Welcome To NeuGroup

Connecting Every Finance Professional Who Wants To Share And Learn

Welcome To NeuGroup

Connecting Every Finance Professional Who Wants To Share And Learn

Our Mission

To help our members in Corporate Finance and Treasury reach their full, professional potential. We assist our members and those who serve them to drive success for their companies, their customers, their teams, their peers and themselves.

Our Vision

To connect every finance professional who wants to share and learn with others seeking the same. Bring the best of these professionals into our leading membership network for knowledge exchange to be a source for solutions, advice to achieve greater success and for new insight and validation for the advancement of Corporate Finance and Treasury professions.

The Corporate Finance and Treasury Elite From the World's Most Iconic Companies
NeuGroup Process

Share Your Projects And Priorities And What You Would Most Like To Learn From Other Finance Professionals

Connect

NeuGroup helps you forge meaningful connections with fellow finance professionals who share similar projects and priorities or have useful experience with them.

Exchange

NeuGroup establishes trust to facilitate open and honest knowledge exchange and inspires you to share and learn to reach your full professional potential.

Distill

NeuGroup distills useful content from each exchange to drive success and focuses on new insight that is validated by our peer groups of leading finance professionals.

Testimonials

NeuGroup Helps Our Members Drive Success For Themselves, Their Teams, Their Companies, Their Customers, Investors And Every Other Stakeholder In Their Reaching Their Full Potential

Our NeuGroups

NeuGroup currently connects 500+ corporate finance and treasury professionals from hundreds of the world’s most iconic companies for knowledge exchange in over 20 peer groups and distills insight from these exchanges to help them succeed.

Appealing to Millennials and Gen Zers: The Academic Perspective

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

  • Strategic thinking
  • Business decision-making
    • A Foster School assistant dean later elaborated: “New graduates are seeking jobs in strategic positions that impact a company’s present and future direction. They are savvy in technology, use of communication networks, and see both the present and the future in how they think, so where they can exercise these attributes and skills makes a difference to them.  They think with innovation in mind and have a global sense of their potential impact.”
  • Cross-functional teams
  • Salary
    • The average salary for Foster’s 2018 MBA finance graduates was about $115,000, plus a signing bonus of $25,000.
  • Flexibility/work balance.
  • Promotions.
    • In an earlier session, one treasurer asked his peers if they found that new hires expected a promotion every year. He said that’s unrealistic and his approach is to tell people the company is “going to get you where you ultimately want to go,” but don’t expect a promotion every year. Another treasurer said finance has a 70% retention rate and warned, “You’ll lose them if they’re not advancing.”
  • Frequent feedback. The Foster School professors added that MBAs want contact with senior leadership.

How to engage potential recruits. The Foster School presentation recommended members take these actions to appeal to MBA students:

  • Give a guest lecture or serve on a panel at the school.
  • Host a group of students for a tour or talk.
  • Sponsor a spring analytics project.
  • Mentor a student.
  • The obvious: Hold on-campus recruiting events.

The corporate perspective. Not all the treasurers present said they favored MBA graduates. In fact, one member said MBA grads who are on rotations in the company’s leadership program usually don’t return to finance roles because they “want to do exciting business stuff, sexy biz dev stuff.” It’s easier, he said, to retain undergraduates who start in finance. “I love the leadership program when we get undergrads,” he said.

  • Another treasurer asked, “How do we make finance sexier?” He noted that corporates are often competing against investment banks for top talent.
  • The first treasurer said that when he does hire MBAs, he takes graduates from “second tier” schools who did well and are intent on proving themselves, as opposed to trying to recruit Ivy League MBAs. “Let them go to McKinsey or Goldman Sachs,” he said.
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Activist Investors Who Care About More Than One Kind of Green

Founder’s Edition, by Joseph Neu

Takeaways from a fireside chat with ValueAct founder Jeffrey Ubben.

Based on a head’s up from a top Wall Street activist defense adviser, I went to an event earlier this month hosted by Refinitiv and Reuters Breakingviews that featured a fireside chat with ValueAct co-founder Jeffrey Ubben. Mr. Ubben has stopped trying to increase his net worth and is now focused on making the world a better place (at least according to his worldview). One of the vehicles for him to do this is the ValueAct Spring Fund launched in 2018, which invests in companies aiming to address environmental and social problems.

Founder’s Edition, by Joseph Neu

Takeaways from a fireside chat with ValueAct founder Jeffrey Ubben.

Based on a head’s up from a top Wall Street activist defense adviser, I went to an event earlier this month hosted by Refinitiv and Reuters Breakingviews that featured a fireside chat with ValueAct co-founder Jeffrey Ubben. Mr. Ubben has stopped trying to increase his net worth and is now focused on making the world a better place (at least according to his worldview). One of the vehicles for him to do this is the ValueAct Spring Fund launched in 2018, which invests in companies aiming to address environmental and social problems.

  • Inspired by Silent Spring. According to Ubben, the Spring Fund name was inspired by the Rachel Carson environmental science book published in 1962.
  • What makes the fund unique. It’s run by one of the leading activist investors at a firm with $16 billion under management that’s famous for, among other thing, forcing its way onto the board of Microsoft, proving mega-caps were not off limits. “It takes a profit maximizer to know a profit maximizer,” Mr. Ubben said. Bringing an activist mindset to an environmental and social investment mandate has appeal, and Mr. Ubben has raised $1 billion in capital so far.

Here are some key insights from Mr. Ubben:

  • Larry Fink’s letter ups the ante substantially. BlackRock Chairman and CEO Larry Fink’s latest annual letter to CEOs ups the ante on sustainability, calling for “a fundamental reshaping of finance.”
  • Building on multi-stakeholder and corporate purpose mandates. Climate risk as investment risk and putting sustainability at the center of investment mandates may be the most powerful driver of the multi-stakeholder, corporate purpose mandate that Mr. Fink helped usher into modern thinking in his earlier letter.
  • Sustainability is a way to get the long term back. The constituency to support sustainability includes at least two-thirds of CEOs who see it as a way to win back a long-term view from shareholders—give me more than a quarter to reallocate capital to save the world before showing returns on that investment. There are probably one-third of those that are really driven to save the world.
  • Profit maximization over decades. To make the case for profit-driven investment in sustainability, investors need to understand that the time frames must extend 30 to 40 years. Decisions made based on current values, versus terminal values, will lead to investments that will destroy capital over the next generation. They are not conducive to long-term profits.
  • Change the investor base. Thus, companies that want to embrace sustainability and long-term profitability in their corporate purpose need to move toward investors who share that purpose.
  •  This is the window to move. Not only is more research convincing more people to believe in climate risk and the need for action, but the cost of capital in the current lower-for-longer interest rate environment is conducive to making new investments and reallocating capital. As Mr. Ubben notes, we have moved from the traditional situation of being short financing to being short human, social and environmental capital.
  • The effort is capital intensive. Ultimately, the transition to sustainability will be capital intensive. Such a capital-intensive effort will require the capital structures of existing large companies. For this reason, Mr. Ubben is not a fan of villanization.
  • Big Oil capital budgets needed.  One of his investments is in Nikola Motor, for example, which is developing hydrogen fuel cells for long-haul trucking.  To move to this future, there needs to be substantial capital invested in refueling platforms and distribution. “We will need the capital budgets of a Shell or a BP to do this over the next 30 to 40 years,” he said.
  • Shifting value propositions. While shifting to long-term value propositions is one necessity for the fundamental reshaping of capitalist economies, another is a change in perception of value and unit economics. As an example, Mr. Ubben said that if biodiesel becomes mainstream, it would make sense for McDonald’s to pay customers to order french fries to generate more used frying oil to convert into fuel.
  • Utilities need pristine governance.  The grid is the most important asset in the energy economy, including a clean energy one. So it’s imperative that utilities embrace a multi-stakeholder model and adopt the best possible governance. If customers have no choice but to be utility customers, then the economy must rely on regulators and government to sustain their ESG viability. This drives Mr. Ubben’s activist investment in Hawaiian Electric Industries and his calls for a management shake-up. He favors performance-based ratemaking for utilities, encouraging them to become asset light and deploy micro grids.

Ultimately, it’s impossible to know if green activist investors like Mr. Ubben are motivated mostly by a philanthropic desire to fix a system they helped create and make capitalism work for society, or are using the increasing embrace of ESG to profit from green activism. It’s probably a bit of each. Regardless, finance professionals at multinationals have no choice but to pay attention and take action.

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A High Bar: Lowering Corporate Expectations and Under-delivering Successfully

Slower economic growth, tighter consumer credit put pressure on finance chiefs in Asia.

The subdued mood among participants at the recent NeuGroup meeting of CFOs in Asia reflected the difficulty many members say they are facing as China’s economic growth slows and business conditions worsen, while expectations for revenue growth at corporate headquarters remain unrealistically high.

Slower economic growth and tighter consumer credit put pressure on finance chiefs in Asia.

The subdued mood among participants at a recent NeuGroup meeting of CFOs in Asia reflected the difficulty many members say they are facing as China’s economic growth slows and business conditions worsen, while expectations for revenue growth at corporate headquarters remain unrealistically high.

Managing expectations. The key challenge, then, for some members is managing the expectations of those in the C-Suite who still want 10% revenue growth. In other words, CFOs and their teams need to figure out how to successfully under-deliver. This topic—and how to deal with failure—will be discussed at the group’s next meeting in April in Shanghai (email us about your eligibility to attend).

Tighter belts. Dealing with the fallout from lower production has meant implementing cost-cutting initiatives, and some members expect the challenging business climate and the need for belt-tightening to last three to five years.

Pressure to produce. As demand slows, members say Chinese authorities are exerting pressure on corporates to build inventory to reduce the impact on the economy and keep employment high. Much of this pressure is indirect, through so-called window guidance, which is a part of life in China and the way government agencies influence corporate behavior with unwritten rules.

Credit, not tariffs. Although trade tensions between the US and China have added to the region’s challenges, the tightening of consumer credit in China ranked as a more serious concern for many participants, based on comments during the projects and priorities session at the meeting.

  • Other concerns mentioned at the meeting include complying with China’s corporate social credit system and the wide-ranging reform of the country’s individual income tax that has implications for corporates.

Hope for the future. Members remain bullish on the long-term business prospects in China, thanks in part to the country’s population of 1.4 billion. But for now the pressure is on, and some members are searching for ways to reduce the stress. How else to explain why one finance team has created a “S— Happens Award?”

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What China’s Individual Income Tax Changes Mean for Corporates, Expats

CFOs with employees in the country need to plan for new residency rules and ensure compliance.

The most significant reform of China’s individual income tax (IIT) laws in 38 years has numerous implications for foreign workers and the multinational corporations that employ them. Michelle Zhou, a partner at KPMG, presented many of the critical elements of the changes to a group of CFOs at a recent NeuGroup meeting in Shanghai.

CFOs with employees in the country need to plan for new residency rules and ensure compliance.

The most significant reform of China’s individual income tax (IIT) laws in 38 years has numerous implications for foreign workers and the multinational corporations that employ them. Michelle Zhou, a partner at KPMG, presented many of the critical elements of the changes to a group of CFOs at a recent NeuGroup meeting in Shanghai.

Big picture. CFOs—who are responsible for income reporting—need to proactively dig into the details of the changes with tax advisors and coordinate closely with human resources departments to develop retention policies that address the potentially negative financial effects the new rules may have for some employees. These include changes in the treatment of annual bonuses and equity incentives—although not all details have been announced.

Defining residency. High on the list of takeaways is that an individual who lives in China for 183 days or more will now be considered a tax resident, instead of one year under the old rules. This has implications for whether the employee pays tax only on income sourced in China or on all of her worldwide income.
• A new “six-year rule” replaces the old five-year concession rule. Under the old policy, if a foreign worker stayed in China for five consecutive years, her worldwide income would be taxed in China. The new law extends the period to six years, allowing foreign workers in China more time to avoid paying taxes on income sourced overseas.
o Under the new rules, if the person leaves mainland China for more than 30 consecutive days at any point during the six years, the clock to count tax residency will be reset.

Tax-exempt benefits vs. itemized deductions. The new law allows foreign workers to take advantage of several new itemized deductions limited to specified amounts:
• Children’s education.
• Further education.
• Mortgage interest or housing rent
• Medical fees for serious illness.
• Elderly care.

Foreign workers who don’t take the deductions listed above can continue use tax-exempt benefits until the end of 2021 by claiming allowances of a “reasonable amount” for children’s education, language training fees, housing rental, home leave visits, relocation expenses, and meal and laundry expenses. Corporates need to make sure employees are aware of the choice and the pros and cons of their decision.

Greater Bay Area preferential tax policy. To attract highly skilled workers to a number of cities in Guangdong province, China is providing them with the incentive of an effective tax rate of 15% via a tax subsidy. The policy is effective until the end of 2023.

CFO checklist. KPMG identified several areas that fall within the CFO’s purview that require action:
• Review tax budgets and plans for the new IIT system, including interaction with payroll.
• Review compliance and implement robust policies and processes to mitigate risks; prepare for tax audit.
• Review the company’s obligation to employees, offer training on annual tax filing; work with HR on retention.
• Examine how the new rules affect business traveler risks.

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China’s Corporate Social Credit System: What Corporates Need to Know and Do Now

The implications and challenges for corporates facing a new world of ratings.

Full implementation of China’s corporate social credit system (SCS) is slated for the end of 2020—a reality with huge implications for multinationals doing business in the country. And that means more work for many CFOs and finance teams. • CFOs are often in charge of coordinating the final reporting of data provided by multiple areas of the company and ensuring there is no conflicting information. They’re also responsible for updates, the remediation of incorrect or invalid reporting, and follow-up with various agencies. It’s a huge job. Members of the NeuGroup’s Asia CFOs’ Peer Group got a helpful reality check on what corporate social credit ratings mean for them during a recent presentation by Björn Conrad, CEO of the China consulting firm Sinolytics.

The implications and challenges for corporates facing a new world of ratings.

Full implementation of China’s corporate social credit system (SCS) is slated for the end of 2020—a reality with huge implications for multinationals doing business in the country. And that means more work for many CFOs and finance teams.

  • CFOs are often in charge of coordinating the final reporting of data provided by multiple areas of the company and ensuring there is no conflicting information. They’re also responsible for updates, the remediation of incorrect or invalid reporting, and follow-up with various agencies. It’s a huge job.

Members of the NeuGroup’s Asia CFOs’ Peer Group got a helpful reality check on what corporate social credit ratings mean for them during a recent presentation by Björn Conrad, CEO of the China consulting firm Sinolytics.

The presentation included information from a study published in 2019 by Sinolytics and commissioned by the European Chamber of Commerce. In it, Chamber president Jörg Wuttke writes, For better or worse, China’s corporate SCS is here to stay and businesses in China need to prepare for the consequences, and they need to start now.”

The good news. It’s not too late to prepare. Sinolytics says “implementation gaps” will give companies time to make the necessary internal adjustments to manage their regulatory ratings and engage with government authorities on concerns, but notes that inquiries need to be detailed, concrete and technically precise. Corporate leaders need to:

  1. Understand exactly what the system requires from the business.
  2. Assess where their company stands regarding the requirements—and identify gaps.
  3. Design and implement effective internal adjustments.
  4. Continuously monitor further developments of the corporate SCS.

Hard facts. The corporate SCS assesses the behavior of companies through topic-specific regulatory ratings (e.g., tax, customs, environmental protection and product quality) and a parallel set of compliance records (e.g., anti-monopoly cases, data transfers, pricing and licenses). These ratings will be made public, meaning a company’s customers, suppliers and competitors will have access to information that may cause data privacy issues that are not yet resolved.

Sinolytics says:

  • The system covers virtually all aspects of a company’s business in China. A multinational is subject to approximately 30 different regulatory ratings—many industry-specific— and compliance records, most of which have already been implemented.
  • Each rating is computed based on a set of rating requirements. In total, an MNC can expect to be rated against approximately 300 such requirements.
  • Some requirements create strategic challenges for companies, including those relating to the behavior of business partners such as suppliers and service providers. This burdens companies with the responsibility of monitoring their partners’ trustworthiness.
  • The corporate SCS uses real-time monitoring and processing systems to collect and interpret big data, which allows immediate detection of compliance and determines a company’s social credit score.

Ratings reality. Sinolytics says algorithm-based ratings of companies will have direct consequences after the collected data is processed and rated against the defined requirements. A good rating leads to rewards and a negative performance is sanctioned.

  • Carrot: High corporate SCS scores can mean fewer audits (e.g., taxes, safety), better credit conditions, easier market access and more public procurement opportunities for corporates.
  • Stick: Low scores mean the opposite of the above, and for every negative rating, there’s already a set of sanctions in place, Sinolytics says.
    • Sanctions include penalty fees, court orders, higher inspection rates, targeted audits, restricted issuance of government approvals (e.g., land-use rights and investment permits), exclusion from preferential policies (e.g., subsidies and tax rebates), restrictions from public procurement, as well as public blaming and shaming. And don’t forget blacklisting. Sanctions can even personally affect the legal representative and key personnel of a company.

Will the system create a more level playing field?

Sinolytics says yes—in principle. “The requirements and consequences of the Corporate SCS apply to all companies registered in China, regardless of ownership structure. This might in fact translate into an advantage for international companies vis-à-vis their Chinese competitors, as many international companies feature more advanced internal compliance structures,” the study says. However, Sinolytics has these caveats:

  • The field may be more level but the game played on it will be more difficult and controlled than before.
  • The system has the potential for discriminatory use toward international companies as there is no guarantee that the ratings cannot be applied in a biased way, targeting specific companies with greater scrutiny.
  • Some of the rating requirements apply to all market participants but are more difficult for international companies to fulfill. “This appears to be the case for the State Administration for Market Regulation’s blacklisting mechanism for ‘heavily distrusted entities,’ which makes the SCS useable in trade conflicts.”
  • Chinese companies might have an advantage in navigating the intricacies of the system, and that’s potentially enhanced by better information flows from government authorities.
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Treasury Center as Profit Center

The silver lining in the new scrutiny of global transfer pricing is that treasury might finally escape from its cost center box.

The context here is the mess treasury is going to face with tax, cleaning up after the OECD BEPS Actions. The silver lining is that the new scrutiny of global transfer pricing might serve as justification for treasury to become a profit center, or at least set up treasury centers and in-house banks that get better compensated based on arm’s-length pricing for services rendered. Few external banks are offering a treasury services where they don’t earn a profit, unless the services are part of an overall “wallet” that is profitable–so why should an in-house bank not be generating profit when providing treasury services for group affiliates?

The silver lining in the new scrutiny of global transfer pricing is that treasury might finally escape from its cost center box.

(Editor’s Note—Original publication date: March 17, 2015)

The context here is the mess treasury is going to face with tax, cleaning up after the OECD BEPS Actions. The silver lining is that the new scrutiny of global transfer pricing might serve as justification for treasury to become a profit center, or at least set up treasury centers and in-house banks that get better compensated based on arm’s-length pricing for services rendered. Few external banks are offering a treasury services where they don’t earn a profit, unless the services are part of an overall “wallet” that is profitable–so why should an in-house bank not be generating profit when providing treasury services for group affiliates?

The context here is the mess treasury faces with tax, cleaning up after the OECD BEPS Actions. The silver lining is that the new scrutiny of global transfer pricing might serve as justification for treasury to become a profit center, or at least set up treasury centers and in-house banks that get better compensated based on arm’s-length pricing for services rendered. Few external banks are offering a treasury services where they don’t earn a profit, unless the services are part of an overall “wallet” that is profitable–so why should an in-house bank not be generating profit when providing treasury services for group affiliates?

Arm’s length = profit
To say that an arm’s-length price must have a profit margin in it, may be simplifying things a bit, but it helps get to the argument that treasurers should be overseeing profit centers in response to growing scrutiny on transfer pricing. They should make this argument because it helps them with the biggest issue they face: being starved for resources despite the huge value-added role treasury plays, because they have only relatively soft performance metrics to point to (compared to profits) when asked to cut costs.

Here is just one service where arm’s length pricing should generate a profit for treasury:

Centralized exposure management for affiliates. Paragraph 69 of the OECD Discussion Draft on BEPS Actions 8, 9 and 10 (on revisions to Chapter 1 of the Transfer Pricing Guidelines, including risk, recharacterisation and special measures) lays out the logic [bold is our emphasis]:

“Often a MNE group will centralise treasury functions with the result that the implementation of risk mitigation strategies relating to interest rate and currency risks are performed centrally in order to improve efficiency and effectiveness. It may be the case that the operating company reports in accordance with group policy a currency exposure, and the centralised treasury function organises a financial instrument that the operating company enters into. As a result, the centralised function can be seen as providing a service to the operating company, for which it should receive compensation on arm’s length terms. More difficult transfer pricing issues may arise, however, if the financial instrument is entered into by the centralised function or another group company, with the result that the positions are not matched within the same company, although the group position is protected. In such a case, an analysis of the conduct of the parties may suggest that the treasury function is not entering into speculative arrangements on its own account, but is taking steps to hedge the specific exposure of the operating company and has entered into the instrument essentially on behalf of the operating subsidiary. As a consequence the treasury company provides a service…”

Risk is an important component of proposed transfer pricing revisions, since the entity that assumes the risk (as does the entity that receives capital) should have a capability to add value with it (a new take on substance). This gets to transfer pricing rewarding the entity with the capability, not just one contracted to assume risk (or capital). [Note: There will be a public consultation on these transfer pricing matters on March 19-20 at the OECD Conference Centre in Paris.]

Treasury is often the function with the most capability to manage financial risk and thus arm’s-length transfer pricing should reward treasury for the services it provides in managing it, especially when it involves risk transfer between affiliates, but even risk management done on their behalf.

High value vs. low value-adding services
In contrast to high value-adding risk management activities, there are low value-adding services that require arm’s length transfer pricing: Enough to reflect the service rendered, but not so much to shift profits unfairly by charging well in excess of their value add. The discussion draft for BEPS Action 10 (on Proposed Modifications to Chapter VII of the Transfer Pricing Guidelines Related to Low Value-Adding Intra-Group Services) suggests that financial transactions would fall outside the definition of low value-adding services, which may have transfer pricing determined on a more simplified cost-center basis.

However, one comment letter from bMoxie, a boutique Belgian professional services firm specializing in tax and transfer pricing, notes that financial transactions can be wide ranging, and thus not all treasury services would be high value:

“It is unclear what is meant with financial transactions. We tend to strictly define this is as the exchange of (financial) assets, and accordingly not be as broad as the full spectrum of financial services or services that relate to the financial position of companies. Indeed many multinational groups organize their financial services or treasury departments centrally to enable an efficient and effective service to the group members, which may include the execution of financial transactions, but also certain financial services. These services in turn may be fitting or not fitting the definition of low value-adding services. It is not uncommon that group treasury centers also provide auxiliary services that fit the examples of what is provided in paragraph 7.48 – i.e. that are merely of an accounting or administrative nature, and that do entail processing and managing of accounts receivable and account payable. In other words, the scope of a treasury department typically includes investment and funding activities, and may include other financial services that do require the assumption or control of substantial or significant risk, but may very well include services that could be considered low value-adding services, in the view of bMoxie.

Taking it one step further, even for instance in the light of a cash pool, that entails the exchange of assets, it may well be that the cash pool manager is only to be considered economically to be performing a pure clerical function when it contractually vis-à-vis the cash pool bank and the participants does not assume any risk, however in practice this would not unlikely be the case that the cash pool manager. We just wanted to make the point that even in the light of services auxiliary to financial transactions, there may be a certain division of activities amongst stakeholders that could lead one of the service providers rendering services that could technically qualify as low value-adding services.”

This sort of thinking will not get treasury out of its cost center box. It may also warrant more careful consideration going forward of what activities get put in a treasury center or in-house bank (e.g., payment and collection activities) vs. a shared services center, merely to keep the transfer pricing categorizations clean and the treasury-as-profit-center silver lining intact.

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Corporate Finance Ranks Most Concerned About 2020 Risks

What, me worry? Yes! Finance execs most worried about risks in the new year.

Corporate finance executives have jumped to the lead in terms of companies’ top executives concerned about the magnitude and severity of risks their organizations face in 2020, with economic conditions and regulatory scrutiny their top concerns.

What, me worry? Yes! Finance execs most worried about risks in the new year.

Corporate finance executives have jumped to the lead in terms of companies’ top executives concerned about the magnitude and severity of risks their organizations face in 2020, with economic conditions and regulatory scrutiny their top concerns.

On a scale of one to 10, chief financial officers’ impression of risk faced by their companies in the year ahead jumped to 6.5 from 6.0 in last year’s survey. That puts them in the lead from fifth place last year, out of seven categories of surveyed executives that comprised board members and six types of C-suite executives. Dr. Mark Beasley, professor and director of the Enterprise Risk Management Initiative (ERMI) at N. Carolina State University, noted that chief audit officers’ assessment of risk also increase noticeably from last year, and chief risk officers’ bumped up slightly, to 6.0 from 5.9.

Chief executives officers and boards of directors instead saw their concerns about risk lesson in this year’s study compared to last year’s.

The research was conducted by ERMI and consultancy Protiviti, and co-authored by Mr. Beasley and Ken Thomas, a managing director in Protiviti’s Business Performance Improvement practice. The survey received responses from 825 C-Suite executives and directors in companies across the globe. The top five concerns for CFOs were:

Economic conditions. Although the second concern overall, CFOs marked economic conditions starting to restrict some growth opportunities as their top concern, a big jump from last year’s survey when it was not even among the top 10 risks.

Regulatory changes and scrutiny. CFOs worry that an emphasis on regulations may increase and noticeably affect the manner in which their companies’ products and services will be produced or delivered. Mr. Beasley noted that the regulations extend beyond financial requirements to areas such as privacy, with European privacy regulations already in effect and those in California arriving in 2020, and increased government scrutiny of business models such as the big technology firms’.

Resistance to change. As innovative technology is deployed at an ever more rapid pace, CFOs are concerned about their organizations’ ability to embrace that change and remain competitive.

Top talent. Related to the previous concern, CFOs are concerned about their companies’ ability to attract and retain top talent in a tightening talent market, and consequently their ability to achieve operational targets. “How does [corporate finance] move from more production-type activities to more machine learning and other artificial intelligence technologies, taking people away from the analytics they used to spend time on and using that talent in the most efficient way,” Mr. Thomas said.

Cyber, of course. Pervasive across companies, cyber-risk concerns keep CFOs awake at night worrying about whether their organizations are sufficiently prepared to manage cyber threats that could significantly disrupt core operations and/or damage the company’s brand. Mr. Thomas noted that finance departments’ increasing use of technology-driven analytics ingests pulls data from multiple sources, heightening the risk. “Companies are moving to more tech-driven activities and operations that rely ever more on sources of data that can be impacted,” he said.

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A High Bar: Lowering Corporate Expectations and Under-delivering Successfully

Slower economic growth, tighter consumer credit put pressure on finance chiefs in Asia.

The subdued mood among participants at the recent NeuGroup meeting of CFOs in Asia reflected the difficulty many members say they are facing as China’s economic growth slows and business conditions worsen, while expectations for revenue growth at corporate headquarters remain unrealistically high.

Slower economic growth and tighter consumer credit put pressure on finance chiefs in Asia.

The subdued mood among participants at a recent NeuGroup meeting of CFOs in Asia reflected the difficulty many members say they are facing as China’s economic growth slows and business conditions worsen, while expectations for revenue growth at corporate headquarters remain unrealistically high.

Managing expectations. The key challenge, then, for some members is managing the expectations of those in the C-Suite who still want 10% revenue growth. In other words, CFOs and their teams need to figure out how to successfully under-deliver. This topic—and how to deal with failure—will be discussed at the group’s next meeting in April in Shanghai (email us about your eligibility to attend).

Tighter belts. Dealing with the fallout from lower production has meant implementing cost-cutting initiatives, and some members expect the challenging business climate and the need for belt-tightening to last three to five years.

Pressure to produce. As demand slows, members say Chinese authorities are exerting pressure on corporates to build inventory to reduce the impact on the economy and keep employment high. Much of this pressure is indirect, through so-called window guidance, which is a part of life in China and the way government agencies influence corporate behavior with unwritten rules.

Credit, not tariffs. Although trade tensions between the US and China have added to the region’s challenges, the tightening of consumer credit in China ranked as a more serious concern for many participants, based on comments during the projects and priorities session at the meeting.

  • Other concerns mentioned at the meeting include complying with China’s corporate social credit system and the wide-ranging reform of the country’s individual income tax that has implications for corporates.

Hope for the future. Members remain bullish on the long-term business prospects in China, thanks in part to the country’s population of 1.4 billion. But for now the pressure is on, and some members are searching for ways to reduce the stress. How else to explain why one finance team has created a “S— Happens Award?”

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What China’s Individual Income Tax Changes Mean for Corporates, Expats

CFOs with employees in the country need to plan for new residency rules and ensure compliance.

The most significant reform of China’s individual income tax (IIT) laws in 38 years has numerous implications for foreign workers and the multinational corporations that employ them. Michelle Zhou, a partner at KPMG, presented many of the critical elements of the changes to a group of CFOs at a recent NeuGroup meeting in Shanghai.

CFOs with employees in the country need to plan for new residency rules and ensure compliance.

The most significant reform of China’s individual income tax (IIT) laws in 38 years has numerous implications for foreign workers and the multinational corporations that employ them. Michelle Zhou, a partner at KPMG, presented many of the critical elements of the changes to a group of CFOs at a recent NeuGroup meeting in Shanghai.

Big picture. CFOs—who are responsible for income reporting—need to proactively dig into the details of the changes with tax advisors and coordinate closely with human resources departments to develop retention policies that address the potentially negative financial effects the new rules may have for some employees. These include changes in the treatment of annual bonuses and equity incentives—although not all details have been announced.

Defining residency. High on the list of takeaways is that an individual who lives in China for 183 days or more will now be considered a tax resident, instead of one year under the old rules. This has implications for whether the employee pays tax only on income sourced in China or on all of her worldwide income.
• A new “six-year rule” replaces the old five-year concession rule. Under the old policy, if a foreign worker stayed in China for five consecutive years, her worldwide income would be taxed in China. The new law extends the period to six years, allowing foreign workers in China more time to avoid paying taxes on income sourced overseas.
o Under the new rules, if the person leaves mainland China for more than 30 consecutive days at any point during the six years, the clock to count tax residency will be reset.

Tax-exempt benefits vs. itemized deductions. The new law allows foreign workers to take advantage of several new itemized deductions limited to specified amounts:
• Children’s education.
• Further education.
• Mortgage interest or housing rent
• Medical fees for serious illness.
• Elderly care.

Foreign workers who don’t take the deductions listed above can continue use tax-exempt benefits until the end of 2021 by claiming allowances of a “reasonable amount” for children’s education, language training fees, housing rental, home leave visits, relocation expenses, and meal and laundry expenses. Corporates need to make sure employees are aware of the choice and the pros and cons of their decision.

Greater Bay Area preferential tax policy. To attract highly skilled workers to a number of cities in Guangdong province, China is providing them with the incentive of an effective tax rate of 15% via a tax subsidy. The policy is effective until the end of 2023.

CFO checklist. KPMG identified several areas that fall within the CFO’s purview that require action:
• Review tax budgets and plans for the new IIT system, including interaction with payroll.
• Review compliance and implement robust policies and processes to mitigate risks; prepare for tax audit.
• Review the company’s obligation to employees, offer training on annual tax filing; work with HR on retention.
• Examine how the new rules affect business traveler risks.

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China’s Corporate Social Credit System: What Corporates Need to Know and Do Now

The implications and challenges for corporates facing a new world of ratings.

Full implementation of China’s corporate social credit system (SCS) is slated for the end of 2020—a reality with huge implications for multinationals doing business in the country. And that means more work for many CFOs and finance teams. • CFOs are often in charge of coordinating the final reporting of data provided by multiple areas of the company and ensuring there is no conflicting information. They’re also responsible for updates, the remediation of incorrect or invalid reporting, and follow-up with various agencies. It’s a huge job. Members of the NeuGroup’s Asia CFOs’ Peer Group got a helpful reality check on what corporate social credit ratings mean for them during a recent presentation by Björn Conrad, CEO of the China consulting firm Sinolytics.

The implications and challenges for corporates facing a new world of ratings.

Full implementation of China’s corporate social credit system (SCS) is slated for the end of 2020—a reality with huge implications for multinationals doing business in the country. And that means more work for many CFOs and finance teams.

  • CFOs are often in charge of coordinating the final reporting of data provided by multiple areas of the company and ensuring there is no conflicting information. They’re also responsible for updates, the remediation of incorrect or invalid reporting, and follow-up with various agencies. It’s a huge job.

Members of the NeuGroup’s Asia CFOs’ Peer Group got a helpful reality check on what corporate social credit ratings mean for them during a recent presentation by Björn Conrad, CEO of the China consulting firm Sinolytics.

The presentation included information from a study published in 2019 by Sinolytics and commissioned by the European Chamber of Commerce. In it, Chamber president Jörg Wuttke writes, For better or worse, China’s corporate SCS is here to stay and businesses in China need to prepare for the consequences, and they need to start now.”

The good news. It’s not too late to prepare. Sinolytics says “implementation gaps” will give companies time to make the necessary internal adjustments to manage their regulatory ratings and engage with government authorities on concerns, but notes that inquiries need to be detailed, concrete and technically precise. Corporate leaders need to:

  1. Understand exactly what the system requires from the business.
  2. Assess where their company stands regarding the requirements—and identify gaps.
  3. Design and implement effective internal adjustments.
  4. Continuously monitor further developments of the corporate SCS.

Hard facts. The corporate SCS assesses the behavior of companies through topic-specific regulatory ratings (e.g., tax, customs, environmental protection and product quality) and a parallel set of compliance records (e.g., anti-monopoly cases, data transfers, pricing and licenses). These ratings will be made public, meaning a company’s customers, suppliers and competitors will have access to information that may cause data privacy issues that are not yet resolved.

Sinolytics says:

  • The system covers virtually all aspects of a company’s business in China. A multinational is subject to approximately 30 different regulatory ratings—many industry-specific— and compliance records, most of which have already been implemented.
  • Each rating is computed based on a set of rating requirements. In total, an MNC can expect to be rated against approximately 300 such requirements.
  • Some requirements create strategic challenges for companies, including those relating to the behavior of business partners such as suppliers and service providers. This burdens companies with the responsibility of monitoring their partners’ trustworthiness.
  • The corporate SCS uses real-time monitoring and processing systems to collect and interpret big data, which allows immediate detection of compliance and determines a company’s social credit score.

Ratings reality. Sinolytics says algorithm-based ratings of companies will have direct consequences after the collected data is processed and rated against the defined requirements. A good rating leads to rewards and a negative performance is sanctioned.

  • Carrot: High corporate SCS scores can mean fewer audits (e.g., taxes, safety), better credit conditions, easier market access and more public procurement opportunities for corporates.
  • Stick: Low scores mean the opposite of the above, and for every negative rating, there’s already a set of sanctions in place, Sinolytics says.
    • Sanctions include penalty fees, court orders, higher inspection rates, targeted audits, restricted issuance of government approvals (e.g., land-use rights and investment permits), exclusion from preferential policies (e.g., subsidies and tax rebates), restrictions from public procurement, as well as public blaming and shaming. And don’t forget blacklisting. Sanctions can even personally affect the legal representative and key personnel of a company.

Will the system create a more level playing field?

Sinolytics says yes—in principle. “The requirements and consequences of the Corporate SCS apply to all companies registered in China, regardless of ownership structure. This might in fact translate into an advantage for international companies vis-à-vis their Chinese competitors, as many international companies feature more advanced internal compliance structures,” the study says. However, Sinolytics has these caveats:

  • The field may be more level but the game played on it will be more difficult and controlled than before.
  • The system has the potential for discriminatory use toward international companies as there is no guarantee that the ratings cannot be applied in a biased way, targeting specific companies with greater scrutiny.
  • Some of the rating requirements apply to all market participants but are more difficult for international companies to fulfill. “This appears to be the case for the State Administration for Market Regulation’s blacklisting mechanism for ‘heavily distrusted entities,’ which makes the SCS useable in trade conflicts.”
  • Chinese companies might have an advantage in navigating the intricacies of the system, and that’s potentially enhanced by better information flows from government authorities.
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The Five Cash Management Initiatives Treasurers Should Consider

When it comes to cash management, treasurers must keep their focus on ways to make it more efficient and cost effective.

The year 2014 has been one focused on efficiency and innovation as treasurers consider outside-the-box strategies for unlocking working capital and improving the tactical aspects of treasury. Major initiatives including SEPA and the internationalization of the renminbi (RMB) have proven to be catalysts for greater global change both from a strategic and practical treasury perspective.

When it comes to cash management, treasurers must keep their focus on ways to make it more efficient and cost effective.

Editor’s note: This article was originally posted on iTreasurer.com on October 09, 2014.

The year 2014 has been one focused on efficiency and innovation as treasurers consider outside-the-box strategies for unlocking working capital and improving the tactical aspects of treasury. Major initiatives including SEPA and the internationalization of the renminbi (RMB) have proven to be catalysts for greater global change both from a strategic and practical treasury perspective.

Looking ahead to 2015, structural rationalization is the major topic as treasurers continue to review all aspects of their global treasury strategy to ensure the most efficient, most cost-effective structure possible.

“Rationalization is still a big theme,” says Martin Runow, Head of Cash Management Corporates Americas, Global Transaction Banking, Deutsche Bank. “It is one of those areas everyone’s looking at; how to become more efficient and get more control.”

So where should treasurers spend their time and resources in 2015? What projects will provide the greatest value? According to Mr. Runow and colleague, Arthur Brieske, Regional Head of Trade Finance and Cash Management Corporates Global Solutions Americas, Global Transaction Banking, Deutsche Bank, the following five initiatives should be part of treasurers’ overall budget and resource planning process for 2015.

  • Going Beyond SEPA
  • Global Account Rationalization
  • In-House Bank Structures
  • Maximizing Excess Cash
  • RMB Internationalization

GOING BEYOND SEPA
Initially rolled out as an approach for risk mitigation for commercial payment transactions in euro, SEPA adopters have found that SEPA, or the Single Euro Payments Area, provides a more efficient way to transfer and collect funds across borders without managing all the different legal payment frameworks of each country.

SEPA has allowed corporate treasurers to consolidate accounts and improve process efficiencies with the use of the new ISO20022 XML format to ensure the highest level of standardization across their SWIFT network. This format provides consistency in the financial messaging exchange between counterparties and is expected to gain greater efficiencies going forward. According to Mr. Runow the launch of SEPA has driven a lot of efficiencies that most corporate treasurers have been seeking for years. “It has taken ten years to get it up and running,” he says, “but we are there now and there is a lot of good to come of it.”

Many companies have used SEPA as an opportunity to consolidate accounts, allowing for simplification and optimization of structures including centralized accounts payable and accounts receivable, cash pooling and in-house bank structures.

But despite the many bright spots of SEPA, “reconciliation can still be a challenge,” says Mr. Brieske. Seeing a need for a single account with a single currency and a single infrastructure, Mr. Brieske says Deutsche Bank created a solution called Accounts Receivable Manager (ARM) for SEPA, which, according to Deutsche Bank is an automated payer identification solution that enables auto-reconciliation of incoming SEPA credit transfers and reduces the need to maintain multiple bank accounts for separate lines of businesses.

In fact, SEPA has been such a force for change that Deutsche Bank is rolling out this ARM solution so that companies can use it outside of the eurozone. “This model is going to expand beyond SEPA, in India for example, where banking can be complicated for companies,” Mr. Brieske says.

There are still “many more benefits to be had” with SEPA, Mr. Runow notes, but as of now, “a lot of large companies are reaping the benefits of their investment in SEPA and a lot of people are getting true value out of this beyond Europe.”

GLOBAL ACCOUNT RATIONALIZATION
As noted above, the SEPA initiative has acted as the catalyst for other global projects, with high priority placed on account rationalization. By reducing accounts across Europe, many large US multinational corporations are realizing significant savings in both hard- and soft-dollar costs. “In the SEPA environment, all corporates need is one account for payments and one account for receivables across the SEPA landscape,” says Mr. Brieske.

The downstream effect of reducing the number of physical bank accounts accentuates the ongoing challenge of managing banking relationships around the globe. Issues like overall cost, allocation of bank wallet, management of counterparty risk, and supporting the needs of the operating business, are all equally important when deciding which bank provider receives what level of business within your organization.

Keeping every bank happy is a tough job, if not impossible. However, being able to spread the wallet across fewer banks is one of the positive by-products of a bank consolidation.

IN-HOUSE BANK STRUCTURES
Treasurers have continued to find ways to alleviate the growing cash balances that have become strategically more important to their organizations as they face increased pressure to refine their cash management initiatives to provide more efficient movement of these cash balances.

Based on recent NeuGroup peer group survey results, nearly 70 percent of respondents have up to 50 percent of their total cash “trapped,” with everyone putting a focus on the ability to use these trapped balances when local entities require funding. Structures like in-house banks (IHBs) are becoming more commonplace as organizations take the next step to further enhance their global liquidity models. Many times these structures can bring a significant amount of processing efficiency and can help unlock trapped cash by allowing the funds to be loaned out across participating subsidiaries, thus reducing trapped cash.

Considerations for establishing an IHB start with choosing a favorable location, along with important tax structure considerations, local regulations and withholding tax impacts. These primary areas of focus should be defined prior to kicking off an IHB project.

The practical considerations for the evolution of the IHB can be directly attributed to global expansion and increased revenue mix overseas in addition to complexities related to time zones, language, growth of regional shared services and decision execution.

Traditionally, IHBs have been set up to alleviate the voluminous amount of intercompany transactions between legal entities and to comply with tax policies. The natural evolution of these structures then focused on cross-entity liquidity management, while maintaining clear segregation to avoid commingling of funds. Next, was the consolidation of cash balances on a regional level with centralized oversight using tools like notional pools to add efficiency. Structures continued to evolve to include centralized cash forecasting and foreign exchange management with the final phase of development being one of global consolidation with one global account for pay on-behalf-of (POBO) and one for collections on-behalf-of (COBO) across all business units.

The Dodd-Frank Act and Basel III regulations have placed greater scrutiny on banks and have mandated stricter guidelines on the amount of capital a bank must hold for certain types of transaction activity. As a result of this and other regulations focused on anti-money-laundering, banks have placed stricter compliance requirements on their KYC process.

Mr. Brieske says, “The challenges IHBs will confront are likely to stem from the challenges banks are facing with increased regulation. So indirectly, regulations will impact them, but it is the banks that will be responsible for the regulations.”

Mr. Runow adds that those MNCs that establish an IHB structure will need to ensure everything is tightly buttoned-up and that reconciliations and account reporting are thorough and diligent. “There’s no room for sloppiness, no cutting corners,” he says.

RMB INTERNATIONALIZATION
As a result of the ongoing RMB regulatory changes, there has been a significant improvement in the ease of making cross-border RMB payments via China. “Chinese regulators have certainly shown that they have a strong interest in RMB payments going global by making it easier to transact in RMB,” says Mr. Runow. But the RMB is still a fairly new currency on the international scene.

He acknowledges that “flows are going through the roof;” however, they are still modest compared to the US dollar or euro.” Despite this, Mr. Runow and Mr. Brieske expects this will change in the next few years.

The RMB can now be integrated as part of a corporation’s overall liquidity management strategies with pooling of RMB and cross-border RMB lending becoming commonplace. On February 20, 2014, the People’s Bank of China announced its support of the expansion of RMB cross-border usage in the China (Shanghai) Free Trade Zone (Shanghai FTZ), which now allows for the following activities:

  • Simplified document check requirements for current and direct investments in the Shanghai FTZ
  • Cross-border borrowing for corporates and non-bank financial institutions registered in the Shanghai FTZ
  • Two-way RMB cross-border cash pooling
  • Cross-border RMB POBO/COBO

The RMB internationalization project has begun to pick up steam over the second half of 2014, with many global MNCs looking to launch new cash management strategies in Asia. Those who are taking the time to create these new structures are able to unlock China’s previously “trapped cash” challenge, and optimize their cash held in this part of the world where many opportunities lie for them.

According to Mr. Brieske, the loosening of these regulations will eventually have a downstream effect moving from very large corporations to small local businesses. “As deregulation happens, you will not have to wait to see the pent up demand to kick in — it is already happening.” The result will be a rapid increase in payment volumes, which is likely to result in the RMB moving to the top five SWIFT currencies within the next several years.

MAXIMIZING EXCESS CASH
According to Mr. Runow, most MNCs today are still very risk-averse and focused on principal preservation. “The dilemma is corporates are looking for yield but there is little appetite to go into risky assets,” he says. Mr. Runow adds that from what he has seen investment policies actually have become “stricter rather than more lenient.”

This has been supported by feedback from recent NeuGroup peer group meetings. With the continuation of low yields, it is little wonder that cash portfolio asset allocations are heavily weighted toward money market funds, US Treasuries and agency debt, corporate bonds above the single-A threshold and corporate commercial paper and certificates of deposit.

Mr. Runow says, “Corporates continue to be very strict and highly conservative, tending to seek return of invested money over return on investment.”

With the continuation of low rates expected through a good part of 2015, treasurers may be well served to consider implementing an IHB so that their growing levels of excess cash can work harder around the globe versus sitting in a very low-yielding investment asset.

LOOKING AHEAD
The tagline “less is more” has been the mantra for practitioners since the onset of the economic crisis and now well into the recovery; unfortunately, for most it looks like it will remain the mandate for some time to come. Therefore, treasurers will have to continue to work smarter when it comes to rationalizing structures, cutting expenses and most importantly, getting the company’s cash to safely work harder. They will also have to remain alert to new possibilities of maximizing cash where it is sometimes considered trapped. With this in mind, extra attention will have to be paid to the RMB and its continued growth and ease of use.

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