Interesting Times for European Treasury Tax: the Treasurer's Perspective
Over the last 15 or so years, I have written a number of articles entitled ‘Interesting Times for Treasury Tax’ with these mainly having been written from the perspective of, and for the benefit of, tax practitioners. In this and subsequent articles, however, I will be writing from the treasurer’s perspective when dealing with the taxation of treasury transactions in both a local jurisdiction and a European cross-border context.
The scope of treasury transactions is broad and ranges from the relatively straightforward, e.g. intra-group lending and hedging foreign currency payables/receivables, to the highly complex, e.g. raising new funds using complex debt instruments such as convertibles and hybrid debt.
From a tax perspective, the issues associated with treasury transactions are equally as wide ranging. It is important to note, however, that just because a treasury transaction is relatively straightforward, it doesn’t necessarily follow that the tax analysis will also be straightforward – and in some cases it can be exactly the opposite.
In considering the tax analysis of treasury transactions the overall aim is a combination of tax efficiency and tax neutrality, and we need to be able to do this in both a local jurisdiction and a European cross-border context.
Achieving this within a particular jurisdiction is usually possible, although it can be particularly frustrating for a treasurer when having to cope with differing jurisdictional tax regimes – a transaction that is treated in a particular way in one jurisdiction can be treated completely differently in another jurisdiction.
In a cross-border context, the position becomes much more complex and there are many instances of transactions between European jurisdictions that give rise to a tax mismatch of some kind. Tthis has become increasingly the case since the introduction of IFRS accounting standards a few years ago.
When raising external financing, the treasurer’s key tax aims are firstly to achieve full relief for financing costs/costs of raising the finance and, secondly, to suffer no irrecoverable withholding taxes. But this isn’t always the case: for example, a special purpose finance company is used to raise the funds and there are restrictions on the deductibility of the financing cost.
When lending intra-group, the key tax aims are two-fold: first, to secure that the lender is taxed and the borrower secures tax relief for the financing charge; and second, to ensure that there are no irrecoverable withholding taxes. This can be a challenge: for example, the lender is taxed on an accruals basis but the borrower only obtains relief on a paid/redemption basis.
Taxation of derivatives is still relatively new territory from a legislative perspective: some jurisdictions have sophisticated and well-developed regimes, e.g. the UK, while others, e.g. Luxembourg, have no special rules. This can give rise to difficulties when, for example, hedging payables and receivables both in terms of a local hedging policy, i.e. different treatments in different regimes, and a centralised hedging policy, i.e. cross-border mismatches.
What we are looking at here is hedging in one jurisdiction assets that are held in other jurisdictions. For example, a UK plc may hedge net assets of its US and European subsidiaries.
The ‘bad’ answer here is that profits and losses on the hedge will have to be brought into account for tax purposes as they are recognised in the accounts, which could give rise to a tax mismatch. In the UK there are special tax rules that, in broad terms, link the taxation of the hedge to the assets being hedged, but is this always the outcome in other European jurisdictions?
The accounting scene has changed considerably in recent years, largely as a result of the introduction of IFRS accounting standards. While this has resulted in consistency in terms of consolidated accounts across Europe, this isn’t necessarily the case with individual company accounts, which are the accounts that matter from a tax perspective. When we look at the local accounting standards applying to individual company, we find that there have been a number of approaches in terms of harmonising local standards with IFRS and this has given rise to new tax mismatches.
How might we start to resolve these issues? A much talked about option would be to move towards harmonisation of both local accounting standards and tax rules, i.e. a common European tax base. While both projects are currently under discussion, with the common tax base project perhaps being further advanced, there is no sign that either are likely to be implemented in the foreseeable future.
Which leaves the more likely option of gradual movement by EU member states towards harmonisation. While this might not be ideal, it does have the potential to be effective if there can be general agreement on the key areas of concern and in respect of which lobbying should be undertaken.
The likelihood is that current situation will prevail for some time to kind and that, accordingly, it will continue to be essential to undertake a detailed tax analysis to ensure that, wherever possible, tax efficiency and tax neutrality can prevail. And while it might not always be possible to resolve all of the tax issues, an early tax analysis can often enable these aims to be achieved without affecting the overall commercial objectives of the treasury transaction in question.