Published: January 01, 2000
Treasurers around the world are focusing attention on liquidity management, with the objective of maximising internal liquidity sources – and those managing entities within Latin America are no exception. Techniques, such as cash pooling (where possible) or utilising zero balance accounts (ZBA), allow companies to centralise liquidity within the organisation, thereby reducing its reliance on external debt, or enabling more efficient investment of excess cash. In the last few years, the reduced availability of external credit and higher costs of funding have made the benefits associated with optimising internal liquidity particularly attractive.
However, when embarking on a liquidity optimisation project, it is important to first understand what can and cannot be achieved before getting started. Latin America is a diverse region consisting of a number of different countries, currencies and regulatory environments. As such, the task of managing liquidity across the region will need to accommodate these variations, in order to establish the most effective structure.
While some regions support the use of liquidity management structures that can be applied in the same way across a number of different countries, companies looking to manage their liquidity in Latin America need to employ a more flexible approach. Each country has its own set of rules regarding the types of accounts that can be held, and the way in which liquidity can be pooled or optimised.
In light of this diversity, liquidity management in Latin America needs to be tackled on a country-by-country basis. For most companies, the first step towards greater efficiency is to review and rationalise the company’s banking relationships in each country. This exercise can benefit the company in a number of ways. For a start, companies will typically be able to reduce bank fees by moving to a smaller number of relationships. A second advantage can involve negotiating lower charges per transaction as a result of concentrating more business to a smaller number of banks.
Once a rationalisation exercise has taken place, the next step is to consider which cash pooling techniques can be used. By using cash concentration, companies can physically concentrate the balances on a number of accounts into a single header account. In the case of notional pooling, where allowed, positive and negative balances on different accounts are offset without any transfer of funds. Although notional pooling tends to be less widely available, physical cash concentration structures are becoming more common within Latin America and interest in these structures is steadily increasing.
When a company has optimised liquidity at an entity level or a country level, it may be possible to gain greater levels of efficiency across the region, particularly by using offshore pooling to centralise cash offshore. Companies with smaller operations within the region may find that a regional pooling structure is not cost effective, but in such cases it may be possible to incorporate the company’s Latin America entities into regional pooling structures by setting up an offshore cash pool.
For many international companies with operations in Latin America, the repatriation of cash is a particular priority. With much of the trade in Latin America denominated in US dollar (USD) – including intercompany flows and third party transactions – companies may have the opportunity to set up offshore USD cash pools in London, New York or Singapore, for example. While local regulatory considerations will need to be taken into account when setting up this type of structure, offshore cash pooling can be leveraged in order to manage liquidity within the region more effectively, thereby reducing a company’s funding or interest income optimisation needs.
Liquidity management continues to be a top priority for corporations around the world. In light of the diverse regulatory landscape in Latin America, the most effective approach is to build a structure from the bottom up, tackling liquidity at a country level first, before focusing on creating additional efficiencies across the region. Finally, even with an effective structure in place, companies should continue to monitor the changing regulatory environment in order to take advantage of any additional opportunities that arise.[[[PAGE]]]
Mexico may be perceived as more liberal where liquidity management is concerned, compared with other countries in Latin America, having gone through a gradual process of regulatory relaxation during the last few years. The country has no exchange controls, and resident corporations are permitted to hold offshore accounts. Onshore accounts are not restricted to local currency and current accounts can be interest bearing.
Sweeping and cash pooling are unrestricted within a single local resident entity, between resident entities and between resident and non-resident entities. There are also limited restrictions on intercompany lending among these same categories of entities. An extensive range of products are available for optimising surplus aggregated liquidity, including certificates of deposit, commercial paper and a variety of government and corporate bonds. Returns from these products are treated as normal corporate revenue and taxed on that same basis.
Chile is an attractive business location for international corporations in light of its investment grade credit rating and stable democratic government. Corporations in Chile can hold current accounts denominated in local currency, euro (EUR) and US dollar (USD), but only local currency current accounts may pay interest on the account balance, although presently banks don’t pay interests on current accounts. Today there are few exchange controls — although there are some reporting requirements to be aware of regarding certain types of FX transactions — and USD/EUR funds can be moved cross-border without restriction.
Zero-balancing onshore is possible in the same currency, although for tax reasons it is important to clearly demonstrate the nature of relationship between entities in relation to common funds kept in the same account. Also, if the account has no movement of funds for a certain period, the bank is permitted to close it. By the same token, while there are neither specific regulations nor restrictions forbidding notional pooling, there are some tax considerations regarding joint debtor status and thin capitalisation rules to be aware of.
Peru is broadly similar to Chile where liquidity management is concerned, with freely exchangeable currencies and relatively limited central bank reporting requirements. Onshore accounts can be held in foreign currencies. There is a financial transaction tax that would affect zero-balancing activity if the accounts do not belong to the same legal entity. In some circumstances, this financial transaction tax would also be levied on transactions to and from bank accounts that are held by Peruvian companies outside of Peru. Cross-border liquidity structures involving resident and non-resident entities are possible, but some tax planning is necessary to deal with rules of thin capitalisation, transfer pricing and double taxation. Also, offshore banks making deposits with Peruvian banks should take into account that the Peruvian Central Bank recurrently adjusts reserve requirements on liabilities of Peruvian banks with foreign banks.
Brazil has an efficient banking infrastructure capable of supporting sophisticated liquidity management techniques. Sweeping or physical cash concentration within the same local entity is allowed in Brazil, but neither is typically permitted among different resident entities or among resident and non-resident entities. Zero-balancing is commonly used among subsidiaries of the same resident entities. While it is theoretically possible to hold a reference account on behalf of others, any sweeping transactions may be treated as intercompany loans, while also being liable to tax charges. Brazil has a three-tiered taxation system, with taxes levied at federal, state and municipal levels. Some taxes are levied on in-country investment and loan transactions within Brazil; however, a 6% financial transaction tax (Imposto sobre Operacoes Financeiras – IOF) on some international fixed income investment transactions was abolished in June 2013.
FX controls are in place for the movement of funds in and out of the country. Documentation for incoming and outgoing remittances must be presented for prior approval of all such remittances, which are also subject to reporting requirements post-completion. Proof must also be provided showing that the applicable withholding tax has been paid prior to approval being granted.
Colombia has changed significantly in recent years. The security situation has improved and so also have other factors, such as economic and sovereign credit indicators. This is leading to a growing number of international corporations to take more than a passing interest in the country.
The liquidity management structure in Colombia has similarities to Brazil. The clearing infrastructure is efficient; with high and low value clearing systems for electronic payments (plus a separate system for checks). Offshore accounts in currencies other than pesos are permitted. Under special circumstances, certain Colombian residents may have local accounts in foreign currencies.
While intercompany loans and cross-border pooling are not permitted in Colombia there is still some scope for liquidity management. For example, as of 2011, the Colombian Central Bank authorised Colombian entities to obtain cross-border loans with foreign entities not classified as financial entities; therefore permitting cross-border intercompany loans subject to certain registration requirements. There are also certain tax considerations to be aware of regarding thin capitalisation rules. Zero-balancing between companies within the same group is permitted, although the range of suitable investment instruments is not extensive. There is no overnight deposit market, but interest-bearing savings accounts and term deposit certificates are available, along with bank commercial paper. There is a financial transaction tax that applies to all bank debits, other than those between accounts belonging to the same entity, and those up to a certain value from savings accounts.
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