Legal Entity Rationalization

Tax Executives Institute

Phoenix, AZ

30 October 2013
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

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Agenda

LER and market dynamics

Typical business case for LER

Suggested approach to LER

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LER and market dynamics

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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 Tax
Regulatory Treasury
Accounting Finance
IT Operations
HR/Payroll

Effect of market dynamics, operational changes, and acquisitions and

dispositions

Drives multi-faceted benefits

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Changing growth strategy and market
insights
1990-2001 2001-2007 2007-2009 2009-present
Credit markets remain
90s were the longest Dow Jones Industrial Worst recession since
tight but easing
period of growth in Average grew by over the Great Depression
U.S. history Continuing regulatory
80% Subprime mortgage
scrutiny across the globe
Dot-com crash was a Private equity boom crisis
sector-specific event Companies take more
Easy access to capital Collapse of U.S
balanced approach to
Capital remained (e.g., covenant lite .housing bubble
growth (organic vs.
accessible financing) Global financial
acquisitions)
Other parts of Many organizations crisis and collapse Paradigm shift in the
economy remained focused externally and of major financial
market organizations
strong grew through M&A institutions
focused on internal
Blip in overall global activity Tight credit markets
liquidity and growth
economy Increased regulatory sources
scrutiny across the Historically complex
globe organization s focus on
Many companies focus simplifying legal structure
We are targeting a reduction of non-growth cost of on survival Free up liquidity
$3billion over three years we are measuring reductions
in legal entities, headquarters, rooftops, The fact is Reduce costs (internal
that complexity is the enemy of growth and we want to and external)
eliminate it Nimble/positioned for
growth
Letter to Stakeholders
General Electric Company Annual Report

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Typical business case

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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.
Exampleassume:
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:
100 200
300 LER leads to
eliminations
Results in
Go-forward
entities
entities
$2.5 5.0m
annual savings

This is administrative cost savings only, before any tax and/or other benefits which
typically crystallize during projects.

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Typical business case
Administrative cost components

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.
Clients indicate administrative cost savings in the following key areas
Finance/accounting Hard Soft Tax Hard Soft
Statutory audits Federal, state and local country income tax reporting and
Internal accounting/account reconciliations filings, disclosures
Auditing each entity Valued-added and other indirect tax filings
Management and external reporting Net worth/capital stock tax filings
Tax basis and tax attribute monitoring, transfer pricing
Information technology Legal/regulatory/contractual

Initial plug-in of legal entities into business systems, Licensing, permits, fees and insurance
controls, reporting Maintaining general corporate legal documents and structure
Data warehousing of accounting and legal information Agreements with same or similar counterparty
Software licensing for each entity Intercompany agreements and transfer pricing documentation
Duplicative IT functions, platforms, systems Liability risks
Human Capital Intellectual property

Duplicative management functions Duplicative management functions

Duplicative HR systems, pensions, benefit plans and
Other savings can potentially include: Duplicative HR systems, pensions, benefit plans and profit-
profit-sharing plans sharing plans
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 synergies Cost avoidance Structural alignment Governance and control

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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 targets human capital, assets
and operations.
In addition to the administrative cost savings, LER thus opens an opportunity for
strategic alignment with the organizations 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.)

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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.

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Suggested approach to LER

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LER process map

Project setup Entity assessment

Step 3 Step 4c Step 5

Step 1 Step 2 Step 4a Step 4b
Develop Future state Implementation
Project Pre-assessment Local Complexity
BU/jurisdiction organization plan
kick-of workshops assessments analysis
roadmap plan

Passport PL Passport SC Passport PL Passport SC

Merge, liquidate
Due diligence and implementation
or strike-of

Step 6b
Step 6a Step 6c Step 7
Functional step
Tax step plans Validation Elimination
plans

Passport PL Passport PL Passport SC

PL = Program Leader SC = Steering Committee

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Proposed project approach

OCT NOV DEC JAN FEB MAR APR MAY June July August September

Kick-off

Workshops

Roadmap

Wave 1 assessment

Wave 1 implementation
planning

Wave 1 due diligence and

implementation

Wave 1 elimination

Wave 2 assessment,

Wave 2 implementation
planning

Wave 2 due diligence and

implementation

Wave 2 elimination

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Organizational jurisdictional footprint
Identification of high impact jurisdictions for initial focus

Most organizations have a large percentage of their legal

24 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
27 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
59 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)

18 This approach needs to be validated relative to an

organizations particular facts and circumstances, regulatory
12 and tax profile, etc.

Wave 1/High Population Jurisdictions Wave 2 TBD Wave 3 TBD

Entity % TargetE Go Entity % Target Go Entity % Target Go
Jurisdiction Count Total lim Forward Jurisdiction Count Total Elim Forward Jurisdiction Count Total Elim Forward

United States %

United Kingdom %

Germany %

Brazil %
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Singapore %
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.

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Identify and minimize stakeholder impact
Bringing speed to save money

Step 1 Identifying isolated elimination blockers Step 2 Identifying recurring stakeholder themes
Canvas the business, avoiding deep-dives with any Focus on solutions to recurring themes brings efficiency
particular stakeholder until relative inputs from across the and speed
business are considered Recurring stakeholder themes are identified and entities are
Start with toughest stakeholders (usually tax, legal, regulatory) grouped accordingly
avoids disrupting other stakeholders Strategize potential solutions to recurring themes within each
Focused conversations with stakeholders to understand stakeholder grouping
commercial realities, both internal and external Brings efficiency by leveraging one solution across sub-populations
Strategize potential solutions to one-off isolated objections to of legal entities
legal entity eliminations
Avoids wasted time and resources, brings focus to key issues,
brings speed

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Streamlining legal entities can help
companies manage their Capital Agenda

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