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Reach out to REACH

GLOBAL CHEMICALS. Reach out to REACH. REACH Webinar Series February 1, 2007. KPMG INTERNATIONAL. Part 1 – REACH: AN INDUSTRY ASSESSMENT. REACH. 1. 2. Companies’ readiness. 2. 6. Case studies. 3. 15. Summary. 4. 18. REACH: recent KPMG engagements. Governmental level

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Reach out to REACH

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  1. GLOBAL CHEMICALS Reach out to REACH REACH Webinar Series February 1, 2007 KPMG INTERNATIONAL

  2. Part 1 – REACH: AN INDUSTRY ASSESSMENT • REACH 1 2 • Companies’ readiness 2 6 • Case studies 3 15 • Summary 4 18

  3. REACH: recent KPMG engagements • Governmental level • Dutch impact assessment (NL) • European extended impact assessment (D, UK, F, I and B) w/CEFIC • Guiding national REACH helpdesk (NL) • Advice to non-EU national governments • Company level • Fine chemical sector: assessing vulnerability towards REACH • Pharmaceutical sector: assessing supply chain risks • All sectors: preparedness assessment (scope: 100 companies)

  4. New as well as old substances Everything above 1 tonne per annum (TPA) production or import in volume …per EC producer or importer New substances: before start of production or import How is REACH supposed to work? 1 Registration is done by the industry 2 Old substances 1000 TPA within three years after adoption 100 TPA within six years 1 TPA within eleven years 3 Pre-registration duty Number of substances per volume band (not to scale) 20,000 1 – 10 t Pre registration 4 Possibility of consortia formation 4,600 10 – 100 t 2,900 100 – 1000 t 2,600 100t + CMR Enters into force T + 1 T + 1.5 T + 3 T + 11

  5. How REACH can become costly • Not just the direct cost … • Pre-registration, cost of testing (minus test already done), chemical safety assessment, registration (not included: evaluation, authorization) • A lot of companies are chemical suppliers (CS) as well as downstream users (DU) • …but, most likely, also indirect costs • Price increase or discontinuation of raw materials, reformulation, re-approval CS BOTH DU • “ …indirect cost are feared the most!

  6. Spring 2007: REACH entering into force Titles I, IV, XII, XIII, XIV commence(safety data sheets) Competent authorities appointed Fees and test methods regulations Review of Annexes I-III and possible commitology proposals Spring 2008: Agency starts in Helsinki, Finland Titles II, III, V, VI, VII, X and XI commence(pre-registration, data-sharing, …) Existing legislation ceases Member States enforcement law by 18 month after entry into force Spring 2010: First Registration deadline (>1000 TPA, Carcinogenic, mutogenic, reprotoxic (CMR) >1 TPA, aquatic toxicity >100 TPA) The route towards REACH

  7. KPMG survey on companies’ state of readiness • 1. Sample size • 102 international firms with a Dutch subsidiary from relevant sectors • Sample of companies which will likely be affected by REACH • 2. Survey results: familiarity with REACH • Of the 102 companies, 39 percent of them appear to be not or hardly aware of REACH • 23 percent characterized their familiarity with REACH as ‘little’ CONCLUSION This means that a significant part of the companies that are supposed to be affected by REACH, are insufficiently familiar with REACH to be able to comply

  8. KPMG survey on companies’ state of readiness • One in ten companies expects to no longer be able to manufacture particular products under REACH… • 3. Survey results: impact on the company • Companies familiar with REACH (n=62) expect a major impact: • 92 percent expect that REACH will to some degree affect the availability or price of raw materials and products • 29 percent feels that REACH will affect more than a quarter of all raw materialsand products • 10 percent expect not to be able to manufacture products themselves once REACH is in place CONCLUSION This means that many companies will probably be confronted with higher prices or unavailability of certain raw materials and semi-finished products under REACH

  9. KPMG survey on companies’ state of readiness • More than half of the companies familiar with REACH made little preparationso far… • 4. Survey results preparing for REACH • Of the companies familiar with REACH (n=62): • 53 percent did not make an impact assessment for REACH • 55 percent did not make an action plan in order to cope with REACH • 69 percent did not assess the reliability of suppliers under REACH (or did not know) • 44 percent did not communicate at all with suppliers/customers about REACH • 71 percent did not internally monitor the progress of the ‘preparing-for-REACH’ activities CONCLUSION This means that although the companies themselves expect a major impact from REACH, they hardly started preparing for it.

  10. KPMG survey on companies’ state of readiness • Companies should try to limit the REACH indirect supply chain effects by: • Getting insight into and communicate within the supply chain • Attaining a ‘common optimal solution’ with the other supplychain partners • This can only be accomplished if companies start preparing in time. However, with over half of the companies, this seems not to be the case. CONCLUSION There is a risk that companies that do not prepare well will overreact (withdraw products from the market) when REACH is there. This may cause disruption of entire supply chains, hitting also the companies that did prepare.

  11. Scenario 1: doing too little,too late Waiting until REACH is finalized? Your suppliers and competitors are already taking decisions This will leave you less room tomaneuver and less time to implementthe choices made Scenario 2: overreacting The general idea is that REACH is going to have big effects You therefore instantly and rigorously rationalize your portfolio and pass on all the REACH costs The pressure is now put on your suppliers and customers You, however, have now forced them to do the same and the whole supply chain, including you, suffers The idea that REACH is going tohave big effects, has become aself-fulfilling prophecy KPMG’ survey conclusions: what to avoid • “ So…better act now, but in a balanced way

  12. KPMG’s four step approach to REACH: step 1 • Determine urgency • Question • How ‘vulnerable’ is my company to REACH? • Action • Install multidisciplinary team • Define scope (product/market combinations) • Perform assessment, involve senior management • Output • Company vulnerability • Decision whether to take next step 1 2 3 4

  13. KPMG’s four step approach to REACH: step 2 • Assess level of preparedness • Question • How well am I prepared? • Action • Compare present preparations, including communication activities, against… • Mandatory tasks and best practices • Output • Level of preparation, relative to ‘urgency’ (step 1) • Decision whether to increase efforts 1 2 3 4

  14. KPMG’s four step approach to REACH: step 3 • Perform portfolio analysis (PA) • Question • Where and when will we be confronted with direct REACH costs? How can I limit them? • Action • Gather the data required (volumes, margins...) • Compare costs against estimated future profits • Inventory of ways to limit costs (consortia) • Output • Range and timetable of investments • Decision whether to invest (alone or within consortium) or withdraw product 1 2 3 4

  15. KPMG’s four step approach to REACH: step 4 • Assess supply chain risks • Question • Where are weaknesses in the supply chain? • Action • Select critical parts of the supply chain • Assess suppliers against predefined criteria • Define supplier risk profile • Output • Risk diagram • Decision whether to investigate further or take immediate action 1 2 3 4

  16. Case study 1: life science company • Step 1: how vulnerable is our company to REACH? • 1. Sensitivity is relatively low… • Main contributing factors: • High turnover • Resources available (knowledge, funding) • Raw material costs represent small fraction of total product cost • 2. …but so are the possibilities to adapt … • Main contributing factors: • Long time-to market cycle • Weak negotiation position in the value chain • Limited possibilities to produce outside EU • Limited possibilities to change the portfolio High High High 50 50 50 Sensitivity Adaptability Vulnerability 12 -16 -29 0 0 0 3. …resulting in a slightly higher vulnerability than the referencegroup average* -50 -50 -50 Compared to KPMG database reference group (score set at 0): EU companies likely to be affected by REACH. • “ Slightly higher vulnerability compared to reference group

  17. Case study 2: personal care products mfg • “ Direct REACH cost can amount to millions of euro STEP 1 We derive the direct cost per individual substance STEP 2 Then we identify the amount of substances per volume brand STEP 3 Finally we calculate the direct costs in total

  18. REACH: a management issue • “ • You will only manage your market share…. Legislator Supplier of the supplier Process chemical supplier Business unit Management Raw material supplier R&D Customer Marketing Production site 1 Purchase Global Head Quarters Distributor Production site 2 Legal Audit Maintenance Other BU’s Importer Chemical Agency Competitor • ” • … if you have insight into chemicals and information streams!

  19. Part 1: in summary • The chemical industry is not ready for REACH • Get insight into material and informationstreams • Take proportionate measures, based onobjectivecriteria • Limit directcosts to remove pressure fromsupply chain

  20. Part 2: TAX CONSIDERATIONS What are the transfer pricing consequences? 20 1 REACH costs: are they tax deductible? 23 2 3 Influence on supply chain and investment decisions 24 Financing REACH costs 25 4 Tax consequences in a broader context 26 5 KPMG’s REACH checklist 27 6

  21. What are the transfer pricing consequences? US Global HQ The Netherlands Holding / services Switzerland Eur HQ / principal Germany production / R&D France Sales

  22. What are the transfer pricing consequences? • What is transfer pricing? • Pricing of transactions between affiliated entities • Prices must be objective => ‘arm’s length’ • Goal: avoid international double taxation • Increase of attention by tax authorities • Documentation required

  23. What are the transfer pricing consequences? • Allocation of REACH costs • Qualify and quantify • REACH applies to production, sales, import, usage • Which entities should register? • Which entity should bear what part of the costs? • What allocation key should be used (turnover, production, profit)? • Internal costs: plus mark-up? • Royalties and further: • Are IT systems able to process the recharges? • Do not forget indirect taxes (custom duties, VAT…)

  24. REACH costs: are they tax deductible? • The characterization of REACH costs is unclear; ambiguity • Should, for example, internal and external costs be treated differently? • REACH costs tax deductible as ‘ordinary’ expenses? • Should REACH costs be capitalized? • If so: can the capitalized expenses be depreciated? • If so: what depreciation period should be used? • And…. • Tax treatment can vary per country • The allocation of costs and the tax treatment can have a major cash flow impact (for example: 35 percent of the total costs) • “ Agreement in advance with tax authorities may be possible…

  25. Supply chain and investment decisions • Is it useful to optimize the supply chain? • Changes in the supply chain will have major tax consequences: • ‘Exit charges’ • Permanent establishment • Transfer pricing systems • Legal structure • Finance • VAT • Customs • Administrative burden (IT systems, etc.) • REACH costs – and tax consequences – will influenceinvestment decisions

  26. Financing REACH costs • Similar tax issues as with any other major investment • What entities need ‘cash’? • Equity or debt? • Debt: from related companies or from third parties? • Interest deduction: • Profit capacity • Tax limitations • Transfer pricing • Tax optimization

  27. Tax consequences in a broader context Tax accounting and transfer pricing issues Availability of feedstock/raw material Supply chain impact and investment decisions DOING BUSINESS UNDER THE REACH LEGISLATION Increased cost, lower profitability IT systems and data exchange Ability to deliver product portfolio Integration into the organization

  28. KPMG’s REACH checklist • Conduct an initial REACH impact assessment • Involve senior management • Identify a multidisciplinary team • Assess level of preparedness and develop an action plan • Perform portfolio analysis, find ways to limit the costs • Budget appropriately for registration and associated costs • Assess reliability of suppliers and potential benefits of supply re-routing • Set up communication plan for customers, investors and others • Include REACH as part of the internal audit program • Assess tax and accounting implications • Align IT systems with REACH requirements

  29. Presenters’ contact details Rob Ronday ronday.rob@kpmg.nl +31 6 512 676 11 Marc Temme temme.marc@kpmg.nl +31 73 680 1610 © 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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