3 minute read 16 Jul 2021
ey-luxembourg-react-call-capital-multinationals

React to capital calls of multinationals

By Christian Schlesser

EY Luxembourg Partner, International Tax and Transactions Services Leader

Passionate about tennis, soccer and cooking good food.

3 minute read 16 Jul 2021
Related topics Tax

Recent tax and transfer pricing reforms require a complete re-evaluation of the means in which multinationals design their funding structures. In addition, cash mobilization has become a priority for multinationals trying to manage funding needs around the world.

What were the latest capital structure decisions taken by multinationals? 

Oana Popescu: From the early stages of the pandemic, we noticed that the primary concern of our clients was to address the liquidity needs of their organizations. Multinationals active in sectors such as retail, hospitality and automotive, needed to raise funding at high interest rates on the market to secure the short-term requirements of their operations. In this respect, the cash pool has been used extensively to push those funds down in a cost-efficient manner to those subsidiaries most in need. The role of the cash pool leader became critical in the management of credit limits down the chain. On the other hand, we have noticed that borrowers from less impacted sectors and/or presenting strong credit profiles were looking to re-finance their debt in order to benefit from the lower interest rates available on the market, including those offered via European Central Bank programs for non-financial corporates with attractive interest rates and an optimized funding costs. 

How could business needs be aligned with tax constraints arising from new international rules? 

Oana Popescu: Once business decisions are implemented, multinationals must adjust their transfer pricing policies accordingly. Given the unprecedented situation in which decisions were recently made, new complexities have had to be assessed from an international tax perspective. Luxembourg treasurers had to manage the amounts of internal/ external debt and where it was raised. These decisions led to different withholding tax or interest limitation implications depending on how the latest international tax standards were implemented in the relevant domestic legislation. Moreover, some Luxembourg treasurers had to determine to what extent they could deviate from existing transfer pricing studies. This topic is particularly complex when long-term funding contracted at higher interest rates is injected into existing cash pools bearing typically low interest rates. The complexity arises from the fact that those specific transactions can create accounting losses at the level of the cash pool leader. The question often raised is whether those losses would be acceptable from a tax perspective. Although in principle, the OECD guidance on the transfer pricing implications of the Covid-19 pandemic should be a good reference in answering that question, it does not provide explicit guidance for financing structures. 

Which topics are treasurers preparing for in the upcoming months? 

Christian Schlesser: Several developments will have a significant impact on any multinational’s capital structure. We expect the following trends to be particularly relevant for Luxembourg treasurers going forward: 

  • Transfer pricing policies for cash pools (including netting benefit allocation) and financing structures will be subject to increased scrutiny from tax authorities, pursuant to the publication of the OECD guidance on financial transactions in February 2020. The guidance has already been endorsed by numerous jurisdictions that are part of the OECD BEPS Inclusive Framework (e.g., Belgium, Ireland, the UK) and we are seeing tax authorities already ask the questions arising from those new rules, even during tax audits that date before the new rules were published. Tax authorities increasingly prepare their audits of future years by collecting relevant information in previous years’ audits. 
  • Scrutiny will continue to be triggered on topics such as the commercial rationale of financial transactions and the financial capacity of borrowers/guarantors to service their debt/guarantee. Since the commercial rationale principle had already been included in article 56 bis of the Luxembourg Income Tax Law, we expect Luxembourg tax authorities to continue to bring it up in their inquiries. 
  • Globally, treasurers should be prepared to be increasingly challenged on the beneficial ownership of interest income streams based on, either the application of the principle purpose test to companies that claim a reduction of withholding tax rates provided in double tax treaties or, apparently undercapitalized entities. As such, it makes sense to review group structures to simplify and enhance the group cash flow and eliminate entities that have no purpose. A robust and simple treasury organization will also reduce the time spent to respond to documentation requests from foreign tax authorities based in those countries where a withholding tax reduction is requested. 
  • The BEPS 2.0 initiative will introduce global minimum taxation requirements, denying interest deductions or introducing withholding taxes if the income is subject to a low tax rate at the level of the recipient.
This article has been published in ATEL magazine, edition 106.

Summary

Recent tax and transfer pricing reforms require a complete re-evaluation of the means in which multinationals design their funding structures. In addition, cash mobilization has become a priority for multinationals trying to manage funding needs around the world.

About this article

By Christian Schlesser

EY Luxembourg Partner, International Tax and Transactions Services Leader

Passionate about tennis, soccer and cooking good food.

Related topics Tax