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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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© 2013 McGladrey LLP. All Rights Reserved.
Introduction & Objectives
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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.
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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
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• 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
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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
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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
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The right tax
structure could
help global
expansion
effectively
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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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Key Tax Structuring Considerations
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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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Key Tax Structuring Considerations
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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.
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• 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
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Substance Considerations
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• ‘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
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• 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
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• 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
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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
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Statements in public opinion:
BEPS
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• 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
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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
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Supply Chain Management
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• 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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Supply Chain Management
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Supply Chain Management
28
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
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Structuring
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• 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
Supply Chain Management
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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
© 2013 McGladrey LLP. All Rights Reserved.
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