Tax Executives Institute

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1 Tax Executives Institute International Tax Update - Hot Topics & Planning Opportunities Kevin Cunningham Managing Director Washington National Tax May 9, 2017

2 Notice The following information is not intended to be written advice concerning one or more Federal tax matters subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 2

3 Agenda Where we seem to be going International tax reform Mandatory repatriation Executive order to review tax regulations Where we have been.. Final Section 385 regulations Final Section 987 regulations Final Section 367 regulations for goodwill and going concern value 3

4 International Tax Reform

5 Key Proposals Business President Trump House blueprint Camp bill (April 26, 2017) Corporate rate 15% 20% Reduce to 25% (over several years) Use for everything except titles and slide headers Individual owners Arial of 15% rate, possibly limited (including to charts, Active graphics, business income text) of passthroughs and small and medium owners of passthrough entities proprietorships KPMG Extra Light KPMG Extra Light Italics KPMG Thin Italics passthrough businesses (with capped at 25% ordinary income unspecified anti-abuse Use rules) for title rate. slide Backstopped and main headers by only reasonable compensation requirement for owneroperators taxes. Other changes to Sub K. Use for emphasis in title slide and main headers only Interest expense Not mentioned Net interest expense not Do not use deductible but carried forward indefinitely with unspecified special rules for financial services companies Qualified domestic manufacturing generally taxed at no higher than 25%. Owners who materially participate treat 70% of combined compensation and distributive share as subject to employment Carried interest Not mentioned Not clear Special rules When presenting in a large room, this may be used for title Cost recovery KPMG Light Not mentioned Full and immediate expensing Replace MACRS with system slide and main headers only for investments in tangible that lengthens recovery lives When presenting property in and a large intangible room, assets, this may and be used indexes for depreciable basis KPMG Light Italics emphasis in but title not slide landand main headers only for inflation. Extend amortization period for acquired KPMG Thin Do not use Code section 197 intangibles. Caps on expensing. Other. No broad rule, but limits amount of deductible interest expense that could apply to a U.S. corporation shareholder with one or more foreign corporations in some cases 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

6 Key Proposals - International Arial Destination based cash flow system, with border adjustments Territorial system KPMG Extra Light KPMG Extra Light Italics KPMG Light KPMG Light Italics Repatriation of existing earnings and profits (E&P) KPMG Thin KPMG Thin Italics President Trump House blueprint Camp bill Use for everything except titles and slide headers (April 26, 2017) (including charts, graphics, text) Not mentioned in one-page Move towards a destinationbased tax system, with Not included summary document border adjustments Use for title slide and main headers only Move to territorial system. No details. Territorial tax system, with U.S. corporate shareholder 100% exemption for gets 95% deduction for dividends received from foreign sourced portion of foreign subsidiaries. Repeal dividends received from Use for emphasis most of in current title slide subpart and main F headers certain foreign only subsidiaries. regime, but retain foreign Complex provisions to personal holding company prevent offshore shifting of When presenting rules in for a passive large room, foreign this may profits. be used Minimum for title tax of 15% slide and main income. headers only on CFC s foreign earnings. Modify active financing When presenting in a large room, this may be used for exception Foreign earnings emphasis in title slide and main headers only accumulated under old Do not use system taxed; rate determined in consultation with Congress Do not use Foreign earnings accumulated under old system repatriated by paying tax of 8.75% to the extent held in cash or cash equivalents or 3.5% otherwise (payable in installments over 8 years) Foreign earnings accumulated under old system repatriated by paying tax of 8.75% to the extent held in cash or cash equivalents or 3.5% otherwise (payable in installments over 8 years) 6

7 Tax reform Prospects for success Tax reform plus/minus Factors favoring reform Increased urgency around tax reform U.S. statutory corporate tax rate highest in the OECD Unified GOP control of House, Senate, and White House GOP may have budget reconciliation option to avoid Senate 60-vote filibuster threshold Mandatory repatriation of foreign earnings to pay in part for infrastructure investment could draw bipartisan support Use of new rules requiring dynamic scoring could reduce costs of rate reduction Goal of revenue neutrality reduces budgetary pressures of rate cuts Countervailing factors Repeal and replacement of the Affordable Care Act possibly a higher GOP priority U.S. multinationals effective rates largely in line with OECD averages could erode political support Senate rules generally require 60 votes (8 Democrats) to pass most legislation Budget reconciliation rules can impose budgetary straitjacket, making policy options less desirable Use of repatriation revenue to pay for spending could be viewed as a violation of the pledge not to raise taxes signed by more than 250 members of Congress Little precedent for use of dynamic scoring in official revenue estimates benefits could prove to be de minimis Revenue neutrality increases likelihood of losers and winners 7

8 Tax reform Distribution of benefits House Blueprint factors affecting outcomes Factors suggesting lower tax burden High number of domestic suppliers, foreign customers Asset-intensive business Low-leverage business model Domestically domiciled IP Tax burden currently determined largely by the statutory tax rate Factors suggesting higher tax burden High number of foreign suppliers, domestic customers Multinational with significant cross-border financing High-leverage business model Value chain relies on imports from foreign affiliates Currently manage tax burden via heavy use of deductions, credits, preference items, and other incentives and special rules 8

9 Mandatory Repatriation

10 Mandatory Repatriation Former Rep. Camp s TRA 14 Proposal Appears to be the Model Overview o Applied to U.S. Shareholders ( USSHs ) of CFCs and 10/50 Companies (10% US voting stock ownership) o Undistributed and untaxed post-1986 foreign earnings ( deferred E&P ) treated as subpart F income Measured as of the foreign corporation s last tax year before the territorial regime applies Inclusion by USSHs based on Section 951 pro rata share rules Deferred E&P would not have been reduced for dividends distributed in such year (i.e., add-back of current year dividends) PTI excluded 10

11 Mandatory Repatriation (continued) Overview (continued) o A subpart F income received deduction applies, determined by reference to the portion of the deferred E&P related to foreign cash position (75%) vs. other assets (90%) Leads to 8.75% effective rate for cash and 3.5% for other o Under Camp TRA 14, it appears that the subpart F inclusion is generally not separately siloed Can offset with NOLs or excess FTCs But OFL recapture does not apply 11

12 E&P deficits Mandatory Repatriation (continued) o Under Camp s proposal, USSH s pro rata share of E&P deficits in foreign corporations would have been aggregated o Aggregate E&P deficits then allocated among those foreign corporations with deferred E&P o Treatment of hovering deficits for this purpose o Impact of deficit allocation on FTC utilization? Need affirmative planning? 12

13 Foreign Tax Credits Mandatory Repatriation (continued) o Under Camp s proposal, FTC disallowed to the extent attributable to amount for which a deduction was allowed (75% - foreign cash position/ 90% remaining E&P) Commensurate reduction in Section 78 gross-up o Consider impact of current year dividend add back and E&P deficit allocations 13

14 Mandatory Repatriation (continued) Foreign cash position (under Camp Proposal) o Defined as including cash, foreign currency, net account receivables, CDs, commercial paper, US, state, and foreign government securities, short term obligations (<1 year), and other assets Treasury determines as being economically similar o Appears to exclude loan receivables (e.g., excludes PTI protected section 956 loans) o Determined, as the greater of: Aggregate foreign cash position as of the close of the last taxable year which began before the tax year in which the participation exemption system would have applied; or Average aggregate foreign cash position for the prior two years o Anti-abuse rule to disregard a transaction if the principal purpose of the transaction is to reduce aggregate foreign cash position 14

15 Mandatory Repatriation (continued) Taxable Year Considerations (under Camp Proposal) o The transition year for mandatory repatriation is the last tax year beginning before tax reform begins (assume 1/1/18) o For 12/31 CFCs, all of 2017 would be the transition year, so mandatory subpart F inclusion would make all distributions out of PTI and may limit planning o 11/30 CFCs would transition for the YE beginning 12/1/17 and ending 11/30/18; YE 11/30/17 planning would be unaffected by subpart F treatment 15

16 Mandatory Repatriation (continued) Importance of foreign attribute analyses to facilitate: o o o o o Modeling associated with mandatory repatriation tax cost Identification and implementation of planning opportunities Readiness (tax accounting perspective): tax impacts reflected in financial statements in the period that includes the date of enactment (e.g., existing APB 23 liability assertion, deferred tax liability, etc.) Treasury and cash mobilization objectives (tax and non-tax) Available foreign distributable reserves, solvency restrictions, corporate compliance, foreign exchange controls etc. 16

17 Repatriation Planning Basic Concepts Section 312(a)(3) Upon distributions, E&P reduced by the sum of amount of money, principal amount of the obligations of such corporation, and the adjusted basis of the other property Allows built-in loss property to reduce E&P Section 304 Related corporations sale of stock treated as distributions Shifting basis to property owned by selling corporation to eliminate E&P D Reorganization Built-in loss asset transfer to related corporations Boot within gain rule limits amount of taxable gain (if any) Subsequent transfers of stock received in the D reorganization allow high basis to eliminate E&P Granite Trust Reduce ownership in subsidiary to below 80% Causes taxable liquidation of subsidiary E&P generated from taxable gain offset by deficits at shareholders of subsidiary 17

18 Section 312(a)(3) Planning BIL Distribution Transaction Steps USP Step 1: CFC 2 distributes Asset A, which has a built-in loss, to CFC 1. FV: $10 AB: $50 E&P: $75 Asset A CFC 1 CFC 2 1 Other Assets Asset A Anticipated U.S. Tax Consequences The distribution generally can qualify for the exception from subpart F income under section 954(c)(6). CFC 1 has $10 of dividend income and increases its E&P by $10. The distribution causes CFC 2 s E&P to be reduced under section 312(a)(3) by $50, from $75 to $25. Accordingly, $40 of E&P has been eliminated by crystalizing the built-in loss in Asset A. Timing of section 312(a)(3) Reductions. Focus initially on BIL asset profile of second or lower tier CFCs with large section 959(c)(3) balances. 18

19 Section 312(a)(3) Planning Section 304 USP CFC 1 Transaction Steps Step 1: CFC 3 sells the stock of CFC 5, which has a built-in loss, to CFC 4 in exchange for $99 of cash and $1 of CFC 4 stock. Step 2: CFC 3 distributes the CFC 4 stock to CFC 2. 2 CFC 4 Stock E&P: $100 FV: $100 AB: $200 CFC 2 Cash and CFC 4 Stock CFC 3 CFC 4 CFC 5 1 CFC 5 CFC 5 E&P: $200 Anticipated U.S. Tax Consequences Step 1 is a section 304 transaction that is treated as a deemed distribution to CFC 3 in redemption of the stock of CFC 4. The deemed distribution is sourced first from the E&P of CFC 4, the acquiring corporation. The deemed distribution generally can qualify for the exception from subpart F income under section 954(c)(6). $99 of E&P shifts from CFC 4 to CFC 3, resulting in CFC 3 having $199 of E&P. CFC 3 s tax basis in CFC 5 stock hops to its CFC 4 stock, leaving CFC 3 with CFC 4 stock having a fair market value of $1 and a tax basis of $200. CFC 3 reduces its E&P by $199, from $199 to $0, under section 312(a)(3) as a result of its distribution of the CFC 4 shares to CFC 2. CFC 2 should have only $1 of dividend income as a result of the distribution. 19

20 Section 312(a)(3) Planning Boot D FV: $100 AB: $100 USP $100 1 CFC 1 Stock Transaction Steps Step 1: USP sells the stock of CFC 1, which does not have a built-in gain, to CFC 2 in exchange for cash. Step 2: CFC 1 converts to a disregarded entity for U.S. federal tax purposes. CFC 1 CFC 2 E&P: $110 Foreign Taxes: $25 CFC 1 2 E&P: $0 Foreign Taxes: $0 Anticipated U.S. Tax Consequences If all applicable requirements are met, Steps 1 and 2 should be treated as a tax-free D Reorganization with boot such that CFC 1 is deemed to transfer its assets to CFC 2 in exchange for cash and then CFC 1 is deemed to distribute in liquidation such consideration to USP. Because USP has tax basis in its CFC 1 stock equal to fair market value, none of the $100 consideration paid by CFC 2 should be taxable to USP. However, CFC 1 may be required to reduce its E&P by the full $100. Rev. Rul Under section 312(a)(3), E&P is generally reduced by the adjusted basis of the property distributed. CFC 1 s deemed distribution of $100 to USP causes CFC 1 s E&P to be reduced from $110 to $10 under section 361(c). 20

21 Section 312(a)(3) Planning Boot D (Cont.) FV: $100 AB: $100 CFC 1 CFC 2 E&P: $110 Foreign Taxes: $25 USP $100 1 CFC 1 CFC 1 Stock E&P: $0 Foreign Taxes: $0 Anticipated U.S. Tax Consequences (Cont.) CFC 1 s section 902 E&P pool is reduced as CFC 1 s E&P is reduced under section 312. Thus, CFC 1 s section 902 E&P pool amount, which carries over to CFC 2 under sections 381 and 367(b), is $10. Although not free from doubt, it appears CFC 1 s foreign taxes are only reduced by dividends. Since the distribution of the $100 is not a dividend, there is no corresponding reduction in CFC 1 s foreign taxes. Therefore, $100 of E&P has been eliminated from the system. CFC 2 has $10 of E&P and $25 of foreign taxes, resulting in a high-taxed pool of earnings. 2 21

22 Executive Order to Review Tax Regulatio

23 Executive Order on Tax Regulations Immediate action is necessary to reduce the burden existing tax regulations impose on American taxpayers and thereby to provide tax relief and useful, simplified tax guidance Issued on April 21, 2017 Treasury to review all significant tax regulations issued on or after January 1, Earlier determinations of whether a regulation is significant under Executive Order are not controlling Interim report due June 20, 2017 identifying regulations that - Impose an undue financial burden - Add undue complexity to the tax law, or - Exceed the statutory authority of the IRS Final report due September 18, 2017 containing specific recommendations to mitigate the burdens imposed by the identified regulations 23

24 Final Section 385 Regulations

25 Future of Section 385 Regulations I appreciate the Trump administration s thorough review of all these regulations and encourage them to work to roll back the section 385 regs. Ways and Means Committee Chair Kevin Brady Its not targeted at just those [Section 385 regulations]. It s targeted at things that are significant and create complexity and undue burdensome situations. Treasury Secretary Steve Mnuchin. Destination-based cash flow tax plan would and other tax reform might eliminate deduction for net interest expense (thus, the Section 385 regulations would become irrelevant). Complying with the documentation rules represents the primary cost to taxpayers. Estimate of initial start-up costs and infrastructure investment for corporations in the first few years of approximately $224 million and on-going compliance costs of $56 million. 25

26 Final Regulations: Significant Changes and Effective Dates The Final Regulations retain the general framework of the Proposed Regulations, but in a significantly narrower scope 1. Only apply to instruments issued by a Covered Member (i.e., a domestic corporation) and held by a non-consolidated Expanded Group member 2. Documentation Rules compliance deadline generally is the issuer s timely-filed U.S. tax return 3. Expanded exceptions and reductions to the Recast Rules Documentation Rules Apply for taxable years ending on or after January 19, 2017 (the General Effective Date ) with respect to instruments issued on or after January 1, 2018 Recast Rules The General Effective Date, although they also apply to transactions occurring and instruments issued after April 4,

27 The Documentation Rules

28 Documentation Rules Overview and Scope (1) aimed at: e.g., open account indebtedness Accounting records of U.S. entity Cash $1000 Accounts payable-cayman $1000 (2) establish documentation and maintenance requirements regarding the following factors: Unconditional obligation to pay a sum certain-fixed date; Creditor rights; Reasonable expectation of payment (e.g., appraisal of property if debt is nonrecourse, annual credit analysis)); and Debtor-creditor relationship (e.g., payments of principal and interest, actions to enforce) Scope Apply to publicly-traded and large privately-held groups (total assets exceed $100 million or total revenue exceeds $50 million) Apply to an interest: (i) issued by a Covered Member in the legal form of a debt instrument, or intercompany payables and receivables documented as debt in a general ledger or similar system, and (ii) held by a nonconsolidated Expanded Group member or Controlled Partnership (an EGI ) Documentation generally must be in place no later than the issuer s timely-filed U.S. tax return (including extensions) for the year the EGI was issued or a year that includes a relevant date Failure to satisfy results in the EGI being treated as stock for all purposes 28

29 Exceptions Reasonable Cause If reasonable cause for failure to comply is established, taxpayer must prepare the necessary documentation within a reasonable time of establishing reasonable cause and maintain such documentation in accordance with the Documentation Rules Highly-Compliant Taxpayers If a taxpayer establishes that it is otherwise highly-compliant with the Documentation Rules, (generally ten percent non-compliance by amount) a non-compliant EGI is not automatically treated as stock, but is presumed to be stock Taxpayer can rebut this presumption if it clearly establishes that the EGI should be characterized as debt under common law; significant weight attached to the four factors described in the Documentation Rules Scrivener s Error A taxpayer can self-correct ministerial or non-material failures or errors prior to IRS discovery 29

30 Documentation Rules Applicability of documentation rules U.S. payables Transactions 1. CFC provides goods or service to USP (e.g., goods manufactured offshore sold back into U.S.) on credit 2. USP accrues payable and routinely settles within a reasonable time, taking positions that the payables qualify for section 956 exception and does not accrue interest under section 482 Manufactured goods, services, etc. USP CFC Debt (payables, etc.) Discussion Documentation Rules apply to ALL in form intercompany debt, even if just a trade payable and/or documented as debt in a ledger, accounting system and no legal instrument governs the debt instrument USP and CFC will have to enter into overall arrangement to confirm debt treatment, once Documentation Rules take effect - Risk/issue: failure to properly document recasts the USP payable into equity, which in turn denies use of section 956 exception for trade payable debt, and thus could result in a section 956 inclusion Regular or strategic section 956 loans also are subject to the Documentation Rules 30

31 The Recast Rules

32 General Rule A Covered Debt Instrument ( CDI ) issued to an expanded group member is treated as stock if it is issued in one of the following transactions: A distribution In exchange for stock of an Expanded Group member ( EG Stock ) other than an Exempt Exchange In exchange for property in an asset reorganization if the CDI is received as boot by an Expanded Group member 32

33 Recast Rules-Distribution Example: Distribution of a CDI US1 issues and distributes a $100 CDI to FP Example: Distribution funded by a CDI US1 borrows $100 from FS; less than 36 months later it distributes $100 to FP FP FP US1 FS US1 $100 $100 Note FS CFC CFC 33

34 Recast Rules-Exchange for Stock Example: Stock purchase with a CDI US1 buys US2 stock from FP in exchange for a $100 CDI Example: Stock purchase funded by a CDI US1 borrows $100 from FP; less than 36 months later, it buys US2 stock from FP in exchange for $100 FP FP US1 US2 US1 US2 CFC CFC 34

35 Recast Rules-Exchange for Property Example: Asset Reorg with CDI boot Example: Asset Reorg boot funded by a CDI US2 merges into US1 in exchange for US1 stock and a $100 CDI US1 borrows $100 from FP; less than 36 months later, US2 merges into it in exchange for its stock and $100 in cash FP FP US1 Merger US2 US1 Merger US2 CFC CFC 35

36 Funding Rule A CDI that is not a Qualified Short-Term Debt Instrument is treated as stock if: The CDI is issued by a Covered Member (a Funded Member ) to an Expanded Group member in exchange for property, and Based on the facts and circumstances, the CDI is issued with a principal purpose of, or is otherwise treated under the Per Se Rule as, funding one of the following distributions or acquisitions by the Funded Member (each a Funded Transaction ) A distribution of property to an Expanded Group member other than in an Exempt Distribution An acquisition of EG Stock from an Expanded Group member in exchange for EG Stock other than in an Exempt Exchange A distribution of boot to an Expanded Group member in an asset reorganization The Funded Transaction is not recharacterized If a Covered Member s note distribution is not treated as stock under the General Rule, the note is treated as issued for property for purposes of the applying the Funding Rule 36

37 Funding Rule Per se rule: A CDI is treated as funding a funded transaction if the CDI is issued during the 72-month period beginning 36 months before the funded transaction (the Per Se Period ) If multiple CDIs are issued in the Per Se Period, the CDIs are tested in the order issued on a FIFO basis If a CDI is issued in multiple Funded Transactions Per Se Period, the CDI is treated as funding the Funded Transactions in the order of occurrence on a FIFO basis 37

38 General Rule and Funding Rule Exceptions and Reductions: Overview The General Rule and the Funding Rule are subject to certain exceptions and reductions Two Types of Exceptions: Rules that exclude specific transactions from being general rule transactions and/or a funded transactions (the Specific Exceptions ): Subsidiary stock acquisitions; compensatory stock acquisitions; transfer pricing adjustments; securities dealers; and cascading recasts The Threshold Exception - Does not include a cliff effect i.e., all expanded groups can exclude the first $50 million of CDIs from the Recast Rules Two types of reductions that reduce the amount of General Rule transactions and/or Funded Transactions: Expanded Group Earnings Reduction Qualified Contributions Reduction Exceptions and reductions are applied in the following order: Specific Exceptions, Expanded Group Earnings Reduction, Qualified Contributions Reduction, and Threshold Exception 38

39 Section 987 Final Regulations

40 Section 987 A taxpayer having one or more QBUs with a functional currency other than the US dollar shall determine its taxable income by Computing taxable income for each QBU in its functional currency, Translating the income or loss of the QBU into the taxpayer s functional currency at the appropriate exchange rate, and Making proper adjustments as set forth in regulations to account for transfers of property between QBUs of the taxpayer.... The legislative history provides that exchange gain or loss was intended to be recognized to the extent the value of the currency at the time of the remittance differs from the value when earned 40

41 Section 987(1) Compute Income in Functional Currency Arial KPMG Extra Light KPMG Extra Light Italics KPMG Light KPMG Light Italics KPMG Thin KPMG Thin Italics Use for everything except titles and slide headers (including charts, graphics, text) Use for title slide and main headers only Use for emphasis in title slide and main headers only When presenting in a large room, this may be used for title slide and main headers only When presenting in a large room, this may be used for emphasis in title slide and main headers only Do not use Do not use 41

42 Section 987(2) Translate Earnings at Average Arial KPMG Extra Light KPMG Extra Light Italics KPMG Light KPMG Light Italics KPMG Thin KPMG Thin Italics Use for everything except titles and slide headers (including charts, graphics, text) Use for title slide and main headers only Use for emphasis in title slide and main headers only When presenting in a large room, this may be used for title slide and main headers only When presenting in a large room, this may be used for emphasis in title slide and main headers only Do not use Do not use 42

43 Section 987(3) Proper Adjustments to Account for Remittances Arial KPMG Extra Light KPMG Extra Light Italics KPMG Light KPMG Light Italics KPMG Thin KPMG Thin Italics Use for everything except titles and slide headers (including charts, graphics, text) Use for title slide and main headers only Use for emphasis in title slide and main headers only When presenting in a large room, this may be used for title slide and main headers only When presenting in a large room, this may be used for emphasis in title slide and main headers only Do not use Do not use AUD1:$1.2 43

44 Effective Dates Election to apply to tax years on or after January 1, 2017 Tax years beginning on or after January 1, 2018 General Effective Dates Loss Deferral Rules Effective date of December 7, 2016 for transactions entered into with a principal purpose of recognizing Section 987 loss Apply generally to transactions entered into after January 6,

45 Overview of the Regulation Package Income Calculation 987 Gain/Loss Loss Disallowance Rules Section 988 Profit and loss statement translated into the owner s functional currency Retains Balance Sheet approach proposed in 2006 Simplifying Effective immediately Loss Deferral for related party loans with respect to principal purpose transaction Election to mark to market 988 items Final regulations adopt the general framework of the Proposed 2006 Section 987 Regulations 45

46 Theory of Final Section 987 Regulations Balance sheet approach, using special translation convention, to limit 987 gain/loss to the change in net worth of a QBU attributable to currency fluctuations Financial assets and liabilities translated at the year end spot rate All other items translated at the historic exchange rate Regulations use an 8 Step Method to isolate currency movements 46

47 Net Unrecognized Section 987 Gain or Loss Calculate change in net worth of QBU Step 1 Adjust for transfers to and from QBU Steps 2 5 Adjust for income or loss Step 6 Adjust for tax exempt income and nondeductible expenses Steps 7-8 Net unrecognized 987 gain or loss 47

48 Recognized Section 987 Gain or Loss Cumulative Net Unrecognized Section 987 Gain/Loss Remittance X = Proportion Recognized Section 987 Gain or Loss 48

49 Deferral Events and Outbound Loss Events Deferral Events Recognition deferred in connection with certain QBU terminations. These rules apply with respect to all QBUs (e.g., QBUs not generally subject to final regulations). Rules apply to QBU terminations and partnership transactions in which the assets and liabilities of the QBU remain within a single controlled group and remain subject to Section 987. Deferred gain or loss recognized when the QBU makes subsequent remittances, or when the QBU ceases to be owned by a member of the controlled group. 49

50 Deferral Events and Outbound Loss Events (continued) Outbound Loss Events Foreign exchange loss deferred when QBU assets are transferred to a related foreign person in certain outbound transactions Gains, however, are taken into account In nonrecognition transaction, the basis of stock received in the transaction is increased by the outbound loss In taxable transaction, the deferred loss is recognized when the owner and the successor cease to be members of the same controlled group 50

51 Final Section 367 Regulations for Goodwill and Going Concern Value

52 Final Section 367(a) and (d) Regulations Section 367 Treatment of Outbound Property Transfers ( ) Tangible Property Section 367(a) Taxable unless qualifies for the Active Trade or Business (ATB) Exception, subject to certain limitations Intangible Property Section 367(d) Defined in Section 936(h)(3)(B) Always taxable as either a contingent sale (deemed royalty) or a straight sale 52

53 Section 367(a) Rules and Intangible Property ATB Exception: Gain is not recognized under Section 367(a) if the property is transferred for use by the foreign transferee corporation in an active trade or business outside the United States - Hot Asset Exception: The ATB Exception does not apply to the transfer of (i) inventory, (ii) accounts receivable (or similar property), (iii) foreign currency or foreign currency-denominated property, (iv) certain leased property, and (v) intangible property with the meaning of Section 936(h)(3)(B) ( Section 936 Intangible Property ) - Other Exceptions to the ATB Exception: Depreciation recapture, branch loss recapture, and outbound asset reorganizations Section 936 Intangible Property is defined as: Patent, invention, formula, process, design, pattern, or know-how; Copyright, literary, musical or artistic composition; Trademark, trade name or brand name; Franchise, license or contract; Method, program, system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical date; or Any similar item 53

54 Final Section 367(a) and (d) Regulations Section 367 Treatment of Outbound Property Transfers ( ) Foreign Goodwill and Going Concern Value Not clear if it s a Section 936(h)(3)(B) intangible If an intangible, exempt under Section 367(d) If tangible, can generally qualify for ATB exception Lead to numerous disputes between taxpayers and the IRS 54

55 Final Section 367(a) and (d) Regulations (continued) Proposed Section 367(a) and (d) Regulations (Sept. 16, 2015) Tangible Property Property eligible for the ATB Exception narrowed Intangible Property Minor changes to deemed royalty mechanics; no 20 year limit Foreign Goodwill and Going Concern Value Still not clear if it is a Section 936(h)(3)(B) intangible Tangible Property no ATB Exception Intangible Property deemed royalty or gain 55

56 Items of Note Final Section 367(a) and (d) Regulations (continued) Regulations finalized with no material changes Generally retroactive to September 14, 2015 Election for non-atb eligible tangible property Elimination of ATB eligibility for certain property denominated in nonfunctional currency Improved organization of Section 367(a) Tangible Property Rules and ATB Exception 56

57 What Questions Do You Have?

58 Presenter Kevin Cunningham KPMG LLP (202)

59 Thank you

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