Forex Policy for Customer Contracts

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 :
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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 :

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Transfer pricing model Local Income tax rate which impacts profitability at net income level Orange Business Services global hedging policy

OBS 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

OBS 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

OBS Forex Policy - April 2011

Pricing Approach
FX Approach Natural Hedging 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 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 Price Adjustment Clause Provision for Forex Exposure

Multinational Corporations

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

Possible if variable prices are Where fixed prices are required, acceptable. it is not possible to vary FX rates. Rates agreed periodically. FX risk provision is required Billing converted at agreed rates

Other International Business (Small and Medium Business)

Natural hedging may be possible but unlikely due to central billing. Natural hedging to be used Not recommended as it where possible. consumes internal resource Price books need to be set correctly at start Usually achieved except for ERS. For ERS or other Costs without ERS should where possible be Natural Hedging, Clause to be sold in the same currency as negociated when possible purchased Most appropriate solution Solution to be avoided

Valid solution

Local Business

or Provisions to be applied

OBS Forex Policy - April 2011

Billing Approach
Local 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)

OBS 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 1 euro = X loc 1 1.4 0.85 1.28 2.3 1.37 1.37 9 60 110 1500 40 1.75 9.8 1 loc = X euro 1 0.7143 1.1765 0.7813 0.4348 0.7299 0.7299 0.1111 0.0167 0.0091 0.0007 0.0250 0.5714 0.1020

MAJOR CURRENCIES United States United Kingdom Switzerland Brazil Australia Canada China People's Rep. India Japan Korea (South) Russia Singapore OBS Forex Policy - April 2011 South Africa EURO US Dollar Pound Sterling Swiss Franc Brazilian Real Australian Dollar Canadian Dollar Yuan Renminbi Indian Rupee Yen Won Russian Ruble Singapore Dollar Rand EUR USD GBP CHF BRL AUD CAD CNY INR JPY KRW RUB SGD ZAR

Appendices

OBS Forex Policy - April 2011

Europe Reference Currencies

Iceland

Sweden Finland Russian Norway Federation Estonia

EUR
Denmark

Latvia United Kingdom Rep. Of Ireland Lithuania

GBP CHF RUB USD

Belarus Netherlands Belgium Lux. Germany Czech republic Slovakia Austria Hungary Romania Ukraine Kazakhstan Moldova Poland

France

Switz. Italy

Slovenia Croatia Bosnia

Serbia Bulgaria Georgia Azerbaijan Armenia Turkey Turkmenistan Uzbekistan

Andorra Spain Portugal

Montenegro

Macedonia Albania Greece

Cyprus Tunisia

Syria Lebanon Israel Iraq Jordan Iran Afghanistan

OBS Forex Policy - April 2011 Morocco

Algeria Libya

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Egypt

Africa Reference Currencies

EUR USD ZAR

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Americas Reference Currencies

EUR USD CAD BRL

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Asia Reference Currencies

EUR AUD SGD RUB USD INR JPY KRW CNY

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2 currency zone model

EUR USD

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Pricing and Billing :

Pricing currency to be proposed depending on the Cost currency Billing currency to be proposed depending on the country where we will bill

Cost

Price

Invoice

Payment

Cost Currency

Price Currency

Billing Currency

Payment Currency

Unit Cost in Cost Currency

Price adjustme nt Clause

Billing Clause

Reduction of payment terms

NB : Negotiation currency can be different from each price currency

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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

EUR 8% 8%

USD 8% 8%

EUR USD GBP

CHF
RUB CAD BRL AUD SGD INR CNY JPY KRW ZAR

4%
8% 8% 8% 8% 8% 8% 8% 8% 8% 8%

8%
8% 4% 4% 8% 4% 8% 4% 8% 8% 8%

Provision rates will be reviewed on an annual basis

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OBS 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:
Value end of February 2011 (including provisions)
Countries VAT receivables in M 41,0 6,5 10,8 2,9 2,3 1,7 65,2 VAT Rate% Recommendation for new contract with customer's agreement Recommendation for WebALC

Brazil Argentina Italy Turkey Greece India TOTAL

17% to 30% depending of the state 21% 20% 18% 19% 13%

Biling of Regional Services Biling of Local services only Billing of Global Services Billing of regional services in USD Billing of Global Services Biling of Regional Services

VAT already included in WebALC VAT already included in WebALC

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.

OBS Forex Policy - April 2011

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