Cash-trapped: the challenge of
managing cash across borders
Globalisation has opened doors for small companies
as well as large to trade overseas.
Trading across borders can bring great rewards, but also additional risks. One that has
gained prominence recently, is the risk that a company’s hard-earned cash may become
trapped overseas. This used to be a problem only for large corporates, but now that
smaller companies routinely trade internationally, they are encountering the same issue.
The trouble with ‘trapped cash’ is that it can reduce a company’s ability to put cash
surpluses in one part of the business to work elsewhere. This prevents companies
from offsetting debt, raising borrowing costs, and may also restrict future
investment and growth plans. The good news is that, with careful analysis and
planning, and decisions by some regulators to relax their restrictions on movement
of cash, companies are now better placed to release their ‘trapped cash’.
Contents
1
I ntroduction /
Glossary of terms
2
Your questions answered
4
BS perspective /
R
More information
Glossary of terms
‘Trapped cash’: Money legitimately
earned overseas, but which it is difficult or
costly to repatriate due to restrictions either
in the overseas or home market.
Restricted/inaccessible/ensnared cash:
Alternative descriptions for ‘trapped cash’.
Some people prefer these terms because
they do not suggest that the monies are
permanently trapped, but that they are
difficult to repatriate for diverse reasons.
Basel III: The latest international regulatory
framework for banks that proposes stricter
rules on capital, liquidity and leverage ratios
for banks.
Offsetting: Using cash reserves to offset
debts and reduce borrowing.
Foreign Exchange risks: The risk that
assets or cash flows that are denominated
in a foreign currency may reduce in value
as exchange rates fluctuate.
• ‘Trapped cash’ is now an issue for middle market companies as well as major
corporates, in today’s globalised world.
• In a credit-conscious world, companies need to tap into cash trapped overseas to
offset their borrowing, and provide resources for further investment.
• Regulatory reforms in major emerging markets are making ‘trapped cash’ more
accessible, and businesses must grasp the chance to access funds they previously
couldn’t reach.
• Companies should also consider developing a liquidity strategy, combining practical
measures on their business and tax structure with current advice on the countries
they operate in, to best manage their cash and liquidity.
Liquidity: A generic term, in this context,
for cash assets.
Your questions answered
What is ‘trapped cash’ and why does it matter?
‘Trapped cash’ is an umbrella term for
cash that an international business has
generated overseas, and which, for a
number of reasons, they are unable to
repatriate to their home country. Often,
‘trapped cash’ is not actually permanently
trapped, but it is difficult, time-consuming
or expensive to bring home.
The issue of ‘trapped cash’ has been
around for a long time, but it has become
a more urgent issue for many companies
in recent years. It now rarely makes
economic sense to have surplus cash
languishing overseas.
Prudent financial management would
suggest that companies should use their
internal resources to reduce or offset
debt, rather than to seek to increase
borrowings. And by placing greater
emphasis on sound cash and liquidity
management, a company can not only
offset existing debt but also invest to grow
its business without seeking new credit.
With so many companies now trading
internationally, there are also encouraging
developments from regulators to
make ‘trapped cash’ more accessible,
particularly in a number of key emerging
markets. For example, China, India,
Malaysia, Russia and Turkey have all
initiated reforms to address these issues
(see page 3 for more information).
What are the main reasons for cash being trapped?
Cash may be trapped in some parts of the world due to local or external factors,
or a combination of both. These may include:
Which jurisdictions are
most affected by ‘trapped
cash’ issues?
A survey by EuroFinance found that China
was the largest location for ‘trapped
cash’ – unsurprisingly, given China’s huge
importance in the world economy. Overall,
the problem arises mostly in emerging
markets, across eastern Europe, Asia and
Latin America.
!
Global top 10 locations for
‘Trapped Cash’
Regulatory restrictions in the host
country, such as:
• foreign exchange controls – e.g. on
converting and transferring currencies.
• c apital requirements – e.g. capital has
to remain onshore for a certain period.
• regulations – e.g. restrictions on intercompany lending.
• t axation – e.g. on cross-border cash
flows, or high withholding taxes on
dividends paid.
Tax issues, such as:
• d
omestic tax treatment of overseas
cash, which can discourage its
repatriation. This is a problem
particularly in the US, where the
relatively high corporate tax rate
(at 35%) is payable when earnings
are repatriated, prompting many US
companies to leave large amounts
of cash overseas.
• r e-patriation of cash as either dividends
or intercompany loans, which can
possibly result in the deduction of
withholding tax depending on the
jurisdictions involved.
Perspectives
2
‘Trapped cash’
1. China
2. Argentina/Brazil
4. Venezuela
5. India
6. South Korea
7. Thailand
8. Russia
9. South Africa
10. Algeria/Indonesia/Malaysia/Turkey
Source: EuroFinance Corporate Treasury
Network survey
Your questions answered
How can I get my ‘trapped cash’ back?
As there are so many variables – in company type and size, regulations and tax
treatment in different countries, there is no ‘one size fits all’ solution.
International banks offer a number of products to mitigate ‘trapped cash’ issues such
as cross-border cash optimisation and cross-currency notional pooling products, but
these tend only to be practical for very large businesses, which already have liquidity
strategies in place.
Smaller companies should first consider a range of practical measures to understand
and manage the issue, such as:
What regulatory reforms
should I be aware of?
There are rapid changes in regulation,
especially in emerging markets, which
will benefit international companies with
cash held overseas, some of which are
summarised below. But this is a fastchanging area, so always seek professional
guidance from accountants, lawyers and
bankers on your operations in any given
country before taking any action.
China
• A UK-China treaty has reduced tax
rates on dividends, royalties and
service fees, making it more tax
efficient for UK companies to remove
funds from China.
Using some of the tools and
technology to track and see balances
around the globe;
Deciding whether to maintain currency
accounts inside or outside of the country in
question. You may incur transaction costs
for receiving and paying money, but it can
also give you easier access to that cash;
• The People’s Bank of China, China’s
central bank, is relaxing controls
on cross-border renminbi flows,
and reiterating its long-term aim
to allow renminbi conversion to
other currencies for capital account
transactions.
• Pilot schemes to repatriate ‘trapped
cash’ in China have been launched
with central bank approval. They target
cross-border intercompany lending
and cross-border netting and allow
firms to tap into internal sources of
liquidity and reduce funding costs.
India
Where possible, encouraging customers
to pay in GBP or another easily
convertible currency;
Naturally ‘hedging’ your foreign currency or
currencies, by incurring expenses against
income you are generating in that currency.
Second, they should consider developing a formal liquidity strategy, in consultation
with specialist advisers. This would involve conducting in-depth analysis of relevant
countries’ laws, their own business and cash management structure, and their tax setup, to best manage their cash and liquidity.
If you have not already built up cash balances overseas, then prevention will be better
than a cure. Before investing in new markets, companies should do their research
into local regulations and restrictions on the movement of cash, and draw up an
investment strategy to mitigate the risk of ‘trapped cash’.
Perspectives
3
‘Trapped cash’
• Companies in India can now lend
money to overseas subsidiaries,
provided the amount does not exceed
400% of their net worth.
Malaysia
• Capital account restrictions are
being lifted.
Russia and Turkey
• Regulatory changes are now allowing
companies to invest abroad.
‘Trapped cash’ can harm your
company’s health
Cash surpluses unable
to be put to work elsewhere
in the business
Taxes on funds
remitted overseas
Increased borrowing
costs across the enterprise
as a whole
Rapid changes in
regulation, especially in
emerging markets
RBS perspective
As companies conduct more
business internationally, the issue of how
to bring cash generated overseas back
home is well worth considering, as many
emerging markets have regulations that
restrict the movement of cash beyond
their borders. Having cash trapped
overseas can leave a company strapped
for cash at home, so it pays to have a
strategy to address this.
Regulatory changes also create the
need to revisit this issue. For example,
Basel III regulations will increase capital
requirements for banks. Conversely,
in some markets, such as China,
regulations are being relaxed to allow
companies to repatriate their cash
more easily, which is good news for any
business trading internationally.
Existing cash management
structures may not be fit
for purpose
When the world economy was booming,
companies didn’t worry too much about
their overseas cash. In today’s more
difficult economic conditions, putting
cash surpluses you have built up
overseas to work elsewhere can only
benefit your business.
There is no silver bullet to doing this, as
every company’s needs will be different.
But by reviewing their organisational
structure and tax arrangements, their
cash management structure, earnings
and expenses, companies have a great
opportunity to improve their liquidity,
and make best use of all the cash they
are holding around the world.
Perspectives
4
‘Trapped cash’
Where do I go for
more information?
For an overview of ‘The Trapped Cash
Conundrum’, see this article from the
Association of Corporate Treasurers:
www.treasurers.org/node/8474
For more information, speak to your
Relationship Manager or call the
RBS Hotline on 0800 210 0235
Text Relay 18001 0800 210 0235
Lines are open 9am-5pm Monday to
Friday (excluding public holidays).
Calls may be recorded.