When companies branch out into new countries, treasury departments will need to determine what will be required to operate in the region. From there, they can begin to establish policies and procedures.

The 2020 AFP Asia-Pacific Treasury Management Handbook, sponsored by Kyriba, explores some of the vital treasury elements that enable a company to begin doing business in a new country.

FUNDING THE NEW ENTITY

Treasury first needs to fund the establishment of a new entity in the region. As the APAC Handbook notes, this includes any costs associated with formal registration of the new entity, such as registration and legal fees. To do so, treasury needs to have an understanding of the company’s liquidity profile in the area. In the current environment, liquidity is being heavily scrutinized.  

According to Bob Stark, vice president of strategy for Kyriba, executing the right treasury strategy is dependent on understanding the new entity’s liquidity profile. “If the business is cash flow positive, then treasury needs a plan to optimize excess cash and liquidity,” he said. “That may be as simple as investing in-country or sweeping into a global cash pool. On the other hand, if the entity requires funding, then treasury must anticipate the source of funding and factor the cost of funds into the business plan.”

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Once the initial entity has been established, treasury can then begin to iron out policies and procedures in the region. Treasury should make an effort to follow its established global policies, though it may need to make exceptions to comply with local regulations.

Complying with local regulations will require treasury to work closely with the tax department and possibly some external advisors. In particular, tax can provide guidance on the best ways to finance the new entity, offering advice on the application of withholding tax on interest on intercompany loans, tax on loans from non-residents, corporation tax, and stamp duty on loan documents.

Financing can be challenging; treasury’s activities in the new territory will determine the most appropriate sources of long-term and working capital finance. These decisions will need to be consistent with the overall funding strategy, as well as any strategy that’s been worked out for the new entity.

“Many global organizations will turn to cash pooling to sweep out excess cash and fund short term liquidity needs. Typically, you will see physical pooling more often, but the mechanics are different for China compared to India or Singapore,” Stark said. “Intercompany loans will offer a longer-term alternative, but must be executed in collaboration with the company’s tax experts. There are important considerations in addition to liquidity, which will drive the right decision for each organization.”

OPENING BANK ACCOUNTS

To be able to make and receive payments, treasury will need to ascertain whether the new entity needs to hold bank accounts. And if so, what currencies will they be held in?

The decision to open in-country bank accounts will be determined by a combination of the company’s activities in the new market, the way in which the local entity has been established, and any restrictions imposed by local regulations. If the company does have a physical presence in the country, it may be too difficult to avoid opening an in-country bank account.

“When opening bank accounts within the country, it is important to implement proper controls and signatory processes while also ensuring visibility at the global corporate level. The ease in balancing local versus headquarter control will revolve around what banks are utilized,” Stark said.

Choose banking partners is a big decision. There’s often an interest in picking the largest bank in the region, or the one with branches closest to the new entity’s offices or retail locations. “Local banking relationships are important, but treasury will need a connection to the bank, as well to ensure proper governance,” Stark said. “So, it's important to ensure that overall visibility aligns with the corporate strategy.

Therefore, a lot of these decisions can’t be locally made; they need to be made in concert with the treasury policy. “It may also be tempting to choose a global banking partner for the entire region,” Stark said. “This strategy can present its own challenges if necessary banking services are not fully available in that particular country, making simple processes like payments, sweeps, and FX unnecessarily challenging. So these are all considerations that have to be thought about when deciding the best bank relationships to use in each particular country.”

When going through the process of setting up bank accounts locally, it can be essential to have international signatories. This is for know-your-customer (KYC) and internal compliance. “You can’t just have people on the ground locally have the only control over the accounts, and you probably also want to restrict their ability to withdraw and wire out significant funds,” Stark said. “The treasury policy must clearly state what activities can be performed by local representation versus what requires corporate treasury to be involved. It's important to think those things through.”

A final consideration is around how to manage currency exposure. The latest COVID-19 crisis demonstrated volatility in non-major currencies, meaning that liquidity and future cash flows held in some Asian countries would have been significantly affected if FX was not fully managed. “It is imperative to have full visibility into currency exposure on future cash flows and within the balance sheet. CFOs do not want to be caught by surprise, with expected cash flows worth less in the organization’s base currency,” Stark added. “Just having visibility can help with simple decisions like reducing net currency exposure naturally or via hedging”.

For more insights on establishing a treasury presence in a new region, download the 2020 AFP Asia-Pacific Treasury Management Handbook.