<div class="indented"> <div class="indented"> DRAFT - FOR DISSCUSSION ONLY Presentation to OECD Working Party 6 Tim McDonald - Vice President, Finance &amp; Accounting - Global Taxes Graeme Wood - Director, Global Tax - Transfer Pricing Business Use Agenda • Introduction to Procter &amp; Gamble • Residual Profit Split Method • Regional and Business Line Segmentation • Other Options under Pillar 1 and Economic Analysis • Question &amp; Answers □RAFT FOR DISCUSSION ONLY 2 Z P&amp;G Introduction to Procter &amp; Gamble P&amp;G Today Sales* Advertising, Marketing, and Promotion Expenses* Research &amp; Development Expenses* $66.8 Billion $12 Billion $1.9 Billion Before Tax Earnings* $13.3 Billion Countries Where Our Brands are Sold 180+ Countries With Taxable Physical Presence 71 Countries With 3rd Party Distributors 150+ | ‘Fiscal 2018 Figures 4 Business Use Evolution of Procter &amp; Gamble Business Model CHANGES IN BUSINESS OPERATIONS OVER LAST 182 YEARS 1837-1900: US domestic business (plus export) 1900-2000: Decentralized local country operations 2000-present: Globally / Regionally Centralized Operations P&amp;G Sales Distribution: U.S. / Rest of the World 1980: 70% / 30% 1995: 49% / 51% 2018: 41% / 59% DRAFT FOR DISCUSSION ONLY 5 Business Use 10 Product Categories FABRIC CARE HOME CARE BABY CARE FAMILY CARE FEMININE CARE HAIR CARE GROOMING ORAL CARE PERSONAL HEALTH CARE SKIN &amp; PERSONAL CARE DRAFT FOR DISCUSSION ONLY B Business Use P&amp;G’s Current Business Model 2000 - PRESENT: GLOBALLY / REGIONALLY CENTRALIZED BUSINESS —, GBU: High level ■ strategic oversight and guidance - -- - - &gt; RBU: manage financial (P/L) responsibility for category-specific business in their respective regions Brand Equity Building Regional Supply Chain L-....... J Local Distribution Implementation of regional marketing plans Dual HQ Structure: Centralized back office business support services ''Stewardship and x functional support services and capabilities across the entire P&amp;G Lorganization_______&gt; 1. 100% of GBU /RBU leadership in U.S. or Regional HQ locations. 2. More than 80% of P&amp;G Senior leadership (Group Presidents, Presidents, VPs, and Directors) are in U. S. or Regional HQ locations. 3. Most of remainder of senior management are local sales leaders in large markets. GBU: Global Business Unit RBU: Regional Business Unit SMO: Selling &amp; Market Operations GBS: Global Business Services CF: Corporate Functions DRAFT FOR DISCUSSION ONLY 7 Business Use P&amp;G Illustrative TP Approach, Simplified Legal Entity Flow Parent Company US (IP Owner) Manufacturing Entity Profit &amp; Loss: Technology / Trademark Royalty Regional HQ More than 4,000 employees Entrepreneur Distribution Agreement (RBU Leadership) TNMM Profit &amp; Loss: Residual Profit or Loss after Routine Returns Distribution Entity Profit &amp; Loss: Percentage of Net Sales in Territory Global APA Coverage* Profit &amp; Loss: Mark-Up on Total Manufacturing Expense Approximately 80% of cross-border profits have been extensively audited and approved in APAs with 16 countries. In addition, we have pending APAs in 9 countries. Covered Transaction Number of APAs TP Method IP License 4 RPSM Distribution 13 TNMM Manufacturing 8 TNMM ‘Excludes service transactions DRAFT FOR DISCUSSION ONLY Residual Profit Split Method Business Use Typical Residual Profit Split Method MNE "system profit" attributed to routine and non-routine functions providing an arm's length return for each party’s contribution to the global value chain. Brand Equity Product and Process Technology / Legal Protection Manufacturing Sales and Distribution J Support Services ■-&gt; Residual profits allocated between the licensor and licensee utilizing RPSM based on relative value contributions. Returns based on TNMM using appropriate Profit Level Indicator (PLI). * DRAFT FOR DISCUSSION ONLY 10 Business Use Accounting Issues Common to all Profit Methods All profit methods require an agreed and defined tax base. Agreement would be required on the following parameters: • Agreement on a standardized GAAP method of accounting • Consistency on treatment of items such as fixed asset cost recovery, inventory valuation, pension and retirement accounting, and equity compensation • MNE parent fiscal year end versus local country statutory accounting year • Agreement on the allocation of shared costs • Multi-year average / trailing data for determination of system profits (especially critical for cyclical businesses) • Treatment and subsequent recognition of taxable losses DRAFT FOR DISCUSSION ONLY Business Use P&amp;G Facts &amp; Circumstance RPSM vs. Cost Based RPSM Licensor United States Licensee Entrepreneurs Globally spends $1.9B annually on Research &amp; Development (“R&amp;D”) Globally spends more than $12B annually on advertising, marketing, and promotion Own legal trademark, IP, and know-how Own “brand equity” for licensed brands Average life of P&amp;G’s investments in R&amp;D substantially exceeds the average life of investments in marketing, advertising, and promotion. As demonstrated by our bilateral APAs, RPSM based only on costs incurred to develop marketing intangibles versus costs to develop trade intangibles would not be consistent with economics and value creation in P&amp;G business model. In our largest APA, a cost based RPSM would imply only 14% of residual profit to the United States. However, the parties to the APA concluded that approximately 45% of residual profit should be allocated to the U.S. DRAFT FOR DISCUSSION ONLY t2 Business Use Residual Profit Split - Calculation Parameters A sustainable Residual Profit Split computation requires agreement across many complex dimensions, including: • Separation of operating profit into routine (agreed returns?) vs. residual • Definition and allocation of intangible creating costs (and all other costs) to business lines and/or markets • Relative lives of each spending within each intangible asset class (trade vs. marketing). • Relative risks associated with each function / intangible asset • Determination of the MNE functions that contribute to the creation of the intangibles as well as the relative contributions and owner of intangibles In our experience, the relative life of each intangible asset is the most contentious area of disagreement under a RPSM. The longer the useful life of a particular asset, then the greater its relative value in the profit allocation. DRAFT FOR DISCUSSION ONLY 13 Business Use Residual Profit Split - Final Thoughts Does a Profit Split approach meet the Inclusive Framework’s objectives as stated within the Workplan / Consultation Document? • RPSM is the most facts and resource intensive method (taxpayer and government). And is considered the most technically complicated and time-intensive Transfer Pricing methodology. • Application of the proposed RPSM in a multilateral context would require agreement on a multitude of complicated calculation parameters across multiple stakeholders. • Based upon P&amp;G’s experience, successful application of Residual Profit Split, even in a bilateral context, is complex and resource intensive requiring extensive expertise and professional judgement. • We believe such a fact (and opinion) intensive TP methodology will dramatically increase the potential for MAP disputes, unresolved cases, and multiple taxation of the same income. DRAFT FOR DISCUSSION ONLY 14 Business Use Global Profit Allocation - Potential Implications • To illustrate, 41% of P&amp;G’s sales are in the United States. P&amp;G earns a materially higher gross and net margin on sales to U.S. customers versus the rest of the world. • 95% of products sold in the U.S. are manufactured in the U.S. • The U.S. is not actively involved in the day to day management of non-U.S. business operations. • A global approach, while potentially simpler to execute, would be highly distortive for many exporting and G7 countries with companies similar to P&amp;G’s profile. • The result would be: • Re-allocation of purely domestic U.S, profit toward markets outside of the U.S. • A material departure from DEMPE / arm’s length standard leading to a misalignment of taxable income from the locations of value creation. Disregard for the legal ownership of IP, real and substantial DEMPE activity, and managerial value creating activities at non-U.S. entrepreneur locations that have significant management substance and today earn residual profit or loss. DRAFT FOR DISCUSSION ONLY 16 Business Use Global vs. Regional Allocation - Questions for Consideration Global Approach Questions Potential Regional Approach Solutions Should income allocation be disconnected from supply chain / active management of sales into market jurisdiction? A regional approach may provide a closer linkage to value creation and real supply chain / contractual framework (e.g. connection of “marketing intangible" owner directly to destination market) A regional approach may also reduce the risk of excess income reallocation when there is high variability in profitability across regions / supply chain. What adjustments are necessary to existing tax treaties to reflect a multilateral re-allocation of income? A regional approach could be implemented on a bilateral basis (especially if adjustment is considered between “entrepreneur" and “distribution" legal entities). How are audit adjustments handled that potentially involve multiple jurisdictions? A regional approach may provide more clear handling of audit adjustments due to bilateral implementation. How are centralized expenses allocated across multiple geographies? Centralized expense question remains, however complexity reduced due to regional versus global scope. How are global profit adjustments handled? Should cash flow to match profit re-allocations? Regional profit adjustments can be operationalized in an easier manner through TP adjustments in regional supply chain. What are indirect tax and/or customs considerations associated with Indirect tax / customs issues can be handled via adjustments to any re-allocation? supply chain pricing. DRAFT FOR DISCUSSION ONLY Business Use Business Line Profit Allocation A “business line” approach may present significant complications and judgmental segmentations. Considerations may include: • Basis of accounting / profit determination - Business line results may not be consistently disclosed within audited accounts across jurisdictions. • Definition of “Business Line” - Agreement would be required between MNEs and tax administrators to ensure consistent compliance. Should the “business line” reflect distribution channels, GAAP disclosure groupings, material (5% -10% of total?) proportion of total sales, or other rationale global groupings? What to do if the globally defined “business line” is not material in a market jurisdiction? • Frequent changes in “Business Line” - Potential for volatility due to change in underlying business activities, M&amp;A activities, etc. may materially change business line results each year DRAFT FOR DISCUSSION ONLY 16 Business Use Administration For business profiles such as P&amp;G’s, a regional / supply chain approach may be more appropriate as it more closely aligns with an MNE’s actual value chain / DEMPE functions. • However, it may be possible that in certain business models or industries a global or business line approach may be more appropriate. • We suggest the taxpayer be allowed to make a global binding multi-year election for the business grouping subject to a review by either the home country tax authority or an OECD/IF review board to ensure that the groupings and profit allocation process are not materially distortive. • It may be also appropriate to consider an expanded CbyCR reporting that could be used as the basis for application of Pillar 1 (and Pillar 2). DRAFT FOR DISCUSSION ONLY IB Business Use Fractional Apportionment • U.S. state and local experience shows that fractional apportionment can easily be distorted to be under inclusive (allowing “nowhere income”) or over inclusive (creating double taxation). • History in the U.S. has shown that economic self-interest has undermined the three factor formula apportionment approach in the determination of U.S. state and local income tax liabilities. • Over time, most states have diverged from the multi-state compact three factor formula and either double weight sales or delete the payroll and asset apportionment factors altogether so as not to have a tax disincentive for employment and investment in their state. • Therefore, adoption of a fractional apportionment should be recognized as a likely practical adoption of a 100% destination sales apportionment of intangible returns. DRAFT FOR DISCUSSION ONLY Business Use Enhanced Distributor Return • We recognize there is tension in the international tax framework and support modification of the current system to re-establish an orderly international tax system. • An enhanced formulaic distributor return could retain much of the arm’s length principle. A modest increase in distributor return could be viewed as fully consistent with the arm’s length principle to the extent that it represents a sharing of global scale for high return enterprises. • If correctly designed, the enhanced distributor return could enable a modest increase in the attribution of profit to the destination market without the complexity associated with a facts and circumstance RPSM or a formulaic top-down re-allocation of income, • The enhanced distributor approach would likely provide significant simplification and administrative relief. • A formulaic enhanced distributor return could be designed to set a minimum distributor return with the option for a tax authority to seek a higher return under a facts and circumstances approach based on traditional TP methodology. This increment would, however, need to be DRAFT FOR DISCUSSION ONLY subject to full double taxation relief (traditional MAP, various types of arbitration, or potentially a ®w global body that resolves tax disputes.) draft for DISCUSSION ONLY 22 Business Use Economic Analysis • It is clear that the “taxation of the digitized economy” project is very different than other previous OECD projects. This project will overtly reallocate a portion of the corporate tax base away from manufacturing, IP owning and management center locations to destination sales / market locations. • For this to be politically possible for revenue losing jurisdictions, the change will need to be modest and promised new stability must be ensured. - Double/multiple taxation of the same income must become impossible. • Counter-measures must be authorized against jurisdictions that fail to follow the newly reestablished international tax norms. • Revenue impact assessments of Pillar 1 &amp; 2 should be transparent and take into account likely taxpayer behavioral responses to these measures. Lower taxed regional HQ locations will be directly impacted. As their tax advantage narrows, the high cost of those locations will cause these activities and their related costs to migrate. Business will not likely abandon pre-tax efficient centralized structures but the historic challenge of charging out these costs will reemerge. The most likely secondary effects will be that these displaced costs will be borne by the parent country, manufacturing export and G20 jurisdictions. DRAFT FOR DISCUSSION ONLY 23 Q&amp;A and Discussion THANK YOU </div> </div>

Treasury Releases P&amp;G Presentation for OECD Working Group Discussion

Treasury Releases P&G Presentation for OECD Working Group Discussion

Procter & Gamble Co.

Treasury has released a draft slide presentation submitted by Procter & Gamble for discussion purposes with an OECD working group.

Treasury has released a draft slide presentation submitted by Procter &amp; Gamble for discussion purposes with an OECD working group.