Deloitte Global Tax Planning Conference at Villanova University School of Law

Transcription

1 Deloitte Global Tax Planning Conference at Villanova University School of Law Track 2 Tax Planning Update for Foreign- Owned U.S. Companies November 20, 2015

2 Today at a Glance Welcome and Introductions Transfer Pricing Updates Affecting U.S. Inbound Groups Intellectual Property Planning for U.S. Inbound Groups Refreshment Break Global Tax Reset how initiatives such as the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, pre-emptive global legislative activity, and an active U.S. regulatory environment, have, and will continue to, fundamentally change the global tax landscape Lunch Multistate Tax Issues for Inbound Companies Financing Strategies Update for U.S. Inbound Groups Michael Steinsaltz Boris Nemirov Tim Tuerff Michael Steinsaltz Daniel Markiewicz Richard Hyman Michael Steinsaltz Panelists Jason Wyman Michael Bryan Harrison Cohen Jonathan Goldblatt Refreshment Break Innovation Box Regimes Closing Remarks Adjourn Harrison Cohen Godfried Schutz Michael Steinsaltz 1 Deloitte Global Tax Planning Conference at Villanova University School of Law

3 Transfer Pricing Updates Affecting U.S. Inbound Groups Boris Nemirov Tim Tuerff Deloitte Tax LLP November 20, 2015

4 Agenda What is the Global Tax Reset? Impact of BEPS on Inbound Transfer Pricing Country-by-Country (CbC) Reporting Master File / Local File Documentation Potential Impact of Altera Corp. v. Commissioner on Inbound Transfer Pricing Impact of 482-1T(f)(2)(i) Temporary Regulations on Inbound Transfer Pricing 3 Deloitte Global Tax Planning Conference at Villanova University School of Law

5 What is the Global Tax Reset?

6 What is the Global Tax Reset? The G20/OECD BEPS Action Plan BEPS Objectives BEPS TP Drafts BEPS Final Deliverables Reduce opportunities for potential tax avoidance by multinational enterprises (MNEs) Have MNE pay their fair share of taxes Increase transparency and coordinate enforcement Simplify TP compliance Use anti-abuse rules along with new TP rules (2 pronged approach) For the first time non- OECD countries invited with full voting rights Included deviations from the arm s length standard (ALS) Reflected intra OECD disagreements on taxing rights Reflected intra OECD disagreements between capital exporting and capital importing countries Became less about BEPS and more about taxing rights BEPS is not over, controversial TP items are still unresolved and pushed to 2016 and 2017 The ALS likely to be subject to further challenges 5 Deloitte Global Tax Planning Conference at Villanova University School of Law

7 What is the Global Tax Reset?, continued The two driving forces of the reset are Less Base Erosion: Shift of taxable income from zero/low tax jurisdictions towards higher tax jurisdictions Change in Taxing Rights: Shift of taxable income from capital exporting countries towards capital importing countries MNEs may react to these OECD BEPS induced forces by re-allocating their assets/functions/risks Real impact on operations and non-tax functions; focus on IP Navigating the reset requires a broad view of the environment 6 Deloitte Global Tax Planning Conference at Villanova University School of Law

8 Impact of BEPS on Inbound Transfer Pricing

9 Impact of BEPS on Inbound Transfer Pricing The Great Balance Shift Historically the U.S. was one of the most aggressive and sophisticated TP tax administrations in the world. Inbound pricing often reflected that by being very conservative. Rest of World (ROW) Environment Tendency to deem the ALS ineffective and move away from it Legislative implementation of BEPS underway in many counties Tendency to ignore written contracts and re-characterize transactions Tendency to distrust transactions common only to MNEs U.S. Environment Remains deeply committed to the ALS Few regulatory changes to implement BEPS expected Significant focus on outbound transfers of U.S. IP Continued deference to written contracts and long history of contract law relevant to TP Recognition that MNEs enter into transactions that third-parties do not After the reset the U.S. is becoming relatively much less aggressive than many ROW countries (e.g., UK, Australia, Benelux, China, India) and it is likely that inbound pricing will reflect that change in the world balance. 8 Deloitte Global Tax Planning Conference at Villanova University School of Law

10 Impact of BEPS on Inbound Transfer Pricing, continued Tax administrations may challenge a controlled transaction in two ways Challenge the character of the transaction (re-characterize or non-recognize) Tax administration re-writes the contract based on asserted economic substance Challenge the pricing of the transaction Tax administration respects the contract but re-prices it Outside of the U.S. expect increased use of re-characterization and nonrecognition Guidance provided in Chapter I of the OECD Transfer Pricing Guidelines for MNEs General skepticism of intercompany contracts The U.S. is unlikely to change the Regulations The IRS must respect a written contract that has economic substance regardless of whether or not third-parties would/do enter into the same transaction under the same circumstances It is the result of the transaction that has to be ALS, not the transaction itself See Treas. Reg (b)(1), (d)(3)(ii)(B), (d)(3)(iii)(B) 9 Deloitte Global Tax Planning Conference at Villanova University School of Law

11 Impact of BEPS on Inbound Transfer Pricing, continued Contracts are increasingly essential in ensuring respect of transaction by tax administrations They are the starting point of a TP analysis Because BEPS tends to make it easier for tax administrations to complete or re-write a contract Write as complete contracts as possible Ensure behaviors consistent with the letter of the contract Rely on U.S. contract law principles Establish Financial Capacity: This should be seen as a documentation issue as much as a substantive requirement of BEPS Financial capacity is not just about the debt-equity balance sheet position It is about access to the capital markets by the subsidiary as a standalone entity Establish Control over Risk: This should be seen as a documentation issue as much as a substantive requirement of BEPS Consult with advisers on what is necessary to establish control 10 Deloitte Global Tax Planning Conference at Villanova University School of Law

12 Country-by-Country (CbC) Reporting

13 OECD s Progress so Far September 2014: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting A three-tier global standard for transfer pricing documentation, including a common template for county-by-country information to be reported to tax authorities February 2015: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting Application to large businesses and filing mechanisms June 2015: Country-by-Country Reporting Implementation Package Outlines model legislation that governments can use to adopt the new rules, as well as competent authority agreements to implement the sharing mechanisms for the countryby-country report 12 Deloitte Global Tax Planning Conference at Villanova University School of Law

14 Country Adoption Progress so Far Country Approach Australia Spain UK Introduced draft legislation adopting 3 tier approach Will adopt CbC Indicated will only adopt CbC U.S. Priority Guidance Plan indicates regulations under 6011 and 6038 for CbC only Canada Singapore Germany China Japan Announced will adopt CbC, year unclear Rethinking CbC requirements in light of secondary reporting requirement Indicated will adopt 3 tier approach Likely will require inbound companies to produce 3 tier documentation but may not adopt CbC for China MNEs No public announcement but likely will be implementing CbC and Master File 13 Deloitte Global Tax Planning Conference at Villanova University School of Law

15 OECD s BEPS Deliverable 13 Guidance The model template for a CbC Report contains three parts (filled out by the Reporting MNE, or ultimate parent of a MNE group): Table 1 Overview of aggregate allocation of income, taxes and business activities (including capital, assets and employees) by tax jurisdiction Includes revenues from related parties v. unrelated parties Independent contractors participating in the ordinary operating activities of the Constituent Entity may be reported as employees Table 2 List of all constituent entities of the MNE Group included in each aggregation per tax jurisdiction Constituent entities resident in each tax jurisdiction; Tax jurisdiction of organization or incorporation if different from tax jurisdiction of residence; Main business activity for each constituent entity Table 3 Additional information 14 Deloitte Global Tax Planning Conference at Villanova University School of Law

16 Country-by-Country Report Requirements Information required by tax jurisdiction (aggregate for all entities including permanent establishments) 1. Revenues (related, unrelated, total) 2. Profit/Loss before income tax 3. Income tax paid (cash) 4. Income tax accrued 5. Stated capital 6. Accumulated earnings 7. Number of employees 8. Tangible assets other than cash and cash equivalents 15 Deloitte Global Tax Planning Conference at Villanova University School of Law

17 Adoption of CBC by the United States Proposed regulations on CbC implementation anticipated by the end of calendar year 2015 Expected to follow the OECD CbC guidance Required for companies with revenues in excess of $852M Unlikely to be under authority of Section 6662 (not considered transfer pricing documentation) First report due for fiscal year 2016 no later than December 31, 2017 The CbC report will generally be filed in the country where the headquarters of the MNE resides The CbC report will then be exchanged by tax administrations Most inbound U.S. companies will likely not be filing a CbC report with the U.S. Government Unclear whether the CbC report will be collected with the U.S. tax return May be collected through an alternative filing mechanism 16 Deloitte Global Tax Planning Conference at Villanova University School of Law

18 Master File / Local File Documentation

19 OECD Approach to Documentation Information in Master File AT MNE GROUP LEVEL Industry sector in which the MNE operates Factors affecting the performance of businesses operating in that sector How the MNE group responds to factors affecting performance in that sector Business strategies Markets Products Supply chain Functions, assets and risks Information in Local File AT TRANSACTIONAL LEVEL The contractual terms of the transaction The functions, assets and risks contributed by each party and how they relate to the wider generation of value within the MNE The characteristics of property transferred or service provided The economic circumstances of the parties and of the market in which the parties operate The business strategies pursued by the parties 18 Deloitte Global Tax Planning Conference at Villanova University School of Law

20 Adoption of Master File / Local File by the United States U.S. taxpayers face a contemporaneous documentation requirement under Section so-called principal documents are required to meet the Section 6662 requirements Contemporaneous transfer pricing documentation protects a U.S. taxpayer from penalties in case of an adjustment otherwise resulting in the imposition of penalties Will the U.S. require U.S. taxpayers to produce an OECD compliant Master File / Local File? An act of Congress or at least a change in regulations would be required Statements from Treasury officials acknowledge overlap between the information required under Section 6662 and the OECD Global File / Master File and suggest Treasury/IRS have authority to require the information Comments by Brian Jenn, Attorney Advisor with the U.S. Department of Treasury Office of Tax Policy, before a recent ABA tax meeting in Chicago suggests that the government may implement the master file and local file reporting if the IRS determines it will be helpful to have them 19 Deloitte Global Tax Planning Conference at Villanova University School of Law

21 Potential Impact of Altera Corp. v. Commissioner on Inbound Transfer Pricing

22 Potential Impact of Altera Corp. v. Commissioner on Inbound Transfer Pricing July 27, the USTC held in a unanimous 15-0 decision that Treas. Reg (d)(2)(2003) is invalid Inclusion of stock based compensations in IDC in QCSA (aka, the all costs rule ) because it did not satisfy the reasoned decision making standard enunciated in State Farm (463 US 29 (1983)) It imposes on Treasury and the IRS a much higher standard to issue regulations (governed by the Administrative Procedure Act) Treasury and the IRS have historically taken the position that the APA does not apply to their Section 482 regulatory activities (interpretive rather than legislative) It raises the potential for implications around other 482 regulations Potential impact beyond 9th Circuit 21 Deloitte Global Tax Planning Conference at Villanova University School of Law

23 Potential Impact of Altera Corp. v. Commissioner on Inbound Transfer Pricing, continued Inbound structures where U.S. subsidiary owns valuable IP Outbound migration of IP (Treas. Reg or ) followed by R&D service contract (Treas. Reg ) Under Altera an outbound transfer of IP can arguably be valued post-tax regardless of Treas. Reg (g)(2)(x) Under Altera a R&D service contract can arguably not include SBC FP US License R&D Services IPCo IP Outbound migration of U.S. IP 22 Deloitte Global Tax Planning Conference at Villanova University School of Law

24 Impact of Treas. Reg T(f)(2)(i) Temporary Regulations on Inbound Transfer Pricing

25 Impact of Treas. Reg T(f)(2)(i) on Inbound Transfer Pricing Treas. Reg T(f)(2)(i) are referred to as the aggregation rules They were changed on September 14, 2015 to attempt to increase the valuation of outbound transfers of foreign rights to U.S. IP By requiring all transfers of values to be priced under Section 482 regardless of their tax treatment under other sections of the Code and Regulations Targeted non-936(h)(3)(b) intangibles (synergies, goodwill, going concern, workforce in place) By requiring transfers of multiple assets jointly exploited in a trade or business to be considered in the aggregate for valuation purpose rather than valued separately Tilting the valuation scale towards an income method as opposed to transactional methods for each transaction Additional regulatory changes anticipated Treas. Reg (b)(1) (the ALS) Treas. Reg (Intangibles) 24 Deloitte Global Tax Planning Conference at Villanova University School of Law

26 Impact of Treas. Reg T(f)(2)(i) on Inbound Transfer Pricing, continued Treas. Reg T(f)(2)(i) in an inbound context U.S. subsidiary licenses assets or rights from multiple affiliates Aggregation rules to impact how value of the assets or rights is calculated Apply the allocation rules to determine the portion of the total value (including synergies) allocable to each license Value(License 1 + License 2) > Value (License 1) + Value (License 2) License 1 FP US License 2 Sister Co 25 Deloitte Global Tax Planning Conference at Villanova University School of Law

27 Questions?

28 Contact info Boris Nemirov Principal Deloitte Tax LLP Tim Tuerff Partner (WNT) Deloitte Tax LLP 27 Deloitte Global Tax Planning Conference at Villanova University School of Law

29 Intellectual Property Planning for U.S. Inbound Groups Michael Steinsaltz Daniel Markiewicz Deloitte Tax LLP November 20, 2015

30 Agenda U.S. IP Planning Overview Alternative Methods to Migrate IP Impact of Notice on Partnership Structures Impact of Section 367(d) Regulations Structured Passive Investment Arrangements (SPIA) May Company Regulations under Section 337(d) Use of APAs 29 Deloitte Global Tax Planning Conference at Villanova University School of Law

31 U.S. IP Planning Overview

32 Reasons for Centralizing IP Centralization of IP Managing IP in a controlled way can give rise to commercial benefits such as greater control of IP from a legal perspective Opportunity to leverage IP value as a commercial asset Efficiency in managing IP from multiple locations Greater sharing of IP and network intangibles Tax Efficiency NOTE: IP Planning is typically executed through some form of IP Migration 31 Deloitte Global Tax Planning Conference at Villanova University School of Law

33 Alternative Methods to Migrate IP

34 IP Transfers Methods: Sale / Installment sale Royalty Corporate freeze IP partnership 33 Deloitte Global Tax Planning Conference at Villanova University School of Law

35 Direct Sale of IP Overview IP could be sold for cash or on an installment note basis. IP is licensed to the U.S. and other companies (e.g. distributors) in exchange for a royalty (or embedded in product sold to U.S.). Further IP development outside of IPCo s home country is undertaken as contract R&D. US FP Cash IPCo U.S. Tax Considerations Sale will give rise to U.S. source taxable income. Installment Method may not be available for Installment Sale due to anti-abuse rule. Installment Method requires interest charge on deferred taxes under the installment note. U.S. debt capacity will be reduced as a result of lower income due to royalty expense. PE in the U.S. can be avoided with proper governance. IP 34 Deloitte Global Tax Planning Conference at Villanova University School of Law

36 Royalty Overview IP is licensed to the U.S. and other companies (e.g. distributors) in exchange for a royalty (fixed or contingent). IP is licensed to the U.S. and other companies (e.g. distributors) in exchange for a royalty (or embedded in product sold to U.S.). Further IP development outside of IPCo s home country is undertaken as contract R&D US FP License IPCo U.S. Tax Considerations Royalties reflect the value of the portion of the IP transferred, plus the time value of money. After the license term is reached, the licensor will still own substantial rights to the IP. License gives rise to U.S. and foreign source taxable income based on the jurisdiction in which the underlying IP is used. U.S. debt capacity will be reduced over time. PE in the U.S. can be avoided with proper governance. 35 Deloitte Global Tax Planning Conference at Villanova University School of Law IP

37 Corporate Freeze Overview IP is contributed by US to IPCo in exchange for fixed rate preferred shares. Foreign parent contributes its IP (plus, potentially foreign subsidiaries) to IPCo for common shares. IP is licensed back to transferors in exchange for a royalty (or embedded in product sold to US). Further IP development outside of IPCo s home country is undertaken as contract R&D. US FP P/S C/S General Tax Considerations Determine assets to be transferred (i.e., solely IP or IP and operating companies). Determine tax treatment of IP transfer to FP. Determine tax basis and amortization of IP for IPCo. Consider deferred tax consequences. IP IPCo F Subs 36 Deloitte Global Tax Planning Conference at Villanova University School of Law

38 Corporate Freeze, continued U.S. Tax Considerations Value of the US interest in the IP is frozen. No gain or loss should be recognized on the transfer. Section 367(d) will require US to recognize deemed royalty income commensurate with income of the transferred IP over the useful life of the IP. Income is treated as ordinary and sourced in the same manner as a royalty. Basis in the preferred stock should increase to the extent that deemed royalty income is recognized but cash is not received. Amount of annual royalties should reflect the value of the IP transferred (including foreign goodwill) plus the time value of money. Amount of the preferred coupon must be arm s length. Preferred coupon should carry deemed paid foreign tax credits. Consider applying rules that allow dividend to be recharacterized as the deemed royalty. US IP FP P/S C/S IPCo F Subs 37 Deloitte Global Tax Planning Conference at Villanova University School of Law

39 IP Partnership Structure Overview FP and US form IPCo as a limited liability company. IPCo elects to be treated as a partnership for U.S. federal income tax purposes. US transfers IP into IPCo in exchange for new common and (predominantly) new preferred shares of IPCo. FP transfers IP and possibly non-u.s. operating companies to IPCo in exchange for common shares. OpCos may elect to be treated as disregarded for U.S. federal income tax purposes. IP is licensed back to transferors in exchange for a royalty (or embedded in product sold to US). Further IP development outside of IPCo s home country is undertaken as contract R&D. General Tax Considerations Determine appropriate ratio of US preferred interest to non-us common interest. Other considerations similar to Corporate Freeze US IP FP P/S and C/S C/S IPCo DREs 38 Deloitte Global Tax Planning Conference at Villanova University School of Law

40 IP Partnership Structure, continued U.S. Tax Considerations Value of the US interest in the IP largely is frozen. No gain or loss should be recognized on the transfer (subject to Notice ). Section 704(c) will require income allocations to the extent of the built-in gain in the contributed assets, likely over 15 years. Preferred coupon and 704(c) allocation is ordinary income and sourced in the same manner as the underlying royalties or operating company income allocable to the US partner. Basis in the preferred interest should increase to the extent of the 704(c) allocation. Amount of the preferred coupon to be arm s length. Preferred coupon and the Section 704(c) amount should carry foreign tax credits. US IP FP P/S and C/S C/S IPCo DREs 39 Deloitte Global Tax Planning Conference at Villanova University School of Law

41 Impact of Notice on Partnership Structures

42 Notice Background On August 6, 2015, the IRS released Notice to announce forthcoming regulations addressing the application of section 721(c) to certain contributions by U.S. partners of property to partnerships with foreign partners (the Notice ). In general, section 721(a) will not apply to certain contributions of built-in gain property to partnerships with foreign partners, such that the contribution may result in gain recognition. The forthcoming regulations apply to transfers occurring on or after August 6, 2015 (and those occurring before August 6, 2015 that result from entity classification elections filed on or after August 6, 2015). However, forthcoming regulations providing guidance on the application of section 482 are to apply prospectively. 41 Deloitte Global Tax Planning Conference at Villanova University School of Law

43 Notice General Rule Regulations will provide that section 721(a) will not apply when a U.S. Transferor contributes an item of Section 721(c) Property (or portion thereof) to a Section 721(c) Partnership, unless the Gain Deferral Method is applied with respect to the Section 721(c) Property. Section 721(c) Property Any property with built-in gain (other than cash, securities (including stocks, bonds, and certain other financial assets) or items of tangible property with less than $20,000 of built-in gain). Section 721(c) Partnership A partnership (domestic or foreign) if a U.S. transferor contributes Section 721(c) Property to the partnership, and after the contribution, (i) a Related Foreign Person is a direct or indirect partner, and (ii) the U.S. transferor and any Related Persons own more than 50 percent of the interest in the capital, profits, deductions or losses. 42 Deloitte Global Tax Planning Conference at Villanova University School of Law

44 The Gain Deferral Method Section 721(a) will continue to apply to Section 721(c) Property contributed to a Section 721(c) Partnership if the Gain Deferral Method ( GDM ) is applied with respect to the Section 721(c) Property. The GDM is the following: i. the partnership must adopt the remedial allocation method in (d) with respect to section 721(c) property; ii. the partnership must allocate all items of section 704(b) income, gain, loss, and deduction with respect to an item of section 721(c) property in the same proportions; iii. In the case of a foreign partnership, the U.S. transferors must meet certain new reporting requirements; iv. the U.S transferor must recognize remaining pre-contribution built-in gain upon certain acceleration events; and v. the partnership must adopt the GDM for all subsequent built-in gain property contributed by the U.S. transferor (and related U.S. transferors) within a certain time period (generally 60 months). 43 Deloitte Global Tax Planning Conference at Villanova University School of Law

45 Acceleration Events Upon an acceleration event, the U.S. transferor must recognize gain in an amount equal to the remaining built-in gain that would have been allocated to the U.S. transferor if the partnership had sold the section 721(c) property immediately before the acceleration event for its fair market value. An acceleration event is any transaction that: i. would reduce the amount of remaining built-in gain that a U.S. transferor would recognize under the GDM if that transaction had not occurred, or ii. could defer the recognition of that built-in gain. An acceleration event also includes a failure to comply with all the requirements of the GDM, including failure to comply with reporting requirements. 44 Deloitte Global Tax Planning Conference at Villanova University School of Law

46 Acceleration Events, continued Acceleration events can include (not exhaustive): Distribution or contribution of any property by the partnership; A technical termination; The U.S. transferor transferring all or part of its interest in a partnership. Acceleration events do not include: transfers of partnership interests by U.S. transferors to domestic corporations in section 351(a) and 381(a) transfers, so long as the parties continue to apply GDM after the transfers; transfers by partnerships of section 721(c) property to a domestic corporation in a section 351(a) exchange; and transfers by partnerships of section 721(c) property to foreign corporations in a section 351(a) exchange to the extent the property is treated as transferred by the U.S. partners to the foreign corporation in an outbound transfer under Treas. Reg (a)-1T(c)(3)(i) or (ii). 45 Deloitte Global Tax Planning Conference at Villanova University School of Law

47 Post-Notice Partnership Structures Partnership structures still viable, but certain prior planning is precluded: Must recognize built-in gain on U.S. IP under remedial allocation method Certain special allocations are no longer permitted Technical issues may be clarified in regulations Pre-Notice structures not subject to change, but caution is required (e.g., technical terminations) Valuation approach could to be subject to scrutiny for both pre-notice and post-notice contributions 46 Deloitte Global Tax Planning Conference at Villanova University School of Law

48 Impact of Section 367(d) Regulations

49 Background Outbound Transfers Under Section 367 Generally, under Sec. 367(a)(1), a U.S. person will recognize gain on a Section 332, 351, 356, or 361 transfer of property to a foreign corporation unless an exception applies. Sec. 367(a)(3) provides an exception applicable to transfers of certain property for use by a foreign corporation in the active conduct of a trade or business (ATB) outside the United States. Applies to certain items of tangible property. Certain categories of property are not eligible for the ATB exception, including intangible property within the meaning of 936(h)(3)(B). Sec. 367(d) provides special rules for outbound transfer of intangible property within the meaning of Sec. 936(h)(3)(B). Treas. Reg (d)-1T(b) explicitly excludes foreign goodwill or going concern value from the scope of 367(d). This is consistent with the legislative history of 367(d). 48 Deloitte Global Tax Planning Conference at Villanova University School of Law

50 The Proposed Regulations Bottom Line The proposed regulations under Sec. 367(a) and (d) would provide that gain on outbound Sec. 367(a)(1) transfers of all property other than certain tangible property, certain financial assets, and working interests in oil and gas property will be recognized either: Immediately (under Sec. 367(a)); or Over the useful life of the transferred property (under section 367(d)). The timing of the income pick-up is at the election of the taxpayer. Although the preamble focuses primarily on foreign goodwill or going concern value, this applies equally to U.S. goodwill as well as workforcein-place. 49 Deloitte Global Tax Planning Conference at Villanova University School of Law

51 Section 367(d) Proposed Regulations Removal of Exception for Foreign Goodwill and Going Concern Value Proposed regulations state that final regulations will be effective as of the date of the proposed regulations. Specific exception for foreign goodwill and going concern value in existing temporary regulations would be removed. Definition of Intangible property in the section 367(d) temporary regulations would be modified to mean either: property described in section 936(h)(3)(B), or property to which a U.S. transferor applies section 367(d) in lieu of section 367(a). Additionally, the proposed regulations would eliminate the current regulations which limits the useful life of intangible property to 20 years. Useful life will become the entire period during which the exploitation of the intangible property is reasonably anticipated to occur at the time of the transfer. 50 Deloitte Global Tax Planning Conference at Villanova University School of Law

52 Section 367(d) Contribution USP (US) IP Steps 1. USP contributes a portion of its IP to CFC 2 in an exchange described in section CFC 2 contributes IP to CFP in exchange for an X% partnership interest. CFC 1 (Country Y) CFC 2 (Country X) 3. CFC 1 contributes Operating Entities (in disregarded form) to CFP in exchange for a Y% partnership interest. 4. USP and CFP enter into an agreement to share R&D costs. Y% X% Intended Tax Consequences Operating Entities Royalty CFP Operating Entities IP IP USP s contribution of IP to CFC 2 should be subject to section 367(d). USP is treated as having transferred the IP to CFC 2 in exchange for payments contingent on the productivity or use of the IP. Therefore, USP is required to include in its U.S. taxable income an arm s length amount (determined under section 482 and the regulations thereunder) for the use of the IP over its useful life (see Treas. Reg (d)- 1T(c)(1)). CFC 1 and CFC 2 s contributions to CFP qualify as tax-free contributions under section 721(a). CFC 2 s contribution of IP to CFP should not result in gain recognition to USP (see Treas. Reg (d)-1T(f)(3)). 51 Deloitte Global Tax Planning Conference at Villanova University School of Law

53 Section 367(d) Contribution, continued Operating Entities CFC 1 (Country Y) Royalty USP (US) Y% X% CFP Operating Entities IP CFC 2 (Country X) 52 Deloitte Global Tax Planning Conference at Villanova University School of Law IP IP Considerations Application of the Notice s anti-abuse rule How the section 367(d) fiction is treated at the partnership level o o Is the value of the IP net of the section 367(d) charge? Is the section 367(d) charge treated as a liability (e.g., a contingent liability)? Whether CFP is entitled to a deduction equal to the amount of the section 367(d) income included in USP s U.S. taxable income (see Treas. Reg (d)-1T(c)(2)). Ability to allocate the deduction for the section 367(d) amount at CFP (as the transferee foreign corporation) to CFC 2. Impact to USP, CFC 2, and CFP if the amount of the section 367(d) inclusion is not paid by CFP as of the last day of the third taxable year following the taxable year to which the account receivable relates and the receivable is treated as contributed by USP to the transferee foreign corporation (see Treas. Reg (d)-1T(g)(ii)). Consider ability to repatriate cash to USP Ongoing application of section 367(d), including certain prohibitions on transferring the non-u.s. IP and the CFP interests Whether USP s contribution of IP and the subsequent agreement to share R&D costs between USP and CFP could be aggregated for valuation purposes. Synergistic value of IP transferred Whether a tax gross-up of post-tax values of the IP is required.

54 Summary of IP Migration Models IP Migration Models Direct Sale of IP Installment Sale U.S. IP Royalty Corporate Freeze Partnership Structure Centralization of IP Achieved -1 legal entity Achieved -1 legal entity Achieved -1 legal entity achieved - if FP can transfer IP tax free to IPCo achieved - if FP can transfer IP tax free to IPCo Cash Tax High in year 1 Spread over term of the Installment note (if installment method is sustained) 5+ years depending on the nature of the IP Spread over life of IP. Partly offset by FTCs Dependent on nature of the IP. Partly offset by FTCs ETR Impact First year spike Stable Stable Deferred taxes can impact ETR in year of contribution Deferred taxes can impact ETR in year of contribution Impact on U.S. debt levels Reduced upfront when proceeds are received Reduced when installment payments are received Reduced when royalty payments are received Reduced only when preferred stock is redeemed or transferred Reduced only if partnership interest is redeemed or transferred. Risk Low tax risk / risk on valuation Tax risk on anti-abuse rule Tax risk on license characterization Tax risk on useful lives of IP, discount rate on deemed royalties, and preferred coupon Tax risk on business purpose, value of IP, preferred coupon Complexity Low Low Low Medium High 53 Deloitte Global Tax Planning Conference at Villanova University School of Law

55 Structured Passive Investment Arrangements (SPIA)

56 Structured Passive Investment Arrangements (SPIA) Amounts paid to a foreign country are not compulsory payments, and thus are not creditable foreign taxes, if such payments are attributable to a structured passive investment arrangement ( SPIA ). An arrangement is a SPIA if all of the following conditions are satisfied: 1. SPV Condition This condition is satisfied if the arrangement involves a passive special purpose vehicle ( SPV ) and there is a payment attributable to the income of such entity. 2. U.S. Party Condition This condition is satisfied if a person would be eligible to claim a credit under section 901(a) (including a credit for foreign taxes deemed paid under section 902 or 960) for all or a portion of the foreign payment described in the SPV Condition if it was a tax without regard to the application of the rules for SPIAs. 3. Direct Investment Condition This condition is satisfied if the U.S. party's proportionate share of the foreign tax payments described in the SPV Condition is (or is expected to be) substantially greater than the payments that would normally arise if the U.S. party owned its proportionate share of the SPV s assets directly and paid foreign taxes on income from such assets. 4. Foreign Tax Benefit Condition This condition is satisfied if the arrangement is reasonably expected to result in a credit, deduction, loss, exemption, exclusion, or other tax benefit for a counterparty or a person related to the counterparty, but not related to the U.S. entity. 5. Counterparty Condition This condition is satisfied if the arrangement includes a person, the counterparty, that under the laws of the foreign country in which the person is subject to tax on the basis of place of management, place of incorporation or similar criterion, or is otherwise subject to net basis tax, owns (directly or indirectly) an equity interest in the SPV or the assets of the SPV. 6. Inconsistent Treatment Condition This condition is satisfied if there is inconsistent treatment of one or more aspects of the arrangement under the laws of the United States and a foreign country and the U.S. treatment results in either materially less income or a materially greater amount of foreign tax credits than would be available if foreign law controlled the U.S. tax treatment. 55 Deloitte Global Tax Planning Conference at Villanova University School of Law

57 May Company Regulations under Section 337(d)

58 May Company Regulations under Section 337(d) On June 12, 2015, temporary regulations under section 337(d) were issued, which are intended to prevent corporations from using partnerships to avoid gain required to be recognized under sections 311(b) or 336(a). The new temporary regulations under Treas. Reg (d)-3T replace former proposed regulations issued on December 15, 1992, and are effective for transactions on or after June 12, Under the new temporary regulations, if a corporate partner contributes appreciated property to a partnership that owns stock of the corporate partner, the corporate partner is generally required to recognize gain at the time of the contribution (the deemed redemption rule). Stock of the corporate partner generally includes stock of the corporate partner or stock of a corporation that controls such corporate partner (within the meaning of section 304(c)). Stock of a corporate partner, however, does not include any equity interests held or acquired by the partnership if all capital and profits partnership interests are held by members of the same U.S. affiliated group (as defined under section 1504(a)). While the former proposed regulations included a similar deemed redemption rule, the stock of a corporate partner was determined under section 1504(a) and not section 304(c). Examples of transactions which may be impacted by these regulations include: A Corporate Partner contributes appreciated property to a partnership that owns stock of the Corporate Partner. A partnership acquires stock of the Corporate Partner. A partnership that owns stock of the Corporate Partner distributes appreciated property to a partner other than the Corporate Partner. A partnership distributes stock of the Corporate Partner to the Corporate Partner. A partnership agreement is amended in a manner that increases a Corporate Partner s interest in the stock of the Corporate Partner (including in connection with a contribution to, or distribution from, a partnership). 57 Deloitte Global Tax Planning Conference at Villanova University School of Law

59 Use of APAs

60 What Is An Advance Pricing Agreement (APA)? IRS APA requirements published in Rev. Proc Binding contract with the tax authorities and taxpayers: Covers facts, pricing methods, and results with respect to covered intercompany transactions IRS may propose or require inclusion of Interrelated Matters (issues, years and countries) May include CWI waivers Generally five-year term (with rollback to open tax years) and can be renewed Critical Assumption clauses allow renegotiation in the event of changed circumstances Voluntary process provides taxpayers with non-adversarial alternative to resolving transfer pricing disputes 59 Deloitte Global Tax Planning Conference at Villanova University School of Law

61 Types of APAs Unilateral contract between the taxpayer and the IRS Bilateral comprises of three agreements with two tax authorities: A mutual agreement reached through the competent authority process between the IRS and a foreign tax authority APA between the U.S. taxpayer(s) and the IRS APA between the related foreign taxpayer(s) and the respective foreign tax authority Multilateral agreements with more than two tax authorities IRS preference for bilateral and multilateral APAs may later decline if Taxpayer requests a unilateral APA and treaty partner proposes an adjustment 60 Deloitte Global Tax Planning Conference at Villanova University School of Law

62 APA Phased Approach Phase 1: APA Strategy & Functional/Economic Analysis Phase 2: Pre-Filing Conference Meetings Phase 3: Preparation and Filing of APA Submissions Phase 4: Negotiations with Tax Authorities Phase 5: Drafting of APA Phase 6: Execution and Monitoring 61 Deloitte Global Tax Planning Conference at Villanova University School of Law

63 Bilateral APA Benefits and Challenges Key Benefits A go forward TPM of at least 5 years Rollback to open audit years possible Significantly mitigate penalty risk Defers potential assessments and related cash outlays Provides certainty not otherwise available Generally more objective / experienced APA teams avoid the rogue auditor syndrome Entry into APA process reduces involvement of a local IRS office and forces it to accept the APA methodology Greatly reduced TP compliance and audit defense costs Simplifies financial reporting process Possibility of renewal at reduced cost Potential Challenges An APA may focus scrutiny on other transactions in the structure and other issues Current transfer pricing policy may be perceived as too high or too low and could be reduced under an APA; that is, it may work against the client s tax interest No guarantee that proposed methodology will be agreed to Potential requirement to provide more information upfront 62 Deloitte Global Tax Planning Conference at Villanova University School of Law

64 What Is Driving APAs? (Why are APA Programs so Busy?) Repetitive transfer pricing audits Provides taxpayers with non-adversarial alternative to resolving transfer pricing disputes Two or more tax authorities auditing same issue ASC certainty for transactions and years covered by APA Change in transfer pricing policies Limited ability to change transfer prices retroactively Operational and cash management Manage transfer pricing real-time as opposed to responding to audits years later OECD BEPS concerns 63 Deloitte Global Tax Planning Conference at Villanova University School of Law

65 Questions?

66 Contact info Michael Steinsaltz Partner Deloitte Tax LLP Daniel Markiewicz Partner Deloitte Tax LLP 65 Deloitte Global Tax Planning Conference at Villanova University School of Law

67 Refreshment Break (Inbound Participants: Please Return to This Room After the Break for the Plenary)

68 Global Tax Reset How initiatives such as the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, preemptive global legislative activity, and an active U.S. regulatory environment, have, and will continue to, fundamentally change the global tax landscape Moderated by: Richard Hyman Michael Steinsaltz Deloitte Tax LLP November 20, 2015

69 Lunch

70 Multistate Tax Issues for Inbound Companies Jason Wyman Michael Bryan Deloitte Tax LLP November 20, 2015

71 Agenda Tax Haven Provisions Financing U.S. Operations Foreign Principal Company Structures 70 Deloitte Global Tax Planning Conference at Villanova University School of Law

72 Tax Haven Provisions

73 Tax Haven Provisions Seven states (AK, CT, DC, MT, OR, RI, and WV) currently have some form of a tax haven provision that seeks to include certain foreign entities in a state s unitary combined return Blacklist approach vs. definitions / facts and circumstances tests DC, MT, OR are the only states to currently employ a statutory blacklist approach that identifies specific countries as tax havens Luxembourg is notably included on each of these blacklists Tax haven legislation has also been active in a number of other states, particularly blacklist approaches, and is expected to continue as a topic of interest at the state level Countries such as Switzerland, the Netherlands, and Ireland have also been discussed as potential tax haven jurisdictions, but as of yet, none of these countries are specifically included on any state blacklists Significant media attention, including enhanced coverage on the impact of offshore tax havens and inversion transactions on state tax revenues 72 Deloitte Global Tax Planning Conference at Villanova University School of Law

74 Financing U.S. Operations

75 Foreign Financing Structures Not all foreign financing structures are treated equally from a state tax perspective Tower structures Foreign finance company with a U.S. branch Repo transactions Hybrid instruments Notional interest deductions Use of loss companies Important to completely understand the state tax implications of restructuring existing foreign financing structures 74 Deloitte Global Tax Planning Conference at Villanova University School of Law

76 Fundamental State Tax Considerations of Setting up a U.S. Branch of a Foreign Corporation Taxation in state where U.S. branch is located State income tax nexus, tax base, and apportionment considerations, including conformity with federal income tax provisions State franchise/net worth tax nexus, tax base, and apportionment considerations Potential application of other state and local taxes, including gross receipt taxes, sales/use tax, business license fees, property taxes, etc. Taxation in other states U.S. branch activity may result in foreign corporation (and potentially its worldwide income) being included in state unitary combined returns 75 Deloitte Global Tax Planning Conference at Villanova University School of Law

77 Related Party Expense Addback Many states, including a number of unitary states, have statutory provisions requiring the addback of related party expenses, including interest expense The concept of what constitutes a related party is broadly defined in most instances Payments to foreign affiliates may be subject to addback Addback exceptions may exist and vary by state, including often having different exceptions based on the type of expense involved 76 Deloitte Global Tax Planning Conference at Villanova University School of Law

78 Common Addback Exceptions Payment made to related party in a foreign country Related party may be required to be located in a country that has comprehensive income tax treaty with the U.S. Some states impose a more restrictive subject to tax requirement to this exception Conduit payments Unreasonable result Payment is at arm s length rates and tax avoidance is not a principal purpose of the transaction Agreement with the state 77 Deloitte Global Tax Planning Conference at Villanova University School of Law

79 Issues with Subject to Tax Exceptions Related party may be required to include the interest income in the foreign country tax base What if interest income is excluded from the foreign country tax base or otherwise exempt from taxation under foreign law? Related party may be subject to tax in the foreign country at a minimum effective tax rate Minimum effective tax rate threshold varies by state, as does the method of calculation Consider implications if interest income is offset by NOLs or other deductions in the foreign country, or if the related party files on a combined or group relief basis in the foreign country 78 Deloitte Global Tax Planning Conference at Villanova University School of Law

80 Foreign Entities in Unitary Combined Reports Worldwide filings Water s edge filings 20% or more U.S. factors Subject to federal income tax or required to file a federal return Effectively connected income (possibly without treaty provisions) U.S. source Fixed, Determinable, Annual, or Periodic ( FDAP ) income Subpart F income inclusion ratio More than 20% of income from related party intangible property or services Tax havens If included, how is the entity s income determined? 79 Deloitte Global Tax Planning Conference at Villanova University School of Law

81 Other Potential State Challenges Asserting economic or factor-based presence nexus on foreign financing company Adjustments to intercompany transfer pricing Expense attribution and interest offset provisions Application of IRC 163(j) limitations to a separate company or unitary combined return filing Debt vs. equity testing on a separate company basis Business purpose and economic substance-focused challenges Forcing combination upon audit 80 Deloitte Global Tax Planning Conference at Villanova University School of Law

82 State Income Tax Efficiency Is the organization s U.S. leverage structure efficient from a state income tax perspective? Where is U.S. debt located? Operating companies vs. holding company Implications of separate company vs. consolidated/combined reporting requirements at the state level Opportunities to make structure more efficient Restructuring of U.S. operations (e.g., conversion of operating companies to disregarded LLCs) Address inefficiencies during a refinancing of existing debt or when moving from one foreign financing structure to another State filing method elections 81 Deloitte Global Tax Planning Conference at Villanova University School of Law

83 Foreign Principal Company Structures

84 Tolling Structure Example 83 Deloitte Global Tax Planning Conference at Villanova University School of Law

85 Nexus and Tax Base Income and Franchise Tax Inventory ownership may trigger state income and franchise tax nexus for the principal operating company ( POC ) States are not required to follow federal treaties, and as such, some could tax the worldwide income of the POC or tax an amount equal to federal ECI without the application of treaty provisions Franchise taxes often based on capital and thus not tied into federal taxable income or influenced by federal treaties POC sales to a U.S. entity may be sufficient to create economic or factor presence nexus in certain states Intangible or service related charges to a U.S. entity, whether from the POC or an affiliated foreign IP or service company, may be sufficient to create economic or factor presence nexus 84 Deloitte Global Tax Planning Conference at Villanova University School of Law

86 Apportionment Sales factor impact of transferring U.S. inventory from a U.S. entity to the POC in conjunction with a tolling structure going live Sales factor sourcing of tolling service fee paid by the POC to U.S. tollers Throwback sales considerations for the POC Sales factor sourcing of intangible income and service fees that may be paid by U.S. entities to the POC or an affiliated foreign IP or service company 85 Deloitte Global Tax Planning Conference at Villanova University School of Law

87 Unitary Combined Reporting POC may be included in a combined return due to having 20% or more U.S. activity even if POC does not have nexus within that state POC sales to a U.S. entity as well as the potential ownership of U.S. inventory (separately or in combination) may cause POC to satisfy 20% or more U.S. activity test POC may be included to the extent of ECI, as determined without application of treaties POC may be included under state tax haven provisions 86 Deloitte Global Tax Planning Conference at Villanova University School of Law

88 Nexus Non-Income Based Taxes Inventory ownership may also lead to filing responsibilities and tax liabilities for other state and local taxes such as sales/use, property, gross receipts, etc. Not properly registering for sales/use tax or having the appropriate exemption certificates in place in a timely manner can cause typically exempt sale for resale transactions to become taxable 87 Deloitte Global Tax Planning Conference at Villanova University School of Law

89 Questions?

90 Contact info Jason Wyman Partner Deloitte Tax LLP Michael Bryan Director (WNT-MS) Deloitte Tax LLP 89 Deloitte Global Tax Planning Conference at Villanova University School of Law

91 Financing Strategies Update for U.S. Inbound Groups Harrison Cohen Jonathan Goldblatt Deloitte Tax LLP November 20, 2015

92 Agenda OECD/G20 BEPS Project Overview Compulsory Spontaneous Exchange of Rulings (Action 5) Interest Deductions (Action 4) Hybrid Mismatch Arrangements (Action 2) Other Inbound Financing in Light of Luxembourg Changes and BEPS 91 Deloitte Global Tax Planning Conference at Villanova University School of Law

93 OECD/G20 BEPS Project

94 The 2015 Final Reports What is final? TPG changes are largely done OECD Model change recommendations have partly been finished What is not final? Individual countries must still decide extent to which they will amend domestic law in light of recommendations OECD and other countries must still: Develop multilateral instrument for speeding incorporation of recommended OECD Model changes into existing bilateral treaties Complete anti-treaty-abuse recommendations for OECD Model when Treasury Dep t finalizes U.S. Model treaty updates Report on attribution of profits to PEs in light of PE definition changes, transfer pricing of financial transactions, and several other items Monitor each other for compliance with minimum standards 93 Deloitte Global Tax Planning Conference at Villanova University School of Law

95 Enacting Anti-BEPS Legislation What domestic laws will individual countries enact, or have they enacted, to address BEPS? By mutual agreement By individual decision Mutual agreements in Final Reports reflect various levels of consensus: Level Translation Endorsed Actions Minimum Standard Common Approach Best Practices Commitment to consistent implementation of standards in final report, to be monitored by OECD during and after implementation Agreement on general tax policy direction ; aspiration that they become minimum standards over time Negotiators failed to reach consensus that countries must adopt legislation on the topic in question Action 5 (Harmful tax practices) Action 6 (Treaty abuse) Action 14 (Dispute resolution) Action 2 (Hybrid mismatches) Action 4 (Base erosion via interest) Action 3 (CFC rules) 94 Deloitte Global Tax Planning Conference at Villanova University School of Law

96 Selected Country Actions Country Legislation Date Australia Austria Brazil China Australia has already taken action on the multinational antiavoidance law (MAAL) Bill, which is currently before Parliament. Structures with principal purpose of avoiding tax by not having tax presence disregarded, with profits from domestic sales being booked domestically Maximum penalties for avoidance and profit-shifting schemes would be doubled Bill introduced into Parliament for Country-by-Country (CbC) reporting regime applying to entities within a group with annual global income of more than AU$1 billion. No deduction for payments that are not sufficiently taxed or are not taxed at all at the level of the recipient. A tax rate of 10% at the level of the recipient will be considered sufficient for these purposes Government published proposed rules that introduce new reporting requirement for taxpayers to disclose transactions that were carried out to reduce, eliminate or defer taxes. Deduction of cross-border payments to overseas related parties will be subject to more prudent assessment by the tax authority. Discussion draft of Implementation Measures of Special Tax Adjustment released in Sept incorporates a number of recommendations in the context of the BEPS initiative Effective as of January 1, 2016 Effective as of January 1, 2016 March 1, 2014 January 1, 2016 (if proposed rules are converted into Law) March 18, 2015 Still in draft but expected to be finalized by the end of 2015 or early Deloitte Global Tax Planning Conference at Villanova University School of Law

97 Selected Country Actions, continued Country Legislation Date EU member states GAAR introduced in the EU Parent-Subsidiary Directive to be implemented mandatorily by all 28 EU member states Anti-hybrid instrument measure introduced in the EU Parent-Subsidiary Directive to be implemented mandatorily by all 28 EU member states: Exemption disallowed on hybrid dividends (Proposed) Directive for exchange of information of rulings within the EU likely to be implemented by all EU member states. January 1, 2016 January 1, 2017 France Deduction disallowed for low-taxed related party interest expense FY ending on or after September 25, 2013 Germany Dividend exemption disallowed on hybrid dividends. Disallowance of deduction on hybrid instruments and in certain double dip structures planned. FY beginning January 1, 2014 Still unclear, likely FY beginning January 1, 2016 Ireland Default rule that all companies incorporated in Ireland are tax resident in Ireland January 1, 2015 (new companies) Transition to 2020 (companies with existing Ireland operations) 96 Deloitte Global Tax Planning Conference at Villanova University School of Law

98 Selected Country Actions, continued Country Legislation Date Italy Japan Luxembourg Digital Tax : 25% WHT would apply on digital sales made by foreign entities to Italian clients. WHT not applicable if the sales are made through an Italian PE of the foreign entity. Cross-border digital services are deemed to take place at the main office or domicile of the service recipient, instead of at the main office of the supplier, for Japanese consumption tax (VAT) purposes 95% foreign dividend exemption disallowed for a dividend that is deductible in the source country (e.g., dividends on redeemable preference shares between Australia and Japan) Exit tax applicable to Japanese resident individuals with certain financial assets Suspend consideration of certain types of ruling requests regarding PE status pending U.S.-Luxembourg treaty negotiations Announced by Government: should be included in the 2016 Financial Law and likely applicable as of January 1, October 1, 2015 Fiscal years beginning on or after April 1, 2016 July 1, 2015 Mexico Double deduction by related parties on single payment is disallowed. Deduction of interest, royalties and technical assistance (different item than technical service under domestic law) is disallowed unless payment is subject to taxation in recipient jurisdiction. Treaty benefit only allowed with affidavit evincing double taxation Country by country reporting (and master/local file documentation). 97 Deloitte Global Tax Planning Conference at Villanova University School of Law January 1, 2014 January 1, 2016 (first deadline December 31, 2017).

99 Selected Country Actions, continued Country Legislation Date Russia Switzerland Ukraine Treaty benefits only allowed if foreign recipient is recognized as actual recipient of income/beneficial owner under the Russian law having no legal obligation to transfer the income received (in part or in full) to another party of the group. Deduction for royalty, interest and service fees is increasingly challenged by tax authorities and viewed as tax-free profit repatriation tool where the deduction of these expenses affect the financial performance of the local company. Introduction of CbC reporting. Automatic (spontaneous) data exchange (which will also be applicable for tax rulings). In process of repealing Auxiliary Company, Mixed Company, Holding Company, and Commissionaire regimes Transfer pricing rules recently strengthened to prevent shifting of profits offshore PE definition expanded to include the location of servers in Ukraine In the next 2-3 years Likely as from January 1, 2017 or January 1, 2018 (only tax rulings will be exchanged which are valid on these days). January 1, 2015 United Kingdom Diverted Profit Tax introduced and applies where a non-uk resident company artificially avoids creating a taxable presence in the UK; or where a UK resident company (or UK PE) uses transactions or entities lacking economic substance. If applicable, a tax rate of 25% is charged on perceived diverted profits. 98 Deloitte Global Tax Planning Conference at Villanova University School of Law April 1, 2015

100 Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance (Action 5)

101 Compulsory Spontaneous Information Exchange Agreed OECD framework for compulsory spontaneous exchange in respect of rulings in 6 categories: Rulings relating to preferential tax regimes Unilateral APAs or other cross-border unilateral transfer pricing rulings Cross-border rulings providing for downward adjustment of taxable profits PE rulings Related party conduit rulings Any other type agreed by the Forum on Harmful Tax Practices that in the absence of spontaneous information exchange give rise to BEPS concerns Countries to which material must be sent are specified by reference to the type of ruling Material on post-2009 rulings that remained effective as of January 1, 2014 must be sent by the end of 2016 Material on new rulings starting April 1, 2016 must be sent within 3 months of issue 100 Deloitte Global Tax Planning Conference at Villanova University School of Law

102 Limiting Base Erosion Involving Interest Deductions and Other Financial Payments (Action 4)

103 Limits on Interest Deductions Common Approach Fixed Ratio Rule: Entity may deduct net interest expense up to a fixed percentage (ranging from 10-30%) of EBITDA Report contains relevant factors to consider in setting the fixed ratio along the 10-30% corridor. Optional Group Ratio Rule: If net interest expense in excess of fixed ratio, may deduct net interest expense up to the group s ratio of net third-party interest expense to group EBITDA. Look to consolidated financial statements to determine group members, net third-party interest expense, and group EBITDA. Optional 10% uplift to net third-party interest expense Countries agreed as to common approach as to general policy direction and Continuing work on banking and insurance issues to be completed by 2016 Follow-up with more detail on Group Ratio Rule. 102 Deloitte Global Tax Planning Conference at Villanova University School of Law

104 Neutralizing the Effects of Hybrid Mismatch Arrangements (Action 2)

105 Examples of Hybrid Mismatch Arrangements Reverse Hybrid Rule Imported Mismatch Rule 104 Deloitte Global Tax Planning Conference at Villanova University School of Law

106 Examples of Hybrid Mismatch Arrangements, continued Hybrid Financial Instrument Rule Disregarded Hybrid Payments Rule 105 Deloitte Global Tax Planning Conference at Villanova University School of Law

107 Examples of Hybrid Mismatch Arrangements, continued Deductible Hybrid Payments Rule Dual Resident Rule 106 Deloitte Global Tax Planning Conference at Villanova University School of Law

108 Other 2015 Final Reports Action Overview Significant Developments Level of Endorsement Next Steps Strengthen CFC Rules (Action 3) Outlines building blocks for design of a CFC regime Largely unchanged Best Practice Prevent treaty abuse (Action 6) Recommends changes to OECD Model to prevent treaty shopping Largely unchanged Minimum Standard Insert into the Multilateral Instrument The LOB will be updated to reflect the U.S. Model Treaty revisions due to be finalized this fall. Non-collective investment vehicles to be addressed in early 2016 Make dispute resolution mechanisms more effective (Action 14) Recommendations for timely, effective, efficient resolution of disputes through MAP 20 countries agreed to develop mandatory binding arbitration provisions: Australia, Canada, Japan, New Zealand, U.S., & 15 European countries: Austria, Belgium, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, & UK Minimum Standard Develop mandatory binding arbitration procedures Determine scope of subjects of arbitration Peer review of individual country MAP process 107 Deloitte Global Tax Planning Conference at Villanova University School of Law

109 Other 2015 Final Reports, continued Action Overview Significant Developments Level of Endorsement Next Steps Develop multilateral instrument (Action 15) Ad hoc group, open to all interested countries, began May 2015 to develop multilateral instrument to implement the BEPS treaty-related measures by amending bilateral treaties See discussion of OECD Model changes above Negotiations underway with over 90 countries United States has joined To be open for signature by end of 2016 Mandatory disclosure rules (Action 12) Modular framework that enables countries without mandatory disclosure rules to design a regime that fits their need to obtain early information on potentially aggressive or abusive tax planning schemes and their users Best Practice 108 Deloitte Global Tax Planning Conference at Villanova University School of Law

110 Other 2015 Final Reports, continued Action Overview Significant Developments Level of Endorsement Tax Challenges of digital economy (Action 1) Digital economy cannot be ringfenced; BEPS risks, addressed in other Actions, are exacerbated by the digital economy Generally concludes that other parts of the BEPS Package addressing mobile income effectively address BEPS concerns in the digital economy Next Steps Post-project monitoring process to be developed in 2016 Transfer pricing and documentation (Actions 8-10, 13) Discussed below Discussed below Discussed below 109 Deloitte Global Tax Planning Conference at Villanova University School of Law

111 Inbound Financing in Light of Luxembourg Changes and BEPS

112 Luxembourg-U.S. Branch Structure Overview: Foreign Parent owns USCo and LuxCo. LuxCo owns US Branch. Foreign Parent loans funds to USCo ( Loan 1 ). Foreign Parent contributes Loan 1 to LuxCo. LuxCo establishes US Branch with minimal U.S. activities which would not give rise to a U.S. trade or business. LuxCo allocates Loan 1 to the US Branch. LuxCo (Luxembourg) Foreign Parent (Country X) USCo (US) Considerations: USCo obtains interest deduction provided Loan 1 is valid indebtedness for U.S. federal income tax purposes. Provided Loan 1 does not meet the requirements of the asset-use test or the business-activities test, the interest income should not be considered ECI. Pursuant to the U.S.-Luxembourg treaty, Luxembourg generally does not tax income of the US Branch because it is a U.S. permanent establishment for Luxembourg purposes. US Branch (US) Loan Deloitte Global Tax Planning Conference at Villanova University School of Law

113 Changes in U.S. Branch Structure The U.S. Department of Treasury ( Treasury ) has been in contact with the Luxembourg tax authorities ("LTA") regarding the U.S. Branch structure of Luxembourg companies. Those structures are often used to leverage multinational companies and the benefit is socalled double non-taxation. Nevertheless, they may not trigger the hybrid arrangement neutralization rule recommended by the BEPS Project. See Example 1.8, Action 2. This double non-taxation is achieved through a different application of the domestic laws in the U.S. and Luxembourg. There are technical arguments and grounds to sustain the application and recognition of a PE in the U.S. for Luxembourg tax purposes and hence to exempt any income attributable to such PE. However, there has been increased political pressure to address this mismatch. To address the issue the Treasury has mentioned that it would like to modify the current income tax treaty between Luxembourg and the U.S. Both sides agreed to address the U.S. Branch structures and may implement measures to ensure that the U.S. Branch structures are not effective any longer. In the beginning of October, the Treasury requested that the LTA adopt changes to address U.S. branch structures immediately, including existing structures. Treasury has requested that Luxembourg provide a proposal on how this will be accomplished. 112 Deloitte Global Tax Planning Conference at Villanova University School of Law

114 Changes in U.S. Branch Structure, continued Given the exemption provided for in the U.S.-Luxembourg tax treaty, changes could only be enacted through: Change to the U.S. Luxembourg tax treaty which, if agreed by the negotiators, would then have to be approved by the U.S. Senate. This alternative seems unlikely given the 5-plus-year Senate stalemate over tax treaties and Treasury s insistence that changes be made this year. Change in U.S. legislation. This, again, seem unlikely given the current U.S. political environment and the short time frame. Change in Luxembourg internal law. This could affect other countries, not just the U.S. branch structures. There may be some question as to whether Luxembourg could pass a domestic law which would override the treaty provision. Change by mutual agreement of the Competent Authorities. Such a change would be considered a change in interpretation or administration of the treaty, not a change of the treaty itself or either country s domestic law. Treasury would like changes to be effective January 2016; there has been no indication as to whether there would be any grace period for existing structures to unwind after the change. 113 Deloitte Global Tax Planning Conference at Villanova University School of Law

115 Utilization of Losses Overview: Foreign Parent owns USCo and Foreign OpCo. Foreign Parent loans funds to USCo. Foreign OpCo, organized in the same jurisdiction as Foreign Parent, has significant net operating losses. Loan Foreign Parent (Country X) Consolidation Considerations: Under Country X rules, Foreign Parent can utilize losses created by Foreign OpCo to offset interest income received from USCo. USCo (US) Foreign OpCo (Country X) 114 Deloitte Global Tax Planning Conference at Villanova University School of Law

116 Lux Tower Overview: Foreign Parent owns USCo 1. USCo 1 owns ForCo, a disregarded entity that owns USCo 2. Foreign Parent and ForCo together form a fiscal unity. Foreign Parent loans funds to USCo 1. USCo 1 lends the funds to ForCo. Considerations: Deduction in the U.S. for interest paid by USCo 1 to Foreign Parent. Loan from USCo 1 to ForCo should be disregarded for U.S. federal tax purposes with no income inclusion in the U.S. on the interest expense accrued by ForCo. Interest deduction at ForCo can offset interest income at Foreign Parent under Luxembourg fiscal unity rules. * This structure may work in other jurisdictions (e.g., France with French Branch under USCo 1) Fiscal Unity Loan Foreign Parent (Luxembourg) USCo 1 (US) ForCo (Luxembourg) USCo 2 (US) Loan 115 Deloitte Global Tax Planning Conference at Villanova University School of Law

117 Swiss/U.S. Branch Overview: Foreign Parent owns USCo and ForCo. ForCo owns US Branch. Foreign Parent loans funds to USCo ( Loan 1 ). Foreign Parent contributes Loan 1 to ForCo. ForCo establishes US Branch engaged in internal treasury activity. ForCo allocates Loan 1 to the US Branch. ForCo (Switzerland) Foreign Parent (Country X) USCo (US) Considerations: USCo obtains interest deduction provided Loan 1 is valid indebtedness for U.S. federal income tax purposes. Provided Loan 1 does not meet the requirements of the asset-use test or the business-activities test, the interest income should not be considered ECI. Switzerland generally does not tax income of a foreign branch provided such branch is subject to local tax. US Branch (US) Loan Deloitte Global Tax Planning Conference at Villanova University School of Law

118 Lux/Irish IFL Structure Overview: Foreign Parent owns USCo and IrishCo. IrishCo owns LuxCo. IrishCo makes and interest free loan ( IFL ) to LuxCo. LuxCo loans cash to USCo ( Loan ). Foreign Parent (Country X) Considerations: Under Irish law, to the extent IrishCo is not a trading company, there is no interest income imputed on the IFL. IFL IrishCo (Ireland) USCo (US) Under Luxembourg law, LuxCo receives a deemed interest deduction on the IFL which is available to offset interest income on the Loan. LuxCo (Luxembourg) Loan Consider CFC rules in Foreign Parent s jurisdiction. 117 Deloitte Global Tax Planning Conference at Villanova University School of Law

119 Questions?

120 Contact info Harrison Cohen Director (WNT-IT) Deloitte Tax LLP Jonathan Goldblatt Partner Deloitte Tax LLP 119 Deloitte Global Tax Planning Conference at Villanova University School of Law

121 Refreshment break

122 Innovation Box Regimes Harrison Cohen Godfried Schutz Deloitte Tax LLP November 20, 2015

123 Agenda Overview of Innovation Box Regimes Recent Developments in Innovation Box Regimes Major European Innovation Box Regimes Netherlands Ireland Outlook in Other Countries Impact Developments in Innovation Box Regimes Boustany-Neal U.S. Innovation Box Proposal U.S. Model Treaty Change Regarding Special Tax Regimes OECD Harmful Tax Competition Modified Nexus Standards 122 Deloitte Global Tax Planning Conference at Villanova University School of Law

124 Overview of Innovation Box Regimes

125 IP Box Innovation box: What is it? Popular in Europe Incentive for R&D activities through low tax rate (or partial income exemption) 124 Deloitte Global Tax Planning Conference at Villanova University School of Law

126 IP Box Typical Innovation Box Elements Contract R&D (within) group allowed? What kind of IP qualifies? Patents? Trademarks? Know how? Other? Self-developed vs acquired IP Substance / IP functionality needed? 125 Deloitte Global Tax Planning Conference at Villanova University School of Law

127 IP Box Review of Regimes (Selected) Country Regime Conclusion Netherlands UK Luxembourg Switzerland Belgium Spain France Innovation box Patent Box IP Box Different IP regimes Patent income deduction Partial IP income exemption Reduced rate for gains/profits from licensing IP rights To be brought within new Nexus Approach 126 Deloitte Global Tax Planning Conference at Villanova University School of Law

128 IP Box Typical Characteristics Average 75% reduction in domestic corporate income tax rate Acquired patents qualify (or in some case acquired IP will qualify if the entity develops the IP further) Broad definition of qualifying IP: NL BE LU FR PT UK ES HU MT CH (NW) CY LI Patents & patent rights Trademarks Designs & models a) Copyrights a) c) c) d) Domain names Trade secrets/know-how a) b) a) Only if R&D declaration b) Know-how (BE)/industrial processes (FR) closely associated with patents c) Only software d) Only artistic Source: European Commission Yes Yes, with restrictions No 127 Deloitte Global Tax Planning Conference at Villanova University School of Law

129 Recent Developments in Innovation Box Regimes

130 IP Box (BEPS Action 5) Why change to innovation box regimes needed? Action 5 (Harmful tax practices) OECD Nexus approach (compromise between the UK and Germany) Substance / functionality required (measured through R&D costs) Existing patent box regimes must be amended before 30 June 2016 Legislative process must commence in 2015 and take effect no later than 30 June 2016 Grandfathering up to 5 years (until 30 June 2021) Closing existing regime to new entrants Consider opting into existing patent box regimes before June 2016 to avail of grandfathering? 129 Deloitte Global Tax Planning Conference at Villanova University School of Law

131 IP Box Nexus Approach Net of expenditure Sales with embedded IP income? Qualifying expenditure + outsourced R&D + IP acquisition cost 130 Deloitte Global Tax Planning Conference at Villanova University School of Law

132 IP Box Qualifying IP Currently patents and functionally equivalent IP assets Marketing related IP assets such as trademarks are excluded Clarification required on scope e.g. copyrighted software, innovations from technology development, technical scientific research Unsuccessful R&D? Grandfathering No new entrants to old regime once new patent box in place (no later than June 2016) Grandfathering of existing regimes (latest date 30 June 2021) FHTP to discuss measure to mitigate risk of new entrants benefiting from grandfathering Tracking and tracing Transitional procedures on change from old to new regime Should not be required to track historical qualifying expenditure Practical methodologies required to identify qualifying expenditure 131 Deloitte Global Tax Planning Conference at Villanova University School of Law

133 Major European Innovation Box Regimes

134 Major European Innovation Box Regimes Netherlands BEPS Action 5: (Modified) Nexus Approach Action 8: Intangibles EU State aid Harmful tax competition New anti-abuse rule in the I&R-directive Dutch Government Embraces Modified Nexus Approach No limitation to patents 133 Deloitte Global Tax Planning Conference at Villanova University School of Law

135 Major European Innovation Box Regimes Ireland Knowledge Development Box (KDB) is the first OECD-compliant intellectual property (IP) box regime. KDB will provide for a 6.25% corporation tax rate on profits arising from research and development projects relating to certain patents and copyrighted software carried out by an Irish company. Tracking and tracing provisions likely will attach to the regime. Require separate profitability stream to be computed for each individual IP asset. Expected to have effect for accounting periods commencing on or after 1 January Deloitte Global Tax Planning Conference at Villanova University School of Law

136 Major European Innovation Box Regimes Other Countries Reformed Patent Box Modified Nexus Reformed patent box starts June 2016 based on the Modified Nexus approach which will only offer tax incentives where R&D undertaken in the respective country. Tracking and tracing provisions Worth considering whether a claim under the current rules can be made before June 2016 so the benefit can be retained until June Deloitte Global Tax Planning Conference at Villanova University School of Law

137 Impact Developments in Innovation Box Regimes

138 Impact Developments in Innovation Box Regimes Contract R&D restricted IP Box regime 5% DEMPE functions Parent Qualifying IP limited to patent and patent-like IP; no trademarks Country 1 R&D 50 Contract R&D Country 2 R&D 50 no customer related IP etc Costs vs DEMPE functions? Third party 137 Deloitte Global Tax Planning Conference at Villanova University School of Law

139 Boustany-Neal U.S. Innovation Box Proposal

140 Compare Boustany-Neal Innovation Box 5-year US R&D expenditures 5-year total costs x Tentative innovation profit = Innovation box profit, 29% of which is taxed at normal corporate rate (10.15% if normal rate is 35%) Total costs is all costs less COGS, interest and taxes (and R&D for necessarily foreign testing) United States includes possessions (e.g., Puerto Rico) Tentative innovation profit = income of corporation from sale, lease, license or other disposition of qualified property : Patent, invention, formula, process, design, pattern, or know-how Any product produced using the above Motion picture film or video tape Computer software All members of expanded affiliated group treated as a single corporation (substitute >50% for 80% ) 139 Deloitte Global Tax Planning Conference at Villanova University School of Law

141 Compare Boustany-Neal Innovation Box, continued Treasury authorized to provide anti-abuse regulations and regulations for acquisitions and dispositions of the major portion of a trade or business or of a separate unit of a trade or business Special rules for inbound transfers of IP from CFCs to U.S. Shareholders Distributions by CFCs to U.S. shareholders of certain appreciated IP can be made without taxable income or gain realization where: The IP is a patent, invention, formula, process, design, pattern, know-how, motion picture film or video tape, or computer software, and The distribution is pursuant to a contemporaneous written qualified plan that: Describes the property and the distributions, Is in effect before the distribution is made, and Is filed with the Treasury Secretary 140 Deloitte Global Tax Planning Conference at Villanova University School of Law

142 U.S. Model Treaty Change Regarding Special Tax Regimes

143 U.S. Model Treaty Change Regarding Special Tax Regimes Articles 11 (Interest), 12 (Royalties), and 21 (Other Income) of U.S. Model would provide that items described in those articles may be taxed in the source country, with no treaty protection, if the beneficial owner of the item is both related to the payer, and subject to a special tax regime with respect to that type of income in its residence country at any time during the taxable period in which the item is paid. Special tax regime defined as any legislation, regulation or administrative practice that provides a preferential effective rate of taxation to such income or profit, but excludes any regime the application of which does not disproportionately benefit interest, royalties or other income, or any combination thereof that, with regard to royalties, satisfies a substantial activity requirement that implements the principles of Article 7 (Business Profits) or Article 9 (Associated Enterprises) that applies principally to charitable, religious, etc. organizations; pension plans; and regulated widely-held retail collective investment vehicles 142 Deloitte Global Tax Planning Conference at Villanova University School of Law

144 U.S. Model Treaty Change Regarding Special Tax Regimes, continued Special tax regime (STR) includes notional deductions allowed with respect to equity The STR exception for royalties subject to a substantial activity requirement interpreted consistent with any standards promulgated by the Forum on Harmful Tax Practices as provided in Action 5 of the BEPS Project Providing advance pricing agreements (APAs) generally is not an STR However, ruling practices inconsistent with the arm s length standard or the Authorised OECD Approach for attribution of profits to a PE may be an STR STR exception for regime the application of which does not disproportionately benefit interest, royalties or other income, or any combination thereof applies to a participation exemption for foreign PEs, but not if the exemption is administered in a manner that reasonably expected to disproportionately benefit such income by, for example, treating such income as attributable to a foreign [PE] in circumstances in which the state in which the [PE] is situated would not be expected to tax the income 143 Deloitte Global Tax Planning Conference at Villanova University School of Law

145 OECD Harmful Tax Competition Modified Nexus Standards

146 Preferential Tax Regimes Minimum standard: Preferential regimes will meet a substantial activity requirement Harmful preferential regimes impose no or a low ETR on income from geographically mobile financial or other service activities and have some or all of 11 other factors Modified nexus approach previously agreed in February for preferential IP regimes: Qualifying IP Expenditures Overall IP Expenditures x Overall IP Income = Income receiving tax benefits 145 Deloitte Global Tax Planning Conference at Villanova University School of Law

147 Preferential Tax Regimes, continued Final Report adds: Qualifying IP assets for preferential IP regimes Patents and functionally equivalent protected IP (includes software) Definition of qualifying expenditures: R&D expenditures qualify Acquisition and related party expenditures do not qualify Exception for up to 30% of qualifying expenditures (the up-lift ) Rules for preventing avoidance of treatment as acquisition expenditures Acceptable approach to tracking and tracing past and present R&D expenditures to the relevant income 16 Preferential IP regimes tested and found non-compliant with the agreed minimum standards Include Italy and UK patent boxes, and Netherlands innovation box 146 Deloitte Global Tax Planning Conference at Villanova University School of Law

148 Questions?

149 Contact info Harrison Cohen Director (WNT-IT) Deloitte Tax LLP Godfried Schutz Partner (ICE-Netherlands) Deloitte Tax LLP 148 Deloitte Global Tax Planning Conference at Villanova University School of Law

150 Closing Remarks Michael Steinsaltz November 20, 2015

151 This presentation contains general information only and Deloitte is 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. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this presentation. 150 Deloitte Global Tax Planning Conference at Villanova University School of Law

152 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. 36 USC Member of Deloitte Touche Tohmatsu Limited