1022-00008 · Northgate Telecommunications PLC · Negotiation & Drafting

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 30th Floor New York, NY 10022

INTERNAL MEMORANDUM

TO: Colette Whitman, Partner, Bankruptcy & Restructuring Group Christy Bauer, Lead Associate, intellectual Property Group

FROM: Garrett Simmons, Working Associate, Tax Group

DATE: April 28, 2023

RE: Tax Structuring Analysis — Northgate Americas, Inc. / Cedarpoint Systems Integration, Inc. Master Services Agreement

MATTER NO.: 1022-00008

This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation or in connection with the rendering of legal advice. It is not intended for distribution outside of Calderwood & Harkness LLP and the client without prior authorization. Any disclosure, copying, or distribution of this memorandum, or the taking of any action based on its contents, by anyone other than the intended recipients is strictly prohibited.

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I. Executive Summary

This memorandum analyzes the federal, state, and cross-border tax implications arising from the proposed Master Services Agreement (the "MSA") between Northgate Americas, Inc. ("NAI" or "Northgate Americas"), EIN 84-3291067, a Delaware corporation and wholly owned subsidiary of Northgate Telecommunications PLC ("NTP" or the "UK Parent"), a public limited company listed on the London Stock Exchange (ticker: NTP.L), and Cedarpoint Systems Integration, Inc. ("Cedarpoint" or "CSI"), EIN 52-4178503, a Delaware corporation headquartered in Reston, Virginia. The MSA, which is currently being negotiated and is targeted for execution on or around June 9, 2023, contemplates a total contract value ("TCV") of $75,000,000 over a five-year initial term, corresponding to an annual contract value ("ACV") of $15,000,000 ($1,250,000 per month).

The purpose of this memorandum is to address four principal tax areas that are implicated by the proposed transaction structure and to provide recommendations for the contractual tax provisions that should be incorporated into the second draft of the MSA:

1. State Sales and Use Tax Treatment. The MSA involves service delivery across 340 managed nodes in 28 U.S. states, requiring a careful analysis of the sales and use tax classification of each of the three fee components — managed network services ($10,500,000/yr, representing 70% of ACV), the ArcMesh platform license and maintenance ($3,000,000/yr, representing 20% of ACV), and professional services ($1,500,000/yr, representing 10% of ACV) — under each state's tax regime.

2. Canadian GST/HST Implications. Cedarpoint operates a secondary Network Operations Center ("NOC") in Winnipeg, Manitoba, Canada, from which certain monitoring and managed network services will be delivered. Northgate Americas also maintains managed nodes in three Canadian provinces, necessitating an analysis of Canadian federal Goods and Services Tax ("GST"), Harmonized Sales Tax ("HST"), and provincial sales tax ("PST") obligations.

3. Transfer Pricing Considerations. Although the primary payment flow under the MSA is between two unrelated U.S. entities (NAI to CSI), transfer pricing issues arise indirectly because Northgate Americas may seek to allocate or recover a portion of the $15,000,000 annual MSA costs upstream to the UK Parent through intercompany management fees, cost-sharing arrangements, or service fee allocations. Any such intercompany charges must comply with arm's-length standards under IRC Section 482 and the OECD Transfer Pricing Guidelines.

4. U.S. Withholding Tax Obligations. To the extent Northgate Americas makes upstream payments to its UK Parent that are characterized as service fees, royalties, interest, or dividends, U.S. withholding tax obligations under IRC Sections 1441–1442 may apply, subject to reduction or elimination under the United States–United Kingdom Income Tax Treaty (the "Treaty" or "Convention").

Based on the analysis set forth in this memorandum, the principal recommendations are as follows:

• The MSA should include comprehensive tax provisions covering gross-up obligations, tax cooperation, tax indemnification, and detailed invoicing mechanics. These provisions are described in Section VII of this memorandum and should be incorporated into the second draft MSA targeted for circulation on May 5, 2023.

• The fee breakdown among the three service categories (managed network services, ArcMesh platform license and maintenance, and professional services) must be maintained on all invoices and in all payment records. This separation is critical for state sales and use tax optimization, as the taxability of each component varies significantly from state to state.

• The Canadian NOC service delivery must be addressed through appropriate GST/HST/PST provisions in the MSA. Cedarpoint should confirm its GST/HST registration status with the Canada Revenue Agency, and the parties should agree on a fee allocation methodology for Canadian-sourced services.

• Northgate Americas should prepare or update its transfer pricing documentation (master file and local file) to reflect the MSA cost flows and any intercompany allocations to the UK Parent. Contemporaneous documentation is essential to defend the arm's-length nature of any upstream charges.

• Northgate Americas should obtain a current IRS Form W-8BEN-E from Northgate Telecommunications PLC prior to the MSA services commencement date of June 9, 2023, and should update the form at least every three years, to ensure compliance with U.S. withholding and reporting obligations for any FDAP payments to the UK Parent.

Each of these topics is addressed in detail in the sections that follow.

II. Background and Transaction Structure

A. Parties and Corporate Structure

The MSA involves two contracting parties — Northgate Americas, Inc. (as the customer and recipient of services) and Cedarpoint Systems Integration, Inc. (as the service provider) — with the ultimate corporate parent of the customer, Northgate Telecommunications PLC, playing an indirect but significant role in the tax structuring analysis due to the intercompany and cross-border payment flows that are implicated by the transaction.

Northgate Telecommunications PLC. NTP is a United Kingdom–headquartered public limited company incorporated under the laws of England and Wales. NTP is listed on the London Stock Exchange under the ticker symbol NTP.L and maintains its principal offices at 45 Threadneedle Court, London EC2R 8AH, United Kingdom. For fiscal year 2022, NTP reported consolidated revenues of approximately £6.8 billion and employed approximately 22,000 individuals across 14 countries. NTP is a global telecommunications provider offering enterprise networking, managed connectivity, and cloud infrastructure services to multinational corporations. NTP's North American operations are conducted principally through its wholly owned U.S. subsidiary, Northgate Americas, Inc.

Northgate Americas, Inc. NAI is a Delaware corporation and wholly owned subsidiary of NTP. NAI maintains its principal office at 1700 Market Street, Suite 2400, Philadelphia, Pennsylvania 19103, with its registered office in Delaware at c/o Calvert Corporate Services, Inc., 1209 Orange Street, Wilmington, Delaware 19801. NAI's Employer Identification Number is 84-3291067. NAI serves as NTP's U.S. contracting entity for the MSA and is the entity through which NTP's North American managed network operations, enterprise sales, and customer support functions are conducted. Warren Liang serves as President of NAI. NAI files a separate U.S. federal income tax return (IRS Form 1120) as a domestic corporation and is subject to U.S. federal, state, and local income taxation on its worldwide income.

Cedarpoint Systems Integration, Inc. CSI is a Delaware corporation headquartered at 11400 Commerce Park Drive, Suite 600, Reston, Virginia 20191. CSI's Employer Identification Number is 52-4178503. For fiscal year 2022, CSI reported revenues of approximately $420 million and employed approximately 1,800 individuals. Rajiv Sundaram serves as Chief Executive Officer. CSI is majority-owned (approximately 62%) by Ridgeline Capital Partners, LP, a Delaware limited partnership based in Greenwich, Connecticut. CSI is a leading provider of managed network services, systems integration, and proprietary network management software (including its ArcMesh platform) to enterprise customers in the telecommunications, financial services, and healthcare sectors.

Cedarpoint Winnipeg NOC. In addition to its primary U.S. operations center in Reston, Virginia, Cedarpoint operates a secondary Network Operations Center at 200 Portage Avenue, Suite 1500, Winnipeg, Manitoba R3C 3X2, Canada. The Winnipeg NOC provides 24×7 monitoring and managed network operations services on a shared basis for Cedarpoint's North American customer base. As discussed in Section IV below, the Winnipeg NOC's involvement in the delivery of services to Northgate Americas has significant implications for Canadian GST/HST and provincial sales tax analysis.

B. Fee Structure and Payment Flows

The MSA contemplates a total contract value of $75,000,000 over a five-year initial term commencing June 9, 2023 and expiring June 8, 2028, with two automatic two-year renewal periods unless either party provides written notice of non-renewal at least 180 days prior to the expiration of the then-current term. The annual contract value is $15,000,000, payable in equal monthly installments of $1,250,000.

The total contract value is comprised of three distinct fee components, each of which requires separate tax treatment analysis under federal, state, and cross-border tax regimes:

Managed Network Services ($10,500,000/yr — 70% of ACV). This component encompasses the ongoing operations, monitoring, fault management, capacity management, and network operations center services provided by Cedarpoint across NAI's 340 managed nodes in 28 U.S. states and 3 Canadian provinces. Monitoring is performed on a 24×7 basis from both the Reston, Virginia facility and the Winnipeg, Manitoba NOC. This component includes NOC staffing, network event correlation, incident response, change management, and performance reporting.

ArcMesh Platform License and Maintenance ($3,000,000/yr — 20% of ACV). This component covers the license to use Cedarpoint's proprietary ArcMesh network management and orchestration platform (version 4.2), as well as ongoing maintenance, patches, updates, and upgrades to the platform during the term of the MSA. The classification of this component — whether as a license of prewritten (canned) software, a software-as-a-service ("SaaS") subscription, or a combination thereof — is critical for state sales and use tax purposes, as discussed in Section III.C below.

Professional Services ($1,500,000/yr — 10% of ACV). This component covers implementation, migration, optimization, and consulting services provided by Cedarpoint's professional services team in connection with the transition from Northgate Americas' legacy MPLS provider, Greystone Halcyon Software, to the Cedarpoint managed network platform. The migration is planned to occur in three phases over approximately 18 months, with ongoing optimization services continuing for the remainder of the initial term.

In addition to the three fee components described above, the MSA provides for annual wind-down escrow deposits of $750,000 per year, to be deposited by Northgate Americas into an escrow account at Dravello National Bank (escrow account number FNB-ESC-2023-07742), with an aggregate cap of $3,750,000. These deposits are intended to fund transition and wind-down services in the event of MSA termination or non-renewal and are characterized as refundable security deposits. The tax treatment of these escrow deposits is discussed in Sections III.G and VII.F below.

Payment Direction. The primary payment flow under the MSA is from Northgate Americas to Cedarpoint, representing a domestic U.S.-to-U.S. payment between two unrelated entities. However, as discussed in Sections V and VI below, potential upstream payment flows from Northgate Americas to Northgate Telecommunications PLC (U.S.-to-UK) may arise in the form of management fees, cost-sharing contributions, or dividend distributions that incorporate or reflect MSA costs. These upstream flows implicate transfer pricing considerations under IRC Section 482 and U.S. withholding tax obligations under IRC Sections 1441–1442, subject to any applicable Treaty reductions.

Service Delivery Geography. Services under the MSA will be delivered across 340 managed nodes located in 28 U.S. states and 3 Canadian provinces. The specific state and provincial locations are set forth in Schedule 1 (Node Locations) to the MSA, a complete copy of which has not yet been finalized. The migration from the legacy MPLS provider, Greystone Halcyon Software, will proceed in three phases over 18 months, beginning with Phase 1 on the MSA commencement date.

III. State Sales and Use Tax Analysis

A. General Framework

The delivery of services across 340 managed nodes in 28 U.S. states creates significant multi-state sales and use tax considerations that must be addressed both contractually (in the MSA) and operationally (through proper invoicing, collection, and remittance procedures). The complexity of this analysis arises from the fact that each state's sales and use tax regime independently classifies and taxes (or exempts) the three fee components of the MSA — managed network services, software licensing and maintenance, and professional services — according to its own statutory definitions, administrative rulings, and judicial interpretations.

Nexus. As a threshold matter, Cedarpoint, as the service provider, likely has physical or economic nexus in many or all of the 28 states in which Northgate Americas maintains managed nodes. Cedarpoint's service delivery activities — including the deployment of on-site personnel for implementation and migration (Phase 1 through Phase 3), remote monitoring from both the Reston, Virginia and Winnipeg, Manitoba NOC facilities, and the licensing of ArcMesh software that may be installed or accessed at NAI's node locations — are sufficient to establish nexus for sales and use tax collection purposes in most states under current law. Furthermore, following the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), many states have adopted economic nexus thresholds based on revenue or transaction volume that Cedarpoint likely exceeds in the relevant states given the scale of the MSA.

Northgate Americas, as the customer, has physical presence (managed nodes) in all 28 states, which independently creates nexus for use tax self-assessment purposes. In states where Cedarpoint does not collect sales tax — whether due to exemption claims, classification disputes, or nexus uncertainty — Northgate Americas may have a complementary obligation to self-assess and remit use tax on the taxable portion of the services and licenses received.

Classification. The central analytical task is to classify each fee component under each state's sales and use tax regime. The three components present distinct classification profiles:

(i) Managed network services ($10,500,000/yr) — generally characterized as a service, but may be classified as telecommunications services, managed IT services, data processing services, or information services depending on the applicable state's statutory definitions.

(ii) ArcMesh platform license and maintenance ($3,000,000/yr) — may be classified as prewritten (canned) software, SaaS, or a combination thereof, depending on the delivery method (cloud-hosted vs. on-premise installation); the maintenance component may be separately classified as a service or as part of the software license.

(iii) Professional services ($1,500,000/yr) — generally characterized as consulting, implementation, or technology services, which are exempt from sales tax in most states but subject to tax in certain states that broadly tax information technology, computer, or data processing services.

Given the 28-state scope of the MSA, a comprehensive state-by-state taxability analysis is required. This memorandum provides a general framework for that analysis, with state-specific determinations to follow once a complete list of node locations (Schedule 1) is obtained from Northgate Americas. The subsections below address each fee component in turn.

B. Managed Network Services ($10,500,000/yr)

The managed network services component represents the largest share of the MSA's annual contract value at 70% ($10,500,000/yr) and will be the most significant line item from a sales tax perspective. This component encompasses a range of activities — including 24×7 NOC monitoring, fault management, capacity management, network event correlation, incident response, change management, and performance reporting — that different states may classify under different taxable or exempt categories.

Telecommunications Services. Many states impose sales or excise taxes on telecommunications services broadly defined, encompassing not only traditional voice and data transmission services but also ancillary services such as monitoring, management, and network operations. States that impose broad telecommunications services taxes may capture NOC monitoring and network management activities within their scope. For example, states such as New York, Texas, Florida, Ohio, and Pennsylvania impose sales tax on various categories of telecommunications and ancillary services, though the precise scope of taxability varies by state.

Data Processing and Information Services. Some states separately classify and tax data processing services or information services. Network monitoring, event correlation, and performance reporting activities under the MSA may fall within these categories in certain states. For example, Texas taxes data processing services (Tex. Tax Code § 151.0035), while New York taxes information services (N.Y. Tax Law § 1105(c)(1)). The classification of managed network services as "data processing" versus "telecommunications" versus a non-taxable "service" can significantly affect the applicable tax rate and the availability of exemptions.

Managed IT Services / Computer Services. A growing number of states have addressed the taxability of managed IT services or computer services through specific statutory provisions or administrative rulings. In some states, managed services that involve the use of computer software or hardware to monitor and manage a customer's network infrastructure may be treated as taxable computer services, while in other states they may be treated as non-taxable professional or consulting services.

Recommendation. Cedarpoint, as the service provider, should be contractually responsible for properly collecting and remitting applicable state sales and use taxes on the managed network services component. All invoices should separately state the managed network services fees and any applicable state sales or use taxes. To the extent that Cedarpoint takes the position that managed network services are not taxable in a particular state, that position should be documented and communicated to Northgate Americas so that NAI can assess its complementary use tax obligations.

We recommend that a detailed state-by-state taxability matrix be prepared once the complete list of 28 states is confirmed through Schedule 1 to the MSA. This matrix should identify, for each state: (a) the applicable statutory classification of managed network services; (b) the applicable tax rate; (c) any available exemptions (including telecommunications resale exemptions, if applicable); and (d) any relevant administrative rulings or letter rulings that provide guidance on the taxability of comparable services.

C. ArcMesh Platform License and Maintenance ($3,000,000/yr)

The ArcMesh platform license and maintenance component requires the most nuanced sales tax analysis of the three MSA fee components, because the tax treatment of software licensing and maintenance varies dramatically across states and depends critically on the method of delivery (on-premise installation versus cloud-hosted/SaaS access) and the characterization of the maintenance component (bundled versus separately stated).

Software Classification. ArcMesh v4.2 is Cedarpoint's proprietary network management and orchestration platform. It is classified as prewritten (canned) software, as it is developed and marketed to multiple customers and is not custom-developed for Northgate Americas. The tax treatment of prewritten software varies by state as follows:

On-Premise Installation. If ArcMesh is installed on servers or hardware located at Northgate Americas' node locations, the vast majority of states treat prewritten software delivered in tangible or electronic form as taxable tangible personal property (or a taxable sale of a digital product). This treatment is nearly universal and would result in sales tax applicability in most or all of the 28 states in which NAI has managed nodes.

Cloud-Hosted / SaaS Delivery. If ArcMesh is accessed remotely by Northgate Americas through a cloud-hosted or SaaS delivery model — meaning that the software resides on Cedarpoint's servers and is accessed by NAI users over the internet without installation on NAI's hardware — the tax treatment is more variable and evolving. A growing number of states, including New York, Texas, Pennsylvania, Connecticut, Ohio, and others, have enacted legislation or issued administrative guidance treating SaaS as taxable. However, many states continue to exempt SaaS transactions from sales tax, particularly where the customer does not receive a transfer of possession or control of the software.

Hybrid Delivery. It is possible that ArcMesh is delivered through a hybrid model in which certain components are installed locally at node locations while other components (such as the orchestration and management dashboard) are accessed remotely via the cloud. In such cases, the tax treatment may differ by component, and the allocation of the license fee between on-premise and cloud-hosted elements may affect the overall tax liability.

We recommend that Christy Bauer and the intellectual Property Group confirm the precise delivery method for ArcMesh v4.2 with Cedarpoint's technical team, as this determination will drive the state-by-state sales tax classification. If ArcMesh is delivered as SaaS, the analysis must address the expanding patchwork of state SaaS taxation rules, which continue to evolve and may change during the five-year initial term of the MSA.

Maintenance Component. The ArcMesh license fee of $3,000,000/yr includes both the license to use the platform and ongoing maintenance (patches, updates, and upgrades). From a sales tax perspective, it is critical to separately state and separately price the license and maintenance components on all invoices. The reasons are as follows:

• In many states, software maintenance agreements that include updates and upgrades are treated as taxable if bundled with the software license but may be exempt (or subject to a reduced rate) if separately stated and separately priced. For example, several states distinguish between "mandatory" maintenance (required as a condition of the license, and therefore treated as part of the taxable software transaction) and "optional" maintenance (separately contracted and potentially exempt).

• In states that exempt SaaS but tax prewritten software, or vice versa, the separate statement of the maintenance component can affect whether the maintenance fees are "pulled" into the taxable or exempt classification of the underlying software transaction.

• For audit defensibility purposes, separate line-item invoicing creates a clear documentary record of the distinct components and allows the parties to take consistent positions on the applicable tax treatment of each component.

Recommendation. The $3,000,000/yr ArcMesh fee should be clearly broken out on all invoices between the license fee ($X) and the maintenance fee ($Y), with the specific allocation to be determined in consultation with Cedarpoint's pricing team and incorporated into Exhibit C (Pricing Schedule) of the MSA. This separation is essential for optimizing tax treatment in states that exempt one component but not the other. Furthermore, the MSA should clearly characterize the maintenance component as a separately priced, optional service, to the extent commercially feasible, to maximize the availability of maintenance-specific exemptions.

D. Professional Services ($1,500,000/yr)

The professional services component encompasses implementation, migration, and optimization consulting services provided by Cedarpoint in connection with the transition from Northgate Americas' legacy MPLS provider, Greystone Halcyon Software, to the Cedarpoint managed network platform. These services include network architecture design, migration planning and execution, configuration and testing, and ongoing performance optimization.

General Rule. The majority of U.S. states do not impose sales tax on professional, consulting, or personal services. This general rule reflects the historical limitation of state sales taxes to the sale of tangible personal property, with service taxation representing a more recent and still incomplete expansion of the sales tax base. Accordingly, the professional services component of the MSA is likely exempt from sales tax in the majority of the 28 states in which NAI has managed nodes.

Notable Exceptions. However, several important exceptions exist. Certain states impose sales tax on information technology services, computer services, or data processing services that may encompass the implementation, migration, and optimization consulting described in the MSA. For example:

• States that tax "computer services" or "computer consulting" may capture network migration and optimization activities within the scope of the tax.

• States that tax "data processing services" may argue that migration and optimization services involve the manipulation of data or the reconfiguration of data networks and therefore fall within the taxable definition.

• States that tax "information services" may similarly characterize network architecture consulting as a taxable information service.

Bundling Risk. A particularly important risk is that professional services related to software implementation may be recharacterized as part of the software sale in states that follow "true object" or "bundling" tests. If the professional services are not separately stated and separately priced from the ArcMesh platform license, certain states may treat the combined charge as a single taxable transaction, with the professional services fees pulled into the taxable software classification. This risk is heightened where the professional services are performed primarily to configure, customize, or implement the ArcMesh platform.

Recommendation. We recommend the following measures to preserve the non-taxable characterization of the professional services component:

1. The MSA should clearly distinguish professional services from the ArcMesh platform license in both the body of the agreement and the pricing exhibits. Professional services should be described in separate statements of work ("SOWs") that are independent from the ArcMesh license grant.

2. Invoices should separately state professional services fees from ArcMesh license and maintenance fees, with no bundling or cross-referencing that would suggest the professional services are an inseparable component of the software transaction.

3. The professional services SOWs should describe the services in terms of consulting, advisory, and implementation assistance rather than in terms of software customization, development, or modification, to the extent consistent with the actual scope of services performed.

4. To the extent professional services are performed at specific node locations in specific states, the invoices should identify the location at which the services were performed, as this may affect the situs of the taxable event and the applicability of state-specific exemptions.

E. Use Tax Exposure for Northgate Americas

In states where Cedarpoint does not collect sales tax — whether because the relevant fee component is classified as exempt, because Cedarpoint lacks nexus (unlikely given the analysis above), or because of a good-faith classification dispute — Northgate Americas may have a complementary use tax obligation. Use tax is a self-assessed tax imposed on the purchaser or user of taxable property or services when sales tax has not been collected by the vendor. The use tax rate is generally the same as the applicable sales tax rate.

Northgate Americas should implement internal use tax accrual procedures to ensure that use tax is properly assessed and remitted on any MSA payments for which Cedarpoint does not collect sales tax. These procedures should include:

• A monthly review of Cedarpoint invoices to identify any line items on which sales tax was not collected.

• A determination, for each such line item, of whether the underlying service or license is subject to use tax in the state where the service was received or the software was used.

• Accrual and remittance of use tax on the applicable portion of the payment, based on the tax rate in effect in the relevant state.

• Maintenance of records documenting the use tax analysis, including the basis for any determination that a particular payment is not subject to use tax.

Northgate Americas' independent auditors at Dunmore & Pratt LLP, and specifically Helen Treadway (lead audit partner), should be notified of the MSA structure and the multi-state tax exposure so that proper accruals can be reflected in NAI's financial statements. This notification is particularly important given the materiality of the MSA — $15,000,000 per year, with potential sales and use tax exposure across 28 states — and the potential for state tax authorities to assess use tax deficiencies in connection with routine audits.

F. Exemption Certificates and Documentation

Northgate Americas may qualify for sales tax exemptions in certain states based on the nature of its business and the use of the services received under the MSA. In particular:

• Resale Exemptions. If Northgate Americas uses the managed network services, ArcMesh platform, or professional services in the provision of telecommunications services that it resells to its own customers, NAI may qualify for a resale exemption in states that recognize such exemptions for telecommunications or IT services. This analysis depends on the extent to which NAI is itself a provider of taxable services that incorporate the Cedarpoint inputs as an integral component.

• Telecommunications Exemptions. Certain states provide specific exemptions for property or services purchased by telecommunications companies for use in providing telecommunications services to the public. NAI's status as a subsidiary of a major telecommunications company (NTP) may support a claim for such exemptions, depending on the scope of NAI's regulated telecommunications activities in each state.

Recommendation. We recommend that Northgate Americas compile and deliver to Cedarpoint applicable multi-state exemption certificates prior to the commencement of services under the MSA. These certificates may include Streamlined Sales and Use Tax Agreement ("SSUTA") exemption certificates (for states that are members of the Streamlined Sales Tax program), state-specific exemption forms, and any other documentation required by the applicable state to substantiate an exemption claim. The MSA should include a cooperation clause requiring both parties to provide necessary tax documentation, exemption certificates, and information on a timely basis, as further discussed in Section VII.B below.

Northgate Americas' VP of Procurement, North America (Deirdre Kwan) and VP of Network Operations (Katrina Bosch) should be consulted to determine whether NAI has existing sales tax exemption certificates on file for its node locations and whether additional certificates need to be obtained or updated in connection with the MSA.

G. Escrow Deposits — Sales Tax Treatment

The MSA provides for annual wind-down escrow deposits of $750,000 per year, to be deposited by Northgate Americas into escrow account FNB-ESC-2023-07742 at Dravello National Bank, with an aggregate cap of $3,750,000. These deposits are intended to fund transition and wind-down services in the event of MSA termination or non-renewal.

Tax Treatment. The annual escrow deposits should not be treated as taxable consideration for services at the time of deposit. Under the general principles applicable in most states, sales tax is imposed on the sale or furnishing of taxable services, with the tax measured by the total consideration paid for the services. A refundable security deposit, however, is not consideration for services — it is a contingent payment that is returned to the depositor if the contingency (in this case, termination or non-renewal) does not occur or if the deposit is not drawn upon. So long as the escrow deposits are properly characterized as refundable, contingent security deposits rather than prepaid service fees, they should not be subject to sales tax at the time of deposit.

However, if the escrow deposits are ultimately applied to transition or wind-down services upon termination of the MSA, the amount so applied would constitute taxable consideration for services at the time of application. Sales tax would be due on the applied amount at the rate in effect in the state(s) where the transition services are performed.

Recommendation. The MSA and the accompanying escrow agreement with Dravello National Bank should clearly characterize the annual $750,000 deposits as contingent, refundable security deposits rather than prepaid service fees. Specific language should be included to the effect that: (a) the deposits remain the property of Northgate Americas until applied to transition services in accordance with the terms of the escrow agreement; (b) any unused deposits are refundable to Northgate Americas upon the expiration or termination of the MSA (or upon completion of transition services, if less than the deposited amount is required); and (c) the deposits are not consideration for services and are not subject to sales tax at the time of deposit. This characterization should be consistent across the MSA, the escrow agreement, and the invoicing records.

IV. Canadian GST/HST Analysis

A. Cedarpoint's Winnipeg NOC and Cross-Border Services

As noted in Section II.A above, Cedarpoint operates a secondary Network Operations Center at 200 Portage Avenue, Suite 1500, Winnipeg, Manitoba R3C 3X2, Canada. The Winnipeg NOC provides 24×7 monitoring and managed network operations services alongside the primary Reston, Virginia facility. According to the preliminary MSA specifications, the Winnipeg NOC handles a material portion of the overnight and weekend monitoring for North American nodes, as well as certain overflow capacity during peak event periods.

In addition to the service delivery from the Winnipeg NOC, Northgate Americas maintains managed nodes in three Canadian provinces (the specific provinces are to be confirmed from Schedule 1 — Node Locations to the MSA, which has not yet been finalized). The combination of Canadian-based service delivery (from the Winnipeg NOC) and Canadian-located service recipients (NAI's managed nodes) creates Canadian indirect tax obligations that must be addressed in the MSA.

B. GST/HST Registration and Collection

Canada imposes a federal Goods and Services Tax ("GST") at a rate of 5% on most taxable supplies of goods and services made in Canada. In certain provinces, the federal GST has been harmonized with the provincial sales tax to form the Harmonized Sales Tax ("HST"), which combines the federal and provincial components into a single tax. In non-harmonized provinces, the federal GST and the provincial retail sales tax ("PST") apply separately.

Registration Requirements. If Cedarpoint is providing taxable supplies in Canada — including IT services, SaaS, and monitoring services delivered from the Winnipeg NOC — and exceeds the small-supplier threshold of $30,000 in annual taxable supplies in Canada, Cedarpoint is required to register for GST/HST purposes with the Canada Revenue Agency ("CRA"). Given the overall scale of Cedarpoint's Canadian operations (the Winnipeg NOC employs staff and generates revenue from Canadian-sourced services to multiple customers), it is highly likely that Cedarpoint exceeds the small-supplier threshold and is either already registered or is required to register.

Applicable Rates. The applicable GST/HST rates depend on the province in which the taxable supply is made:

Note: The specific Canadian provinces in which NAI has managed nodes have not yet been confirmed. The table above includes provinces that are commonly relevant for telecommunications and managed services operations in Canada. Once Schedule 1 is finalized, the applicable rates can be confirmed.

Manitoba Considerations. For Manitoba specifically — where Cedarpoint's Winnipeg NOC is located — the province is not an HST-harmonized province. Instead, Manitoba imposes a provincial retail sales tax ("RST") at a rate of 7% on certain taxable services, in addition to the federal GST at 5%. The combined effective rate is 12%. The Manitoba RST applies to a broad range of services, including telecommunications services and certain computer and data processing services. Cedarpoint should confirm whether its Winnipeg NOC operations trigger Manitoba RST registration and collection obligations in addition to federal GST obligations.

C. Place of Supply Rules

The determination of which province's tax applies to a particular supply — known as the "place of supply" analysis — is governed by the Place of Supply (GST/HST) Regulations and related provisions of the Excise Tax Act (Canada). The rules vary depending on the type of supply:

Services Generally. For services, the place of supply for GST/HST purposes is generally determined based on where the service is performed or where the recipient is located, depending on the nature of the service. For services that are performed primarily in a single province, the place of supply is the province where the service is performed. For services performed in multiple provinces, the place of supply is generally the province with the greatest proportion of the service performance.

Electronic Services and SaaS. For electronic services and SaaS supplied to Canadian recipients, the supply is generally taxable based on the Canadian address of the recipient. If the recipient (Northgate Americas) has multiple addresses in Canada (i.e., managed node locations in multiple provinces), the place of supply may be determined based on the address most closely connected with the supply or, in some cases, allocated among provinces.

Monitoring Services. The managed network monitoring services present a mixed place of supply analysis. The monitoring services are rendered from the Winnipeg NOC (located in Manitoba) but are delivered to managed nodes potentially located in multiple Canadian provinces. The place of supply could arguably be Manitoba (where the service is performed) or the province where the monitored node is located (where the service is consumed). The applicable analysis depends on the specific characterization of the monitoring services under the Place of Supply Regulations and on whether the services are more properly classified as services performed in a particular location or as services supplied to a recipient at a particular location.

Recommended Allocation Methodology. We recommend that a portion of the managed network services fee and ArcMesh license fee be allocated to Canadian operations based on a reasonable allocation methodology. The most straightforward methodology would be a node-based allocation: the ratio of Canadian managed nodes to total managed nodes (Canadian nodes / 340 total nodes) would be applied to the applicable fee components to determine the Canadian-sourced portion subject to GST/HST/PST. This allocation would then be further divided among Canadian provinces based on the location of the Canadian nodes.

For example, if Northgate Americas has 15 managed nodes in Canada out of 340 total nodes (approximately 4.4%), the Canadian-allocated portion of the managed network services fee would be approximately $462,000/yr ($10,500,000 × 15/340), and the Canadian-allocated portion of the ArcMesh license fee would be approximately $132,000/yr ($3,000,000 × 15/340). These amounts would then be subject to the applicable GST/HST/PST rates based on the province in which each Canadian node is located.

D. Input Tax Credits

If Cedarpoint incurs GST/HST on inputs at the Winnipeg NOC — including lease payments, utilities, equipment purchases, and other operating expenses — it may claim input tax credits ("ITCs") to recover the GST/HST paid on those inputs, thereby reducing the net Canadian tax cost associated with its Canadian operations. ITCs are available to the extent the inputs are used in the course of making taxable supplies.

Similarly, Northgate Americas (or its Canadian affiliate, if one exists) may be eligible for ITCs on GST/HST paid on the services and licenses received from Cedarpoint, to the extent those services are used in the course of NAI's own taxable commercial activities in Canada. If NAI uses the managed network services and ArcMesh platform in connection with its own telecommunications service offerings to Canadian customers, the ITCs could offset a significant portion of the GST/HST cost.

The availability of ITCs depends on the nature of NAI's Canadian operations and whether NAI (or a Canadian Northgate affiliate) is registered for GST/HST purposes. This should be confirmed with NAI's tax department and with Dunmore & Pratt LLP.

E. Contractual Recommendations — Canadian Tax

Based on the foregoing analysis, we recommend the following contractual provisions to address Canadian indirect taxes:

1. The MSA should include a provision addressing Canadian indirect taxes (GST/HST/PST) separately from U.S. state sales and use taxes. The provision should acknowledge that a portion of the managed network services and ArcMesh platform license may be subject to Canadian taxes and should allocate responsibility for collection and remittance.

2. Cedarpoint should be contractually responsible for proper GST/HST registration with the CRA, collection of applicable GST/HST/PST on the Canadian-sourced portion of the services, and remittance to the CRA and applicable provincial tax authorities.

3. The fee allocation methodology between U.S. and Canadian services should be defined in the MSA or the pricing schedule (Exhibit C). We recommend the node-based allocation methodology described in Section IV.C above, unless a more precise methodology is warranted based on the actual service delivery model.

4. Cedarpoint invoices for Canadian-sourced services should include Cedarpoint's GST/HST registration number, the applicable GST/HST/PST rates, and the Canadian dollar equivalent of the allocated fees (if invoiced in U.S. dollars).

5. The MSA should require Cedarpoint to notify Northgate Americas promptly of any changes in its GST/HST registration status, any Canadian tax audits or assessments related to the MSA, and any changes in Canadian tax law that materially affect the tax treatment of the services.

V. Transfer Pricing Considerations

A. Overview of the Issue

Northgate Americas, Inc. (EIN 84-3291067) is a wholly owned subsidiary of Northgate Telecommunications PLC, a UK-headquartered multinational corporation. The primary payment flow under the MSA — from Northgate Americas to Cedarpoint — is a transaction between two unrelated U.S. entities at a negotiated arm's-length price. As such, the direct MSA payment flow does not raise transfer pricing concerns.

However, transfer pricing issues arise indirectly in connection with the intercompany cost allocation between Northgate Americas and its UK Parent. Specifically, NAI may seek to recover or allocate a portion of the $15,000,000 annual MSA costs upstream to NTP through one or more intercompany charging mechanisms, including:

• Management fees. NAI may charge NTP a management fee that includes an allocation of third-party costs incurred by NAI on behalf of the NTP group, including the MSA costs.

• Cost-sharing arrangements. NAI and NTP may have (or may establish) a cost-sharing arrangement under which the parties share the costs of third-party services that benefit the global NTP group, with each party bearing a portion of the cost commensurate with the benefit it receives.

• Service fee allocations. NAI may allocate a portion of the managed network services costs to NTP under an intercompany service agreement, to the extent that NTP benefits from the managed network (e.g., through global network integration, UK-based management oversight, or the provision of data and analytics to NTP's global operations).

If any such intercompany charges are made, they must comply with the arm's-length standard under U.S. and UK transfer pricing rules. The failure to properly document and price intercompany charges can result in transfer pricing adjustments by the IRS or HMRC, double taxation, and penalties.

B. IRS Section 482 / OECD Guidelines

Arm's-Length Standard. Under IRC Section 482, the IRS has the authority to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among organizations, trades, or businesses owned or controlled by the same interests, in order to prevent evasion of taxes or to clearly reflect income. The operative standard is the arm's-length principle: intercompany charges must reflect the prices that would be charged between unrelated parties in comparable transactions under comparable circumstances.

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) provide similar guidance and are broadly consistent with the U.S. Section 482 regulations. Both the IRS and HMRC apply the arm's-length standard as the governing principle for cross-border intercompany transactions.

Appropriate Transfer Pricing Methods. For intercompany charges from Northgate Americas to Northgate Telecommunications PLC related to MSA costs, the following transfer pricing methods may be applicable:

• Cost-Plus Method. If Northgate Americas acts as a cost center, passing through third-party costs (the Cedarpoint MSA charges) to the UK Parent with a markup that reflects the value added by NAI in procuring, managing, and overseeing the services, the cost-plus method would be appropriate. Under this method, the intercompany price is determined by adding an arm's-length markup to NAI's costs. The appropriate markup percentage should be benchmarked against comparable service arrangements between unrelated parties.

• Comparable Uncontrolled Price (CUP) Method. The actual pricing in the MSA between NAI and Cedarpoint — which is a transaction between two unrelated parties negotiated at arm's length — may serve as a comparable uncontrolled price for transfer pricing purposes. If NAI passes through the MSA costs to NTP at cost (without a markup), the CUP method could support the position that the intercompany price is arm's length because it is based on the actual arm's-length price paid by NAI to Cedarpoint. However, if NAI adds value in managing the Cedarpoint relationship, a cost-plus or TNMM analysis may be more appropriate.

• Transactional Net Margin Method (TNMM). Under the TNMM, the arm's-length price is determined by reference to the net profit margin earned by comparable companies performing comparable functions. This method may be appropriate if the cost-plus or CUP methods are not readily applicable or if NAI's intercompany service activities are part of a broader bundle of intercompany services.

Documentation Requirements. Under U.S. transfer pricing documentation rules (IRC Section 6662(e) and Treas. Reg. § 1.6662-6), taxpayers are required to maintain contemporaneous transfer pricing documentation to avoid the imposition of transfer pricing penalties. Northgate Americas should prepare or update its transfer pricing documentation — including the OECD-standard master file (describing the MNE group's organizational structure, business operations, and transfer pricing policies) and local file (describing NAI's specific intercompany transactions, functional analysis, and economic analysis) — to reflect the MSA cost flows and any intercompany allocations to the UK Parent.

C. UK Considerations

Northgate Telecommunications PLC, as the UK Parent and ultimate beneficiary of the managed network services and ArcMesh platform, is subject to UK transfer pricing rules set forth in Part 4 of the Taxation (International and Other Provisions) Act 2010 ("TIOPA 2010"). HMRC requires that cross-border intercompany transactions between UK-resident companies and their foreign affiliates be priced at arm's length, consistent with the OECD Transfer Pricing Guidelines.

HMRC Scrutiny. HMRC may scrutinize the intercompany allocation to determine whether it is commensurate with the value of services actually received by the UK Parent versus those consumed by the U.S. subsidiary's operations. Since the 340 managed nodes and the North American operations are managed by Northgate Americas, a strong argument can be made that the full cost of the MSA should remain at the U.S. subsidiary level, reflecting the fact that NAI is the primary beneficiary of the managed network services and the ArcMesh platform. An allocation to the UK Parent would be appropriate only to the extent that NTP actually benefits from the services — for example, through global network integration, access to network data and analytics that inform NTP's global strategy, UK-based management oversight of the North American network, or the use of ArcMesh technology in NTP's non-U.S. operations.

Double Taxation Risk. If the IRS and HMRC take inconsistent positions on the appropriate intercompany allocation — for example, if the IRS increases NAI's U.S. taxable income by disallowing a deduction for intercompany charges paid to NTP, while HMRC simultaneously requires NTP to include the intercompany income in its UK taxable income — double taxation may result. The US-UK income tax treaty includes a mutual agreement procedure ("MAP") provision (Article 26) and an arbitration provision (Article 26, paragraph 5) that can be invoked to resolve such disputes, but the MAP process is often slow and uncertain.

D. Recommendations

Based on the foregoing analysis, we recommend the following steps to address the transfer pricing considerations arising from the MSA:

1. Functional Analysis. Conduct a transfer pricing functional analysis to determine the appropriate allocation of MSA costs between Northgate Americas and Northgate Telecommunications PLC. This analysis should identify the functions performed, assets used, and risks assumed by each entity in connection with the managed network services and ArcMesh platform, and should determine the proportion of the MSA costs that is properly allocable to each entity based on the benefits received.

2. Contemporaneous Documentation. Prepare contemporaneous transfer pricing documentation (master file and local file) reflecting the MSA cost flows, the intercompany allocation methodology, and the economic analysis supporting the arm's-length nature of the intercompany charges. This documentation should be completed prior to the filing of NAI's U.S. federal income tax return for the tax year in which the MSA commences.

3. Intercompany Service Agreement. If Northgate Americas allocates MSA costs to the UK Parent, the allocation should be formalized in a written intercompany service agreement between NAI and NTP that specifies the services provided, the allocation methodology, the arm's-length pricing, and the payment terms. This intercompany agreement should be consistent with the transfer pricing documentation and should be executed contemporaneously with, or prior to, the commencement of intercompany charges.

4. Cooperation Provision. Include a provision in the MSA (or in the intercompany service agreement between NAI and NTP) requiring cooperation between the parties on transfer pricing inquiries by the IRS or HMRC. While the MSA itself is between NAI and Cedarpoint (unrelated parties), the MSA pricing and fee structure will be relevant evidence in any transfer pricing inquiry, and both parties should be prepared to provide documentation and information as needed.

5. Auditor Coordination. Consult with Dunmore & Pratt LLP (Helen Treadway, lead audit partner) regarding the proper financial statement treatment of intercompany allocations related to the MSA, including the accrual of transfer pricing adjustments, uncertain tax positions (FIN 48/ASC 740-10), and the disclosure of related-party transactions.

VI. U.S. Withholding Tax Analysis — Upstream Payments to UK Parent

A. Potential Withholding Obligations

To the extent Northgate Americas makes payments to Northgate Telecommunications PLC (its UK Parent) — whether characterized as intercompany service fees, management fees, cost-sharing contributions, royalties, interest, or dividends — U.S. withholding tax may apply under IRC Sections 1441–1442.

Under the general statutory framework, fixed or determinable annual or periodical ("FDAP") income paid by a U.S. person (or from U.S. sources) to a foreign person is subject to a 30% U.S. withholding tax, unless the rate is reduced or eliminated by an applicable income tax treaty. FDAP income broadly includes interest, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income. Service fees paid to a foreign person for services performed in the United States may also constitute FDAP income subject to withholding.

The applicability of withholding tax to upstream payments from NAI to NTP depends critically on the characterization of the payments, as discussed in the following subsections.

B. US-UK Income Tax Treaty

The United States and the United Kingdom have a comprehensive income tax treaty — the Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, signed July 24, 2001, as amended by protocol (the "Treaty") — that may reduce or eliminate U.S. withholding tax on certain categories of income paid by NAI to NTP. The relevant Treaty provisions are as follows:

Business Profits (Article 7). Under Article 7 of the Treaty, business profits of an enterprise of a Contracting State (the UK, in the case of NTP) are taxable only in that state unless the enterprise carries on business in the other Contracting State (the US) through a permanent establishment ("PE") situated therein. If NTP does not have a U.S. PE (other than through NAI, which is a separate legal entity and files its own U.S. tax returns), then intercompany service fees that constitute "business profits" of NTP would generally not be subject to U.S. taxation under Article 7, and no withholding would apply.

However, this analysis requires careful consideration of whether NTP's activities in the United States — including its ownership and management of NAI — create a PE under Article 5 of the Treaty. If NTP personnel participate in the oversight or management of the MSA relationship or the North American network operations, there may be a risk that NTP has a PE in the United States, which could subject a portion of the intercompany service fees to U.S. taxation. Additionally, the IRS may seek to recharacterize payments from a U.S. subsidiary to its foreign parent as payments other than "business profits" (e.g., as royalties or dividends), thereby avoiding the application of Article 7.

Royalties (Article 12). Under Article 12 of the Treaty, royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State are taxable only in the state of residence. In other words, the Treaty provides a 0% withholding rate on royalties — royalties paid by a U.S. resident to a UK resident are exempt from U.S. withholding tax under the Treaty.

This provision is potentially relevant if any portion of the upstream payment from NAI to NTP is characterized as a royalty — for example, if NAI is deemed to be paying NTP for the sub-licensing or cost-sharing of technology, intellectual property, or know-how. However, as noted below, the direct ArcMesh license is between Cedarpoint and NAI (unrelated parties), not between NAI and NTP, and any upstream payment from NAI to NTP related to the ArcMesh platform would more likely be characterized as a cost-sharing contribution or management fee rather than a royalty.

Technical Fees / Services. The US-UK Treaty does not include a separate article on technical services fees. This is in contrast to certain other U.S. tax treaties (e.g., with India) that include specific provisions for fees for technical services. The absence of a separate technical services article means that service fees paid by NAI to NTP generally fall under the business profits article (Article 7) and would be exempt from U.S. withholding if NTP does not have a U.S. PE, as discussed above.

Dividends (Article 10). If MSA costs are funded through dividend distributions from NAI to NTP — for example, if NAI's after-tax profits (which reflect the MSA costs as deductible expenses) are distributed to NTP as dividends — the dividend withholding rules under Article 10 of the Treaty apply. Under Article 10, the Treaty withholding rate on dividends paid by a U.S. company to a UK parent company that owns more than 10% of the voting stock of the U.S. company is 5%. Since NTP owns 100% of NAI, the applicable rate would be 5%.

This 5% rate represents a significant reduction from the statutory 30% rate but is not zero. NAI would be required to withhold 5% of any dividend distributions to NTP and remit the withheld amount to the IRS. NTP would be entitled to a foreign tax credit in the UK for the U.S. withholding tax paid, subject to UK foreign tax credit limitations.

Interest (Article 11). If MSA costs are funded through intercompany loans from NTP to NAI — with NAI using the loan proceeds to fund MSA payments and NTP receiving interest payments from NAI — the interest withholding rules under Article 11 of the Treaty apply. Under Article 11, interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State is taxable only in the state of residence. In other words, the Treaty provides a 0% withholding rate on interest — interest paid by NAI to NTP is exempt from U.S. withholding tax under the Treaty, provided the interest is not effectively connected with a U.S. PE of NTP.

C. Characterization Risk

The proper characterization of upstream payment flows from NAI to NTP is critical, as the withholding tax consequences vary significantly depending on the character of the payment:

ArcMesh-Related Risk. A particular characterization risk arises in connection with the ArcMesh platform license component of the MSA ($3,000,000/yr). If a portion of the intercompany charge

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 30th Floor New York, NY 10022
INTERNAL MEMORANDUM
TO: Colette Whitman, Partner, Bankruptcy & Restructuring Group Christy Bauer, Lead Associate, intellectual Property Group
FROM: Garrett Simmons, Working Associate, Tax Group
DATE: April 28, 2023
RE: Tax Structuring Analysis — Northgate Americas, Inc. / Cedarpoint Systems Integration, Inc. Master Services Agreement
MATTER NO.: 1022-00008
This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation or in connection with the rendering of legal advice. It is not intended for distribution outside of Calderwood & Harkness LLP and the client without prior authorization. Any disclosure, copying, or distribution of this memorandum, or the taking of any action based on its contents, by anyone other than the intended recipients is strictly prohibited.
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I. Executive Summary
This memorandum analyzes the federal, state, and cross-border tax implications arising from the proposed Master Services Agreement (the "MSA") between Northgate Americas, Inc. ("NAI" or "Northgate Americas"), EIN 84-3291067, a Delaware corporation and wholly owned subsidiary of Northgate Telecommunications PLC ("NTP" or the "UK Parent"), a public limited company listed on the London Stock Exchange (ticker: NTP.L), and Cedarpoint Systems Integration, Inc. ("Cedarpoint" or "CSI"), EIN 52-4178503, a Delaware corporation headquartered in Reston, Virginia. The MSA, which is currently being negotiated and is targeted for execution on or around June 9, 2023, contemplates a total contract value ("TCV") of $75,000,000 over a five-year initial term, corresponding to an annual contract value ("ACV") of $15,000,000 ($1,250,000 per month).
The purpose of this memorandum is to address four principal tax areas that are implicated by the proposed transaction structure and to provide recommendations for the contractual tax provisions that should be incorporated into the second draft of the MSA:
1. State Sales and Use Tax Treatment. The MSA involves service delivery across 340 managed nodes in 28 U.S. states, requiring a careful analysis of the sales and use tax classification of each of the three fee components — managed network services ($10,500,000/yr, representing 70% of ACV), the ArcMesh platform license and maintenance ($3,000,000/yr, representing 20% of ACV), and professional services ($1,500,000/yr, representing 10% of ACV) — under each state's tax regime.
2. Canadian GST/HST Implications. Cedarpoint operates a secondary Network Operations Center ("NOC") in Winnipeg, Manitoba, Canada, from which certain monitoring and managed network services will be delivered. Northgate Americas also maintains managed nodes in three Canadian provinces, necessitating an analysis of Canadian federal Goods and Services Tax ("GST"), Harmonized Sales Tax ("HST"), and provincial sales tax ("PST") obligations.
3. Transfer Pricing Considerations. Although the primary payment flow under the MSA is between two unrelated U.S. entities (NAI to CSI), transfer pricing issues arise indirectly because Northgate Americas may seek to allocate or recover a portion of the $15,000,000 annual MSA costs upstream to the UK Parent through intercompany management fees, cost-sharing arrangements, or service fee allocations. Any such intercompany charges must comply with arm's-length standards under IRC Section 482 and the OECD Transfer Pricing Guidelines.
4. U.S. Withholding Tax Obligations. To the extent Northgate Americas makes upstream payments to its UK Parent that are characterized as service fees, royalties, interest, or dividends, U.S. withholding tax obligations under IRC Sections 1441–1442 may apply, subject to reduction or elimination under the United States–United Kingdom Income Tax Treaty (the "Treaty" or "Convention").
Based on the analysis set forth in this memorandum, the principal recommendations are as follows:
• The MSA should include comprehensive tax provisions covering gross-up obligations, tax cooperation, tax indemnification, and detailed invoicing mechanics. These provisions are described in Section VII of this memorandum and should be incorporated into the second draft MSA targeted for circulation on May 5, 2023.
• The fee breakdown among the three service categories (managed network services, ArcMesh platform license and maintenance, and professional services) must be maintained on all invoices and in all payment records. This separation is critical for state sales and use tax optimization, as the taxability of each component varies significantly from state to state.
• The Canadian NOC service delivery must be addressed through appropriate GST/HST/PST provisions in the MSA. Cedarpoint should confirm its GST/HST registration status with the Canada Revenue Agency, and the parties should agree on a fee allocation methodology for Canadian-sourced services.
• Northgate Americas should prepare or update its transfer pricing documentation (master file and local file) to reflect the MSA cost flows and any intercompany allocations to the UK Parent. Contemporaneous documentation is essential to defend the arm's-length nature of any upstream charges.
• Northgate Americas should obtain a current IRS Form W-8BEN-E from Northgate Telecommunications PLC prior to the MSA services commencement date of June 9, 2023, and should update the form at least every three years, to ensure compliance with U.S. withholding and reporting obligations for any FDAP payments to the UK Parent.
Each of these topics is addressed in detail in the sections that follow.
II. Background and Transaction Structure
A. Parties and Corporate Structure
The MSA involves two contracting parties — Northgate Americas, Inc. (as the customer and recipient of services) and Cedarpoint Systems Integration, Inc. (as the service provider) — with the ultimate corporate parent of the customer, Northgate Telecommunications PLC, playing an indirect but significant role in the tax structuring analysis due to the intercompany and cross-border payment flows that are implicated by the transaction.
Northgate Telecommunications PLC. NTP is a United Kingdom–headquartered public limited company incorporated under the laws of England and Wales. NTP is listed on the London Stock Exchange under the ticker symbol NTP.L and maintains its principal offices at 45 Threadneedle Court, London EC2R 8AH, United Kingdom. For fiscal year 2022, NTP reported consolidated revenues of approximately £6.8 billion and employed approximately 22,000 individuals across 14 countries. NTP is a global telecommunications provider offering enterprise networking, managed connectivity, and cloud infrastructure services to multinational corporations. NTP's North American operations are conducted principally through its wholly owned U.S. subsidiary, Northgate Americas, Inc.
Northgate Americas, Inc. NAI is a Delaware corporation and wholly owned subsidiary of NTP. NAI maintains its principal office at 1700 Market Street, Suite 2400, Philadelphia, Pennsylvania 19103, with its registered office in Delaware at c/o Calvert Corporate Services, Inc., 1209 Orange Street, Wilmington, Delaware 19801. NAI's Employer Identification Number is 84-3291067. NAI serves as NTP's U.S. contracting entity for the MSA and is the entity through which NTP's North American managed network operations, enterprise sales, and customer support functions are conducted. Warren Liang serves as President of NAI. NAI files a separate U.S. federal income tax return (IRS Form 1120) as a domestic corporation and is subject to U.S. federal, state, and local income taxation on its worldwide income.
Cedarpoint Systems Integration, Inc. CSI is a Delaware corporation headquartered at 11400 Commerce Park Drive, Suite 600, Reston, Virginia 20191. CSI's Employer Identification Number is 52-4178503. For fiscal year 2022, CSI reported revenues of approximately $420 million and employed approximately 1,800 individuals. Rajiv Sundaram serves as Chief Executive Officer. CSI is majority-owned (approximately 62%) by Ridgeline Capital Partners, LP, a Delaware limited partnership based in Greenwich, Connecticut. CSI is a leading provider of managed network services, systems integration, and proprietary network management software (including its ArcMesh platform) to enterprise customers in the telecommunications, financial services, and healthcare sectors.
Cedarpoint Winnipeg NOC. In addition to its primary U.S. operations center in Reston, Virginia, Cedarpoint operates a secondary Network Operations Center at 200 Portage Avenue, Suite 1500, Winnipeg, Manitoba R3C 3X2, Canada. The Winnipeg NOC provides 24×7 monitoring and managed network operations services on a shared basis for Cedarpoint's North American customer base. As discussed in Section IV below, the Winnipeg NOC's involvement in the delivery of services to Northgate Americas has significant implications for Canadian GST/HST and provincial sales tax analysis.
B. Fee Structure and Payment Flows
The MSA contemplates a total contract value of $75,000,000 over a five-year initial term commencing June 9, 2023 and expiring June 8, 2028, with two automatic two-year renewal periods unless either party provides written notice of non-renewal at least 180 days prior to the expiration of the then-current term. The annual contract value is $15,000,000, payable in equal monthly installments of $1,250,000.
The total contract value is comprised of three distinct fee components, each of which requires separate tax treatment analysis under federal, state, and cross-border tax regimes:
Managed Network Services ($10,500,000/yr — 70% of ACV). This component encompasses the ongoing operations, monitoring, fault management, capacity management, and network operations center services provided by Cedarpoint across NAI's 340 managed nodes in 28 U.S. states and 3 Canadian provinces. Monitoring is performed on a 24×7 basis from both the Reston, Virginia facility and the Winnipeg, Manitoba NOC. This component includes NOC staffing, network event correlation, incident response, change management, and performance reporting.
ArcMesh Platform License and Maintenance ($3,000,000/yr — 20% of ACV). This component covers the license to use Cedarpoint's proprietary ArcMesh network management and orchestration platform (version 4.2), as well as ongoing maintenance, patches, updates, and upgrades to the platform during the term of the MSA. The classification of this component — whether as a license of prewritten (canned) software, a software-as-a-service ("SaaS") subscription, or a combination thereof — is critical for state sales and use tax purposes, as discussed in Section III.C below.
Professional Services ($1,500,000/yr — 10% of ACV). This component covers implementation, migration, optimization, and consulting services provided by Cedarpoint's professional services team in connection with the transition from Northgate Americas' legacy MPLS provider, Greystone Halcyon Software, to the Cedarpoint managed network platform. The migration is planned to occur in three phases over approximately 18 months, with ongoing optimization services continuing for the remainder of the initial term.
In addition to the three fee components described above, the MSA provides for annual wind-down escrow deposits of $750,000 per year, to be deposited by Northgate Americas into an escrow account at Dravello National Bank (escrow account number FNB-ESC-2023-07742), with an aggregate cap of $3,750,000. These deposits are intended to fund transition and wind-down services in the event of MSA termination or non-renewal and are characterized as refundable security deposits. The tax treatment of these escrow deposits is discussed in Sections III.G and VII.F below.
Payment Direction. The primary payment flow under the MSA is from Northgate Americas to Cedarpoint, representing a domestic U.S.-to-U.S. payment between two unrelated entities. However, as discussed in Sections V and VI below, potential upstream payment flows from Northgate Americas to Northgate Telecommunications PLC (U.S.-to-UK) may arise in the form of management fees, cost-sharing contributions, or dividend distributions that incorporate or reflect MSA costs. These upstream flows implicate transfer pricing considerations under IRC Section 482 and U.S. withholding tax obligations under IRC Sections 1441–1442, subject to any applicable Treaty reductions.
Service Delivery Geography. Services under the MSA will be delivered across 340 managed nodes located in 28 U.S. states and 3 Canadian provinces. The specific state and provincial locations are set forth in Schedule 1 (Node Locations) to the MSA, a complete copy of which has not yet been finalized. The migration from the legacy MPLS provider, Greystone Halcyon Software, will proceed in three phases over 18 months, beginning with Phase 1 on the MSA commencement date.
III. State Sales and Use Tax Analysis
A. General Framework
The delivery of services across 340 managed nodes in 28 U.S. states creates significant multi-state sales and use tax considerations that must be addressed both contractually (in the MSA) and operationally (through proper invoicing, collection, and remittance procedures). The complexity of this analysis arises from the fact that each state's sales and use tax regime independently classifies and taxes (or exempts) the three fee components of the MSA — managed network services, software licensing and maintenance, and professional services — according to its own statutory definitions, administrative rulings, and judicial interpretations.
Nexus. As a threshold matter, Cedarpoint, as the service provider, likely has physical or economic nexus in many or all of the 28 states in which Northgate Americas maintains managed nodes. Cedarpoint's service delivery activities — including the deployment of on-site personnel for implementation and migration (Phase 1 through Phase 3), remote monitoring from both the Reston, Virginia and Winnipeg, Manitoba NOC facilities, and the licensing of ArcMesh software that may be installed or accessed at NAI's node locations — are sufficient to establish nexus for sales and use tax collection purposes in most states under current law. Furthermore, following the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), many states have adopted economic nexus thresholds based on revenue or transaction volume that Cedarpoint likely exceeds in the relevant states given the scale of the MSA.
Northgate Americas, as the customer, has physical presence (managed nodes) in all 28 states, which independently creates nexus for use tax self-assessment purposes. In states where Cedarpoint does not collect sales tax — whether due to exemption claims, classification disputes, or nexus uncertainty — Northgate Americas may have a complementary obligation to self-assess and remit use tax on the taxable portion of the services and licenses received.
Classification. The central analytical task is to classify each fee component under each state's sales and use tax regime. The three components present distinct classification profiles:
(i) Managed network services ($10,500,000/yr) — generally characterized as a service, but may be classified as telecommunications services, managed IT services, data processing services, or information services depending on the applicable state's statutory definitions.
(ii) ArcMesh platform license and maintenance ($3,000,000/yr) — may be classified as prewritten (canned) software, SaaS, or a combination thereof, depending on the delivery method (cloud-hosted vs. on-premise installation); the maintenance component may be separately classified as a service or as part of the software license.
(iii) Professional services ($1,500,000/yr) — generally characterized as consulting, implementation, or technology services, which are exempt from sales tax in most states but subject to tax in certain states that broadly tax information technology, computer, or data processing services.
Given the 28-state scope of the MSA, a comprehensive state-by-state taxability analysis is required. This memorandum provides a general framework for that analysis, with state-specific determinations to follow once a complete list of node locations (Schedule 1) is obtained from Northgate Americas. The subsections below address each fee component in turn.
B. Managed Network Services ($10,500,000/yr)
The managed network services component represents the largest share of the MSA's annual contract value at 70% ($10,500,000/yr) and will be the most significant line item from a sales tax perspective. This component encompasses a range of activities — including 24×7 NOC monitoring, fault management, capacity management, network event correlation, incident response, change management, and performance reporting — that different states may classify under different taxable or exempt categories.
Telecommunications Services. Many states impose sales or excise taxes on telecommunications services broadly defined, encompassing not only traditional voice and data transmission services but also ancillary services such as monitoring, management, and network operations. States that impose broad telecommunications services taxes may capture NOC monitoring and network management activities within their scope. For example, states such as New York, Texas, Florida, Ohio, and Pennsylvania impose sales tax on various categories of telecommunications and ancillary services, though the precise scope of taxability varies by state.
Data Processing and Information Services. Some states separately classify and tax data processing services or information services. Network monitoring, event correlation, and performance reporting activities under the MSA may fall within these categories in certain states. For example, Texas taxes data processing services (Tex. Tax Code § 151.0035), while New York taxes information services (N.Y. Tax Law § 1105(c)(1)). The classification of managed network services as "data processing" versus "telecommunications" versus a non-taxable "service" can significantly affect the applicable tax rate and the availability of exemptions.
Managed IT Services / Computer Services. A growing number of states have addressed the taxability of managed IT services or computer services through specific statutory provisions or administrative rulings. In some states, managed services that involve the use of computer software or hardware to monitor and manage a customer's network infrastructure may be treated as taxable computer services, while in other states they may be treated as non-taxable professional or consulting services.
Recommendation. Cedarpoint, as the service provider, should be contractually responsible for properly collecting and remitting applicable state sales and use taxes on the managed network services component. All invoices should separately state the managed network services fees and any applicable state sales or use taxes. To the extent that Cedarpoint takes the position that managed network services are not taxable in a particular state, that position should be documented and communicated to Northgate Americas so that NAI can assess its complementary use tax obligations.
We recommend that a detailed state-by-state taxability matrix be prepared once the complete list of 28 states is confirmed through Schedule 1 to the MSA. This matrix should identify, for each state: (a) the applicable statutory classification of managed network services; (b) the applicable tax rate; (c) any available exemptions (including telecommunications resale exemptions, if applicable); and (d) any relevant administrative rulings or letter rulings that provide guidance on the taxability of comparable services.
C. ArcMesh Platform License and Maintenance ($3,000,000/yr)
The ArcMesh platform license and maintenance component requires the most nuanced sales tax analysis of the three MSA fee components, because the tax treatment of software licensing and maintenance varies dramatically across states and depends critically on the method of delivery (on-premise installation versus cloud-hosted/SaaS access) and the characterization of the maintenance component (bundled versus separately stated).
Software Classification. ArcMesh v4.2 is Cedarpoint's proprietary network management and orchestration platform. It is classified as prewritten (canned) software, as it is developed and marketed to multiple customers and is not custom-developed for Northgate Americas. The tax treatment of prewritten software varies by state as follows:
On-Premise Installation. If ArcMesh is installed on servers or hardware located at Northgate Americas' node locations, the vast majority of states treat prewritten software delivered in tangible or electronic form as taxable tangible personal property (or a taxable sale of a digital product). This treatment is nearly universal and would result in sales tax applicability in most or all of the 28 states in which NAI has managed nodes.
Cloud-Hosted / SaaS Delivery. If ArcMesh is accessed remotely by Northgate Americas through a cloud-hosted or SaaS delivery model — meaning that the software resides on Cedarpoint's servers and is accessed by NAI users over the internet without installation on NAI's hardware — the tax treatment is more variable and evolving. A growing number of states, including New York, Texas, Pennsylvania, Connecticut, Ohio, and others, have enacted legislation or issued administrative guidance treating SaaS as taxable. However, many states continue to exempt SaaS transactions from sales tax, particularly where the customer does not receive a transfer of possession or control of the software.
Hybrid Delivery. It is possible that ArcMesh is delivered through a hybrid model in which certain components are installed locally at node locations while other components (such as the orchestration and management dashboard) are accessed remotely via the cloud. In such cases, the tax treatment may differ by component, and the allocation of the license fee between on-premise and cloud-hosted elements may affect the overall tax liability.
We recommend that Christy Bauer and the intellectual Property Group confirm the precise delivery method for ArcMesh v4.2 with Cedarpoint's technical team, as this determination will drive the state-by-state sales tax classification. If ArcMesh is delivered as SaaS, the analysis must address the expanding patchwork of state SaaS taxation rules, which continue to evolve and may change during the five-year initial term of the MSA.
Maintenance Component. The ArcMesh license fee of $3,000,000/yr includes both the license to use the platform and ongoing maintenance (patches, updates, and upgrades). From a sales tax perspective, it is critical to separately state and separately price the license and maintenance components on all invoices. The reasons are as follows:
• In many states, software maintenance agreements that include updates and upgrades are treated as taxable if bundled with the software license but may be exempt (or subject to a reduced rate) if separately stated and separately priced. For example, several states distinguish between "mandatory" maintenance (required as a condition of the license, and therefore treated as part of the taxable software transaction) and "optional" maintenance (separately contracted and potentially exempt).
• In states that exempt SaaS but tax prewritten software, or vice versa, the separate statement of the maintenance component can affect whether the maintenance fees are "pulled" into the taxable or exempt classification of the underlying software transaction.
• For audit defensibility purposes, separate line-item invoicing creates a clear documentary record of the distinct components and allows the parties to take consistent positions on the applicable tax treatment of each component.
Recommendation. The $3,000,000/yr ArcMesh fee should be clearly broken out on all invoices between the license fee ($X) and the maintenance fee ($Y), with the specific allocation to be determined in consultation with Cedarpoint's pricing team and incorporated into Exhibit C (Pricing Schedule) of the MSA. This separation is essential for optimizing tax treatment in states that exempt one component but not the other. Furthermore, the MSA should clearly characterize the maintenance component as a separately priced, optional service, to the extent commercially feasible, to maximize the availability of maintenance-specific exemptions.
D. Professional Services ($1,500,000/yr)
The professional services component encompasses implementation, migration, and optimization consulting services provided by Cedarpoint in connection with the transition from Northgate Americas' legacy MPLS provider, Greystone Halcyon Software, to the Cedarpoint managed network platform. These services include network architecture design, migration planning and execution, configuration and testing, and ongoing performance optimization.
General Rule. The majority of U.S. states do not impose sales tax on professional, consulting, or personal services. This general rule reflects the historical limitation of state sales taxes to the sale of tangible personal property, with service taxation representing a more recent and still incomplete expansion of the sales tax base. Accordingly, the professional services component of the MSA is likely exempt from sales tax in the majority of the 28 states in which NAI has managed nodes.
Notable Exceptions. However, several important exceptions exist. Certain states impose sales tax on information technology services, computer services, or data processing services that may encompass the implementation, migration, and optimization consulting described in the MSA. For example:
• States that tax "computer services" or "computer consulting" may capture network migration and optimization activities within the scope of the tax.
• States that tax "data processing services" may argue that migration and optimization services involve the manipulation of data or the reconfiguration of data networks and therefore fall within the taxable definition.
• States that tax "information services" may similarly characterize network architecture consulting as a taxable information service.
Bundling Risk. A particularly important risk is that professional services related to software implementation may be recharacterized as part of the software sale in states that follow "true object" or "bundling" tests. If the professional services are not separately stated and separately priced from the ArcMesh platform license, certain states may treat the combined charge as a single taxable transaction, with the professional services fees pulled into the taxable software classification. This risk is heightened where the professional services are performed primarily to configure, customize, or implement the ArcMesh platform.
Recommendation. We recommend the following measures to preserve the non-taxable characterization of the professional services component:
1. The MSA should clearly distinguish professional services from the ArcMesh platform license in both the body of the agreement and the pricing exhibits. Professional services should be described in separate statements of work ("SOWs") that are independent from the ArcMesh license grant.
2. Invoices should separately state professional services fees from ArcMesh license and maintenance fees, with no bundling or cross-referencing that would suggest the professional services are an inseparable component of the software transaction.
3. The professional services SOWs should describe the services in terms of consulting, advisory, and implementation assistance rather than in terms of software customization, development, or modification, to the extent consistent with the actual scope of services performed.
4. To the extent professional services are performed at specific node locations in specific states, the invoices should identify the location at which the services were performed, as this may affect the situs of the taxable event and the applicability of state-specific exemptions.
E. Use Tax Exposure for Northgate Americas
In states where Cedarpoint does not collect sales tax — whether because the relevant fee component is classified as exempt, because Cedarpoint lacks nexus (unlikely given the analysis above), or because of a good-faith classification dispute — Northgate Americas may have a complementary use tax obligation. Use tax is a self-assessed tax imposed on the purchaser or user of taxable property or services when sales tax has not been collected by the vendor. The use tax rate is generally the same as the applicable sales tax rate.
Northgate Americas should implement internal use tax accrual procedures to ensure that use tax is properly assessed and remitted on any MSA payments for which Cedarpoint does not collect sales tax. These procedures should include:
• A monthly review of Cedarpoint invoices to identify any line items on which sales tax was not collected.
• A determination, for each such line item, of whether the underlying service or license is subject to use tax in the state where the service was received or the software was used.
• Accrual and remittance of use tax on the applicable portion of the payment, based on the tax rate in effect in the relevant state.
• Maintenance of records documenting the use tax analysis, including the basis for any determination that a particular payment is not subject to use tax.
Northgate Americas' independent auditors at Dunmore & Pratt LLP, and specifically Helen Treadway (lead audit partner), should be notified of the MSA structure and the multi-state tax exposure so that proper accruals can be reflected in NAI's financial statements. This notification is particularly important given the materiality of the MSA — $15,000,000 per year, with potential sales and use tax exposure across 28 states — and the potential for state tax authorities to assess use tax deficiencies in connection with routine audits.
F. Exemption Certificates and Documentation
Northgate Americas may qualify for sales tax exemptions in certain states based on the nature of its business and the use of the services received under the MSA. In particular:
• Resale Exemptions. If Northgate Americas uses the managed network services, ArcMesh platform, or professional services in the provision of telecommunications services that it resells to its own customers, NAI may qualify for a resale exemption in states that recognize such exemptions for telecommunications or IT services. This analysis depends on the extent to which NAI is itself a provider of taxable services that incorporate the Cedarpoint inputs as an integral component.
• Telecommunications Exemptions. Certain states provide specific exemptions for property or services purchased by telecommunications companies for use in providing telecommunications services to the public. NAI's status as a subsidiary of a major telecommunications company (NTP) may support a claim for such exemptions, depending on the scope of NAI's regulated telecommunications activities in each state.
Recommendation. We recommend that Northgate Americas compile and deliver to Cedarpoint applicable multi-state exemption certificates prior to the commencement of services under the MSA. These certificates may include Streamlined Sales and Use Tax Agreement ("SSUTA") exemption certificates (for states that are members of the Streamlined Sales Tax program), state-specific exemption forms, and any other documentation required by the applicable state to substantiate an exemption claim. The MSA should include a cooperation clause requiring both parties to provide necessary tax documentation, exemption certificates, and information on a timely basis, as further discussed in Section VII.B below.
Northgate Americas' VP of Procurement, North America (Deirdre Kwan) and VP of Network Operations (Katrina Bosch) should be consulted to determine whether NAI has existing sales tax exemption certificates on file for its node locations and whether additional certificates need to be obtained or updated in connection with the MSA.
G. Escrow Deposits — Sales Tax Treatment
The MSA provides for annual wind-down escrow deposits of $750,000 per year, to be deposited by Northgate Americas into escrow account FNB-ESC-2023-07742 at Dravello National Bank, with an aggregate cap of $3,750,000. These deposits are intended to fund transition and wind-down services in the event of MSA termination or non-renewal.
Tax Treatment. The annual escrow deposits should not be treated as taxable consideration for services at the time of deposit. Under the general principles applicable in most states, sales tax is imposed on the sale or furnishing of taxable services, with the tax measured by the total consideration paid for the services. A refundable security deposit, however, is not consideration for services — it is a contingent payment that is returned to the depositor if the contingency (in this case, termination or non-renewal) does not occur or if the deposit is not drawn upon. So long as the escrow deposits are properly characterized as refundable, contingent security deposits rather than prepaid service fees, they should not be subject to sales tax at the time of deposit.
However, if the escrow deposits are ultimately applied to transition or wind-down services upon termination of the MSA, the amount so applied would constitute taxable consideration for services at the time of application. Sales tax would be due on the applied amount at the rate in effect in the state(s) where the transition services are performed.
Recommendation. The MSA and the accompanying escrow agreement with Dravello National Bank should clearly characterize the annual $750,000 deposits as contingent, refundable security deposits rather than prepaid service fees. Specific language should be included to the effect that: (a) the deposits remain the property of Northgate Americas until applied to transition services in accordance with the terms of the escrow agreement; (b) any unused deposits are refundable to Northgate Americas upon the expiration or termination of the MSA (or upon completion of transition services, if less than the deposited amount is required); and (c) the deposits are not consideration for services and are not subject to sales tax at the time of deposit. This characterization should be consistent across the MSA, the escrow agreement, and the invoicing records.
IV. Canadian GST/HST Analysis
A. Cedarpoint's Winnipeg NOC and Cross-Border Services
As noted in Section II.A above, Cedarpoint operates a secondary Network Operations Center at 200 Portage Avenue, Suite 1500, Winnipeg, Manitoba R3C 3X2, Canada. The Winnipeg NOC provides 24×7 monitoring and managed network operations services alongside the primary Reston, Virginia facility. According to the preliminary MSA specifications, the Winnipeg NOC handles a material portion of the overnight and weekend monitoring for North American nodes, as well as certain overflow capacity during peak event periods.
In addition to the service delivery from the Winnipeg NOC, Northgate Americas maintains managed nodes in three Canadian provinces (the specific provinces are to be confirmed from Schedule 1 — Node Locations to the MSA, which has not yet been finalized). The combination of Canadian-based service delivery (from the Winnipeg NOC) and Canadian-located service recipients (NAI's managed nodes) creates Canadian indirect tax obligations that must be addressed in the MSA.
B. GST/HST Registration and Collection
Canada imposes a federal Goods and Services Tax ("GST") at a rate of 5% on most taxable supplies of goods and services made in Canada. In certain provinces, the federal GST has been harmonized with the provincial sales tax to form the Harmonized Sales Tax ("HST"), which combines the federal and provincial components into a single tax. In non-harmonized provinces, the federal GST and the provincial retail sales tax ("PST") apply separately.
Registration Requirements. If Cedarpoint is providing taxable supplies in Canada — including IT services, SaaS, and monitoring services delivered from the Winnipeg NOC — and exceeds the small-supplier threshold of $30,000 in annual taxable supplies in Canada, Cedarpoint is required to register for GST/HST purposes with the Canada Revenue Agency ("CRA"). Given the overall scale of Cedarpoint's Canadian operations (the Winnipeg NOC employs staff and generates revenue from Canadian-sourced services to multiple customers), it is highly likely that Cedarpoint exceeds the small-supplier threshold and is either already registered or is required to register.
Applicable Rates. The applicable GST/HST rates depend on the province in which the taxable supply is made:
Note: The specific Canadian provinces in which NAI has managed nodes have not yet been confirmed. The table above includes provinces that are commonly relevant for telecommunications and managed services operations in Canada. Once Schedule 1 is finalized, the applicable rates can be confirmed.
Manitoba Considerations. For Manitoba specifically — where Cedarpoint's Winnipeg NOC is located — the province is not an HST-harmonized province. Instead, Manitoba imposes a provincial retail sales tax ("RST") at a rate of 7% on certain taxable services, in addition to the federal GST at 5%. The combined effective rate is 12%. The Manitoba RST applies to a broad range of services, including telecommunications services and certain computer and data processing services. Cedarpoint should confirm whether its Winnipeg NOC operations trigger Manitoba RST registration and collection obligations in addition to federal GST obligations.
C. Place of Supply Rules
The determination of which province's tax applies to a particular supply — known as the "place of supply" analysis — is governed by the Place of Supply (GST/HST) Regulations and related provisions of the Excise Tax Act (Canada). The rules vary depending on the type of supply:
Services Generally. For services, the place of supply for GST/HST purposes is generally determined based on where the service is performed or where the recipient is located, depending on the nature of the service. For services that are performed primarily in a single province, the place of supply is the province where the service is performed. For services performed in multiple provinces, the place of supply is generally the province with the greatest proportion of the service performance.
Electronic Services and SaaS. For electronic services and SaaS supplied to Canadian recipients, the supply is generally taxable based on the Canadian address of the recipient. If the recipient (Northgate Americas) has multiple addresses in Canada (i.e., managed node locations in multiple provinces), the place of supply may be determined based on the address most closely connected with the supply or, in some cases, allocated among provinces.
Monitoring Services. The managed network monitoring services present a mixed place of supply analysis. The monitoring services are rendered from the Winnipeg NOC (located in Manitoba) but are delivered to managed nodes potentially located in multiple Canadian provinces. The place of supply could arguably be Manitoba (where the service is performed) or the province where the monitored node is located (where the service is consumed). The applicable analysis depends on the specific characterization of the monitoring services under the Place of Supply Regulations and on whether the services are more properly classified as services performed in a particular location or as services supplied to a recipient at a particular location.
Recommended Allocation Methodology. We recommend that a portion of the managed network services fee and ArcMesh license fee be allocated to Canadian operations based on a reasonable allocation methodology. The most straightforward methodology would be a node-based allocation: the ratio of Canadian managed nodes to total managed nodes (Canadian nodes / 340 total nodes) would be applied to the applicable fee components to determine the Canadian-sourced portion subject to GST/HST/PST. This allocation would then be further divided among Canadian provinces based on the location of the Canadian nodes.
For example, if Northgate Americas has 15 managed nodes in Canada out of 340 total nodes (approximately 4.4%), the Canadian-allocated portion of the managed network services fee would be approximately $462,000/yr ($10,500,000 × 15/340), and the Canadian-allocated portion of the ArcMesh license fee would be approximately $132,000/yr ($3,000,000 × 15/340). These amounts would then be subject to the applicable GST/HST/PST rates based on the province in which each Canadian node is located.
D. Input Tax Credits
If Cedarpoint incurs GST/HST on inputs at the Winnipeg NOC — including lease payments, utilities, equipment purchases, and other operating expenses — it may claim input tax credits ("ITCs") to recover the GST/HST paid on those inputs, thereby reducing the net Canadian tax cost associated with its Canadian operations. ITCs are available to the extent the inputs are used in the course of making taxable supplies.
Similarly, Northgate Americas (or its Canadian affiliate, if one exists) may be eligible for ITCs on GST/HST paid on the services and licenses received from Cedarpoint, to the extent those services are used in the course of NAI's own taxable commercial activities in Canada. If NAI uses the managed network services and ArcMesh platform in connection with its own telecommunications service offerings to Canadian customers, the ITCs could offset a significant portion of the GST/HST cost.
The availability of ITCs depends on the nature of NAI's Canadian operations and whether NAI (or a Canadian Northgate affiliate) is registered for GST/HST purposes. This should be confirmed with NAI's tax department and with Dunmore & Pratt LLP.
E. Contractual Recommendations — Canadian Tax
Based on the foregoing analysis, we recommend the following contractual provisions to address Canadian indirect taxes:
1. The MSA should include a provision addressing Canadian indirect taxes (GST/HST/PST) separately from U.S. state sales and use taxes. The provision should acknowledge that a portion of the managed network services and ArcMesh platform license may be subject to Canadian taxes and should allocate responsibility for collection and remittance.
2. Cedarpoint should be contractually responsible for proper GST/HST registration with the CRA, collection of applicable GST/HST/PST on the Canadian-sourced portion of the services, and remittance to the CRA and applicable provincial tax authorities.
3. The fee allocation methodology between U.S. and Canadian services should be defined in the MSA or the pricing schedule (Exhibit C). We recommend the node-based allocation methodology described in Section IV.C above, unless a more precise methodology is warranted based on the actual service delivery model.
4. Cedarpoint invoices for Canadian-sourced services should include Cedarpoint's GST/HST registration number, the applicable GST/HST/PST rates, and the Canadian dollar equivalent of the allocated fees (if invoiced in U.S. dollars).
5. The MSA should require Cedarpoint to notify Northgate Americas promptly of any changes in its GST/HST registration status, any Canadian tax audits or assessments related to the MSA, and any changes in Canadian tax law that materially affect the tax treatment of the services.
V. Transfer Pricing Considerations
A. Overview of the Issue
Northgate Americas, Inc. (EIN 84-3291067) is a wholly owned subsidiary of Northgate Telecommunications PLC, a UK-headquartered multinational corporation. The primary payment flow under the MSA — from Northgate Americas to Cedarpoint — is a transaction between two unrelated U.S. entities at a negotiated arm's-length price. As such, the direct MSA payment flow does not raise transfer pricing concerns.
However, transfer pricing issues arise indirectly in connection with the intercompany cost allocation between Northgate Americas and its UK Parent. Specifically, NAI may seek to recover or allocate a portion of the $15,000,000 annual MSA costs upstream to NTP through one or more intercompany charging mechanisms, including:
• Management fees. NAI may charge NTP a management fee that includes an allocation of third-party costs incurred by NAI on behalf of the NTP group, including the MSA costs.
• Cost-sharing arrangements. NAI and NTP may have (or may establish) a cost-sharing arrangement under which the parties share the costs of third-party services that benefit the global NTP group, with each party bearing a portion of the cost commensurate with the benefit it receives.
• Service fee allocations. NAI may allocate a portion of the managed network services costs to NTP under an intercompany service agreement, to the extent that NTP benefits from the managed network (e.g., through global network integration, UK-based management oversight, or the provision of data and analytics to NTP's global operations).
If any such intercompany charges are made, they must comply with the arm's-length standard under U.S. and UK transfer pricing rules. The failure to properly document and price intercompany charges can result in transfer pricing adjustments by the IRS or HMRC, double taxation, and penalties.
B. IRS Section 482 / OECD Guidelines
Arm's-Length Standard. Under IRC Section 482, the IRS has the authority to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among organizations, trades, or businesses owned or controlled by the same interests, in order to prevent evasion of taxes or to clearly reflect income. The operative standard is the arm's-length principle: intercompany charges must reflect the prices that would be charged between unrelated parties in comparable transactions under comparable circumstances.
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition) provide similar guidance and are broadly consistent with the U.S. Section 482 regulations. Both the IRS and HMRC apply the arm's-length standard as the governing principle for cross-border intercompany transactions.
Appropriate Transfer Pricing Methods. For intercompany charges from Northgate Americas to Northgate Telecommunications PLC related to MSA costs, the following transfer pricing methods may be applicable:
• Cost-Plus Method. If Northgate Americas acts as a cost center, passing through third-party costs (the Cedarpoint MSA charges) to the UK Parent with a markup that reflects the value added by NAI in procuring, managing, and overseeing the services, the cost-plus method would be appropriate. Under this method, the intercompany price is determined by adding an arm's-length markup to NAI's costs. The appropriate markup percentage should be benchmarked against comparable service arrangements between unrelated parties.
• Comparable Uncontrolled Price (CUP) Method. The actual pricing in the MSA between NAI and Cedarpoint — which is a transaction between two unrelated parties negotiated at arm's length — may serve as a comparable uncontrolled price for transfer pricing purposes. If NAI passes through the MSA costs to NTP at cost (without a markup), the CUP method could support the position that the intercompany price is arm's length because it is based on the actual arm's-length price paid by NAI to Cedarpoint. However, if NAI adds value in managing the Cedarpoint relationship, a cost-plus or TNMM analysis may be more appropriate.
• Transactional Net Margin Method (TNMM). Under the TNMM, the arm's-length price is determined by reference to the net profit margin earned by comparable companies performing comparable functions. This method may be appropriate if the cost-plus or CUP methods are not readily applicable or if NAI's intercompany service activities are part of a broader bundle of intercompany services.
Documentation Requirements. Under U.S. transfer pricing documentation rules (IRC Section 6662(e) and Treas. Reg. § 1.6662-6), taxpayers are required to maintain contemporaneous transfer pricing documentation to avoid the imposition of transfer pricing penalties. Northgate Americas should prepare or update its transfer pricing documentation — including the OECD-standard master file (describing the MNE group's organizational structure, business operations, and transfer pricing policies) and local file (describing NAI's specific intercompany transactions, functional analysis, and economic analysis) — to reflect the MSA cost flows and any intercompany allocations to the UK Parent.
C. UK Considerations
Northgate Telecommunications PLC, as the UK Parent and ultimate beneficiary of the managed network services and ArcMesh platform, is subject to UK transfer pricing rules set forth in Part 4 of the Taxation (International and Other Provisions) Act 2010 ("TIOPA 2010"). HMRC requires that cross-border intercompany transactions between UK-resident companies and their foreign affiliates be priced at arm's length, consistent with the OECD Transfer Pricing Guidelines.
HMRC Scrutiny. HMRC may scrutinize the intercompany allocation to determine whether it is commensurate with the value of services actually received by the UK Parent versus those consumed by the U.S. subsidiary's operations. Since the 340 managed nodes and the North American operations are managed by Northgate Americas, a strong argument can be made that the full cost of the MSA should remain at the U.S. subsidiary level, reflecting the fact that NAI is the primary beneficiary of the managed network services and the ArcMesh platform. An allocation to the UK Parent would be appropriate only to the extent that NTP actually benefits from the services — for example, through global network integration, access to network data and analytics that inform NTP's global strategy, UK-based management oversight of the North American network, or the use of ArcMesh technology in NTP's non-U.S. operations.
Double Taxation Risk. If the IRS and HMRC take inconsistent positions on the appropriate intercompany allocation — for example, if the IRS increases NAI's U.S. taxable income by disallowing a deduction for intercompany charges paid to NTP, while HMRC simultaneously requires NTP to include the intercompany income in its UK taxable income — double taxation may result. The US-UK income tax treaty includes a mutual agreement procedure ("MAP") provision (Article 26) and an arbitration provision (Article 26, paragraph 5) that can be invoked to resolve such disputes, but the MAP process is often slow and uncertain.
D. Recommendations
Based on the foregoing analysis, we recommend the following steps to address the transfer pricing considerations arising from the MSA:
1. Functional Analysis. Conduct a transfer pricing functional analysis to determine the appropriate allocation of MSA costs between Northgate Americas and Northgate Telecommunications PLC. This analysis should identify the functions performed, assets used, and risks assumed by each entity in connection with the managed network services and ArcMesh platform, and should determine the proportion of the MSA costs that is properly allocable to each entity based on the benefits received.
2. Contemporaneous Documentation. Prepare contemporaneous transfer pricing documentation (master file and local file) reflecting the MSA cost flows, the intercompany allocation methodology, and the economic analysis supporting the arm's-length nature of the intercompany charges. This documentation should be completed prior to the filing of NAI's U.S. federal income tax return for the tax year in which the MSA commences.
3. Intercompany Service Agreement. If Northgate Americas allocates MSA costs to the UK Parent, the allocation should be formalized in a written intercompany service agreement between NAI and NTP that specifies the services provided, the allocation methodology, the arm's-length pricing, and the payment terms. This intercompany agreement should be consistent with the transfer pricing documentation and should be executed contemporaneously with, or prior to, the commencement of intercompany charges.
4. Cooperation Provision. Include a provision in the MSA (or in the intercompany service agreement between NAI and NTP) requiring cooperation between the parties on transfer pricing inquiries by the IRS or HMRC. While the MSA itself is between NAI and Cedarpoint (unrelated parties), the MSA pricing and fee structure will be relevant evidence in any transfer pricing inquiry, and both parties should be prepared to provide documentation and information as needed.
5. Auditor Coordination. Consult with Dunmore & Pratt LLP (Helen Treadway, lead audit partner) regarding the proper financial statement treatment of intercompany allocations related to the MSA, including the accrual of transfer pricing adjustments, uncertain tax positions (FIN 48/ASC 740-10), and the disclosure of related-party transactions.
VI. U.S. Withholding Tax Analysis — Upstream Payments to UK Parent
A. Potential Withholding Obligations
To the extent Northgate Americas makes payments to Northgate Telecommunications PLC (its UK Parent) — whether characterized as intercompany service fees, management fees, cost-sharing contributions, royalties, interest, or dividends — U.S. withholding tax may apply under IRC Sections 1441–1442.
Under the general statutory framework, fixed or determinable annual or periodical ("FDAP") income paid by a U.S. person (or from U.S. sources) to a foreign person is subject to a 30% U.S. withholding tax, unless the rate is reduced or eliminated by an applicable income tax treaty. FDAP income broadly includes interest, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income. Service fees paid to a foreign person for services performed in the United States may also constitute FDAP income subject to withholding.
The applicability of withholding tax to upstream payments from NAI to NTP depends critically on the characterization of the payments, as discussed in the following subsections.
B. US-UK Income Tax Treaty
The United States and the United Kingdom have a comprehensive income tax treaty — the Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, signed July 24, 2001, as amended by protocol (the "Treaty") — that may reduce or eliminate U.S. withholding tax on certain categories of income paid by NAI to NTP. The relevant Treaty provisions are as follows:
Business Profits (Article 7). Under Article 7 of the Treaty, business profits of an enterprise of a Contracting State (the UK, in the case of NTP) are taxable only in that state unless the enterprise carries on business in the other Contracting State (the US) through a permanent establishment ("PE") situated therein. If NTP does not have a U.S. PE (other than through NAI, which is a separate legal entity and files its own U.S. tax returns), then intercompany service fees that constitute "business profits" of NTP would generally not be subject to U.S. taxation under Article 7, and no withholding would apply.
However, this analysis requires careful consideration of whether NTP's activities in the United States — including its ownership and management of NAI — create a PE under Article 5 of the Treaty. If NTP personnel participate in the oversight or management of the MSA relationship or the North American network operations, there may be a risk that NTP has a PE in the United States, which could subject a portion of the intercompany service fees to U.S. taxation. Additionally, the IRS may seek to recharacterize payments from a U.S. subsidiary to its foreign parent as payments other than "business profits" (e.g., as royalties or dividends), thereby avoiding the application of Article 7.
Royalties (Article 12). Under Article 12 of the Treaty, royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State are taxable only in the state of residence. In other words, the Treaty provides a 0% withholding rate on royalties — royalties paid by a U.S. resident to a UK resident are exempt from U.S. withholding tax under the Treaty.
This provision is potentially relevant if any portion of the upstream payment from NAI to NTP is characterized as a royalty — for example, if NAI is deemed to be paying NTP for the sub-licensing or cost-sharing of technology, intellectual property, or know-how. However, as noted below, the direct ArcMesh license is between Cedarpoint and NAI (unrelated parties), not between NAI and NTP, and any upstream payment from NAI to NTP related to the ArcMesh platform would more likely be characterized as a cost-sharing contribution or management fee rather than a royalty.
Technical Fees / Services. The US-UK Treaty does not include a separate article on technical services fees. This is in contrast to certain other U.S. tax treaties (e.g., with India) that include specific provisions for fees for technical services. The absence of a separate technical services article means that service fees paid by NAI to NTP generally fall under the business profits article (Article 7) and would be exempt from U.S. withholding if NTP does not have a U.S. PE, as discussed above.
Dividends (Article 10). If MSA costs are funded through dividend distributions from NAI to NTP — for example, if NAI's after-tax profits (which reflect the MSA costs as deductible expenses) are distributed to NTP as dividends — the dividend withholding rules under Article 10 of the Treaty apply. Under Article 10, the Treaty withholding rate on dividends paid by a U.S. company to a UK parent company that owns more than 10% of the voting stock of the U.S. company is 5%. Since NTP owns 100% of NAI, the applicable rate would be 5%.
This 5% rate represents a significant reduction from the statutory 30% rate but is not zero. NAI would be required to withhold 5% of any dividend distributions to NTP and remit the withheld amount to the IRS. NTP would be entitled to a foreign tax credit in the UK for the U.S. withholding tax paid, subject to UK foreign tax credit limitations.
Interest (Article 11). If MSA costs are funded through intercompany loans from NTP to NAI — with NAI using the loan proceeds to fund MSA payments and NTP receiving interest payments from NAI — the interest withholding rules under Article 11 of the Treaty apply. Under Article 11, interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State is taxable only in the state of residence. In other words, the Treaty provides a 0% withholding rate on interest — interest paid by NAI to NTP is exempt from U.S. withholding tax under the Treaty, provided the interest is not effectively connected with a U.S. PE of NTP.
C. Characterization Risk
The proper characterization of upstream payment flows from NAI to NTP is critical, as the withholding tax consequences vary significantly depending on the character of the payment:
ArcMesh-Related Risk. A particular characterization risk arises in connection with the ArcMesh platform license component of the MSA ($3,000,000/yr). If a portion of the intercompany charge

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