ESOP – Financial Operating Models Model 1 & Model 2 Definitions

Exams – Financial Operating Models The following slides set out two basic models for the British Council Group which might be used to run its exams business in a specific country. Model 1: This is the preferred model as it is generally much more tax efficient. It maximises cash collection in the UK charity allowing effective cash management. Under this model BC UK would sell exams directly to overseas candidates and the local BC Subsidiary provides support services for delivery and assessment of the exam. Model 2: This may be the only viable model in some countries due to local banking and/or tax regulations. It is usually far less tax efficient with exams profits (surplus) being taxed overseas. Cash can still sometimes be settled in the UK maintaining efficiency from a cash management perspective but this depends on local banking regulations and is not always possible. Under this model the BC Subsidiary sells exams to candidates as principal under a distribution agreement from BC UK.

Model 1 – Subsidiary as Service Provider to BC UK BC UK BC Subsidiary Cam U Can Online sale direct to candidates IDP Exam fees cash settlement Board fees Sub provides local support services to BC UK for exam delivery and assessment Candidates Service fee paid to sub under formal intra-group agreement Chase/GP Online payments service

Model 2 – Subsidiary sells locally under licence BC UK BC Subsidiary Cam U Can IDP Exam fees cash settlement on behalf of BC sub (unless local regulations require cash settlement in country) Board fees Distribution agreement – BC UK grants rights to sub to deliver exams in local market Candidates Fee paid to BC UK for distribution rights Sub sells exams as principal. Responsible for delivery and assessment of exam Chase/GP Online payments service

Tax considerations Tax issues to considerModel 1 Sub as service provider to BC UK Model 2 Sub sells locally under licence Corporate income tax (CIT ) Potential for reduced CIT leakage (as less revenue-generating functions performed in country) Local CIT registration most likely required, resulting in higher foreign CIT than under Model 1 Transfer pricing Service fee income for subsidiary needs to be sufficient to satisfy local transfer pricing rules Fees payable to BC UK for distribution rights need to be arm’s length VAT Exam services may be exempt or chargeable - depends on local tax rules Possible UK VAT costs under ‘reverse charge’ mechanism Direct sales could have an impact on the UK PESM arrangement Exam services may be exempt or chargeable - depends on local tax rules (but exemptions less likely to be available to trading subsidiary) Could be local ‘reverse charge’ costs to subsidiary (review on case by case basis) Withholding taxes (WHT) Generally lower exposure to WHT under this model Some countries may impose WHT on royalties, dividends and interest payable to BC UK

Exams – Financial Operating Models Having looked at the basic interactions required for the models to operate, it is important to consider and understand the legal contractual agreements and arrangements that will be needed for the models to operate successfully and in a compliant fashion. We also need to fully understand the cash movements and payments involved with operating them. The following slides therefore look in more detail at the specific contractual relationships that will exist within the British Council Group and with external parties. They also map the initial investments and ongoing operating payments and cash movements that will exist for each of the financial operating models.

Model 1 - Subsidiary as service provider to BC UK BC UK BC Subsidiary Cam U IDP Non-business customers BC Holdings (“BCH”) BCMS Ltd (“Noida”) Chase PT/ GP UK India Overseas (1) IELTS JV agreement (5) Shared services (6) Online exams sales (4) BCH Loan (2) Online payment collection service (3) Local exam support services provided by Subsidiary to BC Contractual relationships (1)Existing IELTS joint venture agreement between BC UK and Cambridge/IDP (2)Global online payments collection services contracts between BC and Chase Paymentech/JPMorgan (3) Service agreement whereby BCR agrees to provide local support services to BCUK to facilitate delivery of examination services (4)Equity and inter-company loan provided by BCH to BC Subsidiary on set up (5)Noida support services (incl. reconciliation of online payments income for BC Subsidiary) (6)Local customers register and pay online to enter exams via BCUK website *

Model 1 – Subsidiary as service provider to BC UK BC UK BC Subsidiary Cam U IDP Non-business customers BC Holdings (“BCH”) BCMS Ltd (“Noida”) Chase PT/ GP UK India Overseas (4) Board fees (5) Global service fees (1) Equity/ debt injection (3) Online payments (local settlement) Payments overview (1)Initial injection of equity and debt from BCH (2)BC Subsidiary pays local costs in local currency (3)Customer pay course fees online in Sterling or Local currency. ChasePaymentech collect initially and transfer to BC UK bank account (£/USD/Euro). Noida records receipts as income of BCUK. (4)BCUK pays external board fees on global basis (5)BCUK pays monthly service fees to Noida (incl. element relating to BC Subsidiary) (6)BCUK pays inter-company service charge to BC Subsidiary – subject to compliance with local currency laws (7)Any residual accounting surpluses within BC Subsidiary paid up as dividend to BCH. Interest paid on inter-company loan. (2) BC Subsidiary pays local costs (6) Service fee (7) Dividends & loan interest

Model 2 – Subsidiary sells locally under licence BC UK BC Subsidiary Cam U IDP Non-business customers BC Holdings (“BCH”) BCMS Ltd (“Noida”) Chase PT/ GP UK India Overseas (1) IELTS JV agreement (5) Shared services (6) Examination services (4) BCH Loan (2) Online payment collection service (3) IELTS licensing and central services Contractual relationships (1)Existing IELTS joint venture agreement between BC UK and Cambridge/IDP (2)Global online payments collection services contracts between BC and Chase Paymentech/Global Payments (3)BC UK grants licence* to BC Subsidiary to distribute IELTS within the local market and agrees to provide central support services to BC Subsidiary. BCUK collects online receipts as agent for BC Subsidiary. (4)Equity and inter-company loan provided by BCH to BC Subsidiary on set up (5)Noida support services (incl. reconciliation of online payments income for BC Subsidiary) (6)BC Subsidiary sells exams to customers in country as principal. [*Query: are any legal consents/notifications needed under IELTS JV agreement to sub- licence delivery to subsidiary?] *

Model 2 – Subsidiary sells locally under licence BC UK BC Subsidiary Cam U IDP Non-business customers BC Holdings (“BCH”) BCMS Ltd (“Noida”) Chase PT/ GP UK India Overseas (4) Board fees (5) Global service fees (1) Equity/ debt injection (3) Online payments (local settlement) Payments overview (1)Initial injection of equity and debt from BCH (2)BC Subsidiary pays local costs in costs in local currency (3)Customer pay course fees (plus local VAT) online in local currency. ChasePaymentech collect initially within BC UK bank account (£/USD/Euro) and transmit local currency to local BC Subsidiary bank account. Noida records receipts as income of BC Subsidiary. (4)BCUK pays external board fees on global basis (5)BCUK pays monthly service fees to Noida (incl. element relating to BC Subsidiary) (6)BC Subsidiary pays inter-company service charge (“transfer pricing charge”) to BCUK in £ sterling – subject to compliance with local currency laws (7)Any residual accounting surpluses within BCR paid up as dividend to BCH. Interest paid on inter-company loan. (2) BC Subsidiary pays local costs (6) “Transfer pricing” charge (7) Dividends & loan interest