Forex Policy for Customer Contracts

Forex Policy for Customer Contracts

April 2011

2OBS Forex Policy - April 2011

Introduction

The purpose of this policy is to improve our pricing and billing methods from a currency and tax perspective in order to preserve our competitiveness and protect our profitability

This guidance aims contract by contract :- at identifying Forex impact on business profitability- at giving clear and consistent recommendations to Sales to

minimize risks due to Forex, VAT & other operating taxes

This presentation does not cover :- Transfer pricing model- Local Income tax rate which impacts profitability at net income

level- Orange Business Services global hedging policy


Policy

Contract Risk Management : Implement Natural Hedging contract by contract, the main leverage to

decrease Forex exposure If no Natural Hedging, then Forex fluctuation risk has to be mitigated

through Price Adjustment Clauses If no Forex adjustment clause, a Forex risk provision is to be included in

the Presales Business Case on the part of costs which is not hedged or not protected by a price adjustment clause (see rules in appendices)

Exchange rate to be used : Use of a unique exchange rate, consistent with market for pricing tools,

business cases and commercial proposals to ensure consistency of the overall process

The Reference Business Rate will be published by OBS Finance, on a monthly basis but change only in case of significant currency fluctuation (+/- 5%)

Billing and VAT : Local to local billing recommended for all services for the purpose of Tax

and VAT optimization Billing currency must be the functional currency of the local entity


How to implement Natural Hedging: The multi-currency pricing model

In order to reduce the complexity, 14 reference currencies will be used for pricing, if the concerned zones are material enough in a deal.

The world currencies have been linked to one of these 14 Reference Currencies depending on currency fluctuations on the last years :

Europe : EUR, CHF (Switzerland), GBP (UK), RUB (Russia) Americas : USD, CAD (Canada), BRL (Brazil) Africa : USD, EUR, ZAR (South Africa) Asia : USD, JPY (Japan), KRW (Korea), INR (India), SGD (Singapore), AUD (Australia), CNY

(China)

Every local currency is pegged or linked to one of these main currencies (see list in appendix).

In case of low materiality, a simplified model can be used, and the 14 currencies linked either to EUR or USD:

Each of these 14 Reference Currencies can be included in one zone USD or EUR of the 2 currency zone model :

EUR zone : EUR, CHF, GBP USD zone : USD, CAD, BRL, RUB, JPY, KRW, INR, SGD, AUD, CNY, ZAR

Materiality of currency zones has to be assessed by Commercial Management


Pricing Approach

FX Approach Natural Hedging Price Adjustment Clause Provision for Forex Exposure

Multinational Corporations

This is the approach when possible.FX clauses should not be used where local billing is possible as erodes natural hedging.Price books need to be set up correctly at start

Should be used where natural hedging is not possible.Impact on efficiency of business due to price book maintenance

Where there is no natural hedging or FX clause then there is a requirement for an FX risk provision

Institutions and Government International

contracts

Governments will not accept local billing and as a result natural hedging is not possible. May accept billing converted to own currency from local currency

Possible if variable prices are acceptable. Rates agreed periodically.Billing converted at agreed rates

Where fixed prices are required, it is not possible to vary FX rates.FX risk provision is required

Other International Business (Small

and Medium Business)

Natural hedging may be possible but unlikely due to central billing. Natural hedging to be used where possible.Price books need to be set correctly at start

Not recommended as it consumes internal resource

Valid solution

Local Business

Usually achieved except for ERS. ERS should where possible be sold in the same currency as purchased

For ERS or other Costs without Natural Hedging, Clause to be negociated when possible…

… or Provisions to be applied

Most appropriate solutionSolution to be avoided


Billing ApproachLocal to Local Billing – In local entity currency

Local to Local billing recommended for all services for the purpose of fiscal optimization

Local billing requested in 6 countries (Brazil, Argentina, Italy, Turkey, Greece, India) as the only way to improve our VAT balances, for all business (otherwise costs to be computed including VAT for pricing purpose)

Billing policy :

– Check if we have a license on concerned service (Data, Voice, ERS or IS Services)

– Billing currency = currency of local Equant entity

Exceptions to this policy in some countries due to currency exchange control, cash repatriation difficulties, high inflation rate, political instabilities (see countries black list in attachment)


OBS Reference Business Rates

Finance define each month on the 1st day of the month the new rates to be used by all BUs for pricing and Business Cases

These rates are proposed depending on the last end of month rate, the global economic environment and the rate already used for the month before.

It is expected that BUs (GCS and GS) update their respective tools according to the policy and timeframe.Rates applicable on 01 April 2011

MAJOR CURRENCIES 1 euro = X loc 1 loc = X euroEURO EUR 1 1

United States US Dollar USD 1.4 0.7143United Kingdom Pound Sterling GBP 0.85 1.1765Switzerland Swiss Franc CHF 1.28 0.7813Brazil Brazilian Real BRL 2.3 0.4348Australia Australian Dollar AUD 1.37 0.7299Canada Canadian Dollar CAD 1.37 0.7299China People's Rep. Yuan Renminbi CNY 9 0.1111India Indian Rupee INR 60 0.0167Japan Yen JPY 110 0.0091Korea (South) Won KRW 1500 0.0007Russia Russian Ruble RUB 40 0.0250Singapore Singapore Dollar SGD 1.75 0.5714South Africa Rand ZAR 9.8 0.1020


Appendices


Europe Reference Currencies

Russian

Federation

MoroccoIraq Iran

Afghanistan

Spain

France

Turkey

Germany

Poland

UnitedKingdom

Portugal

Belarus

Italy

Ukraine

Greece

Finland

Sweden

Norway

Tunisia

Algeria

LibyaEgypt

AustriaSwitz.

Estonia

Latvia

Andorra

Lithuania

Kazakhstan

Turkmenistan

Azerbaijan

Georgia

Armenia

Uzbekistan

Rep. OfIreland

Belgium

Lux.

Netherlands

Denmark

Slovakia

Albania

HungaryRomania

Serbia

Bulgaria

Czech republic

Israel

Lebanon

CyprusSyria

Jordan

Iceland

Moldova

Bosnia

CroatiaSlovenia

Macedonia

Montenegro

EUR

GBP

CHF

RUB

USD


Africa Reference Currencies

EUR

ZAR

USD


Americas Reference Currencies

EUR

CAD

USD

BRL


Asia Reference Currencies

EUR

AUD

SGD

RUB

USD

INR

JPY

KRW

CNY


2 currency zone model

EUR

USD


NB : Negotiation currency can be different from each price currency

Pricing and Billing :Pricing currency to be proposed depending on the Cost currencyBilling currency to be proposed depending on the country where we will bill

Cost Currency

Price Currency

Billing Currency

Cost Price Invoice

Payment Currency

Payment

Price adjustment Clause

Price adjustment Clause

Billing Clause

Billing Clause

Unit Costin Cost

Currency

Reductionof payment

terms


Forex Risk Provisions

For the part of the cost that is not protected (for the non hedged & no Clause) :

Forex risk Provision = 0% between a local currency and its Reference Currency

Natural Hedging : no provision

Forex Clause (<=3 mths) : no provision

Forex Clause (<=12 mths) : 50% of provision with no Clause

Forex Risk : provision calculated as a percentage of concerned costs

Provision rates will be reviewed on an annual basis

Provision EUR USD

EUR 8%

USD 8%

GBP 8% 8%

CHF 4% 8%

RUB 8% 8%

CAD 8% 4%

BRL 8% 4%

AUD 8% 8%

SGD 8% 4%

INR 8% 8%

CNY 8% 4%

JPY 8% 8%

KRW 8% 8%

ZAR 8% 8%


VAT issues : local/regional billing is requested in 6 specific countries VAT Recoverability:

As at February 2011, VAT receivable balances by main identified countries are as follows:

Local billing is requested in these countries in order to catch up on increase of VAT credits.

Accesses for Brazil and Argentina already include VAT. If local billing is chosen, WebALC costs can be decreased.

Countries VAT receivables

in M€

VAT Rate% Recommendation for new contract with customer's agreement

Recommendation for WebALC

Brazil 41,0 17% to 30% depending of

the stateBiling of Regional Services VAT already included in WebALC

Argentina 6,5 21% Biling of Local services only VAT already included in WebALC

Italy 10,8 20% Billing of Global Services

Turkey 2,9 18% Billing of regional services in USD

Greece 2,3 19% Billing of Global Services

India 1,7 13% Biling of Regional Services

TOTAL 65,2

Value end of February 2011 (including provisions)

Documents

Forex Policy for Customer Contracts