While this blog won’t attempt to provide an extensive review of all the internal-alliance partners for treasury, there is one that the author believes is more dense with potential than most and yet is almost universally neglected – that between treasury and tax.
When this pairing is suggested to an audience their typical first response is that tax is a specialty and so – in the hustle and bustle of daily business – treasurers are content with confining their communications with these specialists to infrequent occasions in which tax compliance is the central concern.
Many readers will be old enough to remember when treasury had this label as well – even among some chief financial officers. It was to be consulted only after special occasions, such as when an acquisition was finalised or an investment holding turned sour. Yet treasurers should beware of making such a mistake. The fact is that tax is undergoing the same shift toward a strategic role that treasury has been experiencing and could use an empathetic ear.
A close tax relationship holds considerable potential for treasury to extend its value, magnify its strategic impact and strengthen its skill-set. The first step in establishing or strengthening that alliance is to understand tax’s perspective of the world.
A company’s tax department is likely to be faced with many, if not all, of the following challenges:
- Reducing, avoiding, or at least deferring taxes triggered by cash flows.
- Keeping the effective tax rate down as company income shifts overseas.
- Complying with complex regulations in an environment of heightened scrutiny. To these have been added the Foreign Account Tax Compliance Act (FATCA) and Foreign Bank Account Report (FBAR).
- Taking advantage of cross border tax planning opportunities.
- Analysing proposed deals and their expected returns.
- Forecasting the tax payments (and maybe refunds).
- Advising senior management on optimal structure to achieve corporate objectives.
Any of the above sound familiar? They reflect the same drivers and issues that financial professionals commonly face, albeit from a different angle. There is no other department at most global companies in which so many common interests exist as with treasury. These are people to get to know well.
Advice on how to maximise the Tax relationship necessarily varies with each company’s unique profile, but can be distilled it into three steps:
- Master the tax perspective.
- Agree on the points of intersection.
- Nurture, nurture, nurture
Master the tax perspective:
Note that the first step does not read ‘master tax issues’. The aim is not to become a tax practitioner but to understand what matters most to treasury in the business. The list of tax challenges above can serve a good starter. In beginning here, treasurers can gain the ability to anticipate tax impacts, expand their repertoire of strategic solutions, and maybe even learn about issues that they were not aware of but that might impact treasury. The application of these benefits is evident among top performing treasurers when it comes time to conduct a financing or undertake or assess a proposed liquidity transaction. It is also possible to recognise ways in which the treasury team’s skill set can aid tax. For example, tax often focuses too single-mindedly on tax planning in a business deal; treasury can introduce the aspect of operational feasibility.
Agree on the points of intersection:
With this basis of understanding established, it’s quite natural to then proceed to elaborating on the specific points of intersection between treasury and tax. Most of the issues that make up the tax perspective have a corresponding treasury aspect. A basic ‘back-of-the-napkin list’ would include:
- Improvement of the company’s cash position.
- Analysis of acquisition/divestiture opportunities.
- Evaluation of opportunities in overseas markets.
- Management of heightened regulatory scrutiny.
- The effect of cash flows on the business.
- Optimisation of in-house banking (IHB) and cross border transactions.
- Management of risk.
- Negotiation of bank covenants and bond indentures.
Again a series of starter questions can jump start this step:
- What actions is treasury taking that could compromise tax planning?
- What opportunities are there to structure the business to improve the value of cash pooling and intercompany lending arrangements?
- What tax sensitivities should treasury be aware of when negotiating bank covenants or bond indentures?
- What is the most efficient process for completing FBAR reporting? Treasury holds much of the required data; tax has processes and software for meeting this requirement.
Establishing mutual interests leads to mutual acknowledgement that these are issues of importance. Tax is more likely to think of treasury when the topics come up and vice versa. That helps form a long-term mindset of cooperation.
Nurture, nurture, nurture:
This brings us to the need to ensure the fruits of all this effort won’t whither on the vine. The sense of discovery and opportunity that sparks the initial meetings may naturally decline over time, but it is critical to nurture the relationship for the long term.
So treasurers should seek regular meetings with their tax counterpart. Narrow the meeting subjects so that it produces meaningful discussion of a few important issues rather than a less than satisfactory discussion about many. Both parties should aim to identify the ways they can leverage each other.
For example tax and treasury share several skill sets, including risk management and corporate finance, as well as using many of the same tools and analytical approaches. This suggests inter-departmental rotations and cross-training can produce mutual benefits.
Understanding treasury from a tax perspective is a basic necessity for achieving the best treasury results and is key to securing a strategic partner role for treasury. Consider it an investment of time that is sure to yield high returns for treasury and ultimately for the organization as a whole. Tax might not have a reputation as an exciting subject on the cutting edge of global finance, but the wealth of common interests with treasury is undeniable and treasurers will benefit greatly from establishing an active dialogue with them. Don’t let their statutory countenances fool you – tax people throw some of the best after-hours parties around!
Businesses should look to identify the strategic opportunities presented by GDPR rather than simply seeing regulatory hurdles as an additional constraint, costs or obligation for the compliance officer.
There has been an uptick of treasurers inquiring about interest rate risk management in recent months as interest rates in the US and UK have started to show a rise in momentum, said Chatham Financial at the annual Bellin treasury conference.
PSD2 is set to remake the EU payments marketplace. This deliberate public policy exercise is going to regulate and demonstrate what next generation financial crime competencies must be and cement the standard going forward.
The new EU General Data Protection Regulation of the European Union will have a wide impact on how data of EU citizens can be stored – and business are well advised to not take it lightly.