International Treasury
Back to Basics - The Effect of
Transfer Pricing
William J. Zink
Grant Thornton International
Susan H.Griffiths
Global Cash Management Ltd.
Objectives for Today
• Review Treasury’s interface with global
business operations
• Describe operating and treasury transactions –
issues for global treasury management
• Introduce and define transfer
pricing concepts
• Explain transfer pricing
procedures
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
2
1
International Treasury – Key
Responsibilities
• Streamlining intercompany flows
– Pricing
– Currencies
– Payment Mechanics
• Optimizing cash utilization across borders
• Providing funding/access to funding with minimal w/h
tax impact
• Developing local and cross border investment strategies
• Selecting efficient bank and other vendor services
regionally and globally
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3
International Treasury and
Transfer Pricing
• Treasury must understand the nature of all
intercompany cash flows (operating
transactions) and interface with Tax in terms of
correctly
pricing these related company flows
• Transfer pricing can significantly impact
liquidity/risk management strategy.
• Internally provided financial/banking
services (treasury transactions) are also
subject to transfer pricing treatment.
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
4
2
Global Business
Treasury Interface
US
USTreasury
Treasury
Cross Border
Financial services
& transactions
Cash management control
Overseas
Overseas
Subsidiaries
Subsidiaries
Overseas
Overseas
Subsidiaries
Subsidiaries
US
USDomestic
Domestic
Operations
Operations
Goods & services flows
Grant Thornton International
Global Cash Management Ltd.
5
Operating Transactions –
Major Treasury Concerns
• Pricing Currency and FX
Exposure
• Cash Flows and Settlement
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
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3
Operating Transactions
US
USsubsidiary
subsidiary
lease
UKSubsidiary
Subsidiary
UK
product
GermanSubsidiary
Subsidiary
German
services
s
ice
v
r
pro se
services
duc
product
t
roy
alti
es
Japanese
JapaneseSubsidiary
Subsidiary
product
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Global Cash Management Ltd.
7
Operating Transactions - Issues
Currencies?
Interco sale
US
USmanufacture
manufacture
FC = Euro
FC = USD
Price list in USD
German
GermanSub
Sub
sell
European
Europeancustomers
customers
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Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
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4
Operating Transactions - Issues
Risk Management ?
Sales Currency?
US
USmanufacture
manufacture
German
GermanSub
Sub
If Euro - risk
If USD – risk
European
Europeancustomers
customers
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Pricing Currency – Impact on
Purchasing Subsidiary
USD
Local FC
• Creates a FX exposure
for subsidiary
• Can move to local
supplies sources
• Issues in pricing
structure for third party
sales
• Impact on profit margins
• Potential negative P/L
hit
• Eliminates transaction
exposure, but not
underlying risk as price
list is still in USD
• Centralizes risk
management with US
Treasury, but may create
problems (price list,
accounting) with US
manufacturing entity
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
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5
Operating Transactions –
Major Treasury Concerns
• Pricing Currency and FX exposure
• Cash Flows and Settlement
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Operating Transactions
16 transactions
Multiple currencies
Settlement?
US
USsubsidiary
subsidiary
Pay USD
UKSubsidiary
Subsidiary
UK
Pay USD
Pay Euro
Pay
Yen Pay Euro
Pay
US
D
Pay GBP
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
GermanSubsidiary
Subsidiary
German
Pay Yen
Japanese
JapaneseSubsidiary
Subsidiary
12
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Operating Transactions
Solution - Netting
4 transactions
GermanSubsidiary
Subsidiary
German
US
USsubsidiary
subsidiary
Pay USD
Receive Euro
NettingCenter
Center
Netting
Pay Yen
Receive GBP
Japanese
JapaneseSubsidiary
Subsidiary
UKSubsidiary
Subsidiary
UK
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Solution - Netting
• Billing stays the same for A/R & A/P for
each entity
• Netting “center” receives detail of all
transactions (monthly)
• Calculates the “net” due to/from each
entity in their own currency (based on USD
or EUR)
• FX rates bid/fixed
• Entities notified of amounts to be
received/paid
• 4 transactions monthly – fixed date
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
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7
Netting Benefits
•
•
•
•
•
Streamlines intercompany flows
Reduces transaction costs
Simplifies procedures
Develops internal discipline
Centralizes (simplifies) FX risk
management but does not eliminate
underlying exposure for participating
entities
Grant Thornton International
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15
Basic Treasury Steps
Operating Transactions
Identify Transactions
Risk Management
Assessment
Systems Issues
Roll Out
Review Transfer Pricing
(with Tax)
Netting Analysis
Banking
Requirements
Review with
Resource
Business Ops
Requirements
Ongoing Liquidity
Management
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
Evaluate Terms
Cash Management
16
8
Operating Transactions Issues
Issue
Issue
••
••
••
••
••
••
••
Who’s Involved?
Involved?
Who’s
Sourcing&
&Cost
CostBase
Base
Sourcing
ListPrice
Price(Transfer
(TransferPrice)
Price)
List
Currency(Risk
(RiskMgt.)
Mgt.)
Currency
Terms
Terms
Payment
Payment
Mechanism/Locations
Mechanism/Locations
Timing(Liquidity
(LiquidityMgt.)
Mgt.)
Timing
SettlementMechanics
Mechanics
Settlement
••
••
••
••
••
••
••
Business
Business Ops
Ops
Business
Business Ops
Ops &
& Tax
Tax
Business
Business Ops
Ops &
& Treasury
Treasury
Business
Business Ops
Ops &
& Treasury
Treasury
Business
Business Ops,
Ops, Treasury
Treasury
&
Tax
& Tax
Treasury
Treasury&
&Tax
Tax
Treasury
Treasury
Grant Thornton International
Global Cash Management Ltd.
17
Treasury Transactions
US
USTreasury
Treasury
Banking,
Funding, Investing
US
USDomestic
Domestic
Operations
Operations
Overseas
Overseas
Subsidiaries
Subsidiaries
Overseas
Overseas
Subsidiaries
Subsidiaries
Interco settlement,
Advisory, liquidity/risk mgt.
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
Liquidity/Risk Mgt.
Banking Services
18
9
Treasury Transactions – Major
Treasury Concerns
• Effective cash utilization across borders and
entity structures
– Tax effective solutions
– Banking structure and services
– Managing intercompany funds flows
• Market access for funding and investing
– Withholding tax issues
– Pricing and FX exposure impact
Grant Thornton International
Global Cash Management Ltd.
19
Treasury Transactions Optimizing Cash Utilization
Banks
Banks
invest
lend
ZBA/Pool
borrow
Sub
SubAA
$$$++
$$$++
Sub
SubBB
($$$)
($$$)
lend
dividend
capital
Parent
ParentCo
Co
Treasury/Tax
Treasury/Tax
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
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10
Treasury Transactions - Providing
Funding Access
Banks
Banks
invest
Sub
SubAA
$$$++
$$$++
ZBA/Pool
lend
borrow
Sub
SubBB
($$$)
($$$)
access
lend
dividend
capital
Parent
ParentCo
Co
lend
Treasury/Tax Captive
Treasury/Tax
Captive
Finance
FinanceCo
Co
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Global Cash Management Ltd.
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Treasury Transactions - Tax
Implications
FX
Regional Treasury
Center (RTC)
Location?
(Tax Jurisdiction)
Advisory
Liquidity Mgt
Fees?
(Transfer Pricing)
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
Subs
22
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Transactions Which Require
Transfer Pricing Treatment
Treasury Transfer
Pricing Transactions
(TTPT)
US
USTreasury
Treasury
Treasury Transfer
Pricing Transactions
(TTPT)
Overseas
Overseas
Subsidiaries
Subsidiaries
Overseas
Overseas
Subsidiaries
Subsidiaries
US
USDomestic
Domestic
Operations
Operations
Operating Transfer
Pricing Transactions (OTPT)
Grant Thornton International
Global Cash Management Ltd.
23
Transfer Pricing
Definition:
Transfer pricing is a fair, but arm’s
length price assigned to the buying/selling
of goods and services between related
companies
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
24
12
Transfer Pricing
•
•
•
•
•
Significance
Where
Identification
Methodology
Reporting
Grant Thornton International
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Why is Transfer Pricing
Important?
• As a penalty protection during the tax
audit
• For putting the tax audit on your terms
• As a planning document to
improve performance
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
26
13
Where is Transfer Pricing
Used?
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Argentina
Australia
Austria
Belgium
Brazil
Canada
China
Columbia
Denmark
Finland
France
Germany
India
Ireland
Italy
Japan
Korea
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Pakistan
Portugal
Romania
Singapore
South Africa
Spain
Sweden
Switzerland
United Kingdom
United States
Uruguay
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Global Cash Management Ltd.
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Operating Transfer Pricing
Transactions (OTPT)
CONTROL
Cross
border
X Sub
Y Sub
Products
Licenses
Services
Leases
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
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Cross Border
Operating Transfer Pricing
Transactions (OTPT)
Producer
Production of
Widgets
Costs Incurred
to Unrelated
Parties
Sales to
Related
Distributor
Distributor
Distribution and
Resale of Widgets
Costs Incurred
to Related
Producer
Sales to
Unrelated
Parties
The Transfer Pricing Issue
Grant Thornton International
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Creator/Buyer
Licensor of Mfg/Mktg Intangibles
Costs Incurred
to Related and
Unrelated Parties
to Develop/Buy
Intangibles
Royalty
Income
Cross Border
Operating Transfer Pricing
Transactions (OTPT)
User
Licensee of Mfg/Mktg Intangibles
Royalty
Expense
Mgf/Mktg
Profits
The Transfer Pricing Issue
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
30
15
Cross Border
Operating Transfer Pricing
Transactions (OTPT)
Provider
Renders Service
Recipient
Benefits from Service
Service Fee
Expense
Service Fee
Revenue
Local Profits
Costs Incurred
The Transfer Pricing Issue
Grant Thornton International
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Lessor
Leasing Tangible Property
Rent
Local
Local Profits
Profits Income
Cross Border
Operating Transfer Pricing
Transactions (OTPT)
Lessee
Leasing Tangible Property
Rent
Expense
Local Profits
The Transfer Pricing Issue
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
32
16
Treasury Transfer Pricing
Transactions (TTPT)
Sub A
CONTROL
Sub B
YSub
Co.B
Cross
Border
Treasury
Sub
SubCC
Services
Liquidity Mgt.
Borrow/Invest
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Cross Border
Treasury Transfer Pricing
Transactions (TTPT)
Treasury
Function
Banking,
Investing,
Lending,
Hedging
Service Fee
Revenue
OPCO
Benefits from Service
Service Fee
Expense
Costs Incurred
Local Profits
The Transfer Pricing Issue
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
34
17
Treasury
Lends/Sources Funds
Currency/
Risk/
Hedge?
Local Profits
Cross Border
Treasury Transfer Pricing
Transactions (TTPT)
OPCO
Borrows Funds
Interest
Expense
Interest
Income
Local Profits
The Transfer Pricing Issue
Grant Thornton International
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What is Transfer Pricing Trying
to Accomplish?
Related Party #1
Controlled Transaction
Related Party #2
To Justify this
as Arm’s Length
Document
Comparability Analysis
Transfer Price Method Analysis
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
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Comparability Analysis 1
Internal Comparables
Related Party #1
Look Here
3rd Party
Vendor
Controlled Transaction
To Be Tested
Related Party #2
Look Here
3rd Party
Customer
Look Here
3rd Party
Vendor
Look Here
3rd Party
Customer
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Comparability Analysis 2
External Comparables
Related Party #1
Unrelated Party #1
Related Party #1
Controlled Transaction
To Be Tested
Look Here
Uncontrolled Third Party
Transaction
Selected financial ratios
from public data disclosure
bases
Grant Thornton International
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Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
Related Party #2
Unrelated Party #2
Related Party #2
38
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Transfer Price Method Analysis
Identify Transaction
Products
Licenses
Services
Loans
Leases
1. Apply Appropriate Methods
2. Determine and Justify Best Method
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Functions/Risks/Intangible
Property/Field Reviews
Special
Circumstances?
Controlled
Transactions
Functional
Analysis
Risk
Analysis
Internal
3rd Party
Transactions
Intangible
Analysis
Contractual
Analysis
Uncontrolled
Transactions
Grant Thornton International
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Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
Economic
Analysis
Property/
Service
Analysis
External 3rd
Party
Transactions
40
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The OTPT Methods
Tangible Property
Intangible Property
Services
Comparable Uncontrolled
Price Method (CUP)
Comparable Uncontrolled
Integral Services as Market
Transactions Method (CUT) Value
Resale Price Method (RPM)
Comparable Profits Method
(CPM)
Cost Plus Method (C+)
Residual Profit Split Method
(RPSM)
Comparable Profits Method
(CPM)
Comparable Profit Split
Method (CPSM)
Residual Profit Split Method
(RPSM)
Other Unspecified Methods
Non-integral Services at Cost
Comparable Profit Split
Method (CPSM)
Other Unspecified Methods
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Treasury Transfer Pricing
Transactions (TTPT) Methods
Loans
• Four month grace period for
cross border related party
debt
• Purchase/resale of inventory
– grace period based on
average collection period
• Consider principal, duration,
security and credit standing
• Consider situs of borrower.
• Consider AFR.
Services
• Integral services as
market value
• Non-integral services
at cost
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
42
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The Transfer Pricing
Documentation Report
Transfer
TransferPricing
Pricing
Documentation
DocumentationReport
Report
XYZ
XYZCompany
Company
Year
YearEnd
End12/31/02
12/31/02
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Transfer Pricing Documentation
Report Contains (1)
• Business Overview
• Taxpayer’s History & Organizational
Structure
• Functional Analysis
• Risk Analysis
• Description of Method Selected
• Description of Alternative Methods
Considered
Grant Thornton International
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Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
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Transfer Pricing Documentation
Report Contains (2)
• Description of Controlled Transactions
• Description of Comparables
• Explanation of Economic Analysis &
Projections
• Description of Relevant Data Obtained
After Year End
• General Index of Principal & Background
Documents
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45
Post Report Planning
•
•
•
•
•
•
•
•
Reorganization
Special Purpose Vehicles
Contract Manufacturing
Intellectual Property Structures
Commissionaire Structures
Centralized Treasury Function
Tax Consolidations
Tax Treaty Planning
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
46
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Post Report Planning
Case Study
• Manufacturing requiring R&D
• Sales subsidiaries in multiple European
countries
• Intercompany & 3 rd party cross border flows
(Euro & non-Euro)
• Profitable in Germany, France & UK
• Fluctuating profits in other
countries
• No present Treasury focus in region
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47
Post Report Planning
Treasury & Tax Issues
Treasury
Tax
• Treasury Structure &
location
• Selling currencies
• Risk management
• Interco settlement
(netting?)
• Banking requirements
• Financing arrangements
• Investment strategy
• Systems architecture
• European Tax incentives
& special purpose vehicles
• Documentation for
insurance & pricing range
• Tax rate arbitrage
• Limited distribution
(commissionaire?)
• Intellectual property
structure
• Market penetration study
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
48
24
Summary
• Treasury interface with tax – essential
• Intercompany operating (payables/receivables)
transactions require transfer pricing treatment
which Treasury needs to incorporate into
liquidity/risk management planning
• Treasury transactions – including FX, advisory,
banking, investing and financing are also
subject to transfer pricing treatment, which
needs to be evaluated in setting up a logical
Treasury structure and the best approach to
managing cash globally
Grant Thornton International
Global Cash Management Ltd.
49
Thank You
Questions?
Bill
Susan
Grant Thornton International
Global Cash Management Ltd.
Susan Griffiths - shgriffiths@gcmltd.net;
Bill Zink - wzink@gt.com
50
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