From the November 2008 issue of Treasury & Risk magazine

Gold AHA Award Winner in Liquidity

The big business story of the past decade, at least until the recent global financial meltdown, has been opportunities in China, and one of the biggest challenges for multinational corporations has been moving cash out of China due to evolving regulations. Now companies like Intel are working with the Chinese authorities and setting precedent for other multinational corporations. Such corporate efforts, along with China's legal reforms, soon may make it possible to do business in China with increased efficiency in treasury operations and greater freedom to manage liquidity.

A significant development is securing approval from Chinese authorities to allow cross-border lending from an entity in China to an overseas cash pooling entity. "Current regulations do not generally allow cross-border lending," says Robert Yenko, Intel's assistant treasurer. "As a result of working together with the Central Bank, Intel was able to lend funds in China to an offshore cash pooling entity and maximize the yields from those investments."

Other of Intel's advancements are nearly as impressive. Through close cooperation with the Chinese authorities, Intel has:

  • Created a holding company for Chinese entities, streamlining the accounting, IT, finance, legal and tax issues for Intel, and giving the Chinese government one unified legal entity to deal with.
  • Obtained permission from the State Administration of Foreign Exchange (SAFE) to conduct inter-
    company U.S.-dollar based lending between two Chinese entities, thereby allowing Intel to rationalize inter-company lending arrangements between two Chinese entities.
  • Repaid shareholder loans through a legal entity restructuring in a tax effective manner.
  • Planned tax-efficient dividend payments among subsidiaries.

"The combined result of these cooperative efforts," Yenko says, "was our ability to minimize credit risk by reducing concentrated amounts of cash in any one region and gain additional income from generally higher yields overseas. Importantly, the structure also provided us with a framework that will give us more flexibility with our cash in the future as our operations grow and at the same time allow for a more optimal structure for future investment within China."

These changes did not come quickly or easily. "Because we built up a good working relationship with the Chinese Central Bank officials, Intel was one of a few selected to pilot new monetary regulations and allowed to conduct domestic inter-company loans," Yenko says. "Months of brainstorming and collaboration with the Chinese officials yielded this very successful result."

Taxes were a big consideration. Most of Intel's China ventures were funded initially with inter-company loans into China but simply repaying these shareholder loans could be treated as "deemed dividends" for U.S. tax purposes and taxed as such. "To achieve the most tax-efficient solution, we reorganized our entire legal entity structure in China," Yenko explains. "Then we got approval from the Chinese government to transfer the existing loans of these Chinese entities to the new shareholders." Repayments of loans and dividends were then executed within the limited window offered by a temporary provision in the U.S. tax law that allowed certain distributions to occur without U.S. tax consequences.

The work paid off. As a result of this project, "We were able to tax effectively, move some cash and generate net present value by achieving a higher return on investments," Yenko says.


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