The Modern Treasury and Risk Management Function: An Overview of Certain Key Tax Considerations

• Published in: Journal of Taxation of Financial Products 2021-03, Vol.18 (1), p.5-39
• Main Authors: Weiss, Justin, Raglan, Hubert
• Format: Article
• Language: English
• Subjects: Accounting firms; Banking; Cost control; Currency transactions; Financial statements; Funding; Global economy; Globalization; Hedging; Hedging (Finance); Modernization; Risk management; Treasury operations
• ISSN: 1529-9287

[...]an approach can carry with it significant operational burdens in the form of duplicative costs and resources, inefficient use of cash on a global basis, less than optimal risk management and lack of centralized control which could introduce more possibilities for error or fraud.4 The establishment of one or more centralized treasury operations within the corporate5 group can address many of these issues.6 Centralization can offer significant cost savings, and in some cases, tax savings. Centralized treasury operations can manage funding and hedging matters on behalf of a large number of affiliates and enter into funding and hedging arrangements with third parties (typically large investment banks) on terms that are, in the aggregate, more favorable than the bespoke approach that typifies the decentralized model.7 In addition to reduced cost of funds and counterparty exposure, various other operational benefits, such as increased efficiency in execution, analysis and reporting, streamlined control and manager-t and increased visibility over the company's cash flows may result as operations are restructured and combined.8 The right structure for each company will depend on a variety of considerations. [...]in Section VI, we provide a high-level overview of some of the other key tax considerations implicated by establishing and operating such an ITC, including recent guidance from the oEcD,13 before ending with a brief conclusion in Section VII. [...]the parent of a corporate group with an investment grade credit rating may find it easiest to borrow from third parties in the capital markets and use such borrowed funds to finance the operations of its subsidiaries (whether in the form of equity capital or intercompany debt funding).16 Similarly, this de facto treasury center may manage the group's exposure to one or more risks (e.g., foreign currency, interest rate, or commodity price risk) by executing hedging transactions that offset the net exposure of the group.