Establishing a Financial Treasury Centre (FTC) is one of the means supporting the growth strategy of any company and making its cash management more efficient. Typically, treasury centres are structured when a company reaches certain size, international reach and complexity of treasury operations as in a multi-national corporation (MNC). However, smaller-sized enterprises as well as other market players such as insurance companies, asset owners and asset managers also benefit from similar structures.
A high-level overview of considerations for building a FTC
Key areas that FTCs cover
In general, the treasury management function consists of three main components:
Daily cash management including liquidity and investments
Financial risk management - identification and hedging of foreign exchange risks and interest rate risks
Corporate finance - management of financial assets and liabilities on the balance sheet as well as long-term finding and the financial aspects of mergers and acquisitions
In addition, the treasurer may also have a responsibility to manage banking relationships and provide input on investor relationships, working capital management, tax etc. The full remit is tailored to fit the needs of the organisation.
Types of FTCs
There are various types of treasury centres depending on the nature of the business and the respective organisational culture – centralised vs decentralised and the evolution of the treasury function:
Global Treasury Centre – a fully centralised treasury centre whereby all operational entities globally report directly into one single Treasury entity. It is sometimes referred to as “in-house bank”
Global Treasury Centre with Regional Treasury Centres – all regional business units report into the regional centre to account for local time zones. The regional treasury centre provides for control and co-ordination. RTCs also have local experts on the ground—a helpful resource for companies operating several time zones away.
Hybrid – a combination model whereby most business units report into one global treasury centre with a few independent specialised treasury operations vehicles.
Selecting the right structure can be challenging and time-consuming in view of needed legal and tax due diligence, inter-company policies creation, recruitment etc. However, once established and up and running, benefits come fast.
Advantages of Centralisation
Centralising treasury operations can deliver significant benefits and efficiencies, such as, in no particular order:
Centralise cash for self-finding purposes, optimisation of interest results and improved risk management
Reduce banking relationships
Reduce number of bank accounts
Ensure sufficient liquidity and credit is available to conduct core business
Increase productivity through simplified processing and fewer transaction fees
Risk reduction from standardizing processes
Concentration of knowledge and experience – leading to improved results with fewer people and reduced risk of error
Improved forecasting and cash visibility
Disadvantages of Centralisation
Reduction of local knowledge
Resistance from local management
Complex management information system flows and increased demand on enterprise resource planning (ERP) systems
Location of FTC
There is nothing more important when setting up a FTC than considering its location. Companies seeking optimal tax benefits will seek a treasury centre location that provides a relatively low effective tax rate on intra-group financial activities such as:
A relatively low corporate income tax on the income of the treasury centre
A relatively low withholding tax (WHT) on (interest) flows between the treasury centre and other legal entities within the group
The optimal location for a FTC is not the same for all companies. It depends on each company’s individual situation and priorities. Many tax and non-tax elements play a role. Broadly, one needs to look at the following elements and seek detailed legal and tax advice:
- Tax regime and attractiveness:
- The parent company that owns the FTC has to assess potential tax benefits of outsourcing the central treasury to a low tax jurisdiction
- Both the parent and the subsidiary entities need to assess how WHT interest is levied on interest paid by the group companies to the treasury centre and vice versa
- Transfer pricing rules and limitations such as thin capitalisation rules that set a limit on the level of deductible interest generating debt to avoid loss of tax revenue
- Government Incentive Schemes such as tax incentives for expatriates
- Talent pool, availability of qualified staff
- The existence and availability of a highly skilled, educated, diverse and mobile workforce, speaking foreign languages and technically savvy etc
- Financial infrastructure, banking environment
- Infrastructure & Accessibility
- Logistics, travel, real estate facilities required for the operation of a company
- Political & Economic Stability, Rule of law
- Country Credit Ratings:
- Evaluate the ability and willingness of the local government to fulfil their financial commitments, measured by the three main Rating Agencies: S&P, Moodys and Fitch
- Regulatory/ Legal Landscape
- Exchange Controls and central bank regulations
- Existence of other regional treasury centres
- Overall Cost (cost of living, real estate) etc
- Currency environment and access to Capital markets
- - The ability and ease of an organisation to finance itself through accessing longer term capital via traditional markets (Equity and Debt).
If the respective FTC (global; regional or hybrid) jurisdiction is part of a wider economic bloc such as the EU, the due diligence should also look at some potential impacts from the bloc rules and directives related to treasury centres and deployed solutions. In particular, the EU has an in-depth legislation around state aid, transfer pricing, WHT on intercompany loans etc.
How HSBC can help
When establishing a financial global or regional treasury centre, it helps to have a banking partner with extensive global and local experience. In general, banks are not in a position to provide tax advice as it is not their field of expertise. However, we can provide practical guidelines or share the experiences of other clients (while keeping strict confidentiality rules).
No matter the size of your organization, HSBC Global Liquidity and Cash Management team can provide solutions tailored to your company within your domestic market and internationally.
When establishing a financial global or regional treasury centre, it helps to have a banking partner with extensive global and local experience. In general, banks are not in a position to provide tax advice as it is not their field of expertise. However, we can provide practical guidelines or share the experiences of other clients (while keeping strict confidentiality rules).
To this end, we have created our liquidity management hubs to match your FTC footprint and ensure we can meet your requirements for multi-currency and multi-entity structures.
Our liquidity hubs in Americas, Europe, Asia and MENAT are underpinned by continuous investments in technology, people and talent pools of highly skilled IT resources. Local knowledge and domestic solutions are inter-connected with the rest of the world to achieve economies of scale and seamless integration across markets to guarantee long-term success, continuity and sustainability of the proposition.
