International Tax Issues

Transcription

1 International Tax Issues A Discussion of FATCA and Selected Changes in the Tax Laws of South Korea, Australia, China and India PEI Fund Compliance Forum May 3, 2011 Steven D. Bortnick William D. LaFayette Managing Director and CFO # v1

2 Part I FATCA 2

3 Current Rules UBS Abuse SH Acct. Holder FPC UBS interest & capital gains invests in U.S. securities 3

4 Current Rules UBS Abuse UBS provides U.S. payor with certificate that interest and capital gains allocable to FPC No U.S. tax on interest (portfolio interest) or capital gains SH is U.S. person Evades U.S. tax 4

5 Current Rules Abuse through Fund SH FPC 30% interest No U.S. tax withheld; no reporting If SH is U.S. person, tax is evaded Portfolio Company 5

6 Enter FATCA Imposes new reporting and withholding tax regime on payments of U.S. source withholdable payments to foreign entities The world is divided into Foreign financial institutions ( FFI ) Non financial foreign entities ( NFFE ) Effective date Generally for payments made after 12/31/2012 No FATCA withholding on obligations that are outstanding on or before March 18,

7 FATCA New Regime Payments of withholdable payments to foreign entities subject to 30% withholding tax unless recipient agrees to comply with new disclosure rules Withholdable payment U.S. Source Interest (including portfolio interest), dividends, and other fixed determinable annual or periodic income AND Gross proceeds from the disposition of property (stocks or bonds) that can produce U.S. source interest or dividends 7

8 Payments to FFI Withholdable payment subject to 30% withholding unless FFI enters into agreement with IRS to disclose information about certain U.S. account holders, including name, address, account balance, gross receipts, OR FFI agrees to be treated as a U.S. financial institution and treat each holder of a U.S. account that is a specified holder as a U.S. person, and thus being subject to 1099 reporting, etc. Eliminates need to report account balance Known as 1471(b) agreements 8

9 What is an FFI? Foreign bank, foreign custodian and foreign entities primarily engaged in the business of investing, re-investing or trading in securities, partnership interests or commodities or any interest in such items Includes foreign hedge funds, foreign private equity funds, Foreign Entity means any entity that is not a U.S. person Place of organization key for corporations and partnerships 9

10 Fund Structures FPC USTP Foreign Individuals USTE FPC Cayco LLC Cayco U.S. Fund U.S. Fund pays U.S. source interest or capital gains Cayco and Cayco LLC must enter into agreement with IRS to provide information on all U.S. account holders (LPs), including looking through FPC 10

11 Fund of Fund Structure Cayco Fund Foreign Hedge Fund U.S. source interest capital gains from investment Payment to Foreign Hedge Fund is subject to 30% unless FHF is compliant with reporting For FHF to be compliant Cayco Fund must advise FHF of the specified U.S. persons in Cayco Fund and comply with information reporting 11

12 Certification Approach Notice Notice sets out detailed rules on diligence that must undertake. Notice indicates that Treasury/IRS considering allowing MNCs to rely on certifications from entity payees as to their FATCA treatment (i.e., good or bad FFIs or NFFEs). 12 Substantially less burdensome than documentation and due diligence requirements expected of financial institutions paying holders of financial accounts. Just following this approach still requires identification of substantial U.S. owners of entity payees. Would these certifications be an official IRS form or could each taxpayer create its own? What information would be needed on such a certification? Would there be any associated due diligence required? (Presumably at odds with reliance concept.) Would the certifications need to be renewed periodically? How about monitoring any changed circumstances in FATCA treatment of entity (e.g., good FFI goes bad ; entry of new substantial U.S. owners, etc.)?

13 Notice Holding Companies dividend PE Funds FC dividend FC1 USC FC2 Foreign entity formed to be holding company for subsidiary or group primarily engaged in trade or business other than FI excluded as FFI. No help to fund, but helps portfolio cos. Is FC still exempt holding company? PE funds will sell FC, so FC should not be an investment vehicle. 13

14 Part II Selected Changes in the Tax Laws of South Korea, Australia, China and India 14

15 General Tax Considerations in Cross-Border Investing Minimize taxes in foreign jurisdiction Avoid taxation before cash receipts ( phantom income ) Maintain capital gain on exit/partial exit and qualified dividend income on distributions Avoid/minimize tax on leveraged recap Avoid/minimize foreign withholding taxes Avoid UBTI for tax-exempt investors Maintain VCOC status of the fund Will a buyer like the structure or be able to restructure on a tax efficient basis? What does it take/cost to implement and maintain structure? 15

16 PE Investment in PRC Circular 698 Released December 10, 2009, effective January 1, Permits taxation of gain on sale of non PRC holding companies of PRC companies. Initial impetus on withholding agent to withhold tax. If no withholding, seller must file return and pay tax within 7 days of transfer. Provides rules for determining purchase price if in non-prc currency. If tax rate on seller is <12.5%, subject to information/documentation request. Tax authorities allowed to ignore holding company under substance over form doctrine. Ability to adjust purchase price if not arms length. 16

17 PE Investment in China Jiangsu Case US Group Offshore Intermediate Co. Hong Kong Jiangsu 49% PRC taxed sale of Hong Kong under GAAR Hong Kong lacked substance No employees No assets/liabilities other than Jiangsu No operational activities 17

18 Investment in India Vodafone Essex Group Vodafone UK Vodafone Int l Holdings BV CGP Investments (Cayman) Marketing Holding Cos. Hutchinson Essex Ltd. (India) India proceeded against Vodafone for failure to withhold Transaction was indirect transfer of controlling interest in Indian operating co. Government transaction involved transfer of control premium, right to use Hutch brand in India and non-compete and certain intra-group being and option rights all Indian Bombay High Court diverse rights and entitlements gave had sufficient nexus with India Scheduled for hearing before Supreme Court in July 18

19 Private Equity Investment in Korea Before July 1, 2006 PE Fund Co-investors Cayman Luxembourg Used to aggregate capital. Through EU directive and treaty, avoids Belgium withholding on dividends. Participation exemption used to avoid Luxembourg tax. PECs/alphabet shares used to avoid Luxembourg withholding on dividends. Belgium Belgium-Korea tax treaty eliminates capital gains tax in Korea. Korea (Target) 19

20 Korean Attack on Structure First attempt 2005 Substance over form doctrine Treaty resident not beneficial owner of Korean target Treaty resident just formal owner, not true beneficial owner Difficult to prove 20

21 Korean Attack on Structure (cont d) July 1, 2006 Amendments to Corporate Income Tax Act and Investment Tax Adjustment Act effective Substance over form applied to treaty Must withhold on dividends, interest, royalties and capital gains paid to residents of tax havens even if treaty What is a tax haven? Possibility for prior approval not to withhold substantial disclosure 21

22 Private Equity Investment in Australia Myer/TPG TPG investors Cayman Islands Luxembourg Used to aggregate funds of investors. Treaty and EU directive used to avoid Dutch withholding on distributions. Participation exemption avoids Luxembourg tax. Methods available to avoid Luxembourg tax on distributions to Cayman Islands. Dutch BV Treaty resident to reduce/diminish taxes on interest, dividends, capital gains. Australia (Target) 22

23 Australian Attack on Structure Gain on sale was ordinary income, not capital gain Source of income was Australia Dutch treaty did not apply because of treaty shopping Australian Taxation Office released 4 tax determinations at the end of December 2010 that impact PE investment in Australia 23