(b) Stage 2. As multinational operations expand, international treasury continues to
expand so that it is often duplicating all domestic treasury functional areas.
- Foreign exchange risk management, reporting and analysis of derivative posi-
tions - Multinational cash management, netting, pooling, and bank relations
- International tax management and earnings repatriation
- International capital markets, subsidiary funding, capital structure
It is often at this stage, prior to the firm truly addressing the organizational and
functional conflicts, in which many of the worst treasury management practices arise.
The firm has outgrown the effectiveness of its managerial structure.
(c) Stage 3. A large multinational firm now reflects both the scope of its global ac-
tivities through functional areas (foreign exchange, cash management, etc.) but is
also highly regionalized, requiring regional treasury specialists or managers in addi-
tion to a redefinition of the functional financial overlap and duplication problems
arising under Stage #2.^7
Although foreign currency management, foreign exchange risk management, and
international tax management are the most widely recognized unique features of in-
ternational treasury, managing the cash flow process within the multinational firm is
first priority. The fact that many of the cash flows are denominated in multiple cur-
rencies (the subject of the following section on currency management) complicates
the process significantly.
But the complexity of issues in international treasury defies simple categorization.
Note the variety of functional areas which are working in combination in the follow-
ing sample of an international treasury problem:
In countries such as Italy and Switzerland withholding tax rules will strongly influence
the choice of technique. A Dutch company, for example, was confronted with recurring
deficit situations of its subsidiaries in Italy. A zero balancing structure would result in
intercompany loans from the treasury (located in the Netherlands) to the Italian sub-
sidiaries. The average lending amount over a year would be US$2,000,000 on which
10% debit interest would be charged. On the US$200,000 interest payment, 10% with-
holding tax (according to the treaty between Italy and the Netherlands) would be de-
ducted. This US$20,000 would result in an actual cost for the treasury because the loan
would be financed by a credit facility in the Netherlands, which would lead to the un-
availability of settlement opportunities within the Dutch corporate income tax system.
Faced with this scenario the company decided to re-evaluate their original zero balanc-
ing structure.^8It is readily apparent that all the financial functions—cash management, foreign
exchange management, centralized versus decentralized management and control
5.3 INTERNATIONAL TREASURY MANAGEMENT 5 • 11(^7) Westinghouse recently restructured Treasury from one which had grown international to one which
is international. Prior to restructuring, Westinghouse’s treasury had six primary areas: banking, credit and
collections, corporate finance, domestic cash management, pension, and international. After restructur-
ing, treasury was reduced to five areas, global capital markets, global cash management, pension, project
finance, corporate finance, and had reduced total positions from 109 to 40.
(^8) “International Liquidity Management: Efficiency Through Creativity,” by Marcel Van Eijk, Treasury
Management International, Special Report, 1995.