Trapped cash – earnings held by subsidiaries in foreign countries that cannot be easily repatriated to the parent company – remain a constant concern for any corporate carrying out international business. And in the current volatile economic environment, the issue of trapped cash is only going to become more pressing.
However, this trapped cash can be freed through a combination of local knowledge, tax and legal expertise, and good stakeholder engagement, the ACT’s annual Cash Management Conference has heard.
It is worthwhile having a watchlist of countries that can be seen as high risk, with regulatory red flag indicators
According to Stephen Hackett, treasurer at United International Pictures, one of the first places to start when thinking about repatriating cash is the treasury policy. “You want to have a well-defined cash management strategy, and you want to be able to see where your liquidity risk threshold is, and what the minimum amount of working capital is required in a certain country,” he said.
“If you have any cash, can you redeploy that back to the centre easily?” he asked. “And if you can, do you have tax efficient structures in place that will enable you to do so?” He added that banking platforms and treasury management systems can improve visibility of any funds that are accumulating in foreign accounts.
He also suggested that it is worthwhile having a watchlist of countries that can be seen as high risk, with regulatory red flag indicators – such a list will capture whether they have capital controls, an unstable currency or withholding taxes that can prevent legitimately earned income moving across borders.
Paul Landless, a partner at Clifford Chance specialising in structured finance and fintech, advised corporate treasurers to marry what particular regulations say with what is happening politically “on the ground”, when often there can be a change in policies and enforcement.
Ensure the paperwork is not only correct but provides the information that is relevant to a particular country’s requirements is also important. “The trapping is not only through hard tax or regulatory black and white, a lot of it is grey,” Landless explained. “Ask what we actually need to be doing to satisfy an officer in a particular department that the documentation pack is sound.”
You need to identify in which part of the business the trapped cash is, and then reach out to that stakeholder
Nevertheless, it is important to understand the reasons why a country may be restricting capital movements, and this may need to be explained internally as well. This could be to stabilise a currency, or to ensure there is enough currency available to pay for imports. And cash can also appear to be trapped, when in reality it is going through a legitimate bureaucratic process. Good teamwork can help resolve such situations.
“You need to identify in which part of the business the trapped cash is, and then reach out to that stakeholder,” advised Hackett. “Ask questions about what the cash is for and why it is there, and then look at strategic options to get the cash out. So, talk with the tax team to look at the capital controls and regulatory issues, and then the legal team. Finally, there is the CFO, in case there is any pushback from the local business that might not want to send cash back to the centre.”
Intelligence gathering is particularly important where the corporate treasury team is small in number
Landless stressed the importance of good intelligence gathering, so that treasurers can understand what might be in the pipeline for particular jurisdictions, suggesting local banks, law firms and consultants can be good sources of intelligence. “Get your intelligence up on where are things are evolving, future changes, future withholding tax issues, future documentation requirements, future funding issues, future thresholds on capital controls, and changing limits.”
Hackett added that such intelligence gathering is particularly important where the corporate treasury team is small in number, as this can limit the time available to go through and understand local regulations.
Philip Smith is editor of The Treasurer
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