The 2019 National Multistate Tax Symposium State tax reboot The age of Multistate. February 6-8, 2019

Transcription

1 The 2019 National Multistate Tax Symposium State tax reboot The age of Multistate February 6-8, 2019

2 State tax consequences of international restructurings Jeff Friedman, Eversheds Sutherland (US) LLP Sarah Murray, Deloitte Tax LLP February 6-8, 2019

3 Common International and Domestic Restructurings and the Potential Impact to State Tax 3

4 Common International and Domestic Restructurings Out from Under Transaction Migration of Income/Assets to the US IP Migration U.S. Sales Office for Foreign Self-Manufactured Goods Split Ownership Structures Interest Expense Limitation GILTI Holding Company 4

5 Out from Under Transaction CFC Foreign Parent US CFC stock Federal Tax Treatment Gain on the transfer of the stock of CFC is recharacterized as a dividend under Section 1248 to the extent of the CFC s E&P Dividend generally treated as either PTI or eligible for a 100% DRD under Section 245A Consider impact of Section 59A CFC State Tax Treatment Most states conform to Section 1248, but there are SIGNIFICANT exceptions, e.g., California There may be federal/state basis differences due to Section 961 and state non-conformity to GILTI/ Section 965 If a state does not conform to Section 245A, there may be a limit to the amount of DRD or the taxpayer may be required to make an interest offset adjustment 5

6 Migration of Income/Assets to US Check the Box Federal Tax Treatment US Foreign Entity The check the box election of Foreign Entity is deemed to be a liquidation Because Foreign Entity is foreign, the liquidation does not qualify as a nontaxable liquidation under Section 332, and US is treated as if it received a dividend of all of Foreign Entity s E&P under Section 367(b) The dividend is generally treated as either previously taxed income or eligible for a 100% DRD under Section 245A Consider impact of Section 59A CFCs that are converted to disregarded entities will become fully taxable, but may create the potential to generate additional FDII deduction due to foreign sales State Tax Treatment If a state does not conform to Section 245A, there may be a limit to the amount of DRD or the taxpayer may be required to make an interest offset adjustment Constitutionality of Section 367(b) recast 6

7 IP Migration Federal Tax Treatment US Often done to transfer IP from a low-tax jurisdiction in accordance with BEPS CFC 1 recognizes gain on the sale to CFC 2, and CFC 2 gets an amortizable fair market value basis in the IP CFC 1 CFC 2 Sale of IP If the gain was recognized prior to CFC 1 being subject to GILTI, the gain was thought to not be required to be included in US shareholder income, however GILTI regulations include an anti-abuse provision denying the amortization if the gain was recognized in a GILTI-free period. State Tax Treatment In states where the taxpayer files on a worldwide basis, the transaction gain may be deferred under the federal consolidated group return principle, e.g., Treas. Reg , and may be subject to subsequent recognition events If the taxpayer files in a state where CFC 1 is subject to inclusion in a combined group under tax haven rules, the gain may be included in the state s taxable income unless an exception applies 7

8 U.S. Sales Office for Foreign Self-Manufactured Goods Facts Canco Canco, CanSub or CFA (ForeignCo) manufactures finished goods (FG) outside the U.S. that it intends to sell to U.S. customers CanSub or CFA FG US LLC FG US LLC, a disregarded entity, has a U.S. office or fixed place of business (U.S. Office) for U.S. federal tax purposes, through which it conducts marketing, sales and distribution activities Manufacturing of finished goods Sales of finished goods through a U.S. office Customers ForeignCo sells FG to LLC LLC sells FG directly to customers (or to a domestic affiliate) 8

9 U.S. Sales Office for Foreign Self-Manufactured Goods (continued) Federal Tax Treatment CanSub or CFA Manufacturing of finished goods Canco FG US LLC Customers FG Sales of finished goods through a U.S. office Relevant Income is sourced solely on the basis of production activities, instead of the place of sale, under Section 863(b) Income sourced on the basis of the location of the production assets is 100% of the Relevant Income, under section 863(b)(2); the portion of the income that is U.S. source is zero LLC s income likely would be 100% foreign source Possible that none of this foreign source income would be effectively connected income (ECI) State Tax Treatment Nexus of U.S. Office based on physical and economic nexus State taxation of an entity with no ECI and state income tax starting point (i.e. worldwide income) Non-income tax implications and reporting requirements Consider Foreign Tax Implications and Transfer Pricing 9

10 Split Ownership Structures Foreign Affiliate Foreign Parent US 40% Federal Tax Treatment Due to the changes to the attribution rules of Section 958(b), the 60% ownership of Foreign Sub by Foreign Affiliate is attributed to US US is required to recognize a pro-rata share of GILTI generated by Foreign Sub State Tax Treatment 60% Foreign Sub US s ownership percentage may be too low to claim a full state DRD under the state s foreign source DRD (or Section 245A, in conforming states) How do the rules of Section 958 that enable Section 318 attribution for purposes of Subpart F/GILTI interact with state DRD rules? Consider apportionment impact Consider tax havens 10

11 Interest Expense Limitation Foreign Parent US Cons. Grp. Federal Tax Treatment Interest expense of members of the US consolidated group is capped at 30% of adjusted taxable income (ATI) under revised Section 163(j) Limitation determined at consolidated group level, including consolidated ATI, which excludes Foreign Sub State Tax Treatment Foreign Sub 80/20 Co. How will the income and interest expense of Foreign Sub, as an 80/20 company, impact state Section 163(j) limitation of members of the US consolidated group? 11

12 Interest Expense Limitation (continued) Bank Acquisition Debt Foreign Parent US Cons. Grp. US Acq. Sub $ Target Stock Parent Federal Tax Treatment Interest expense related to Acquisition Debt is capped at 30% of ATI under revised Section 163(j) Limitation determined at consolidated group level, including consolidated ATI State Tax Treatment Potential requirement for separate interest expense limitation calculation for US Acquisition Sub in separate reporting states/differing combined v. consolidated groups Potential for state limitation where no federal limitation Target Interplay with existing state interest expense addback regimes 12

13 GILTI Holding Company Federal Tax Treatment CFC Opco Holdco CFC CFC stock Federal GILTI recognition is based on the consolidated group before and after the transfer State Tax Treatment GILTI is recognized by Holdco, which may be eligible for exclusion as an 80/20 company Should be considered in the context of an overall reorganization Importance of business purpose and economic substance Requires state tax liability analysis of old structure (CFC under Opco) vs. new structure (CFC under Holdco), e.g., nexus, filing methodology, apportionment, state treatment of GILTI deduction and FDII deduction (Section 250) Consider how will GILTI income be sourced for apportionment purposes, impact to Holdco, and potential 80/20 treatment Potential state approaches to factor representation: Detroit Formula Include the gross 951A amount in the sales factor Include GILTI net of the 50% deduction pursuant to Section 250 (in states that allow) Exclude GILTI 13

14 Contact information Jeff Friedman Eversheds Sutherland (US) LLP Sarah Murray Deloitte Tax LLP 14

15 This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation. 15

16 As used in this document, Deloitte means Deloitte Tax LLP a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte USA LLP, Deloitte LLP and their respective subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.