28 th Annual Institute on Current Issues in International Taxation

Transcription

1 28 th Annual Institute on Current Issues in International Taxation International Update Panel December 18, 2015 (2:45-3:45pm) John Bates BakerHostetler Presented by: Mike DiFronzo (Chair) PricewaterhouseCoopers LLP Karen Brown George Washington University Doug Poms Office of the International Tax Counsel Dan McCall Office of the Associate Chief Counsel (International) 1

2 Agenda BEPS Update/Overview Business Plan Update Subpart F Developments Foreign Tax Credit Developments PFIC Developments 2

3 BEPS Update/Overview 3

4 Business Plan Update 4

5 Subpart F Developments 5

6 Former T(b)(4) Anti-Abuse Rule Former T(b)(4)(i) provided: For purposes of (b)(1) of the regulations, a [CFC] will be considered to hold indirectly (A) the investments in United States property held on its behalf by a trustee or nominee or (B) at the discretion of the District Director, investments in US property acquired by any other foreign corporation that is controlled by the [CFC] if one of the principal purposes for creating, organizing, or funding (through capital contributions or debt) such other foreign corporation is to avoid the application of section 956 with respect to the [CFC]. 6

7 Revised T(b)(4) Anti-Abuse Rule For purposes of section 956, United States property held indirectly by a controlled foreign corporation includes (A) United States property held on behalf of the controlled foreign corporation by a trustee or a nominee; (B) United States property acquired by any other foreign corporation that is controlled by the controlled foreign corporation if a principal purpose of creating, organizing, or funding by any means (including through capital contributions or debt) the other foreign corporation is to avoid the application of section 956 with respect to the controlled foreign corporation; (C) Property acquired by a partnership that is controlled by the controlled foreign corporation if the property would be United States property if held directly by the controlled foreign corporation, and a principal purpose of creating, organizing, or funding by any means (including through capital contributions or debt) the partnership is to avoid the application of section 956 with respect to the controlled foreign corporation. 7

8 Revised T(b)(4) Anti-Abuse Rule Applies to US property acquired by partnerships with bad principal purpose ( T(b)(4)(i)(C)) Applies to funding of foreign corporation or partnership by any means, not limited to capital contributions or debt ( T(b)(4)(i)(B) and (C)) Is self-executing, rather than applicable at discretion of District Director ( T(b)(4)(i)(B) and (C)) Requires a bad principal purpose, rather than one of the principal purposes to be bad ( T(b)(4)(i)(B) and (C)) Adds example clarifying that: Anti-abuse rule can apply even if US property actually held by other CFC and there would be 951(a)(1)(B) inclusion with respect to such other CFC If anti-abuse rule applies, no 951(a)(1)(B) inclusion with respect to CFC that actually holds US property Tax attributes of CFCs (E&P, PTI, and foreign taxes, among others) taken into account in applying principal purpose test (see T(b)(4)(iv), Ex. 3) 8

9 Application of Revised 956 Anti-Abuse Rule FS2 makes loan to FS1, and FS1 makes loan to P Example describes tax attributes of FS1 and FS2, and assumes bad principal purpose of funding of FS1 Taking tax attributes into account consistent with recent guidance (see CCA , CCA ) Clarifies that because anti-abuse rule treats FS2 as holding US property, no 951(a)(1)(B) inclusion with respect to FS1 See T(b)(4)(iv), Ex. 3 $100 Loan FS1 (CFC) E&P: $100 FT: $100 Cash: $0 P (US) $100 Loan FS2 (CFC) E&P: >$100 FT: $0 Cash: Substantial 9

10 Effective Date of Revised Anti-Abuse Rule Revisions to 956 Anti-Abuse Rules Extension of 956 anti-abuse rule to funding of partnerships ( T(b)(4)(i)(C)) Extension of 956 anti-abuse rule to funding other than through capital contributions or debt ( T(b)(4)(i)(B) and (C)) Restatement of principal purpose test ( T(b)(4)(i)(B) and (C)) Elimination of discretionary clause (now self-executing) ( T(b)(4)(i)(B)) Coordination between 956 anti-abuse rule and attribution of US property held by partnerships to CFC partners ( T(b)(4)(iii)) Addition of special distribution rule regarding obligations of foreign partnerships ( T(b)(5)) Effective Taxable years of CFCs ending on or after 9/1/15 with respect to property acquired on or after 9/1/15 Same Same Same Same Taxable years of CFCs ending on or after 9/1/15 with respect to distributions made on or after 9/1/15 10

11 Active Rents and Royalties Exception FPCHI includes dividends, interest, rents, royalties, among other types of income, subject to exceptions Rents and royalties are excluded from FPHCI if received from person other than related person and derived in active conduct of trade or business within meaning of (c) for rents or (d) for royalties ( (b)(6)) Rents and royalties both have active development and active marketing exceptions 11

12 Active Development Tests Active development test requires CFC to be regularly engaged in: Manufacture or production of, or acquisition and addition of substantial value to, certain property (in case of rents) ( (c)(1)(i)) Development, creation, or production of, or acquisition of and addition of substantial value to, certain property (in case of royalties) ( (d)(1)(i)) 12

13 Active Marketing Tests Active marketing test requires CFC to operate in foreign country an organization regularly engaged in business of marketing, or marketing and servicing, leased or licensing property, and that is substantial in relation to amount of rents or royalties derived from leased or licensed property ( (c)(1)(iv); (d)(1)(ii)) Safe harbor provides that substantiality test is satisfied if active leasing or licensing expenses are at least 25% of adjusted leasing or licensing profits ( (c)(2)(ii); (d)(2)(ii) 13

14 Revised Active Development Test Royalties considered derived in active conduct of trade or business if derived by CFC (the licensor) from licensing: Prior Final Regulations ( (d)(1)(i)) (i) Property that the licensor has developed, created, or produced, or has acquired and added substantial value to, but only so long as the licensor is regularly engaged in the development, creation or production of, or in the acquisition of and addition of substantial value to, property of such kind Temporary Regulations ( T(d)(1)(i)) (i) Property that the licensor, through its own officers or staff of employees, has developed, created, or produced, or property that the licensor has acquired and, through its own officers or staff of employees, added substantial value to, but only so long as the licensor, through its officers or staff of employees, is regularly engaged in the development, creation, or production of, or in the acquisition and addition of substantial value to, property of such kind 14

15 Revised Active Marketing Test Royalties considered derived in the active conduct of a trade or business if derived by the CFC (the licensor) from licensing: Prior Final Regulations ( (d)(1)(ii)) (ii) Property that is licensed as a result of the performance of marketing functions by such licensor if the licensor, through its own officers or staff of employees located in a foreign country, maintains and operates an organization in such country that is regularly engaged in the business of marketing, or of marketing and servicing, the licensed property and that is substantial in relation to the amount of royalties derived from the licensing of such property. Temporary Regulations ( T(d)(1)(ii)) (ii) Property that is licensed as a result of the performance of marketing functions by such licensor through its own officers or staff of employees located in a foreign country or countries, if the licensor, through its officers or staff of employees, maintains and operates an organization either in such foreign country or in such foreign countries (collectively), as applicable, that is regularly engaged in the business of marketing, or of marketing and servicing, the licensed property and that is substantial in relation to the amount of royalties derived from the licensing of such property. 15

16 Effect of CST and PCT Payments For purposes of both active development and active marketing tests: Cost-sharing Transaction (CST) Payments and Platform Contribution Transaction (PCT) Payments made by CFC will not cause CFC s officers and employees to be treated as undertaking activities of controlled participant to which payments are made ( T(c)(2)(viii) and (d)(2)(v)) Deductions for CST Payments and PCT Payments are excluded from definition of active leasing and licensing expenses ( T(c)(2)(iii)(E) and (d)(2)(iii)(e)) 16

17 Effective Date of Revised Active Rents and Royalties Rules Revisions to Active Rents and Royalties Rules Requirement that activities be conducted by officers or employees of CFC ( T(c)(1)(i) and (iii), - 2T(d)(1)(i) and (ii)) Clarification that activities may be conducted in more than one foreign country ( T(c)(1)(iv), - 2T(c)(2)(ii), -2T(d)(1)(ii), and -2T(d)(2)(ii)) Provision that CST payments and PCT payments by CFC do not cause activities to be treated as conducted by officers or employees of CFC ( T(c)(2)(viii) and - 2T(d)(2)(v)) Effective Rents or royalties received or accrued during taxable years ending on or after 9/1/15 with respect to property manufactured or to which substantial value has been added on or after 9/1/15 Rents or royalties received or accrued during taxable years ending on or after 9/1/15 to the extent rents or royalties received or accrued on or after 9/1/15 Same 17

18 BMC SOFTWARE 5 th CIR, 3/13/2015 TRANSFER PRICING SECONDARY ADJUSTMENT DOES NOT RESULT IN INCREASE IN RELATED PARTY INDEBTEDNESS THAT RETROACTIVELY REDUCES 965 DIVIDENDS RECV D DEDUCTION 18

19 5 TH CIRCUIT REVERSES T.C. ROYALTIES PAID BY BMC S CFC BSEH FOR LICENSING SOFTWARE FOUND NOT ARM S LENGTH IN CLOSING AGREEMENT, BMC AGREES TO AN INCREASE IN INCOME (PRIMARY ADJUSTMENT) AND CREATION OF ACCTS REC VBLE FROM BSEH IN EQUAL AMT FOR TWO YRS (SECONDART ADJ) 19

20 RETROACTIVE EFFECT ON 965 DEDUCTION? CLOSING AGRMT PROVIDED ADJUSTMENT FOR FEDERAL INCOME TAX PURPOSES COM R ARGUES ACCTS REC VBLE ESTBL D FOR ALL TAX PURPOSES INCLUDING 965 DEDUCTION IN YR PRIOR TO CLOSING AGRMT 5 TH CIR DISAGREES: 1) PLAIN LANGUAGE OF 965(b)(3), 2) CLOSING AGRMT COVERED ONLY TAX CONSEQUENCES EXPRESSLY ENUMERATED 20

21 BACKDATED ACCT S REC VBLE DEBT CREATED BY CLOSING AGRMT ACTUALLY AROSE AFTER TESTING PERIOD FOR DETERMINING WHETHER 965 DEDUCTION REDUCED NOT A SUBSEQUENT ADJ TO REFLECT WHAT ACTUALLY HAPPENED DURING TESTING PERIOD, BUT A FICTION SET UP FOR INTEREST AND CASH ACCT IMBALANCE FROM PRIMARY ADJUSTMENT 21

22 BACKDATED ACCTS REC VBLE THERE WAS NO DEBT AS OF CLOSE OF TESTING PD BECAUSE A/R NOT SET UP UNTIL A YR LATER/ 965 DEDUCTION CANNOT BE REDUCED CT ACCORDS NOT EVEN SKIDMORE DEFERENCE TO NOTICE PROVIDING THAT A/R UNDER CLOSING AGRMT TO BE TREATED AS DEBT FOR 965(b)(3) PURPOSES [NO ANALYSIS/EXPLANATION] 22

23 CONTRACTUAL AGRMT? 5 TH CIR FOUND BMC DID NOT CONTRACTUALLY AGREE TO 965 EFFECT BOILERPLATE REFERENCE IN CLOSING AGRMT FOR FEDERAL INCOME TAX PURPOSES COMPREHENSIVE ENUMERATION TO SPECIFIC TAX CONSEQUENCES FLOWING FROM ADJUSTMENT BUT NO REFERENCE TO 965 EVEN IF AGRMT AMBIGUOUS, TESTIMONY (NOT REBUTTED) OF BMC INTENT ONLY TO BE IN SAME POSITION AS IF IT ORIGINALLY SET AGREED TRANSFER PRICES [NO ADVERSE CONSEQUENCES FROM BRINGING CASH BACK TO PARENT] FAVORS BMC 23

24 CONTRACTUAL AGREEMENT? 5 TH CIR REJECTS ARGUMENT THAT RETROACTIVE A/R TO BE TREATED AS ACTUAL A/R UNLESS TP NEGOTIATED OTHERWISE IN CLOSING AGRMT CASE LAW DISTINGUISHABLE 2005 NOTICE NOT INCORP D BY REFERENCE BMC AWARE OF NOTICE BUT COULD NOT HAVE UNDERSTOOD IT TO BE INCORP D COM R NOW EXPLICITLY OUTLINES 965 CONSEQUENCES IN CLOSING AGRMTS NO INDEBTEDNESS FOR 965 PURPOSES 24

25 GLAM TAX RATE DISPARITY TEST FOR MANUFACTURING CFC S SALES BRANCH 25

26 EFFECTIVE TAX RATE CALCULATION UNDER REGS (b)(I)(i)(b) CFC (COUNTRY B) MFRS RAW MATERIALS FROM UNRELATED SUPPLIER TO MAKE PRODUCT X IN COUNTRY B CFC S WHOLLY OWNED SUB, DE (DISREGARDED) LOCATED IN COUNTRY A EARNS COMMISSION FROM SALE (NO MFR) OF PRODUCT X TO UNRELATED CUSTOMERS OUTSIDE A & B 26

27 SALES BRANCH DE EARNS 100X [EURO] OF COMMISSION ON SALE OF X & 30X [EURO] OF RELATED EXPENSES COUNTRIES A & B IMPOSE 20% STATUTORY RATE ON SALES INCOME COUNTRY A: EXCLUDE 50% OF SALES INCOME FROM MFR D GOODS SOLD OUTSIDE A COUNTRY B: NO TAX ON SALES INCOME UNTIL REMITTED TO CFC AS DIVIDEND 27

28 SALES BRANCH COUNTRIES A & B: ALLOW 30X [EURO] DEDUCTION FOR SALES EXPENSES DE PAID 4X [EURO] TAX TO COUNTRY A IN YR 1 28

29 RATE DISPARITY REGS TO PREVENT USE OF BRANCH TO SUBVERT SUBPT F RULES, 954(d)(2) TESTS USE OF BRANCH OUTSIDE CFC S COUNTRY OF INCORP TO DETERMINE WHETHER IT HAS SUBSTANTIALLY SAME EFFECT AS IF BRANCH []WERE A WHOLLY OWNED SUBSIDIARY DERIVING SUCH INCOME REGS APPLY RATE DISPARITY TEST 29

30 RATE DISPARITY REGS COMPARISON OF EFFECTIVE RATE OF TAX ON SALES INCOME ALLOCATED TO BRANCH TO EFFECTIVE RATE OF TAX ON CFC IF SALES INCOME DERIVED IN ITS COUNTRY OF INCORP COMMON TAX BASE MUST BE USED TO COMPUTE THE ACTUAL ERT AND HYPOTHETICAL ERT (IF ACTUAL ERT LESS THAN 90% OF AND AT LEAST 5% POINTS LESS THAN HYPO ERT USE OF BRANCH DEEMED TO HAVE TAX AVOIDANCE EFFECT) OTHERWISE WOULD IGNORE INCENTIVE TO SHIFT INCOME FROM MFG JURIS TO SALES JURIS THAT GRANTS EXCLUSIONS & DEDUCTIONS TO DERIVE SMALLER TAX BASE 30

31 COMMON TAX BASE MUST USE HYPOTHETICAL SALES INCOME TAX BASE IN THE MFG JURISDICTION FIVE STEPS: DETERMINE RELEVANT INCOME DETERMINE ACTUAL TAX ON THAT INCOME DETERMINE HYPO TAX BASE DETERMINE HYPO TAX DIVIDE ACTUAL & HYPO TAX BY HYPT BASE & COMPARE RESULTING ERTs 31

32 CALCULATING RATE DISPARITY STEP 1 GROSS INCOME: 100X [EURO] STEP 2 ACTUAL TAX IN COUNTRY A: 4X [EURO] (100 x.50 = 50 EXCLUDED, = 20, 20 x.20 = 4) STEP 3 HYPO TAX BASE: 100X 30x = 70X UNDER COUNTRY B LAW STEP 4 HYPOTHETICAL COUNTRY B TAX: 14X (.20 x 70X) STEP 5 COMPARE ACTUAL & HYP ERT 32

33 CALCULATING RATE DISPARITY ACTUAL ERT = 5.71% (.04/.70) HYPO ERT = 20% (.14/.70) ACTUAL ERT IS LESS THAN 90% OF AND AT LEAST 5% POINTS BELOW HYPO ERT DE IS TREATED AS WHOLLY OWNED SUB OF CFC AND ITS SALES INCOME = FBCSI & SUBPT F INCOME UNLESS EXCEPTIONS APPLY 33

34 CONSISTENCY? DEPARTURE FROM PREVIOUS PLRs? DEPARTURE FROM IMPLICATION IN REGULATIONS? 34

35 Foreign Tax Credit Developments 35

36 Albemarle Corp. Background Accrual of foreign tax liability for foreign tax generally accrues at end of foreign tax accounting period (e.g., Rev. Rul , C.B. 390) Contested liability doctrine liability for disputed tax does not accrue under all-events test until contest is resolved (see Dixie Pine v. Commissioner, 320 U.S. 516 (1944)) Relation-back doctrine once foreign tax accrues under all-events test, foreign tax credited in year to which foreign tax relates even if before year of accrual (e.g., Rev. Rul , C.B. 125) Post (d)(3)(A) If the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be 10 years from the date prescribed by law for filing the return for the year in which such taxes were actually paid or accrued. 36

37 Albemarle Corp. Facts Belgian subsidiary of taxpayer paid interest from 1997 to 2001 on debt Belgian subsidiary initially took position that Belgian withholding tax did not apply In 2001, Belgian tax authority asserted that interest payments were subject to 25% Belgian withholding tax In 2002, Belgian subsidiary and Belgian tax authority agreed that 15% Belgian tax applied, and additional taxes were paid for 1997 to 2001 In 2009, taxpayer filed refund claim for 1997 to 2001 tax years, claiming additional credits 37

38 Albemarle Corp. Issue was when 10-year statute of limitations began to run (i.e., when Belgian taxes were actually paid or accrued) Taxpayer contended that Belgian taxes actually accrued in 2002, when all events test was first satisfied (i.e., when contest with Belgian tax authority was settled) IRS contended that Belgian taxes actually accrued in 1997 and 1998 under relation-back doctrine IRS denied refund claims for 1997 and 1998 (but accepted refund claims for 1999, 2000, and 2001), asserting that claims were untimely and should have been filed on or before 3/15/2008 and 3/15/2009, respectively 38

39 Albemarle Corp. Court of Claims agreed with IRS, relying on the legislative history, concluding that use of word actually was intended to overrule Ampex Corp. v. United States, 620 F.2d 853 (Ct. Cl. 1980) (see Albemarle Corp. v. United States, 118 Fed. Cl. 549 (Ct. Cl. 2014)) Ampex held that under prior version of statute a claim was timely if filed within 10 years of due date of return for year in which foreign tax carryforwards were claimed, even if filed more than 10 years after due date of returns for years in which carryforwards arose Federal Circuit affirmed Court of Claims, citing: Legislative history Use of same phrase and application of phrase in FTC carryover regulations Policy behind extended 10-year statute of limitations to accommodate resolutions of foreign tax disputes, not to provide additional time to file refund claims after disputes resolved (see 797 F.3d 1011 (Fed. Cir. 2015)) Petition for rehearing denied in October 2015 (see 16 AFTR 2d ) 39

40 PFIC Developments 40

41 PLR /21/2014 PFIC LOOK-THROUGH RULES 41

42 1297(c), 1298(b)(7) X CORP NOT CFC US SUB y US SUB Z 42

43 LOOK-THROUGH RULES X CORP (COUNTRY M) HAS U.S. S/H BUT IS NOT CFC X CORP ENGAGED IN R & D, COMMERCIALIZATION & MKTG OF PHARMACEUTICAL TREATMENTS Y CONDUCTS RELATED OPERATIONS X HOLDS Y OBLIGATION ON WHICH Y PAYS/ACCRUES U.S. SOURCE INTEREST EXPENSE 43

44 LOOK-THROUGH RULES X CORP OWNS NO PFIC STOCK TAKING INTO ACCT ONLY INCOME EARNED & ASSETS DIRECTLY OWNED BY X AND INCOME EARNED & ASSETS OWNED BY Y (OTHER THAN DIVIDENDS FROM & STOCK OF Z), X WOULD NOT BE PFIC 44

45 LOOK-THROUGH RULES UNDER LOOK-THROUGH RULES OF 1297(c), X DEEMED TO HOLD PROPOR. SHARE OF Y ASSETS & TO RECEIVE PROPOR. SHARE OF X S INCOME B/C X HAS WAIVED TREATY BENEFIT, UNDER 1298(b)(7), SHARES OF Z TREATED AS ASSET HELD DIRECTLY BY X THAT DOESN T PRODUCE PASSIVE INCOME & IS NOT HELD FOR PRODUCTION OF PASSIVE INCOME (FOR ASSET TEST RE X) 45

46 LOOK-THROUGH RULES DIVIDENDS PAID BY Z TO Y ARE TREATED AS REC VD DIRECTLY BY X AND ARE NOT PASSIVE INCOME FOR INCOME TEST RE X PER 1297(c), Y STOCK & DIVIDENDS PAID X BY Y ARE DISREGARDED IN APPLYING ASSET & INCOME TEST RE X PER 1297(c), LOAN FROM X TO Y AND INTEREST PD ON LOAN DISREGARDED FOR ASSET & INCOME TEXT RE X 46

47 Legislative Update 47

48 Protecting Americans From Tax Hikes Act (PATH) of 2015 Provision Extension/Effective Date 954(c)(6) Look-Through Rule Retroactively extended; effective for taxable years of CFCs beginning before January 1, 2020 Exception to Subpart F for Active Financing Income Exception to 267(d)(1) for Transfers from Tax-Indifferent Parties Extension of Treatment of RICs as Qualified Investment Entities under FIRPTA and Application to REITs Increase of Ownership Limit for Publicly Traded Exception from FIRPTA for Stock of REITs Exception from FIRPTA for Qualified Foreign Pension Funds Retroactively made permanent Effective for sales and other dispositions of property acquired after December 31, 2015 in sales or exchanges to which 267(a)(1) applies Effective on January 1, 2015 Effective on enactment Effective on enactment 48

49 Political(?) Update 49

50 International Tax Proposals of Presidential Candidates* Candidate Corporate International Tax Proposal Jeb Bush Territorial system; deemed repatriation of deferred earnings taxed at 8.75% Ben Carson Tax-free repatriation for six months, provided 10% of repatriated amounts used in enterprise zones or to create jobs Chris Christie Deemed repatriation taxed at 8.75% Hillary Clinton Stronger anti-inversion rules; exit tax on deferred earnings of inverting US corporations Ted Cruz Territorial system; deemed repatriation taxed at 10% Lindsey Graham Mike Huckabee John Kasich Rand Paul Deemed repatriation taxed at 10% No tax on international income; federal sales tax at 23% with rebates for low-income households Territorial system; tax-free repatriation Territorial system Marco Rubio Territorial system; deemed repatriation taxed at 6% Bernie Sanders Worldwide system without deferral; additional limits on FTC; revised anti-inversion and inbound rules Donald Trump Worldwide system without deferral (with FTC); deemed repatriation taxed at 10% * From Tax Foundation 50

51 THANK YOU! This document is not written tax advice directed at the particular facts and circumstances of any person. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 51