International Risk Management Making the Most of Worldwide Business Manuel Rajunov Managing Partner International Tax Services

Why expand abroad? Remain competitive Domestic cushion Broaden base Build market share Extend life cycles Inventory/capital Tax incentives

Developing an international business plan What is the goal for your business internationally? What should you incorporate in the international business plan? RUSSIA ASIA EUROPE MIDDLE EAST AFRICA USA SOUTH AMERICA AUSTRALIA CANADA ANTARCTICA GREENLAND

Factors to consider in going global Domestic success Domestic sales trends Domestic market share Product modifications Financial/Human resources New venture vs. marketing operations Cost of foreign market entry Commitment - foreign time frame Commitment - sustained efforts Absorb additional duties Mindset of management

Domestic Manufacturing Company Polycon example Domestic Manufacturing Company Polycon Lens Company Country A

Overseas Representation Polycon example Overseas Representation Office/Agent B Country B Polycon Lens Company Country A

Polycon example Polycon Lens Company Country A Overseas Representation Office/Agent B Country B Polycon Lens Company Country A Foreign Sales Subsidiary Luna Technics Co. Country C

Polycon example Polycon Lens Company Country A Overseas Representation Office/Agent B Country B Polycon Lens Company Country A Foreign Sales Subsidiary Luna Technics Co. Country C Foreign Manufacturing Plant Polycon Mfg. Co. Country D

Polycon example Office/Agent B Country B Luna Technics Co. Country C Polycon Lens Company Country A American Sales Subsidiary Polycon Sales (U.S) Country H Luna Technics Co. Country C European Sales Subsidiary Polycon Sales (Europa) Country G Polycon Mfg. Co. Country D Middle East Sales Subsidiary Polycon Sales (Middle East) Country F Far East Sales Subsidiary Polycon Sales (Far East) Country E

Polycon example Visitec Corp. Country I Office/Agent B Country B Acquisition of Foreign Co. Visitec Corp. Country I Office/Agent B Country B Polycon Lens Company Country A Polycon Sales (U.S) Country H Luna Technics Co. Country C Polycon Sales (Europa) Country G Polycon Mfg. Co. Country D Polycon Sales (Middle East) Country F Polycon Sales (Far East) Country E

Polycon example Polycon Lens Co. Country A Overseas holding co. Polycon (Holdings) Country J Polycon Mfg. Co. Country D Visitec Corp. Country I Polycon Sales (U.S.) Country H Polycon Sales (Europa) Country G Polycon Sales (Middle East) Country F Polycon Sales (Far East) Country E Luna Technics Company Country C Flow of dividends

Polycon example Polycon Lens Co. Country A Polycon (Holdings) Country J Overseas finance co. Polycon Finance Country K Polycon Mfg. Co. Country D Visitec Corp. Country I Polycon Sales (U.S.) Country H Polycon Sales (Europa) Country G Polycon Sales (Middle East) Country F Polycon Sales (Far East) Country E Luna Technics Company Country C Flow of interest

Polycon example Polycon Lens Co. Country A Polycon (Holdings) Country J Real estate investment co. Polycon Investments Country L Polycon Finance Country K Polycon Mfg. Co. Country D Visitec Corp. Country I Polycon Sales (U.S.) Country H Polycon Sales (Europa) Country G Polycon Sales (Middle East) Country F Polycon Sales (Far East) Country E Luna Technics Company Country C Flow of interest Flow of dividends

Polycon example Polycon Lens Co. Country A Polycon (Holdings) Country J Polycon Investments Country L Polycon Finance Country K Patent Holding Co. Visimatic (Holdings) Country M Polycon Mfg. Co. Country D Sublicensing co. Visimatic Franchise Co. Country N Visitec Corp. Country I Polycon Sales (U.S.) Country H Polycon Sales (Europa) Country G Polycon Sales (Middle East) Country F Polycon Sales (Far East) Country E Luna Technics Company Country C Flow of interest Flow of dividends Flow of royalties Flow of rental income

Polycon example Polycon Lens Co. Country A Polycon (Holdings) Country J Polycon Investments Country L Polycon Finance Country K Patent Holding Co. Visimatic (Holdings) Country M Captive insurance co. Baskerville Assurance Co. Country O Polycon Mfg. Co. Country D Sublicensing co. Visimatic Franchise Co. Country N Visitec Corp. Country I Polycon Sales (U.S.) Country H Polycon Sales (Europa) Country G Polycon Sales (Middle East) Country F Polycon Sales (Far East) Country E Luna Technics Company Country C Flow of interest Flow of dividends Flow of royalties Flow of rental income Flow of insurance premiums

Why is international tax planning important? DOMESTIC GLOBAL Pre Tax 100 U.S.Taxes - 45 Foreign Taxes - 55 After Tax 0 USA Co. Pre Tax 100 All Taxes - 45 After Tax 55 USA Co. Customer USA Foreign Customer

Structural choices - international operations Entity Advantage Disadvantage Direct export Simple No investment Not close to market Long reaction time License/franchise Minimal investment Control over license/franchise Restrictions must be imposed Activity audits necessary Acquisition of assets or shares Can acquire immediate and full range of capabilities History of performance can be evaluated and reasonably projected High risk - if problems, U.S. owner bears all costs Process can be expensive, esp. in non-English speaking countries JV via partnership or corporation Acquire partner's skills to complement U.S. partner's technologies All U.S. partners to legally bid for in-country work Lack of control Sometimes difficult to expand beyond one country due to nationalistic tendencies New sub Low start-up costs Ability to control planning and direction Need in-country expertise Need to develop infrastructure Unknown to majority of customer base New branch Same as new sub Operating losses can be consolidated in U.S. -other tax Sometimes not viewed as in-country despite

Profit movement techniques Home Company Home Company Interest Rents Royalties profit remittances to home office USA Foreign Services Products Dividends Foreign Branch* Foreign Subsidiary * Also applies to partnerships and hybrid type entities,i.e., foreign corporations treated as partnerships for U.S. purposes

The transfer pricing issue for product sales Cross Border Producer Distributor Distribution and Resale of Widgets Production of Widgets Costs Incurred to Unrelated Parties Sales to Related Distributor Sales to Unrelated Parties Costs Incurred to Related Producer The Transfer Pricing Issue

The transfer pricing issue for licenses Cross Border Creator/Buyer User Licensor of Mfg/Mktg Intangibles Licensee of Mfg/Mktg Intangibles Costs Incurred to Related and Unrelated Parties to Develop/Buy Intangibles Royalty Expense Royalty Income Mgf/Mktg Profits The Transfer Pricing Issue

The transfer pricing issue for services Cross Border Provider Recipient Renders Service Benefits from Service Service Fee Expense Service Fee Revenue Costs Incurred Local Profits The Transfer Pricing Issue

The transfer pricing issue for debt Cross Border Creditor Debtor Lends Funds Borrows Funds Interest Expense Interest Income Local Profits Local Profits The Transfer Pricing Issue

The transfer pricing issue for leases Cross Border Lessor Lessee Leasing Tangible Property Leasing Tangible Property Rent Expense Rent Income Local Profits Local Profits The Transfer Pricing Issue

International tax planning techniques Home (USA) Host (Foreign Market) Designing transactions to eliminate host country taxation (foreign nexus) Minimizing home country taxation through export tax incentives (FSC, I/C Disc) Structuring the foreign business as a branch or as a subsidiary to minimize host country and home country taxation Optimizing the tax effects of financing the foreign business with loan capital and share capital Planning to minimize/avoid home country anti-deferral provisions to keep profits abroad and untaxed at home until a later date Maximizing host country tax savings when acquiring a foreign business via assets or share capital

International tax planning techniques Home (USA) Host (Foreign Market) Researching the feasibility of gaining tax advantages through third country holding, financing, trading and leasing companies Analyzing the advantages/disadvantages of foreign group relief, consolidation Researching all elements of host country tax legislation, e.g., depreciation, inventory methods, deductions, capital gains provisions, credits Taking advantage of all host country deductions, exemptions, and incentives Implementing profit reduction techniques, e.g., transfer pricing policies, management agreements, loans, royalties, etc. Minimizing home country taxation for asset transfers to host country operations

International tax planning techniques Home (USA) Host (Foreign Market) Restructuring foreign branches to foreign subsidiaries to minimize host country taxation Repatriating foreign profits and minimizing global tax cost Monitoring the tax effects of foreign currency exchange fluctuations Maximizing treaty benefits Maximizing foreign tax credits, unilateral and bilateral double taxation relief Designing policies for satisfying tax compliance requirements for employees on foreign assignment