Entity Rationalization &
Alignment Planning
September 2011
General Background
 Key objective is to rationalize existing legal entities and reduce the global footprint in a
tax optimized manner in order to mitigate administrative and compliance burden of nonvital legal entities
 Further, as part of its entity rationalization, Companies can consider implementing taxaligned holding company structures
 In the current environment, there exist specific planning opportunities to maximize tax
attributes and erode local country tax base by re-purposing subsidiaries.
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Benefits of Entity Simplification [Cross-Functional Efficiencies]
Legal and Regulatory

Reduced time and costs
associated with duplicative
licensing, permitting and
regulatory filing costs resulting
from structure designed to meet
outdated legal and regulatory
requirements

Reduced costs associated with
records maintenance

Savings of time expended by
Board of Director members
attending annual meetings and
meeting other statutory formalities

Reduced time and related costs
associated with the preparation
and filing of public notices

Savings associated with
elimination/consolidation of
registered agents in applicable
jurisdictions
Operations

Reduced costs incurred from
duplicative administrative and
shared services costs (e.g.,
consolidation of regional structures
into national structure)

Simplify structure to align with
operating model

Elimination of costs related to
intercompany transactions (e.g.,
work orders, re-titling of property,
fleet sharing, subleases, etc.)

Savings realized through the
consolidation of duplicative
insurance policies and elimination
of duplicative premiums

Savings realized through vendor
rationalization across legal entities
and jurisdictions
HR/Payroll

Time savings associated with
aligning the structure to match the
pension, 401(k) plans, insurance
plans, etc.

Savings relating to reduced costs
associated with employee/
executive mobility (e.g., visa, work
counsel, union, etc.)

Time and cost savings relating to
the preparation and filing of
multiple 990’s and 5500’s

Savings related to payroll
registration fees

Reduction of time required to
maintain intercompany
agreements

Time and cost savings associated
with the creation of structure that
labor contracts can follow
Benefits of Entity Simplification [Cross-Functional Efficiencies]
Treasury and Finance

Reduced time required for cash
budgeting and forecasting

Savings from reduced bank
account service fees and
transaction charges (e.g.,
accounts maintenance, cash
sweeps, interest charges, etc.)




Reduced time and cost of
monitoring covenants (e.g.,
maintaining ratios, monitoring thin
cap, meeting minimum cash
requirements, etc.)
Accounting



Savings of time required to
compile and reconcile month-end
and year-end legal entity financial
reports

Savings of time required to roll
forward and reconcile
intercompany account balances
Reduction of time required to input
and update general ledger legal
entity coding

Savings from reduced system
reconfiguration costs

Reduced cost associated with
incremental system capacity

Savings of time required to draft,
process and maintain reports
requests
Savings of time required to
prepare and post intercompany
journal entries
Reduction of time required to
maintain intercompany positions

Savings from elimination of
extraneous minimum deposit
requirements in multiple
jurisdictions resulting in lower cost
of capital and more efficient cash
management
Savings of time required to
reconcile legal entity books
including posting, adjusting and
eliminating journal entries

Savings of time related to IFRS
implementation readiness
Simplify currency hedging strategy
IT
Deloitte’s Approach
[Holistic Strategy Aligned w/ Operating Model]
Corporate Strategy
Operating Model
Implications
Misalignment between
legal entity structure and
operating model typically
results in:
Legal Entity Structure
Corporate Strategy
 Cumbersome and inefficient use
of internal resources resulting in
duplication of effort
 Unnecessary complexity involved
in execution of strategies,
alignment of people, sharing of
customer data and investment in
infrastructure
Detailed Designs for People, Process
Technology, and Governance
Optimal Approach
 Inefficient financial statement and
tax filing processes and excessive
risk
Operating Model
Multiple Iterations
Common Approach
Legal Entity Structure
 Potential employee morale and
retention issues due to heavy
focus on tactical activities that are
manual and/or redundant
 Higher effective tax rate and
inability to realize other tax
savings opportunities
 Missed financial targets
Detailed Designs for People, Process
Technology, and Governance
Deloitte’s Approach
[Phased Execution with Cross-Functional Teaming]
Operating Model Development Approach
Understand
Current State of
Operating Model
Perform Gap
Analysis
Develop
Hypotheses
Develop
Operating Model
Drafts
Legal Entity Structure Development Approach
Develop
Business
Case
Finalize
Operating Model
and LES
Develop
Implementation
Workplan
Facilitate
Implementation
Discussions
Critical Success Factors
 The organization’s end state operating model should be used to drive the development of the legal entity
structure
 Active involvement from intra-departmental stakeholders is essential during the development of the
operating model and legal entity structure
 It is imperative to obtain executive alignment on the operating model and legal entity structure before
implementation
 A multi-wave work plan that is iterative in nature, should be employed to ensure successful
implementation and adoption of the operating model and legal entity structure
Some General Considerations
 What are the current legal and regulatory restrictions in the jurisdictions that may
dictate legal entity designs?
 What are the key operating model components that drive legal entity design
(customers vs. back office operations, decentralized operations in the regions,
breakdown by product/service offerings, etc.)?
 What are the treasury requirements?
 What non-core activities are/will be outsourced and what is the holistic outsourcing
strategy?
 What capabilities need to be “localized” and executed as management considers
strategic shifts and pursues organic and inorganic growth strategies?
 How may transaction flows be centralized in certain tax jurisdictions to minimize the
effective tax rate?
General Observations/Considerations
Benefits of Reducing Global Footprint
 Reduced administrative costs, tax compliance burden and stewardship expense
Considerations
 Need to evaluate US and Local tax consequences of liquidations
• In-bound liquidations may result in “all earnings and profits amount” to be included in US taxable
income and/or local taxation on transfer of shares
• Intercompany debt could result in “springing debt” or capital conversion upon liquidation
• Variances in functional currency could result in gain/loss to be recognized on asset transfers
 Opportunity to repurpose existing entities to utilize and/or preserve existing tax
attributes into IP holding company, shared-service center, principal company
• Existing losses could create natural profit sink
• Need to consider “hovering deficit” issues
 Maintain/utilize existing entities to mitigate impact of certain tax provisions that aim to
target acquisitions made to evade or avoid income tax
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Some Common Tax Opportunities & Traps to Consider
Tax Legal Entity Simplification Observations
Potential Trap
Experience
Insufficient historical
records
•
•
•
Risk of unknowns
Tax audit risk
Inefficiencies for tax department and
service providers
•
•
•
Insufficient buy-in
Implementation failure
Unrealized benefits
Failure to consider tax
organizational impact
Inadvertent loss of
attributes
Triggering gains on
transactions
Failure to consider all
types of taxes
•
•
•
•
•
•
•
•
•
•
•
Failure to consider
downstream
system/process
implications
•
•
NOLs and Credits
Tax Holidays
Basis
ELAs
DITS - 13 deferred gains and related
state income tax consequences
Federal, state, and foreign income tax
Transfer and sales and use tax
VAT, customs duties
Withholding tax
Source system reporting changes
Updates to automated compliance
tools
Necessary updates to offline
tools/processes (spreadsheets)
Access and understanding of historical
data files (e.g., spreadsheets, FAS,
etc.)
Opportunity
Experience
•
•
Compliance & tax
department processes •
•
Reduced number of required tax
filings
Enhanced data risk management
Lower advisor costs
Increased tax departmental capacity
to focus on higher value planning
U.S. Federal Tax
•
•
Code §165 losses
Attribute and basis preservation
State income tax
savings
•
State income tax savings
Transfer Pricing
•
•
Intellectual Property Domicile
Multi-state and foreign charges
•
•
•
•
•
Improved tracking of cash and
assets
Multi-state and foreign tax planning
Improved cash flow
Tax efficient repatriation
Manage exposure
•
•
Improved capacity
Enhanced risk management
Leverage and
financing
Foreign Tax Credit
Withholding tax
planning
Increased automation
Redeploy resources to •
higher value activities •
Improved morale
Capitalize on planning opportunities
Holding Company Structuring
Benefits
 Efficient movement of cash via treaty network
 Create “no where” income
 Opportunity to insert tax advantaged leverage, utilize hybrid instruments
 Utilization of tax attributes (NOLs, tax credits, etc) more efficiently
 Tax efficiently redeploy offshore cash without residual US tax burden
 Exit planning – capital gain mitigation, tax advantaged spin-offs, worthless stock
deduction, etc.
 Selection of jurisdiction that is flexible to grow with the Company as the business
environment changes (see Appendix II)
Considerations in Selecting Holding Company Location
(See attached matrix for comparison of common holding company jurisdictions)
 Substance requirements
 Statutory tax rate
 Flexible ruling regime
 Controlled foreign company legislation
 Treaty network
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Brazil – Reduction in local tax base
• Background
‒ Brazil is profitable, cash tax-paying jurisdiction
US
Interest
expense
Brazil
Lux HoldCo
Other
Foreign
Entities
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• Strategy
‒ Transfer profitable entities under Lux HoldCo
‒ Transfer Lux HoldCo under Brazil in exchange for
debt and equity
‒ Reduce local Brazil tax base via interest payments
and increased interest on net equity
• Considerations
‒ Brazil CFC rules
‒ Possibility to obtain amortizable step-up in Brazil as
a result of restructuring in order to further reduce
Brazil tax base
‒ Recent Supreme Court cases break in favor of, and
against taxpayers on the issue about supremacy of
domestic law over foreign tax treaties and
protocols.