Philips 2007 Annual Report Download - page 105

Philips Annual Report 2007 111
Country decomposition of the 5% NPPC at risk
in millions of euros
(100)
(50)
0
500
100
150
200
250
2006 20061) 20071) 2) 20071) 3)
total risk
diversification
Netherlands
US
Germany
UK
1) adjusted economic modeling
2) including plan and investment policy changes in 2007
3) including target investment policy 2008
Fiscal
Philips is, as mentioned before, exposed to  scal
uncertainties. This section further describes this exposure.
Transfer pricing uncertainties
Philips has issued transfer pricing directives, which are
in accordance with guidelines of the Organization of
Economic Co-operation and Development. As transfer
pricing has a cross-border effect, the focus of local tax
authorities on implemented transfer pricing procedures
in a country may have an impact on results in another
country. In order to mitigate the transfer pricing
uncertainties, audits are executed on a regular basis
to safeguard the correct implementation of the transfer
pricing directives.
Tax uncertainties on general service agreements
and speci c allocation contracts
Due to the centralization of certain activities in a limited
number of countries (such as research and development
costs, centralized costs for IT, and costs for corporate
functions and head of ce), costs are also centralized.
As a consequence, for tax reasons these costs and / or
revenues must be allocated to the bene ciaries, i.e. the
various Philips entities. For that purpose, apart from
speci c allocation contracts for costs and revenues,
general service agreements (GSAs) are signed with
a large number of entities. Tax authorities review
the implementation of GSAs, often auditing on bene t
test for a particular country or the use of tax credits
attached to GSAs and royalty payments, and may reject
the implemented procedures. Furthermore, buy in/out
situations in the case of (de)mergers could affect the tax
allocation of GSAs between countries. The same applies
to the speci c allocation contracts.
Tax uncertainties due to disentanglements and acquisitions
When a subsidiary of Philips is disentangled, or a new
company is acquired, related tax uncertainties arise.
Philips creates merger and acquisition (M&A) teams for
these disentanglements or acquisitions. These teams
consist of specialists from various corporate functions
and are formed, amongst other things, to identify hidden
tax uncertainties that could subsequently surface when
companies are acquired and to avoid tax claims related
to disentangled entities. These tax uncertainties are
investigated and assessed to mitigate tax uncertainties
in the future as much as possible. Several tax uncertainties
may surface from M&A activities. Examples of uncertainties
are: applicability of the participation exemption, allocation
issues, and non-deductibility of parts of the purchase price.
Tax uncertainties due to permanent establishments
In countries where Philips starts new operations, the
issue of permanent establishment may arise. This is due
to the fact that when operations in new countries are led
from other countries, there is a risk that tax claims will
arise in the new country as well as in the initial country.
Philips assesses these uncertainties before the new
activities are started in a particular country.
Tax uncertainties of losses carried forward and tax credits
carried forward
The value of the losses carried forward is not only a matter
of having suf cient pro ts available within the loss-carried
forward period, but also a matter of suf cient pro ts
within the foreseeable future in the case of losses
carried forward with an inde nite carryforward period.
Valuation allowances of deferred tax asset positions are
in place where considered necessary.
Legal
Please refer to note 27 for additional disclosure relating
to speci c legal proceedings.
98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements