US Tax Legislative/ Regulatory Update

Transcription

1 Institute of International Bankers Annual Tax Seminar US Tax Legislative/ Regulatory Update June 19, 2012 Eric Atkerson, TD Securities (USA) LLC (moderator) Mitch Moetell, Winston & Strawn LLP Diana L. Wollman, Sullivan & Cromwell LLP Attorney Advertising Prior results do not guarantee a similar outcome. 0

2 Economic Substance Regulatory Developments LMSB (9/14/10) LB&I (7/11/11) CC (4/3/12) 1

3 7701(0) economic substance Two LBI Directives to Exam Function LMSB (9/14/10) Any assertion of 6662(b)(6) penalty must be approved in advance by the appropriate Director of Field Operations. LB&I (7/11/11) Instructs examiners and managers on how to determine when it is appropriate to seek that DFO approval. 4-step series of inquires that must develop and analyze before going to DFO. Including: do not use 7701(o) if there is another more appropriate doctrine or rule. 6662(b)(6) and (i) and 6676 penalties apply only to 7701(o) economic substance doctrine and not to application of any other similar rule of law until further notice. 2

4 Chief Counsel Notice goes further CC (4/3/12) instructs Chief Counsel attorneys on three matters: (1) instructions regarding Counsel s role during an exam that involves 7701(o) or the common law economic substance doctrine; (2) instructions for Counsel s review of a statutory notice of deficiency or final partnership administrative adjustment that asserts lack of economic substance ; (3) procedures involving litigating 7701(o) or the common law economic substance doctrine. 3

5 CC :The Interesting Details at Examination Stage 1. When advising Exam on whether 7701(o) and 6662(b) are appropriate, Counsel should consider the factors outlined in the LB&I directives even if the case originates in a division other than LB&I. 2. When advising Exam on the common law economic substance doctrine, Counsel should consider the factors outlined in the LB&I directives. Note that the LB&I Directives cannot be relied upon by taxpayers, but it seems they are being given authority and weight internally at the IRS. 4

6 CC :The Interesting Details at Exam when taxpayer has a PLR 3. If the taxpayer received a favorable PLR on the transaction and is now at Exam where economic substance (common law or 7701(o)) is being considered, the CC gives instructions on how Counsel should proceed in order to determine if the PLR should be revoked and then having it revoked. The CC notes that, because economic substance is a no-ruling area, the PLR will not have discussed it. So, Counsel would be initiating a revocation based upon economic substance when the PLR never addressed economic substance. 5

7 CC :The Interesting Details at Litigation Stage 4. Before Counsel raises economic substance ( 7701(o) or common law) as a new issue in a Tax Court case (or in a letter to the DOJ in a case handled by the DOJ), must coordinate with Division Counsel headquarters and Office of the Associate Chief Counsel (Procedure & Administration) 5. Before filing any brief or motion that addresses economic substance doctrine ( 7701(o) or common law), National Office must review. 6

8 7874 Expatriation Rules Regulatory Developments But only the part that will be interesting to those who contemplate never being involved in an expatriation. 7

9 Temp. Regs T (6/7/12) 7874: the onerous U.S. tax consequences imposed on a US corporation or U.S. partnership that inverts into a foreign entity. What s interesting about these new Temp. Regs.? 1. The specifics of the test for whether a multinational group has substantial business activities in the foreign jurisdiction where it is organized when compared with its total business activities worldwide. 2. How these Temp. Regs. differ from the 2006 and 2009 Regulations. 8

10 The specifics of the new bright-line test are what is interesting Test has four parts, all of which must be passed by the expanded group : Two tests based upon where employees are located; One test based upon where assets are located; and One test based upon where income is derived. 7874(c)(1): expanded group includes all corps linked by at least 50% ownership (vote & value). Partnerships in which the expanded group is a partner? 2012 Temp. Regs. attribute employees, assets, and income from a partnership only if the group owns more than 50% of the partnership by value. And then there is 100% attribution. 9

11 The Two Employee Tests 1. At least 25% by headcount must be based in the foreign country (on inversion date); and 2. At least 25% of total compensation must be paid to employees based in the foreign country (during one year period preceding inversion date). An employee is based in the foreign jurisdiction if he/she spends more time providing services there than in any other single country. Part-time employees are not excluded (so included?). Preamble requests comments on whether partners in a partnership should be counted as employees of the partnership. 10

12 Asset Test: at least 25% of group s assets are located in foreign country Only tangible property, used in the active conduct of a trade or business, by a group member. Value = FMV or adjusted tax basis (consistency req d). Tangible property that is rented by a group member from a nongroup member: must be taken into account and value = 8 x net annual rent. An asset is located in the foreign country only if physically present there both on inversion date, and for more time than any other country during the preceding year. 11

13 Income Test: at least 25% of group income derived in foreign country Gross income during the year preceding inversion. From transactions occurring in ordinary course of business with unrelated customers. Derived in foreign country: if derived from a transaction with a customer located in that country. 12

14 Anti-abuse Kick-out Rules Certain items are kicked-out of numerator, but still included in denominator. Any assets, employees or income located in/derived in the foreign country with a principal purpose of avoiding the purposes of 7874, or such assets or employees, or the business activities to which the income is attributable, are subsequently transferred to any country in connection with a plan that existed at the time of the inversion. So much for a bright-line test? 13

15 What is interesting about how we got to these 2012 Temp. Regs Temp. Regs.: determination is based upon all the facts and circumstances. Safe harbor: 10% or more of employees, assets and income Temp. Regs.: all the facts and circumstances. No safe harbor Temp. Regs.: bright-line, which is now 25%. Was the IRS influenced by the continuation of expatriations? 14

16 304 Transactions Regulatory Developments Notice

17 Notice : New Rules For Cross-Border 304 Transactions New Rules apply when a 304 transaction involves a foreign purchasing corporation. 304 recap: 304 applies when one subsidiary ( purchaser ) purchases a sister subsidiary ( target ) from the parent of both of them. Parent is deemed to contribute the target shares to the purchaser as a 351 contribution; and purchaser is treated as redeeming those shares with the cash purchase price. If this was a real 351 to a foreign corporation, 367 would apply. Prior to 2006, practitioners wondered if 367 did or did not apply to the 304 deemed transactions. 16

18 The IRS Gives the Answer (three times) 2006 Regulations: 367 does not apply Temporary Regulations: 367 still does not apply, but if the taxpayer does not recognize the entire amount of gain that it should on the deemed redemption, the additional gain must be recognized Notice: 367 always applies, but taxpayer can enter into a Gain Recognition Agreement under 367 to defer the gain. What s going on? 17

19 A Development Relating to Repatriation That You Might Have Missed 18

20 US Senate Permanent Subcommittee on Investigations investigates Offshore Funds Located Onshore No, this is not a typo. December 14, 2011 Report: an addendum to an October 2011 report on the 2004 Tax Windfall for Select Multinationals. Otherwise known as 965. Available at TNT (10 pages). While undertaking the 965 investigation, the Staff got interested in where multinational actually put all that trapped offshore cash. So, they commissioned a follow-on study that was reported on in December

21 December Report Results The 27 multinationals surveyed had $538 Billion in undistributed accumulated foreign earnings. 18 of them had over $10 billion standing alone. Estimated total for all multinationals: $1.4 Trillion. So the surveyed 27, represent at least 1/3 of the total. Of the 27 surveyed and their $538 billlion, 46% of that amount was actually held in U.S. bank accounts, U.S. Treasuries or shares of unrelated U.S. corporations. 20

22 December Report Conclusions Almost half of the funds that corporations identify as being offshore are really onshore. This undermines the argument that undistributed accumulated foreign earnings are "trapped" abroad, because nearly half of those funds are already located right here in the United States. U.S. multinational are already well aware that they can invest their offshore funds in U.S. assets, without those funds being deemed repatriated or taxed, because that is what they are doing with a significant amount of those funds. another tax break is not needed for those foreign earnings to be "returned" to the United States. 21

23 December Report Conclusions cont d Investing funds in the U.S. while deferring paying taxes on foreign income raise significant tax fairness issues. They gain a host of benefits from [investing in the U.S.], including the ability to make safe and secure investments using a currency that maintains its value, an efficient and reliable banking system, regulated capital markets, a legal system that protects property rights, and a government that is steadfast in upholding the value of its currency. U.S. tax dollars pay for those benefits, including. The surveyed corporations are enjoying those advantages while deferring payment of the taxes that support it. A new repatriation tax break would only exacerbate that existing tax unfairness. 22

24 A 956/ Notional Principal Contract/ Dodd-Frank Regulatory Development 23

25 Temp. Regs T: applying 956 to notional principal contracts Fall-out from Dodd-Frank Act. A notional principal contract with an upfront payment: upfront payment is treated as a loan (under ). Dodd-Frank requires many credit default and interest rate swaps to be cleared through a US clearinghouse. US clearinghouses only clear standardized swaps So parties use upfront payments to essentially mark-to-market the standardized swap. If the party making the upfront payment is a CFC, this loan to the US clearinghouse could be a 956 investment. 24

26 T solution: the deemed loan is not a 956 investment if 1. the CFC that makes the upfront payment is a dealer in securities or commodities within the meaning of 475; 2. the upfront payment is required under a contract that is cleared by a derivatives clearing organization or a clearing organization that is registered as such under the Commodities Exchange Act or the Securities Exchange Act; 3. the CFC makes the upfront payment to the clearing organization (or to or through a US person that is a clearing member of the clearing organization); 4. the clearing organization makes the upfront payment to the original counterparty to the transaction; 25

27 T solution: the deemed loan is not a 956 investment if cont d 5. the original counterparty is required by the clearing organization to make a payment of equivalent amount as variation margin back to the clearing organization on the same day; and 6. the clearing organization pays the variation margin payment over to the CFC. The industry requested these Regulations and was reportedly very pleased. Preamble states that IRS/Treasury is considering extending the same rules to non-cleared contracts. 26

28