assessing cash management practices in the face of brexit

Treasury and Trade Solutions

“The uncertainty surrounding Brexit presents considerable challenges for Corporate Treasurers around the world.”

— Elizebeth John, EMEA Cash Management Sales Director, Treasury and Trade Solutions, Citi.

Financial risk from economic uncertainty related to political events, as well as changing trading models, has made this a time of heightened concern. Straightforward improvements, such as gaining a clearer view of the number of bank accounts held by the organisation, can help to position Treasury so that any necessary changes can be made on development of a situation. Of course, as with any challenge, these uncertainties also offer an opportunity for Treasurers to elevate the profile of treasury within the organisation.

The importance of conducting a cash management assessment To evaluate the potential impacts of Brexit, Treasurers should conduct a cash management assessment that examines some key data points as given below.

• Determine the volume of SEPA (Single Euro Payments Area) transactions from UK-based EUR accounts, including SEPA Credit Transfer volumes and SEPA Direct Debit volumes.

• Determine the volume of European Economic Area (EEA) currency transactions, such as PLN, HUF, etc.

Elizebeth JohnDirector, EMEA Cash Management Sales, Treasury and Trade Solutions, Citi

Ilan JacobsEMEA Government Affairs, Citi

Cristina VasileBrexit Specialist, Treasury and Trade Solutions, Citi

Assessing Cash Management Practices in the Face of Brexit: What Treasurers Should Consider

3Assessing Cash Management Practices in the Face of Brexit | What Treasurers Should Consider2 Treasury and Trade Solutions

• Look at pooling structures to see which target balancing sweeps result in intercompany transactions. It’s important to be cognisant of the tax domicile of the entities participating in these sweeps.

Once the above information is collected, Treasury can assess the Brexit-related impacts on transactions.

• For organisations with SEPA Direct Debit and high volumes of SEPA Credit Transfer transactions, it may be wise to move these transactions to one of Citi’s 21 EEA-based branches in advance, to avoid any uncertainty in respect of Brexit.

• For a low volume of SEPA Credit Transfers, Citi believes taking a wait and watch approach may be prudent. A special process for SEPA participation of the UK after Brexit may be negotiated, which would alleviate the need for change.

• Since the UK may not be under the Payment Services Directive (PSD), intra-EEA transactions that have no lifting fees today may see lifting fees imposed as a result of Brexit. Of course, unlike in the case of SEPA, this will not affect an organisation’s ability to execute these transactions, so the ramification is a financial one.

Potential impact on pooling structures The main impact on pooling structure flows will be from taxation. After leaving the EU, the UK may no longer be a participant in the Interest and Royalties Directive (IRD) and the Parent-Subsidiary Directive (PD). Thus the flows between UK tax entities and EU tax entities will lose the Directive-related exemptions from withholding tax between related parties in the EU. Post-Brexit, the UK will instead rely on existing Double Taxation Treaties.

Citi’s analysis shows that structures with non-EU headers will not be impacted by Brexit. Structures with EU headers may be impacted if the header is a UK tax entity and if there are significant amounts being swept from tax entities domiciled in Cyprus, Poland, Portugal, Romania or Italy.

For such structures, the company may choose to wait for developments around Brexit. If the company would like to put in place a contingency, they may choose to disengage the impacted participants from the pool or re-domicile the Treasury entity itself.

To meet the changing needs of our clients, Citi is ramping up the currency range, cut off times and other capabilities in Dublin, Amsterdam and Frankfurt. This will offer our customers a choice of locations for centralising their cash management structures.

The impact of Brexit on regulations “The European Commission, the FCA and payment regulatory agencies have made it clear that EU regulations will be applicable in UK in their entirety until Brexit happens in March 2019,” stated Ilan Jacobs, Director, Government Affairs, for Citi. “In addition, the UK and the EU have reached a political agreement, although it is not yet a legally binding treaty. This agreement calls for a standstill transition period, whereby all EU regulations and permissions remain applicable until the end of December 2020. The broader question is what will happen in the longer term?”

Citi believes there will not be a significant divergence between the UK and the EU for the following reasons:

• The EU is the UK’s single largest trading counterpart. World Bank data (2016) suggests that international trade accounts for nearly 60% of the UK’s GDP and half of this is with the EU. Divergence from EU regulations means putting all of this at risk.

• A high proportion of EU regulations, especially in the financial services sector, have international origins. They are spearheaded by The Basel Committee on Banking Supervision (BCBS) or The Financial Stability Board (FSB) or at the G20 level.

“While much remains uncertain with regard to Brexit, Treasurers can rest assured that Citi TTS is working hard to support them in their global business endeavours,” concludes Cristina Vasile, Brexit Project Lead for Citi TTS. “Today, Citi has a strong and diversified presence across the European Union with a footprint in 21 EU/EEA states. Citi remains committed to helping clients achieve their objectives regardless of the outcome of the Brexit negotiations.”

assessing cash management practices in the face of brexit

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