Tax Forum 23 August 2022

Global tax team

© NEC Corporation 2021 NEC Group Internal Use Only

Agenda Tax Forum 23 August 2022

GBU TP guideline
- Introduction guest participants GBU members to Tax Forum
- Introduction, Background & key concepts GBU TP Guideline
- Explanation GBU TP Guideline
- Q&A
NEC Group

Transfer Pricing Guideline

August 2022
Global Finance Department

© NEC Corporation 2021 NEC Group Internal Use Only

 Introduction
This Transfer Pricing Guideline prescribes a targeted net margin to be earned by the distributors or service
providers of covered intercompany transactions in accordance with the at arms’ length concept.

The goal of this guideline is to standardize the transfer pricing process within NEC group and to facilitate
internal communication more efficiently.

The net margin was set based on benchmarking results by an external independent consulting firm.

Net margin : Gross margin at distribution or markup against total cost at service rendering
Covered
This transactions
guideline : Distribution
will be applied of contract
for new hardware/software
negotiations&starting
IT service or1st
after Service Rendering
September 2022.

4 © NEC Corporation 2021 NEC Group Internal Use Only

 Key Concept

Prime Country Affiliate (CA) performs the sales function with/without the provision of the IT service Prime CA's function and
risk are relatively limited, these Prime CA’s would be identified as Limited Risk Distributors (LRDs) while the Sub contractor CA
performs the complicated value add function and bears the material risk.

Under regular business circumstances CA’s that bears limited risk on the basis of a functional, assets and risk analysis, are
expected to have a positive OM within the applicable benchmark range, while the Sub contractor CA earns the excess profit or
suffers the excess loss.

Therefore, it is recommended to verify the actual operating profit margin at the set price and review the price setting if necessary
to ensure the OM is within the required benchmark range.

4 types of intercompany transactions have been identified for the GBU controlled entities.

The selected Transfer Pricing Method for the transactions under this guideline is the Transactional Net Margin Method (TNMM)
with the Operating Margin (OM) as the profit level indicator (PLI).

For all transactions in this guideline the targeted net margins are set at the median in the interquartile range which is based on a
global benchmarking study. In the event local benchmark interquartile ranges should be applied and deviate from the global
benchmark interquartile ranges, the GBU TP team will address the deviation on a case by case basis.
5 © NEC Corporation 2021 NEC Group Internal Use Only
 Transactions 1-4
<Transaction 1> Distribution <Transaction 2>
of Distribution of ＜ Transaction 3 ＞ <Transaction 4>
Covered Hardware (HW) and Covered Hardware(HW) Service Rendering Global Shared Service
software(SW) product and software (SW) Center
with IT services

Prime contractor’s role: Prime contractor’s role:

Limited-risk distributor Value-added distributor

・ Sales activities ・ Sales activities
Prime contractor or Service provider to earn
・ Customer management ・ Customer management
: net margin in accordance with the concept of
・ Delivery support the transfer pricing
(Partial SI, localization)
・ Maintenance support
6 © NEC Corporation 2021 NEC Group Internal Use Only
 Major CA & Business domains to be covered by this guideline
Prime Contractor/ Sub Contractor/
Se rvice Priovide r Se rvice Re cie pie nt
NEC Corporation
GBU s upe rvis e d CA (COE)
NEC Software Solutions UK
GBU s upe rvis e d CA
Trans action 1 & 2 KMD Holding A/ S
NEC Corporation
Avaloq Group AG (for
trans actions not cove re d by its
e xis ting guide line )*
NEC Corporation
GBU s upe rvis e d CA
NEC Software Solutions UK
GBU s upe rvis e d CA
Trans action 3 & 4 KMD Holding A/ S
Global Share d Se rvice Ce nte r
Avaloq Group AG (for
trans actions not cove re d by its
e xis ting guide line )*
The c urre nt e xis ting TP guide line s for Avaloq group AG, Ne tCrac ke r group, Wire le s s Bus ine s s Unit and the c ontrac t R&D for
ove rs e as laboratorie s will c ontinue to be applie d for c urre nt e xis ting trans actions and bus ine s s .
The ne w TP guide line will als o apply to (ne w) trans ac tions in Avaloq group, Ne tCrac ke r group and Wire le s s Bus ine s s Unit that
have not be e n c ove re d by the ir re s pe c tive e xis ting TP guide line s .
7 © NEC Corporation 2021 NEC Group Internal Use Only
Major Bus ine s s Domains Functions
Dis tribution of
Cove re d Hardware (HW) and
s oftware (SW)
Digital Gove rnme nt
(Trans action 1）
Digital Finance
Digital ID (Safe r City Solutions )
Dis tribution of
5G Ne twork
Cove re d Hardware (HW) and s oftware
(SW) with IT s e rvice s
(Trans action 2)
Digital Gove rnme nt
Digital Finance
Digital ID (Safe r City Solutions ) SW de ve lopme nt (Off s hore )
5G Ne twork Bus ine s s de ve lopme nt
Optical Sys te m Inte gration
Public Solutions Sale s and Marke ting
Public Infras tructure Ge ne ral s e rvice s of adminis trative or
Ente rpris e cle rical nature
NW Se rvice Bus ine s s Share d Se rvice
Digital Bus ine s s Platform
Sys te m Platform Bus ine s s
GBU Supervised Country Affiliates
Company Country Company Country

NEC Corporation of America USA NEC Corporation Japan

A NEC Argentina Argentina NEC Australia Australia

m
e NEC Latin America Brazil NEC New Zealand New Zealand
r
i NEC de Colombia Colombia NECAPAC Singapore
c
a NEC de Mexico Mexico NEC Thailand Thailand
A
NEC Chile Chile NECOMAL Malaysia
P
A
NEC Europe UK NEC Philippines Philippines
C
E
NEC Turkey Turkey NEC Indonesia Indonesia
M
E
NEC XON South Africa NEC Vietnam Vietnam
A
NEC Saudi Saudi Arabia NEC India India

NEC Hong Kong Hong Kong

NEC Taiwan Taiwan

8 © NEC Corporation 2021 NEC Group Internal Use Only

 Target Margin (Transaction 1 & 2)
Transaction Function CA to earn Target Margin Target Margin
Americas EMEA APAC India Brazil

<Transaction 1> Gross Margin :

Prime Contractor
Covered Hardware (HW) and Distributions Target Operating Margin 3％ + transactional SGA/Sales ratio for each CA
(Limited-risk distributor)
software(SW) (See Page 10)
20% *
(Gross Margin)
<Transaction 2> Gross Margin :
Prime Contractor
Covered Hardware (HW) and Distributions Target Operating Margin 5％ + transactional SGA/Sales ratio for each CA
(Value-added distributor)
software (SW) with IT services (See Page 12)

* In Brazil, efforts are currently underway to align with the OECD transfer pricing guidelines, and it is recommended to pay close attention to these trends and review them in a timely
manner.

In case Prime Contractor would be Principal of the deal to bear the business risk and the business accountability,
the target margin for the function is NOT covered by this guideline.
The appropriate level of the net margin for Prime CA should be calculated and decided separately based on the
function, risks and the contribution by Prime CA.

9 © NEC Corporation 2021 NEC Group Internal Use Only

Transaction 1 - Distribution of Covered HW/SW product
No. Company GM%
Customer
A 1 NEC Corporation of America 9%
m 2 NEC Argentina 10%
e
3 NEC Latin America 7%
r
i 4 NEC de Colombia 7%
Prime contractor ・ Sales activities c 5 NEC de Mexico 7%
(CA) ・ Customer management a 6 NEC Chile 9%

E 7 NEC Europe 7%
M 8 NEC Turkey 6%
E
・ SW A
9 NEC XON 7%
Sub-contractor ・ Delivery 10 NEC Saudi 7%
11 NEC Corporation 9%
IP owner ・ Maintenance 12 NEC Australia 7%
13 NEC New Zealand 7%
<Transaction> 14 NECAPAC 7%
15 NEC Thailand 7%
Prime CA acts as Limited-risk Distributor A
P 16 NECOMAL 7%
<Pricing> A 17 NEC Philippines 6%
C
18 NEC Indonesia 6%
The Gross Margin of Prime CA should be computed backward so that
19 NEC Vietnam 9%
Prime CA can earn the targeted Operating Margin 3% after the 20 NEC India 7%

deduction of the sales and general expenses. 21 NEC Hong Kong 9%

22 NEC Taiwan 8%
10 © NEC Corporation 2021 NEC Group Internal Use Only
 Transaction 1 – Distribution of Covered HW/SW product Gross Margin calculation method
The Gross Margin of Prime CA should be computed backward so that Prime CA can earn the targeted Operating
Margin 3% after the deduction of SGA.
SGA
182
Weighting Benchmarking
Gross Margin Target = Weighted SGA% of each CA + <SGA% vs. sales> 25% results

OM% target No. Company

FY20-22
Avarage
Weighted
SGA
Operating
Margin
GM%

Benchmark on Operating Margin A 1 NEC Corporation of America 25% 6% 9%

m 2 NEC Argentina 29% 7% 10%
Inte rquartile Range e
3 NEC Latin America 17% 4% 7%
r
Uppe r Quartile (75%) 4.0% OM Target of 4 NEC de Colombia 18% 4% 7%
i
Me dian (50%) 2.3% Transaction 1 c 5 NEC de Mexico 18% 4% 7%
3% a 6 NEC Chile 22% 6% 9%
Lowe r Quartile (25%) 0.8%
E 7 NEC Europe 17% 4% 7%
M 8 NEC Turkey 12% 3% 6%
<Contribution weighting of SGA> E 9 NEC XON 18% 4% 7%
・ 4 steps of possible CA’s contribution are identified and equally weighed. A
10 NEC Saudi 15% 4% 7%
・ For Transaction 1, “25%” as sales activities is used to weigh 11 NEC Corporation 25% 6% 9%
3%
SGA as the contribution. 12 NEC Australia 17% 4% 7%
Contribution 13 NEC New Zealand 17% 4% 7%
Ste ps Role
We ighting Transaction1 14 NECAPAC 17% 4% 7%
Sale s Contact e s tablis hme nt, ke y pe ople / role mapping, 15 NEC Thailand 16% 4% 7%
25% 25% A
activitie s account manage me nt P 16 NECOMAL 18% 4% 7%
De live ry De live ry s upport for s ub contractor which take s A 17 NEC Philippines 13% 3% 6%
25% C
s upport re s pons ibility for e ntire de live ry 18 NEC Indonesia 10% 3% 6%

Mainte nance Mainte nace s upport for s ub contractor which take s 19 NEC Vietnam 24% 6% 9%
25% 20 NEC India 16% 4% 7%
s upport re s pons ibility for e ntire mainte nance
21 NEC Hong Kong 22% 6% 9%
Activitie s as Take re s pobs ibility for e ntire proje ct and be ar the
25% 22 NEC Taiwan 20% 5% 8%
principal mate rial ris k
11 © NEC Corporation 2021 NEC Group Internal Use Only
Transaction 2 – Distribution of Covered HW/SW product + IT services
Customer No. Company GM%

A 1 NEC Corporation of America 24%

・ Sales activities m 2 NEC Argentina 26%
・ Customer management e
3 NEC Latin America 18%
r
Prime contractor ・ Delivery support i 4 NEC de Colombia 18%
(CA) (Partial SI, localization) c 5 NEC de Mexico 18%
a 6 NEC Chile 22%
・ Maintenance support 7 NEC Europe 18%
E
M 8 NEC Turkey 14%
・ SW E 9 NEC XON 18%
Sub-contractor
・ Delivery A
10 NEC Saudi 16%
・ Maintenance 11 NEC Corporation 24%
IP owner
12 NEC Australia 17%
13 NEC New Zealand 18%

<Transaction> 14 NECAPAC 18%

A 15 NEC Thailand 17%

Prime CA acts as Value-added Distributor P 16 NECOMAL 18%
<Pricing> A 17 NEC Philippines 15%
C
18 NEC Indonesia 13%
The Gross Margin of Prime CA should be computed backward so that 19 NEC Vietnam 23%
Prime CA can earn the targeted Operational Margin 5% after the 20 NEC India 17%
21 NEC Hong Kong 22%
deduction of the sales and general expenses.
22 NEC Taiwan 20%

12 © NEC Corporation 2021 NEC Group Internal Use Only

 Transaction 2 – Distribution of Covered HW/SW with IT services Gross Margin calculation method

The Gross Margin of Prime CA should be computed backward so that Prime CA can earn the targeted Operating
Margin 5% after the deduction of SGA. 182
SGA
Weighting Benchmarking
<SGA% vs. sales> 75% results

Gross Margin Target = Weighted SGA% of each CA + No. Company

FY20-22 Weighted Operating
GM%
Avarage SGA Margin
OM% target
A 1 NEC Corporation of America 25% 19% 24%
Benchmark on Operating Margin m 2 NEC Argentina 29% 21% 26%
Inte rquartile Range e
3 NEC Latin America 17% 13% 18%
r
Uppe r Quartile (75%) 7.9% 4 NEC de Colombia 18% 13% 18%
OM Target of i
c 5 NEC de Mexico 18% 13% 18%
Me dian (50%) 4.8% Transaction 2
a 6 NEC Chile 22% 17% 22%
Lowe r Quartile (25%) 1.5% 5%
E 7 NEC Europe 17% 13% 18%
M 8 NEC Turkey 12% 9% 14%
<Contribution weighting of SGA> E 9 NEC XON 18% 13% 18%
・ 4 steps of possible CA’s contribution are identified and equally weighed. A
10 NEC Saudi 15% 11% 16%
・ For Transaction 2, “75%” as sales activities, and delivery & maintenance 11 NEC Corporation 25% 19% 24%
5%
support is used to weigh SGA as the contribution. 12 NEC Australia 17% 12% 17%
13 NEC New Zealand 17% 13% 18%
Transaction 2 14 NECAPAC 17% 13% 18%

A 15 NEC Thailand 16% 12% 17%

P 16 NECOMAL 18% 13% 18%
A 17 NEC Philippines 13% 10% 15%
75% C
18 NEC Indonesia 10% 8% 13%
19 NEC Vietnam 24% 18% 23%
20 NEC India 16% 12% 17%
21 NEC Hong Kong 22% 17% 22%
22 NEC Taiwan 20% 15% 20%

13 © NEC Corporation 2021 NEC Group Internal Use Only

 Transaction 3 – Service Rendering
<Transaction>

Provider Services are provided to Recipients by Providers including COE

<Pricing>
The (Net) Cost Plus method is typically used for determining
Service Payment an arm’s length compensation for Providers of these services.
Cost plus : Total cost markup + Direct cost + Indirect cost

Recipient

Transaction Function CA to earn Target Target Margin (Total Cost Markup (Markup against Total Cost))
Americas EMEA APAC India Brazil

Service Provider outside

3-A：Software Development Activities Service Rendering 7% 18%
sales channels

Service Provider outside

3-B：System Integration and maintenance Service Rendering 6% 18%
sales channels
15% *
（Gross Margin）
3-C：Sales and Marketing activities including Service Provider outside
Service Rendering 6% 12%
business development support sales channels

3-D：General services of an administrative or Service Provider outside

Service Rendering 5% 5%
clerical nature sales channels

* In Brazil, efforts are currently underway to align with the OECD transfer pricing guidelines, and it is recommended to pay close attention to these trends and review them in a timely manner.
14 © NEC Corporation 2021 NEC Group Internal Use Only
 Transaction 4 – Global Shared Service Center
<Transaction>

Provider Services are provided to Recipients by Global Shared Service Center

<Pricing>
The (Net) Cost Plus method is typically used for determining
Service Payment an arm’s length compensation for Providers of these services.
Cost plus : Total cost markup + Direct cost + Indirect cost

Recipient

Transaction Function CA to earn Target Margin Target Margin (Total Cost Markup (Markup against Total Cost))
India Other regions

Service Provider outside sales

Accounting/ Finance Process & Treasury activities Service Rendering
channels 10% * 5% *

Service Provider outside sales

Software Development & Consulting Service Rendering 18% 7%
channels

* To be applied from April 1, 2023.

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Questions & Contacts

Contacts GBU TP Guideline team

• Shuichi Inoue
• Akihito Soejima
• Kaoru Nakamura
• Michihiro Hosoi
• Masayuki Ogawa
• Novi Pikaar

GBU TP guideline email address: global-tp-guideline@gbu.jp.nec.com

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