Forex Policy for Customer Contracts
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Transcript of 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
3OBS Forex Policy - April 2011
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
4OBS Forex Policy - April 2011
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
5OBS Forex Policy - April 2011
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
6OBS Forex Policy - April 2011
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)
7OBS Forex Policy - April 2011
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
8OBS Forex Policy - April 2011
Appendices
9OBS Forex Policy - April 2011
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
10OBS Forex Policy - April 2011
Africa Reference Currencies
EUR
ZAR
USD
11OBS Forex Policy - April 2011
Americas Reference Currencies
EUR
CAD
USD
BRL
12OBS Forex Policy - April 2011
Asia Reference Currencies
EUR
AUD
SGD
RUB
USD
INR
JPY
KRW
CNY
13OBS Forex Policy - April 2011
2 currency zone model
EUR
USD
14OBS Forex Policy - April 2011
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
15OBS Forex Policy - April 2011
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%
16OBS Forex Policy - April 2011
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)