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Systemising Head Office Cost
Allocations
Intercompany Financing
Tanya Smith
ConocoPhillips Norge
31 March 2015
Cautionary Statement
The following presentation includes forward-looking statements. These statements relate to future events, such as
anticipated revenues, earnings, business strategies, competitive position or other aspects of our operations, operating
results or the industries or markets in which we operate or participate in general. Actual outcomes and results may differ
materially from what is expressed or forecast in such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that may prove to be incorrect and are difficult
to predict such as oil and gas prices; operational hazards and drilling risks; potential failure to achieve, and potential delays in
achieving expected reserves or production levels from existing and future oil and gas development projects; unsuccessful
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future environmental regulations or from pending or future litigation; limited access to capital or significantly higher cost of
capital related to illiquidity or uncertainty in the domestic or international financial markets; general domestic and
international economic and political conditions, as well as changes in tax, environmental and other laws applicable to
ConocoPhillips’ business and other economic, business, competitive and/or regulatory factors affecting ConocoPhillips’
business generally as set forth in ConocoPhillips’ filings with the Securities and Exchange Commission (SEC). We caution you
not to place undue reliance on our forward-looking statements, which are only as of the date of this presentation or as
otherwise indicated, and we expressly disclaim any responsibility for updating such information.
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comparison of company operating performance across periods and with peer companies. Any non-GAAP measures included
herein will be accompanied by a reconciliation to the nearest corresponding GAAP measure on our website at
www.conocophillips.com/nongaap.
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proved, probable and possible reserves. We use the term "resource" in this presentation that the SEC’s guidelines prohibit us
from including in filings with the SEC. U.S. investors are urged to consider closely the oil and gas disclosures in our Form 10-K
and other reports and filings with the SEC. Copies are available from the SEC and from the ConocoPhillips website.
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Contents
• Systemising Head Office Cost Allocations
• Cost Allocations System
• Cost basis
• Transfer Pricing Documentation
• Intercompany financing
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COST ALLOCATION SYSTEMS
What and why?
• What is a cost allocation system?
• Components.
• Cost base.
• Allocation factors.
• Why are they used?
• Globalisation.
• Centralisation of services.
• Service centres.
• High frequency/low value transactions.
• Alternative to direct charges.
• Time writing hourly rates.
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What should an effective head office cost allocation system achieve?
• Transparency
• There should be a clear audit trail.
• System should be capable of being explained.
• Costs should be easy to identify.
• Equal/fair distribution of costs
• Each category of costs should be allocated in the same way for each recipient.
• Cost allocations commensurate with the benefits received
• Recipients of the charges should be able to demonstrate a benefit.
• Benefit should be valued from the recipients view point.
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Charging methods - Direct versus Indirect
• Direct Charging – normally hourly rates
• Requested services – can be attached to a specific request for assistance.
• Services which can easily be allocated amongst subsidiaries in Centralised
Service Centres (may be allocated via a key).
• Indirect charging – allocation key
• Services which are for the benefit of all subsidiaries.
• Benefit – only services which an independent company would be prepared to
pay for.
• Allocation keys
• Must be appropriate and relevant for the services being provided and benefits
received.
• Must be consistently applied.
• Must achieve an allocation which is commensurate with the services and
benefits being received (from the recipient’s perspective).
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COST BASIS
What types of costs should be included in the cost basis?
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Employee costs.
Office Costs.
IT Costs.
Other department costs(depending on the pricing model!).
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Human Resources.
Health, Safety and Environment.
Finance.
Legal.
• Mark-up.
• Fully loaded/not fully loaded.
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What should be excluded from the cost basis?
Direct Costs
Shareholder Costs
Costs where there is no direct benefit or only an
incidental benefit to the subsidiary or only an
incidental benefit
Duplicative Services
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Allocation based costs should exclude amount
charged as direct costs and vis versa
Group should have a clear policy on what it
defines as shareholder costs (7.9 OECD
Guidelines)
For example Group Reorganisations, where the
benefit derives merely from being a member of
the group
If the services are performed locally then any
duplication centrally should not be charged
Profit taxation versus production sharing agreement countries
• What does this mean in reality?
• Costs should still be charged to all subsidiaries.
• Same allocation keys/charging methods should be used for all subsidiaries.
• In profit taxation countries the costs will be deductible in calculating
the profits liable to taxation.
• PSA countries will use the formula included in the PSA to calculate the
profits (and possibly the tax) which may or may not include an
element for Head Office cost allocations.
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TRANSFER PRICING
DOCUMENTATION
What should the Transfer Pricing Documentation achieve?
• Document the cost basis and the elements which go into that basis.
• Allocation method/key, relevance of method/key and amount
allocated to subsidiary.
• Risk analysis.
• The two most import things which need to be demonstrated from the
recipients view point are:
• Services received;
• Benefit received
• How should it be used by Tax Authority?
• To base specific queries/questions on.
• The point is not to enable a tax authority to go on a fishing trip unless conflicting
answers are given.
• To gain an understanding of how the business operates – centralised functions
versus locally performed functions.
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Documenting Costs
• Details of what is included in the cost basis.
• Equally what is not included in the cost basis eg shareholder costs,
direct charge costs, head office home country costs.
• How the costs have been allocated – why is this the most relevant
method?
• Why does this give the correct charge to the subsidiary?
• This should be made available by the Head Office
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Documenting Benefit
• Services should only be charged if an independent company would
have been prepared to pay for the service.
• Recipient needs to be able to document the benefit of the services.
• Where the charges are based on an allocation - benefits need to be
demonstrated but as the services are indirect in nature normal rules
of identification of benefit must be modified.
• Normally services which are indirect are nature are high
frequency/low value which creates a challenge for documenting
precise benefit/each individual service.
• Benefit of services available on demand/when required.
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Summary
• This is a high level run through!
• Minimum requirement is that the services must at least create a benefit.
• Benefit is the hardest to document for indirect services.
• Cost basis needs to be determined to ensure only costs related to services
and benefits provided are in the cost basis.
• Will the tax authority accept what you say at first pass – unlikely – they will
have their own ideas.
• The best and desired outcome is that enough supporting documentation is
collected by our business colleagues through the year so that on audit one
can satisfy the tax authority.
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INTERCOMPANY FINANCE
Challenges of Intercompany Financing
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Interest rate
Loan terms
Credit rating of the lender and the borrower
Documentation
Thin capitalisation rules
Interest Rates
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How should the rate be set?
Benchmarking?
Fixed versus variable?
What would a bank offer?
• Restrictive covenants
• Should you try and get a formal/informal offer from a bank.
• Back to back loan?
• Pass through interest rate.
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Terms of the loan
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Need to be third party.
Restrictive covenants which a bank would normally request.
Repayment terms
Again what would a bank offer?
Credit rating
• Does the subsidiary have its own credit rating?
• Should you downwards adjust the parent company/lending company
credit rating?
• Independent assessment of the borrowers credit rating
• Key in setting interest rate and terms.
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Transfer Pricing Documentation
• When should the documentation be prepared?
• What should be documented and included in the documentation?
• Interest rate report
• Benchmarking study
• Ultimate question – is it third party and why is this the best option for
the borrowing company.
• Thin Capitalisation rules.
• Again don’t expect the Tax Authorities to accept at first pass – but
make sure you feel confident in defending your position.
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