06.12.2014 Emerging Markets Cross-Border Transactions

Moderator: Alexander B. Kasdan, Senior Managing Director, DelMorgan & Co.

Expert Panel:

Neil Morganbesser, Co-Founder, President & CEO, DelMorgan & Co.

Tim C. Bruinsma, Partner, Norton Rose Fulbright

Malcolm S. McNeil, Partner, Arent Fox LLP

Chip Morgan, Managing Director, BDO USA, LLP

EMERGING MARKETS CROSS-BORDER TRANSACTIONS

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Alexander B. Kasdan is a Senior Managing Director at DelMorgan & Co. He has more than twenty years of investment banking, real estate, corporate law and corporate strategy experience. Mr. Kasdan has executed over 100 domestic and cross-border transactions totaling more than $10 billion in overall volume in a variety of industries. Prior to joining DelMorgan, Mr. Kasdan founded Convergence Capital Partners, LLC, a boutique investment banking advisory and real estate investment firm and was an investment banker at Barrington Associates, Peter J. Solomon Company, Credit Suisse First Boston and Merrill Lynch. Mr. Kasdan practiced law with O’Melveny & Myers LLP (formerly O’Sullivan Graev & Karabell LLP) and Paul, Hastings, Janofsky & Walker LLP (formerly Battle Fowler LLP), where he specialized in mergers and acquisitions, private equity and corporate finance transactions. In addition, Mr. Kasdan served as Corporate Counsel in charge of business development at Schlumberger Ltd., a global oilfield and information services company. Mr. Kasdan graduated magna cum laude from Middlebury College with a B.A. degree in Economics and Italian and was elected to Phi Beta Kappa during his junior year. In addition, he holds a J.D. degree from Columbia University Law School and has studied at the University of Florence in Italy. Mr. Kasdan is admitted to the Bar in the State of New York. Mr. Kasdan is a Senior Advisor to Governance and Transactions LLC, an advisory firm established in 2003 by Mr. James L. Gunderson, former Secretary and General Counsel of Schlumberger Limited, to assist boards, management and owners with corporate governance, compliance, structuring and strategic transactions.

100 Wilshire Blvd. Suite 750 Santa Monica, CA 90401 P: (310) 935-3826 M: (310) 980-1718 www.delmorganco.com [email protected]

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Neil Morganbesser is co-Founder and President & CEO of DelMorgan & Co. where he provides senior leadership within the firm and helps oversee all client engagements. Mr. Morganbesser is also CEO of Globalist Capital LLC, DelMorgan’s broker-dealer affiliate. Mr. Morganbesser has over 20 years of experience providing financial and strategic advice to a full range of clients, including entrepreneurs, large corporations, governments, family businesses, private equity funds, and special committees of public companies. Mr. Morganbesser has been affiliated with some of the leading institutions in the world, and his experience ranges from representing the offshore owners in the sale of a small, private U.S. company for $10 million to representing the special committee of a large, public company in a $9 billion negotiated management buyout with a highly complex financial structure. Mr. Morganbesser has truly global experience with the most sophisticated transactions, across a broad range of industries and in a large number of jurisdictions, as the lead banker on a wide variety of transactional and other advisory assignments, including domestic and cross-border mergers, acquisitions, joint ventures, sales and divestitures, restructurings, special committee assignments, unsolicited acquisitions and hostile defense. With transactional experience in over 30 countries, Mr. Morganbesser has successfully advised on over 75 transactions. Until May 2008, Mr. Morganbesser was the head of West Coast and Asia Mergers & Acquisitions at Bear Stearns & Co., as a Senior Managing Director based in Los Angeles. Prior to joining Bear Stearns in May 2001, Mr. Morganbesser was an investment banker in the Mergers, Acquisitions and Restructuring Department at Morgan Stanley (in New York from 1993-1998 and in Los Angeles from 1998-2001). From 1990-1993, Mr. Morganbesser was a corporate and M&A attorney at the preeminent New York law firm of Wachtell, Lipton, Rosen & Katz. Mr. Morganbesser graduated with an A.B. magna cum laude in Applied Mathematics / Economics from Harvard University (Phi Beta Kappa) in 1986 and received his J.D. and M.B.A. degrees (Order of the Coif, with honors) from Stanford University in 1990.

100 Wilshire Blvd. Suite 750 Santa Monica, CA 90401 (310) 319-2000 [email protected] www.delmorganco.com

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Tim C. Bruinsma is a partner and the head of the Corporate Law Department in the Los Angeles office of Norton Rose Fulbright, a global law firm which has 55 offices in 27 countries. Tim is a transactional attorney, providing legal representation in a wide variety of corporate and commercial transactions, particularly mergers and acquisitions, with an emphasis upon international finance and cross-border matters. His clients range from entrepreneurial and mid-market companies to multinational corporations. Tim has represented such corporations as a premier international toy company, the world's largest cereal company, a major Japanese-American automobile company, the leading wood products and forestry corporation, an international freight and transport company, the world's largest family entertainment corporation and a major Austrian bank. Tim was educated at Lehigh University, the University of California at Berkeley and Claremont McKenna College, where he graduated Cum Laude with a Bachelor's Degree in Political Science. He received his Juris Doctor Law Degree, Cum Laude, at Loyola University School of Law in Los Angeles. Tim serves on governing boards of non-profit corporations and organizations, including the Board of the Southern California Chapter of the U.S. Fund for UNICEF.

555 South Flower Street Forty-First Floor Los Angeles, CA 90071 (213) 892-9333 tim.bruinsma@ nortonrosefulbright.com www.nortonrosefulbright.com

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Malcolm McNeil is a partner in the Los Angeles office of Arent Fox LLP, where he focuses on litigation, business and transactional matters involving international clients. He has approximately 30 years of litigation and commercial experience in a wide variety of matters including business/commercial, construction (defect and coverage issues), employment disputes, administrative proceedings, family law, probate, intellectual property, partnership dissolutions and real property. Malcolm also has 18 years of experience resolving civil disputes as a mediator. Malcolm focuses on litigation issues for a wide variety of businesses including those in the venture capital formation, retail, textile, manufacturing, import/export, real estate investment, aviation and publishing industries. He also has experience in cross-border negotiations and has an established network of colleagues throughout the globe available to assist in foreign countries as needs arise. Malcolm’s practice has included representation of clients in most forums, including a range of administrative forums, statewide and nationally. Known for his leadership and accomplishments, particularly for clients with business interests in China, Malcolm was named to a three-year term on the Shenzhen Court of International Arbitration. Malcolm is a graduate of Loyola Law School, Los Angeles, and Antioch University.

555 West Fifth Street, 48th Floor Los Angeles California 90013 213.443.7656 [email protected] www.arentfox.com

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Chip Morgan is a managing director with BDO USA, LLP. Chip’s career has been centered on international tax for over 30 years. He has been an ITS partner with two of the Big 4, where he advised clients across a broad range of industries, geographies and transactions. In addition, he has industry experience as VP Tax for a semiconductor manufacturer and a software company, where he had practical experience with implementing and defending international tax structures, and working to keep the tax structures aligned with the underlying business operations as they evolve over time. Chip holds degrees from Columbia University School of Law and University of North Carolina at Chapel Hill.

1888 Century Park East, 4th Floor Los Angeles CA 90067 (310) 557-7517 [email protected] www.bdo.com

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ORGANIZER & HOST: Anna Spektor is the Founder of Expert Webcast, a sophisticated digital source of expertise for the professional and the business communities domestically and internationally. Producing the industry’s leading webcast panels covering corporate, M&A, restructuring and finance topics, Expert Webcast addresses timely and relevant issues faced by general counsel, C-level executives, boards of directors, business owners and their advisors, as well as institutional investors.

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ISSUES IN CROSS-BORDER TRANSACTIONS

•  The global outlook for cross-border investment and M&A activity in the emerging markets

•  Risks particular to investments in emerging markets; specifically in technology and natural resources

•  Types and indicia of risk •  Transaction objectives and structures •  Economic risks particular to cross-border and emerging market

investments •  Raising capital for cross border investment and M&A: explaining the

risks to potential investors •  Successful deal execution •  Cultural considerations •  Case studies

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Emerging Markets Cross-Border Transactions

NORTON ROSE FULBRIGHT Tim C. Bruinsma, Esq. Partner, Los Angeles June 12, 2014

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I.  Jurisdictional and Legal Issues

A. Which Laws Apply? Cross-border transactions generally are impacted by a number of legal jurisdictions.

•  Primarily, there are country jurisdictions on both sides of the “border.” •  Legal jurisdictions within the countries. •  Local rules and regulations, including unwritten conventions and customs.

B. Lots of Agencies, Lots of Rules. There are often indirect or non-regulatory factors to consider: •  Several levels of officialdom as well as private interests. •  Interface not only with several agencies but also with private

stakeholders regarding local labor, supply chains, utilities, entitlements, etc.

•  Many protectionist restrictions.

C. Special Laws. There are also other types of laws to consider such as sharia, or Islamic law, which may work in concert with secular law or in abrogation of it.

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II.  Cultural Issues

A. Local Influences. Even in our increasingly global economy, local convention and business styles influence transactions.

•  Relationships can be critical. •  Trust must first be established

B. Negotiation may vary.

•  Typically, U.S. negotiation is quite linear: i.e., one step after another, each built on the foregoing. In many countries, negotiation is more circular; i.e., many issues are in play and there is constant interplay until they are all pulled together and agreed upon at the end. A “spider web” metaphor works well to describe the framework.

•  Identifying the decision-maker and decision-making process may be difficult.

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II.  Cultural Issues

In some cultures, business is like war; it is possible to get caught up in serious conflict, between competing interests.

•  It is important to remember that negotiation starts from the very first communication.

C. Legal documentation can be affected by culture.

•  In the US, we have a well-developed commercial law tradition. Most contracts are infused with certain basic legal premises; these do not have to be restated in the contracts.

•  But this is not at all the case in many other jurisdictions. If something is not written in the agreement in great detail, it may not be enforced.

D. Management positions and employee relations are often infused with desperation.

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III.  Structuring the Transaction

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A.  Marketing, sales and distribution transactions are heavily

dependent upon good, reliable commercial contacts in the target country.

B.  Branch offices and local subsidiaries raise similar concerns about in-country personnel, particularly management personnel.

C.  Joint venture or partnering transactions may require selection of good and capable financial partners.

D.  Local Professional Assistance. It is virtually essential to have good, local professionals involved. They are often valuable not only for what they know but who they know.

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III.  Structuring the Transaction

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E.  Enterprise zones and other business incentives should be explored.

•  Commonly found in the target country •  U.S. export support for the outbound transaction can be significant;

F.  Grants and Financing Incentives may be made available by the target country, or in the region, or through bi-national or multinational funding agencies, such as the World Bank, IFC, OPIC, Exim Bank, et al.

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IV.   Income Tax Planning

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A.  Essential Element. The importance of tax analysis and planning must be stressed. Most all cross-border transactions are heavily-impacted by tax considerations, both U.S. and foreign. •  Income taxes, in both jurisdictions, are of primary concern and

should be addressed. •  There are other tax issues to consider as well, such as excise taxes,

transfer taxes, taxes on rent and royalties, etc. B.  Offshore Structures. A typical cross border transaction will involve

formation of an offshore corporate entity. •  To minimize or defer taxation, either in the outgoing (e.g., U.S.)

jurisdiction, or the target country jurisdiction, or both. •  Examples: U.S. company forming a Cayman Islands company for

inbound investment into South or Central America, forming a Hong Kong company for China, a Mauritius company for India., a Cyprus company for Russia, etc.

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IV.   Income Tax Planning

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C.  Tax Treaties between countries may offer some relief and are an important tax planning tool.

D.  Host Country Tax Incentives. In addition to business incentives, tax incentives such as exemptions or tax holidays may be offered by the target country. They are often quite valuable and should be negotiated upfront if at all possible.

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V.  Export and Import Controls and Regulations A.  Inbound and Outbound. There are export controls on outbound

transactions and import controls on inbound transactions, and a host of related regulations, in all affected jurisdictions.

B.  On the U.S. side, consider: •  Foreign Corrupt Practices Act which makes make it unlawful for a

U.S. person to make a payment to a foreign official for the purpose of obtaining or retaining business; i.e., anything in the nature of a gift or bribe.

•  International Traffic in Arms Regulations (ITARs) which is a set of US government regulations that control the export and import of defense-related articles and services.

•  The Office of Foreign Assets Control (OFAC) is an agency which administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign states, organizations, and individuals.

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V.  Export and Import Controls and Regulations •  Export Administration Regulations (EARs) are the rules by which

the U.S. Department of Commerce regulates and controls exports of goods from the US, particularly dual-use commodities, software, and technology. “Dual-use” items are those that have predominantly commercial uses, but could also have military applications.

•  Committee on Foreign Investment in the United States (CFIUS) is an inter-agency committee of the US government that reviews the national security implications of foreign investments in U.S. companies or operations. Their focus is on inbound investment.

•  Sanctions. The Ukraine conflict has of course lead to a number of special sanctions against the Russian Republic, many of which directly or indirectly impact U.S.-Russia cross-border transactions.

C.  Other countries have their own versions of many of the foregoing legal restrictions.

D.  Significant. It is essential that the applicable laws be carefully considered before engaging in a cross-border transaction. Unwinding the problem after the fact can be costly, painful, time-consuming and quite possibly unsuccessful. There may also be criminal penalties.

A.

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VI. Logistics

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A.  Transportation and communication problems may slow the process and cost money; so logistical planning is essential.

B.  Sourcing. Sourcing materials, labor, utilities and technological support is critical. If they can’t be sourced locally, then other locations must be considered, adding to the cost and complexity.

•  Labor laws in many countries may be particularly problematic. Finding capable employees can be a real challenge; termination of employees may be difficult and expensive.

•  Supply chains are often hindered by local governmental controls

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VII.  Dispute Resolution A.  Basic Choices.

•  Litigation, which has limitations in cross-border transactions. It requires a viable legal structure acceptable to both parties.

•  Arbitration, a good alternative which will probably be less complicated and less expensive. Additionally, it is more flexible. The parties can agree to an appropriate jurisdiction, applicable law and methods of enforcement.

•  Mediation, a non-binding means of facilitating resolution of a dispute. It is common to have the parties agree to attempt mediation before turning to either litigation or arbitration.

B.  Overlooked and Understated. Dispute resolution is often left to the last minute but it deserves much greater attention. Strategically, the location of a dispute proceeding and the applicable law can be significant factors. Just the inconvenience and cost of having to defend an arbitration, etc. in a foreign jurisdiction can have a material effect on the outcome.

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VIII. Conclusion

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Plan ahead. Things that might not seem as important in domestic transactions can be very significant in cross-border transactions, particularly in developing countries.

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Disclaimer Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members (“the Norton Rose Fulbright members”) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

References to “Norton Rose Fulbright”, “the law firm”, and “legal practice” are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together “Norton Rose Fulbright entity/entities”). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity.

The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.

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Cross-border Considerations in Global

Investment and M&A Activity!

June 12, 2014

Chip Morgan, BDO

[email protected]

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The Right Perspective

•  First things first: operational success. Tax planning should take

place within the parameters of what is needed to achieve business

goals – complexity and multiple internal transactions can be

distractions

•  Global tax versus local tax: a local advisors’ context is minimizing

local tax, not the broader goal of minimizing global tax

  Local country planning can have negative parent country implications

  Measuring the effectiveness of tax planning: cash flow versus financial reporting

  Non-income taxes, such as duties and VAT, are “above the line”

•  Redeploying and repatriating: what to do with low-taxed foreign

earnings?

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Nexus Planning

•  Common goal: avoid nexus as long as possible by making the local

operation a supporting agent rather than a principal

•  Different nexus criteria for different types of tax:

  Corporate income tax: “doing business” per local rules (extremely low threshold

in many emerging markets) or Permanent Establishment per tax treaties (a key

test being the contractual authority to generate revenue)

  VAT/GST/sales tax: taxable supply of goods and services

  Payroll tax: employees versus independent contractors

  Customs duties: importing and exporting

•  Technical possibility versus practical feasibility

  Sometimes easier to accept cost-plus rather than avoid corporate income tax

nexus altogether

  “Look and feel” of a local company: prospective customers, prospective

employees, and various government regulators may have different perspectives

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Scaling the Tax Structure as Operations Evolve

•  Sales operations   Representative office (no nexus)   Cost-plus support services   Commission agent   Buy-sell principal: limited risk or full-fledged distributor

•  Other activities (manufacturing/assembly, R&D, procurement, logistics, shared service center, etc.)   Cost-plus   “Other” arrangement that reflects the underlying value of goods and services

rather than costs incurred

•  Anticipate transitions from simpler to more robust operations over time to minimize the risk that operational changes might trigger unexpected tax charges

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Transfer Pricing

•  Arm’s length standard

  Based on facts and circumstances

  Burden of proof is “backwards” and generally country by country

  Contemporaneous documentation is critical because tax auditors have hindsight,

tax audit settlements are often negotiated compromises, and the risk of double

taxation is high

•  Competent Authority

  Treaty-based mechanism to minimize the risk of double taxation

  Generally requires exhaustion of per-country dispute resolution procedures

•  Advance Pricing Agreements

•  Approaches to transfer pricing vary widely in emerging markets,

both in determining and applying appropriate methodologies and in

resolving disputes

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Transfer Pricing and Intellectual Property

•  Transfer pricing reflects where activities are undertaken, where

risks are borne, and where intangibles are owned and used

•  The location of many activities is driven by business realities, such

as where customers are based or where manufacturing takes place

•  Intellectual Property can be hugely valuable in the context of

otherwise routine activities/supply chains, can often be “carved

out,” and can be located in a tax-favorable jurisdiction

  Developing new IP versus moving existing IP

  Inadvertent IP ownership via outsourced R&D operations, especially in emerging

markets

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Cost-plus in Emerging Markets

•  Cost-plus is a commonly used intercompany arrangement in a

variety of contexts: simple and relatively predictable

•  The appropriate uplift is a transfer pricing matter that should be

properly benchmarked and documented

•  Tax authorities in some emerging markets struggle with the

generally accepted ranges of uplifts used in more mature economies

and insist on much higher uplift percentages

  Pick battles carefully

  Consistency is intuitively and practically useful, but may not be achievable

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Deferring US Tax on Foreign Profits

•  The US taxes worldwide profits and uses a foreign tax credit

mechanism to avoid double tax (as opposed to territorial systems

used by many countries in which foreign profits are simply not

taxed)

•  In general: profits of a foreign subsidiary are taxed in the US when

dividends are paid to the US parent

•  Exception: so-called “Subpart F” income (often income related to

transactions occurring outside the local country and involving

related parties) is taxed as earned, whether or not repatriated to

the US parent in the form of dividends

•  This is a key driver of “Inversions,” a complex tax planning

technique that results in non-US parent structures

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Redeploying and Repatriating

•  Anticipate local country exit hurdles, such as withholding taxes

imposed on the movement of funds (especially dividends, interest,

and royalties) and currency controls

•  Understand differences in how transactions are characterized by

different countries, such as services versus royalties

•  Anticipate higher level, especially US, taxation of cross border

movements of funds between lower level subsidiaries

  Effective tax planning for US-based groups often involves “check-the-box” rules

that determine whether a particular entity is treated for US purposes as a

separate company versus a disregarded entity, notwithstanding how the entity is

viewed for local tax purposes

  “Check-the-box” planning can create additional complexity because different tax

authorities might have fundamentally different views on a particular entity and

the bottom line impact can be significant

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Constant Change

•  Tax rules change quickly due to legislation, regulation, litigation,

and administrative practices

•  Emerging markets’ tax rules often have less robust written

explanation/guidance and the case-by-case administration of

general rules can vary widely

  Especially relevant with new types of transactions and ways of doing business,

such as hosted arrangements in the cloud

•  US tax rules are well-developed, but are inordinately complex, and

will someday undergo fundamental reform

  An important driver is the US government’s (both parties) desire to bring the US

corporate tax rate more in line with major trading partners; however, the

government has zero consensus on how to achieve this

  Whatever approach is ultimately implemented, expect substantial changes to our

longstanding rules for taxing foreign operations

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LA / NY / SF / DC / arentfox.com

Emerging Markets Cross Border Transactions Dispute Resolution Planning in the Emerging Markets & Cross Border Transactions

June 12, 2014

Malcolm'S.'McNeil'Partner'

ARENT'FOX'Los'Angeles'

(213)'443A7656'[email protected]'

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Dispute Resolution

!  What is it? – Mediation – Arbitration – Litigation

Dispute Resolution Planning in the Emerging Markets & Cross Border Transactions

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Questions – 5 W’s !  Who? !  What? !  Where? !  When? !  Why?

Dispute Resolution Planning in the Emerging Markets & Cross Border Transactions 3

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Questions – 5 W’s (cont.) !  Who – Who will litigate? !  What – What will be the relief needed? !  Where – Where do you need the relief? !  When – When will it be needed? !  Why – Is this an ongoing relationship or will it

be terminated?


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Enforcement !  Money / Injunctions?

– How will we handle post judgment enforcement; where are the assets?


Business

06.12.2014 Emerging Markets Cross-Border Transactions