Presentation on theme: "Legal Entity Rationalization Tax Executives Institute Phoenix, AZ 30 October 2013."— Presentation transcript:
Legal Entity Rationalization Tax Executives Institute Phoenix, AZ 30 October 2013
Page 1 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
Page 2 Agenda ► LER and market dynamics ► Typical business case for LER ► Suggested approach to LER
Page 4 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
Page 5 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 2001-20072007-2009 1990-2001 ► 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 survival We 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 Stakeholders General Electric Company Annual Report
Page 7 Potential LER benefits Potential 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: 300 entities LER leads to 100 eliminations Results in 200 Go-forward entities ► This is administrative cost savings only, before any tax and/or other benefits which typically crystallize during projects. $2.5 – 5.0m annual savings
Page 8 Typical business case Administrative cost components Clients indicate administrative cost savings in the following key areas Finance/accountingHardSoftTaxHardSoft ► 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 technologyLegal/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 CapitalIntellectual 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 synergiesCost avoidanceStructural alignmentGovernance and control
Page 9 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.)
Page 10 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.
Page 14 Organizational jurisdictional footprint Identification 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 Jurisdiction Entity Count % Total Target Elim Go Forward Wave 3 sub-totals Wave 2 – TBD Jurisdiction Entity Count % Total Target Elim Go Forward Wave 2 sub-totals Wave 1/High Population Jurisdictions Jurisdiction Entity Count % Total Target Elim Go Forward United States% United Kingdom% Germany% Brazil% Singapore% Wave 1 sub-totals% 59 12 27 18 24
Page 15 Addressing stakeholder challenges Objectivity 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.
Page 16 Identify and minimize stakeholder impact Bringing 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
Page 17 Streamlining legal entities can help companies manage their Capital Agenda