Inefficiencies in both the commercial, and tax outcomes of the funding of subsidiaries' operations have often been identified where a review of the broader funding structure of the group has been undertaken. Commonly identified inefficiencies include the use of intercompany debt to fund the operations of loss-making subsidiaries (or subsidiaries with effective tax rates of less than 30 percent) and a ‘spider-web’ of intercompany balances across international borders.
Even in a Base Erosion and Profit Shifting (BEPS) world with cross-border financing and refinancing facing heightened scrutiny / risk, the rationalisation of such inefficiencies, whether by the conversion of debt balances to equity or the repayment, offset or forgiveness of the spider-web, may be desirable, particularly given the strong commercial imperatives coming from an improved balance sheet and simplification of flows.
In undertaking any such activity, it will be important to consider a range of issues including the potential realisation of unrealised foreign exchange gains and losses, thin capitalisation, differences in Australian and foreign tax rates, crystallising withholding tax obligations, franking account impacts, transfer pricing and accounting. However, the application of some reasonably vanilla techniques can result in substantial commercial benefits and tax savings.