Why Legal Entity Management matters Webcast 2014

Transcription

1 Webcast March 2014

2 Your panel on today s webcast Samantha Keen Transaction Advisory Services skeen@uk.ey.com Graham Roberts Financial Accounting Advisory Services groberts1@uk.ey.com Jelger Buitelaar International Tax Services jbuitelaar@uk.ey.com John Hinton Transaction Tax jhinton1@uk.ey.com Russell Payne Transaction Advisory Services rpayne@uk.ey.com Page 1

3 Agenda Managing compliance and reporting Country-by-country reporting (CbC) Improving tax efficiency Proactively managing your legal entities - reducing cost and complexity Audience questions Page 2

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5 Managing compliance and reporting Proposed changes in regulatory and legislative frameworks, including expected increase in global tax reporting requirements under country-by-country reporting Improving tax efficiency Proactively managing your legal entities; reducing cost and complexity Page 4

6 Audience polling question #1 For which of the following reasons does your organization actively manage and review the legal entity 1 structure? (please select all that apply) Tax effectiveness Operational efficiency and alignment Eliminating surplus entities Statutory compliance and reporting None of the above Not applicable 1 Legal entity includes company, partnership, limited liability corporation, trust or branch.

7 Managing compliance and reporting

8 Local statutory reporting what we have observed Number of territories spanned by operations* We are just inefficient. We end up being accurate, but it takes way too much effort. Fortune Global 500 materials company *Based on interviews with more than 200 finance and tax executives of Fortune Global 500 and Forbes Global 2000 companies Page 7

9 Local statutory reporting decentralized, older models don t seem to be working According to EY s global survey, Seizing the opportunity in global compliance and reporting: Nearly 20% of respondents experienced a tax or financial reporting-related business disruption 48% said their processes and systems for statutory accounting and reporting lack standardization 59% said their level of governance over statutory accounting and reporting varies greatly 77% said local resources are important for statutory accounting and reporting Leading companies are transforming their global compliance and reporting function to address these changing requirements About the survey: released in June 2011 by EY; results are based on responses from more than 200 finance and tax executives of Fortune Global 500 and Forbes Global 2000 companies. Page 8

10 Focus on statutory local reporting opportunities to drive efficiencies and mitigate risks Current state Group filing Lack of control over subsidiaries Lack of communication Cost of statutory reporting Compliance risks Inconsistency in accounting policies Risk of errors in reporting Sub 1 1 GAAP* Sub 2 2 GAAP* Sub 3 3 GAAP* Sub GAAP* Sub X X GAAP* *Generally Accepted Accounting Principles Page 9

11 Focus on statutory local reporting rationalization Future state Group reporting Global approach Communication protocols Global IFRS* accounting policy and IFRS reporting toolkit List of GAAP differences Group understanding of local distribution frameworks and tensions Controls IFRS* subsidiaries GAAP similar to IFRS* subsidiaries Other GAAP subsidiaries * International Financial Reporting Standards Page 10

12 Audience polling question #2 Has your organization considered a more standardised approach to addressing local reporting requirements? (please select one) Yes, we have already implemented a centralised structure for local statutory reporting Yes, we are planning or implementing a centralised reporting structure No, we prefer a decentralised approach No, we haven't actively thought about our approach to local statutory reporting Not applicable or don't know

13 Country-by-country reporting (CbC)

14 Overview of OECD BEPS project The Organisation for Economic Cooperation & Development s (OECD) Action Plan on addressing Base Erosion and Profit Shifting (BEPS) is aimed at government concern about potential for multinational companies (MNCs) to reduce their tax liabilities through shifting of income to no- or lowtax countries. It is driven by: MNC tax issues that have been in the headlines around the world. G8 and G20 governments have endorsed OECD s work on BEPS and have committed to individual country action. Major developing countries, including China and India, are actively participating in BEPS project. Responsive changes over the next few years will differ across countries in specifics and in timing, reflecting each country s particular circumstances. The OECD BEPS agenda is ambitious in both scope and timing; the issues are complex, but there is a real sense of political imperative. Companies need to be ready for the BEPS-related developments in all countries where they have operations or investment. Page 13

15 OECD discussion draft on transfer pricing documentation and CbC reporting OECD discussion draft issued 30 January 2014 Structured as a replacement to Chapter V (Documentation) of the OECD Transfer Pricing Guidelines Sets forth a two-tier approach to transfer pricing that is intended to be standardised across countries: A master file with global information relevant across the group A local file with transactional information relevant to the local entity Provides a draft of the template for CbC reporting: Proposed to be included in the master file Discussion draft does not necessarily reflect consensus views of the OECD working groups involved OECD considers that stakeholder comments are essential OECD considering whether information relevant to other aspects of tax administration and the BEPS Action Plan should be added to the template Page 14

16 Development of CbC reporting approach The information would be of greatest use to tax authorities, including those of developing countries, if it were presented in a standardised format focusing on high-level information on the global allocation of profits and taxes paid. We call on the OECD to develop a common template for country-by-country reporting to tax authorities by major multinational enterprises. 18 June 2013 G8 Leaders Statement Action 13 will include a requirement that MNEs provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template. 19 July 2013 OECD Action BEPS Action Plan As long as all involved in preparing and reviewing such data understand that risk assessment is a first step and that precision may not be necessary, greater overall reporting might productively be required for risk assessment purposes. 30 July 2013 OECD White Paper on Transfer Pricing Documentation a balance needs to be sought between the usefulness of the data to tax administrations for risk assessment and other purposes, and the compliance burdens placed on taxpayers. 3 October 2013 OECD Memorandum on Transfer Pricing Documentation and Country by Country Reporting Page 15

17 Country Constituent entities organized in the country Place of effectiv e management Important business activity code(s) Rev enues Earnings before income tax Total withholding tax paid Stated capital and accumulated earnings Number of employees Total employee expense Tangible assets other than cash and cash equiv alents Royalties paid to constituent entities Royalties receiv ed from constituent entities Interest paid to constituent entities Interest receiv ed from constituent entities Serv ice fees paid to constituent entities Serv ice fees receiv ed from constituent entities OECD draft CbC reporting template Income Tax Paid (on Cash Basis) (a) To country of organization (b) To all other countries Total: Total: Total: Total: Page 16

18 Scope of OECD draft CbC reporting template Draft template requires reporting for each entity in MNC group arranged by country of organisation, with branches treated as entities for this purpose Information required in draft template: Place of effective management Important business activity codes Revenues Earnings before income tax Income tax paid on cash basis to country of organisation and to all other countries Total withholding tax paid Stated capital and accumulated earnings Number of employees and total employee expense Tangible assets (other than cash and cash equivalents) Royalties paid to and received from related entities Interest paid to and received from related entities Service fees paid to and received from related entities Space provided for any further brief information that the taxpayer considers necessary or that would facilitate understanding of the required information Entire template, with all entity and country information, to be provided to the tax authority in each country in which the MNC has an entity or branch Page 17

19 OECD timeline for finalization 30 January 2014 Discussion draft released 23 February 2014 Due date for submission of comments to the OECD March 2014 Consultation on discussion draft May 2014 OECD Working Party 6 expected to finish work on the template June July 2014 OECD expected to approve template for release By September 2014 OECD expected to release country-by-country reporting template Page 18

20 Audience polling question #3 Which of the following is the most likely outcome of CbC reporting? (please select one) Additional resources expended by taxpayers and tax authorities Changes by the tax authorities in their tax audit approach Fundamental changes to transfer pricing framework All of the above Not applicable

21 Improving tax efficiency

22 Tax drivers for entity rationalization Improving tax efficiency of corporate structures: Simplifying historical tax structures Responding to corporate governance requirements on managing tax Matching corporate structure and tax operating model Page 21

23 Tax drivers for entity rationalization Creation of opportunities for: Optimizing value from tax assets Tax-efficient profit repatriation Tax-efficient return and lease of capital Page 22

24 Tax drivers for entity rationalization Drivers in the current environment: Focus on cost-savings Increase in M&A activity Exit & divestment strategies Corporate acquisitions and integration Page 23

25 Audience polling question #4 What does your organization estimate the average carrying cost of a legal entity to be? (please select one) 10,000 or less 10,000 to 25,000 25,000 to 50,000 50,000 to 75,000 75,000 plus Do not know Not applicable

26 Proactively managing your legal entities - reducing cost and complexity

27 Why simplifying or rationalizing your legal entities matters Improved governance and control Administrative cost savings Reduced compliance and regulatory activity Operational synergies Page 26

28 Potential annual administrative cost savings from Legal Entity Rationalization (LER) Organisations generally seek to eliminate at least one-third of their legal entity population. For ABC Company, if we assume: 300 total operating entities worldwide One-third reduction in entity population, i.e., 100 entities to be targeted A 15k 30k average cost structure per entity per year Our experience shows: 300 entities LER leads to 100 eliminations results in 200 go-forward entities million annual savings This is administrative cost savings only, before any tax or other benefits that typically crystallise during projects. Page 27

29 LER critical success factors Anticipated time commitment Initial high level review Saving time, avoiding disruptions Identification of high-impact opportunities to eliminate Addressing stakeholder challenges Page 28

30 Typical challenges encountered on projects Not a business as usual activity Avoid the loss of momentum Program challenges Entity challenges Pace Project progress is slower than it should be Managing change Lack of coordination of internal and external resource Tax risks Crystallization of gains Inefficient unwinding of intercompany balances Value Savings are left on the table Lack of understanding of cost drivers Loss of corporate memory Unidentified assets, e.g., brands or IP Poor control of cost Unidentified liabilities, e.g., industrial injury claims Sustainability Benefits are not sustained over time Quick win programs are not followed by significant initiatives No strategy for dealing with acquired entities Operational issues Licenses, contracts, warranties Employees, TUPE, pensions Information technology platforms/data Page 29

31 Audience questions

32 Legal notice The information in this presentation is intended to provide only a general outline of the subjects covered. It should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice. Accordingly, Ernst & Young LLP accepts no responsibility for loss arising from any action taken or not taken by anyone using this pack. The information in this pack will have been supplemented by matters arising from any oral presentation by us, and should be considered in the light of this additional information. If you require any further information or explanations, or specific advice, please contact us and we will be happy to discuss matters further. Page 31

33 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EYGM Limited. All Rights Reserved. EYG no. DE0523 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com Page 32

34 Thank you