Cross Border Joint Ventures Canadian/US

Transcription

1 67 th Annual Tax Conference 67e Conférence fiscale annuelle 2015 OUTLINE I. A. Choice of entity B. Formation transaction C. Foreign tax credit utilization D. Income allocations E. Outside basis F. Transfer pricing G. Cross-border rate management H. Exit II. A. Choice of entity B. Formation transaction C. Operations D. Foreign tax credit utilization E. Withholding tax F. US investor entity G. Cross-border rate management H. Exit 2

2 Choice of entity Choice of entity / entity classification - Canada two-step analysis - US so-called check-the-box regulations US entities: corporation, partnership (LP, LLP, LLLP), statutory/business trust, LLC, etc. Canadian perspective: corporation or partnership, absent financing structures typically seeking consistent treatment in Canada and the US Classification of actual legal joint venture (IRC 7701(a)(2) vs. Bow Valley Husky (Bermuda), Continental Bank; PLR ) 3 Choice of entity corporation Treaty resident Art. IV LOB Art. XXIX-A Qualifying person US C-corp 4

3 Choice of entity LLC US LLC Art. IV liable to tax Fifth Protocol, Art. IV(6) not a complete answer US branch profits tax Art. IV(7) Canadian income/tax mismatch Anson v. HMRC 5 Choice of entity LLC Anson v. HMRC: The profits do not belong to the LLC in the first instance and then become the property of the members. Accordingly, our finding of fact in the light of the terms of the LLC operating agreement and the views of the experts is that the members of [the LLC] have an interest in the profits of [the LLC] as they arise. 6

4 Choice of entity partnership Partnership or legal joint venture Branch profits tax 5% if Art. XXIX is satisfied Canadian treatment LLLP: CRA document no C6 (Q.3) 7 Formation transaction Contribution of assets ITA ss. 97(2) requires a Canadian partnership IRC 721 typically tax-deferred (FIRPTA asset?) Policy basis for ITA ss. 97(2)? CRA document no C6 (Q.6) IRC 754 election in place? 8

5 Foreign tax credit utilization Partnership income to be allocated Cash receipts and disbursements vs. accrual Depreciation vs. CCA (including basis) Repairs and maintenance IRC 163(j) Loss disallowance rules 9 Income allocations 10 Substantial economic effect (IRC 704 regs) - Economic effect test - Substantiality test ITA ss. 103(1), 103(1.1) IRC 1446 withholding Tax distributions inequity between foreign partner and domestic partner

6 Tax distribution clause The Partnership may make aggregate annual distributions to each Partner of an amount that is intended to cover the Partner s aggregate federal and state income tax liability with respect to Partnership income allocated to the Partner for the Partnership s taxable year (the Tax Distribution ). the Tax Distribution will be equal to 41% of the [income] allocable to each on a quarterly basis. The amount of the Tax Distribution will be reduced by any federal, state and local income taxes that the Partnership may be required to withhold or pay on behalf of any Partner... Any amount distributed to a Partner pursuant to this Section 5.2 as well as any income tax payment made by the Company on behalf of a Partner shall be treated as a distribution made to such Partner for purposes of Section Outside basis IRC 752 ITA paras. 53(2)(c) and 53(2)(e) 12

7 Outside basis negative basis Bank $ $ $ Refinancing at the partnership level to fund a distribution Mismatch between Canadian outside basis rules and US outside basis rules Canadian ACB goes negative FTC consequences 13 Transfer Pricing Transactions - Management fees - Sales of goods - Royalties - etc. 100% Holdco 25% 75% ITA ss. 247(2) applies to partnerships based on identity of partner Disguised allocation? Compliance (T106, Documentation) 14

8 Cross-border rate management US individual tax Canadian individual tax with foreign tax credits 15 Cross-border rate management US corporate tax Branch profits tax Canadian corporate tax with (typically excess) foreign tax credit 16

9 Cross-border rate management ULC US individual tax Branch profits tax Canada corporate tax FTC mismatch Individual tax on dividends (under integration) 17 Exit Sale of assets or interest in entity? Revenue Ruling Proposed Obama codification Inside/outside basis mismatch Assets 18

10 Exit Potential withholdings IRC 1445 (FIRPTA) and 1446 FTC management in Canada Branch profits tax on exit limited exception 19 Choice of entity Canadian entities: corporation, partnership, ULC US perspective: blocker or flow-through (eligible entity) Classification of actual legal joint venture (IRC 7701(a)(2) vs. Bow Valley Husky (Bermuda), Continental Bank; PLR ) 20

11 Choice of entity treaty benefits Treaty resident Art. IV Canadian corporation Art. XXIX-A Qualifying person Canco 21 Choice of entity treaty benefits Treaty resident Art. IV Canadian ULC Art. XXIX-A Qualifying person ULC 22

12 Choice of entity treaty benefits Partnership or legal joint venture Canadian branch tax Canadian treatment 23 Formation transaction Inbound inside basis mismatch Contribution of assets 24

13 Operations, FTCs, withholding Similar issues relating to definition of income No equivalent to IRC 1446 withholding Possible Reg. 105 withholding 25 Foreign tax credit utilization ULC In context of ULC resourcing rules under Art. XXIV can become key PUC dividend necessary to avoid 25% withholding (Art. IV(7)) Substantial economic effect shareholders agreement 26

14 US investor entity LLC Art. IV(6) inbound LLC investment NR303 Canadian branch tax 27 US investor entity S-corporation S-corp Flow-through treatment in US Recognized as a treaty resident of US 28

15 Transfer Pricing 100% Unlikely an abuse given disparate economic interests Disguised allocation? Holdco Transactions - Management fees - Sales of goods - Royalties - etc. 25% 75% 29 Cross-border rate management Canadian individual rates US individual tax, excess foreign tax credit 30

16 Cross-border rate management Canadian corporate tax Branch profits tax US corporate tax, FTC for Canadian tax paid 31 Cross-border rate management Canadian corporate tax Branch profits tax at rate of 25% - CRA document no E5 US individual tax flow through of foreign tax credits 32

17 Cross-border rate management S-corp Canadian corporate tax Branch profits tax US individual tax Flow through of foreign tax credit 33 Cross-border rate management S-corp Canadian corporate tax at ULC level 5% dividend withholding (PUC dividend) US individual tax on flowthrough basis, flow through FTC ULC 34

18 Exit Sale of assets or interest in entity? Taxable Canadian property? Inside/outside basis mismatch Business Assets 35 Exit Potential withholdings ITA s. 116 FTC management in US Branch tax on exit? 36

19 QUESTIONS? Bradley Thompson, LLM Associé / Partner Bureau , boul. René Lévesque Ouest Montréal (QC) H3B 2K2 Téléphone : Télécopieur : Sans frais : Courriel : Bradley.thompson@mnp.ca mnp.ca COMPTABILITÉ CONSULATION FISCALITÉ 37 38