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© 2013 McGladrey LLP. All Rights Reserved. © 2013 McGladrey LLP. All Rights Reserved.

March 19, 2014

Capitalize on Tax Efficient Strategies —

Global Strategic Placement of Assets, IP, Cash and Supply Chain

© 2013 McGladrey LLP. All Rights Reserved.

Today’s Goals

• Introduction & Objectives

• Planning Considerations and a Phased Approach

• Closing Comments

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Introduction & Objectives


McGladrey LLP and McGladrey Alliance locations

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• McGladrey is a leading provider of assurance, tax and consulting services focused on the middle market.

• With more than 6,700 people in 75 U.S. cities and access to more than 32,000 people in 100 countries through our membership in RSM International, we can meet your needs wherever in the world you do business.


Objectives

• “Capitalize on Tax Efficient Strategies — Global Strategic Placement of

Assets, IP, Cash and Supply Chain”

• We will provide you insights into global tax planning, a global perspective & recent trends and thoughts for the future, be it whether you are in a start up mode or well experienced in the area of (global) tax planning.

• What we will demonstrate in this presentation:

• A company’s tax strategy should obviously be aligned with its business strategy.

• So the development of new business models, together with the possibility of harsher tax regulations, will require the development of new tax strategies – strategies that are tailored to the models individual pharmaceutical companies choose.

• Substance more important than ever. Major economies share knowledge about their local substance requirements, local risks etc.

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Structuring Considerations; A Phased Approach


• It is important to obtain, gain, maintain and improve competitiveness through business and tax model optimization.

• Elements such as taxation of various types of income, availability of foreign tax rulings, tax credits & incentives, value chain management planning or transfer pricing regulations, are key in the selecting of the most appropriate location and structure.

• Any commercial arrangements should therefore be structured to minimize the potential impact on ETRs (subject, of course, to any legal restrictions or other issues that may apply).

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Cornerstones of IP structuring

IP Legal

protection

Commercial

reality

Tax

Effectivenes

s


IP Legal protection

Considerations

• What type of IP are we dealing with? Can the IP be protected?

• Which law applies to the defense of IP?

• Who can file claims in international cases (IP owner, exclusive licensee, non-exclusive licensee)

• What happens in case of bankruptcy: who will be the owner of IP?

IP Legal protection

Location of R&D Centers

Non-harmonization

Geographical segmentation

Type of IP

Applicable law?

Bankruptcy

IP Legal Protection

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Commercial reality

Considerations

• Can R&D staff be located in a specific (tax friendly) country?

• Can the R&D staff (in another country) easily cooperate with other staff (e.g. sales depth)

• Can the key decision makers easily cooperate with the R&D staff if they are based in another country?

Commercial reality

Location of R&D

Centers

Presence of qualified

staff

Geographic market

differences

Decision making

processes

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Commercial Reality


Tax effectiveness

Tax effectiven

ess

Substance

Beneficial ownership

Offshoring

vs.

Special IP regimes

(Re) Structure/ migration

(Exit taxes)

Transfer Pricing

CFC regimes

Anti avoidance

rules

Hybrid entity

planning?

Considerations

Legislative

• Many countries introduce IP tax regimes (patent box etc.)

• Other R&D facilities (subsidies, wage tax incentives etc.)

Market

• On shoring: from offshore tax havens to onshore IP-friendly regimes. Likely explanations:

• Increasing substance requirements

• Controversy

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Tax Effectiveness

© 2013 McGladrey LLP. All Rights Reserved. 10

The right tax

structure could

help global

expansion

effectively


Design of An Investment Platform Structure

Building blocks of a blue print

• Taxation at level OpCo 1

• Withholding tax on finance interest paid by FinanceCo

• Taxation of FinanceCo & IPCo on income received

• Withholding tax on distributions to ParentCo

• Participation exemption regime with respect to foreign dividends and capital gains

• Taxation on (ultimate) shareholder level and consideration of repatriation

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Key Tax Structuring Considerations

1. Tax Effective Structuring

• Funding of acquisitions

• Choice of legal entity

• Taxation of IP income

• Design not without Implementation and Maintenance

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2. The location of more value-adding activities in regional hubs

• R&D

• Market

• Manufacturing

• Transfer Pricing

• Most developed countries offer tax credits or deductions on eligible

R&D expenditure.

• PE management

• The allocation of income among the participants in the supply chain

will become much more difficult, compounding the challenges

associated with the administration of transfer pricing for companies

and tax authorities alike.

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3. Collective management of indirect taxes and customs requirements

• The globalization of the pharmaceutical supply chain and provision of

product & service offerings will high light the challenges of managing

indirect taxes and customs duties, requiring a collaborative approach.

• It is key to acknowledge that meeting the requirements require the

implementation of robust processes, solid risk management and a

sophisticated degree of automation, as well as close cooperation with

the key members of the supply chain, such as brokers and

warehouse operators.

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Tax effectiveness - Onshore IP regimes Regular Income Taxation Specific IP Income taxation Trading Income

Taxation

France

The corporate tax rate is including social contribution and surtax

is 36.1%. Small and medium size companies are subject to a corporate

income tax rate of 15% for taxable profits of up to EUR 38,120.

Licensing fees relating to certain IP rights

can benefit from a 16.2% tax rate. n/a

Germany

Corporate income tax amounts to 15% (plus 5.5% solidarity surcharge

thereon) and trade tax amounts to about 7%-17.15% (depending on

municipality), resulting in a total tax rate of 22.8%-33.0%.

n/a n/a

Ireland

The corporate income tax rate on trading income and certain foreign

dividends is 12.5%. Passive income is taxed at a rate of 25%, capital gains at

a rate of 33%.

If IP income is considered to be active

income, subject to12.5% tax rate.

Depreciation of acquired IP possible, so

typical ETR for IP is much lower.

The corporate income tax

rate on trading income is

12.5%.

Luxembourg

21% general rate; 22.47% effective rate (including 7% surcharge); 29.22%

for Luxembourg City (including 7% surcharge and 6.75% municipal business

tax);

Tax regime aims at encouraging investments

in intellectual property and R&D by allowing

currently 5.76% effective tax rate on IP

income.

n/a

Netherlands The headline rate of corporate income tax is 25% levied on taxable profits

(including capital gains) in excess of EUR 200,000. The rate applicable to

the first EUR 200,000 of taxable profits is 20%.

The “innovation box” is available for

income from self-produced qualifying

intangible assets, taxed at an effective

rate of 5%.

n/a

Switzerland

Income taxes are applied on federal, cantonal and communal level in

Switzerland. The pre-tax corporate income tax rates range between 11.4%

and 24.4% (depending on municipality).

IP income may be subject to

tax rates of 8.5%-1 2% (mixed companies) or

8.8% (license box in the Canton of

Nidwalden).

Trading income may be

subject to tax rates of 5%

(principal companies)

or 8.5%-12% (mixed

companies).

UK

The main corporate income tax rate is 23%. Profits up to GBP 300,000 are

taxed at a rate of 20%. Marginal relief applies to profits between GBP

300,000 and GBP 1.5 million

A new patent box regime with

a tax rate of 10% on qualifying patent-derived

income is phased in from April 2013.

n/a

Specific Country Tax Rates For IP Income

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Tax effectiveness - Onshore IP regimes

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Tax Incentives & Credits

Country R&D Tax incentives Other incentives

France R&D tax credit of 30% for the portion of the R&D expenses below EUR 100 million

is available, reduced to 5% for the portion exceeding that amount.

Financial support is available in various forms. In addition, small and

midsize innovative start-up companies (“JEI”) may benefit from a one-

year corporate tax exemption and a 50% rebate for the following year.

Germany n/a

Financial support is available in various forms, e.g. investment subsidies

of 2.5% for investments started in 2013 in the former Eastern German

parts or regional subsidies as well as subsidies on European, Federal

and State level

Ireland

Ireland also provides a tax credit of 25% of capital and revenue expenditure on

qualifying research and development expenditure. It is possible to claim excess

R&D credits as a cash refund.

Certain start-up companies are exempt from tax in each of their first 3

years.

Luxembourg R&D expenses are deductible in accordance with normal rules Various financial aid programs are available

Netherlands

Employers engaged in certain R&D activities (“WBSO”) are entitled to a payroll tax

reduction of 38% (in certain cases 50%) of the relevant payroll costs, up to a

maximum base amount of EUR 200,000, and 14% for any excess base (maximum

reduction of EUR 14 million). In addition, the R&D deduction (RDA) of 60% of the

eligible cost and expenditure is available for investments in new business assets.

Financial support is available in various forms.

Switzerland Accruals for future R&D projects executed by third parties are permitted in an

amount of up to 10% of the taxable profit, maximum CHF 1 million.

Full or partial tax holidays of up to ten years on cantonal and – in certain

regions – federal tax level can be granted to substantial investment

projects. In addition, funding in case of a collaboration between the

company and a university may be available.

UK

Tax incentives for R&D expenditure are available, with an enhanced deduction of

130% for large companies and of 225% for small and midsized enterprises. From

April 2013, an optional above-the-line R&D tax credit of 10% of qualifying

expenditure is available for large companies.

Twenty-four new enterprise zones have been set up in economically

declining areas of the UK. Possible measures include a five- year

holiday up to GBP 275,000.


• Ireland and Switzerland have had very competitive tax rates which is reflected by the fact that a lot of Life Science companies have moved their international headquarters there. It must be noted that the Netherlands, Luxembourg and the UK are quickly catching up through the introduction of tax incentives for income generated from innovation-related activities. Together, Ireland, Switzerland, the UK and the Netherlands offer attractive solutions for the management of IP.

• In addition, the UK, the Netherlands, and Ireland offer attractive tax incentive programs for R&D activities, as a result of which many companies have consequently located R&D and manufacturing operations to these countries. By contrast, Germany and Switzerland seek to support such activities by direct subsidies.

• In addition, Swiss authorities are able to grant full or partial tax holidays of up to ten years for substantial investment projects. France, the UK and Ireland have similar provisions for start-up companies.

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Tax Incentives & Credits


Substance Considerations


• ‘Substance’ is a widely known tax concept, especially used in cross-

border tax situations. Nonetheless the expression ‘substance’ does not

normally appear in the actual text of tax treaties.

• A number of other tests are used, such as ‘residency’, ‘beneficial

ownership’, ‘qualifying persons’, ‘base erosion’ and increasingly anti-

avoidance articles such as a ‘general purpose’ tests. In addition, modern

tax treaties increasingly contain a ‘general anti-avoidance rule’.

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Substance


• Management and control is key:

• Control of the risks connected with the assets

• Decisive influence (not necessary carrying out daily work) relating to the

functions in this overview.

• Important (universal) substance indicators:

• i.e. directors, employees, specialized knowledge, bookkeeping and offices,

depending on the activities of the entity, should all be present, at least during

important decisions

• Local directors meetings & shareholders meetings

• Have the bookkeeping done locally (i.e. trust office)

• Having qualified local personnel

• Having (and using) a local account (i.e. trust office)

• Having a local address (i.e. trust office)

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Substance


• Increase of activity in the field of exchange of information:

• Possible spontaneous exchange of information by one country to

another (in specific cases)

• Information requests (e.g. for beneficial ownership or substance

purposes)

• Number of Tax Information Exchange Agreements has increased

significantly over recent years

• BEPS report issued by the OECD, followed by various commenting

reports under the influence of public opinion.

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Substance


1. Background

UK Parliamentary

Investigation of

Starbucks, Amazon

and Google

“Sweet Nothings” Report by Action Aid regarding Associated

British Food

Questions raised in

Dutch parliament

about role of the

Netherlands in tax

evasion

OECD Report on

Base Erosion and

Profit Shifting

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BEPS


Statements in public opinion:

BEPS

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http://www.google.nl/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=YeM2Ju2z3yFkVM&tbnid=Wjf5i930jRTyXM:&ved=0CAUQjRw&url=http://makewealthhistory.org/2009/02/23/how-corporate-tax-evasion-affects-the-poor/&ei=RjVDUfn1Aeqc0QX1lYH4Aw&psig=AFQjCNEpP7F-mv_1rNwVWx6FSslqNy6f7A&ust=1363445418795769

http://www.google.nl/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=BDiWSBra0X5Y1M&tbnid=E0aRsX_hBur6_M:&ved=0CAUQjRw&url=http://www.guardian.co.uk/commentisfree/2011/jun/28/glastonbury-u2-tax-protest&ei=5DVDUYywJMmH0AWt_IDQBw&psig=AFQjCNEpP7F-mv_1rNwVWx6FSslqNy6f7A&ust=1363445418795769

http://www.google.nl/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=cmt1yrAqCe6_ZM&tbnid=X2oEBSQiIVhfFM:&ved=0CAUQjRw&url=http://www.newint.org/blog/2011/06/20/bono-u2-tax-dodging-avoidance/&ei=oTZDUaCRLemX0QWEkoCQDw&psig=AFQjCNGE4xvQfmqNHEAVP6m-eDzmKTgNXw&ust=1363445738305313


• April 2013: OECD publishes report on BEPS • Addressing concerns related to BEPS

• Key pressure areas: • International mismatches in entity and instrument characterisation

• The effectiveness of anti-avoidance measures

• June 2013: G8 summit agrees on matters around tax and transparency

• July 2013: OECD publishes Action Plan on BEPS

• For each action, the OECD specifies the measures, resources, and methodologies that will be needed to implement the action, and includes a deadline for completing the work necessary to develop a particular measure. The OECD has set three deadlines under which the necessary work must be completed: September 2014, September 2015, and December 2015.

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BEPS

Upon request of

G20

Aim is to provide

comprehensive, balanced

and effective strategies for

countries concerned with

BEPS

Follow up action

plan announced


What may the OECD potentially do?

• Change clauses of the OECD Model Tax Treaty

• Change the OECD Commentary to the OECD Model Tax Treaty

• Change the OECD transfer pricing guidelines

• Propose that member states change their national legislation (or work through the G-20 to try and influence local legislation).

• Develop and roll – out a multilateral treaty

What are we seeing already?

• More aggressive approaches by local tax authorities emboldened by BEPS

• French concept of ‘virtual permanent establishment’

• Place of management PEs (e.g., in the case of matrix management organizations)

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BEPS


Supply Chain Management


• SCM combines tax planning and business model optimization to efficiently

structure the flow of products from R&D to manufacturing and distribution

in a tax-efficient manner.

• The effectiveness is determined by the ability to consolidate cross-border

flows and to centralize strategic and administrative functions, together

with key risks, functions and people.

• Optimal transition to a centralized business model requires careful

planning in different tax areas such as indirect taxes (VAT, custom duties),

corporate tax, transfer pricing and accounting.

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Principal

The entity which

owns the key

functions and risks

within a group

Full Risk

Distributor (FRD)

A company that

independently buys

and sells. The

company bears

hereby all the risks

Contract

manufacturing

The entity which is

acting on behalf of

other parties,

without taking stock

risks

Sales Agent

Entity which sells

goods in the name

and for the account

and risk of another

(the principal)

Toll Manufacturing

The entity which is

producing on behalf

of other parties,

without having the

ownership of the

raw materials or

finished products

(Sales)

Commissionnaire

Entity which is

closing agreements

with customers on

its own behalf,

where the goods are

finally delivered by

the principal


Structuring


• Planning structures

• IP (for instance, Lux or Cyprus IP Box Structure)

• Cash (for instance, CV-BV Structure)

• Supply Chain Management (for instance, Dutch-Irish Principal

structure)

30


© 2013 McGladrey LLP. All Rights Reserved. 31


Closing Comments

• A company’s tax strategy should obviously be aligned with its business

strategy.

• So the development of new business models, together with the possibility

of harsher tax regulations, will require the development of new tax

strategies – strategies that are tailored to the models individual

pharmaceutical companies choose.

• Substance more important than ever. Major economies share knowledge

about their local substance requirements, local risks etc.

32


This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice

or services. This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and

you should consult a qualified professional advisor before taking any action based on the information herein. McGladrey LLP, its affiliates and

related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.

McGladrey LLP is an Iowa limited liability partnership and the U.S. member firm of RSM International, a global network of independent accounting,

tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal

entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party.

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Capitalize on Tax Efficient Strategies Global Strategic ... 2_Lanza-van den... · Capitalize on Tax Efficient Strategies — Global Strategic Placement of ... on Tax Efficient Strategies