal financing structures and simplifying financing

arrangements

BEPS actions: Impact on Treasury

. © 2016 Deloitte & Touche LLP

Action item

1 Digital economy

2 Hybrid mismatch arrangements

3 Controlled foreign company rules

4 Interest deductions

5 Harmful tax practices

6 Preventing tax treaty abuse

7 Avoidance of permanent establishment

status

8 TP aspects of intangibles

9 TP aspects of risk and capital

10 TP for high risk transactions

11 Methodologies and data analysis

12 Disclosure rules

13 TP documentation

14 Dispute resolution

15 Multilateral instruments

Recommendations for changes to domestic law, as well as double tax treaties, to

address hybrid instrument mismatches. Will affect the after-tax cost of hybrid

financing. Certain arrangements in US groups may be unintentionally impacted (e.g.

if hybrid entities are involved)

• Key changes in BEPS recommendations:

• Decreased importance of contractual allocations of risk; rather control of

risk determines risk allocation. Focus is on managing and controlling risk

• Emphasis on where functions are carried out and where people are

located rather than legal location of risk

• Transaction should be respected if it has the “fundamental economic

attributes of an arrangement between unrelated parties and commercial

rationality”

• One example concludes that when borrowing from an affiliate and a 3rd party

and the 3rd party loan price reflects an implicit group credit support, the related

party loan should be priced commensurate with the 3rd party loan, i.e. no group

synergy should be factored into the i/c interest rate

Recommendations propose new 3-tier approach to TP documentation:

• Country by country report - Key financial information on MNC affiliates on an

aggregate country basis with an activity code for each affiliate

• Masterfile - Key information about the group`s global operations including a

focus on 3rd party and intercompany funding arrangements

• Local file – Detailed local analysis of the transactions


BEPS actions: Movement in Asia

Country Type

Australia First mover

Peoples Republic of China First mover

Japan First mover

South Korea First mover

India Fast follower

Hong Kong Slow follower

Taiwan Slow follower

Singapore Slow follower

Indonesia Slow follower

Malaysia Slow follower

Philippines Slow follower

Thailand Slow follower

Vietnam Slow follower



Singapore: Position on key actions

BEPS: Implementation


Action Singapore’s position

1 Digital economy Unclear, may consider GST on e-services

2 Hybrids Not expected to adopt recommendations

3 CFC No change expected

4 Interest Unclear, unlikely to adopt in short-term

5 Harmful tax practices Singapore tax incentives to be examined as follow on work in 2016. Government believes

incentives are all substance based, to be seen whether OECD agrees. On transparency, taxpayer

agreements will be shared via AEOI from 2018

6 Treaty abuse Minimum standard likely to be adopted. Singapore has preference for Principal Purpose Test

7 PE status Unlikely to actively push to adopt, but have indicated that the new version of the PE article may

start to find its way into Singapore’s treaties in the future over time

8-10 Transfer pricing To consider adoption of updates to OECD TP Guidelines on case-by-case basis

11 Monitoring Government considers this as important

12 Mandatory disclosure Unclear


Singapore: Position on key actions (cont.)

BEPS: Implementation


Action Singapore’s position

13 CbC, master / local

file

No public announcement on CBCR yet, but Government is consulting widely and appears to

generally be in favour of adoption. Possible that a consultation document may be released

following private/closed consultations

Assuming consultation proceeds as expected, Singapore would likely look to adopt CBCR in

OECD prescribed format once sufficient OECD/G20 countries adopt, potentially from 2017

Concerns about use of taxpayer data by other tax authorities to initiate “profit grabs” / disputes

TP documentation requirements updated in January 2015

14 Dispute resolution Will adhere to minimum standard, considering mandatory binding arbitration

15 Multilateral instrument Actively participating

In general, an increased focus on BEPS in Singapore:

• More proactive interactions from Government with taxpayers and interested parties

• Ministry of Finance appear to be taking a more active role at the OECD (e.g. on the multilateral instrument)

• Media interest growing


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About Deloitte Southeast Asia

Deloitte Southeast Asia Ltd – a member firm of Deloitte Tohmatsu Limited comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and

Vietnam – was established to deliver measurable value to the particular demands of increasingly intra-regional and fast growing companies and enterprises.

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A Broader Look at Notional Pooling, China & India

A look at Notional Pooling Structures Notional Pooling has traditionally been a popular cash and liquidity management technique. In recent years, evolving

regulatory, tax and accounting issues have resulted in tightening requirements around notional pooling and therefore

incremental costs and administration burdens on the corporate end users.

Top Tips for Corporate Treasurers

Leverage Alternative

Liquidity Programs to

achieve the same

centralization objectives

(e.g. Physical Cash

pooling, Payment /

Receive on behalf (POBO))

Select the most suitable

Header company and

Location for the Notional

pool

Review participants

involved in a Notional

pool structure – consider

using Single entity

structures

Use one bank as a

holistic cash and liquidity

management provider

Consider:

• Do the costs now outweigh the benefits of

having a notional pooling program?

(BASEL III)

• Are there inconsistencies between how

banks treat notional pooling programs?

(IAS 32 vs. US GAAP)

• Are you facing incremental questions on

where the participants in the pool are

incorporated?

20 A Broader Look at Notional Pooling, China & India

Case Study : RMB Cross Border Pooling

Header entity is

registered in the

SFTZ

China outside

SFTZ

In House Bank

Offshore RMB (CNH) A/C

RMB Special A/C

Domestic

TBA

Sub A/C 2

Domestic

TBA

Sub A/C 1

Domestic

TBA

Sub A/C 3

RMB General A/C

(Domestic Concentration Header A/C)

Hong Kong

China

Domestic Pool

Automatic

Sweeping

Domestic TBA

(concentration)

Amt. matched to

POBO req

FX where

required

Excess cash

positions*,

repayment

*Services are subject to regulatory restrictions and market

The Company

• Fortune 500 company with successful manufacturing

& consumer franchise in China

• Global In House Bank (IHB) managing global cash

flows and Payment on Behalf (POBO) including

China

The Solution

• RMB Cross Border Pooling was implemented

allowing for cross border bi-directional intercompany

loans between the IHB and its China subsidiary

• These liquidity flows were integrated with the

Domestic CNY POBO solution managed by the

China subsidiary

• Funding for Domestic Pool managed globally for Just

in time funding into China

Global pool

In House Bank

USD/ EUR Funding A/Cs

The Benefits

• Minimal cash buffers left in local subsidiary accounts*

• Full utilization of cash flow globally, with exact funding

• Assurance that funds reach China the same day via

Citi’s automated sweeping program


Liquidity Management in India

Source: Deloitte, 2015 India Corporate Treasury Survey Source: Deloitte, 2015 India Corporate Treasury Survey

Lack of visibility still #1 challenge for corporates in

India

Taxation and Companies Act related laws necessary, but continue

to be a challenge

Source: Deloitte, 2015 India Corporate Treasury Survey

Best in Class Solutions

Multi-bank Solutions

Multi-entity Cash

Concentration

Solutions

Fragmented

Cash, Multiple

Banking Partners

SWIFT not widely

used between

banks

Cash reporting

requires manual

efforts

Liquidity Management Landscape

Increased

operating costs

from localizing

global platforms

Companies Act law* being further

relaxed

* Some relaxation for private entities to conduct intercompany transactions


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