1. Transfer Pricing in Latin America & the Caribbean Private Sector Perspective ELINA CASTRO ALSTOM GROUP LATAM TAX DIRECTOR April 26, 2013

2. ALSTOM Group Organisation The ALSTOM Group is organized across : Three activities: equipment and services for Power generation, Rail transport, Power transmission Four sectors: Power Thermal, Power Renewables, Transport, Grid Several businesses per sector: Hydro, Gas, Steam, Rolling Stock, Signalling etc. Several product line per business: Turbines, Generators etc. This information shows how important it is for the Group to have a Transfer Pricing Compliance Policy worldwide

3. Three main activities in 4 sectors

4. 4 Increasing pressure Public Finance Officers in various countries. Multiplication of tax audits: number of audits and reassessments have been constantly increasing over the past few years. Long duration of the litigation procedures. Economic Double taxation risk (taxing of the same profit twice). Therefore it is always better to anticipate Transfer Pricing potential issues. What are we facing?

5. Challenges DOCUMENTATION There are numerous different regulatory approaches for TP documentation increasing the compliance costs for MNEs DOUBLE TAXATION Especially in countries with no Tax Treaties LACK OF BUSINESS KNOWLEDGE Commercial awareness leads to more efficient assessment by Tax auditors DURATION OF THE LITIGATION PROCESSES Costly and unpredictable DISCUSSIONS OF TAX POSITIONS If both parties do it openly it is generally more efficient and leads to quicker legal certainty. 5

6. Challenges CHANGES IN LAW A group’s reaction to the different legal requirements country by country will be driven by evaluation of tax risks involved OECD TP GUIDELINES In the Region only Chile and Mexico are OECD members PLACES TO INVEST/DOING BUSINESS MNEs have the right to decide where they invest;Business is done where they can Industrial/commercial decisions are not only «tax driven». INSTRUMENT AN ENHANCED RELATIONSHIP PROGRAM Although not easy to install should be on the wish list of all Tax Administrators INCREASE AUDITING SKILLS IN RELATION TO INTERNATIONAL TAX ISSUES 6

7. Challenges ♦BEPS versus TAX OPTIMIZATION Tax authorities must accept that, the MNEs have the right to minimize tax within the rule and the spirit of the law, or if they change the law, this can only be done for the future and NOT on a retrospective basis. ♦IMPROVEMENT AND CLARIFICATIONS OF TRANSFER PRICING RULES  Are we taking this road?  Why increase the layers/criteria: OECD + UN + BRICS ?  Who will be able to make the final decision if the rules and the interpretation is not shared by the majority of the players? 7

8. An example of Concerns – Cash pooling 8 CorpCo (Holding) ZcoS (Sub) YCO (Holding) State B o CorpCo Manages centralized international treasury Lends money to its subsidiary Yco o YCo Manages local centralized treasury,and loan excess cash or asks for money when necessary to centralized International Treasury. Gives loans to local subsidiary ZcoS for its normal business activity. Pays and collects interests abroad and locally to the local subsidiary in State B. o YCo is audited and Tax Authority rejects 100% interest deductions Comparability elements (solvency, term, amount, rate, warranties, etc.) State A

9. Aspects to consider: o Comparability elements Solvency, Term, Warranties, Currency, Amount, etc. o Deductibility Arm’s length Interest rate collected > Interest rate paid o Contractual Support Signed contract stipulating the aspects of the financing, term, warranty, solvency, etc. o Withholding Creditor Residence certificate Arm’s length interest o If Tax Authority considers taxpayer not compliant recategorization: treatment as dividends Non-deductible WHT increased with grossing up o OUTCOME: INSTRUMENTATION OF CASH POOLING WAS CHANGED 9 An example of Concerns – Cash pooling

10. ♦TAX AUTHORITY ARGUMENTATION –The operation that generates the interest payment to the Treasury concentrator of the Group can fit into the normative assumption regulated in local Income Tax Law as back to back credit, that is to say that will be treated as dividend and will be subject to appropriate taxation. ♦ALSTOM’S VIEW –International transactions cannot be requalified as simply as mere internal domestic transaction –International transfer pricing rules should be looked at through international principles ( treaty overrides internal laws) 10 An example of Concerns – Cash pooling

11. Conclusions LATAM tax authorities challenge the increasily universal regulations, OECD rules and treaties that constitute the basis of economic globalization They are ready to introduce new concepts challenging the «arm´s length principle». The arm´s length principle is so far the unique international concept providing a degree of certainty and protection on a «fair determination of functional remuneration» Reality in many industrial groups is complex. For several years they have seen their turnover and income move from Europe to emerging countries. In some countries MNEs comply with local taxation requirements and experience increasing demands of «local content» for onshore business. 11

12. Conclusions ♦ Far from DOUBLE EXEMPTION issues, we are more concerned about the rise of DOUBLE TAXATION due to unilateral interpretation of tax treaties and abuse of tax at source without the possibility of recovery ( Tax Treaty between France and Brazil) ♦ When analysing tax burden, all MNEs are contributors of all other indirect taxes as VAT, State taxes, Municipality taxes, and so on. ♦ International institutions, when evaluating collection, must analyze «total tax contribution» and not only Corporate tax FINAL MESSAGE: Let MNEs and Tax authorities work together to improve our relationship and understanding of tax matters for the benefit of both parties. 12

13. 13 Questions?

14. THANK YOU!!! 14

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