23 rd Annual Health Sciences Tax Conference

Transcription

1 23 rd Annual Health Sciences Tax Conference Treasury tax issues for life sciences companies December 9, 2013

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit ey.com. This presentation is 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP. Page 2

3 Non-reliance disclosure Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as tax or accounting advice. Page 3

4 Panelists Andre Petrunoff Pfizer New York, NY Andy Brown Ernst & Young LLP 5 Times Square New York, NY andy.brown@ey.com Lee Holt Ernst & Young LLP 5 Times Square New York, NY lee.holt@ey.com Matthew Stevens Ernst & Young LLP 1101 New York Avenue N.W. Washington, DC matthew.stevens@ey.com Page 4

5 Agenda Introduction managing offshore capital with a foreign treasury center Common treasury activities Internal Revenue Service (IRS) audit issues US trade or business issues of foreign treasury centers Page 5

6 Introduction managing offshore capital with a foreign treasury center Page 6

7 What are some challenges that treasury departments face today? Foreign currency, interest rate, commodity and credit markets are all highly volatile. There are challenges dealing with implications of the Dodd- Frank Act. Many US multinationals have offshore liquidity that is difficult to redeploy. These challenges have led to increased and more complex corporate treasury department activities, which, in turn, create a wide variety of tax issues and opportunities. Focus areas Foreign currency Financial risk management/hedging Cash management Financing Page 7

8 Common treasury activities Page 8

9 Hedging Centralized foreign exchange (FX) hedging FX FX USP FX FX Intercompany derivatives can qualify as bona fide hedges Regarded exposures/entities FR TC GER FX Disregarded exposures/entities TC nets intercompanies, enters into net hedges with bank FX FX net collateral net FX FX FX Manage Subpart F income at TC 475(a) Reg (g)(2)(ii)? Bank UK DRE Page 9

10 Hedging Hedging impermissible exposures USP Net FX gains on forward and note are foreign personal holding company income (FPHCI) 100 note TC GER $ 100 forward contract $140 Bank Beware of timing whipsaws under 1256 and 1092 Bona fide hedging exception If note reasonably expected to give rise to Subpart F income, fails as hedge What if note and hedge are in US? Page 10

11 Hedging US hedge of foreign receivables US TC $ $ :$ forward Bank Generally, ineligible for hedging treatment (not a risk of the taxpayer) Forward may be marked-to-market under 1256, accelerating gains 1092 straddle provisions may defer losses to the extent of any unrecognized gain in any offsetting positions Character, if derivative is not FX A/R Page 11

12 Hedging Controlled foreign corporation (CFC) hedge of nonfunctional currency borrowing Bank 1 $ note US TC $ :$ forward debtor Bank 2 creditor Potential Subpart F income exposure Exchange gain or loss on borrowing is apportioned between Subpart F and non-subpart F Exchange gain or loss on hedge may be wholly Subpart F or non-subpart F income or apportioned Options Integrate debt with hedge under Reg Temp. Reg T(b)(1) and (6) whipsaw Potential passive basket income Identify as bona fide hedging transaction under Reg (a)(4)(ii)(B) Page 12

13 Cash management Zero balancing vs notional pooling USP Zero balancing Cash sweep Intercompany loans Intercompany interest 954(c)(6)/same country Subpart F income CFC TC 400 CFC2-400 Notional pooling Cash stays in affiliate bank accounts 400 Bank interest Amount of pool benefit Allocation of pool benefit Hybrid structures Money Market Investment Bank Page 13

14 Cash management The perils of the intragroup receivable Deemed dividends Alterman Foods Current taxation of offshore earnings under 956 Gulf Oil, Sherwood Properties Interest imputation under 482 and 7872 Cutts Create unitary group for state tax purposes MeadWestvaco Affect apportionment for state tax purposes Page 14

15 Cash management Netting 150 A/P 200 A/R USP 10 A/P 75 A/R Who owes how much to whom? Can you net offsetting receivables? Currency issues? FR GER UK Page 15

16 Cash management Controlling netting FR 50 A/R USP 65 A/R 150 A/P TC 10 A/P 200 A/R 75 A/R GER UK Treasury Center as payment factory Third-party payments Umbrella intercompany netting agreement What is an obligation? Must be legally effective in all jurisdictions Mechanical issues Netting agreement Page 16

17 Cash management and netting Stay vigilant Controlling the issues of intragroup receivables requires collaboration with treasury and accounting functions. The tax department cannot handle this alone. How you book transactions can hurt you. Make sure tax planning keeps pace with changes to treasury procedures. Perform periodic reviews to catch problems before they get too big. Page 17

18 Intercompany financing When has interest been paid? Loans held by a foreign related party (e.g., controlled foreign corporation) generally, no deduction is permitted for the interest expense until paid by the borrower. Deferring interest expense deductions until payment can affect, among other things, Subpart F (e.g., the application of the CFC look-through provision) and foreign tax credit determinations. Consider: Significant modifications Accrued interest satisfied with obligor s own note Capitalization of debt Page 18

19 Intercompany financing Organisation for Economic Co-operation and Development (OECD) action plan on base erosion and profit shifting (BEPS) Action items of particular importance to treasury planning Neutralize the effects of hybrid mismatch arrangements (September 2014) Limit base erosion via interest deduction and other financial payments (September 2015) Consistent with trend toward restricting interest deductions For example, France, Sweden, Canada Steps to take now: knowledge is key Page 19

20 IRS audit issues Page 20

21 More challenges IRS scrutiny IRS examination of cross-border financing, foreign currency and cash management issues has increased. International Practice Networks (IPNs) in Large Business and International Division (LB&I) have identified as high priorities: Inbound cash repatriation strategies to reduce withholding Outbound repatriation strategies to avoid tax Deferring US tax on foreign earnings Financial products and withholding on financial transactions Scrutiny of hedging identification and straddles Scrutiny of intercompany transactions Increased resources more financial products and international specialists involved in examinations earlier Litigation PepsiCo, NA General Partnership, Tyco Page 21

22 Inadvertent error Traps and pitfalls Treas. Reg (g)(2)(ii) Transaction is a hedging transaction. Failure to identify the transaction was due to an inadvertent error. All of the taxpayer s hedging transactions in all open years are being treated on either original or, if necessary, amended returns as provided in paragraphs (a)(1) and (2) of Treas. Reg Ignorance of the law is not enough to establish inadvertent error, said K. Scott Brown, Branch 6 attorney, IRS Office of Associate Chief Counsel (Financial Institutions and Products) on May 10, Chief Counsel Advice (CCA) (April 20, 2010) The taxpayer identified other transactions as economic hedges. The taxpayer was aware of ability to treat hedges as ordinary under tax rules but made the decision not to research further. Page 22

23 Debt/equity issues Thin capitalization /Plantation Patterns concerns Critical to obtain contemporaneous documentation supporting debt capacity Leveraging-up transactions Can a corporation pay a dividend in the form of a note? Business purpose requirement? Repeated refinancings How to reconcile with obligation to repay debt at maturity Retesting events Does a significant modification under Reg require retesting for debt/equity status? How much protection is granted under Reg (f)(7)(ii)? Page 23

24 Other treasury issues Intercompany pricing The IRS may ask why safe harbor rates were not used. There should be a comparison of interest paid on long-term liabilities to interest earned on deposits in the parent s cash pool. There is a question of whether the subsidiary must refinance fixed rate loans from the parent or other related party when interest rates drop. Page 24

25 US trade or business issues of foreign treasury centers Page 25

26 Inbound taxation issues of foreign treasury center Consider offshore treasury center (i.e., a CFC) that acts as a payment factory Assistant treasurer of the US parent authorized to act on behalf of the treasury center Foreign source income is effectively connected with the conduct of a trade or business within the United States if: The foreign corporation has an office or other fixed place of business within the United States to which such income, gain or loss is attributable. Such income, gain or loss consists of interest or amounts received for the provision of guarantees of indebtedness, and is derived in the active conduct of a banking, financing or similar business within the United States Page 26

27 Inbound taxation issues of foreign treasury center Also consider: Subpart F and effectively connected income coordination under 864(c)(4)(D)(ii) Foreign exchange gains and losses (Reg (c)) US$ qualified business units of non-us$ functional currency controlled foreign corporations Page 27

28 Questions? Page 28

29 Thank you! Page 29

30 CPE credit reminder Please remember you must drop one of your CPE cards in the box before you leave the classroom. CPE credit will not be awarded unless you deposit one of your cards. Page 30