2016 Engineering & Construction Conference. June 15 17, 2016 The Westin Austin Downtown Austin, Texas

Transcription

1 2016 Engineering & Construction Conference June 15 17, 2016 The Westin Austin Downtown Austin, Texas

2 Going Global: Structuring Cross-Border Operations Patrick Lee Tax Partner Deloitte Tax LLP Sajeev Sidher Managing Director, Tax Deloitte Tax LLP Mike Whalen Managing Director Deloitte Transactions and Business Analytics LLP 4:00 5:30 p.m.

3 Contents Global Tax Reset Transfer Pricing in the Era of BEPS Country-by-country reporting and master file/local file Expansion Scenarios 1. Existing Relationships Leading to International Expansion 2. Forming Strategic JVs to Penetrate International Markets 3. Going it Alone Potential Future Business Models for Financing Structures Overview of the Proposed 385 (Debt vs. Equity) Regulations

4 Global Tax Reset

5 Overview of the 2015 final Base Erosion and Profit Shifting ( BEPS ) reports On October 5, 2015 the OECD Committee on Fiscal Affairs released the Final Reports from the BEPS project Included in the release were Significant rules addressing Transfer Pricing, including risk recharacterization and CbC reporting Changes to the Definition of PE Hybrid mismatches Use of a multilateral instrument Other reports address preferential tax regimes, limitations on interest expense, CFC recommendations, and treaty abuse The 2015 Final Reports recommend changes to domestic laws, the OECD Model Tax Convention, and the OECD Transfer Pricing Guidelines Next Steps: Signing of the multilateral instrument and changes to domestic law

6 Global Tax Reset The tax landscape governing international groups is changing. International groups will need to Assess the Impact, Respond to Change, Report the Impact. Assess the impact Respond to change: Reset the strategy Report the impact Action 2 Hybrids Identify hybrids Analyze local variation (Deloitte Action 2 Map) Model impact and consider migration strategy Action 4 Interest Deductibility Evaluate the AS IS position Analyze local variation (Deloitte Action 4 Map) Model impact Scenario plan what variables will change? Action 7 Permanent Establishment Analyze contracts Determine fragmentation status Ensure compliance with country by country reporting Assess insurance/ reinsurance activities Actions 8,9,10 Transfer Pricing Identify operational and contractual risks Evaluate how risk is managed (contractually and people) and what changes can be made Consider pricing of wider Treasury activity (cash pool, hedging, etc.) Respond in line with group tax policy, strategy and governance, and group risk appetite Aligned with group profit forecast, potential future acquisitions and planned capital spend Likely to be a short term and a long term strategy Obtain stakeholder buy-in Groups will have to communicate their story to stakeholders and be ready for any further questions Finco Territory Change/State Aid Identify current arrangements and rulings Re-analyze with an OECD TP lens Expect local and treaty change Consider legal advice Assess the impact in a holistic way. Actions (including non-financing ones) interact Accurate group forecasts will allow effective modelling (include impact of responses to other BEPS actions) Understanding variation in jurisdictions responses is vital scenario planning Overlay Country-by-country reporting, multilateral instrument, CFC recommendations

7 Global Tax Reset OECD BEPS Committee has not missed a deadline to date Final recommendations from OECD will be legislated domestically November 2012 G20 leaders meet February 2013 Addressing Base Erosion and Profit Shifting published July 2013 Action Plan delivered to G20 Finance Ministers Late 2013 Early 2014 Discussion drafts, public comments, public consultations on 2014 deliverables January/ July 2015 Reports on all actions finalized October 2015 Reports presented to G20 Finance Ministers; reports published END of recommendation period START of implementation phase November 2015 First meeting to negotiate multilateral instrument (Action 15) January/ December 2016 Specific issues worked on (includes pricing aspects of financial transactions) December 2016 Sign multilateral instrument

8 Transfer Pricing in Era of BEPS

9 Entitlement to Profits Moves to OpCos Pre-BEPS world Post-BEPS world US Parent Develops IP (Service R&D) US Parent CV Funds IP (Licensor) CV BV BV Operate business (Licensee) Op. 1 Op 2 Op. 1 Op. 2

10 Substance requirement post-beps To be entitled to IP return Control operational risks Operation means: Development, enhancement, maintenance, protection, exploitation (aka DEMPE functions) Thus IP return has shifted from financial capital to people functions Financial capital gets a projected risk-free return or a risk-adjusted return The OECD has not agreed on what to do with actual returns (who receives the unanticipated upsides) Controlling operational risks requires for each operational risk In-location people who Are qualified, have decisionmaking authority, demonstrate inlocation exercise of decisionmaking authority as it relates to risk mitigation No in-location white lab coat requirement or headcount requirement Board meetings are no longer sufficient Setting procedures and policies no longer sufficient

11 Cost sharing post-beps Qualified Cost Sharing Agreement ( QCSA ) No control requirement In a QCSA the U.S. will not challenge the rest of world ( ROW ) IP return Foreign tax administrations of DEMPE functions may challenge Thus without operational substance in CV, IP return may be viewed as showing Exploitation Non-Qualified Cost Sharing Agreement ( NQCSA ) Control requirement under Treas. Reg (d)(3)(iii)(B)(3) In a NQCSA the U.S. can arguably challenge the ROW IP return Foreign tax administrations of DEMPE functions may also challenge Thus without operational substance in CV, IP return will be fought between The US as a DEMPE provider Countries exploiting the IP as E providers MOVE DEMPE SUBSTANCE INTO YOUR IP COMPANIES

12 Country-by-country reporting and master file/local file

13 CbC reporting and master file/local file Country-by-country reporting involves a new disclosure requirement that requires a report indicating the allocation of assets, employees, and taxable income among jurisdictions CbC reports will need to be filed in the tax residence of the ultimate parent entity, i.e. the U.S. for most U.S. multinationals These CbC reports are then shared between tax authorities through an automatic exchange of information agreement between jurisdictions Treasury officials believe they have sufficient statutory authority to adopt country-by-country reporting requirements similar to those proposed in the BEPS project, and Treasury intends to issue regulations as early as the end of 2015 Most countries have indicated that they will adopt country-by-country reporting requirements, and U.S. multinationals should be taking steps to prepare for the automatic exchange of CbC reports Separate national requirements for master file, local file

14 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 Overview of IRS proposed CbC regulations Consistent with OECD section 13 report with the following changes: US ultimate parent entity must file annually if its multinational enterprise (MNE) group had annual revenues of $850 million or more in the preceding year CbC report is due with timely-filed tax return (with extensions) not 12 months after year-end as suggested by the OECD Will apply to taxable years of U.S. parent entity that begin on or after the date final regulations are issued (expected sometime in 2016) o Calendar year taxpayers would first apply regulations for 2017 tax year, filed in 2018, exchanged by IRS with treaty and TIEA partners in 2019 o Fiscal year taxpayers may file earlier o Requirement to include tax ID number for constituent entities in the tax jurisdiction of residence The regulations are expected top be finalized by June 30, The IRS may allow taxpayers to select the U.S. parent as a surrogate filer for FY 2016 to reduce compliance burden of U.S. multinationals

16 Starting with FY16, CbC will become part of Transfer Pricing Documentation BEPS Action 13 Proposals New guidelines adopt a 3-tiered approach Country-by-Country Template Key financial information on all group members on an aggregate country basis with an activity code for each member Master File Key information about the group`s global operations including an overview of the company`s structure from a transfer pricing perspective Local File Master Master Detailed transfer pricing analysis of the transactions undertaken by the local taxpayer

17 Expansion Scenarios

18 Existing Relationships Leading to International Expansion Tax costs (company & employee; direct & indirect) can materially impact contract economics Local country immigration and tax rules may lead to complexity and reporting surprises Transfer pricing and related reporting may be relevant, even if a separate legal entity is not formed 18

19 Forming Strategic JVs to Penetrate International Markets EMPLOYMENT IMPLICATIONS Secondment vs. JV employees Expatriate taxation Gross-ups and other costs TRANSFER PRICING STRUCTURE/REPATRIATION Documentation requirements CbC reporting Pricing Treaty rates for withholding Legal entity structure Local country planning 19

20 Going it Alone Legal: operating locations, entity selection/timing, reporting requirements, repatriation objectives, US tax considerations, local country tax planning, withholding tax/treaty availability Employment: expatriate policy, local contracting/governance (including mandatory bonuses, retention, pensions); payroll administration, contracting authority with third parties. Transfer Pricing: documentation requirements (master file and local file), develop pricing strategy/policy, CbC reporting, substance requirements

21 Potential Future Business Models for Financing Structures

22 Financing strategy selection criteria Identifying and implementing an efficient and sustainable financing strategy requires evaluating various (tax and non-tax) criteria Cash repatriation: The alternative structure should allow repatriation of profits without substantial tax costs Taxation: Ideally, the new structure would result in a global tax rate that is not substantially different than under the current structure Ruling comfort: The company would like to obtain comfort on the new structure via a tax ruling in the countries concerned Sustainability: Ideally the chosen structure could be sustained for mid- to long term, i.e. three to five years Substance: Consider the location of the treasury teams. Ideally, the new structure does not require a total change of the substance Complexity: The structure should be as simple as possible: in terms of setting-up, but also in terms of maintenance Flexibility and exit: A flexible unwinding of the alternative is a plus Also need to anticipate changes by embedding more flexibility/diversification in the financing structure and consider source country considerations (deductibility, interest withholding tax, etc.) when identifying/implementing a new financing structure.

23 Low-tax jurisdictions Haven Finance Co. Parent Intercompany Loans OpCo s OpCo s Facts No/Low tax finance company makes intercompany loans Benefit Claim a one-sided deduction without corresponding income pick-up in haven OpCo local tax consequences Withholding taxes likely. Consider whether deduction would be impacted Haven tax considerations No interest income on the loan in haven Other considerations Simple structure Need to consider business purpose, substance and other similar requirements

24 Interest free loans Irish Company Parent Interest free loan OpCo s NL Co / LuxCo interco financing Facts Irish company extends interest-free loan to Dutch/Lux affiliate, which onlends to OpCo s Benefit Claim a one-sided deduction without corresponding income pick-up in Ireland Parent tax consequences In principle, no participation exemption issues at the level of Parent if EU resident Lux/NL tax consequences Deemed deduction on the IFL: offset Forex considerations to be monitored Irish tax considerations No interest income on the loan in Ireland since interest-free

25 Branch structures: Active trading branch Parent Facts Lux branch extends loans to OpCo s Benefit Claim a notional deduction in Luxembourg on a deemed head office loan granted by the head office Equity Belgium/EU Lux Branch OpCo s Luxembourg tax consequences Notional deduction in Luxembourg on a deemed head office loan Financing activity performed by the Lux Branch is subject to Luxembourg transfer pricing (minimum spread required) Interco financing

26 Dutch CV-BV held by Cayman Company Loan USP Cayman NL CV NL Co BV or Coop Tax consequences No NL interest WHT (or royalty WHT if license) No dividend WHT if structured properly Other considerations Consider making CV to NL loan interest free and taking a notional interest deduction in NL. This could improve treaty position of NL Co in respect of OpCo jurisdictions Consider use of licenses instead of loans Consider impact of adoption of antihybrid (Action 2) rules on interest deductibility at OpCos OpCo s

27 Overview of the Proposed 385 (Debt vs. Equity) Regulations

28 Overview On April 4, 2016, the United States Treasury and the IRS released proposed regulations under Section 385 to address whether a purported debt instrument that is issued to a related party is treated as stock or debt, or as in part stock and in part debt, for U.S. federal income tax purposes. Objectives of the Operative Rules Authorize Bifurcation Require Documentation Target I/C Leveraging Transactions Implement the grant of regulatory authority under section 385 to bifurcate certain related party debt instruments. Impose strict contemporaneous documentation requirements on certain related party debt instruments as a prerequisite to treatment of such instruments as debt; otherwise, such instruments are treated as equity. Treat as stock certain debt instruments issued to a related party by way of, or in connection with, certain distribution and acquisition transactions that do not introduce new capital into the broader related party group. The Bifurcation, Documentation, and Prohibited Leveraging Transaction rules: Apply Concurrently Each Define Related Party Differently Adversely Impact Day-to-Day Internal Funding and Treasury Operations Require Burdensome Data Gathering and Tracking

29 Structure of the Proposed Regulations Prop. Reg Definitions, Deemed Exchanges, Bifurcation Provides common definitions, specifies the tax consequences when a debt instrument is treated as stock (i.e., a deemed exchange ), and provides the operative rules for bifurcation. Prop. Reg Prop. Reg Prop. Reg Documentation Provides definitional and operative rules for the contemporaneous documentation requirements. Prohibited Leveraging Transactions General Rule Treats certain related party debt as equity if it is issued (i) in a distribution; (ii) in certain exchanges for related party stock; and (iii) in exchange for property in certain asset reorganizations. Funding Rule Related party funding of similar transactions ( prohibited transactions ) is also treated as equity; funding presumed if it occurs 36 months before or after the prohibited transaction. Consolidated Groups Single Entity Concept All members of a consolidated group are treated a single entity. Coordination Rules Transfers of such debt outside of the consolidated group may cause the Proposed Regulations to apply.

30 Effective Dates Prop. Reg and Prop. Reg and The Bifurcation and Documentation rules apply to any instruments issued or deemed issued on or after the date these regulations are published as final regulations in the Federal Register. These Prohibited Leveraging Transaction and consolidated group rules generally apply to debt instruments issued after April 4, Post-April 4, 2016 debt instruments that would be recharacterized as equity under these sections are treated as indebtedness until 90 days after the date of publication of these regulations as final. They are deemed exchanged for equity on the 90 th day. Under the Funding Rule, a prohibited transaction that generally occurs before April 4, 2016 will not be taken into account (even though the debt instrument may have been issued after April 4, 2016). Pre- 4/4/16 Debt grandfathered Prohibited transactions ignored Pre- Final Regs New debt subject to recharacterization Prohibited transactions considered Final Regs New debt subject to bifurcation and documentation Final Regs + 90 days Post 4/4/16 debt can be recharacterized Treasury has stated that it intends to move swiftly to finalize the Proposed Regulations

31 State Tax Overview The Proposed Regulations were not drafted with domestic transactions in mind but may nevertheless have a wide impact on state income taxes, including: State conformity to federal provisions Application of federal effective dates under state law Preemption of state interest addback statutes (and related exceptions) Net worth/franchise tax consequences

32 A slight change in facts can yield a big change in results! US Property Distribution US CFC1 CFC2 Stock CFC3 Lender Loan CFC2 CFC2 Payment CFC4 Loan Distribution Scenarios 1. Scenario A: Borrow from Bank & cash distribution = No Funding Rule (At least not Yet!) 2. Scenario B: Borrow from Expanded Group Member & cash distribution = Debt Recast as Equity under Funding Rule 3. Scenario C: Straight Note Distribution = Note Recast as Equity under General Rule In each scenario, assume no current year E&P Stock Sale Scenarios 1. Scenario A: CFC3 acquires CFC2 for cash w/o borrowing = No General or Funding Rule (At least not Yet!) 2. Scenario B: CFC3 acquires CFC2 for note = Note Recast as Equity under General Rule & NOT A 304 TRANSACTION 3. Scenario C: CFC3 acquires CFC2 with funds borrowed from CFC4 = CFC3 Note to CFC4 Recast as Equity under Funding Rule BUT STILL A 304 TRANSACTION

33 Going Forward: Follow the Funding Rule Stop Light Entity (or U.S. consolidated group) Has Engaged in both a funding leg AND a prohibited transactions leg within the 72-month per se period Entity (or U.S. consolidated group) has engaged in a funding leg OR a prohibited transactions leg But Not Both within the 72-month per se period Entity (or U.S. consolidated group) Has Not Engaged in either a funding leg or a prohibited transactions leg within the 72-month per se period

34 Next Steps Educate Inventory Plan Document Educate key stakeholders about the basic rules tax, treasury, and accounting personnel Webcast Finance Committee meeting Training session Implement processes to refer all potential issues to global tax function Determine related parties for each operative rule. Identify in-scope debt instruments. Loans Cash pooling and related arrangements Ordinary course transactions not paid in the normal course Build a sustainable inventory process Maximize terms of grandfathered debt Plan to use current year E&P exception Plan to use 90- day transition rule Consider moving third party debt to the U.S. Modify due diligence procedures to consider new rules Determine impact on future ETR Gather all operative documents for cash pooling and ordinary course transactions Develop a sustainable approach to document reasonable expectation of repayment, actual payments, and debtor-creditor behavior upon non-payment Develop a process to archive documentation