M&A and Capital Markets Update · Offshore Drillers Manufacturing Sand Subsea Focused Majors Pressure Pumpers Land Services Land ... cycle valuation _____ Source: FactSet as of 9/23/2016.

Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. © Copyright 2016 Latham & Watkins. All Rights Reserved.

M&A and Capital Markets Update: The Continuing Impact of Low Commodity Prices on the

Market Activity and Opportunities for the Future

C. Timothy Fenn, Latham & Watkins LLP Adam Peakes, Tudor Pickering Holt & Co.

6th Oilfield Services Law Conference October 11, 2016

Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. © Copyright 2016 Latham & Watkins. All Rights Reserved.

OFS Market Update

Commodity Prices

Gas Price Snapshot Long Term Chart – Last 10 Years

Current Chart – Last 6 Months

1.51.71.92.12.32.52.72.93.13.3

4/1/2016 5/1/2016 6/1/2016 7/1/2016 8/1/2016 9/1/2016 10/1/20160.5

2.5

4.5

6.5

8.5

10.5

12.5

14.5

15

35

55

75

95

115

135

155Long Term Chart – Last 10 Years

Current Chart – Last 6 Months

30

35

40

45

50

55

4/1/2016 5/1/2016 6/1/2016 7/1/2016 8/1/2016 9/1/2016 10/1/2016

Oil Price Snapshot

3

Oil Macro Update

4

TPH Supply / Demand Model (mmboe/d)

Real-Time Inventories Point to ~Balanced Market Inventories Project to be Very Tight by YE ‘17

2014 2015 2016 2017

Demand: Total 93.0 94.7 96.0 97.1

Supply: Total 93.7 96.4 96.5 96.8

United States 12.0 12.9 12.3 12.2

OPEC 31.2 32.3 33.0 33.5

Non-OPEC Ex-US 39.6 40.0 39.7 39.6

NGLs 6.5 6.7 6.8 6.9

Processing Gains + Other Ethanol 4.5 4.5 4.6 4.6

Supply Exceeds Demand 0.8 1.6 0.5 (0.2)

Balancing Item (0.2) (0.7) (0.8) (0.8)

Implied Inventory Change 0.6 1.0 (0.3) (1.0)

Modest declines now with FID cliff impacting 2018-2020

Demand growth assumptions moderate after big price-driven gains in 2015

US declines largely already baked through 2017. “The Big 3” largely will drive growth thereafter

Iran sanctions relief provided 2016 growth (+650 kb/d modestly above TPH expectation) but further gains more challenging

Stage set for drawdown of inventories through 2017

2,200

2,700

3,200

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Mill

ion

Barr

els

Max/2015

Min

Norm

2016

2017

Even with increasing OPEC supply in 2016 and 2017, OECD inventories fall below 10-year norms by 4Q17

2,200

2,700

3,200

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Mill

ion

Barr

els

Max/2015

Min

Norm

2016

OECD inventory YTD trending in-line with 10 year norms…suggesting a global oil market that is nearly balanced

___________________________________ Source: IEA & TPH Research.

Natural Gas Macro Update

2016 YTD Review

Warm winter 2015 / 2016 drove storage overhang

Currently market running with the structural undersupply required to maintain market undersupply & clear storage capacity by end of injection season

Gas / Coal switching continues to do its job

Winter 2016 / 2017 price strength driven by:

Market 3 Bcf/d structurally undersupplied at current prices

Continue to expect production declines through late 2016

Weather risk to the upside

Late 2017 / 2018 weak price concerns driven by:

Incremental associated gas production with oily basins looking both more productive & gassier

Significant ramp in gas-directed activity expected in response to late 2016 / 2017 price signal

Greater confidence in NE infrastructure coming on-line as planned

Commentary Price Forecast Update

5

TPH Natural Gas price Forecast

($/mmbtu) 2016E 2017E 2018E 2019E 2020E

Current $2.48 $3.75 $2.75 $3.00 $3.00

April 2016 2.25 3.65 3.25 3.25 3.25

Prompt Year by Quarter

Q1 '17 Q2 '17 Q3 '17 Q4 '17

$4.25 $3.75 $3.75 $3.25

($/mmbtu)

Maintain bullish 2017 stance but increasingly concerned about weak

2018 prices

___________________________________ Source: TPH Research.

Dissecting U.S. Land Rig Count: Additions Since May 2016 Trough

___________________________________ Source: Baker Hughes as of 9/23/2016.

Peak to Trough Trough to Current

Peak Trough Change in Rigs Current Change in Rigs

Basin (11/14/14) (5/27/16) Oil/Liquids Gas % (9/23/16) Oil/Liquids Gas %

Permian 565 137 (421) (7) (76%) 201 64 0 47%

Eagle Ford 209 29 (169) (11) (86%) 37 7 1 28%

Williston 188 22 (165) (1) (88%) 28 6 0 27%

Cana Woodford 41 28 (9) (4) (32%) 33 5 0 18%

Granite Wash 59 6 (30) (23) (90%) 9 3 0 50%

Mississippian 75 3 (68) (4) (96%) 3 0 0 0%

DJ-Niobrara 58 13 (28) (17) (78%) 16 3 0 23%

Total Oil/Liquids Plays 1,195 238 (890) (67) (80%) 327 88 1 37%

Marcellus 83 26 0 (57) (69%) 30 0 4 15%

Utica 49 11 (23) (15) (78%) 15 0 4 36%

Haynesville 39 15 (1) (23) (62%) 13 0 (2) (13%)

Barnett 25 2 (13) (10) (92%) 1 (1) 0 (50%)

Fayetteville 9 0 0 (9) (100%) 0 0 0 NA

Ardmore Woodford 7 1 (6) 0 (86%) 1 0 0 0%

Arkoma Woodford 6 3 1 (4) (50%) 3 (1) 1 0%

Total Gas Plays 218 58 (42) (118) (73%) 63 (2) 7 9%

Others 463 84 (302) (77) (82%) 101 16 1 20%

Total 1,876 380 (1,234) (262) (80%) 491 102 9 29%

Approximately two-thirds of the rig count additions since the May ’16 trough have come from the Permian

6

Upstream Capex by Year

___________________________________ Source: FactSet as of 9/30/2016. Note: Universe includes APA, APC, AR, CHK, CLR, COG, COP, CRZO, CXO, DVN, ECA-CA, EOG, EPE, EQT, FANG, GPOR, LPI, MRD, MRO, NBL, NFX, OAS, OXY, PE, PXD, QEP, RICE, RRC, RSPP, SM, SWN, WLL, WPX and XEC. 7

$137.9

$86.1

$40.5

$50.3

2014 2015 2016E 2017E

(USD in Billions)

268 191

97 128 154

133

89

40 53

66

402

280

137

181 220

2014A 2015A 2016E 2017E 2018E

Horizontal Vertical / Directional

___________________________________ Source: Wall Street equity research post Q2 2016 and Spears & Associates.

300

500

700

900

1,100

1,300

1,500

1,700

1,900

2014A 2015A 2016E 2017E 2018E

Barclays Deutsche BankGuggenheim JefferiesMorgan Stanley RBC Capital MarketsSimmons / Piper Jaffray SpearsTudor, Pickering, Holt Wells Fargo

OFS Key U.S. Land Indicators

Rig Count Forecast by Broker Wells Drilled (000s)

Footage Drilled (mm)

1,215

995

960

959

927

911

870

2018E Median: 959 Rigs

20.2 14.1

7.3 9.7 11.5

25.6

13.8

5.7 7.7

9.5

45.8

27.9

13.0 17.4

21.0

2014A 2015A 2016E 2017E 2018E

Horizontal Vertical / Directional

8

OFS Equity Performance by Subsector

June 2014 WTI Peak to February 2016 WTI Trough (6/23/14 to 2/11/16)

February 2016 WTI Trough to Current (2/11/16 to 9/23/16)

9

___________________________________ Source: FactSet as of 9/23/2016. Manufacturing: FET, HTG-GB, NOV and SBO-AT; Pressure Pumpers: CFW-CA, RES; Majors: BHI, HAL, SLB and WFT; Subsea Focused: DRQ, FTI and OII; Land Services: NR, OIS, SPN and TTI; Sand: FMSA, HCLP, and LCA. Land Drillers: ESI-CA, HP, NBR, PKD, PTEN and PD-CA; Offshore Drillers: ESV, RDC, NE, ATW, DO, SDRL and RIG.

3%

6%

16%

17%

41%

44%

48%

49%

70%

95%

262%

Subsea Focused

Offshore Drillers

OSX

Majors

Henry Hub

Manufacturing

Land Services

Land Drillers

WTI

Pressure Pumpers

Sand

(82%)

(81%)

(72%)

(72%)

(68%)

(67%)

(63%)

(59%)

(53%)

(51%)

(34%)

Sand

Offshore Drillers

Land Drillers

Pressure Pumpers

Manufacturing

Land Services

Subsea Focused

WTI

Majors

OSX

Henry HubOFS equities have rallied significantly since mid-February trough, reflecting sentiment that the

upcycle is soon approaching

Cur

rent

201

8E

EV /

EBIT

DA

Cycle to Cycle EBITDA Multiples Comparison

10

His

toric

al N

TM

Aver

age

(2

010

– 20

14)

% C

hang

e

11.1x 10.7x 9.7x 9.4x 8.8x

7.5x 6.6x 6.4x

Offshore Drillers Manufacturing Sand Subsea Focused Majors Pressure Pumpers Land Services Land Drillers

6.5x 8.0x 8.2x

11.9x

6.5x 5.6x 5.7x 5.2x

Offshore Drillers Manufacturing Sand Subsea Focused Majors Pressure Pumpers Land Services Land Drillers

69.6%

35% 18%

(22%)

35% 34%

16% 23%

Offshore Drillers Manufacturing Sand Subsea Focused Majors Pressure Pumpers Land Services Land Drillers

Investors starting to look to 2018 for mid-cycle valuation

___________________________________ Source: FactSet as of 9/23/2016. Manufacturing: FET, HTG-GB, NOV and SBO-AT; Pressure Pumpers: CFW-CA, RES; Majors: BHI, HAL, SLB and WFT; Subsea Focused: DRQ, FTI and OII; Land Services: NR, OIS, SPN and TTI; Sand: FMSA, HCLP, and SLCA. Land Drillers: ESI-CA, HP, NBR, PKD, PTEN and PD-CA; Offshore Drillers: ESV, RDC, NE, ATW, DO, SDRL and RIG. (1) Excludes FMSA for historical multiple due to lack of trading history.

(1)

(10%)

10%

30%

50%

70%

90%

110%

130%

2014 2015 2016 2017 2018

Inde

xed

EBIT

DA

(69%)

(32%)

(49%)

(63%)

(35%)

(66%)

(60%)

(71%)

(10%)

10%

30%

50%

70%

90%

110%

130%

2014 2015 2016 2017 2018

Inde

xed

Rev

enue

(46%)(45%)

(34%)(40%)(41%)

(47%)

22%

(55%)

How Does Wall Street Envision the OFS Recovery?

Revenue Indexed to 2014A EBITDA Indexed to 2014A

11

Manufacturing Pressure Pumpers Land Drillers Majors Subsea Focused Land Services Sand Offshore Drillers

___________________________________ Source: FactSet as of 9/23/2016. Manufacturing: FET, HTG-GB, NOV and SBO-AT; Pressure Pumpers: CFW-CA, RES; Majors: BHI, HAL, SLB and WFT; Subsea Focused: DRQ, FTI and OII; Land Services: NR, OIS, SPN and TTI; Sand: FMSA, HCLP, and SLCA. Land Drillers: ESI-CA, HP, NBR, PKD, PTEN and PD-CA; Offshore Drillers: ESV, RDC, NE, ATW, DO, SDRL and RIG.

• Oil & Gas M&A is bit more active • The recent increase in commodity prices, particularly off of the early July floor, has given confidence to the market • Recent deals:

• Private equity generally remains on the sidelines, but we believe they are preparing for a meaningful increase in activity later in 2016

• Most private equity funds have been raising significant capital as part of their regular fundraising activity and in anticipation of a market rebound

• Recent deals:

Recent Trends – M&A

Sale of Agave Energy Group to Lucid Energy Group II September 2016

Sale of Vantage Energy to Rice Energy September 2016

Sale of Freeport-McMoran assets to Anadarko September 2016

Undisclosed investment by Intervale Capital and Bayou City Energy Management in High Mesa September 2016

$500 million investment by Alberta Investment Management in Howard Midstream Partners August 2016

$1.56 billion acquisition of 89% stake in Centennial Resource Production by Riverstone Holdings July 2016

High Mesa, Inc.

12

13

Commentary

Distressed sales and restructuring activity continue to be the bulk of the transaction activity

Several of the highest profile situations are reaching inflection point

□ Seventy Seven

□ C&J

□ Key

□ Stallion

First signs of healthy company M&A emerged in April

Selected Transactions

___________________________________ Source: Company press releases, IHS.

Date Parties Involved Description

Acquisitions

9/14/2016 Patterson / Warrior

Patterson agreed to acquire Warror Drilling Rig for an undisclosed amount

Warrior designs, manufactures and services high-spec rig components with a focus on top drive

technology for improved drilling performance

8/28/2016 Rubicon Oilfield / Logan

Rubicon agreed to acquire Logan for ~$90mm ($39mm in cash, 86% premium on closing price)

Logan manufactures oil field tools / equipment and provides seismic surveying services

8/4/2016US Silica /

Sandbox

US Silica acquired Sandbox for $218 MM (34% cash, 66% stock)

Sand logistics provider with a patented sand container for the transload to wellsite delivery process

7/14/2016AFGlobal /

Managed Pressure Operations

AFGlobal acquired MPO, a subsidiary of MHWirth, for an undisclosed amount

Solidifies company as OEM of complete deepwater managed pressure drilling offerings

6/18/2016US Silica /

New Birmingham

US Silica acquired sand producer New Birmingham for $210 MM (57% cash, 43% stock)

Regional sand mine based in Tyler with 2 MM tpa of capacity that primarily sells sand FOB plant to TX

6/18/2016American Securities /

Ulterra Drilling Technologies

Ulterra is a manufacturer of PDC drilling bits for the oil and gas industry

ESCO Corp, who owned Ulterra previously, bought the business from Intervale for $225 MM in 2012

6/3/2016Schlumberger /

Saltel Industries

Saltel is a French-based engineering, manufacturing and service company

Products include expandable steel patches and packers for the oil and gas industry

6/3/2016Schlumberger /

Omron Oilfield and Marine

Omron designs, manufactures, and sells aftermarket services for automated drive & control systems

Fits within Schlumberger's long-term strategy to develop integrated well construction systems

6/1/2016NOV / Trican

(completion tools business)

NOV acquired completion tools business from Trican for $41 MM

Designs and sells downhole tools for multi-stage fracturing and multi-zone completions

4/27/2016Schlumberger / Xtreme Drilling (coiled

tubing division)

Schlumberger acquired 11 CT units located in Saudi Arabia and in the U.S. for C$205 MM

Xtreme retained its fleet of 21 land rigs

4/1/2016Schoeller-Bleckmann /

Downhole Technology

Schoeller-Bleckman acquired 68% of Downhole Technology for $103 MM

Downhole Technology is a leading provider of composite frac plugs

Schoeller-Bleckmann also received option to purchase remaining 32% after 3 years

2016 OFS M&A Update

• Energy high-yield offerings have seen recent uptick since Q4 of 2015 • Recent deals:

• Some investment grade energy deals are getting done • Recent deals:

Recent Trends – Debt Capital Markets

Great Western $300 million September 2016

Transocean $1.25 billion July 2016

Weatherford $1.5 billion June 2016

Spectra Energy $800 million October 2016

Sempra Energy $500 million October 2016

Magellan Midstream $500 million September 2016

14

• Debt-for-Debt Exchanges • Offerings of second lien notes in exchange for outstanding unsecured notes at a deep discounts began in May 2015, but now

somewhat out of favor based on poor trading performance for some

• Small groups of majority holders are generally offered second lien notes, while remaining noteholders often offered only third lien notes at different pricing

• A few exchanges included a side by side 144A offering to raise additional liquidity

• Payments for consent remain an issue

• Payments to any noteholder for a consent, waiver or amendment of any of the terms or provisions of an indenture must be made to all noteholders

Recent Trends – Debt Capital Markets

15

Oilfield Service Debt Capital Market Summary

Oilfield Service High Yield Issuances Since 2013 OFS High Yield Performance (YTD)

16 ___________________________________ Source: ML Index System, FactSet as of 9/23/2016. Note: Majors / Investment Grade Index includes: BHI, HAL, SLB. Offshore Drillers HY Index includes: DO, ATW, ESV, NE, RDC, RIG. Onshore Services HY: PDS, PKD, PTEN, SPN, WFT, HP.

$1,500$1,475

$825

$100

$1,310

$1,500

$350

- -

$350

- - -

$1,500

$1,250

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'160%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Jan Feb Mar Apr May Jun Jul Aug Sep

Majors / Investment Grade Offshore Drillers HY

Onshore Services HY

• IPOs resurfacing in equity markets • Dozens of IPOs in the pipeline, predominantly upstream and midstream • Delaware-focused E&Ps appear keen on IPO

• Reopening of the public markets. Deleveraging may be available if companies are willing to take the dilution.

Recent Trends – Equity Capital Markets

Summit Midstream $128 million September 2016

Rice Energy $1 billion September 2016

17

Noble Midstream IPO $281 million September 2016

Extraction IPO Pending

Smart Sand IPO Pending

Anadarko Petroleum $1.9 billion September 2016

• Greater interest in preferred deals, particularly in the MLP space • Recent deals:

• Pros • Can come at a lower cost than common unit issuance • New pool of capital outside of traditional LP unit investors • Some equity credit from rating agencies, so balance sheet accretive

• Cons • Smaller than common unit issuance, so may not serve as a significant source of equity funding for the sector • Investors take a Schedule K-1 and not a 1099; tax planning necessary for certain institutional investors

• Common Terms • Liquidation Preference - $25.00 if public; purchase price if private – plus accrued distributions in each case • Distributions typically based on more normalized yield plus 2% to 4%; can be PIK • Conversion triggers vary but include COC, forced conversion based on price appreciation, optional conversion by the holder • Redemption triggers include fixed period (5 years or 10 years), COC • Minority protection are fairly limited in public deals – issuance of pari or senior securities, change in partnership agreement that would be

materially adverse, voting on an as-converted basis with common units • Generally no board representation or only board observer unless (in public deals) distributions remain unpaid for 6 quarters (then up to 2)

Recent Trends – Equity Capital Markets

EnLink Midstream Partners $750 million from TPG Capital

Plains All American $1.5 billion from Kayne Anderson/First Reserve

Western Gas Partners $449 million from Kayne Anderson/First Reserve

18

$16.1

$4.6

C&J IPO Date (7/28/11) Current

Commentary Investable Market Cap (USD in Billions)

M&A, bankruptcies and lower overall equity valuations (as a result of the downcycle) together have resulted in a dearth of investable OFS names

Inability to establish sizable positions has money managers demanding additional options

___________________________________ Source: FactSet as of 9/30/2016.

Selected Companies Included (7): BAS, CJES, CFW-CA, CPX, KEG, TCW-CA, RES

Selected Companies Included (4): CFW-CA, FRC-CA, TCW-CA, RES (<$2Bn Including Only the RES Float)

Investable Market Cap Has Dwindled Selected Completion Service Companies (Prior Cycle vs. Current)

19

Equity Markets Have Been Active in 2016… As Companies Take Advantage of Rising Oil Prices

20

Annual Equity Issuances by Subsector

Quarterly OFS Equity Issuances

(USD in billions)

$0.7

$1.3 $1.5

$0.1 $0.2 $0.1 $0.8 $0.9

$0.2

$0.4

$0.5

$0.4

$1.1 $1.3

$2.0

$0.4 $0.1 $0.2 $0.1

$0.0

$0.8 $0.9

$0.2

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16

FO IPO

___________________________________ Source: Company filings.

$9.9$14.2 $16.6 $17.3

$22.4

$23.4$19.6

$22.0$14.7 $4.8

$3.1 $2.8

$4.7

$0.4$1.9

$2.4 $3.6

$3.1

$1.3$0.8

$39 $40

$47

$34$30

$0

$10

$20

$30

$40

$50

2012 2013 2014 2015 2016 YTD

Upstream Midstream OFS Refining

2016 Oil Field Service Equity Offerings

21

(USD in millions except per share amounts)

___________________________________ Source: Company filings and FactSet as of 9/23/2016.

Issuer DatePrimary Use of

ProceedsOffering Deal Size

% of Pre-Deal Shrs. Out

Offering Size vs. 30 Day ADTV

Discount % to Last Sale

Offer / Current Comments

Hi-Crush Partners 8/10/2016 Acquisition $80 12% 12.3x (4.0%) 2.0%Acquisition financing to fund purchase of additional mine

Fairmount Santrol 7/20/2016 Repay Debt $171 15% 20.3x (3.3%) 7.9%Opportunistic financing on the backs of recent run up of sand stocks

TETRA Technologies 6/16/2016 Repay Debt $63 15% 8.4x (13.8%) 4.8%Issuing equity on heels of significant stock outperformance

Hi-Crush Partners 6/14/2016 Corporate $49 11% 6.6x (9.5%) 2.0%Opportunistic financing on the backs of positive investor sentiment in sand subsector

Tesco 6/8/2016 Corporate $50 15% 33.9x (11.4%) (9.3%)Opportunistic financing after bouncing from February lows

Trican Well Service 6/1/2106 Repay Debt $46 25% 63.5x (8.6%) 22.8%Dilutive equity to repay borrowings under revolving credit facility

Core Laboratories 5/11/2016 Repay Debt $175 3% 2.4x (3.4%) (3.2%)Opportunistic financing helps to shore up balance sheet

Hi-Crush Partners 4/29/2016 Repay Debt $44 16% 15.3x (10.3%) 51.0%Opportunistic financing and enhances liquidity for cash strapped company

Independence Contract Drilling

4/20/2016 Repay Debt $46 54% 573.8x (28.8%) 37.1%Dilutive equity but will provide much needed liquidity

Ensco 4/15/2016 Repay Debt $527 24% 5.1x (12.7%) (8.7%)Capital raised to help company get through lengthy offshore drilling recovery cycle

US Silica 3/16/2016 Acquisition Dry Powder $174 16% 4.2x (3.5%) 62.9%Market speculation that SLCA was going to use proceeds to consolidate assets

Weatherford 3/1/2016 Repay Debt $650 15% 6.8x (8.7%) (8.0%)First OFS Equity offering since Q3'15

Median $72 15% 10.4x (9.1%) 3.4%

Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. © Copyright 2016 Latham & Watkins. All Rights Reserved.

Risks for International Operations

• On 30 August, the European Commission has concluded that Ireland granted undue tax benefits of up to €13 billion to Apple.

• This is, by far, the biggest State aid recovery ever ordered by the Commission.

A New Record

23

• So far, the Commission closed four of the six formal investigations it has launched into tax rulings

• Before Ireland, it decided that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks respectively Individual APAs

• The Commission also adopted a final decision finding that the Belgian measure exempting excess profits constituted State aid and ordered Belgium to recover the aid from the beneficiaries Aid scheme

Tax Rulings State Aid Cases (1)

24

• Two further investigations are expected to be concluded in the near future:

• One opened in October 2014 regarding an advance tax ruling that Amazon had obtained in Luxembourg…

• …and another concerning a tax ruling obtained by McDonald’s in Luxembourg

Tax Rulings State Aid Cases (1)

25

"In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes. Under the EU's state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the Member State were applied in a fair and non-discriminatory way.” Joaquín Almunia

• Great Recession 2008-2012 • Tax shopping competition among EU Member States • Counter aggressive tax planning

Tax Rulings State Aid Cases (1)

26

The Broader Context

STATE AID:

• In June 2013, the European Commission opened investigations under EU State aid rules into the tax ruling practice of six Member States: i.e. Cyprus, Ireland, Luxembourg, Malta, the Netherlands and the UK.

• In December 2014, the Commission also requested information from Belgium and extended its State aid enquiry on tax rulings to all Member States.

• The Commission negative decision of 30 August 2016 (Apple/Ireland) was just the latest outcome of a widespread investigation that covered…MORE THAN 1,000 TAX RULINGS!!

Immediate action because Commission has exclusive competence

TAX HARMONIZATION: • In December 2012, the Commission issued two

formal recommendations: (1) one on aggressive tax planning and (2) the other regarding third countries’ minimum standards of good governance in tax matters.

• In 2016, the Commission also published a Communication on external strategy for effective taxation.

• In January 2016, the Commission adopted the Anti-Tax Avoidance Package, which reflects the OECD’s anti-Base Erosion and Profit Shifting project (“BEPS”) and introduces suggestions for “fairer, simpler and more effective” corporate taxation in the EU.

• A Common Consolidated Tax Base project has been announced for late 2016.

Unanimity of Member States in the European Council after opinion of the European Parliament

27

1. Advantage: Arm’s length principle ➜ prices charged for commercial transactions between various parts of the same group of

companies, in particular for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group do not reflect market reality

➜ Mis-allocation of taxable profit between subsidiaries of a group located in different countries

➜ OECD Guidelines v. EU State aid law concept

2. Selectivity: Not open to all. ➜ comfort letters by tax authorities giving a specific company clarity on how its corporate tax

will be calculated or on the use of special tax provisions

➜ as such are not problematic

➜ but may involve state aid if provide selective advantages to a specific company or group of companies

The State Aid Issues at Stake

28

When is a tax measure not selective?

• General measures: tax measures open to all economic agents operating within a Member State

• Tax measures of a technical nature (e.g., tax rate, depreciation rules, loss carry-over rules, or provisions to prevent double taxation/tax avoidance)

• Measures pursuing general economic policy objectives through a reduction of the tax burden related to the production of goods (e.g., R&D/environmental incentives)

Fiscal State Aid — Selectivity

29

EU orders Apple to pay €13 billion in taxes

Source: European Commission

30

• Apple Sales International (ASI) and Apple Operations Europe (AOE) are two Irish incorporated companies part of a group controlled by Apple Inc. (U.S.)

• The taxable profits of ASI and AOE in Ireland were determined on the basis of individual tax rulings granted by Ireland in 1991 and 2007

• These tax rulings endorsed a split of the profits for tax purposes in Ireland • most profits were internally allocated away from Ireland to a “head office”. • Their «head offices» are located nowhere, therefore not taxed. • Same tax mechanism for ASI and AOE.

• According to the Commission, the tax rulings issued by Ireland endorsed an artificial internal

allocation of profits within ASI and AOE, which has no factual or economic justification.

The Apple Decision

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• Objective of the recovery: remove the distortion of competition created by the aid. There are NO FINES and recovery does not aim at penalising the beneficiary, but only at re-establishing the conditions of competition.

• The Commission has set out in its decision the methodology to calculate the value of the advantage enjoyed by Apple. However, recovery is the responsibility of the Member State that has granted the aid and follows national procedural rules.

• EU procedural rules allow the recovery of the illegal State aid with a 10-year limitation period, starting from the Commission’s first enquiry into the ruling.

• The amount of the aid to be recovered by Ireland would be reduced if other countries (including the U.S.) were to require Apple to pay taxes on the profits recorded in their territories during the recovery period.

The Apple Decision: Recovery of the Aid

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1. Think EU State aid law not only tax planning

2. Understand the notion of what may constitute State aid and its consequences

3. Consider what type of fiscal arrangement you benefit from

4. Analyze its consistency with State aid law

5. In case of doubt, seek State aid legal advice …

6. … and engage as early as possible with the European Commission

7. In case of an investigation, be proactive

8. In case of a negative decision, bring an appeal before the EU courts and engage with

national authorities

9. Continue to monitor where the EC is focused

10. Do not underestimate the impact on your company

10 Precautions

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