Hear an in-depth discussion of emerging trends in the global and domestic tax controversy landscape, and learn leading practices for managing tax risks.

1. 22nd Annual Health Sciences
Tax Conference
Managing global and domestic tax controversy:
trends and leading practices
December 3, 2012

2. Disclaimer
Any US tax advice contained herein was not intended or
written to be used, and cannot be used, for the purpose of
avoiding penalties that may be imposed under the Internal
Revenue Code or applicable state or local tax law
provisions.
Page 2 Managing global and domestic tax controversy: trends and leading practices

3. Disclaimer
Ernst & Young refers to the global organization of member firms of Ernst & Young Global
Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving
member firm of Ernst & Young Global Limited operating in the US. For more information
about our organization, please visit www.ey.com.
This presentation is ©2012 Ernst & Young LLP. All rights reserved. No part of this
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law. Ernst & Young LLP expressly disclaims any liability in connection with use of this
presentation or its contents by any third party.
Views expressed in this presentation are not necessarily those of Ernst & Young LLP.
Page 3 Managing global and domestic tax controversy: trends and leading practices

4. Presenters
► Stephen DelSordo ► Ned Connelly
Tax Director Ernst & Young LLP
Johnson & Johnson Stamford, CT
New Brunswick NJ +1 203 674 3006
ned.connelly@ey.com
► Rob Hanson ► Frank Ng
Ernst & Young LLP Ernst & Young LLP
Washington, DC Washington, DC
+1 202 327 5696 +1 202 327 7887
rob hanson@ey.com frank.ng@ey.com
Page 4 Managing global and domestic tax controversy: trends and leading practices

5. Managing global tax risk

6. The economic climate change …
and what does it mean for your business?
► US debt crisis
► Banking crisis
► Tax reform
► Financial crisis
► Euro crisis
► Sovereign debt
crisis
► Greek
bankruptcy?
► Rising
unemployment
► Austerity focus
Page 6 Managing global and domestic tax controversy: trends and leading practices

7. The four engines of change are still running
at full speed …
Globalization Shifting economy Changing models Legislative and
of administration regulatory change
Page 7 Managing global and domestic tax controversy: trends and leading practices

8. 2011– 12 Tax risk and controversy survey
A new era of global risk and uncertainty
► Ernst & Young
surveyed stakeholders
in more than 541
companies in 18
countries, including
tax directors, CFOs
and 100 Audit
committee members
► In addition, we
surveyed tax policy-
makers and
administrators around
the globe
► Download the survey
from our webcast
screen or at
www.ey.com/taxrisksurvey
Page 8 Managing global and domestic tax controversy: trends and leading practices

9. 2011–12 Tax risk and controversy survey
A new era of global risk and uncertainty
► 75% have experienced more
aggressive tax audits.
► 85% have experienced an increase in
international focus by tax authorities.
► 57% of tax administrators identified
transfer pricing as their leading
tax risk.
► 94% of tax policy-makers predict some
or significant growth in General Anti-
Avoidance Rules (GAAR) and anti-
avoidance measures.
► 97% of tax administrators will increase
their focus on international structures
and cross-border transactions.
Page 9 Managing global and domestic tax controversy: trends and leading practices

10. What is the corporate tax community saying
about tax risk and controversy?
► Tax administrations around the world become more aggressive and focused:
► 75% of companies say they have experienced a rise in volume or aggressiveness of tax audits.
► 85% of tax directors in companies with more than US$5 billion in revenues reported that they had experienced an
increase in international focus by tax authorities in the last two years.
► High pace of legislative change creates more risk and uncertainty:
► 75% of tax directors in the largest companies report heightened risk or uncertainty around tax legislation. This figure
rises to 78% for Brazil, Russia, India and China (BRIC)-based companies and 83% for US-based companies.
► 81% of tax policy-makers see growth in GAAR and other anti-avoidance legislation in the next three years, while
94% see new legislation in the area of disclosure and transparency.
► Disclosure and transparency requirements are growing:
► 78% report that they have experienced an increase in disclosure and transparency requirements made upon their
company in the last two years. US-based companies report 83%, China respondents 85% and Brazil-based
respondents 88%.
► 76% of tax administrators expect to focus on enforcing these requirements in the next three years, while 94% of tax
policy-makers expect there to be either some or significant growth in transparency.
► Expansion in emerging markets is creating tax risk and uncertainty:
► 92% of China-based companies and 62% of Brazil-based companies confirm that they have experienced a rise in
the volume or aggressiveness of tax audits in the last three years.
► 78% of BRIC-headquartered companies reported greater risk or uncertainty around legislation, compared with 67%
of all companies globally.
Page 10 Managing global and domestic tax controversy: trends and leading practices

11. A tax controversy “explosion” — what are
we observing
► More frequent controversies and key areas of focus are:
► Transfer pricing
► Indirect taxes
► Employment taxes — expatriate, domestic, short-term travelers
► Cross-border financing arrangements
► Focus on high-net-worth individuals
► Information reporting requirements and withholding taxes
► Business credits and tax incentives
► More time being spent managing tax controversy and risk
► Increased C-suite attention on managing global tax risk
► Stiffer penalty regimes
► Government collaboration — information exchanges and joint audits
► Expectation to comply with both “spirit” and “letter” of the law
► Heightened reputational, financial and personal risks
Page 11 Managing global and domestic tax controversy: trends and leading practices

12. The global consequences are real
and companies are paying the price
Country Example
China Manufacturer subjected to largest payroll audit ever in China resulting in the requirement for payment of
$25m in back taxes and $8m in penalties.
France Increasingly aggressive social security authorities led a raid and criminal investigation on multinational
company resulting in $8m assessment of back social security tax and penalties, even though the
company had an agreement with another EU country to protect its position in France.
USA
Oil company fined $20m for falsifying work permit applications.
Japan Global financial services company had their entire foreign retirement plan retroactively disqualified for
Japan tax purposes required payments of back tax of $8m and 1m in penalties.
Germany SEC enquiry into related matter uncovers internal control breakdown requiring multinational company to
re-state financial statements by Euro 100m to correctly report employer paid tax expense.
UK Company pays ₤40m + in back taxes and penalties for failure to accurately report home paid income in
the UK.
Brazil Company unable to collect $1m in employee debt by not being able to enforce loan agreements not
written in local language.
India European multinational assessed Euro 5m in penalties for failing to report full home paid compensation
for employees assigned to work in India. Indian authorities now open full 3-year investigation resulting in
additional professional fees of over Euro 1m to respond.
UK Of 407 immigration investigations in the UK, 72% resulted in prosecution and criminal sanctions, of which
46% included jail sentences of 7-12 months.
Page 12 Managing global and domestic tax controversy: trends and leading practices

13. Potential business impacts and
opportunities
Heightened tax risks mean unpleasant surprises:
► Unbudgeted costs
► Increased compliance burden
► More penalties
► Diversion of personnel to controversy
management
► Reputational risk — consumers and tax
administrations
► External stakeholder concern
A proactive approach that incorporates tax risk management into strategic decision-making can reap benefits:
► Creates greater certainty and ability to plan
► Releases significant amounts of cash from the provision
► Provides more timely resolution of issues
► Provides reduction of tax compliance costs
► Frees up best people from managing complex tax controversies and litigation
► Increases prospects of a lighter tax audit focus in the future
Page 13 Managing global and domestic tax controversy: trends and leading practices

14. Assessing your global tax risk management
capabilities … are you prepared?
► Do you understand Internal Revenue Service (IRS) and foreign
enforcement priorities, audit practices and procedures?
► Do you have organizational strategies and processes to manage tax
risk and global tax audits?
► Do you have management information systems to manage global tax
audits and disputes?
► Do you have a process to assess information-reporting compliance
risks?
► Is tax risk management and controversy embedded in corporate
governance at all levels of the company?
► Do you have a process to monitor global legislative and tax
administration changes?
Page 14 Managing global and domestic tax controversy: trends and leading practices

15. Five focus areas for an effective tax
controversy management
Adopt a Evaluate Address tax Make strong Stay
global global risk and corporate connected
approach to resources, controversy governance in with global
tax risk and processes at a strategic tax a priority — legislative,
controversy and systems level — and it is to tax regulatory
management for tax risk execute well administrators, and tax
management and it makes administration
good business change
sense
Page 15 Managing global and domestic tax controversy: trends and leading practices

16. Effective and efficient management of global
tax controversy: five leading practices
Evaluate your Manage your Include global
Adopt a global Stay connected
global systems ongoing and tax risk as a
approach to with tax policy
and resources potential tax corporate
managing tax risk and legislative
for tax risk controversies at governance
and controversy changes
management a strategic level issue
Have you … Have you … Have you … How can you … How can you …
► Embedded “tax risk ► Conducted a global ► Help your board ► Ensure all major tax
► Established your global
tax risk policy? thinking” in all aspects of assessment of current understand the tax areas of tax policy and
► Established your vision the tax life cycle? inventory based on key implications of business regulatory changes in key
► Ensured proper criteria? decisions? jurisdictions are
and strategy?
governance over global ► Identified appropriate ► Help your board integrated into tax risk
► Enhanced your
relationships with global tax risk management? processes for managing understand the structure, planning?
► Understood tax risk controversies (centralized processes and policies ► Assess the implications
tax policy and
administration? implications of changing vs local)? related to tax controversy of the potential change
► Pursued a process to business models and ► Understood implications and risk management upon your business
influence tax policy and transactions? of actions in other within the company? operations?
► Established an ongoing jurisdictions, entities and ► Ensure appropriate ► Develop clear lines of
administration?
process to identify, years? oversight of tax risks responsibility, lines of
assess, monitor and ► Leveraged opportunities related to transactions? communication and
mitigate risks? to use resolution tools ► Keep the board informed knowledge-sharing
► Obtained and retained and processes in of tax policy, legislative among responsible
the right talent and countries to help facilitate and administration issues resources?
resources? closure of disputes and that may impact your ► Actively engage with
► Understood financial issues? business? policy-makers on key
accounting implications ► Understood multi-year issues?
of resolved disputes? and multi-jurisdictional
implications?
► Understood legislative
and regulatory
environment?
Page 16 Managing global and domestic tax controversy: trends and leading practices

17. Global tax risk management — corporate
governance framework

18. Global interest in tax corporate governance
“ I am suggesting that you, the leaders of your organizations, should have a mechanism to oversee tax risk as part of
your governance process.” “…the audit committee needs to know and influence what tax posture the tax planners
are taking.”
Dave Hartnett, HMRC Permanent Secretary for Tax – United Kingdom
“ Most of the material weaknesses and the business processes have to do with taxes…(the) result of this development
is that tax is becoming increasingly important in the boardroom.”
Theo Poolen, Deputy Director-General, Dutch Tax and Customs Administration — The Netherlands
“ Tax legislation has long imposed tax compliance obligations on companies. While this is not new, what we are
observing — both here and overseas — is an increasing focus by regulators on the need for robust risk
management frameworks. My question for you as directors is: how well-placed are you to meet increased levels of
scrutiny, both now and into the future?”
Michael D'Ascenzo — Australian Tax Office Commissioner
“ The board must oversee how management manages them (taxes). And that means some level of understanding, a
set of policy principles and then a control system of review and reporting that assures the board that their policy is
being carried out. My goal is to promote good corporate governance on tax issues and engage the corporate
community in a dialogue about the appropriate role of the board of directors in tax risk oversight.”
Douglas Shulman — Commissioner, Internal Revenue Service — United States
Page 18 Managing global and domestic tax controversy: trends and leading practices

19. What should clients do?
► Develop a global tax corporate governance model that
includes:
► A board policy outlining the overarching approach to dealing with
tax risk at a strategic level
► A Tax Charter defining the operational elements of tax corporate
governance to ensure staff accountability
► A tax risk management reporting framework that supports Tax
Charter guidelines
► Embed tax risk governance throughout the organization
► Establish board, management, tax and business unit roles
and responsibilities
► Implement mechanisms to identify and escalate significant
tax risk to the board
Page 19 Managing global and domestic tax controversy: trends and leading practices

20. Benefits of global tax corporate governance
► Improves communication with the board on tax issues
► Standardizes procedures and operational elements of the
tax function across the enterprise
► Applies a consistent global approach to tax risk
management
► Encourages global issues to be escalated and considered
by designated responsible person/office
► Identifies early tax risks, with earlier opportunities to
manage impact
► Enhances global accountability related to tax risk
management
Page 20 Managing global and domestic tax controversy: trends and leading practices

21. Short-term business travelers — a growing
issue for global controversy management

22. Short-term business travelers (STBT)
► Globalization and centralized ► Corporate tax permanent
business models have led to establishment exposure
an increase in STBT ► Personal income
► Often unclear whether tax tax exposure
issues are handled by HR or ► Social Security and fringe
the Tax Department benefits taxes
► Withholding obligations
► Transfer pricing
“This is a question too difficult for a mathematician. It should be
asked of a philosopher.”
~Albert Einstein, about filling out his income tax form, 1944
Page 22 Managing global and domestic tax controversy: trends and leading practices

23. STBT enforcement activity across
the Americas
► United States
► In June 2011, employment tax audit specialists were given specific training on
STBT issues
► Employment tax audit specialists are now specifically targeting foreign executive
travellers, including requesting copies of visas and travel records
► Focus on Section 482 service charges
► IRS Outer Continental Shelf Initiative
► IRS is using Coast Guard GPS records to identify vessels
► Canada
► Taxing authorities are now paying greater attention to board of directors
► New program makes it easier for companies to obtain tax deduction waivers
► Program is seen as possible prelude to crackdown on STBT
► Asking for list of employees who are not on the Canadian payroll is now a part of a
routine audit
► Canadian Border Services agents are aggressively questioning STBT and making
referrals to Immigration Department
Page 23 Managing global and domestic tax controversy: trends and leading practices

24. STBT enforcement activity across EMEIA
► France
► Increasingly aggressive Social Security authorities led to a raid and criminal
investigation on multinational corporations (MNCs), resulting in a US$8m
assessment of back Social Security tax and penalties, even though the company
had an agreement with another EU country to protect its position in France
► Germany
► SEC enquiry into related matter uncovers internal control breakdown, requiring
multinational enterprises to restate financial statements by Euro100m to correctly
report employer-paid tax expense
► United Kingdom
► Company paid £40m+ in back taxes and penalties for failure to accurately report
home paid income in the UK
► Of 407 immigration investigations in the UK, 72% resulted in prosecution and
criminal sanctions, of which 46% included jail sentences of 7-12 months
Page 24 Managing global and domestic tax controversy: trends and leading practices

25. STBT enforcement activity across
Asia-Pacific
► Australia – enforcement activity in relation to
► withholding obligations of employers
► Value-added tax (VAT) obligations
► fringe benefit tax obligations and lodgement enforcement
► unintended creation of permanent establishments
► China – enforcement activity in relation to STBT obligations, as well as
difficulty in obtaining consistent treatment across regional SATs
(revenue authorities)
► India – increased focus change of to on of permanent establishments
within India
► Japan – audits in relation to withholding obligations for short-term travellers
and creation of permanent establishments
► Korea – very active in the exchange of information with other countries in
relation to STBT
► Taiwan – audits of STBT obligations and information-sharing with immigration
authority, which has precluded some employees from re-entering the country
Page 25 Managing global and domestic tax controversy: trends and leading practices

26. Questions or comments?