Corporate taxforum


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How does it impact your Belgian Finance company. Recent trends in the European tax landscape -
Relevant headlines of the Belgian tax reform 2012

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Corporate taxforum

  1. 1. Belgian Corporate Tax Reform:How does it impact your BelgianFinance company30 May 2012, DiegemSeminar Organised for ATEBPeter Moreau – Andy NeuteleersGuest Speaker Veronique Tai, President of the Belgian rulingCommission
  2. 2. Agenda► Introductions and welcome► Recent trends in the European tax landscape► Relevant Headlines of the Belgian Tax Reform 2012► Introduction of the Belgian Ruling Commission► Impact tax reform on Belgian Finance and Treasury company - Selected topics► Closing and Cocktails Page 2
  3. 3. Recent Trends in the European TaxLandscape► Governments seek additional revenue through tax increase and/or broadening of the tax base.► Introduction of more strict thin capitalisation rules► Introduction of other interest deduction limitation rules ► EBITDA interest limitation ► Limitation in interest deduction for acquisition of shares► Stricter (application of) anti-abuse rules - focus on “substance”► EU and OECD focus on double non-taxation through mismatches (e.g. hybrid) – “code of conduct”► Limitation on use of tax losses► More exchange of information► More tax and TP controversy – more aggressive tax audits► Aggressive tax planning under scrutiny – media coverage► Introducing NID (Italy)► Lowering tax rate and making tax regime more attractive (UK) Page 3
  4. 4. Relevant Headlines of the 2012 tax reform► Notional interest deduction► Thin capitalization rules► Anti-abuse legislation Page 4
  5. 5. Notional interest deduction Page 5
  6. 6. Notional Interest Deduction (NID)► Introduced in 2005 (applicable Tax Year 2007) to “replace” BCC regime► Deemed deduction on qualifying Belgian GAAP equity (reduced by items such as financial fixed assets, foreign branch equity, ...)► Deduction linked to 10 year OLO but capped to 3.8 % for tax years 2011 and 2012, for tax year 2012 NID rate is 3.425 % (3.925 % for SMEs)► Full carry forward (C/F) but limited to 7 years► Can not be used against abnormal or benevolent income ... (circular)► Budget Impact : ► Tax year 2010 NID : used16.3 Bio € with 2010 C/F: 12.6 Bio € (PV-QP 25/07/2011), ► Estimated total NID equity 2010 : minimum 330 Bio € (applying 4.973% on NID used)► Unique measure? No! The Netherlands, Luxembourg, Switzerland, Italy, ... have similar measures► Many other financing regimes & alternatives (EU & non-EU) exist Page 6
  7. 7. Notional Interest Deduction (NID) ( ) Interest Parent Loan - Interest Belgian NID Co (Foreign) Op Co Loan - + - NID and foreign tax credit Page 7
  8. 8. Notional Interest Deduction (NID) – NewRate Cap► Maximum NID rate is still based on 10 year OLO but capped► Reduction NID cap to 3% as of taxable year 2013 (accounting years > 30/12/2012) (as from taxable year 2015: NID rate will be determined by law) - 3.5% NID for SMEs► Would have been +/- 4.2% based on average 2011‘12 month’ 10 year OLO► Law of 28 December 2011 (Belgian official Gazette 30/12/2011)► Expected income … 1,620 Mio € (+/- 45.6% tax measures) Page 8
  9. 9. Notional Interest Deduction (NID) – NewCarry Forward abolished► Third program law relating to 2011 budget, still to be voted, but approved at government level► All non-used NID for accounting years > 30/12/2012 (taxable years 2013) is “lost” – abolishment of article 205 quinquies ITC going forward - no more carry forward► Companies with an existing “stock” of unused NID “C/F" for accounting years 31/12/2011 or accounting years ending < 31/12/2012 (taxable year 2012 and before) can still carry forward that stock, but subject to certain limitations ! (1 MIO € / 60-40)► These limitations are immensely complex to apply in practice and will result in a considerable amount of calculation work for the years to come ! – Impact on deferred tax assets ! Page 9
  10. 10. Basic principles to be applied for “C/F” stockNID – Accounting years < 31/12/2012► The calculation of the NID “C/F” to be applied in a particular year becomes a complete “separate operation” of the tax return. It becomes its last operation, and will thus be effected “AFTER” the deduction of any tax loss “C/F" (a reversal of the two operations, first NOLs and thereafter NID “C/F” thus vice-versa compared to the past)► The NID “C/F” to be used will be a function of (1) the existing 7 year limitation following the year the NID was created (2) a % of residual profit and/or the 1 Mio €-rule, the residual profit being the taxable profit left before the last operation (the imputation of the NID “C/F”)► NID “C/F” can always be applied on the first 1 Mio € of residual profit► The residual profit left after imputation of the first 1 Mio €, can only be reduced by NID “C/F” to a maximum of 60% - 40% remains taxable basis. Page 10
  11. 11. Next ...carry forward ?► The 7 year limitation continues to exist, meaning that NID C/F can not be used after 7 years beyond its year of inception, However “If part of the NID “C/F” that could have normally been used under the former law within the 7 year limitation cannot be used in a particular year as a result of the application of the 60/40 limitation, that part of the NID C/F becomes C/F “indefinitely”, that is without limitations in time”► On the other hand, if because of the reversal of the operations, the use of existing tax loss carry forwards (NOLs) prevent the timely use of NID “C/F” within the normal 7 year limitation, that part of the unused NID “C/F” is lost forever, thus affecting tax deferred assets if periodic income previsions do not foresee the use of NID “C/F” before expiry of the NOLs Page 11
  12. 12. Thin cap rules Page 12
  13. 13. Thin capitalization - General► To prevent tax avoidance by excessive leveraging, many countries have introduced rules to prevent thin capitalization (Thin Cap)► Two existing rules in Belgium ‘7/1’ (‘1/1’)► Under the current legislation, a specific 7/1 Thin Cap applies where the beneficial owner of the interest is a person who is not subject to tax or if the income is subject to a tax regime that is significantly more advantageous compared to the Belgian tax regime (Art 198,11° ITC)► Current Thin Cap almost never applies, because of a “too narrow beneficial ownership concept (direct-indirect)” & EU/treaty context► The new thin cap is estimated to generate 100 Mio € income► Change of thin cap ratio from ‘7:1’ now to ‘5:1’ and broaden scope► Referral to an ‘annex to the budget’ – with reference to PPL structures Page 13
  14. 14. Thin capitalization - New art. 198, 11° ITCProgram Law of March 29th 2012Dutch French“onverminderd de toepassing van de artikelen 54 en « sans préjudice de l’application des articles 54 et 55,55, de betaalde of toegekende interesten van leningen les intérêts d’emprunts payés ou attribués si, et dansindien, en in de mate van die overschrijding, het totale la mesure de ce dépassement, le montant total desditsbedrag van deze leningen, andere dan obligaties of emprunts, autres que des obligations ou autres titresandere gelijksoortige effecten uitgegeven door een analogues émis par appel public à l’épargne et autresopenbaar beroep op het spaarwezen en andere dan que les emprunts octroyés par des institutions visées àleningen toegekend door instellingen bedoeld in artikel l’article 56, § 2, 2°, excède cinq fois la somme des56, § 2, 2°, hoger is dan vijf maal de som van de réserves taxées au début de la période imposable etbelaste reserves bij het begin van het belastbare du capital libéré à la fin de cette période, lorsque lestijdperk en het gestort kapitaal bij het einde van dit bénéficiaires effectifs de ceux-ci :tijdperk, wanneer de werkelijke verkrijgers ervan : ► soit, ne sont pas soumis à un impôt sur les► hetzij, niet onderworpen zijn aan een revenus ou y sont soumis, pour ces revenus, à inkomstenbelasting of, voor die inkomsten, un régime de taxation notablement plus onderworpen zijn aan een aanzienlijk gunstigere avantageux que celui résultant des dispositions aanslagregeling dan die welke voortvloeit uit de du droit commun applicables en Belgique; bepalingen van gemeen recht van toepassing in ► soit, font partie d’un groupe auquel appartient le België; débiteur »► hetzij, deel uitmaken van een groep waartoe de schuldenaar behoort”English (free translation)“notwithstanding the application of the articles 54 and 55, any interest paid or attributed on loans, if, and in so far they are excessive,the total amount of these loans, other than bonds or similar securities which are issued to the public, et other than loans granted byinstitutions aimed by art. 56, § 2, 2°, exceeds five times the sum of the taxable reserves at the beginning of the taxable period and ofthe paid-in capital at the end of that period, where the beneficial owner of these:► either is not subject to income tax or, for these income, is subject to a far more beneficial regime on interest income than in Belgium;► either is part of a group to which belong the debtor” Page 14
  15. 15. Thin capitalization – New► The scope of existing thin cap rules will be broadened ► Change of thin cap ratio from 7:1 to 5:1 ► Not only for loans with beneficiaries in tax havens but also for intra-group loans, irrespective of tax treatment of interest ► Debt includes all loans, with the exclusion of bonds, other publicly issued borrowing instruments and loans granted by financial institutions ► In case of indirect loans or guaranteed loans, the determination of the beneficial owner will be crucial► Not applicable for: ► Companies engaged in leasing of movable goods ► Companies mainly engaged in factoring and real estate leasing, provided ► They’re part of financial sector, and ► Loans are effectively used for factoring / leasing ► Companies mainly engaged in execution of projects of public-private cooperation Page 15
  16. 16. Thin capitalization – New► How to calculate: ► Qualifying equity : taxed reserves at the start of the financial year + paid-up capital (incl. share premium) at the end of the financial year► What if threshold is exceeded: ► Interest expense on exceeding part is not tax deductible ► To be calculated on pro rata basis► Preliminary assessment of new rules ► Thin cap rules are less strict than in other EU / OECD countries ► In case of substantial leverage in Belgium, it will be necessary to check the qualifying debt/equity ratio to verify whether equity needs to be reinforced → definition of equity provides opportunity for planning Page 16
  17. 17. Thin capitalization – New► Entry in force is postponed ► Date will be determined by the King ► At the latest at 1 July 2012 ► Problem of cash-pooling/intra-group financing companies/factoring should be solved by then Page 17
  18. 18. Thin capitalization – New - RegulationScoping – Interest & loan► No longer limited to interest paid to beneficial owner, subject to no income tax or a far more beneficial regime for interest income► Also for intra-group loans (irrespective of tax treatment of interest at the level of the beneficiary) ► Definition of group companies in accordance with Art. 11 Companies Code ► Connected, related companies (concept of control) ► Consortia (companies under central management) ↔ Initial version: (broader) BCC definition ► Excluded: loans contracted by ► Leasing companies (RD55) under supervision of BNB/NBB and FSMA insofar the loans relate to leasing activities ► Factoring companies under supervision of BNB/NBB and FSMA insofar the loans relate to factoring activities ► Companies primarily active in the field of public-private cooperation Page 18
  19. 19. Thin capitalization – New - RegulationScoping – Debt & equity► Change of thin cap ratio from 7:1 now to 5:1► Debt ► All relevant “loans”, with the exclusion of ► Publicly issued bonds ► Other publicly issued or comparable borrowing instruments ► Loans granted by certain financial institutions (banks, insurance companies and other types of financial institutions listed in Art. 56, §2, 2° ITC 92)► Equity = fiscal equity ► The sum of the taxable reserves at “the beginning of the taxable period” and the paid-in capital “at the end” of the taxable period ↔ Initial version: accounting equity ► Special provision neutralizing the decrease of taxed reserves in case of parent-subsidiary restructurings (merger goodwill) Page 19
  20. 20. Thin capitalization – New - Debt & equity –Exemptions based on the creditor► “Other than loans granted by... institutions meant in ITC 56 § 2, 2° ITC”. These are:1. Regulated Belgian or EU credit institutions2. National Bank of Belgium3. Herdisconterings- en Waarborginstituut4. Regulated Belgian or EU mortgage companies5. Regulated Belgian or EU consumer credit companies6. Regulated Belgian or EU insurance companies7. FPIM and regional investment companies Page 20
  21. 21. Thin capitalization – New - Debt & equity –Exemptions based on the debtor► “Not applicable on loans received by...”1. Regulated movable asset leasing companies2. Companies of which a) the principal activity consists of factoring or immovable asset leasing and this b) within the financial sector and c) to the extent that the received funds are effectively used for leasing and factoring activities. STRICT!!3. Companies of which the principal activity consists of executing public- private cooperation projects Page 21
  22. 22. Thin capitalization – New – Indirect loans &guaranteed loans – Look THROUGH !► In the case of loans guaranteed by party x or loans whereby a party x has provided the lender with the proceeds to finance & whereby party x partially or fully bears the risk, then party x will be considered the beneficiary owner, unless the guarantee or the indirect funding did not have “tax avoidance” as its principal motivation► Concept of guaranteed loans to include in I/C debt, is “extremely soft” as it’s easy to evidence lower cost of funding ≠ other jurisdictions ≠ plantation patterns (US law)► Indirect funding (B to B) comparable to old “anti-channeling” provisions Page 22
  23. 23. Thin capitalization – NewNo Netting ?► Future of Belgium as location for financing centers? ► Future of cash pooling and intercompany factoring? ► No netting (no Dutch 10d-type rule) ► Factoring/leasing exclusion: too restrictive scope of application ► No tax consolidation (double taxation) ► Legislative change in progress to ► Introduce netting (only on excess of interest-out vs. interest-in) ► For interests paid/received as part of a centralized treasury group agreement Page 23
  24. 24. Thin capitalization – Amendments forTreasury Centers (1)► A special provision (exception) is inserted for central treasury & financing companies to the extent they are involved in daily treasury activities or treasury management (cash pooling), within a group (as defined under Article 11 Companies Code)► As regards such financing (daily cash pooling & others) as part of a central treasury management within a group (Article 11 Companies Code), the amount of interest considered paid & attributed for purposes of the thin cap is calculated as the difference between: ► Interests paid (expensed) to group companies (not being financial institutions) ► Interests received from group companies as part of a central treasury agreement (not being financial institutions) Page 24
  25. 25. Thin capitalization – Amendments forTreasury Centers (2)► When calculating this positive difference, interests relating to group companies that are not subject to tax or not subject to a foreign tax similar/comparable to Belgian tax or based in a country where the common tax regime is considerable more advantageous regime (EEA countries being excluded from the latter), are not taken into account► The companies concerned need to clarify their used financing & treasury group model in a treasury agreement (raamovereenkomst/convention cadre) concluded between group members Page 25
  26. 26. Thin capitalization – Amendments forTreasury Centers (3)► In this interco agreement the group co’s explain the used financing model and the activities qualifying within central treasury management. This document is required for the tax audit of the netting exception. The agreement a.o. needs to explain: ► The treasury model as regards the investment/placement or redistribution of excess cash of certain group co’s with other group co’s ► The treasury model as regards the guaranteeing of third party loans with group co’s ► The way “netting” is achieved between incoming/outgoing group debt/receivables ► The principles & modalities applied for remunerating the model► In other words “Transfer Pricing” & a solid interco agreement become very relevant => APA’s are best considered Page 26
  27. 27. Thin capitalization – Amendments forTreasury Centers (4)► Central treasury management is considered to be the management of “Daily” treasury transactions or short-term treasury management and even exceptionally long-term treasury management in order to account for specific circumstances applicable under normal treasury management► Transactions not qualifying under these circumstances are subject to the general Thin cap rule, then the netting rule does not apply Page 27
  28. 28. Thin capitalization – Amendments forTreasury Centers - Example B/S (in -000-) P/L “only related to central treasury agreement”Receivables LT 125 Equity 125 Fin. Costs 4,000 Fin. Income Group Co’s 3,000 Group Co’sReceivables ST 1,000 Debt ST 1,000 Group Co’s 700 Group Co’s 800 Fin. costs 1,000 Fin. Income 300 Non-group Co’s 300 Third parties 200 others SHT Tax haven Bank 500 Fin. Income 200 1,125 1,125 Related banks Fin. Income 2,000 Other 5,500 5,500 Ø Normal Thin cap: 4,000 * 800 – (5 * 125) = 875 800 ØNew Thin cap: (4,000 – 3,000) * 800 – (5 * 125) = 218.75 800 Page 28
  29. 29. New anti-abuse legislation Page 29
  30. 30. 2012 Tax reformNew anti-abuse legislation► “Right to choose least tax way” (Brepols doctrine)► Original provision (art 344 §1) adopted in 1993 ► Recharacterization of transaction(s), when aim of legal characterization of the parties opted for is tax avoidance ► Taxpayer may prove legitimate needs of a financial or economic nature for the chosen legal characterization ► Limited application in practice due to strict legal approach adopted in case law of Supreme Court : need for similar legal consequences (impossible for one-step transactions and difficult for step-by-step transactions unless (near-)simulation) Page 30
  31. 31. 2012 Tax reformNew anti-abuse legislation► Modification of the general anti-abuse provision : ► Abuse of tax law ► Avoidance of the application of provisions of ITC 92 or RD/ITC 92 (taxation vs. tax benefit) ► Through legal and non-simulated legal acts ► Approximating to taxable acts vs. acts not benefiting from a tax benefit ► Not in line with the objectives of the tax provision ► Avoidance of Belgian income tax as sole material purpose Page 31
  32. 32. Comparing Old vs. New Old provision New provisionObject A legal act or separate legal acts A legal act or set of separate legal acts establishing the same operation establishing the same operationNon-opposability Characterization of legal act(s) Legal act(s)Burden of proof Tax avoidance of characterization Abuse of tax lawtax authoritiesCounterproof of Legitimate financial or economic needs Other motives than income taxthe taxpayer avoidanceConsequence Re-characterization in an act with Restore the tax basis and tax identical or similar legal consequences calculation in accordance with the purpose of the tax provision as if there was no abuse Page 32
  33. 33. 2012 Tax reformNew anti-abuse legislation► Modification of the general anti-abuse provision : ► Inspiration in ECJ case law – aimed at wholly artificial arrangements ► Not pursuant the economic goals of the tax provision; or ► Not pursuant the economic reality; or ► Not at normal economic or financial conditions ► Entry into application ► Tax year 2013 ► Tax year 2012 if accounting period is closed on or after 6 April 2012 (date of publication) ► Similar provisions for registration duties and inheritance tax► Action points: ► Assess impact of extended reclassification on structures and operations ► Substance and business rationale Page 33
  34. 34. Introduction of the ruling commission Page 34
  35. 35. Impact on Belgian Finance and TreasuryCompany Page 35
  36. 36. Impact on Belgian Finance and Treasurycompany : General► Lower NID rate and no more carry forward – increase in effective tax rate ?► Thin capitalization limitations – increase in effective tax rate ?► Anti-abuse legislation - impact on tax-effective financing ? Page 36
  37. 37. Why is this hot in transfer pricing?► EY’s 2010 Global Transfer Pricing Survey ► Our in-the-field experience confirms this trend Page 37
  38. 38. Impact on Belgian financingNID► NID is still a sustainable and effective financing/tax planning instrument and attractive for ‘low yield’ financing; mainly short-term EUR or USD funding, cash-pooling, factoring or sub-financing of a main group treasury center► NID is one of the options for Belgian finance companies who must revisit their intra-group financing due to the new thin cap rules► Key will be to revisit the treasury policy and to forecast the taxable spread► Alternatives exist when the intercompany interest rate is above 3% or particularly volatile (see infra) : for example ► PPL/PPS with Netherlands / Luxembourg ► Luxembourg finance branch► Controversy against improper use ► Administrative circular letters and guidelines ► Recently targeted fiscal controls to NID Page 38
  39. 39. Impact on Belgian Finance and Treasurycompany : Topics► Equity funded Finance company : Plain NID► Hybrid financing instruments - Profit Participating Loans► Foreign Finance Branch► Tax Effective Treasury► Cash pooling► The Halo Effect► What works in other countries ? Page 39
  40. 40. Financing Plain NID company Strategy ► Use of an equity financed Belgian company (“BelCo”) to provide intercompany group financing Parent ► The NID at the level of Belco provides decreases in the taxable basis and leads to a low effective tax rate Equity Assessment ► The financing is relatively straightforward to be Interest implemented and maintained. Tried and tested since the introduction of NID BelCo OpCo ► If foreign withholding is applicable, up to 15% foreign tax credit could be claimed in such an equity funded Belco ► NID is still very attractive for low yield financing, even Loan after capping the NID rate at 3% ► If the interest income exceeds the NID rate, the effective tax rate increases quite rapidly. As an example, an interest income of 5% leads to an effective tax rate of 20,0% 15,0% 13,6%. With 6% interest income, the effective tax rate is 10,0% 17% 5,0% 0,0% ► If the interest income is below the NID rate, the unused -5,0% NID cannot be carried forward and a potential tax asset is-10,0%-15,0% permanently lost (no negative ETR possible)-20,0% 2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00% ► In particular this strategy may be very effective to provide ETR -17,0% -6,8% 0,0% 4,9% 8,5% 11,3% 13,6% 15,5% 17,0% short term financing with arm’s length yields around 3% directly to operational companies or to another group Intercompany Financing Rates treasury company Note that negative ETRs are no longer possible, but are shown here to indicate trend. Page 40
  41. 41. FinancingProfit Participating Loan/Security Strategy Parent ► The use of a hybrid financing instrument creates a tax-deduction in the debtor’s country (Belgium), while it results in tax-exempt income in the recipient country, where the instrument qualifies as equityPPL/PPS subscription Exempt dividend ► Belgium on lends the funds realizing an arm’s length Holdco taxable spread ► Could be implemented with a Netherlands or Luxemburg resident PPL subscriber (Holdco)Taxable interest Belco ► Equity component should generate NID Deductible Interest Assessment ► The financing is more complex to be implemented and OpCo’sDeductible Interest maintained (compared to plain NIDco) ► Rulings are required in multiple jurisdictions ► The use of a PPL/PPS is very attractive for high yield 4,0% 3,5% financing and only increases slowly with increased 3,0% 2,5% interest rates 2,0% 1,5% ► With the proposed thin cap rules, Belco should respect 1,0% 0,5% the 5 to 1 debt equity 0,0% ► As an example, an interest income of 5% leads to an -0,5% -1,0% effective tax rate of 2,98%. With 6% interest income, the -1,5% 2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00% effective tax rate is 3,42%. With 10% interest income ETR -1,06% 0,28% 1,18% 1,82% 2,30% 2,68% 2,98% 3,22% 3,42% the effective tax rate would be 4,3% ► Since the precise language of the proposed law are not Intercompany Financing Rates yet available, the Belgian Ruling commission is awaiting . Note that negative ETRs are no longer possible, but are shown here to indicate trend clarity before issuing new rulings Page 41
  42. 42. Financing Finance Branch Strategy ► Use of an equity financed Belgian company (“BelCo”) to Parent provide intercompany group financing ► The equity is allocated to a foreign finance branch which provides group financing ► The branch is low taxed following the tax rules of the branch country Belco ► The income generated by and allocated to the finance branch is exempt in Belgium under the applicable double tax treaty between Belgium and the branch Interest jurisdiction Finance Branch Subs ► The equity and income allocated to the Belgian head- office is low taxed because of the NID ► Multiple branch locations can be considered Loan Assessment2,5% ► The financing is more complex to be implemented and maintained (compared to plain NIDco)2,0% ► Rulings are required or recommended in multiple1,5% jurisdictions1,0% ► No changes in Belgian tax law are currently envisaged0,5% to make this financing ineffective0,0% ► The effective tax rate may vary between 1,5% and 2,5% 2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00% ETR 2,02% 1,62% 1,35% 1,40% 1,43% 1,46% 1,49% 1,51% 1,52% although this depends and varies based on the branch location and the allocation Intercompany Financing Rates ► The finance branch is tried and tested and is a good addition to an existing NID finance company Page 42
  43. 43. Financing Comparison Effective Tax Rates 20,0% NID 15,0% 10,0% 5,0% PPL 0,0% BranchETR -5,0% -10,0% -15,0% -20,0% 2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00% ETR NID -17,0% -6,8% 0,0% 4,9% 8,5% 11,3% 13,6% 15,5% 17,0% ETR PPL -1,06% 0,28% 1,18% 1,82% 2,30% 2,68% 2,98% 3,22% 3,42% ETR Branch 2,02% 1,62% 1,35% 1,40% 1,43% 1,46% 1,49% 1,51% 1,52% Note that negative ETRs are no longer possible, but are shown here to indicate trend. Intercompany Financing Rates Page 43
  44. 44. What if an arm’s length rate falls below theNID rate?► Potential problem area ► Assume full equity financing, with NID deduction at 3.00% ► Assume outbound financing transactions ‘at arm’s length’ lead to an interest rate below 3.00%, for example due to: ► Superior credit rating ► Short term funding ► Specific options► Potential solutions ► Minimum taxable base ruling? ► What if stock of excess NID exists? Page 44
  45. 45. The Belgian Tax Effective Treasury Center► Key concepts ► Optimize planning for Belgian NID-regime ► Whereby NID-rate is a proxy for the risk-free rate (‘RFR’) ► Whereby NID-rate changes annually (difficult to plan for) ► Remunerate treasury center in line with its functional risk profile based on Transactional Net Margin Method: ► For the combined of its activities, and accordingly all transactions % Reported return ► Characterization is that of routine profit center (pre-NID) ► Entrepreneurial counter- party/ies needed (yet flexible) ► on Return On Equity basis = RFR + (low) premium (~D:E) NID-rate 3.0% ► Pragmatic update policy Y Page 45
  46. 46. The Belgian Tax Effective Treasury Center(2/2) Pure cost center Pure profit center► Treasury is characterised as the provider of ► Treasury is characterised as an entrepreneurial routine services, arranging financial in-house financial institution, doing business transactions on behalf of affiliates, either with independently with affiliates on the same basis external or internal financial sources as one would expect an external bank to offer► As a pure cost center, the treasury center ► The treasury profit center’s goal will be typically does not assume risks in respect of its equity, limited to profit maximization. and hence acts as a pure service provider. ► Typical policy: entrepreneurial profits or► Typical policy: Cost Plus losses (for the transactions it engages is). CONTINUUM Routine profit center ► Treasury is characterised as a routine in-house financial institution, doing business under a service level agreement with the parent company or group as a whole, whereby its goal of profit making is expanded to e.g. providing liquidity to group members. ► Typically routine treasury centers are supplied with sufficient equity to perform its roles including taking routine market risks. ► Typical policy: Arm’s length range on a net profit basis compared to its equity at risk – Return on Equity for its role and responsibilities on the aggregate of activities/transactions Page 46
  47. 47. The transfer pricing approach to cashpooling (1/2)► Key TP considerations: ► Division of benefits amongst cash pool participants, after remunerating the cash pool leader in accordance with its functional risk profile ► Irrespective of notional or Benefit of Cash Pooling target balancing pooling In rest e ense ► True and fair assessment of Pre-cash Post-cash xp assumed risks by all pooling pooling te ► Structural financing vs. cash positions ► Pragmatic approach on assessing outside options ► Budget vs. actuals Benefit of cash pooling► Key TP questions and methods ► Remuneration cash pool participants: Residual profit split method ► Remuneration cash pool leader: cost plus – return on equity at risk Page 47
  48. 48. The transfer pricing approach to cashpooling (2/2)► Example: Page 48
  49. 49. Incorporating the HALO – effect in interestrate benchmarking, or not? (1/2)► General interest rate benchmarking approach ► STEP 1 – Assess the credit score of the loan ► Credit worthiness of the borrowing entity HOT TOPIC ► Credit rating adjustment due debt instrument type ► STEP 2 – Benchmark the straight loan interest rates ► Direct ‘CUP’ analysis ► Use of Fair Market Yield Curves ► STEP 3 – Adjust for embedded options and for currency and/or coupon structure ► Embedded options like early prepayment and early demand ► Currency Swaps ► Fixed-to-floating Swaps Page 49
  50. 50. Incorporating the HALO – effect in interestrate benchmarking, or not? (2/2)► Our current approach ► Step 1: Quantitative and qualitative analysis of borrower ► Develop industry specific (quantitative and qualitative) criteria for classifying subsidiaries based on S&P/Moody classification: ► CORE SUBSIDIARY à Group rating ► STRATEGICALLY IMPORTANT à Notching/In-between ► OTHER SUBSIDIARIES à Stand-alone rating ► Step 2: Use CreditScore software to assess credit worthiness of borrowing entity in accordance with classification ► Step 3: Thoroughly document position taken that the framework applies (burden of proof), and how it applies (or not) on the borrowers reviewed ► Explain congruence with the interpretation of the arm’s length principle ► Make use of market references that apply the framework Page 50
  51. 51. What works in other countries ?► Branch financing – Switzerland-Luxembourg-Hungary► Back to Back financing with low/untaxed entity► Transfer Pricing based - excess profit (Netherlands, Luxembourg)► Tax Holiday – Special Regimes (Switzerland, Malta, Cyprus, Hong Kong, Singapore …)► Use of hybrid loans – Use of hybrid entities► Finance rulings financing with a low/untaxed entity ► Traditional Luxembourg-Dutch finance rulings ► Use of a hybrid entity (for example CV-BV)► Use of hybrid loans Page 51
  52. 52. Example : Dutch CV-BV Strategy US-Parent ► The use of a hybrid entity in the Netherlands allows the same advantages as the PPL loan, namely that only a spread of about 12,5 bp is taxed Finco ► CV is a transparent partnership in the Netherlands but a CV Non taxed interest company (CFC) for US tax purposes, consequently ‘subject to Subpart F’ rules the low taxed interestFinancing (1) income is not picked up ► Could be implemented with Luxemburg SNC as well BV ► Could also be considered in Belgium, combination of a Deductible Interest BVBA-SARL & a Maatschap Financing (2) Assessment OpCo’s ► Very powerful Finco, covered by a Dutch or Luxembourg Deductible Interest APA ► Alternative for NID, since allowing higher interest rates ► Spread is limited to a cost + ► Low ETR ► Tested Page 52
  53. 53. Closing Page 53
  54. 54. Key Messages► Review Thin Cap Impact – conclude framework agreement► Review alternatives► Differentiate if needed► Discuss with the ruling commission► Review intercompany pricing model► Transfer pricing documentation and APA► Economic and Business Rationale - No wholly artificial finance structures Page 54
  55. 55. Questions? Page 55
  56. 56. Contact DetailsPeter MoreauPartner – International Tax ServicesOffice: +32 (0)2 774 9187Mobile: +32 (0)477 78 78 24Peter.Moreau@be.ey.comAndy NeuteleersSenior Manager – Transfer PricingOffice: +32 (0)2 774 9941Mobile: +32 (0)476 977 Page 56
  57. 57. Thank you for attending !The above information doesnot constitute advice andcannot be used for thosepurposes