A GUIDE TO CALCULATING TOLL CHARGE

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1 A GUIDE TO CALCULATING TOLL CHARGE

Tax Refrm The likelihd f cmprehensive tax refrm has never been greater.

E&P ) f U.S. multinatinals. The Senate bill sets the rates at 14.5% n E&P held in the frm f liquid assets and 7.

2 Tax Refrm The likelihd f cmprehensive tax refrm has never been greater. The Huse and Senate have each passed their wn versin f the bill and are currently aiming t have a recnciled bill t the President befre year-end. While we can expect minr changes in the final bill, ne prvisin is guaranteed: a ne-time tax n ffshre earnings & prfits ( E&P ) f U.S. multinatinals. The Senate bill sets the rates at 14.5% n E&P held in the frm f liquid assets and 7.5% n nn-liquid. Cmpanies can n lnger wait-and-see: the tll-charge tax is cming, and refrm s timing will cause a strain n resurces t gather infrmatin and prepare the calculatins fr prvisins. Nw is the time is identify practical and feasible ways t calculate the tll-charge. 1

3 Cntents 1 Tll-Charge Wrkplan: Identifying Freign E&P Identifying Freign Tax Pls Calculating the Tll-Charge Tll-Charge Takeaways 2 Infrmatin Gathering Checklist 3 Key Cntacts 2

4 Tll-Charge Wrkplan

5 Identifying Freign E&P Key cnsideratins fr preparatin f detailed calculatins n E&P: Identifying what infrmatin is needed, Wh has custdy f that infrmatin, and Hw t be practical abut aggregating it. A high-level prcess includes the fllwing steps: Calculating general versus passive earnings baskets; Evaluating freign currency transactin implicatins fr E&P; Determining whether previusly taxed incme ( PTI ) E&P pls might exist; Calculating ptential F/X gain r lss n distributins f PTI; and Ensuring that E&P reflects arm s-length transfer pricing n intercmpany transactins; Reviewing the impact f any histrical purchase accunting n E&P balances A ptential time-crunch t prepare these calculatins means identifying slutins t expedite the prcess, such as using balance sheets as prxies fr E&P. 4

6 Identifying Freign Tax Pls The challenges fr calculating freign tax pls include: Identifying years wrth f freign tax returns and payments histry; Lcating r translating infrmatin. Sme imprtant first steps are: Substantiatin f payments; Identificatin f creditable freign taxes (i.e., incme-based taxes); Freign tax redeterminatins fr subsequent freign assessments r refunds; Identificatin f taxes assciated with separate earnings baskets; and Applicatin f anti-splitter rules, sectin 956 anti-hpsctch rule, and ther limitatins n creditability f freign taxes Building a full tax pl calculatin in a shrt perid f time may be impssible, especially if the wrk has never been started r dne befre. Cmpanies shuld be identifying and priritizing which f their freign entities will have the mst material tax pls and which can rely n a high-level estimate. 5

7 Calculating the Tll-Charge Key cnsideratins fr tll-charge calculatin, nce the E&P pls and tax pls are gathered: What is the makeup f E&P between liquid and nn-liquid assets? What is the freign tax credit limitatin? Is there an verall dmestic lss ( ODL ) that can be used? What is the impact n any existing deferred tax liabilities n ffshre earnings? When is this tax due? With additinal visibility int freign E&P, des repatriatin f sme ffshre cash t help pay the tax make sense? 6

8 Tll-Charge Takeaways This tll-charge is NOT a rutine E&P and FTC calculatin. There are many imprtant prvisins making this mre cmplicated than traditinal cmputatins: Operates as a deemed dividend f ffshre earnings & prfits; hwever, calculating the amunt f that deemed dividend requires several steps. Primarily dependent n three new calculatins: (1) Aggregate E&P Determinatin f Aggregate Freign E&P and Aggregate Freign E&P Deficit (2) Cash and equivalents Determinatin f Freign Cash Psitin under new rules. Nte that in grups with intercmpany transactins may experience duble cunting f assets under the cash psitin rules. Taxpayer may ask Service fr permissin t crrect duble cunting. Cash psitin equals the greater f the current cash psitin r the average f the cash psitin as f Nvember 9 with the preceding year. Service may disregard abusive transactins if principal purpse is t reduce the cash psitin. (3) Deductins allwed at the sharehlder level Based n taxpayer s freign cash psitin. Freign Tax Credit ffset(s) are als available against the tax n the tll-charge inclusin, but are subject t traditinal Sec. 904 limitatins; traps like OFLs culd limit FTC benefit. Althugh the full tax is nt due all at nce, many taxpayers will need t prepare calculatin and make payments within the next few mnths. Taxpayers with histrical wnership f CFCs and/r 902 crpratins whse wnership has fluctuated will need t apply year by year wnership percentages t the underlying earnings t determine the amunt f applicable E&P and FTCs. 7

9 Infrmatin Gathering

10 Typical Infrmatin Request Pertinent infrmatin t identify and start gathering: Histrical tax returns and Frm 1118s Infrmatin frm relevant Cntrlled Freign Crpratins ( CFCs ): Organizatinal charts Dividends, bth histrical and deemed Tax payment substantiatin Histrical trial balances Expense allcatin supprt Lcal tax returns Histrical Frms 5471 FTC credit carryfrward supprt NOL supprt Histrical 382 studies Histry f any disslutins, liquidatins, r mergers the CFC was a party t Histry f any 338 electins made by r with respect t the CFC Histry f any 367(d) cntributins made t the CFC 9

11 Key Cntacts

A&M Tax Refrm Specialists ALBERT LIGUORI New Yrk aliguri@alvarezandmarsal.

cm +1 212 763 9586 BRIAN CUMBERLAND Dallas bcumberland@alvarezandmarsal.

12 A&M Tax Refrm Specialists ALBERT LIGUORI New Yrk ADAM BENSON New Yrk BRIAN CUMBERLAND Dallas JILL HARDING San Francisc DREW JOHNSON Washingtn, D.C DOUG SAYUK San Jse

13 Disclaimer These slides are a brief verview f legislatin, therefre it is nt a cmplete analysis and is nt intended t be advice t any particular reader. The descriptins may be versimplificatins intended t highlight areas that may warrant further attentin. The pints cntained herein shuld be reviewed with cunsel r advisrs in respect f any particular circumstances. The infrmatin cntained herein is f a general nature and based n authrities that are subject t change. Readers are reminded that they shuld nt cnsider this publicatin t be a recmmendatin t undertake any tax psitin, nr cnsider the infrmatin cntained herein t be cmplete. Befre any item r treatment is reprted r excluded frm reprting n tax returns, financial statements r any ther dcument, fr any reasn, readers shuld thrughly evaluate their specific facts and circumstances, and btain the advice and assistance f qualified tax advisrs. The infrmatin reprted in this publicatin may nt cntinue t apply t a reader's situatin as a result f changing laws and assciated authritative literature, and readers are reminded t cnsult with their tax r ther prfessinal advisrs befre determining if any infrmatin cntained herein remains applicable t their facts and circumstances. This publicatin is nt intended t be used, and cannt be used, by a client r any ther persn r entity fr the purpse f aviding tax penalties that may be impsed n any taxpayer. 12

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Summary of proposed section 951A GILTI regulations

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