Legal Entity Rationalization Tax Executives Institute Phoenix, AZ 30 October 2013.

Legal Entity Rationalization

Tax Executives Institute

Phoenix, AZ

30 October 2013

IRS circular 230 disclosure

Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions

These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice

Agenda

► LER and market dynamics

► Typical business case for LER

► Suggested approach to LER

LER and market dynamics

What is LER?

►Not simply legal entity elimination or reduction of dormant entities

►Challenging the status quo of legal entity organizational chart, including, but not limited to:

►Legal►Regulatory►Accounting►IT►HR/Payroll

►Effect of market dynamics, operational changes, and acquisitions and dispositions

►Drives multi-faceted benefits

►Tax►Treasury►Finance►Operations

Changing growth strategy and market insights

► Credit markets remain tight but easing

► Continuing regulatory scrutiny across the globe

► Companies take more balanced approach to growth (organic vs. acquisitions)

► Paradigm shift in the market –organizations focused on internal liquidity and growth sources

► Historically complex organization s focus on simplifying legal structure

► Free up liquidity► Reduce costs (internal

and external)► Nimble/positioned for

growth

2001-2007 2007-20091990-2001

► 90’s were the longest period of growth in U.S. history

► Dot-com crash was a sector-specific event

► Capital remained accessible

► Other parts of economy remained strong

► “Blip” in overall global economy

► Dow Jones Industrial Average grew by over 80%

► Private equity boom► Easy access to capital

(e.g., covenant “lite” financing)

► Many organizations focused externally and grew through M&A activity

2009-present

► Worst recession since the Great Depression► Subprime mortgage

crisis► Collapse of

U.S .housing bubble► Global financial

crisis and collapse of major financial institutions

►Tight credit markets► Increased regulatory

scrutiny across the globe

► Many companies focus on survivalWe are targeting a reduction of ‘non-growth cost’ of

$3billion over three years – we are measuring reductions in legal entities, headquarters, ‘rooftops’, – The fact is that complexity is the enemy of growth and we want to eliminate it”

Letter to StakeholdersGeneral Electric Company Annual Report

Typical business case

Potential LER benefitsPotential annual administrative cost savings

► Organizations generally seek to eliminate at least 1/3 of their active, operational entity population► Inactive entities do not produce the sought after cost benefits.

► Example—assume:► 300 total operating entities worldwide► 1/3 reduction in entity population, i.e., 100 entities to be targeted► A $25k – $50k average cost structure per entity per year

Our experience shows:

300entities

LER leads to 100eliminations

Results in 200Go-forward

entities

► This is administrative cost savings only, before any tax and/or other benefits which typically crystallize during projects.

$2.5 – 5.0mannual savings

Typical business caseAdministrative cost components

Clients indicate administrative cost savings in the following key areas

Finance/accounting Hard Soft Tax Hard Soft

► Statutory audits► Internal accounting/account reconciliations► Auditing each entity► Management and external reporting

► Federal, state and local country income tax reporting and filings, disclosures

► Valued-added and other indirect tax filings► Net worth/capital stock tax filings► Tax basis and tax attribute monitoring, transfer pricing

Information technology Legal/regulatory/contractual

► Initial “plug-in” of legal entities into business systems, controls, reporting

► Data warehousing of accounting and legal information► Software licensing for each entity► Duplicative IT functions, platforms, systems

► Licensing, permits, fees and insurance► Maintaining general corporate legal documents and structure► Agreements with same or similar counterparty► Intercompany agreements and transfer pricing documentation► Liability risks

Human Capital Intellectual property

► Duplicative management functions ► Duplicative HR systems, pensions, benefit plans and

profit-sharing plans

► Duplicative management functions ► Duplicative HR systems, pensions, benefit plans and profit-

sharing plans

Clients report an average annual carrying cost per entity of $25-50 thousand, indicating a $2.5-5m annual annuity savings for every 100 entities eliminated.

Other savings can potentially include:► More productive human capital/increased speed to closing► Inefficient tax and legal structures removed/crystallizing tax benefits► Significant reduction in inter-affiliate transactions is generally achieved, thereby resulting in less pressure on internal controls, business systems,

accounting functions, etc.

Other strategic benefits of LER – See next two slides

Operational synergies Cost avoidance Structural alignment Governance and control

Typical business case (continued)Other strategic benefits of LER

Potential benefits

Operational synergies ► LER can potentially result in operational synergies through the thoughtful placement of each target’s human capital, assets and operations.

► In addition to the administrative cost savings, LER thus opens an opportunity for strategic alignment with the organization’s strategy

► Potential to capture benefits with respect to: (1) people, (2) process, (3) technology and(4) third parties.

Cost avoidance ► Avoid plugging entities that can be eliminated into performance improvement agendas, e.g., global finance transformation, accounting and business systems, cash management, etc.

► Plugging an entity into a PI workstream (e.g., SAP implementation) can potentially cost up to $50K per entity► Assuming 100 eliminations: 100 x $50K = $5MM of potential savings beyond

administrative cost savings► Additionally, “speed” may potentially be captured through the avoidance of installing

unneeded entities into new systems and PI agendas.► Reduction of legal entities generally results in less pressure on internal controls and

business systems (e.g., fewer intercompany transactions, contracts, streamlined transfer pricing, etc.)

Typical business case (continued)Other strategic benefits of LER

Potential benefits

Structural alignment ► Opportunity to take advantage of changing market conditions and customer needs. ► Understand new, emerging markets, product portfolios and address customer needs.

Governance and control ► Increased transparency► Management of the population of legal entities by developing a legal entity committee

and procedures manual. ► Identify the risk profile of each remaining legal entity after the LER and categorize

them as high, medium, or low. ► Establish control frameworks to address relevant risks.

Suggested approach to LER

LER process map

Step 1 Project kick-off

Step 2 Pre-assessment

workshops

Step 3Develop

BU/jurisdiction roadmap

Step 4bComplexity

analysis

Step 4cFuture state organization

plan

Step 7Elimination

Project setup Entity assessment

Step 4aLocal

assessments

Step 5Implementation

plan

Step 6bFunctional step

plans

Step 6cValidation

Step 6aTax step plans

Due diligence and implementationMerge, liquidate

or strike-off

Passport PL Passport SC Passport SCPassport PL

Passport PL Passport PL Passport SC

PL = Program Leader SC = Steering Committee

Proposed project approach

DECNOVOCT JAN FEB MAR MAYAPR

Kick-off

Workshops

Roadmap

Wave 1 assessment

Wave 1 implementation planning

Wave 1 elimination

Wave 2 assessment,

June July August September

Wave 2 implementation planning

Wave 2 elimination

Wave 1 due diligence and implementation

Wave 2 due diligence and implementation

Organizational jurisdictional footprintIdentification of high impact jurisdictions for initial focus

► Most organizations have a large percentage of their legal entity population located in a select number of operating jurisdictions. It generally makes sense to focus on these “high population density” jurisdictions in the early stages of LER to ► avoid unwarranted complexity until the project is up and running

efficiently, i.e., with recurring themes, solutions, issues, and other efficiencies identified and appropriately leveraged;

► secure larger volume of entity eliminations quickly by avoiding undue analysis of multiple jurisdictional rules and provisions for small target sets

► Help establish tangible success in the early stages of LER► Involve a smaller team of professionals so that disruptions to business

operations are minimized (see estimates of potential time allotment)

► This approach needs to be validated relative to an organization’s particular facts and circumstances, regulatory and tax profile, etc.

Wave 3 – TBD

JurisdictionEntityCount

%Total

TargetElim

GoForward

Wave 3 sub-totals

Wave 2 – TBD


%Total

TargetElim

GoForward

Wave 2 sub-totals

Wave 1/High Population Jurisdictions


%Total

TargetElim

GoForward

United States %

United Kingdom %

Germany %

Brazil %

Singapore %

Wave 1 sub-totals %

59

12

27

18

24

Addressing stakeholder challengesObjectivity is needed to provide “independent challenge”

► Understand the perspectives of your stakeholders

► Deploy an efficient process to identify, validate and resolve key considerations to quickly meet business objectives

► Deploy an efficient process to challenge and resolve the issues your stakeholders encounter

An objective perspective for LER stakeholders provides an independent challenge to roadblocks, and ideas to overcome suggested blockers.

Identify and minimize stakeholder impactBringing speed to save money

Step 1 – Identifying isolated elimination blockers

Canvas the business, avoiding deep-dives with any particular stakeholder until relative inputs from across the business are considered► Start with toughest stakeholders (usually tax, legal, regulatory) –

avoids disrupting other stakeholders► Focused conversations with stakeholders to understand

commercial realities, both internal and external► Strategize potential solutions to “one-off “ isolated objections to

legal entity eliminations► Avoids wasted time and resources, brings focus to key issues,

brings speed

Step 2 – Identifying recurring stakeholder themes

Focus on solutions to recurring themes brings efficiency and speed► Recurring stakeholder themes are identified and entities are

grouped accordingly► Strategize potential solutions to recurring themes within each

stakeholder grouping► Brings efficiency by leveraging one solution across sub-populations

of legal entities

Streamlining legal entities can help companies manage their Capital Agenda

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Legal Entity Rationalization Tax Executives Institute Phoenix, AZ 30 October 2013.

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