Why Legal Entity Management matters - Live Group · 2014-03-06 · Local statutory reporting – decentralized, older models don’t seem to be working Page 8 Why Legal Entity Management

Why Legal Entity Management matters Webcast 2014

6 March 2014

Your panel on today’s webcast

Why Legal Entity Management matters Page 1

Samantha Keen

Transaction Advisory Services

Email: [email protected]

Graham Roberts

Financial Accounting Advisory Services


Jelger Buitelaar

International Tax Services


John Hinton

Transaction Tax


Russell Payne

Transaction Advisory Services


Agenda


► Why Legal Entity Management matters

► Managing compliance and reporting

► Country-by-country reporting (CbC)

► Improving tax efficiency

► Proactively managing your legal entities - reducing cost and complexity

► Audience questions

Why Legal Entity Management matters

Why Legal Entity Management matters


► 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

Audience polling question #1

For which of the following reasons does your organization actively manage and

review the legal entity1 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.

Managing compliance and reporting

Local statutory reporting – what we have observed


Number of territories spanned by operations*

*Based on interviews with more than 200 finance and tax executives of Fortune Global 500 and Forbes Global 2000 companies

We are just inefficient. We end up being

accurate, but it takes way too much effort. Fortune Global 500 materials company

“ ”

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.

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 X

X GAAP*

Sub …

… GAAP*

*Generally Accepted Accounting Principles

Focus on statutory local reporting – rationalization


Future state

Controls

Group reporting

IFRS* subsidiaries GAAP similar to IFRS* subsidiaries Other GAAP subsidiaries

Global approach

Communication protocols

Global IFRS* accounting policy and IFRS reporting toolkit

List of GAAP differences

Group understanding of local distribution frameworks and tensions

* International Financial Reporting Standards


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

Country-by-country reporting (CbC)

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 low-tax 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.

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

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

OECD draft CbC reporting template


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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

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


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

Improving tax efficiency

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



Creation of opportunities for:

Optimizing value from

tax assets

Tax-efficient profit

repatriation

Tax-efficient return and

lease of capital



Drivers in the current environment:

Focus on cost-savings Increase in M&A activity

Corporate

acquisitions and integration

Exit & divestment

strategies


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

Proactively managing your legal entities - reducing cost and complexity

Why simplifying or rationalizing your legal entities matters


► Improved governance and control

► Administrative cost savings

► Reduced compliance and regulatory activity

► Operational synergies

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

£1.5-£3 million

annual savings

► This is administrative cost savings only, before any tax or other benefits that typically crystallise

during projects.

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

Typical challenges encountered on projects


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

► Poor control of cost

Loss of corporate

memory

► Unidentified assets, e.g.,

brands or IP

► 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

► Not a “business as usual” activity

► Avoid the loss of momentum

Audience questions

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.


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Documents

Why Legal Entity Management matters - Live Group · 2014-03-06 · Local statutory reporting – decentralized, older models don’t seem to be working Page 8 Why Legal Entity Management