IBSA Workshop: Developing Strategies for International Business

Developing Strategies for International Business

Examining a Typical Entrepreneur’s International Group Structure

IBSA Workshop 4th June 2015

Jon Wingent – Investment Client Director

Strictly confidential 3

Important information and risks

This material is for information purposes only. It is not intended to be relied upon to make any investment decision. Although the information herein has been obtained from sources believed to be reliable, neither Close Brothers Asset Management or any of its employees guarantee its accuracy, completeness or fairness. The most recent data has been used where possible. Except in so far as liability under any statute cannot be excluded, no member of Close Brothers Asset Management accepts liability (whether arising in contract, tort or negligence) for any error or omission in this document.

The information contained in this presentation is believed to be correct but cannot be guaranteed where data is sourced from third parties. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.

Past performance is not a reliable indicator of future returns.

No investment, or investment strategy, is without risks. The value of investments will go up and down and clients may get back less than invested.

Issued and approved by Close Asset Management Limited (Company No.1644127) which is registered in England and Wales, is authorised and regulated by the Financial Conduct Authority and is a subsidiary of Close Brothers Group plc. Close Asset Management Limited uses the trading name Close Brothers Asset Management. Registered office at 10 Crown Place, London EC2A 4FT.

Unless otherwise stated, the source of all information or figures is Close Brothers Asset Management.


2015: equity markets lead the charge

In GBP

Led by Japan and Europe

Source: Bloomberg until close of 24 March 2015. Past performance is not a reliable indicator of future returns.

Japan

Europe

ChinaIndia UK US

US 7-10Y

UK IG

UK 7-10y

UK Property

ETFGARS

CopperBre

nt-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

Equities Alternatives Fixed Income and Credit

Within equities: led by Japan and Europe, India and China

Commodity price weakness remains

Led by corporate credit

Equities


China surges, India pegs back


UK: Sell in May and go away?FTSE All Share total return from 1st May to 30th September over the last 10 years

Month of May 2015 YTD 2015 (1st June)

2015 2.71% 11.08%

May- September Full Year

2014 -1.24% 1.18%

2013 2.83% 20.81%

2012 1.07% 12.30%

2011 -14.50% -7.33%

2010 1.63% 14.51%

2009 23.33% 30.12%

2008 -18.50% -29.93%

2007 0.65% 5.32%

2006 0.68% 16.75%

2005 16.21% 22.04%

Average 1.22% 8.58%


2014 YTD

LocalCurrency

EffectGBP Local

Currency Effect

GBP

US - S&P 500 13.68% 7.19% 20.87% 2.06% 4.92% 6.97%

UK - FTSE 100 1.04% 1.04% 8.09% 8.09%

Europe - Eurostoxx 50 4.92% -7.03% -2.11% 18.97% -6.43% 12.54%

Switzerland - SMI 12.93% -5.37% 7.56% 4.72% 8.53% 13.25%

Japan - Nikkei 225 8.96% -7.23% 1.73% 13.03% 5.06% 18.09%

India - Sensex 32.00% 5.30% 37.31% 2.58% 6.34% 8.92%

China - MSCI China 8.27% 6.84% 15.11% 5.05% 5.03% 10.08%

Market returns, half the story …

Source: Bloomberg 25 Feb 2015

And in some cases, they define the return

FX volatility at multi-year high. Currencies affect returns in a major way


99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 150

20

40

60

80

100

120

140

160

180

200

Market action in perspective

Source: Bloomberg, 25 March 2015. Past performance is not a reliable indicator of future returns.

The start of a new bull phase in markets?

USA

Europe

Is the 16 year sideways move over?

UK

Japan


Key themes of 2015: global leadership is shifting

US is resting

ROW catch up, with much room to go

Source: Bloomberg until close of 03 March 2015. Past performance is not a reliable indicator of future returns.

2015 should see US growth spread to the rest of the world

And the asset reflation baton spread from the US to other markets

Budding rotation in equity leadership.

Source: Bloomberg, 20 March 2015..

US

ROW


Bond market liquidity risk

Size of these funds, their influence on pricing and lack of liquidity if bond markets sharply deteriorate


Bond Market Volatility

BIS: Market Liquidity may increasingly come to depend on a few large institutions

Even the very liquid US Sovereign Bond market may suffer

Source: BIS. Bloomberg 20 March

US Corporates: Less volume and dealers Oct 15 2014 Flash crash, 10y Bond Yield


Complex array of macro factors

Source: Bloomberg 16 Jan 2015

Concern is that these factors are slowing growth at a time when inflation eroding as well, Now they all look to additive to growth and benign for inflation

Interdependent affect growth and inflation

Improving Growth Benign Inflation

Positive for equities

Earnings should

improve Dollar Strength

DeflationNegative yields

Decline in oil

Political and Geopolitical

Benign liquidity


The great monetary experiment goes viral

The US/UK Great Monetary Experiment Goes Viral

Net liquidity expansion in 2015 is $1.3 trillionStock of Government debt is shrinking rapidly, by about $800bn over next few years from QE Japan and

Europe

Source: Nevsky Capital, Bloomberg, November 2014

Likely further stimulus ahead Not rush to raise rates

ECB Bows to QE PressureOpen ended $1.2 trillion. 60bn per month, 10% of GDP versus 20% US/UK


US (to Date) EU (so far)0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

QE – We have seen this movie before…

Source: Bloomberg 20 Mar 2015

And the market is much quicker to discount it

S&P 500 and Eurostoxx 50, days before and after the announcement of quantitative easing

This time investors don’t have 3 years to get aboard

QE announced

Eurostoxx 50

S&P 500

180%

16%

180%

18%

?


Abenomics: lots of stimulus

Overweight Japan , but part hedged in exposure. Export oriented shares or tourism linked.

Japan’s weighting in the MSCI World Index in 1987 was 40%, 2x Europe and 10% higher than US. Today its weighting is around 8%.

Source: Bloomberg 20 Mar 2015, Citigroup

Japan Government Pension Fund Aggressively increasing equity allocations


Jan-3

2

Jun-3

2

Nov-32

Apr-33

Sep-33

Feb-34

Jul-3

4

Dec-34

May-

35

Oct

-35

Mar-3

6

Aug-36

Jan-3

7

Jun-3

7

Nov-37

Apr-38

Sep-38

Mar-3

9

Aug-39

Jan-4

0

Jun-4

0

Nov-40

Apr-41

Sep-41

0

50

100

150

200

250

The “mistake of 1937”

The Fed’s pre mature tightening and some fiscal tightening contributed

Janet Yellen has staked her tenure as chair of the Federal Reserve on a simple principle: She'd rather fight inflation than another economic downturn.

Source: Bloomberg 18 March

US Dow Jones Index

Fed 1936-7 hikes

GDP – 9%Ind. Production -40%Prices -11%

Dow Jones -47%


Negative yields—crazy, but true

Raising money at negative yields

Source: Bloomberg 20 March 2015

Would you lend 100 Euros to a French utility company (EDF) to get 99.3 Euros in 2 years?

These companies are essentially being “paid” to store money

“The reasoning to come to Europe is the same for most companies —it’s a cheap source of funding”

Bonds with negative yields (% of total issuance)


Global monetary tsunami

Brazil Australia Canada India Denmark Turkey Egypt Swiss Pakistan Russia-2.5

-2

-1.5

-1

-0.5

0

0.5

1

Changing policy rates since 1st Jan 2014

Canada, India, Norway, Denmark, Switzerland and Turkey have also cut rates.

As Central Banks around the world join the liquidity party

Source: Bloomberg 20 March 2015


Falling oil prices – risk or bonus?

Source: Bloomberg, 20 March 2015

Silver lining is cheaper oil

$900bn stimulus0.5% to global growth

Largest economies are net commodity importers. Non resource stocks benefit.

Destabilising for natural resource countries. Lower food and oil means lower inflation

Seen this before, 1998 …..US stocks went to inflated valuations

OPEC keeps

oil output of 30mm b/d on hold despite low prices


Dollar strength: good news, bad news

China’s peg with the may be Dollar challengedSource: Bloomberg 20 March 2015

USD

Renminbi

Up about 20% in 2014/5 versus most major currencies

Equals weaker Euro and Yen. Supports growth in Europe and Japan. Focus on domestic.

Doing the Fed’s job of tightening

Equivalent to circa 150bp in Fed tightening


The last big dollar trends

1978-1985 Dollar appreciation +50%

S&P increase +100%

1994-2000 Dollar appreciation +30%

S&P increase +180%

Led to continued outperformance of USD assets. Source: BCA Research November 2014


China and India introduce pro growth budgets

China confirms 7%, increase in budget deficit

Embarks on easing program

Further reform

India delivers pro growth budget

Embarks on easing program

Further reform


Elongated recovery, prospects improved

Expect positive economic surprise for non-resource economies over next 6-12 months

Prospects for sustainable recovery have improved

We are here-dot moving higher

Reckless lending

Tightening capacity

Rising wages and inflation

Mid cycle recovery Overall good for risk assets

Growth is improving

Low inflation

Liquidity and rates are benign

18 months 5 years

Bear markets happen here

2015: 3.2% China 7.0%India 5.5%US 3.0%UK 2.5%Euro 1.5%Japan 1.0%


Jobs, Consumer Confidence and Credit

The US jobs market has posted the greatest quarterly job growth in 17 years, creating over 1mm jobs last 11 months, or 12 mm over 60 months

It has seen the longest streak of monthly job gains above 200,00 in 20 years

February added 295,000 jobs and now US close to full employment with jobless rate at 5.5%, lowest since 2008

Eurozone show signs of improvement with the fastest pace of job improvement since 2011, albeit still high unemployment

Working age employment at the

end of 2014

was the highest since records began in 1971

Source: BCA Special report, Assessing the deflation threat February 27 2015

Yearly percentage growth in bank loans

Advanced economies retail sales


Political and geopolitical risks, waning?

And then of course terrorism. ..cyber included

Fears of Eurozone breakup resurface UK Election Fears of Russian collapse

Weighs over markets and positive sentiment


Positive returns, greater volatility

Overweight

Underweight

Overweight

Underweight

Overweight

Underweight

Equities Fixed Income and Credit Alternatives

++

Reduce US overweightUK and Europe-operational leverage O/W Japan, China and India

Focus on absolute return funds Infrastructure, property & REITSU/W Commodities, except gold

O/W credit versus sovereign Focus on investment grade

UK/US yield markets

-

2015 should see US growth spread to the rest of the world

And the asset reflation baton spread from the US to other markets

Thank you

Close Brothers Asset Management 10 Exchange SquarePrimrose StreetLondon, EC2A 2BYTel: 020 7426 4000www.closebrothersam.com

Treaty Access LimitationsRoy Saunders

Functions of a Double Tax Treaty

• Promotion of International Trade

• Elimination of Double Taxation

• Prevention of Fiscal Evasion

www.istructuring.com


• Final version September 2015

• Develop model treaty provisions and recommendations to prevent treaty

shopping

• Clarify that treaties are not intended for double non-taxation

• Examine tax avoidance issues before entering into a treaty

• The title should state that treaty shopping, creating tax evasion or avoidance, is

not the intention of the treaty

• Specific limitation of benefits provision

• General 'principal purposes test' (PPT)

OECD Action 6


Convention between (State A) and (State B) for the elimination of double taxation with respect to taxes on income and on capital and the prevention of tax evasion and avoidance Preamble: .... desiring to further develop their economic relationship and to enhance their cooperation in tax matters, intending to conclude a convention .....without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements .....for the indirect benefit of residents in third States).

Proposed Title of Double Tax Agreement


• Preserving the taxing rights of countries

• Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents... and citizens.

• Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.

• Paragraph 5 contains the Articles and Provisions that are not affected by the Saving Clause.

• Exit/departure tax regimes upheld by Saving Clause

DTA Saving Clause

Residence, Source and Use of Third Country Entities

• Residonia

• Forenzia

• Bizlandia


SALES COMPANIESWORLDWIDE

INITIAL INVESTORS

SECOND ROUND INVESTORS

GROUP HOLDINGCOMPANY

EUROPEAN MANUFACTURING

COMPANY

ASIAN MANUFACTURING

COMPANY

INTERMEDIARY HOLDING COMPANY

RESEARCH & DEVELOPMENT

COMPANY

FINANCE COMPANY

IPR HOLDING COMPANY

INTERMEDIARY LICENSING COMPANY

Third Party Licensing & Franchise

Agreements

E-COMMERCESALES

COMPANY

External finance

E-Commerce sales

Internal Licensing

Agreements

Supply of orders for E-Commerce sales

IPR sub-license

REAL ESTATE INVESTMENT HOLDING

COMPANY

LOCAL SPV COMPANIES


Pathway to BEPS

• Beneficial Ownership

• Conduit Companies

• Remittance saving clauses

• Limitation of Benefits

• Principal Purposes Test


Beneficial Ownership

• MTC 1977 Agents or Nominees

• Commentary reviewed articles 10,11 and 12

• Velcro and Prévost court cases• Possession

• Use

• Risk

• Control of Income



INITIAL INVESTORSSECOND ROUND

INVESTORS


EUROPEAN MANUFACTURING COMPANY

ASIAN MANUFACTURING COMPANY




INVESTORS




FINANCE COMPANYExternal

finance


Qualified person under LOB

• Individuals + certain entities resident in Forenzia

• Regularly traded listed company based in Forenzia or listed there –• Primary place of management and control

• >50% owned by Residencia + <50% deductible income to 3rd parties

• Forenzian active business test =• Bizlandian income derived in connection with or incidental to ..

• 95% derivative benefits test for 7 or fewer equivalent beneficiary owners`+ <50% deductible income to 3rd parties

• Discretionary relief in Bizlandia

• PPT test e.g. acquisition of existing structure


Disqualification under LOB

• Entire treaty is inapplicable (c.f. beneficial ownership restrictions)

• Do Collective Investment Vehicles qualify???




INVESTORS


EUROPEAN MANUFACTURING

COMPANY


INTERMEDIARY HOLDING COMPANY

RESEARCH & DEVELOPMENT

COMPANY

FINANCE COMPANY

IPR HOLDING COMPANY

INTERMEDIARY LICENSING COMPANY

Third Party Licensing & Franchise

Agreements

External finance

Internal Licensing

Agreements

IPR sub-license


UK Shareholders of Malta Company with US dividends

• US/Malta treaty = 5% US w/t from 30%

• LOB – only derivative benefits test applies

• UK individual owns 100% of Malta company

• UK/US treaty limits w/t to 15%

• Therefore 15% should apply to US/Malta dividends BUT

• There is a remittance clause in US/UK treaty!

• UK Company owning Malta company would be OK – 0% w/t



• Where board of directors meet; where CEO and other senior executives usually carry out their activities; which country's laws govern its legal status; where the accounting records are kept; where banking arrangements are located

• Active conduct of a trade or business requires substantial managerial and operational activities - not applicable to headquarters companies

• Examples: • Design, manufacture or sale of same products or services • Research and development facility licensing intellectual property

• Substantiality requirement for related activities

Substance for Active Business Test

Principal Purpose of Transaction (PPT)

• New paragraph 7 Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude ... that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.

• PPT does not restrict LOB provisions but enhances them; obtaining DTA benefits need not be the sole or dominant purpose of a transaction e.g. re-domiciliation prior to sale of asset




INVESTORS




E-COMMERCESALES COMPANY

E-Commerce sales



Art 13(4) does not apply to real estate owning companies if >50% assets non- real estate. New provision brings in 365 day test

Other anti-abuse recommendations


Use of a foreign p.e. to reduce overall tax costs to <60% of tax costs applicable to country claiming DTA relief, unless derived from active conduct of business carried on through the p.e., or royalties from rights developed by the p.e.

Use of foreign permanent establishments


Application of DTAs to Collective Investment Vehicles (CIVs) that:• may not be publicly traded interests • owned by non-equivalent beneficiaries (or may not be known)• distributions by CV are deductible payments (e.g. Luxembourg SV) • not active trade or business but investment vehicle only Definition of a CV - Regulation and Qualification of Investors

Application to Collective Investment Vehicles

Draft provisions of new US MTC

• Special Tax Regimes – to avoid double non-taxation

• Prevent corporate inversion with 10 year rule for expatriated entities

• Strengthening LOB provisions – expanding derivative benefits rule

• Subsequent changes in laws of contracting State

• Limit scope of treaty benefits for foreign permanent establishments

• Mandatory binding arbitration for inter-governmental disputes


Special tax regimes• Right to impose w/t preserved if low or no taxation ensues

• Preferential effective rate of tax – e.g. tax rulings- but not if application of regime does not disproportionally benefit income

• Therefore general availability required such as:

• Standard deductions

• Accelerated depreciation

• Corporate consolidation

• Dividends received deductions

• Loss carry overs

• Foreign tax credits

• Intellectual property income OK if active development of IPR

• Special economic zones for manufacturing

• Regulated collective investments are not included but LOB may be relevant

• REITs subject to investor protection regulation



INVESTORS


REAL ESTATE INVESTMENT HOLDING COMPANY


LOCAL SPV COMPANIES

Corporate inversions

• Dividends, interest and royalties full w/t for 10 years

• Existing treaties to be renegotiated?


Subsequent changes in laws

• If general rate of corporate tax falls below 15%

• Or substantially all foreign source income is exempt e.g. territoriality

• Articles 10,11,12 and 21 may cease to have effect with 6 months notice


General scope

• Applies where profits of entity in Residonia + foreign p.e. = <60% normal tax rate

• Or foreign p.e. State has no DTA with US


www.istructuring.com @TheIBSA

Business Tax Incentives: Utilising available reliefs

IBSA WorkshopBernhard Gilbey: 4 June 2015

57squirepattonboggs.com




FOUNDER AND INITIAL INVESTOR

UK CO (to own / develop IP



FOUNDER AND INITIAL

INVESTOR

UK CO (to develop /own

IP)

Entrepreneurs’ reliefs

SEIS/EIS• Income tax relief• Capital gains tax exemption• Capital gains tax reinvestment

relief

BIS• Res/Non-dom individuals who

claim remittance basis• Broader range of investee

companies than for SEIS/EIS• Share or loan capital• No limits

R&D tax credits

• Income tax relief on money borrowed to invest/lend to UK CO

• Accessing ER, the 10% rate of CGT

• More than 5% of:o voting

rightso nominal

value• Need to own shares

for more than 12 months

• Double-up with spouse?

• Activities that fall to be treated as research and development in accordance with generally accepted accounting practice

• BIS guidelines• SME relief (225% or 230%):

• Fewer than 250 employees and / or

• Annual T/O ≤ €250m and

• B/S ≤ €43m• < 25% capital/voting

rights owned by non-SMEs• SME R&D cap €7.5m of R&D relief

Investors’ reliefs

Personal investment limit

Value of relief

Ownership period

Maximum permitted interest

Size of investee company

Maximum investment for UK CO

SEIS

£100,000 p.a.

IT reduced by 50% of invested sum

3 years <30%:• of ISC• ord SC or• voting rights

Gross assets <£200kFewer than 25 full time employees (or PTE)

£150,000

EIS £1m p.a. IT reduced by 30%

3 years <30%:• of ISC• ord SC or• voting rights

Gross assets <£15m before and <£16m after investmentFewer than 250 full time employees (or PTE) *

£5m over 12 month period*

*RISK CAPITAL INVESTMENTS – PROPOSED CHANGES• Treasury proposed changes to the risk capital investment limits following EC review of state aid on risk capital investments in

2014. New limits (subject to state aid approval by EC) will be £15m of investment within 12 years of first commercial sale (unless UK CO has received previous SEIS, EIS/VCT investment).

• Limit for knowledge intensive companies of • £20m• 499 employees




UK CO (to develop / own IP


TECHNOLOGY EXPERT, KEY SALES INDIVIDUAL

EIS• Income tax relief• Capital gains tax exemption• Capital gains tax reinvestment

relief

VCT• Income tax relief (new issue

shares only)• Capital gains tax exemption

BIS• Res/Non-dom individuals who

claim remittance basis• Broader range of investee

companies than above• Share or loan capital• No limits

EMPLOYEE SHAREHOLDER STATUS• Rights for shares• £2,000 of shares can be

transferred IT free• Capital gains tax exemption

(up to £50,000 of restricted MV at acquisition)

EMI• Income tax (and possibly NI)

relief on exercise – if MV grant• ER if held for at least a year• Similar qualifying conditions

as for EIS in relation to UK CO


Personal investment limit

Value of relief

Ownership period

Maximum permitted interest

Size of investee company

Maximum investment for UK CO

VCT

£200k p.a.

IT reduced by 30%

5 years Gross assets <£15m before and <£16m after investmentFewer than 250 full time employees (or PTE) *

£5m over 12 month period*

Rights given up (some or all of):• Unfair dismissal• Statutory redundancy• Flexible working after parental leave• Statutory rights to request time off

to train• At least 16 weeks notice if proposing

to return early from parental leave






TECHNOLOGY EXPERT, KEY SALES

INDIVIDUAL FRANCE• IT and CGT exemptions

for investments into FCPC, FIPs, FCPIs etc.

• IT (and wealth tax) relief for investments into SMEs (similar(ish) to EIS)

• JEI – limitation tax exemption

GERMANY• Subsidies rather than

investment reliefs• Partial income tax (60%)

on sale of GmbH

US

AUSTRALIA• VCLPs and ESVCLPs• IT and CGT exemptions

for investments into ESVCLPs (exemption for CGT for foreign investors only in VCLPs)






US CO


PATENT BOX – BEPS ACTION 5

PE? BEPS 7

AGENCY ARRANGEMENT

NHS/UK HOSPITALS US HOSPITALS

Key Patent Box conditions• UK CO developed product and product is (or will be) protected by patent

so will be “qualifying IP rights” (exclusive licence not relevant here)• As UK Co is part of a group, active ownership condition - UK CO performs

a significant amount of management activity in relation to IP rights• Elect for the patent box, 10% rate, to apply to relevant IP profits• All of the profit will benefit from patent box regime?


Bernhard GilbeyPartner+44 (0)20 7655 [email protected]

Contact Info Slide

Transfer Pricing: Application of the Profit Split MethodWorkshop: Developing Strategies for International BusinessEmmanuel Llinares, Ph.D

Director and Head of NERA’s Global Transfer Pricing Practice

London

4 June 2015

Amanda Pletz

Associate Director

65

Table of Content

1. Profit Split under BEPS

2. Case Study - Application of RPSM to assess overall contribution to value creation

1. Profit Split under BEPS

67

PSM May Increasingly Apply in Certain Situations

Situations in which the PSM might apply (OECD*)

Typical Profit Split cases– Co-entrepreneurs

– Unique & valuable Intangible

– Integration & sharing of risk

– Hard to value Intangible and articulation of ex ante/ex post approaches

– Fragmented transactions and business models

New business models, notably the digital economy

* Discussion Draft on the Use of Profit Splits in the Context of Global Value Chains, OECD, December 2014.

68

Uncontrolled proliferation of PSM in non-BEPS situations

Unreasonable use of PSM by tax authorities resulting in tax reassessments and double taxation

PSM not necessarily in line with the arm’s length principle

PSM not practical to apply

Work By the OECD on PSM May Open Pandora’s Box According to Business

Overall, there seems to be some fear/hesitation from the business community* related to current OECD work on PSM

* Responses by practitioners and taxpayers, published on February 10, 2015.

69

Fifteen Years of One-Sided Transfer Pricing

Routine Local Functions Benchmark

Low Risks

Industry Information Within the IQ Range

Critical Success Factors

Group Value Chain

Roles and Responsibilities

Strategic and Non-Strategic RisksContribution Analysis

Intangibles Mapping

Economic Analysis

Arm’s Length Pricing System

70

PSM Should Apply Only in Specific Circumstances

Both parties to a transaction make unique and valuable contributions (e.g., contribute unique intangibles) to the transaction

Operations are highly integrated and a one-sided method would not be appropriate

There are important differences between related-party transactions and third-party transactions attributable, for example, to economies of scale or scope

Pricing of other complex transactions with certain properties

71

The VCA Analytical Framework Is a Starting Point

STEP 1. Value Chain

Analysis

STEP 2. Functions

Risks

Assets(Intangibles)

The Analytical Framework Based On Value Chain Analysis – A seven-steps process

STEPS

STEP 3. Legal Entities Define roles of the entities in the joint value creation and

responsibilities in respect of the different value drivers and related risks

Ser

Strategic Operational

Technology related intangibles

Marketing intangibles

Value Driver #1

Value Driver #3

Value Driver #2

Value Driver #5

Value Driver #4

Each person is a proxy for group-wide headcount involved in the activity

72

Analytical framework – value creation, functional analysis and roles and responsibilities

Rela

tionsh

ip

Long term / Cooperative

Short term / « Transactional »

Impact on Capacity Investment

Low High

Marginal Cost

Yield Management

« Open Book » Transparent

expect some risk sharing

Opportunistic Pricing

The Market Pricing Matrix shows the patterns of behaviour of independent parties in price negotiations in different relationships. It can help frame the bargaining position of the transacting parties and assess whether at arm’s length the parties would enter into the transaction at the prevailing terms and conditions

The Market Pricing Matrix shows the patterns of behaviour of independent parties in price negotiations in different relationships. It can help frame the bargaining position of the transacting parties and assess whether at arm’s length the parties would enter into the transaction at the prevailing terms and conditions

Step 4 - Transactional dynamics

73

The Pricing of Any Transaction Requires a Comprehensive Understanding of the Business and its Value Drivers

Traditional Transactions Methods

Comparable Uncontrolled Price (CUP) Resale Price Method Cost Plus Method

Transactional Profit Methods

Transactional Net Margin Method (TNMM) Profit split methods

6. Economic analysis: Application of method(s)

5. Transfer Pricing Method Selection

TRANSFER PRICING PROCESS—Steps 5 to 7

7. Implementation and documentation

74

Preparing a VCA Does Not Imply Using the PSM

Value Chain Analysis is a qualitative assessment of steps in a company’s value creation and serve as the framework for identifying bargaining positions of entities involved therein– It guides the selection and application of the most appropriate transfer

pricing methods

When the Profit Split Method is applicable, it should find its origin and justification in the Value Chain Analysis– Application of the Profit Split Method should rely on solid economic

analyses (analysis of external long-term relationships, investment-based models, game theory, compensation-based models, surveys, etc.)

– Can be applied on global basis or on a transactional basis

75

Where We Do Not Want to Head

A universal application of PSM in virtually all cases

based on arbitrary/simplistic

formulas

=Global Formulary Apportionment

2. Case Study

77

Case study – Fact Pattern

European manufacturer that produces components in Europe and Asia. The products are distributed into the European markets

The firm has significant R&D functions and valuable technology

– Some of the R&D activities, relating to new products and technology, are critical success factors.

These functions typically involve some of the most senior management of the firm

– Other R&D activities are simpler development / execution type of functions

The firm also has significant marketing functions

– The strategic marketing function’s role includes the identification of needs for new products and providing direction for the R&D functions with respect to new product development and management of the product portfolio.

These functions typically involve some of the most senior management of the firm

– Other marketing activities are trade marketing support functions

78

Case Study – Corporate Structure Chart

In this case study, we will show how the profit split method can be used to determine contribution to value creation on the entire value chain. The method

is more commonly used to set or to test transfer prices

79

Case Study

What would a value chain analysis look like?

What is the involvement of key entities in the value chain?

Marketing incl, Brand Development

Manufacturing & Procurement SalesR&D & Technology

Given the above value chain analysis, what transfer pricing techniques can be used to determine the remuneration of the various functions & activities?

• Research & Development Company (R&D execution)

• European Manufacturing Company (Development)

• IPR Holding Company (R&D management)

• Group Holding Company (R&D management)

Fu

nct

ion

s &

en

titi

es i

nvo

lved

• European Manufacturing Company

• Asian manufacturing Company

• Group Holding Company (Manufacturing management)

• Sales Companies Worldwide

• E-Commerce Sales Company

• Group Holding Company

• IPR Holding Company

• Sales Companies Wordlwide

• E-Commerce Sales Company

Costs = 80 Costs = 400 Costs = 120 Costs = 200Costs

8080

Overview of ApproachSummary

Remuneration Consolidated Profit of Business Segment Method

• Residual Profit allocation by function and/or by entity(in this case by function)

Step 2Core functions and Intangibles – Brand / technology etc.

Residual Profit Split Method

Step 1• Determine remuneration for all

benchmarkable activities / assetsRoutine Remuneration

TNMM and / or CUP

Co

ns

oli

da

ted

Se

gm

en

ted

Pro

fit

Once the residual profit has been determined, the key consideration is the definition of the appropriate split factor that should be used

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Step 1 Determination of Routine Remuneration

Question 1: Which functions deserve a routine remuneration?

– Decide based on VCA & FARA

– Here, one could consider (based on facts & circumstances): R&D execution – costs of 50 (out of 80) deserve a routine remunerationManufacturing – total costs of 400Marketing – costs of 100 (out of 120) deserve a routine remunerationSales – total costs of 200

Question 2: which method to use?

– Typically rely on the use of the TNMM

Question 3: What remuneration to provide?

– Requires a benchmarking study (in general)

– Example: Mark-up on total costs of 10% for routine R&D and 5% for routine manufacturing and marketing, return on sales of 3% for routine sales activities

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Step 2 What is Left after Routine Remuneration is Taken Out?

R&D & Technology

Manufacturing & procurement

Marketing including Brand development Sales = 1 000

Total Costs (a) 80 400 120 200

Costs of functions deserving a routine remuneration (b) 50 400 100 200

Mark-up or margin in % (c) 10% on costs 5% on costs 5% on costs 3% of sales

Mark-up or margin in € (d) = (c) × (b) 5 20 5 30

Residual Profits (e) = 1 000 – Σ(d) – Σ(a) 140

83

Value the contribution of IP to

the overall Value Creation Process

Compensation Data

Investments

Game Theoretical Approaches

PROs: Convenient as it relies on internal data

CONs: Sensitivity of communication of compensation data, nature of factors that influence compensation data

Financial Data/ Agreements Third Parties

PROs: Relies on data that can be traced

CONs: Analyses rely on a large number of assumptions

PROs: Ideal to reflect bargaining positions of transacting parties

CONs: Quality and reliability of estimates and assumptions

PROs: Based on market data

CONs: Degree of comparability, quality of data

Step 2 There are Various Ways to Split the Residual Profits

84

Residual Profit Split Method Application Requires Two Steps

Based on the group value chain and value drivers, design the most suitable analysis to split the residuals. In this case, assume that investment approach is most suitable. Assume that its application shows that 60% of residual profits in a given year attributable to technology and 40% to marketing and branding

Co

nso

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ated

Pro

fit

o

n t

he

tran

sact

ion

10

0%

R&D Technology

Marketing & Brand dev.

Ability to define an economically robust split factor is essential to apply this method

30%

28%

42%

Step 2: Split of Residual Profits and IntangiblesStep 1: Routine remunerations for the benchmarkable functions

1. In the case of two identified intangibles, one option could be to isolate and value one intangible outside the RPSM

2. Another option consists in valuing the two intangibles as part of the same RPSM model

85

Implication in Terms of Contribution to Value Creation

Marketing incl, Brand Development

Manufacturing & Procurement SalesR&D & Technology

Routine Remuneration 5 20 5 30

Residual Remuneration 84 0 56 0

Total remuneration 89 20 61 30

% of Total Value Chain 44.5% 10% 30.5% 15%

The residual profit split and transfer pricing methods in general can be used both to price transactions or to assess overall value chain

86

Conclusion

Application of the profit split method should always be based on a thorough understanding of the VCA & FARA

Profit split method is not global apportionment

Method is particularly suitable to situation where several parties have key “DEMPE” functions

The identification of robust and appropriate split factors is an important aspect of the analysis

The method can be applied to set transfer prices, to test transfer prices or to determine contribution to value creation of the entire value chain as in this example

Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. NERA rigorously applies internal confidentiality practices to protect the confidentiality of all client information.

Similarly, our industry is very competitive. We view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals, presentations, methodologies and analytical techniques. Under no circumstances should this material be shared with any third party without the prior written consent of NERA.

© 2015 NERA Economic Consulting

CONFIDENTIALITY

Contact UsAmanda Pletz

Associate DirectorNERA—London+44 207 659 [email protected]

© Copyright 2015NERA UK Limited

All rights reserved.

Emmanuel Llinares

DirectorNERA—London, Paris & Geneva+44 207 659 8650+33 1 70 75 01 93+41 22 819 94 [email protected]

The Post-UK-Election Landscape for SMEs with Global Interests

Philip Baker QCField Court Tax Chambers

3 Field CourtGray’s Inn

London WC1R 5EPTel: 020 3693 3700

[email protected]

FIELD COURT TAX CHAMBERS

International Business Structuring AssociationWorkshop: Developing Strategies for

International Business – London, 4th June 2015


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OUTLINE

The internal dimension – manifesto; Queen’s speech; Minister’s speech; Finance Bill

The external dimension – the OECD, BEPS and beyond The external dimension – the EU What could the new government do?


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THE INTERNAL DIMENSION

The Conservative manifesto we will not raise VAT, National Insurance contributions or

Income Tax but we will raise the 40p Income Tax threshold to £50,000 and take the family home out of tax by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million – so you can keep more of your income and pass it on to future generations.


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The Conservative manifesto• We will:• keep our economy secure by running a surplus so that we

start paying down our debts• increase the tax-free Personal Allowance to £12,500 and

the 40p Income Tax threshold to £50,000• commit to no increases in VAT, National Insurance

contributions or Income Tax• crack down on tax evasion and aggressive tax avoidance

and ensure those who can afford to pay the most do


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The Conservative manifesto And we will raise at least £5 billion from continuing to

tackle tax evasion, and aggressive tax avoidance and tax planning, building on the £7 billion of annual savings we have delivered in this Parliament.


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The Conservative manifestoWe will continue to lead the world on tax and transparency• Tackling tax evasion and aggressive tax avoidance and tax planning is

an important part of our long-term economic plan. • We will increase the annual tax charges paid by those with non-

domiciled status, ensuring that they make a fair contribution to reducing the deficit, and continue to tackle abuses of this status.

• We will lead international efforts to ensure global companies pay their fair share in tax, as David Cameron did at the G8 Summit in Northern Ireland in 2013, which secured significant international progress on fairer tax rules and full transparency over who really owns companies


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The Conservative manifesto• We will push for all countries to sign up to the Extractive Industries

Transparency Initiative; review the implementation of the new international country-by-country tax reporting rules and consider the case for making this information publicly available on a multilateral basis.

• We will ensure developing countries have full access to global automatic tax information exchange systems and continue to build the capacity of tax authorities in developing countries.

• We are also making it a crime if companies fail to put in place measures to stop economic crime, such as tax evasion, in their organisations and making sure that the penalties are large enough to punish and deter.


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The Conservative manifesto - Some comments No radical or far-reaching ideas Largely responsive to public issues and NGOs – tax

avoidance by companies; non-doms; developing countries Focus on corporate tax avoidance and transparency


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The Queen’s Speech, Budget and Finance (No. 2) Act “Legislation will be brought forward to ensure people

working 30 hours a week on the National Minimum Wage do not pay income tax, and to ensure there are no rises in Income Tax rates, Value Added Tax or National Insurance for the next 5 years.”

Budget – 8th July 2015 The tax handcuffs IHT exemption to £1m HMRC powers ???

Parliament rises – 21st July A 3rd Budget and Finance Bill?


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David Gauke's speech at the 'Britain, Europe and tax competition' conference, organised by the European Tax Policy Forum and Institute for Fiscal Studies – 1st June 2015

https://www.gov.uk/government/speeches/financial-secretary-on-the-governments-business-taxation-plans


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• So here’s our vision:• We will continue doing everything we can to help Britain

compete in the world.• We will continue to provide a competitive environment for

businesses carrying on activity in this country.• But if you owe tax, we will expect you to pay it.• And, more specifically, if you generate profits from activity

here in the UK, then you are expected to pay your fair share.• Competitiveness is the watchword – but fairness too. So I

would like to talk a little more about what those two words mean in practice.


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• Competitiveness• So we have been clear that we will maintain the most

competitive business tax regime in the G20.• We have heard worrying noises from across the Channel –

with talk of a minimum tax rate applied on profits. So let me be crystal clear. Direct taxation is a matter for EU member states. Any EU-wide measure would require unanimity across all EU countries. Any form of EU-wide minimum tax rate would undermine our sovereignty and we therefore would block it. Put simply, it ain’t happening.

• Our corporation tax regime will remain competitive - the most competitive of any major economy.


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• Fairness• Fair competition between countries is imperative.• Unfair competition, on the other hand, needs to be fixed.• By unfair competition, we mean individual jurisdictions

allowing certain individuals or companies not to pay tax.


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• Two further points• First, we will carry out the review on business rates, making

the system fit for the 21st century, and conclude it by the end of the year.

• Second, we will continue to make the tax system simpler.• We will be expanding the role and capacity of the Office for

Tax Simplification.• And we will be reforming the way business pay their tax.• Digital tax accounts will be transformational, particularly for

small business. For many, this will herald the end of the tax return.


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Additional points NO CCCTB Continue to target tax evasion Focus on transparency and EoI Continue to consult on tax policy changes No new corporate tax roadmap while BEPS is running

PB’s impressions No plans for major tax system reform No appetite for major tax system reform (winners and losers; the Pasty tax

fiasco) No room for reform (other than to widen the base and counter avoidance)


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THE EXTERNAL DIMENSION – BEPS AND OECD

BEPS – September 2014 Deliverables already being implemented

Action 1: Digital economy Action 2: Hybrid mismatch arrangements Action 5: Countering HTP – Patent boxes Action 6: Treaty abuse Action 8: TP intangibles Action 13: TP documentation and CbCR Action 15: Multilateral instrument


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BEPS – September 2015 Deliverables

Action 3: CFCs Action 4: Interest deductibility Action 5: Countering HTP – Phase 2 Action 7: Prevent PE avoidance Action 8, 9 and 10: TP intangibles (phase 2); risk and capital; high

risk transactions Action 11: gathering data Action 12: disclosure of tax avoidance schemes Action 14: improve dispute resolution PLUS additional work on Digital; Treaty abuse


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BEPS – December 2015 Deliverables

Action 4: Interest deductibility (Phase 2) Action 5: Countering HTP – Phase 3 - transparency Action 15: Multilateral instrument (Phase 2) – probably

overtaken by events


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BEPS – What are the significant changes?

Hybrid mismatch provisions Treaty abuse – LoB; PPT; double non-taxation PE definition Harmful tax practices – patent boxes; disclosure of rulings CbCR Multilateral instrument


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BEPS – What won’t change?

Residence – source allocation (?) The dysfunctional US tax system The existence of “good” tax competition The non-taxation of the digital economy The transfer pricing mess


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BEPS – The institutional dimension

Can the OECD survive (other than as a secretariat for others)?

The G20 (44 countries) appears to function well The multilateral instrument has 80 participants The UN has its own agenda Also IMF; World Bank It can never be back to normal service again


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Other OECD work – FATCA to CRS A huge shift in the international tax norm to AEoI for

financial information The system will need several years to settle down – then

there will be almost complete transparency Extension to corporate transparency over all forms of

rulings


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THE EXTERNAL DIMENSION – EU

June 17th – Corporate roadmap Re-launch of CCCTB as CCTB Greater transparency – especially on rulings

Other EU developments Removal of hurdles to cross-border movement of

individuals EU FATCA – amendments to the Directive on Administrative

Cooperation Exchange of rulings between tax authorities


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THE EXTERNAL DIMENSION – EU

State aid cases

CJEU case law


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WHAT COULD THE NEW GOVERNMENT DO?

Reform Non-doms – will they need to tackle this? Alternatives:

Tweak the system; increase annual charge Fundamental reform

Fundamental reform would need: A regime for short-term secondees / visitors – say initial

seven-ten years; taxed on UK-source income and overseas income only if remitted

The problem is the long-term HINWIs Maybe create a regime of deferral for alienated assets (trusts)

Knock-on effect for IHT if domicile is dropped


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Some fundamental reforms A road map for individual taxation – remove some of

the anomalies; build on definition of residence Merge NIC and IT – or at least, have a common base Abolish IHT and extend CGT to tax on death Reform the taxation of trusts (IHT, IT and CGT), onshore

and offshore, to make transfers of assets via trusts les disadvantaged and complex


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Some fundamental reforms Reform capital gains taxation for non-residents: tax all

disposals of interests in UK land – copy the US FIRPTA provisions (and abolish ATED)

Reform the deduction of interest – place a cap on deductibility and counter aggressive debt arrangements


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Procedural reforms Reform HMRC – review the merger after 10 years;

consider demerging C&E from HMRC

Reform tax procedures – introduce pre-populated tax returns; improve payment flows


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Procedural reforms Increase HMRC powers, especially to combat tax

avoidance

Increase protection for taxpayers’ rights

The Post-UK-Election Landscape for SMEs with Global Interests

Philip Baker QCField Court Tax Chambers

3 Field CourtGray’s Inn

London WC1R 5EPTel: 020 3693 3700

[email protected]


International Business Structuring AssociationWorkshop: Developing Strategies for

International Business – London, 4th June 2015

Discussion Group 1 – Tax Incentives Framework

Building on from the morning’s business incentives session, this discussion focusses on practical aspects around EIS and Business Investment Reliefs and how the raft of EU State Aid cases are likely to affect the landscape for future investments. Will the reliefs utilised by big business in the past have an adverse domino effect on the way small businesses must structure themselves in the future?

Discussion Group 2 – The OECD & the New World Order

The OECD is confident it can produce meaningful actions out of the BEPS Project commissioned via G20, but can it reconcile with government policy decisions at a national level? CCTB is back on the agenda in the EU, whilst the UK has already implemented the DPT. Will the US adopt OECD actions or continue with its own MTCs? The discussion looks at the practical implications of the BEPs Project progress and treaty access limitations.

IBSA Workshop: Developing Strategies for International Business

Small Business & Entrepreneurship

Transcript of IBSA Workshop: Developing Strategies for International Business