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International Business www.pwc.co.uk Key current issues for companies headquartered overseas. Summer 2011

International business key Current Issues for companies ... · International Business Key current issues for companies headquartered overseas Sally Bradley Inbound market segment

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Page 1: International business key Current Issues for companies ... · International Business Key current issues for companies headquartered overseas Sally Bradley Inbound market segment

International Business

www.pwc.co.uk

Key current issues for companies headquartered overseas.

Summer 2011

Page 2: International business key Current Issues for companies ... · International Business Key current issues for companies headquartered overseas Sally Bradley Inbound market segment

2 International Business

1. Donotignoreyoursecondlargestfixed cost – property.

2. Couldyourbusinessrespondeffectivelytoa disaster?

3. Are you able to get cash out of the UK as and when you needto?

4. New risks ahead as M&A activity returns.

5. Strategic Planning & Decision Support – have you thoughtitthrough?

6. Thirdpartycontracts–areyougettingfullvalue?

7. Iscustomsdutyonyourradar?

8. Are you looking for opportunities to reduce the cost of youroperationsintheNorthSea?

International BusinessKey current issues for companies headquartered overseas

Sally Bradley Inbound market segment leader

In this summer edition, we cover the topics detailed below. We welcome your feedback on this publication and your suggestions for what you would like us to cover in future editions.

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Property-related spend is often the second largest fixed cost for a company, and managed by various parts of a multi-national group, resulting in sub-optimal performance and higher cost. Property in the UK can also be some of the most expensive business assets in the world, and consequently, it is imperative to corporate performance that the use and occupation of property is maximised.

Many of our clients are faced with significant and ongoing pressure to reduce cost in the current economic climate. Property-related spend for corporate clients can typically account for up to 15% of total fixed costs. However, the UK is also host to one of the most sophisticated and mature property industries in the world, with a supplier market that can deliver quality services at an acceptable price if procured and managed in an effective way.

There are many external factors that will influence the use, value and cost of corporate property in the UK, including:

• Knowledge of the property market across the UK and the current trends;

• Access to grant funding and development zones;

• A thorough understanding of property law, and property-related tax and accounting law; and

• An understanding of the property services industry and how it can support a corporate occupier.

We believe that bringing PwC expertise and our knowledge of UK law, whilst harnessing the capabilities of the UK property industry on your behalf, can generate significant value and sustainable financial savings to the group. Examples of scenarios where we influence the cost and value of real estate include:

• Acquiring UK companies – we help clients undertake pre-deal due diligence and post deal change extraction and/or integration programmes to ensure maximum value is released including: estate rationalisation and workplace optimisation, whilst ensuring compliance with the wider corporate and real estate objectives of the acquiring parent company.

• Appraising ownership models – PwC will work with the client to determine the preferred property ownership structure to secure maximum benefit in flexibility, committed capital, financing, and risk.

• Contract tendering – we help clients let outsource and service contracts for global estate and FM utilising the more advanced UK market to reduce costs and standardise performance.

How have we helped PwC clients to date?PwC has supported major clients release value or reduce ongoing costs from property, with savings typically between 10-15% on organisations’ second largest cost. For example, PwC supported a global bank with a cost reduction exercise across a global portfolio of 5 million sq ft. Savings worth £30m p.a. were identified through space reduction, more efficient use of remaining assets, improved procurement of servicing contracts, and re-financing opportunities. Each project was subject to individual business cases which looked at 10 year investment plans and related P&L.

Why PwC?Our global presence with local and industry knowledge, allied with our deep technical expertise, means we are well placed to assist clients drive out value and enhanced performance from their property. We have a thorough understanding of corporate property and the processes that influence successful alignment to business needs. Our tried and tested approach draws on all aspects of property related spend – be that legal and tax structuring, developing property strategies aligned to business need or analysis and negotiations with the supply chain to deliver costs savings and performance improvements.

So if you are: thinking of moving operations to the UK; considering acquiring a UK company; have a desire to reduce costs and/or optimise your estate and workspace; want to consider options for your UK HQ; or simply want to have an estate strategy aligned to your business and financial objectives, please call your usual PwC contact.

1 Do not ignore your second largest fixed cost – property

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4 International Business

Disasters seem to be occurring with an increasing frequency across the world. The challenge for those organisations with a global presence is the impact to their people, business, customers and reputation, and accordingly their ability to effectively manage the consequences and keep their business running.

Direct and Indirect consequencesIncreasingly disasters in one part of the world have a global impact. For example, the earthquake in Japan had a significant effect on the supply chains for a number of businesses in Europe; and the floods in Australia pushed up the prices of global commodities such as wheat, coal and steel which also indirectly affected local businesses.

We must therefore guard against complacency, as the knock-on effects of a disaster, even if it is outside the UK, can be very significant. You might think many disasters are unpredictable ‘acts of God’, but in our experience having a robust Crisis Management and Business Continuity Management (BCM) capability, with a defined set of plans which are regularly rehearsed will help reduce some of the impact of a large natural disaster.

How do you get it right?A vital element in responding to any disaster is to ensure that your business communicates effectively with the outside world. Crisis Management is essential: get it right and you can recover faster and even add value to the brand of your organisation. However, get it wrong and you can make a bad situation much worse. Confidence can be won or lost very quickly, so this is all about getting the right person to communicate the right message to the right people at the right time.

As well as identifying and truly understanding what the most critical business activities are, an organisation needs to be aware of its key dependencies, no matter how small these may seem, and what it needs to operate from end to end. For example, knowing where goods or parts are sourced from, where are they made and what materials are used to make them? An incident could affect any part of the supply chain, and if there are gaps in your plans then it is likely this will have an impact across the business.

It is also worth investigating a combined approach to risk management and BCM to ensure that the business recognises large impact, low probability risks and considers the impact of simultaneous incidents. Risks are often considered and mitigated in isolation and this doesn’t always consider the more complex situations in which many real life risks materialise. Regularly reviewing the worst case scenario and understanding consequential impacts can help to give a more accurate picture of the overall impact to the business, and help the business be prepared for the worst.

Key questions to ask• How do you know that your Business

Continuity plans and arrangements will actually work during a disaster?

• Do you have an understanding of what is strategically important to the business?

• Does your organisation have accountability for Business Continuity Management, and has this been assigned to the right people?

• How do you manage the information and key messages during a crisis to raise confidence and limit reputational damage?

• Have you fully considered the exposures in your end-to-end supply chain?

Why PwC?PwC can assist you in any part of the BCM process. We have a team of specialists who have considerable experience in writing, reviewing and rehearsing plans for organisations of various sizes and sector.

We can tailor a solution to meet your needs and have hands-on experience in Programme Management, Business Continuity Planning, Rehearsals, Crisis Management, Supply Chain Resilience, Integrated Risk and IT Disaster Recovery.

2 Could your business respond effectively to a disaster?

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Effective cash management remains a key priority of international groups and part of this includes the flexibility to repatriate cash between territories on an efficient and timely basis to ensure group objectives are met and risk mitigated.

Repatriating cash back on the agenda In the last two to three years we have seen a number of groups accumulating cash on their balance sheets due to reduced transaction activity during the economic downturn. Repatriating cash is now back on the agenda for a number of groups for a variety of reasons:

• To ensure effective cash management across territories and mitigate exchange risk;

• To meet group wide tax planning structures;

• To provide returns back to ultimate shareholders; and

• To support external transactions (i.e. acquisitions).

What are the challenges? For international groups with UK operations, there can be a number of challenges to getting cash out of the UK to where it could be more effectively utilised within the wider group. The UK framework for distributions is relatively complex and we have seen a number of occasions where UK entities have undertaken unlawful distributions as a result of management not being fully aware of the UK distribution framework. Alongside the obvious reputational risk this may present to entities and their directors it will often also mean the original transaction is required to be unwound.

Further to the complex UK framework, as a result of the recent economic downturn, many UK groups have suffered impairments or trading losses which have depleted distributable profit and loss reserves, creating a barrier to parent cash extraction – especially where loaning out of the UK may not be tax efficient. Such cash traps may restrict a group’s ability to meet its objectives or expose it to exchange risk.

Key triggers Typical trigger points where you should seek to involve PwC include:

• Significant UK based cash pool following a transaction;

• Profit and loss deficit restricting cash extraction; and

• Existing pool of cash exposing the group to exchange or tax planning risk.

Why PwC? We have a strong track record in assisting clients extract cash from the UK as and when they need. A recent successful project includes advising a global utility company, where the group sought to increase gearing in the UK and enable cash to be effectively utilised within the international group. A key barrier to this objective was the lack of P&L reserves within key UK entities and we provided a solution to generate sufficient reserves to meet their short to long term requirements and facilitate the overall cash extraction.

Typically our assistance would entail providing guidance on the relatively complex UK distribution rules and identifying your specific barriers to cash extraction – such as dividend blocks or loan agreement inefficiencies. Our accounting and tax experts are able to apply their wealth of experience to identify the most appropriate mechanism to enable you to extract cash and seek solutions to permanently resolve any existing barriers. Previous clients have also valued our ability to project manage the process and other advisors alongside our ability to explain UK specific complexities to overseas head office management.

3 Are you able to get cash out of the UK as and when you need to?

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6 International Business

In spite of continued economic uncertainty, the M&A market displays signs of resurging activity. This recovery comes, however, with a heightened risk in the form the Bribery Act which comes into force 1 July 2011.

The Act consolidates existing legislation, much of which relates to offences for individuals, though it adds some new significant requirements. The Act strengthens UK law and should make it easier to enforce, resulting in heavy fines or even imprisonment.

Notably, little attention has been drawn to the significant development for the M&A market. The Act introduces a new corporate offence of failure to prevent bribery. For the first time, not only will the individual perpetrator be liable, but the organisation itself shall face unlimited financial exposure, including disbarment from EU-wide public sector tendering.

Extra-territorial reachIn the case of those holding investments in the UK, the exposure is very real, but its extent remains unclear as the Act seeks to establish extra-territorial reach. UK incorporated subsidiaries are unambiguously covered by the Act in relation to their activities in the UK and anywhere else in the world. They are also vicariously liable for the acts of any third party acting on their behalf (those deemed “associated persons” which might include for example: distributers, agents and advisors, and of particular importance those that are or interface with foreign public officials).

What is less clear is the extent to which the exposure of those UK subsidiaries “infects” the rest of the group and, in particular, how far – if at all – criminal liability might flow upstream to an overseas holding company.

The final guidance issued by the UK Ministry of Justice in March this year suggests that the mere fact that an

overseas holding company has a UK subsidiary may itself not constitute doing “part of a business” in the UK. On this basis, the overseas holding company may not be deemed culpable.

However, a note of caution: the Ministry of Justice’s guidance is precisely that – guidance, which may or may not determine what a court decides on a particular set of facts. Meanwhile, the Serious Fraud Office has been issuing fighting talk about aggressively asserting jurisdiction over foreign companies where it can.

Due diligenceLike many risks faced by investors, homework is the key to minimising risk and maximising value. A defence exists to the organisational offence – through demonstration that it had “adequate procedures” in place to prevent bribery.

A key element of any such procedures is the need for integrity due diligence, having two key foci. Firstly, a review of possible pre-acquisition offences – actual practices at the coal face must be understood. The review’s scope and extent must reflect geographical, sector and business model based risks. Secondly, ensuring a safety net exists. Does the target organisation itself have adequate procedures in place? This could be crucial to mitigating otherwise unlimited fines if a previous offence subsequently comes to light.

Why PwC?PwC’s Forensic services team is able to deliver a breadth and depth of anti-bribery and corruption experience, advising clients on both their preparedness to the Act and in assisting in the design and implementation of appropriate adequate procedures – for example, through supporting acquiring parties in undertaking risk based reputational due diligence of targets and those with which it does business.

4 New risks ahead as M&A activity returns

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Are you making the right strategic decisions?Our experience of working with CEOs and CFOs in industry is that they have to make key strategic decisions without having the level of insight that they desire as to the impact of their decisions. That is, “what will the decision mean in terms of detailed impact on the monthly cashflows, profits and Key Performance Indicators?”

When considering an acquisition, most businesses undertake significant due diligence as well as modelling to demonstrate the impact of the acquisition under different economic scenarios. However, we frequently see other key strategic decisions being made where only a fraction of the level of diligence and analysis is done.

Recently, one of our manufacturing clients spent several months undertaking due diligence before acquiring a business. In the same year, they spent twice as much as the M&A deal in building a new factory. However, they didn’t do a detailed risk impact analysis on the factory build business case and ended up spending £15M on a state-of-the-art production line, which can only run at 60% capacity because of restrictions in the supply chain and packing capacity.

Have I thought about the impact of key risks?A traditional M&A business case identifies the target company’s profit and cash drivers and considers the impact on these as a result of potential changes in both the internal and external environment. We all know that businesses operate in a dynamic and fluid environment and that underlying assumptions change. Whereas this level

of sensitivity analysis is the norm for M&A, unfortunately this discipline is not routinely applied to other investment proposals and strategic decision making.

One of our food production clients undertook an operational restructuring exercise, investing in more equipment and making significant redundancies, which reduced the excess production capacity and generated £3.5M in efficiency savings. However, they didn’t undertake any scenario analysis to understand the circumstances where this might be a bad decision. As they came through the downturn, their sales reflected a different product mix, with greater success in selling more labour intensive products. Recently, they were unable to fulfil an order whilst the new equipment was only being 50% utilised.

All businesses are aware of the need to control their cost base, particularly in the current climate. The example above demonstrates that it is rarely easy to identify cost savings that do not have wider implications to the business. To enable companies to fully understand how changes to their business drivers impact upon their business, any plan must be comprehensive and include the interactions between departments and the wider environment.

How can I demonstrate the robustness of my business plan and contingency plans?We recently helped a print services business understand their optimum factory footprint under different sales and supply chain scenarios. As a result, they decided to close one of their four factories, but it left them lean and much better positioned to refinance and grow.

It is this level of insight and understanding of the bigger picture that can make the difference when it comes to renegotiating finance terms or covenants.

Having developed a fully integrated plan for a client in the leisure industry to help them understand their strategic options, the impact of risks and the different contingency plans, our client shared the model with their bank to assist in renegotiating their covenants. This was key to the bank making a fair funding offer and also allowed specific covenants to be set that reflected the true drivers of cash and profit in the business.

How can I support my overseas head office to make key strategic decisions that affect me?Whilst you know why you have chosen a certain strategy, it is important to be able to demonstrate why a particular strategy is suggested. A comprehensive plan should include an assessment of alternative options and demonstrate the rationale for why a certain decision was arrived at.

A UK-based subsidiary of an international utilities business approached us as they were considering a €500m joint venture with a European partner and wanted to understand the impact of different legal structures for the operating company and the tax and cash implications of the different options. Our detailed ‘impact analysis model’ provided real insight to the overseas head office to allow them to make a more informed decision.

The work we did with our utilities client above was particularly important for the UK part of the business. The clarity of the business plan and ability to immediately demonstrate the impact of other risks gave the overseas head office confidence as to the outcomes of the venture. This was crucial to the decision to fund this project in the UK ahead of various other international options.

Why PwC?Our team has world-class finance and consulting experience; the UK practice is a global centre of excellence in designing and developing financial models to support strategic decision making. We often work with the relevant expert industry teams and deliver integrated services to support strategic planning. We have carried out such assignments around the world and have significant experience in strategic planning and decision support. In addition, our global network of professionals from more than 160 countries allows us to leverage local knowledge that often impact key decisions.

5 Strategic Planning & Decision Support – have you thought it through?

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8 International Business

The need to deliver strong financial results while maintaining the highest level of control continues to remain a priority for international businesses, where parent companies are looking for their UK operations to deliver.

Driving efficiencies from third party contracts can provide a real opportunity to cut costs and realise value, whilst protecting services and avoiding organisational upheaval.

This is particularly the case where local offices are not staffed with internal contract management and compliance staff.

Significant time and effort has often been spent up front when negotiating third party contracts but much less attention can be focussed on a contract’s day to day management and its on-going financial performance. As a result, delivering full ‘value for money’ from these contracts can be a significant challenge.

Businesses that neglect to ensure full contract compliance risk losing that value through failing to maximise revenue and control costs. They also risk increasing their organisation’s exposure to reputational or operational risks.

In our experience, most third party contracts will be failing to deliver their full potential. Many businesses:

• Aren’t receiving all they pay for;

• Are paying more than they should for what they actually receive; and

• Waste money by contracting for goods and services that are no longer relevant to the business needs and priorities.

We find that the biggest loss of value is where:

• High levels of third party spend are involved;

• Businesses are exposed to risks that they thought the supplier was controlling;

• Contractual arrangements or pricing mechanisms are complex, ambiguous, or lack transparency;

• Supplier relationships are not effective;

• There is reliance on the supplier to self-report performance, using a “trust but not verify” model; and

• Business practices are no longer mirroring the requirements of the contract.

Why PwC?We excel at providing assurance over third party contracts, focusing on risk and value. We can help save cash, from both an historic perspective, but also on an ongoing forward-looking basis – i.e. we get cash back for past mistakes, and show a business how to stop it happening again, whether through changing internal working practices, changing supplier behaviour, or a combination of both.

We also identify where the business is exposed to risk, particularly where regulation, quality, safety and security standards are not being applied.

We use a dedicated team of contracting specialists, supported by firm wide industry and sector expertise, to provide businesses with assurance over third party contracts. This combination of industry expertise and experience from other contract reviews provides us with a unique advantage to help businesses realise savings, improve quality and reduce risks.

In terms of an immediate impact, we can help save money in many categories of spend (including catering, landscaping, capital projects, IT services, facilities management (both hard and soft), waste, and vehicle leasing), and with certain suppliers; we know many of the ‘tricks of the trade’ and ‘where the skeletons are most likely hidden’.

Our methodology is simple – we compare contractual terms to:

(i) Payments made; and

(ii) Goods or services received – i.e. what actually happens in practice.

In our experience, savings of up to 15% of the total contract value can be generated – the higher end savings are most likely to be achieved where there is a high degree of complexity or ambiguity in pricing, delivery or value identification.

Pre-contract, our category specialists can identify key risks to be addressed in forthcoming negotiations.

In the longer term we can help you choose and set the relationship with the right suppliers so that they deliver to quality and continuous improvement on mutually acceptable terms.

We are currently working with a number of international businesses, with UK subsidiaries, to provide contract assurance including undertaking desktop reviews of significant third party contracts to identify areas of contract non-compliance and poor contract management.

If you have any concerns over third party contracts that you wish to discuss, please call your usual PwC contact.

6 Third party contracts – are you getting full value?

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Since 2001’s World Trade Centre attacks, trading blocs around the world have introduced schemes to ensure that the supply chains within their jurisdictions are safe and secure.

If you import goods or services from other territories within your organisation, you could be affected. But to take advantage of new supply chain schemes, you must operate robust procedures and controls for your customs activities and manage safety and security effectively.

Key developments• Greater visibility over global trade

has led to the introduction of the Economic Operator Identification and Registration (EORI) number in the EU. This allows customs authorities in the EU to monitor businesses whose activities are covered by customs legislation.

• UK Senior Accounting Officer (SAO) legislation has forced qualifying businesses to look at their procedures and processes for tax accounting arrangements, including customs duty. Potential penalties for non-compliance include fines for the SAO personally.

• Businesses that pass stringent procedural checks around their customs activities and safety and security measures are being rewarded. The EU’s Authorised Economic Operator (AEO) accreditation scheme gives certain trade advantages over ‘non-AEOs’. Although the real benefits may not be seen until the EU’s Modernised Customs Code (MCC) is fully implemented (expected June 2013).

• Requirements for authorising simplified procedures for customs have changed. Any businesses wishing to benefit from faster clearance at ports would have to be virtually AEO compliant.

The advantages of being compliantBusinesses are beginning to take a look at customs duties, not because they are concerned about how much they pay, but because they see that there are clear advantages in being compliant. For example:

• Faster clearance times;

• Avoiding the requirement to provide a guarantee on customs duty relief schemes (when the MCC comes into force), and

• From a corporate governance perspective, businesses are expected to play the role of the good citizen.

What could you do to become compliant?In this changing environment, you could look to determine what you are doing with regards to your people, processes and technology. It’s worth asking the following questions:

• Has your supply chain been mapped out so that the risk areas can be identified?

• Do you have robust procedures and controls in place around customs, safety and security, including a contract or service level agreement with agents?

• Are you organising the right training for staff?

• Do you have fallback procedures in place in case of staff absence?

• Have you taken a view on whether you need to make any technological improvements?

What does the future look like?With the continued development of AEO type schemes around the world and other EU Member States looking at the potential of introducing SAO legislation, the focus on procedures and controls is only likely to increase.

Mutual recognition between the EU’s AEO scheme and Customs-Trade Partnership Against Terrorism (C-TPAT) in the US, as well the implementation of the MCC in the EU, will make it very difficult for a business not to consider becoming an AEO.

With end-to-end supply chain security as the ultimate goal, it’s clear that there is a shift from the fiscal to the regulatory.

7 Is customs duty on your radar?

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10 International Business

Companies in the oil and gas industry operating in the UK sector of the North Sea have recently been hit by an increase in the supplementary charge payable on profits from their operations. This charge has increased from 20% to 32% with effect from March 2011, albeit discussions with the UK government about the likely impact this will have on investment are ongoing.

It is therefore more important than ever to identify cost-reduction opportunities where possible. One opportunity exists in relation to National Insurance Contributions (NICs). National Insurance is the UK’s social security system and, where a liability arises, contributions are normally payable by both employee and employer. Following a recent increase in the rate at which employer contributions are payable, a liability to pay contributions for offshore employees adds around 13.8% to the wage bill.

However, the UK has special rules which can result in a liability for employees only without an associated employer liability. A liability to pay employer contributions arises where the legal or host employer is resident in or has a Place of Business in the UK. Many companies in the industry therefore make use of offshore employment structures to eliminate employer National Insurance costs for employees working on the UK Continental Shelf (UKCS).

If you don’t currently have an offshore employment company structure, have you considered whether it might be right for you and what the savings from implementing one might be?

On the other hand, if you have one, have you recently reviewed the way that you are using it? Care needs to be taken to avoid inadvertently creating an employer NIC obligation for one of the companies in the structure, and the UK tax authorities are focussing on this area once again.

How does it work?The most basic offshore employment structure involves setting up an offshore employment company (OEC) which becomes the legal employer of all employees working on the UKCS. This company then provides employees to the operating company which carries out client contracts as before.

If the operating company remains a UK company, however, there is a risk that it could be seen as the “host employer” of the OEC’s employees and in that case it might incur an employer NIC liability.

Why is PwC’s solution different?PwC’s solution to this risk is distinctive in that we recommend a “double offshore structure”, i.e. a further offshore company included in the structure. The second offshore company is an operating company which provides an additional layer of protection against any challenge by the UK tax authorities as it creates more separation between the UK company – which may continue to contract with clients – and the employees who carry out their duties offshore for an offshore company. It is less likely that a UK entity could be seen as having an employer National Insurance liability in this case.

How can PwC address key issues?The opportunity is relatively simple in theory, but requires careful implementation and the development of rigorous processes in a number of key areas including recruitment, payroll, operational management and HR. It is also important to review and refresh these processes on a regular basis to ensure that the structure remains robust over time. PwC has a wealth of experience in helping clients to get it right.

8 Are you looking for opportunities to reduce the cost of your operations in the North Sea?

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Design Services 26585 (06/11).

www.pwc.co.uk

ContactFor information on any of these items, please contact your local PwC contact or the following:

Sally BradleyTel: 44 (0)20 7213 5446Email: [email protected]

Pauline KnottTel: 44 (0)121 265 5625Email: [email protected]