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					Best Practices in Tax &Treasury




          October 24, 2001
  Orrick, Herrington & Sutcliffe LLP
  Greenwich Treasury Advisors LLC
Today’s Presentations
  Background on speakers
  Tax issues and opportunities
  Treasury best practices and issues
  Tax & Treasury working together




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   1
Peter Connors
  Tax partner at Orrick, Herrington & Sutcliffe LLP
  Past Chairman, ABA’s Tax Section Committee on
     Financial Transactions
    Most recent publications, ―The New Euro Regulations,‖
     Journal of Bank Taxation (1999); see also
     www.orrick.com
    Author, BNA Portfolio on Section 475
    U.S. Editor, Derivatives & Financial Instruments
    Previously, Tax Partner at Baker & McKenzie, and
     Director of International Capital Markets Tax Services at
     Ernst & Young
    LL.M (Taxation); NYU Law School and J.D., University of
     Richmond
    Phone: (212) 506-5120 Email: pconnors@orrick.com

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   2
Jeff Wallace
  Managing partner, founded GTA in 1992.
  Formerly, VP – International Treasury at American
     Express, Assistant Treasurer of Dun & Bradstreet and of
     Seagram, CPA with Price Waterhouse
  Author of The G31 Report: Core Principles for Managing
     Multinational FX Risk, (AFP, 1999)
  Editorial boards of International Treasurer, International
     Finance & Treasury, and Treasury Management
     International
  Phone: (203) 531-0835
  Email: jeff.wallace@greenwichtreasury.com

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   3
Tax Issues and Opportunities
  Leveraging tax-favored investments
  Tax basics of foreign tax credit and impact on funding
  Impact of FX on offshore Treasury operations
  The offshore bank for vendor finance operations
  Importance of tax documentation for hedging
     transactions
  Repatriation issues




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   4
Treasury Best Practices & Issues
  Core principles for managing FX risk
  Corporate governance and centralized treasury issues
  A compendium of international treasury structures
  In-house banks
    – Purchasing receivables without recourse versus
      interco loans
    – ―Virtual‖ Euro cash consolidation via your interco
      netting system
    – Agency treasury management (outsourcing)
  The 21st Century MNC Treasury



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   5
Tax and Treasury Working Together
  Tax & Treasury are natural partners
  Common mistakes
  Recommendations




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   6
Tax Issues and Opportunities




      Peter Connors, Partner

 Orrick, Herrington & Sutcliffe LLP
Tax Issues and Opportunities
  Leveraging Tax-Favored Investments
  Tax Basics of Foreign Tax Credit and Impact on Funding
  Impact of FX on Offshore Treasury Operations
  The Offshore Bank for Vendor Finance Operations
  Importance of Tax Documentation for Hedging
     Transactions
  Repatriation Issues




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   8
Leveraged Investments in Tax-Favored Investments - 1

  Interest incurred to purchase or carry tax exempt
     investments is not deductible under IRC § 265
  Rev. Proc. 72-18 sets guidelines for determining when
     interest expense is allocable to an investment
  The prohibition does not apply in certain de minimus
     situations,
      – if the investment if less than 2.0% of assets, using
      adjusted tax basis, it will not apply.
  Should also be able to use excess cash created by
   borrowings to meet reasonable needs of business




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   9
Leveraged Investments in Tax-Favored Investments - 2




  By analogy, should apply to money market preferred
      – Double-up of dividends received deduction?

  Intercompany hybrid instruments




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   10
Tax Issues and Opportunities
  Leveraging Tax-Favored Investments
  Tax Basics of Foreign Tax Credit and Impact on
     Funding
  Impact of FX on Offshore Treasury Operations
  The Offshore Bank for Vendor Finance Operations
  Importance of Tax Documentation for Hedging
     Transactions
  Repatriation Issues




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   11
Impact of FTC on Funding —1

Allocation of Interest Expense
  Interest expense is allocated based comparison of
     foreign and US assets
  Losses on certain interest expense equivalents that
     ―alter the cost of funds‖ must be allocated in same
     manner as interest expense
      – Taxpayers must elect to allocate gains from these
         transactions as a reduction of the cost of funds and
         thus reduce interest expense



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   12
Impact of FTC on Funding — 2
  Under the CFC netting rule, interest incurred on certain
     loans to controlled foreign corporations should be
     allocated directly to foreign income

  If not sufficient foreign income, may result in OFL
  The tax benefit associated with the interest deduction
     should include both state and federal taxes
      – However, if interest expense is allocated to foreign
         source interest and the taxpayer is an excess credit
         situation, a reduction in tax benefit should be made



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   13
Impact of FTC on Funding — 3
  Example:
      – Assume US CO has foreign to worldwide ratio of 70%
      – Anticipates borrowing at a cost of 5% or $5 million
      – Tax benefit of $2 million (40% times $5 million) should be
         reduced by 70% to $0.6 million
  Consider strategies to reduce excess FTC position, including C-T-B
   planning and use of offshore finance company
  Consider deconsolidated finance company or
  Consider preferred share issuance




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   14
Tax Issues and Opportunities
  Leveraging Tax-Favored Investments
  Tax Basics of Foreign Tax Credit and Impact on Funding
  Impact of FX on Offshore Treasury Operations
  The Offshore Bank for Vendor Finance Operations
  Importance of Tax Documentation for Hedging
     Transactions
  Repatriation Issues




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   15
Impact of FX on Offshore Treasury Operations-1

  Foreign operations further complicate matters due to
     special rules for foreign source income
  Under the regime for controlled foreign corporations,
     certain categories (―baskets‖) of passive income result in
     foreign personal holding company income (―FPHCI‖)
      –   Gain from property sales
      –   Interest, dividends, etc.
      –   Commodities gains
      –   Foreign currency gain
      –   Income equivalent to interest (e.g., factoring income)



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   16
Impact of FX on Offshore Treasury Operations-2


  Importantly, losses from one category of transaction do
     not reduce income in the other category
  There are hedging regimes within the CFC rules that are
     applicable in addition to the business hedging rules.
  It is often necessary to utilize the complete integration
     regimes to avoid FPHCI basketing problems.




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   17
CFC Borrowing Hedged with Swap


                                                US


  Loan

                                                                      Floating             Swap
Floating Interest                              CFC
                                                                      Fixed             Counterparty


 CFC has $100 of Subpart F income and $100 of manufacturing income.
 Assume it has $60 in interest expense and $20 in swap net income.
                          Subpart F Income                       Non-Subpart F Income


 Amount                          $100                                     $100
 Int. Expense                     ( 30)                                    ( 30)
 Swap Income                       20                                         0
 Net                             $ 90                                      $ 70

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC                                18
Foreign Base Company Sales: No Election

 Assume CFC has an FC receivable arising from a foreign base sales activity. It
 also has $30 of FX loss in year 1 and $30 of FX gain in year 2. It has $100 of
 foreign base company sales income and $100 of manufacturing income.
 Year 1             Subpart F Income                  Non-Subpart F Income
 Amount                   $100                                 $100
 FX                           0                                ( 30)
 Net                      $100                                  $ 70


 Year 2
 Amount                   $100                                 $100
 FX                         30                                       0
 Net                      $130                                  $100




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC                19
Foreign Base Company Sales: Election

 Assume CFC has an FC receivable arising from a foreign base sales activity. It
 also has $30 of FX loss in year 1 and $30 of FX gain in year 2. It has $100 of
 foreign base company sales income and $100 of manufacturing income.
 Year 1             Subpart F Income                  Non-Subpart F Income
 Amount                   $100                                  $100
 FX                         (30)                                     0
 Net                      $ 70                                  $100


 Year 2
 Amount                   $100                                 $100
 FX                         30                                       0
 Net                      $130                                 $100




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC                20
Impact of FX on Offshore Treasury Operations-3

  Euro Adoption Issues
  Issue is when is exchange gain or loss and translation
     gain or loss recognized with respect to legacy currency
     denominated transactions
      – Generally deferred until repayment
      – Planning permitted for receivables and payables
           •
          Election to recognize gain or loss as of last day of
          year prior to the change
    – Need to avoid double taxation
    – Built-in translation gain/loss to be recognized over 4
      years beginning with year of change
  Potential for additional changes in functional currency

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   21
Tax Issues and Opportunities
  Leveraging Tax-Favored Investments
  Tax Basics of Foreign Tax Credit and Impact on Funding
  Impact of FX on Offshore Treasury Operations
  The Offshore Bank for Vendor Finance Operations
  Importance of Tax Documentation for Hedging
     Transactions
  Repatriation Issues




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   22
The Offshore Bank — 1

  Normally interest income received is subpart F income
    – Planning possible for related party interest
  Section 954(h)-- Exclusion for Banks, Insurance
   Companies, and Securities firms
  Banking income includes vendor finance
  Requirements:
      – 70% of income from a lending or finance business
         from unrelated customers
           • Includes making of loans and discounting of
             receivables



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   23
The Offshore Bank — 2
  Requirements (cont’d):
    – 30% limitation on non-banking and non-securities
        Income
      – Substantial activity requirement in home country for
        cross-border income

  12 companies have set up operations in Ireland
  Proposed legislation would make section 954(h)
     permanent
  In today’s environment, vendor financing may be a
     necessary component of the sales function



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   24
Tax Issues and Opportunities
  Leveraging Tax-Favored Investments
  Tax Basics of Foreign Tax Credit and Impact on Funding
  Impact of FX on Offshore Treasury Operations
  The Offshore Bank for Vendor Finance Operations
  Importance of Tax Documentation for Hedging
     Transactions
  Repatriation Issues




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   25
Hedging - Importance of Tax Documentation - 1

  The tax issues for hedging transactions are:
    – Character of G/(L): capital loss versus ordinary loss
    – Timing of G/(L) recognition: consistency of income
     recognition between hedged item and hedging
     instrument
  Two main types of tax hedging regimes:
      – Business hedging regime. This regime aims at
       solving both timing and character issues associated
       with hedges
    – Complete integration regime. Under this regime, a
       transaction and a hedge are fully integrated for most
       purposes of the tax code
  There are, however, other tax hedging regimes related
   to derivatives and hedging activities
Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   26
Hedging - Importance of Tax Documentation - 2

  The type of documentation varies depending on the hedging
   objective and the applicable statute or regulation.
  Unlike FAS 133, hedge treatment is not really an election
  The basic IRS hedge documentation is similar, but by no means
   identical to 133’s:
      – Description of the hedging instrument
      – Description of the hedged item
      – Nature of risk being hedged
      – Particular documentation requirements for the type of taxation
        regime used
      – Description of US Tax accounting method used




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC       27
Hedging - Importance of Tax Documentation - 3

  IRS examiners will routinely ask about the taxpayer’s
     hedging policies and procedures
      – Auditors will have more info than in past
  A properly documented hedge will prevent application of
     the straddle provisions
  It prevents the IRS from having the ability to characterize
     derivative losses as capital and gains as ordinary
  In CFC context, avoids creation of foreign personal
     holding company income




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   28
Hedging - Importance of Tax Documentation - 4

  Improper Documentation — Whipsaw
  Failure to identify a transaction as a hedge
      – The failure is binding on the taxpayer
      – If there is no reasonable basis for not making the
       identification, then gain from the hedging transaction
       is ordinary, but loss will be capital
  If a transaction is improperly identified as a hedge
      – Identification is binding as to gain
      – A loss on the transactions, will be a capital loss,
      however
  Similar rules apply in CFC context

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   29
Tax Issues and Opportunities
  Leveraging Tax-Favored Investments
  Tax Basics of Foreign Tax Credit and Impact on Funding
  Impact of FX on Offshore Treasury Operations
  The Offshore Bank for Vendor Finance Operations
  Importance of Tax Documentation for Hedging
     Transactions
  Repatriation Issues




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   30
Repatriation — 1
  As long as deferral is maintained, taxpayers can use low
     interest tax rate associated with offshore operations to
     provide an EPS benefit
  However, the inability to utilize excess cash provides a
     funding cost
  Common strategies used to access cash
      – Factor receivables (only foreign receivables though!)
        and other property sales,
      – Foreign tax credit planning
      – Short-term intercompany loans



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   31
Repatriation — 2
  Factoring key issues


      – Only foreign receivables avoid section 956

           •   What about receivables of U.S. branches of
               foreign affiliates?


      – Need to avoid US trade or business




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   32
Repatriation — 3
  Foreign tax credit planning


      – Use interest planning and C-T-B planning to create
         chains of high and low taxed income

      – Dividend or make section 956 loans from high tax
         chains




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   33
Repatriation — 4
  Loans from CFCs
      – Single Short-Term Loan
           •
           must be less than 3 months and paid off before
           end of the quarter
      – Successive loans
         • not outstanding at end of quarter
         • must be 6 and 1/2 month break between loans
      – End of quarter loans
         • must not paid off with 30 days and no other loan
           for 59 days by same CFC



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   34
Peter Connors
  Tax partner at Orrick, Herrington & Sutcliffe LLP
  Past Chairman, ABA’s Tax Section Committee on
     Financial Transactions
    Most recent publications, ―The New Euro Regulations,‖
     Journal of Bank Taxation (1999); see also
     www.orrick.com
    Author, BNA Portfolio on Section 475
    U.S. Editor, Derivatives & Financial Instruments
    Previously, Tax Partner at Baker & McKenzie, and
     Director of International Capital Markets Tax Services at
     Ernst & Young
    LL.M (Taxation); NYU Law School and J.D., University of
     Richmond
    Phone: (212) 506-5120 Email: pconnors@orrick.com

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   35
Treasury Best Practices & Issues




  Jeffrey Wallace, Managing Partner
  Greenwich Treasury Advisors LLC
Treasury Best Practices & Issues
  Core principles for managing FX risk
  Corporate governance and centralized treasury issues
  A compendium of international treasury structures
  In-house banks
    – Purchasing receivables without recourse versus
      interco loans
    – ―Virtual‖ Euro cash consolidation via your interco
      netting system
    – Agency treasury management (outsourcing)
  The 21st Century MNC Treasury



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   37
GTA’s FX Benchmarking
  Started in 1998 with the Group of 31 Study sponsored by
     General Motors
      – 31 MNC’s with average sales of $50 billion
  Validated by a 1999 with 36 American MNC’s with
     average sales of $8 million
  GM saw a need for establishing worldwide FX risk
     standards for multinationals
      – The Group of 30’s 1993 derivative standards were
        written for banks
      – For MNC’s, FX hedging is a non-core, non-profit
        activity which needs different standards than those
        appropriate for banks and institu-tional investors.


Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   38
―The Group of 31‖




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   39
G31 Summary Results
We found that a majority — often a large majority — of the
Group of 31 were following each of 12 core risk
management principles that promoted:
  Measurable FX hedging objectives
  Accurate and timely information on how well those
     hedging objectives were being achieved
  Minimizing transactions costs
  Rigorous error and compliance checking
  Responsibility for senior management oversight



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   40
Implementing the Principles
To provide guidance in implementing these 12 risk
management principles, we’ve divided them into three
categories:
  Fundamental principles, which generally applicable to all
     companies involved in FX hedging
  Volume-related principles, whose degree of
     implementation is a function of how much trading volume
     is being done
  Risk-related principles, whose implementation is also a
     function of how much risk is being managed



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   41
12 Core Principles — 1




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   42
12 Core Principles — 2




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   43
Validation by 1999 Study
The following year, we validated these principles with a
second group of 36 American MNC’s, including:




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   44
Volume-Related Practices




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   45
Risk Categories
We found we could use these risk dimensions to divide the
both the 1998 and 199 groups into three ―risk categories‖:




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   46
Risk-Related Practices




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   47
For More Information
Go to www.greenwichtreasury.com to download
  The Group of 31 Report: Core Principles for Managing
     Multinational FX Risk (1999, Association for Finance
     Professionals)
  Describes each principle in more detail, with
     benchmarking data from the Group of 31 study.




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   48
Treasury Best Practices & Issues
  Core principles for managing FX risk
  Corporate governance and centralized treasury
     issues
  A compendium of international treasury structures
  Centralizing cash and funding
      – In-house banks (IHB’s)
      – Purchasing receivables without recourse versus
      interco loans
    – ―Virtual‖ Euro cash consolidation via your interco
      netting system
    – Agency treasury management (outsourcing)
  The 21st Century MNC Treasury
Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   49
Corporate Governance Issues
  Four key questions about the allocation of treasury
     management between the local units/regional
     management and Parent Treasury:
      –
     Who owns the cash?
      –
     Who is responsible for funding/liquidity?
      –
     Who runs the foreign exchange?
      –
     Who is responsible for bank relations?
  Two challenges:
      – Making treasury responsive to the needs of the
        operating units
      – Making operating units responsive to treasury
        initiatives


Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   50
Decentralized Treasury Management – 1
 Decentralized treasury management incurs substantial
 costs in large MNC’s:
    Buy/sell spreads on unnecessary borrowing when
      there is excess cash in the group
    Buy/sell spreads on offsetting FX positions
    Higher interest, FX, and cash management costs
      due to non-professional management and
      diseconomies of scale
    Unnecessary taxes due to suboptimum unit capital
      structures and neglected cross-border tax arbitrage
      opportunities



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   51
Decentralized Treasury Management – 2
Decentralized treasury management is also:
  An inefficient allocation of local management resources
      – Except for proximity, local management provides little
        value-added to treasury management
  Reduces the ability of the corporation to fully mobilize all
   of its financial resources
  Arguably, the role of local management is to produce
     profits, not to manage profits




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   52
How Responsibilities are Allocated




                                 Base = 64, G31 and FX99 Companies
Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   53
Treasury Best Practices & Issues
  Core principles for managing FX risk
  Corporate governance and centralized treasury issues
  A compendium of international treasury structures
  Centralizing cash and funding
    – In-house banks (IHB’s)
    – Purchasing receivables without recourse versus
      interco loans
    – ―Virtual‖ Euro cash consolidation via your interco
      netting system
    – Agency treasury management (outsourcing)
  The 21st Century MNC Treasury

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   54
Centralized FX Management Structures




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   55
Cross-Unit Treasury Building Blocks
  Distributed treasury staff, SPV’s and banks:




                                                                     RTC = Regional
                                                                     Treasury Center

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC                     56
Cash Concentration Methods




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   57
Treasury Best Practices & Issues
  Core principles for managing FX risk
  Corporate governance and centralized treasury issues
  A compendium of international treasury structures
  Centralizing cash and funding
    – In-house banks (IHB’s)
    – Purchasing receivables without recourse versus
      interco loans
    – ―Virtual‖ Euro cash consolidation via your interco
      netting system
    – Agency treasury management (outsourcing)
  The 21st Century MNC Treasury

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   58
Centralizing Cash/Funding — 1
The traditional approach is to use intercompany advances
and loans
  Arms length pricing
  Interest subject to withholding tax
  Since loans can’t be made upstream to parent (imputed
     dividend), often intercompany loans are made within the
     the off-shore companies
  Multilateral lending can lead to a ―spaghetti‖ interco loan
     structure that can be extremely difficult to manage
  Bilateral lending with in in-house bank is best practice



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   59
Reasons for In-House Banks
  Maximize internal cash recycling
  Centralize international cash and FX management in
     one unit with specialist expertise, reducing staff at local
     units

  Retain spreads in the IHB, instead of paying to banks
  Reduce transaction volume and bank charges




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   60
Centralizing Cash/Funding — 2
Purchasing trade receivables without recourse
  Selling unit continues to collect
  Immediate bad debt deduction by seller
  No W/H tax on discount income due to non-recourse
     nature (discount not considered interest)
  Monthly purchases effectively provide evergreen interco
     working capital funding
  Funding the receivables with dollars covered with
     forwards are often more cost-effective than local funding,
     especially in emerging market countries
  Minimizes thin cap problems due to reduced debt

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   61
Centralizing Cash/Funding — 3




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   62
Overlay Bank Structure Issues
  Many, many accounts have to be set up
      – Local red tape can be immense
  Need for daylight overdraft lines further complicates the
     implementation
      – Parent guarantees
      – Local units’ Board approvals
  No one will ever, ever do this again for another bank




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   63
Centralizing Cash/Funding — 4
Consolidate cash by ―piggy-backing‖ off of the existing
interco netting system:
  Add the IHB to the netting system
  Units will excess cash make payments to IHB
  Units needing cash receive payments from IHB
  Monthly nettings with cash transfers and trade payables
     probably pick up at least 60% of the excess cash
      – Use the process to book settle the interco payables
  Weekly nettings with cash transfers only will probably
     pick up 80% of the excess cash
  No muss, no fuss, immediately implementable

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   64
Agency Treasury Management — 1
Outsource the IHB transaction processing (not risk
management)
  Major bank providers are AIB, BofA Citi, DB, JP Morgan
     Chase
  Non-bank providers include FTI, JM Huber Financial
     Services
      – Internet providers are starting to develop
  Most are based in Dublin, having started with the Dublin
     Docks IFSC's




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   65
Agency Treasury Management — 2
  Substantial care and forethought is needed in the
     operating agreement with the provider
      – Must have service level guarantees
  Must be actively managed by Treasury, not forgotten
      – Focus on output, not process
          Process is the provider’s job
           •
  Treasury must be alert to changes in operating
   environment
      – Can’t expect provider to pro-active, looking for what
         needs to be done




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   66
Agency Treasury Management — 3
  Use the provider’s system for parent treasury
     transactions
      – Have them execute the FX hedging trades under
        your direction
      – Have them do the FAS 133 accounting!
      – And the performance analytics




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   67
The 21st Century MNC Treasury — 1
  Treasury works with and supports the business units, not
     just another demander of information from them
  Risk management is disciplined and pro-active with
     active business unit participation with the hedging
     decision-making within policy

  Clearly defined risk performance measures show the
     value-added that Treasury provides

  Truly centralized cash management and funding via an
     IHB



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   68
The 21st Century MNC Treasury — 2
  Close co-operation with Tax generates tax savings and
     lower after-tax cost of interest

  Treasury has a higher level of internal influence, no
     longer considered a cost center
      – Treasury staff have greater career opportunities




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   69
Jeff Wallace
  Managing partner, founded GTA in 1992.
  Formerly, VP – International Treasury at American
     Express, Assistant Treasurer of Dun & Bradstreet and of
     Seagram, CPA with Price Waterhouse
  Author of The G31 Report: Core Principles for Managing
     Multinational FX Risk, (AFP, 1999)
  Editorial boards of International Treasurer, Finance &
     Treasury, and Treasury Management International
  Phone: (203) 531-0835
  Email: jeff.wallace@greenwichtreasury.com

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   70
About GTA
     Ninth year, over 200 clients
     Dedicated to corporate treasury consulting
        – Not affiliated with Greenwich Associates
     Best known for our benchmarking studies




     Visit www.gtallc.com for more details
Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   71
Tax &Treasury Working Together




           October 24, 2001
   Orrick, Herrington & Sutcliffe LLP
  Greenwich Treasury Advisors LLC
Tax and Treasury Working Together
  Tax & Treasury are natural partners
  Common mistakes
  Recommendations




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   73
Tax & Treasury are Natural Partners
  Despite what Controller’s may think, Tax and Treasury
     are the core of Finance, with major P&L operating
     responsibilities
      – Interest, FX and Taxes
  Together, they are the denominator of the EVA formula:
    – Firm value = Future Cash Flow  WACC
    – Managing WACC improves Firm Value
  Treasury provides the raw fuel — money — necessary
     to execute many Tax planning arrangements
  Nearly all international transactions are an exercise in
     international tax arbitrage
  A focus on just reducing taxes can lead to structures that
     have immovable cash or unpayable debt

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   74
Common Mistakes
  The Inadvertent Dealer
  Hedging with the Wrong Instrument
  Failed Hedging Identifications
  Failed Interest Expense Allocation
  Back to Back Loans Through An Active Subsidiary
  Tax planning with no exit strategies




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   75
Tax Trap — The Inadvertent Dealer

                                        US




  US Subsidiary                     Hedge Co                         Foreign Sub

• Transactions with US Subsidiary — Probably not dealer
• Transaction with Foreign Subsidiary — Hedge Co.
  becomes a dealer
• What if Hedge Co is an LLC?
• Protective Identification
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Failed Hedging Identifications
  Consequences described earlier
      – Over reliance on GAAP designations and
     determination of whether a transaction is a derivative
  Many designations are not elective for tax purposes
      – Either adverse consequences for failed designations
     or IRS can designate for the taxpayer
  Designations must also be made at CFC level




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   77
CFC Functional Currency Borrowing


                                                     US


                      Loan
       Bank                                         CFC
                      Interest

 Assume CFC borrows from a third party bank. It has $100 in Subpart F income
 and it has $100 in operating income and $40 in interest expense.
                  Subpart F Income                   Non-Subpart F Income
 Amount                    $100                              $100
 Int. Expense              ( 20)                             ( 20)
 Net                       $ 80                               $ 80



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CFC FX Borrowing - No Designation

                                                      US


  FX Loan                                                                  Currency
                                                                           Swap               Swap
                                                  CFC
  Interest                                                                                 Counterparty
Assume CFC borrows from a third party bank. It has $100 in Subpart F income and it has $100 in operating
income and $40 in interest expense. It also has a currency loss of $20 on retirement of the obligation, but a
gain of $20 on termination of the swap.
                         Subpart F Income                          Non-Subpart F Income

                                 Interest       FX
Amount                           $100                                         $100
Int. Expense                      ( 20)                                        (20)
Retire of Debt (FX)               ( 10)                                        (10)
Curr Swap Gain (principal)                       20                           ____
Net                              $ 70            20                            $70


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Common Mistakes
  The Inadvertent Dealer
  Failed Hedging Identifications
  Hedging with the Wrong Instrument
  Failed Interest Expense Allocation
  Back to Back Loans Through An Active Subsidiary
  Tax planning with no exit strategies




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   80
CFC Functional Currency Borrowing
Hedged with Swap

                                                 US


  Loan

                                                                     Floating          Swap
Floating Interest                               CFC
                                                                     Fixed          Counterparty


 Assume it has $60 in interest expense and $20 in swap net income.
                      Subpart F Income                Non-Subpart F Income
                                 Interest                                Property
 Amount                          $100                                    $100
 Int. Expense                     ( 30)                                  ( 30)
 Swap Income                       20                                        0
 Net                             $ 90                                    $ 70



Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC                             81
CFC Functional Currency Borrowings
Hedged with Forward Contract

                                             US


          Loan                                                                     Short
                                                                                   Futures
          Interest                         CFC
                                                                                   Contract
Assume CFC borrows from a third party bank. It has $100 in Subpart F income and it has $100 in
operating income and $60 in interest expense. Assume that it also has $20 in hedging gains from
futures contracts.
                        Subpart F Income                   Non-Subpart F Income
                             Interest   Property Gains
Amount                       $ 100                                   $ 100
Hedging Gains                              20
Int. Expense                 ( 30)      _____                        ( 30)
Net                          $ 70       $ 20                         $ 70




 Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC                               82
Common Mistakes
  The Inadvertent Dealer
  Failed Hedging Identifications
  Hedging with the Wrong Instrument
  Failed Interest Expense Allocation
  Back to Back Loans Through An Active Subsidiary
  Tax planning with no exit strategies




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   83
Common Mistakes
Failed Interest Expense Allocation
  An election must be made to allocate gain from hedging
     transactions against interest expense
  Without the election, hedging costs are treated like
     interest expense, but gains do not reduce it




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   84
Common Mistakes
  The Inadvertent Dealer
  Failed Hedging Identifications
  Hedging with the Wrong Instrument
  Failed Interest Expense Allocation
  Back to Back Loans Through An Active Subsidiary
  Tax planning with no exit strategies




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   85
Back-to-Back Loans

                                            US


              Loan                                                Loan

              Interest                     CFC                    Interest

Assume CFC lends $2,000 to a non-CFC. It has $100 in Subpart F income and it has $100 in
operating income and $20 in interest income. It also borrows $2,000 and incurs $100 of
interest expense.
                     Subpart F Income                   Non-Subpart F Income
Amount                      $100                                  $100
Int. Income                   20
Int. Expense                 (10)                                 (10)
Net                         $110                                  $90


Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC                         86
Tax Planning with No Exit Strategies
Creating international holding companies or selling
technology/intellectual property rights to an entity in a tax
haven or very low tax rate environment
  APB 23 is used to avoid providing for deferred US taxes
     on the income
  Money goes in tax-free for both book and tax, but can’t
     come out to the US parent without incurring US taxes
     and book taxes
  The foreign affiliate cash flow is effectively locked in the
     entity; meanwhile the US parent has substantial debt
     that cannot be repaid from domestic-sourced income,
     especially taking into account funding dividends
  It’s a devil’s bargain
Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   87
Recommendations — 1
  Regular meetings between Tax and Treasury, especially
     on these topics:
      – Treasury’s funding strategies
      – Tax’s planning strategies and objectives
  Tight coordination on derivative hedge documentation
      – For both FAS 133 and IRS/local authorities
  Dedicated people in both departments responsible for
     the relationship
      – Acts as an observer in the other’s departmental
      meetings
  Active Tax participation on the Company’s Financial Risk
   Committee

Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   88
Recommendations — 2
Annual joint planning on:
  Utilizing excess FTC/managing FTC neutrality
  Repatriation issues
  After-tax cost of debt
      – Interco leading and lagging
  Dealing with excess cash
  Domestic interest allocation to foreign investments
  Utilizing local affiliate tax-loss carrryforwards
  Thin cap issues


Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   89
Recommendations — 3
  Joint tax/treasury departmental targets
      – Specific tax savings
      – After-tax cost of interest savings
      – Double counting of results in each department’s
         goals




Orrick, Herrington & Sutcliffe LLP/Greenwich Treasury Advisors LLC   90