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 1 Tax Planning Update for US Companies Investing Abroad November 20, 2015

2 Today at a Glance Welcome and Introductions Repatriation planning, foreign-tax credit enhancement and subpart F update Global Tax Reset: tax planning in a post-beps environment 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 US regulatory environment, have, and will continue to, fundamentally change the global tax landscape Lunch Overlooked and underutilized business model optimization strategies Changes in the international M&A rules of the road Richard Hyman Harrison Cohen Rich Hyman Mike Leininger Jim Brooks Tom Driscoll John Womack Rich Hyman Mike Steinsaltz Panelists Paul Crispino Jared Gordon Neil Feinstein E.J. Forlini Refreshment Break Transfer pricing updates affecting US companies investing abroad Adjourn 2 Deloitte Global Tax Planning Conference at Villanova University School of Law Kevin Croy Matt Damone Aydin Hayri

3 Repatriation Planning, Foreign Tax Credit Enhancement, and Subpart F Update November 20, 2015

4 Agenda Current Thoughts on Triangular B Reorganizations Foreign Tax Credit Enhancement Temporary Regulations Modifying the Developer and Active Marketing Exceptions to Subpart F Income Temporary and Proposed Regulations under Section Deloitte Global Tax Planning Conference at Villanova University School of Law 4

5 Current Thoughts on Triangular B Reorganizations

6 Triangular B Reorganizations Applicable Rules Treas. Reg (b)-10 In the case where a foreign acquiring corporation acquires its parent s stock in order to purchase a target corporation in a triangular B reorganization or other triangular reorganization within the scope of 368 (a so-called Killer B transaction), regulations under Treas. Reg (b)-10 will treat the consideration paid by the acquiring corporation as a distribution to its parent. Treas. Reg (b)-10(a)(2) provides three exceptions to the application of Treas. Reg (b)- 10. In particular, Treas. Reg (b)-10(a)(2)(iii) contains a priority rule with 367(a), which provides that the Killer B regulations will not apply if: In an exchange under 354 or 356, one or more US persons exchange stock or securities of T and the amount of gain in the T stock or securities recognized by such US persons under 367(a)(1) is equal to or greater than the sum of the amount of the deemed distribution that would be treated by P as a dividend under 301(c)(1) and the amount of such deemed distribution that would be treated by P as gain from the sale or exchange of property under 301(c)(3) if this section would otherwise apply to the triangular reorganization. 6 Deloitte Global Tax Planning Conference at Villanova University School of Law

7 Triangular B Reorganizations Applicable Rules (cont d) Treas. Reg (b)-10 Thus, the Killer B regulations do NOT apply to transactions where the 367(a)(1) amount is equal to or greater than the amount treated as dividend or capital gain (hereafter, 367(b) income) if the Killer B regulations did apply. Notice Notice announced amendments to the Killer B regulations. In relevant part, Notice announced changes to the 367(a) overlap rule in Treas. Reg (b)-10(a)(2)(iii) by limiting the 367(b) income amount to dividends or capital gain taxable to a US entity. Specifically, Notice provides: [r]egulations will provide that 367(b) income includes a 301(c)(1) dividend or 301(c)(3) gain that would arise if 1.367(b)-10 applied to the triangular reorganization only to the extent such dividend income or gain would be subject to US tax or would give rise to an income inclusion under 951(a)(1)(A) that would be subject to US tax. NOTE: If tax-free treatment is required, all triangular reorganizations must comply with business purpose and other requirements to qualify as 368 reorganizations. 7 Deloitte Global Tax Planning Conference at Villanova University School of Law

8 Triangular B Reorganizations Example 1 US1 US Parent US2 Facts: US Parent owns 100% of US1 and US2. US1 owns 100% of FS. US2 owns 100% of FT. US Parent intends for FS to acquire FT in order to consolidate its foreign holdings. FS has $400 of PTI and $400 of untaxed E&P. FT s stock has zero tax basis to US2 and a fair market value of $400. TI = $400M c)(3) = $400M FS FT FT Basis = $0 Value = $400M Valuable CFCs Steps: 1. FS acquires US1 stock in exchange for a selfcreated note in the amount equal to or less than $400m. 2. FS uses the US1 stock to acquire FT from US2. Results: 1. Steps 1 and 2 taken together are intended to constitute a triangular B reorganization. 2. Based on the above facts and provided that certain other requirements are satisfied, Reg (b)-10 (as modified by Notice ) may not apply to the transaction. Gain recognized on FT > 301(c)(1) dividend + 301(c)(3) gain 8 Deloitte Global Tax Planning Conference at Villanova University School of Law

9 Triangular B Reorganizations Example 2 US Parent Facts: US Parent owns 100% of US1 and US2. US1 owns 100% of FS. US2 owns 100% of FT. US Parent intends for FS to acquire FT in order to consolidate its foreign holdings. NQPS 1 US1 US1 Stock US2 Steps: 1. FS issues nonqualified preferred shares ( NQPS ) to US1 in exchange for US1 voting stock. 2. FS acquires FT from US2 using the US1 voting stock. US1 Stock FS FTFT FT Stock FT Results: 1. Steps 1 and 2 taken together are intended to constitute a triangular B reorganization. 2. Based on the above facts and provided that certain other requirements are satisfied, Reg (b)-10 (as modified by Notice ) may not apply to the transaction. 3. What U.S. tax basis should US1 take in the NQPS that it receives? 9 Deloitte Global Tax Planning Conference at Villanova University School of Law

10 Triangular B Reorganizations Example 3 US Parent Facts: US Parent owns 100% of FC1 and USS. FC1 owns 100% of FC2. USS owns 100% of FT. US Parent intends for FC2 to acquire FT in order to consolidate its foreign holdings. 1 ash/ Note FC1 Stock FC1 FC1 Stock USS Steps: 1. FC2 acquires the stock of its parent, FC1, in exchange for cash or a note. 2. FC1 stock is used as consideration to acquire the stock of FT from USS. FC2 FT FT Stock FT Results: 1. Steps 1 and 2 taken together are intended to constitute a triangular B reorganization. 2. Treas. Reg (b)-10 (as modified by Notice ) should apply to the transaction only to the extent that a hypothetical distribution from FC2 to FC1 as a result of this transaction would result in subpart F income (i.e., the Notice limits the 367(b) income amount to dividends or capital gain taxable to a US entity.) Gain recognized on FT > 301(c)(1) dividend + 301(c)(3) gain 10 Deloitte Global Tax Planning Conference at Villanova University School of Law

11 1 Non-Triangular B Reorganizations: Taxable Acquisition $1B Cash/ FC1 Note US Parent USS FC1 FT 1 US Parent Stock US Parent Stock Shareholders FT Facts: US Parent owns 100% of USS. USS owns 100% of FC1. Unrelated shareholders own 100% of FT. US Parent intends for FC1 intends to acquire FT from unrelated shareholders, and FT s value is $1,000m. Steps: 1. In order to acquire F Target, FC1 purchases $1,000m of US Parent stock from the market or US Parent in exchange for cash or a FC1 note. 2. FC1 transfers the US Parent stock to the shareholders in exchange for the stock of F Target. Results: 1. Transaction does not qualify as a 368 reorganization. Therefore, Treas. Reg (b)- 10 does not apply. 11 Deloitte Global Tax Planning Conference at Villanova University School of Law

12 Foreign Tax Credit Enhancement

13 Foreign Tax Credit Enhancement 901(m): Introduction Unrelated CFC Assets US CFC Assets Denial of FTC with respect to covered asset acquisition (step-up in the US but not under foreign law). Provision will result in the reduction of FTCs to CFC based upon foreign tax that will be imposed on step-up (computed under US law). Applies to covered asset acquisitions after 12/31/10, with transition relief for certain unrelated transactions. Covered asset acquisitions potentially include: Acquisition of corporation with 338 election; Acquisition of DRE that is related and treated as a stock purchase under local law; Asset acquisition for US tax purposes that is disregarded for foreign purposes; and Acquisition of partnership interest with 754 election. Broad regulatory authority to exempt acquisitions. The rationale for the provision seems to be that if the US does not tax the built-in gain, the US should not provide an FTC for the foreign tax on the built-in gain. 13 Deloitte Global Tax Planning Conference at Villanova University School of Law

14 Avoiding CAAs 14 Deloitte Global Tax Planning Conference at Villanova University School of Law 14

15 Foreign Tax Credit Enhancement Hybrid Partnership Merger 1 (Base Case) Foreign Seller USCo Facts: CFC1 and CFC2 form BR1, which is treated as a corporation under Brazilian tax law and a partnership under US tax law. (CFC1 and CFC2 could also own a pre-existing entity that is considered a partnership for US federal income tax purposes.) BR2 (Brazil) CFC1 (Country X) Merge 50% 50% BR1 (Brazil) CFC2 (Country X) BR1 then acquires the shares of BR2 and immediately thereafter, BR2 merges into BR1. Note: This must be an actual merger or liquidation under foreign law a check-thebox liquidation would be a CAA. A 338(g) election is not made with respect to the acquisition of BR2 (and Rev. Rul is inapplicable). Should this transaction be a CAA? BR2 (Brazil) 15 Deloitte Global Tax Planning Conference at Villanova University School of Law 15

16 Foreign Tax Credit Enhancement Hybrid Partnership Merger 2 (Purchase of HoldCo) Foreign Seller USCo Facts: In this variation, the target consists of an empty holding company (BR2) and an operating company (BR3). BR2 (Brazil) CFC1 (Country X) 50% 50% CFC2 (Country X) If BR3 merges into BR2, and the combined entity subsequently merges or liquidates into BR1, should this be a CAA? Other alternatives? BR3 (Brazil) BR1 (Brazil) BR2 (Brazil) Merge BR3 (Brazil) 16 Deloitte Global Tax Planning Conference at Villanova University School of Law 16

17 Eliminating 901(m) Taint 17 Deloitte Global Tax Planning Conference at Villanova University School of Law 17

18 Foreign Tax Credit Enhancement 901(m) Planning Through Deferred Gain USCo Facts: JP1 acquires the shares of JP2. A 338(g) is made with respect to the acquisition of the JP2 shares. JP1 (Japan) JP1, JP2, and JP3 are all members of the same Japanese tax group. JP2 sells its assets to JP3 in exchange for cash. What happens to the unallocated basis difference (i.e., Sec. 901(m) taint)? JP2 (Japan) Cash Asset JP3 (Japan) Asset Asset Japan Taxation Group 18 Deloitte Global Tax Planning Conference at Villanova University School of Law 18

19 901(m) Disallowance Reduction 19 Deloitte Global Tax Planning Conference at Villanova University School of Law 19

20 Foreign Tax Credit Enhancement 901(m): Planning Through Debt Pushdown US Facts: AU1 acquires the shares of AU2. Either the seller of AU2 filed a check-the-box election for AU2 prior to the acquisition or a 338(g) election was made with respect to the acquisition of AU2 and then, subsequent to the acquisition, a check-the-box election was filed for AU2. Note AU1 (Australia) AU1 then sells the shares of AU3 to AU2 in exchange for a note. What is the potential impact on Sec. 901(m) disallowance? AU2 (Australia) DRE2 AU3 (Australia) AU3 (Australia) Australian Taxation Group 20 Deloitte Global Tax Planning Conference at Villanova University School of Law

21 Temporary Regulations Modifying the Developer and Active Marketing Exceptions to Subpart F Income

22 Temporary Regs under Section 954 Active Rents and Royalty Income Exceptions Temp Regs modify the scope of the active rents and royalty income exceptions under 954(c)(2)(A) and (c) and (d). The active rents and royalty income exceptions can be satisfied through a number of various tests. - The active development test, which requires the CFC to be regularly engaged either in manufacture or production of, or in acquisition of and addition of substantial value to, certain property. - The active marketing tests under (c)(1)(iv) and (d)(1)(ii) apply with respect to property which is leased or licensed as a result of the performance of marketing functions if the lessor or licensor, through its own officers or staff of employees located in a foreign country, maintains and operates an organization in such country which is regularly engaged in the business of marketing, or of marketing and servicing, the leased or licensed property and which is substantial in relation to the amount of rents or royalties derived from the leasing or licensing of such property. 22 Deloitte Global Tax Planning Conference at Villanova University School of Law

23 Temporary Regs under Section 954 Active Rents and Royalty Income Exceptions (cont d) With respect to the active development tests, the Temp Regs provide that the CFC lessor or licensor must perform the required functions through its own officers or staff of employees. - In determining whether a CFC conducts activities through its own officers or staff of employees, cost sharing transaction ( CST ) payments and platform contribution transaction ( PCT ) payments (within the meaning of ) will not cause the CFC to be treated as conducting the activities performed by the controlled participant to which payments are made. With respect to the active marketing tests, the Temp Regs provide that the tests can be satisfied by officers or staff of employees located in one or more foreign countries by organizations maintained and operated in one or more foreign countries. - In determining whether those marketing activities are substantial, CST and PCT payments are not considered active leasing or licensing expenses. 23 Deloitte Global Tax Planning Conference at Villanova University School of Law

24 Temporary Regs under Section 954 Active Rents and Royalty Income Exceptions Example Description: CFC must have its own employees in order to satisfy the active developer test; may not meet the test through R&D activities of US Parent conducted under the CSA. US Parent PCT and CSA payments excluded from safe harbor under substantiality test. PCT; CSA CFC PCT; CSA Payments CFC may meet active marketing through the activities of its DREs in Countries Z, Y and elsewhere (not limited to one single country). Royalty License SM Affiliate (Z) SM Affiliate (Y) License Royalty UR Party 24 Deloitte Global Tax Planning Conference at Villanova University School of Law

25 Temporary and Proposed Regulations under Section 956

26 New Temporary Regulations under Section 956

27 New Temporary Regulations under Section 956 Prior Anti-Avoidance Rule and Modification of -1T(b)(4) P (Domestic) Overview: Prior -1T(b)(4) applied only where: - U.S. property was acquired by a foreign corporation controlled by the CFC, - the funding with a bad purpose was through capital contributions or debt, and - there was an exercise of discretion by the District Director. CFC 1 Contribution to CFC 2 FS1 (CFC) FS2 (CFC) CFC 2 Makes Loan to US Parent As amended, -1T(b)(4) also applies: - if U.S. property is acquired by a partnership, - the funding with a bad purpose was made by any means, - without regard to any IRS exercise of discretion 27 Deloitte Global Tax Planning Conference at Villanova University School of Law

28 New Temporary Regulations under Section 956 Indirectly Held US Property Revised Example 1: P (Domestic) FS2 makes loan to P FS1 sells inventory to FS2 in exchange for trade receivables due in 60 days. A principal purpose of establishing the trade receivables was not to avoid the application of 956 with respect to FS1. FS2 has no earnings and profits and FS1 has substantial accumulated earnings and profits. FS2 makes a loan to P equal to the amount it owes FS1 under the trade receivables. FS2 pays the trade receivables according to their terms. FS1 (CFC) FS1 sells inventory to FS2 in exchange for Trade Receivable FS2 (CFC) FS1 is not considered to indirectly hold U.S. property under T(b)(4) because the funding of FS2 through the sale of inventory in exchange for the establishment of trade receivables was not undertaken with a principal purpose of avoiding the application of 956 with respect to FS1. 28 Deloitte Global Tax Planning Conference at Villanova University School of Law

29 New Temporary Regulations under Section 956 Indirectly Held US Property (cont d) New Example 3: Then FS1 loans $100x to P FS1 (CFC) FS1 has: $100x E&P $100x foreign taxes $0 cash P (Domestic) First, FS2 loans $100x to FS1 FS2 (CFC) FS2 has: $100x E&P $0x foreign taxes substantial cash Neither FS1 nor FS2 has E&P described in 959(c)(1) or 959(c)(2). FS2 loans $100x to FS1. FS1 then loans $100x to P. An income inclusion by P of $100x under 951(a)(1)(B) and 956 with respect to FS1 would result in foreign income taxes deemed paid by P under 960. A principal purpose of funding FS1 through the loan from FS2 is to avoid the application of 956 with respect to FS2. - Under T(b)(4)(i)(B), FS2 is considered to indirectly hold the $100x obligation of P that is held by FS1. As a result, P has an income inclusion of $100x under 951(a)(1)(B) and 956 with respect to FS2, and the foreign income taxes deemed paid by P under 960 is $0. - P does not have an income inclusion under 951(a)(1)(B) and 956 with respect to FS1 related to the $100x loan from FS1 to P. 29 Deloitte Global Tax Planning Conference at Villanova University School of Law

30 New Temporary Regulations under Section 956 Indirectly Held US Property (cont d) New Example 4: P (Domestic) Then FS1 loans $100x to P FS1 has substantial earnings and profits. P and FS1 are the only partners in FPRS. There are no special allocations in the FPRS partnership agreement. FPRS lends $100x to P. Under (a)(3), FS1 is treated as holding U.S. property of $60x (60% x $100x) as a result of the FPRS loan to P. FS1 (CFC) 60% P contributes foreign real estate (FMV=$400x) in exchange for 40% interest 40% A principal purpose of creating, organizing, or funding FPRS is to avoid the application of 956 with respect to FS1. FS1 contributes $600x cash in exchange for 60% interest FPRS (Foreign) 30 Deloitte Global Tax Planning Conference at Villanova University School of Law

31 New Temporary Regulations under Section 956 Indirectly Held US Property (cont d) New Example 4 (cont d): FS1 contributes $600x cash in exchange for 60% interest FS1 (CFC) 60% P (Domestic) 40% FPRS (Foreign) Then FS1 loans $100x to P P contributes foreign real estate (FMV=$400x) in exchange for 40% interest FS1 controls FPRS and a principal purpose of creating, organizing, or funding FPRS was to avoid application of 956 with respect to FS1. Under T(b)(4)(i)(C) FS1 is considered to indirectly hold P s $100x obligation that would be U.S. property if held directly by FS1. Under T(b)(4)(iii), FS1 is treated as holding U.S. property under T(b)(4)(i)(C) only to the extent the amount held indirectly under T(b)(4)(i)(C) exceeds the amount of U.S. property that FS1 is treated as holding under (a)(3). The amount of U.S. property that FS1 is treated as indirectly holding under T(b)(4)(i)(C) ($100x) exceeds the amount determined under (a)(3) ($60x) by $40x. Thus, FS1 is considered to hold U.S. property within the meaning of 956(c) in the amount of $100x ($60x under (a)(3) and $40x under T(b)(4)(i)(C) and (b)(4)(iii)). 31 Deloitte Global Tax Planning Conference at Villanova University School of Law

32 Proposed Regulations under Section 956

33 Proposed Regulations under Section 956 Background - Treas. Reg (a)(3) Background: Current regulations take an aggregate approach in addressing the treatment of a CFC s investment in U.S. property through a partnership. U.S. Parent (a)(3) treats a CFC-partner in partnership that owns property that would be U.S. property if owned directly by CFC as holding an interest in the property equal to its interest in the partnership, and such interest is treated as an interest in U.S. property. CFC1 25% CFC2 75% Thus, CFC1 is treated as holding a 25% interest in the U.S. property, which is treated as an interest in U.S. property for purposes of 956. No specific rules were provided for measuring a CFC-partner s interest in the partnership. USP U.S. Property 33 Deloitte Global Tax Planning Conference at Villanova University School of Law

34 Proposed Regulations under Section 956 Overview of Proposed Regulations U.S. Property Owned through Partnerships: proposed regs provide rules for determining the amount of U.S. property that a CFC partner is treated as holding through a partnership. - Proposed regs treat a CFC partner as holding its share of partnership property based on the partner s liquidation value percentage. Obligations of Foreign Partnerships: proposed regs address when CFC loans to foreign partnerships constitute U.S. property within the meaning of Specifically, the proposed regs address when a foreign partnership s obligation is treated as an obligation of a U.S. person. - Each partner s share of the partnership obligation is determined in accordance with the partner s interest in partnership profits. Pledges and Guarantees of a U.S. Person s Obligation: proposed regs expand the pledges and guarantees rules that give rise to U.S. property to transactions involving partnerships. 34 Deloitte Global Tax Planning Conference at Villanova University School of Law

35 Proposed Regulations under Section 956 U.S. Property Owned Through Partnerships Liquidation Value Percentage Existing rules under (a)(3) provide that a CFC partner in a partnership holding property that would be U.S. property if held directly by the CFC partner is treated as holding an interest in that property based on the partner s interest in the partnership. - There s no specific rule for measuring a CFC partner s interest in the partnership. Proposed regs provide that for purposes of 956, a partner is treated as holding its attributable share of property held by the partnership, which is determined in accordance with the partner s liquidation value percentage. - Liquidation value = cash partner would receive with respect to its interest if partnership sold all assets for FMV, satisfied its liabilities, and liquidated. - If there are special allocations that differ from the partner s liquidation value percentage, the partner s attributable share of that property is determined solely by reference to the partner s special allocation with respect to the property. Preamble to proposed regs states that its reasonable to use liquidation value percentage prior to finalization of proposed regs. 35 Deloitte Global Tax Planning Conference at Villanova University School of Law

36 Proposed Regulations under Section 956 U.S. Property Owned Through Partnerships (cont d) USP (Domestic) FS (CFC) Liquidation Value Percentage = 25% Unrelated (Foreign) Example 1: FPRS holds non-depreciable property that would be U.S. property if held by FS directly with an adjusted basis of $100x. At the close of quarter 1 of year 1, the liquidation value percentage for FS with respect to FPRS is 25%. There are no special allocations in the FPRS partnership agreement. - Under Prop Regs, FS s attributable share of property held by FPRS is 25% (its liquidation value percentage), and its attributable share of FPRS s basis in the property is $25x. - Accordingly, for purposes of determining the amount of U.S. property held by FS as of the close of quarter 1 of year 1, FS is treated as holding U.S. property with an adjusted basis of $25x. FPRS (Foreign) U.S. Property AB = $100x 36 Deloitte Global Tax Planning Conference at Villanova University School of Law

37 Proposed Regulations under Section 956 Obligations of Foreign Partnerships FS (CFC) 90% interest in FPRS profits $100x Loan USP (Domestic) FPRS (Foreign) FPRS s AB in $100x obligation = $100x X Unrelated (Foreign) 10% interest in FPRS profits Example 1: FPRS borrows $100x from FS. FS s basis in the FPRS obligation is $100x. For purposes of 956, the obligation of FPRS is treated as obligations of its partners, USP and X, to the extent of each partner s interest in the partnership profits of FPRS. Because USP, a partner in FPRS, is related to FS within the meaning of 954(d)(3), the exception in the proposed regs does not apply. - Based on its interest in FPRS s profits, USP s attributable share of the FPRS obligation is $90x under the proposed regs. - Accordingly, $90x of the FPRS obligation held by FS is treated as an obligation of USP and is U.S. property within the meaning of 956(c). - Therefore, on the date the loan is made, FS is treated as holding U.S. property of $90x. 37 Deloitte Global Tax Planning Conference at Villanova University School of Law

38 Proposed Regulations under Section 956 Pledges and Guarantees by CFCs and Partnerships X Unrelated (Domestic) Z Bank 30% 70% FS (CFC) USP (Domestic) 90% Pledges assets as security for FPRS s $100 loan from Z $100x Loan FPRS (Foreign) FPRS s AB in $100x obligation = $100x Y Unrelated (Foreign) 10% Example: There are no special allocations in FPRS partnership agreement. FPRS borrows $100x from Z, an unrelated lender. FS pledges its assets as security for FPRS s performance of its obligation to repay the $100x loan. USP s share of the $100x FPRS obligation, determined in accordance with its interest in profits, is $90x. Under (c), $90x of FPRS obligation is treated as an obligation of USP for purposes of Section For purposes of 956, under Prop. Reg (c)(1), FS is considered to hold an obligation of USP in the amount of $90x. - Thus, FS is treated as holding U.S. property in the amount of $90x. 38 Deloitte Global Tax Planning Conference at Villanova University School of Law

39 Questions? 39 Deloitte Global Tax Planning Conference at Villanova University School of Law

40 Contact info Harrison Cohen Tax Director Deloitte Tax LLP Washington National Tax Richard S. Hyman Tax Partner Deloitte Tax LLP Philadelphia Michael J. Leininger Tax Senior Manager Deloitte Tax LLP Philadelphia 40 Deloitte Global Tax Planning Conference at Villanova University School of Law

41 Global Tax Reset: Tax Planning in a Post- BEPS Environment November 20, , 2014

42 Agenda Action 2 Neutralizing Hybrid Mismatch Arrangement Action 4 Interest Deduction and Other Financial Payments Potential Impact on Common Financing Structures Action 7 PE Risks Other Actions 42 Deloitte Global Tax Planning Conference at Villanova University School of Law 42

43 Action 2: Neutralising Hybrid Mismatch Arrangements

44 Neutralizing Hybrid Mismatch Arrangements BEPS Action 2 What is Hybrid Mismatch? Hybrid mismatch arrangements exploit a difference in the characterization of an entity or arrangement under the laws of two or more tax jurisdictions to produce a mismatch in tax outcomes where that mismatch has the effect of lowering the aggregate tax burden of the parties to the arrangement. Three types of mismatch: Double deduction (DD) Generates double deductions for same expense. Deduction/no inclusion (D/NI) Deduction on one side but no income recognition on the other. Indirect deduction/no inclusion (Indirect D/NI) Hybrid mismatch that arises between two jurisdictions is imported into a third jurisdiction. 44 Deloitte Global Tax Planning Conference at Villanova University School of Law 44

45 Neutralizing Hybrid Mismatch Arrangements BEPS Action 2 Targeted Arrangements Deduction/Non Inclusion Arrangement Double Deduction Arrangement LuxCo Payment Country A BelCo Interest Hybrid Financial Instrument BelFinco Country B GP Loan Bank FinCo Preventative rule: eliminate dividend exemptions for deductible payments, and failing that D/I Primary response: deny deduction in the investor jurisdiction to the extent it exceeds the dual inclusion income for the same period; and failing that ND/D Primary response: payer jurisdiction denies deduction, and failing that Secondary rule: require payee to include payment as ordinary income. ND/NI D/I Secondary rule: deny the deduction for a hybrid payment in the subsidiary jurisdiction to the extent it exceeds the dual inclusion income for the same period. D/ND 45 Deloitte Global Tax Planning Conference at Villanova University School of Law

46 Neutralizing Hybrid Mismatch Arrangements BEPS Action 2 Targeted Arrangements (cont d) Indirect Deduction/Non Inclusion Arrangement Country A Hybrid Financial Statement Country B A Co. B Co. Payment Key Other Considerations: Differences in the way two jurisdictions value a payment are not targeted by action 2. Regimes that entitle taxpayers to a unilateral tax deduction for invested equity without requiring the taxpayer to accrue any expenditure (such as NID/ Luxembourg deemed deduction on equity) are not targeted by action 2. Country C Interest Primary response: payer jurisdiction denies deduction, and failing that ND/NI Borrower Co. Secondary rule: - 46 Deloitte Global Tax Planning Conference at Villanova University School of Law

47 Neutralizing Hybrid Mismatch Arrangements BEPS Action 2 Hybrid Mismatches Approach Seeks to achieve a balance between rules that are comprehensive, targeted and administrable. Each rule has its own defined scope. There are 3 scope categories: Applies only to Structured Arrangements Hybrid mismatch is priced into terms of the arrangement; or Facts and circumstances of the arrangement indicate that it has been designed to produce a hybrid mismatch. Applies to Control Group Consolidated for accounting purposes; or First person has control of a second, or a third person has effective control over both persons; or First person has a 50% or greater investment in second, or a third person holds a 50% or greater investment in both; or Associated enterprises. Applied between Related Persons Two persons are related if they are in the same control group; or First person has a 25% or greater investment in the second; or Third person holds a 25% or greater investment in both. 47 Deloitte Global Tax Planning Conference at Villanova University School of Law 47

48 Neutralizing Hybrid Mismatch Arrangements BEPS Action 2 Overview of Recommendations Mismatch Arrangement Specific recommendations on improvements to domestic law Response Recommended hybrid mismatch rule Defensive Rule Scope Hybrid financial instrument No dividend exemption for deductible payments. Proportionate limitation of withholding tax credits. Deny payer deduction Include as ordinary income Related parties and structured arrangements D/NI Disregarded payment made by a hybrid Deny payer deduction Include as ordinary income Control group and structured arrangements Payments made to a reverse hybrid Improvements to offshore investment regime. Restricting tax transparency of intermediate entities where non-resident investors treat the entity as opaque. Deny payer deduction Control group and structured arrangements DD Deductible payment made by a hybrid Deductible payment made by a dual resident Deny payer deduction Deny payer deduction Deny payer deduction No limitation on response, defensive rule applies to control group and structured arrangements Indirect D/NI Imported mismatch arrangements Deny payer deduction Members of a control group and structured arrangements. 48 Deloitte Global Tax Planning Conference at Villanova University School of Law

49 Action 4: Interest Deductions and Other Financial Payments

50 Interest Deductions and Other Financial Payments BEPS Action 4 Interest Deductions Fixed ratio rule deductible net interest within a corridor between 10% - 30% of EBITDA. Option for a group override group ratio can be applied instead of fixed ratio, where group ratio exceeds benchmarked fixed ratio. In addition, the group ratio can be uplifted by up to 10%. Rules to apply to multinational groups as a minimum, but individual countries may apply to domestic groups and/or standalone entities. Option for de minimis net interest expense. Option to allow carry-forward of unutilised net interest capacity. Proposed public benefit project exclusion. Further work to examine applicable best practice for the banking and insurance sectors. 50 Deloitte Global Tax Planning Conference at Villanova University School of Law 50

51 Interest Deductions and Other Financial Payments BEPS Action 4 Interest Deductions (cont d) Interest payments includes accrued amounts and payment economically equivalent to interest. Definition of related parties includes (in addition to 51% ownership test): Parties with effective control over each other; Parties with a 25% or greater investment in the borrower; or Parties are associated parties under the OECD Model Tax Convention. Acting together provision other parties could be aggregated despite not meeting definition of related parties above. Implementation recommended to come into force for Expectations that time will be available to allow restructuring and other transitional rules, e.g. grandfathering. 51 Deloitte Global Tax Planning Conference at Villanova University School of Law 51

52 Potential Impact on Common Financing Structures

53 Potential Impact on Common Financing Structures Possible Consequences Potential Limitation Hybrid mismatch? Treaty abuses? Interest deduction limitations? GAAR? State Aid? Potential Structural Issues Cash repatriation ability; Sustainability; Complexity; Substance requirements; Flexibility and exit. 53 Deloitte Global Tax Planning Conference at Villanova University School of Law

54 Potential Impact on Common Financing Structures Tax Havens Parent Benefit: Claim a one-sided deduction without corresponding income pick-up in haven. Haven Finance Co. OpCo s OpCo s OpCo Local Tax Consequences: Withholding taxes likely. Consider whether deduction would be impacted. Interco Financing Haven Tax Consequences: No interest income on the loan in haven. Other Considerations: Simple structure. Need to consider business purpose, substance and other similar requirements. 54 Deloitte Global Tax Planning Conference at Villanova University School of Law

55 Potential Impact on Common Financing Structures Off-Shore Regime in Singapore/Hong-Kong Parent Benefit: Interest income not effectively taxed in Singapore/Hong Kong as off-shore income based on common law. SingCo / HKCo Parent Tax Consequences: Both Singapore and Hong Kong dividends may qualify for participation exemption. Interco Financing OpCo s (Asian) OpCo s Other Considerations: Application modalities applicable off-shore regime to be managed/monitored. Manage (functional) substance in off-shore jurisdiction. Need to address business purpose, substance and other similar requirements. Possible alternative: SingCo/HKCo owns PPL issued by existing Belgian FinCo (more challenging and different risk profile). 55 Deloitte Global Tax Planning Conference at Villanova University School of Law

56 Potential Impact on Common Financing Structures CPEC Financing Parent Facts: LuxCo receives cash/loan receivables in exchange for CPECs. If cash received, LuxCo on-lends to subsidiaries. Interest Interest LuxCo Foreign Subsidiaries Foreign Subsidiaries CPECs Loan Receivable Luxembourg Tax Treatments: LuxCo is subject to CIT and MBT on its worldwide income, at a combined rate of 29.22%. However, as CPECs are seen as debt from a Luxembourg tax perspective, this income is partly offset by the deduction on the CPECs, leaving an arm s length margin on its financing activities, to be justified by a transfer pricing (TP) report based on OECD accepted methods. 56 Deloitte Global Tax Planning Conference at Villanova University School of Law

57 Potential Impact on Common Financing Structures CPEC Financing (cont d) Interest Interest Parent LuxCo CPECs Loan Receivable Luxembourg Tax Treatments (cont d): Usually an advance pricing agreement (APA) request, including the TP report, is filed with the Luxembourg tax authorities to ensure that the financing structure is in line with the Luxembourg TP rules. Possible to opt for a defensive TP report. The arm s length margin is a gross margin, against which reasonable running costs/operational expenses can be deducted. The net spread is fully taxable in Luxembourg. Luxembourg tax authorities can issue certificates of residence for LuxCo. Foreign Subsidiaries Foreign Subsidiaries Other Considerations: Impact of adoption of anti-hybrid rules (Action 2) on interest deductibility at foreign subsidiaries. 57 Deloitte Global Tax Planning Conference at Villanova University School of Law

58 Potential Impact on Common Financing Structures Partnership Structure Parent Facts: Lux SCS is financed by equity. Lux SCS grants a loan to LuxCo. With the funds received, LuxCo grants a loan to a foreign subsidiary. Lux SCS Interest CPECs LuxCo Interest Foreign Subsidiary Loan Receivable 58 Deloitte Global Tax Planning Conference at Villanova University School of Law

59 Potential Impact on Common Financing Structures Partnership Structure (cont d) Interest Interest Parent Lux SCS LuxCo Foreign Subsidiary CPECs Loan Receivable Luxembourg Tax Treatment: At LuxCo level - LuxCo is subject to CIT and MBT on its worldwide income, at a combined rate of 29.22%. - However, this income is partly offset by the deduction on the loan payables, leaving an arm s length margin on its financing activities, to be justified by a TP report based on OECD accepted methods. - Usually an APA request, including the TP report, is filed with the Luxembourg tax authorities to ensure that the financing structure is in line with the Luxembourg TP rules. - Possible to opt for a defensive TP report. 59 Deloitte Global Tax Planning Conference at Villanova University School of Law

60 Potential Impact on Common Financing Structures Partnership Structure (cont d) Parent Lux SCS Luxembourg Tax Treatment (cont d): The arm s length margin is a gross margin, against which reasonable running costs/operational expenses can be deducted. The net spread is fully taxable in Luxembourg. Luxembourg tax authorities can issue certificates of residence for LuxCo Interest Interest LuxCo Foreign Subsidiary CPECs Loan Receivable Other Considerations: Impact of adoption of anti-hybrid rules (Action 2) on interest deductibility at foreign subsidiaries. 60 Deloitte Global Tax Planning Conference at Villanova University School of Law

61 Potential Impact on Common Financing Structures Treasury Structures: Interest Free Loans (IFL) Parent Benefit: Claim a one-sided deduction without corresponding income pick-up in Ireland. Irish Company NL Co / LuxCo Parent Tax Consequences: In principle, no participation exemption issues at the level of Parent if EU resident. Interest Free Loan BE FinCo (BE) Lux/NL Tax Consequences: Deemed deduction on the IFL: offset income from loan to BE FinCo; Forex considerations to be monitored. Loan OpCo s OpCo s Interco Financing 61 Deloitte Global Tax Planning Conference at Villanova University School of Law

62 Potential Impact on Common Financing Structures Treasury Structures: Interest Free Loans (IFL) (cont d) Parent Irish Tax Consequences: No interest income on the loan in Ireland since interest-free. Irish Company Interest Free Loan NL Co / LuxCo BE FinCo (BE) Other Considerations: Ruling required in Belgium and Luxembourg/ The Netherlands. Need to address business purpose, substance and other similar requirements. Consider Lux/U.S. branch as a potential alternative for Ireland. Loan OpCo s OpCo s Interco Financing 62 Deloitte Global Tax Planning Conference at Villanova University School of Law

63 Potential Impact on Common Financing Structures Non-Trading Lux Branch in Lux Tax Consolidation Parent Illustration: Luxembourg branch with notional interest deduction : Benefit from notional interest deduction on deemed head office loan in Luxembourg. Lux Tax Consolidation (New)co (BE) Lux Branch Lux Tax Consequences: Post-restructuring, loan income is considered taxable income for Lux tax purposes. Part of the capital endowment of the Luxembourg Branch is deemed debt for Luxembourg tax purposes, allowing a deemed interest deduction. Loan LuxCo BE FinCo Interco Financing OpCo s OpCo s 63 Deloitte Global Tax Planning Conference at Villanova University School of Law

64 Potential Impact on Common Financing Structures Non-Trading Lux Branch in Lux Tax Consolidation (cont d) Parent Belgian Tax Consequences: (New)co s branch profits in principle 100% exempt under Belgium-Luxembourg double tax treaty. Lux Tax Consolidation (New)co (BE) Lux Branch Other Considerations: Monitor net wealth tax and potential cash trap in Luxembourg. Ruling required in Belgium and Luxembourg. Need to address business purpose, substance and other similar requirements. Loan LuxCo BE FinCo Interco Financing OpCo s OpCo s 64 Deloitte Global Tax Planning Conference at Villanova University School of Law

65 Potential Impact on Common Financing Structures Branch Structures Non-Trading Irish Branch Parent LuxCo Irish Branch Benefit: Claim a one-sided deduction without corresponding income pick-up in Ireland. Analysis: Interest income not taxed in Ireland (as it is not Irish source income and the branch is not trading in Ireland). Interest income is not taxed in Luxembourg, as Luxembourg sees the Irish branch as a PE of LuxCo and under the treaty with Ireland allocates all taxing rights to Ireland. Taxation in Luxembourg on a small spread Loan BE FinCo Interco Financing OpCo s OpCo s Other Considerations: Need to address business purpose, substance and other similar requirements. Limitations on substance/activity in Ireland to secure its non-trading status. Possible alternatives for Ireland exist within and outside EU. 65 Deloitte Global Tax Planning Conference at Villanova University School of Law

66 Action 7 PE Risks

67 Action 7 PE Risks Definition of PE May Impact Certain BMO Structures Commissionaire activities Auxiliary activities Formal considerations around arrangements could convert a commissionaires/ agent/ into a PE Attribution of profits to PE & Multilateral Treaty: Coming Next Permanent establishments Fixed place of business Splitting up contracts Joint computation of permanency period even with different personnel Personnel from local affiliate may trigger a fixed place of business of POC Artificial fragmentation Warehousing or stockholding by POC could trigger a PE, as it may no longer be considered an ancillary activity Aggregation of stripped functions and risks in the same jurisdiction may trigger a PE 67 Deloitte Global Tax Planning Conference at Villanova University School of Law

68 Action 7 PE Risks New Anti-Fragmentation Rule under Article 5 (4.1) If adopted, the new anti-fragmentation rule may affect common BMO structures where POC conducts activities through a fixed place of business in the same jurisdiction as a related LRD or manufacturing company. Generally, under Article 5(1) entities conducting activities through a fixed place of business in a Contracting State are treated as having a PE in such Contracting State Article 5(4), however, provides a list of exempt activities that will not give rise to a PE even if conducted through a fixed place of business New Article 5(4.1) will add an anti-fragmentation rule, which provides that the Article 5(4) list of exempt activities will not apply if: 1. the same enterprise or a closely related enterprise carries on business at the same place or at another place in the same Contracting State; and 2. the business activities carried on by the 2 enterprises at the same place, or by the same enterprise or closely related enterprises at the 2 places, constitute complementary functions that are part of a cohesive business operation, and either: A. One of the places constitutes a PE for the enterprise or the closely related enterprise, OR B. The overall activity from the combination of the activities carried by the 2 enterprises at the same place, or by the same enterprise or closely related enterprises at the 2 places, is not of a preparatory or auxiliary character. 68 Deloitte Global Tax Planning Conference at Villanova University School of Law 68

69 Action 7 PE Risks Artificial Fragmentation Country X Principal Operating Company Country X Principal Operating Company Country Y MfgCo (Contract or Toll Manufacturer) Country Y SalesCo (Flash Title LRD) #2 Carries on Business #1 Fixed Place of Business: Potential 5(4)* #1 Fixed Place of Business: Potential 5(4)* #2 Carries on Business MfgCo operated warehouse in which POC inventory is stored 3 rd party warehouse in which POC inventory is stored at POC s disposal *Assumes warehouse activities are of a preparatory and auxiliary character as required under the new subjective test in Article 5(4) Article 5(4) Exception shall not apply to #1 if #2 is a PE under Article 5 and combined activities constitute complementary functions that are part of a cohesive business operation Combination of activities is not of a preparatory or auxiliary character and or combined activities constitute complementary functions that are part of a cohesive business operation 69 Deloitte Global Tax Planning Conference at Villanova University School of Law

70 Action 7 PE Risks Artificial Fragmentation (cont d) Principal Operating Company Country X Principal Operating Company Satisfies the Substantial Contribution Manufacturing Test MfgCo (Contract or Toll Manufacturer) Country X Country Y MfgCo (Contract or Toll Manufacturer) SalesCo (Flash Title LRD) Country Y #2 Marketing activities performed through SalesCo on behalf of POC SalesCo (Flash Title LRD) #1 Fixed Place of Business: Potential 5(4)* #1 Fixed Place of Business PE #2 Conducts SubCon mfg oversight activity, but no fixed place of business under 5(1) #1 Fixed Place of Business: Potential 5(4)* Article 5(4) Exception shall not apply to #1 if #2 is a PE under Article 5 and combined activities constitute complementary functions that are part of a cohesive business operation Combination of activities is not of a preparatory or auxiliary character and or combined activities constitute complementary functions that are part of a cohesive business operation 70 Deloitte Global Tax Planning Conference at Villanova University School of Law

71 Other Actions

72 Other Actions Actions 8 and 13 Likely to Be of Interest Action 8: Transfer Pricing of Intangibles More focus on substance and people Action 13: TP Documentation/C-b-C Reporting (three-tiered approach) C-b-C as an analytics tool? Tax authorities are expected to use guidance from Final Report 2015 Masterfile shared with every jurisdiction effect on contents? 72 Deloitte Global Tax Planning Conference at Villanova University School of Law

73 Questions? 73 Deloitte Global Tax Planning Conference at Villanova University School of Law

74 Contact info Jim Brooks Tax Senior Manager Deloitte Tax LLP Philadelphia Thomas Driscoll Tax Partner Deloitte Tax LLP Chicago John Womack Tax Partner Deloitte Tax LLP New York 74 Deloitte Global Tax Planning Conference at Villanova University School of Law

75 Appendix

76 Selective Country Actions to Date

77 Selective Countries Actions to Date Country Legislation Date Australia 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. Effective as of January 1, 2016 Effective as of January 1, 2016 Austria 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. March 1, 2014 Brazil Government published proposed rules that introduce new reporting requirement for taxpayers to disclose transactions that were carried out to reduce, eliminate or defer taxes January 1, 2016 (if proposed rules are converted into Law) 77 Deloitte Global Tax Planning Conference at Villanova University School of Law

78 Selective Countries Actions to Date Country Legislation Date China 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. March 18, 2015 Still in draft, expected to be finalized end of 2015/early 2016 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, Deloitte Global Tax Planning Conference at Villanova University School of Law

79 Selective Countries Actions to Date Country Legislation Date Germany Dividend exemption disallowed on hybrid dividends. Disallowance of deduction on hybrid instruments and in certain double dip structures planned. Ireland Default rule that all companies incorporated in Ireland are tax resident in Ireland. Italy 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. FY beginning January 1, 2014 Still unclear, likely FY beginning January 1, 2016 January 1, 2015 (new companies) Transition to 2020 (companies with existing Ireland operations) Announced by Government: should be included in the 2016 Financial Law and likely applicable as of January 1, Deloitte Global Tax Planning Conference at Villanova University School of Law

80 Selective Countries Actions to Date Country Legislation Date Japan 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. October Fiscal years beginning on or after April 1, 2016 July 1, 2015 Luxembourg Suspend consideration of certain types of ruling requests regarding PE status pending US-Luxembourg treaty negotiations. 80 Deloitte Global Tax Planning Conference at Villanova University School of Law

81 Selective Countries Actions to Date Country Legislation Date 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) January 1, 2014 January 1, 2016 (first deadline December 31, 2017) Russia 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 Deloitte Global Tax Planning Conference at Villanova University School of Law

82 Selective Countries Actions to Date Country Legislation Date Switzerland Introduction of CbCreporting. 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. Ukraine 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 per 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 April 1, Deloitte Global Tax Planning Conference at Villanova University School of Law

83 Refreshment Break (Outbound Participants: Please Return to This Room After the Break for the Plenary)

84 Global Tax Reset How initiatives such as the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, preemptive global legislative activity, and an active US 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

85 Lunch

86 Overlooked and Underutilized Business Model Optimization Strategies November 20, 2015 November 21, 2014

87 Agenda IP / Partnership Structuring Post Notice Dutch Coop Procurement Structure Series LLC Planning BEPS Potential Impact on Existing BMO Structures Thoughts on the Digital Economy 87 Deloitte Global Tax Planning Conference at Villanova University School of Law 87

88 IP / Partnership Structuring Post-Notice

89 Notice General Rule Regulations will provide that section 721(a) will not apply when a US 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. o o 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 US 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 US transferor and any Related Persons own more than 50 percent of the interest in the capital, profits, deductions or losses. 89 Deloitte Global Tax Planning Conference at Villanova University School of Law

90 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 requires the partnership / US transferors: i. adopt the remedial allocation method in (d) with respect to section 721(c) property; ii. 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, US transferors meet certain new reporting requirements; iv. US transferor recognize remaining pre-contribution built-in gain upon acceleration events; and v. adopt the GDM for all subsequent built-in gain property contributed by the US transferor (and related US transferors) within a certain time period (generally 60 months). Upon an acceleration event, the US transferor must recognize gain in an amount equal to the remaining built-in gain that would have been allocated to the US transferor if the partnership had sold the section 721(c) property immediately before the acceleration event for its fair market value. 90 Deloitte Global Tax Planning Conference at Villanova University School of Law

91 Acceleration Events An acceleration event is any transaction that: - would reduce the amount of remaining built-in gain that a US transferor would recognize under the GDM if that transaction had not occurred, or - could defer the recognition of that built-in An acceleration event also includes a failure to comply with all the requirements of the GDM, including failure to comply with reporting requirements. Acceleration events can include (not exhaustive): i. Distribution or contribution of any property by the partnership; ii. iii. A technical termination; and The US transferor transferring all or part of its interest in a partnership. Acceleration events do not include: i. Transfers of partnership interests by US transferors to domestic corp under 351(a) and 381(a) transfers, so long as the parties continue to apply GDM after the transfers; ii. iii. Transfers by partnerships of section 721(c) property to a domestic corp under 351(a); and Transfers by partnerships of section 721(c) property to foreign corp under 351(a) to the extent the property is treated as transferred by the US partners to the foreign corporation in an outbound transfer under Treas. Reg (a)-1T(c)(3)(i) or (ii). 91 Deloitte Global Tax Planning Conference at Villanova University School of Law

92 Section 721(c) Partnership USP (US) Steps 1. USP contributes a portion of its IP with built-in gain to CFP in exchange for an X% partnership interest. IP X% Y% CFC (Country X) 2. CFC contributes Operating Entities (in disregarded form) to CFP in exchange for a Y% partnership interest. 3. USP and CFP enter into an agreement to share research and development (R&D) costs. Intended Tax Consequences CFP IP Operating Entities USP and CFC s contributions to CFP qualify as tax-free contributions under section 721(a), subject to the Notice. Royalty Operating Entities Pursuant to the Notice, CFP adopts the remedial allocation method with respect to the IP contributed by USP (and satisfies all other requirements under the Gain Deferral Method, including the reporting requirements). 92 Deloitte Global Tax Planning Conference at Villanova University School of Law

93 Section 721(c) Partnership (cont.) USP (US) Selected Considerations If the IP does not have built-in gain (e.g., because it was recently acquired), then the Notice should not apply to the contribution. IP X% Y% CFC (Country X) Impact of the requirement to adopt the remedial allocation method USP required to recognize any remaining builtin gain if an Acceleration Event under the Notice occurs. CFP IP Operating Entities Royalty Operating Entities 93 Deloitte Global Tax Planning Conference at Villanova University School of Law

94 Annual License USP (US) License Steps 1. USP licenses a portion of its IP to CFC 2 pursuant to a license agreement. 2. CFC 2 contributes licensed IP rights to CFP in exchange for an X% partnership interest. CFC 1 (Country Y) Royalty CFC 2 (Country X) 3. CFC 1 contributes Operating Entities (in disregarded form) to CFP in exchange for a Y% partnership interest. X% Y% 4. USP and CFP enter into an agreement to share R&D costs. Operating Entities CFP IP IP Intended Tax Consequences USP receives a foreign source royalty from CFC 2. Royalty CFC 2 is entitled to a deduction for the royalty paid to USP. Operating Entities CFC1 and CFC 2 s contributions to CFP qualify as tax-free contributions under section 721(a). 94 Deloitte Global Tax Planning Conference at Villanova University School of Law

95 Dutch Coop Procurement Structure

96 Dutch Coop Procurement Sample Transactional Flows Sponsors Management X Inc. ( X Delaware) Private Label X Brands 3P Customers New European Holdco ( Holdco ) Sale #3 CBT Sale #3 X US Opcos Holdco Germany Holdco Spain Holdco France Holdco UK Coop interest Sale #2 Coop interest Sale #2 Coop interest German Opco Coop interest Spain Opco Coop interest France Opco Coop interest UK Opco Sale #2 Sale #2 Sale #2 Sale #2 Dutch COOP 3P Suppliers China India Vietnam Bangladesh X Global sourcing Limited (BVI) ( X Global Sourcing ) X China Holdings LLC (Delaware) X China Limited ( X China CSO ) 96 Deloitte Global Tax Planning Conference at Villanova University School of Law

97 Dutch Coop Procurement Anticipated Tax Results Corporate characteristics of the Dutch COOP membership interests Each member has one vote. The Coop must conduct greater than 50% of its business with its members. The Coop must distribute all of its profit to its members annually. Distributions made to its members must be computed based on the volume of business that each member transacts with the Coop. US Netherlands Member Countries Dutch Coop elects for US tax purposes to be treated as a COOP under subchapter T COOP subject to regular Dutch tax (25%) Distributions from COOP exempt from tax under local country participation exemption (if available) Dutch COOP has subpart F income from purchase and sale of inventory, but reduced by patronage distributions Dividends not subject to Dutch withholding tax (assuming that most of COOP's income will qualify for PE exemption from Dutch tax) Patronage distributions not subpart F income to COOP members as they are likely not treated as dividends. But otherwise protected by 954(c)(6) Pays regular Dutch corporate income tax Service fees paid to Chinese WOFE not subpart F income due to CTB Sales by CBT to TRUS US not subpart F to the extent inventory manufactured in China (same country) will be sub F leakage to the extent inventory produced outside of China no China tax COOP's E&P (income minus patronage dividends) is allocable to any regular stock issued in addition to membership interests. Dividends on regular stock would carry all foreign taxes imposed on COOP Any stock issued must be held by a person with at least 10% voting power in the COOP in order to obtain FTCs and look through treatment for US FTC purposes 97 Deloitte Global Tax Planning Conference at Villanova University School of Law

98 Series LLC Planning

99 Series LLC Planning Legal Flows of Goods and Services Y (US) Steps 1. Y sells US-manufactured goods to Buy-Sell Co, a Delaware series LLC that is managed and controlled in the [UK]. Portugal CFC 1 Germany CFC Italy CFC The Board members of Buy-Sell negotiate Frame Agreements for the purchase of manufactured goods from Y in the United States, and then sold to each of the local distributors (in the country of the distributor). Warehouse + Computer Co Computer Fee Buy-Sell Series LLC Service Fee UK Services Hubco Buy-Sell Co has no employees or activities, other than holding legal title to the goods and then onselling the goods to the local distributors The goods sit in Warehouse and Computer Co. ( W & C Co ) until a local country order is received. At that point, the applicable series of the Buy-Sell Series LLC takes title to the goods, and sells them to the local country distributor. Portugal Sales Co German Sales Co Italy Sales Co 3 Warehouse and Computer Co also provides computer services to effectuate the sale of goods by the applicable series of the Buy-Sell Series LLC to the local distributors, who place their orders by computer. Portugal Customers Germany Customers Italy Customers 99 Deloitte Global Tax Planning Conference at Villanova University School of Law 99

100 Series LLC Planning Legal Flows of Goods and Services (cont d) Warehouse + Computer Co Portugal CFC Computer Fee Portugal Sales Co Portugal Customers 1 Y (US) Germany CFC Buy-Sell Series LLC German Sales Co Germany Customers Service Fee Italy CFC Italy Sales Co Italy Customers UK Services Hubco 3 Steps 2. When local country distributors receive orders from incountry customers, they place a computerized order for the goods from Buy-Sell Co under the applicable Frame Agreements. The transaction is entirely done by the computer owned by Warehouse and Computer Co, and coordination of delivery and logistics is done by the employees of Warehouse and Computer Co. 3. Each local country distributor then sells to in-country customers. 4. In exchange for the computer, warehouse, and logistical services, Buy-Sell Co pays a service fee to Warehouse and Computer Co. Warehouse and Computer Co will send three separate invoices, one to each series of the Buy-Sell Series LLC. US Tax Considerations Each separate series must have 100 percent of the benefits and burdens of ownership of the assets and liabilities of each series. A series LLC would be characterized as 3 separate disregarded entities, each owned by a CFC. Transfer Pricing Considerations Determination of UK Services Hubco fees, W&C Co fees, and royalties. 100 Deloitte Global Tax Planning Conference at Villanova University School of Law 100

101 Series LLC Planning US Tax Characterization W&C Co Portugal CFC Y (US) Buy-Sell LLC #1 Germany CFC Buy-Sell LLC #2 Italy CFC Buy-Sell LLC #3 UK Services Hubco US Tax Consequences Sales by CFCs to local country customers should be exempt from treatment as foreign base company sales income pursuant to the same country consumption exception of Treas. Reg (a)(3)(i). The fees paid by each series of the Buy-Sell Series LLC to W&C Co and UK Services HubCo should not be subpart F income. US Tax Note Buy-sell could also be brother-sister to the corresponding local sales co Key = Fees for warehousing Portugal Sales Co German Sales Co Italy Sales Co = Fees for computer = Fees to Hubco services = Sale of goods Portugal Customers Germany Customers Italy Customers = Royalties 101 Deloitte Global Tax Planning Conference at Villanova University School of Law

102 BEPS Potential Impact on Existing BMO Structures

103 BEPS Potential Impact on Existing BMO Structures Benefits and Initiatives BMO potential benefits BEPS initiatives Achieving Top line growth Achieving sustainable earnings improvement Simplification of the business model Harmonizing and standardizing of business processes Reducing supply chain and overhead costs Globalizing and/or regionalizing their businesses Centralizing management in one location BEPS may impact BMO structures Action 7: Preventing the artificial avoidance of PE status Action 8: Guidance on TP aspects of intangibles Action 9: Risk and capital Action 10: High risk transactions Action 13: Transfer Pricing documentation. Country by Country Report 103 Deloitte Global Tax Planning Conference at Villanova University School of Law

104 BEPS Potential Impact on Existing BMO Structures Impact on Centralized Model in Certain Principal Locations Attribution of residual profits to POC/IP Co/Risk-taking Co BMO Structure Challenge of traditional profit allocation BEPS effects Risk Based profit Value-Added profit Risk Based profit Value-Added profit Risk Based profit Value-Added profit Country 3 Country 2 Country Profit 1 from Profit Core from Routine Operations Core profit From Operations Core Operations Manufacturer 20% - 40% Statutory Tax Range Risk Based profit Value-Added profit Risk Based profit Value-Added profit Principal Company 0% - 20% Statutory Tax Range Country 3 Country 2 Country Profit 1 from Profit Core from Routine Operations Core profit from Operations Core Operations Sales Company 20% - 40% Statutory Tax Range More profits to be allocated to local entities where physical activity takes place Country 3 Country 2 Country Profit 1 from Profit Core from Routine Operations Core profit From Operations Core Operations Manufacturer 20% - 40% Statutory Tax Range Risk Based profit Value-Added profit Principal Company 0% - 20% Statutory Tax Range Profit allocation to deemed PE Country 3 Country 2 Country Profit 1 from Profit Core from Routine Operations Core profit from Operations Core Operations Sales Company 20% - 40% Statutory Tax Range Region Typical Locations Europe Switzerland Netherlands Ireland United Kingdom Belgium Asia Pacific Americas Singapore Hong Kong Malaysia European POC with local branches Panama Spain China Principals/China Business Trusts Uruguay Costa Rica Luxembourg European POC with local branches 104 Deloitte Global Tax Planning Conference at Villanova University School of Law

105 Alternative Centralized Models An Overview # Model Description 1 From toll-manufacturing to contract manufacturing Inventory holding function of POC constitutes a PE in TM country, manufacturer needs to legally own such inventory in the country. 2 Stockholding LRD POC cannot hold inventory any longer in LRD country, therefore LRD needs to own inventory. 3 Centralized stockholding company Establishment of intermediate central stockholding company between POC and non-stockholding LRD. 4 Business licensing/franchise model Remaining the TM and non-stockholding LRD by implementing a business license model. 105 Deloitte Global Tax Planning Conference at Villanova University School of Law

106 Alternative Centralized Models Manufacturing Alternative business models without stock/finished products holding locally by POC Buy Materials Processing Services Toll Manufacturing Toll Manufacturer Principal Company Sell Risks: Capital Service Fee Risks: Inventory Warranty Intangibles Working Capital Buy Materials Contract Manufacturing Sell Finished Goods Contract Manufacturer Principal Company Sell Risks: Inventory Service Fee Risks: Warranty Intangibles Working Capital Distributor Distributor Sell Customer Sell Customer POC owns all raw materials, in-process goods and finished products and keeps these in the country of the toll manufacturer. 106 Deloitte Global Tax Planning Conference at Villanova University School of Law Holding inventory in the TM country would trigger a PE of POC. Manufacturer needs to own inventory

107 Alternative Centralized Models Distribution Alternative business models without stock/finished products holding locally by POC Old Limited Risk Distributor New Stockholding LRD Sell (flash title) Principal Company Old LRD Sell Risks: Price Volume Inventory Credit Marketing Intangibles Sell (no flash title) Principal Company New LRD Sell Risks: Price Volume Credit Marketing Intangibles Risks: Inventory Customer Customer POC owns all finished products inventory and keeps these in the country of the LRD. POC sells these products to LRD based on flash title sales. 107 Deloitte Global Tax Planning Conference at Villanova University School of Law Holding inventory in the LRD country would trigger a PE of POC. LRD needs to own inventory

108 Alternative Centralized Models Stockholding Company Contractual Arrangements Physical Flows Legal Title Raw Material and Packaging Material Suppliers Contract Manufacturing Agreement Finished Products Sale Principal Operating Company Old LRDs (nonstockholding) (Country Y) Contract Manufacturer (CM) Company (Country Y) Finished Products Sale Central Stockholding Company* Third-Party Customers *POC country/warehouse could be country XYZ 108 Deloitte Global Tax Planning Conference at Villanova University School of Law

109 Alternative Centralized Models Stockholding Company (cont d) Considering the change in PE definition under BEPS, POC most likely cannot hold any inventory in the country of the manufacturer and distributor as these activities may no longer be considered auxiliary or preparatory to the business and may therefore constitute a PE of the POC. A Central Stockholding Company (CSC) would own all finished goods inventory. It s warehouse could be in the country of the manufacturer or in country XYZ. Most likely CSC would have more warehouses through the region. POC would obtain the finished goods based on the CM Agreement and would directly sell to the Central Stockholding Company. The Central Stockholding Company would only sell the finished goods to the LRD s (via flash title) once needed for sales to customers. From a LRD point of view nothing should change compared to today (different contract party/supplier of goods). Inserting a Central Stock Holding Company owning all finished goods locally may establish a PE for this Central Stock Holding company locally however the value attributed to such PE should be minimal. 109 Deloitte Global Tax Planning Conference at Villanova University School of Law 109

110 Alternative Centralized Models Licensing/Franchise Model Contractual Arrangements Physical Flows Legal Title Raw Material and Packaging Material Suppliers Business License Agreement Business Licensor LRD Agreement Flash Title Sale Old LRDs (nonstockholding) (Country Y) Toll Manufacturing ( TM ) Company (local) Toll Manufacturing Agreement Business Licensee (Manufacturing and Distribution) Third-Party Customers 110 Deloitte Global Tax Planning Conference at Villanova University School of Law

111 Thoughts on Digital Economy

112 Digital Economy Online Auction Platform, Internet search, E-services, and Downloadable Digital Products Action 7 Proposes new rules to close off use of certain intercompany arrangements and activity exemptions often used to avoid PE status Principal Action 8 Services $ Marketing Service Co $ Source country Services Value of data - Access to data in source country creates a valuable asset that is located in the source country? Services $ Server Co Custom ers Demand creates value? Fragmented functions Server Communication Indirect Taxes Source country changes imposing VAT or similar taxes in respect of services provided to customers in the source country (destination principle) 112 Deloitte Global Tax Planning Conference at Villanova University School of Law 112

113 Characterization of Income Treaties Payments for the use of, or the right to use, copyright OECD view 1 Payment for computer software is not a royalty unless it is for the use of, or the right to use, copyright in the software Payment for hosting services is not for use of a copyright Software for own use does not involve the use of copyright Alternative views 2 Several non-oecd countries (e.g., Argentina, Morocco, Serbia, Tunisia) regard payments for software, for own use, as royalties² In 2012 Budget, India announced legislative changes which will treat all payments for software, as royalties for domestic tax law purposes Consequences for cloud computing Payments for electronic downloading of software and other digital products, for own use, are not royalties Consequences for cloud computing Payments for electronic downloading of software and other digital products, for own use, will be treated as royalties 1 OECD E-Commerce Report, paras OECD Commentary on Art. 12, paras ² OECD Commentary, Non-OECD Economies Positions, Art. 12, para Deloitte Global Tax Planning Conference at Villanova University School of Law

114 Permanent Establishment A Permanent Establishment (PE) is generally defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. A PE includes an place of management, an office, factory, a workshop, a mine, and a construction site. The word fixed generally requires that a PE must be established at a distinct place with a certain degree of permanence. A PE does not include a facility used solely for: Purchasing, storing, displaying, or delivering goods; Maintenance of a stock of goods solely for processing by another person; Collecting information; or A PE may also arise by imputation from the activities conducted by an agent, whether related or unrelated to an enterprise. The PE concept has proven to be difficult to apply in the e-commerce context. The OECD Commentary on PE (i.e., Article 5) discusses whether the use of computer equipment in e-commerce operations in a country could constitute a PE. 114 Deloitte Global Tax Planning Conference at Villanova University School of Law

115 The Focus on VAT and the Taxation of Cross-border Digital Services With the growth of the cross-border digital economy, the VAT treatment of such supplies has come under increased focus: BEPS Action 1 Addressing the tax challenges of the digital economy OECD Paper on International VAT/GST Guidelines Both papers outline a preference to use the destination principle for VAT. That is, VAT should be due where the services are consumed, which is in line with the EU model. This helps to ensure fiscal neutrality between domestic and foreign suppliers, and also increase tax revenue for local governments. The result is a significant shift in how tax authorities outside the EU are implementing rules for non-established suppliers of e-services. 115 Deloitte Global Tax Planning Conference at Villanova University School of Law

116 A Shift in VAT Rules for Supplies of Digital Services The EU model allows non-eu established suppliers to register for VAT in one country in order to account for VAT across the 28 EU Member States. The rules also only apply for B2C transactions. Outside of the EU, businesses face significant challenges complying with rules in new countries implementing obligations for non-resident suppliers of digital supplies. A recent wave of new countries imposing rules (e.g. South Africa, Japan, Korea, Kenya) and new countries planning to implement rules (e.g. Australia, New Zealand, Israel, Turkey, Canada). Potential inclusion of both B2C and B2B supplies (e.g. South Africa, Korea). No harmonization of VAT compliance, so single registrations and VAT returns required in all countries. Interesting interpretation of various rules that can be very country specific (e.g. B2B vs. B2C supplies in Japan, VAT invoicing in Korea). Complexities are only likely to increase as more countries look to tax non-resident suppliers of digital services going forward 116 Deloitte Global Tax Planning Conference at Villanova University School of Law

117 Questions? 117 Deloitte Global Tax Planning Conference at Villanova University School of Law

118 Contact info Jared Gordon Director Deloitte Tax LLP 118 Deloitte Global Tax Planning Conference at Villanova University School of Law

119 Changes in the International M&A Rules of the Road November 20, 2015 November 21, 2014

120 Agenda Outbound Reorganization Cross Border Acquisition Financing Cross Border Transaction Pitfalls Small ATB Spin-Offs 120 Deloitte Global Tax Planning Conference at Villanova University School of Law 120

121 Outbound Reorganization

122 Outbound Reorganizations 304(b)(3)(B) Exception T/S 1 BANK 1000 Loan 750 Loan 1 And 250 Equity Taxable Acquisition of USS USP Beginning Structure USP, a domestic corporation, is the parent company of USS, a domestic corporation. USS owns of CFC, a controlled foreign corporation. Transaction Steps 1. USP takes out a third-party loan and subsequently contributes the loan proceeds to USS in exchange for a 750 note and 250 of USS equity. 2. USS uses the 1000 of proceeds to acquire US Target in a taxable acquisition. US Target US Target CFC 122 Deloitte Global Tax Planning Conference at Villanova University School of Law

123 Outbound Reorganizations 304(b)(3)(B) Exception (cont d) Note of 750 USP Transaction Steps 3. US Target re-incorporates in Foreign country in a transaction described in 368(a)(1)(F). US Target becomes a CFC in outbound F reorganization USS Considerations Is there an active foreign trade or business under 367(a)(3)(A) to avoid gain recognition on the outbound transfer? Application of 367(d) to covered intangibles. Target (US) Target (Foreign) CFC 123 Deloitte Global Tax Planning Conference at Villanova University School of Law

124 Outbound Reorganizations 304(b)(3)(B) Exception (cont d) Note of 750 USP Considerations (cont d) Adjustments to US Target stock basis under Treas. Reg (a)-7 and (f)-2. Does U.S. Parent Group has an OFL under 904(f) that could be recaptured? Does US Target have subsidiaries requiring GRAs under 1.367(a)-3T(e)? US Target becomes a CFC in outbound F reorganization Target (US) USS Target (Foreign) CFC 124 Deloitte Global Tax Planning Conference at Villanova University School of Law

125 Outbound Reorganizations 304(b)(3)(B) Exception (cont d) USP Transaction Steps 4. USS transfers the stock of Target in exchange for CFC stock and an assumption of USS s acquisition indebtedness. Note of 750 Considerations Target Stock Contribution and Debt Assumption USS Target (Foreign) Target CFC 4 304(b)(3)(B) provides that in the case of a transaction described in both 304 and 351, 351 and 357 and not 304 will apply to a liability assumed by the transferor if such liability was incurred by the transferor to acquire the stock. Target (Foreign) 125 Deloitte Global Tax Planning Conference at Villanova University School of Law

126 Outbound Reorganizations 304(b)(3)(B) Exception (cont d) Considerations (cont d) USP 357(c) provides that no gain or loss is recognized on the assumption of indebtedness unless liabilities assumed exceed USS s adjusted basis in Target (Foreign) stock. Target Stock Contribution and Debt Assumption USS Target (Foreign) Target CFC Note of 750 Authority suggests related party indebtedness used to acquire target falls within section the 304(b)(3)(B) exception. See Combrink v. Commissioner. Notice should not apply to the final step as it does not involve a section 361 transfer. Target (Foreign) 126 Deloitte Global Tax Planning Conference at Villanova University School of Law

127 Outbound Reorganizations 304(b)(3)(B) Exception (cont d) USS USP Note of 750 Issues Outbound F reorganization will require the US Target to recognize all gains (but not losses) realized in its assets transferred to Foreign Target. If USS agrees to reduce its tax basis in the shares of Foreign Target received in the reorganization, then gain realized may be deferred. See 367(a)(5) and 1.367(a)-7 CFC Target (Foreign) 127 Deloitte Global Tax Planning Conference at Villanova University School of Law

128 Outbound Reorganizations 304(b)(3)(B) Exception (cont d) USS USP Note of 750 Issues (cont d) US Target will be required to included as a deemed dividend the 1248 amount of any CFCs owned by US Target if the 1248 amount of Foreign Target stock is less. Typically, the 367(a)(5) adjustments will address this, but not always. If USS agrees to further reduce its tax basis in Foreign Target stock then the deemed dividend is not required. CFC Target (Foreign) 128 Deloitte Global Tax Planning Conference at Villanova University School of Law

129 Outbound Reorganizations 304(b)(3)(B) Exception (cont d) USS USP Note of 750 Issues (cont d) Proposed regulations under 367(a) and 367(d) would exclude all intangibles to intangibles from the active trade or business exception of 367(a)(3)(A). At the taxpayer s election, intangible assets not covered by 367(d) would be eligible for the commensurate with income deemed royalty treat of 367(d). Effective date is for transfer on or after September 15, CFC Target (Foreign) 129 Deloitte Global Tax Planning Conference at Villanova University School of Law

130 Cross Border Acquisition Financing

131 Cross Border Acquisition Financing Financing without Dual Consolidated Loss Beginning Structure Loan to USP USP USS DRE Target Shareholders Target USP is one of several potential buyers of Target, a publicly traded company. USP has a non-u.s. group of companies that are able to combine their local country tax base. Key to being able to make the highest bid is the ability of USP to deduct the financing interest both in the U.S. and in another jurisdiction in which the group pays tax. F 1 F Deloitte Global Tax Planning Conference at Villanova University School of Law

132 Cross Border Acquisition Financing Financing without Dual Consolidated Loss (cont d) Beginning Structure (cont d) Loan to USP USP USS Target Shareholders The Banking syndicate will extend more favorable terms on a loan to DRE if it has more liquid assets to help service the debt. USS has a large loan receivable from USP that may be refinanced into one or more new notes. Target DRE F 1 F Deloitte Global Tax Planning Conference at Villanova University School of Law

133 Cross Border Acquisition Financing Financing without Dual Consolidated Loss (cont d) Steps Loan to USP 2 USS Contributes CFC to DRE USP USS DRE 1 USS Contributes note to CFC CFC 1. U.S. Sub contributes its Note Receivable from U.S. Parent to CFC. 2. U.S. Sub contributes CFC stock to DRE for equity. Analysis USP Note is United States Property to CFC. CFC should be in a treaty jurisdiction or it would owe 30% gross basis tax on the U.S. source interest income. F 1 F Deloitte Global Tax Planning Conference at Villanova University School of Law

134 Cross Border Acquisition Financing Financing without Dual Consolidated Loss (cont d) Analysis (cont d) Loan to USP 2 USP USS 1 USS Contributes note to CFC Interest income accrued by CFC on the Note Receivable is FPHC income, resulting in a 951 inclusion to US Sub. DRE s country of residence will not tax the income of CFC directly or under CFC rules. USS Contributes CFC to DRE DRE CFC F 1 F Deloitte Global Tax Planning Conference at Villanova University School of Law

135 Cross Border Acquisition Financing Financing without Dual Consolidated Loss (cont d) Loan to USP CFC USP USS DRE $$ Target Shareholders Target Bank Loan Steps 3. Bank lends proceeds to DRE for acquisition of Target. 4. DRE acquires Target stock from the shareholders of Target. Analysis DRE Bank interest is deducted and the deduction is made available to offset the income of another foreign person. The deduction for Bank interest is attributable to DRE for purposes of computing a Dual Consolidated Loss. F 1 F Deloitte Global Tax Planning Conference at Villanova University School of Law

136 Cross Border Acquisition Financing Financing without Dual Consolidated Loss (cont d) Loan to USP CFC USP USS DRE Target Bank Loan Analysis (cont d) Also, the 951 inclusion of USS related to the subpart F income CFC has from its interest income on the USP Note will be attributable to DRE for purposes of computing a Dual Consolidated Loss. So long as the 951 income attributable to DRE exceeds the deduction for Bank interest attributable to DRE, there will not be a Dual Consolidated Loss. Thus, the USP group is able to claim a current deduction for the full amount of the interest. F 1 F Deloitte Global Tax Planning Conference at Villanova University School of Law

137 Cross Border Transaction Pitfalls

138 Cross Border Transaction Pitfalls Subpart F Income Resulting from Post-Sale Stock Sales 1 2 Facts USP Foreign Buyer Foreign Buyer USP sells CFC 1 to Foreign Buyer. In the same year as the sale to Foreign Buyer, but subsequent to the sale, CFC 1 sells CFC 2. CFC 1 11/1 USP Sells CFC, to Foreign Buyer CFC 1 CFC 2 CFC 2 12/1 CFC1 sells CFC2 for $100 Analysis 951 requires USP to include in gross income its pro rata share of CFC 1 s subpart F income. Pursuant to 951(a)(2) the pro rata share of CFC 1 subpart F income is $50 [10/12 * ($100-40)]. Value $100 Basis $ Deloitte Global Tax Planning Conference at Villanova University School of Law

139 Cross Border Transaction Pitfalls Loss of 1248 Amount Resulting from Post-Sale Dividend 1 2 Facts USP Foreign Buyer Foreign Buyer 11/1 $60 Dividend USP sells CFC 1 to Foreign Buyer. In the same year as the sale to Foreign Buyer, but subsequent to the sale, CFC 1 pays a dividend to Foreign Buyer. CFC 1 Basis $40 E&P $60 Taxes $50 11/1 USP Sells CFC, to Foreign Buyer for $100 CFC 1 Analysis The $60 of gain realized by USP on the sale is included as a dividend to the extent of CFC 1 s E&P. 139 Deloitte Global Tax Planning Conference at Villanova University School of Law

140 Cross Border Transaction Pitfalls Loss of 1248 Amount Resulting from Post-Sale Dividend (cont d) USP CFC 1 Basis $40 E&P $60 Taxes $50 1 Foreign Buyer 11/1 USP Sells CFC, to Foreign Buyer for $100 2 Foreign Buyer CFC 1 11/1 $60 Dividend Analysis (cont d) Under 1248 regulations the E&P of CFC 1 is first reduced by the distribution made by CFC 1 to Foreign Buyer. No portion of the $60 gain recognized by USP on the sale is considered a 1248 dividend. 140 Deloitte Global Tax Planning Conference at Villanova University School of Law

141 Cross Border Transaction Pitfalls Loss of FTCs Resulting from Post-Sale Lower Tier Dividend 1 2 Facts USP Foreign Buyer Foreign Buyer USP sells CFC 1 to Foreign Buyer. In the same year, but subsequent to the sale, CFC 2 pays a dividend to CFC 1, which is eligible for the samecountry exception. CFC 1 12/20 USP Sells CFC, to Foreign Buyer for $100 CFC 1 CFC 2 CFC 2 12/25 $60 Dividend Analysis Under 1248(c) the E&P taken into account by USP on the sale of CFC 1 includes the E&P of CFC 2. CFC 2 paid a dividend at a time when it was not a member of a qualified group as defined in 902(b). Basis $40 E&P $60 Taxes $ Deloitte Global Tax Planning Conference at Villanova University School of Law

142 Cross Border Transaction Pitfalls Loss of FTCs Resulting from Post-Sale Lower Tier Dividend (cont d) USP CFC 1 1 Foreign Buyer 12/20 USP Sells CFC, to Foreign Buyer for $100 2 Foreign Buyer CFC 1 12/25 $60 Dividend Analysis Although the E&P of CFC 2 moved to CFC 1 the taxes of CFC 2 leave its pool but did not move to CFC 1. Note that dividend is not eligible for 954(c)(6) because payor was not a CFC when dividend was paid. CFC 2 CFC 2 Basis $40 E&P $60 Taxes $ Deloitte Global Tax Planning Conference at Villanova University School of Law

143 Cross Border Transaction Pitfalls Internal Restructuring: In-Bound 304 Sale FP Note Facts FP sells the shares of USP, a company that is not a USRPHC, to FS for a note. USP Stock USP E&P FS E&P Analysis 304 sale may result in a deemed dividend from USP to FP, subject to U.S. withholding tax under USS USP No foreign-to-foreign dividend to the extent of FS s E&P because of 304(b)(5). USS 143 Deloitte Global Tax Planning Conference at Villanova University School of Law

144 Cross Border Transaction Pitfalls Internal Restructuring: In-Bound 304 Sale (cont d) Analysis (cont d) USP E&P FP USP Stock Note FS E&P Withholding obligation on FS under 1445 unless demonstrate USP is not a USRPHC (and file appropriate forms) before the sale. FP should consider file a U.S. tax return and report gain in USP stock unless comply with FIRPTA filing requirements. USS USP USS 144 Deloitte Global Tax Planning Conference at Villanova University School of Law

145 Cross Border Transaction Pitfalls Triangular Reorganization with OFL US 1 FT Basis $0 Value $400m 2 US 2 Stock USP FT Stock US 2 FS FT Common Stock 1 US 2 Stock Facts FS acquires the shares of US 2 and tenders those shares to US 1 in exchange for stock of FT, a CFC. The USP group has a Consolidated OFL. Analysis 904(f)(3)(D) provides that an OFL triggering event includes the disposition of CFC unless both conditions are met: The US transferor receives CFC stock in the exchange, and US transferor maintains the interest in the transferred CFC under Deloitte Global Tax Planning Conference at Villanova University School of Law

146 Cross Border Transaction Pitfalls Triangular Reorganization with OFL (cont d) Analysis (cont d) USP Amount of Gain recognized is the lesser of: US 1 2 US 2 Stock US 2 Common Stock 1 OFL as defined under 1.904(f)- 2(d)(4) to include the sum of: (1) prior year OFL balance, (2) current year OFL, (3) foreign source portion of an NOL carryforward and (4) any foreign source portion of a current year NOL (before recapture), or FT FT Stock FS US 2 Stock Gain realized by US 1. Basis $0 Value $400m FT 146 Deloitte Global Tax Planning Conference at Villanova University School of Law

147 Cross Border Transaction Pitfalls COFL Inherited on Purchase of Domestic Corporation Facts USS owns CFC, which is the only foreign asset in the USP group. USP USS Stock Buyer The USP group has a sizable Consolidated Overall Foreign Loss (COFL) attributable to activities that were disposed of in prior years. USS USS USP sells the shares of USS to an unrelated buyer. Analysis CFC CFC Because USS ceases to be a member of the USP consolidated group, the group must apportion to USS its share of the COFL. 147 Deloitte Global Tax Planning Conference at Villanova University School of Law

148 Cross Border Transaction Pitfalls COFL Inherited on Purchase of Domestic Corporation (cont d) USP Buyer Analysis (cont d) If CFC the only foreign asset of the group, then all of the COFL will be apportioned to USS. USS Stock USS USS CFC CFC 148 Deloitte Global Tax Planning Conference at Villanova University School of Law

149 Cross Border Transaction Pitfalls Calculating Ratable Share Under Treas. Reg (e)(2) Facts U.S. Parent 1966: U.S. Parent sells FC 2 In 1964, U.S. Parent and FC 1 form FC 2 and contribute $50 each. For 1964, FC 2 earned $30 of E&P, $10 of which is subpart F. FC 2 distributed $10 of PTI to FC 1 in a 302(d) redemption on the last day of FC 1 50% 50% U.S. Parent sells its interest in FC 2 for $ : 302(d) of $10 of PTI FC : Earns $10 of Subpart F and $20 of Non- Subpart F 149 Deloitte Global Tax Planning Conference at Villanova University School of Law

150 Cross Border Transaction Pitfalls Calculating Ratable Share Under Treas. Reg (e)(2) (cont d.) 1248 Analysis U.S. Parent 1966: U.S. Parent sells FC 2 302(d) redemption should be treated as a distribution for purposes of calculating the 1248 amount attributable to the two blocks of FC 2 stock. FC : 302(d) of $10 of PTI 50% FC 2 50% There is a question as to whether the PTI distribution excluded from the income of FC 1 under 959(b) should result in an increase of the 1248 amount during (d)(1) includes PTI E&P that is excluded from income under : Earns $10 of Subpart F and $20 of Non- Subpart F 150 Deloitte Global Tax Planning Conference at Villanova University School of Law

151 Cross Border Transaction Pitfalls Calculating Ratable Share Under Treas. Reg (e)(2) (cont d) FC : 302(d) of $10 of PTI U.S. Parent 50% 1966: U.S. Parent sells FC 2 FC 2 50% 1964: Earns $10 of Subpart F and $20 of Non- Subpart F 1248 Analysis (cont d) 1248(a), the determination of how E&P is attributable to stock of a CFC is made pursuant to regulations prescribed by the Secretary. Under the 1248 regulations, the ratable share of CFC E&P is calculated by making adjustments similar to those described in 1248(d)(1). Unlike the statute, the regulations only require an adjustment when there is an exclusion from income under 959(a)(1). See TR (e)(3)(iii) and (4) Example; TR (e)(2)(i) and (iii); (e)(6); TR (f)(5). 151 Deloitte Global Tax Planning Conference at Villanova University School of Law

152 Cross Border Transaction Pitfalls Calculating Ratable Share Under Treas. Reg (e)(2) (cont d) U.S. Parent 1966: U.S. Parent sells FC Analysis (cont d) Therefore, under the regulations, there is likely no increase in 1248 amount on the 302(d) redemption; there is only a reduction in the 1248 amount for the distribution of PTI. FC 1 50% 50% 1965: 302(d) of $10 of PTI FC : Earns $10 of Subpart F and $20 of Non- Subpart F 152 Deloitte Global Tax Planning Conference at Villanova University School of Law

153 Small ATB Spin-Offs

154 Small ATB Spin-Offs In General Treasury and the IRS are currently studying issues under section 337(d) (granting authority to issue rules related to GU-repeal) and section 355 for spin-offs where: Distributing or Controlled has a relatively small active trade or business (ATB) in relation to all of its assets; Distributing or Controlled holds investment assets with a substantial FMV in relation to FMV of all of its assets and ATB assets; The ratio of investment assets to non-investment assets differs significantly between Distributing and Controlled; or An election is made by Distributing or Controlled to be treated as a RIC or a REIT. See Notice In Notice , the government provides that spin-offs that exhibit one or more of the above characteristics may raise section 355 issues under the ATB Requirement, the Business Purpose Requirement, and the Non-Device Requirement. The government has publicly stated that any future guidance with the form of such guidance undecided will be prospective. In the meantime, the IRS has scaled back its ruling practice through three new no-rules and, in general, will not issue PLRs on spin-offs that exhibit the characteristics listed above. See Rev. Proc Deloitte Global Tax Planning Conference at Villanova University School of Law

155 Small ATB Spin-Offs Example Spin-Off Post-Spin-Off Public Public Company X 1 Company X NewCo <20% 2 <20% Company Z NewCo Company Z Company X owned less than 20 percent of Company Z, a publicly traded company, with the portfolio stock representing a substantial asset of Company X. Transaction: Step 1: Company X forms NewCo and transfers its minority interest in Company Z and a small ATB to NewCo. Step 2: Company X distributes NewCo to its shareholders. At the time of the spin-off, it is anticipated that the FMV of the ATB assets in NewCo would represent, e.g., less than 5 percent, of the FMV of NewCo s assets. 155 Deloitte Global Tax Planning Conference at Villanova University School of Law

156 Small ATB Spin-Offs Requirements: Rev. Proc and Notice No-Rule # 1. In Rev. Proc , the IRS set forth a no-rule that ordinarily applies to a spin-off if the gross assets of the ATB has a FMV less than 5 percent of the FMV of the gross assets of Distributing or Controlled (measured immediately after the spin-off). For the 5 percent threshold, all members of a separate affiliated group (a SAG ) are treated as a single corporation and may attribute gross assets of a partnership if rely on partnership business for ATB Requirement. The 5 percent no-rule generally does not apply to internal spin-offs. The no-rules apply to any issue relating to the spin-off s qualification under section 355 and related provisions (or to another spin-off which is part of the same plan or series of related transactions). Not ordinarily means that unique and compelling reasons must be demonstrated to issue the PLR. In Notice , the IRS states that Treasury and the IRS have concluded that, under current law, distributions involving a small ATB may have become less justifiable (noting that such transfers were common under the prior holding company rule in section 355(b)(2)(A)). Do Rev. Proc and Notice indicate a change in the IRS position that may be seen in IRS audit and exam? 156 Deloitte Global Tax Planning Conference at Villanova University School of Law

157 Small ATB Spin-Offs Requirements: Rev. Proc and Notice (cont d) No-Rule # 2. In Rev. Proc , the IRS includes as a no rule that will apply until further study is completed, a distribution where: The FMV of the investment assets of Distributing or Controlled is 2/3 or more of the FMV of its gross assets; The FMV of the gross assets of the ATBs on which Distributing or Controlled relies is less than 10 percent of the FMV of its investment assets The ratio of the FMV of the investment assets to the FMV of the non-investment assets of Distributing or Controlled is three times or more of such ratio for the other corporation. All members of a SAG treated as a single corporation and can attribute the gross assets of a partnership if rely on partnership business for ATB Requirement. Investment assets are defined by reference to section 355(g)(2)(B), with modification. The no-rule generally does not apply to internal spin-offs. The no-rule applies to distributions in which investment assets are disposed of or ATB assets are acquired for a principal purpose of avoiding the no-rule. The IRS provides in Notice that Treasury and the IRS believe that characteristics of the spin-offs described in the no-rules may overcome certain non-device factors : (i) public trading and (ii) non-pro rata distribution. 157 Deloitte Global Tax Planning Conference at Villanova University School of Law

158 Questions? 158 Deloitte Global Tax Planning Conference at Villanova University School of Law

159 Contact info Neil Feinstein Tax Director Deloitte Tax LLP Philadelphia E.J. Forlini Tax Principal Deloitte Tax LLP Washington National Tax 159 Deloitte Global Tax Planning Conference at Villanova University School of Law

160 Refreshment Break

161 Transfer pricing updates affecting US outbound groups November 20, 2015

162 Agenda Impact of BEPS on Outbound Transfer Pricing Country-by-Country (CbC) Reporting Master File / Local File Documentation Impact of Altera Corp. v. Commissioner on Outbound Transfer Pricing Impact of 482-1T(f)(2)(i) Temporary Regulations on Outbound Transfer Pricing 162 Deloitte Global Tax Planning Conference at Villanova University School of Law 162

163 Impact of BEPS on Outbound Transfer Pricing

164 Impact of BEPS on Outbound Transfer Pricing The Great Balance Shift Historically the US was one of the most aggressive and sophisticated TP tax administration in the 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 that MNEs engage into but third-parties do not US Environment Remains deeply committed to the ALS Few regulatory changes to implement BEPS expected Significant focus on outbound transfers of US 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 US is becoming relatively much less aggressive than many ROW countries (e.g., UK, Australia, Benelux, China, India) and it is likely that outbound pricing will reflect that change in the world balance. 164 Deloitte Global Tax Planning Conference at Villanova University School of Law

165 Impact of BEPS on Outbound Transfer Pricing, continued Tax administrations can go after 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 US expect increase use of re-characterization and nonrecognition Guidance provided in Chapter I of the OECD Transfer Pricing Guidelines for MNEs Follows general skepticism about the meaningfulness of intercompany contracts The US is unlikely to change the Regulations that provide The IRS has to respect a written contract that has economic substance regardless of whether or not third-parties would/do enter in 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) 165 Deloitte Global Tax Planning Conference at Villanova University School of Law

166 Impact of BEPS on Outbound Transfer Pricing, continued Contracts are becoming 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 US 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 Very technical, consult with advisers on what is necessary to establish control 166 Deloitte Global Tax Planning Conference at Villanova University School of Law

167 Country-by-Country (CbC) Reporting

168 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 country-by-country report 168 Deloitte Global Tax Planning Conference at Villanova University School of Law

169 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 US 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 169 Deloitte Global Tax Planning Conference at Villanova University School of Law

170 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 170 Deloitte Global Tax Planning Conference at Villanova University School of Law

171 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 171 Deloitte Global Tax Planning Conference at Villanova University School of Law

172 Adoption of CBC by the United States Proposed regulations on CbC implementation will be released by the end of calendar year 2015 Expected to follow closely the guidance on CbC provided by the OECD Required for companies with revenues in excess of $852M CbC will most likely not be part of the transfer pricing documentation under the authority of Section 6662 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 outbound U.S. companies will likely have to file a CbC report with the local foreign governments in which they do business Still unclear whether the CbC report will be collected in the U.S. with the tax return May be collected through some alternative filing mechanism 172 Deloitte Global Tax Planning Conference at Villanova University School of Law

173 Master File / Local File Documentation

174 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 174 Deloitte Global Tax Planning Conference at Villanova University School of Law

175 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 Position of Treasury is that there is mostly overlap between the information required under Section 6662 and the OECD Global File / Master File and Treasury/IRS have authority to require the information The U.S. is certainly not rushing to adopt the OECD Master File / Local File However, the latest statement by Treasury officials (Brian Jenn speaking at a meeting of the ABA section taxation 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 175 Deloitte Global Tax Planning Conference at Villanova University School of Law

176 Impact of Altera Corp. v. Commissioner on Outbound Transfer Pricing

177 Impact of Altera Corp. v. Commissioner on Outbound 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 (US 1983) This is likely the most significant Section 482 judicial decision ever because 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 casts doubts over the validity of a slew of other 482 regulations It has great precedential value including outside the 9th Circuit 177 Deloitte Global Tax Planning Conference at Villanova University School of Law

178 Impact of Altera Corp. v. Commissioner on Outbound Transfer Pricing Factual and Procedural Background Altera Corporation develops, manufactures, and sells programmable logic devices (PLDs) and related hardware, software, and predesigned building blocks for use in programming the PLDs On May 23, 1997, Altera US and Altera International (AI, its subsidiary incorporated in Cayman) entered into a technology license agreement (TLA) and a QCSA. Under the TLA, Altera US licensed to AI the right to use and exploit (everywhere except US and Canada), all of Altera US s intangible property relating to PLDs that existed prior to the CSA. Under the QCSA, Altera US and AI agreed to share costs and risks of research and development (R&D) activities they performed with respect to PLDs after 5/23/1997. During Altera s tax years 2004 through 2007, Altera US granted stock options and other stock based compensation (SBC) to some of its employees, including employees who performed R&D activities related to the intangible development area (IDA) of the CSA. Altera included the cash compensation provided to these employees in the joint cost pool for the QCSA, but not the amounts attributable to the SBC. 178 Deloitte Global Tax Planning Conference at Villanova University School of Law

179 Impact of Altera Corp. v. Commissioner on Outbound Transfer Pricing Legal Background In Xilinx v. Comm r (2010), the Ninth Circuit Court of Appeals upheld the Tax Court s decision that a previous version of the all costs rule (which did not specifically state that SBC must be included) was inconsistent with the arm s length standard and thus invalid. held that the arm s length standard requires an analysis of the actual behavior of unrelated parties rejected the IRS s interpretation of the arm s length standard, which allows for the possibility of a thought experiment to determine arm s length pricing Under the IRS s thought experiment, the correct price can be deduced by simply thinking about economic principles. Under this interpretation of the arm s length standard, the IRS maintains that it did not need to find a contract between uncontrolled parties where they shared SBC costs. Since the IRS conceded that it was not able to find any such contract where uncontrolled parties shared SBC costs, the Tax Court and the Ninth Circuit found in Xilinx that the IRS rule was not consistent with the behavioralist interpretation of the arm s length standard. 179 Deloitte Global Tax Planning Conference at Villanova University School of Law

180 Impact of Altera Corp. v. Commissioner on Outbound Transfer Pricing Practical Implications Many CSAs have clawback clauses indicating that the parties will follow the all costs rule unless and until it is invalidated by a final determination by a court or withdrawn by the IRS. If the clawback clause needs a final determination to be triggered, then it has not been triggered yet (because the IRS would need to fail to appeal in order for it to be final). Clients may also want to consider whether to file a protective claim or amended return to try to get refunds (or increases in NOLs) for prior years in which SBC was included in the joint cost pool for a QCSA. There may be a strong analog for the exclusion of stock-based compensation costs in contract R&D and other corporate services arrangements Such positions depend on the availability of evidence from uncontrolled agreements that such costs are not included in the cost base. 180 Deloitte Global Tax Planning Conference at Villanova University School of Law

181 Impact of Altera Corp. v. Commissioner on Outbound Transfer Pricing, continued Outbound structures where foreign IPCo 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 Outbound migration of US IP IP US Parent IPCo R&D Services ROW OpCo License 181 Deloitte Global Tax Planning Conference at Villanova University School of Law

182 Impact of Altera Corp. v. Commissioner on Outbound Transfer Pricing Further questions about the reach of Altera The court s reliance on the arm s length standard over a strict statutory interpretation of the 482 Treasure Regulations raises a fundamental question; specifically: Does the existence of arm s length behavior that directly contradicts the 482 Treasury Regulations allow Taxpayers to rely on those examples and circumvent the Treasury Regulations? Where else could the Altera decision be applied? Other sections of IP valuation methodologies JV arrangements 182 Deloitte Global Tax Planning Conference at Villanova University School of Law

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

184 Impact of Treas. Reg T(f)(2)(i) on Outbound 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 US 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 We believe that a number of other changes to the regulations issued under Section 482 are in the works Including a potential re-write of Treas. Reg (b)(1) (the ALS) Including a potential re-write of Treas. Reg (Intangibles) Most target perceived abuse in outbound transfers of IP 184 Deloitte Global Tax Planning Conference at Villanova University School of Law

185 Impact of Treas. Reg T(f)(2)(i) on Outbound Transfer Pricing (cont d) IRS application of Treas. Reg T(f)(2)(i) in an outbound context Step 1 - USP transfers IP to FS in a Section 351/367 transfer Step 2 - USP and FS enter into a CSA under Treas. Reg to further develop the IP transferred in Step 1 Taxpayer maintains that FS does not need to make a PCT payment for the items of value that it obtained in nonrecognition transactions in Step 1 How would the IRS analyze this under the Temporary Regulations? IRS may determine that the CSA fails to reflect the full scope of the value provided between the parties (i.e., excludes foreign goodwill) IRS may impute one or more agreements between USP and FS that fully reflect their respective reasonably anticipated commitments in terms of functions performed, resources employed, and risks assumed over time (i.e., add back foreign goodwill) IP planning following acquisitions and mergers In many cases, taxpayers would want to change the economic ownership of individual pieces of IP following a corporate merger or acquisition Under the new and recent guidance, the IRS would expect goodwill identified in a purchase price allocation study to be attached to or allocated to specific pieces of IP 185 Deloitte Global Tax Planning Conference at Villanova University School of Law

186 Questions? 186 Deloitte Global Tax Planning Conference at Villanova University School of Law

187 Contact info Kevin Croy Tax Senior Manager Deloitte Tax LLP Philadelphia Matt Damone Tax Senior Manager Deloitte Tax LLP Philadelphia Aydin Hayri Tax Principal Deloitte Tax LLP Washington 187 Deloitte Global Tax Planning Conference at Villanova University School of Law

188 Closing Remarks Richard Hyman November 20, 2015

189 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. 189 Deloitte Global Tax Planning Conference at Villanova University School of Law

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