Executive Tax Update 2014

Transcription

1 Executive Tax Update IADC International Tax Seminar Corporate Inversions 6 June 2014 Steven Surdell, EY Matthew Newnes, EY

2 Corporate expatriation transactions under Section 7874 Page 2

3 Corporate inversions Page 3

4 Overview An inversion is a transaction whereby a US corporation reincorporates, directly or indirectly, in a foreign jurisdiction. Two general types of inversions: Single company or Self inversion: recent tax law changes limit the circumstances in which these transactions are viable acquisition inversion: combination of US corporation and foreign corporation under a new publicly traded foreign parent corporation A US multinational group may obtain significant tax savings by inverting and restructuring. Reduction in ETR on future investment Reduction in US tax base through leverage Extracting or freezing value of existing foreign operations Page 4

5 Section 7874: Corporate-level Section 7874 applies if, pursuant to a plan (or series of related transactions), 1. A foreign corporation acquires, directly or indirectly, substantially all the properties of a domestic corporation; 2. After the acquisition, at least 60% of the stock (by vote or value) of the foreign corporation is held by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation; and 3. After the acquisition the expanded affiliated group that includes the foreign corporation does not have substantial business activities in the foreign corporation s country of incorporation, when compared to the total business activities of the expanded affiliated group. Page 5

6 Section 367(a): Shareholder-level 1. Inversion transactions may be taxable to the US shareholders of the US corporation under section 367(a)(1) 2. The regulations under section 367(a) provide an exception for transactions that satisfy four requirements: 1. 50% ownership test; 2. Control group test; 3. Substantiality test (which includes an active trade or business test); and 4. A gain recognition agreement is filed by a 5% shareholder Page 6

7 Section 4985: 15% Excise Tax 1. Section 4985 imposes a 15% excise tax on the FMV of the specified stock compensation of disqualified individuals with respect to an expatriated corporation 2. Specified stock compensation is defined broadly to include most forms of compensation the value of which is based on (or determined by reference to) the value of stock in the expatriated corporation. 3. A disqualified individual is an individual that at any time during the 12-month period beginning 6 months before the inversion date is subject to the requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to the expatriated corporation (or any members of its expanded affiliated group) or would be subject to such requirements if the domestic corporation or a member of its expanded affiliated group were an issuer of equities referred in section 16(a) of the Securities Exchange Act of Section 4985 applies only if shareholders of expatriated entity recognize gain with respect to their stock in the expatriated entity in an inversion transaction. Page 7

8 Self Inversion Public A Self inversion only possible if New FP is incorporated in a country where the worldwide group has substantial business activities Substantial Business Activities in Country X? New FP Country X Substantial business activities defined: 25% of the EAG s employees (by head count and compensation) are based in Country X; US Target 25% of the EAG s tangible and real property used or held for use in active trade or business is located in Country X; and 25% of the EAG s trade or business gross income derived from unrelated customers is from customers located in Country X. US Subs CFCs If New FP fails substantial business activities test, New FP is treated as a US corporation for US tax purposes, notwithstanding any treaty obligation. Page 8

9 Case Study Most Recent Public Self Inversion Before Spin (Simplified) Public Public USP US Business B USP Dutch CFC New US B Co Business A Dutch CFC Business A New US B Co Dutch CFC Business B Dutch CFC Business B Business B Page 9

10 Case Study Most Recent Public Self Inversion Before After Public Public New US B Co Merge New Dutch Dutch CFC New Dutch New US B Co Business B US Merger Sub Dutch CFC Business B Page 10

11 Case Study Most Recent Public Self Inversion Before After Public Public USP USP New Dutch Business A Dutch CFC Business A New US B Co Business B Dutch CFC Business B Page 11

12 Other considerations for Section 7874 Page 12

13 Case Study Beginning Structure Cayman (Cayman) M Co 1 M Co % Other investors 25.19% India M Sub Coop (Netherlands) US LLC (US) Page 13

14 Case Study Cayman (Cayman) M Co 1 M Co % Other investors 25.19% India M Sub US LLC (US) Coop (Netherlands) NewCo (Canada) Page 14

15 Case Study Cayman (Cayman) M Co 1 M Co % Other investors 25.19% India M Sub Stock Coop (Netherlands) M Sub NewCo (Canada) US LLC (US) Page 15

16 Case Study Cayman (Cayman) M Co % M Co 2 India 25.19% Other investors Additional Capital of NewCo Coop (Netherlands) M Sub Stock NewCo (Canada) M Sub US LLC (US) Page 16

17 Case Study Cayman (Cayman) M Co % M Co 2 India 25.19% Other investors Coop (Netherlands) NewCo (Canada) M Sub US LLC (US) Page 17

18 Case Study Cayman (Cayman) M Co 1 M Co % India 25.19% Other investors Private investor Coop (Netherlands) Shares <20% Cash >80% NewCo (Canada) M Sub US LLC (US) Page 18

19 Case Study Cayman (Cayman) M Co 1 M Co % 25.19% Other investors India Private investor Coop (Netherlands) IPO <20% >51% NewCo (Canada) Cash TBD% Shares M Sub US LLC (US) Page 19

20 Case Study Cayman (Cayman) M Co 1 M Co % 25.19% Other investors India Private investor Secondary investor Cash Shares Coop (Netherlands) IPO <20% TBD% >51% NewCo (Canada) TBD% M Sub US LLC (US) Page 20

21 Case Study Ending structure Cayman (Cayman) M Co 1 M Co % 25.19% Other investors India Private investor Secondary investor Coop (Netherlands) IPO <20% TBD% >51% NewCo (Canada) TBD% M Sub US LLC (US) Page 21

22 acquisition inversions Page 22

23 Acquisition Inversion Basic Acquisition Structure Public A Public B USP Target US Sub CFCs US Subs Subs acquisition inversion permits use of the value of Target and the business activities of the Target group to minimize the impact of the inversion rules Timing and form of transaction is critical to achieve objectives Target must be acquired first and some (or all) of Target s shareholders must receive shares of New. Page 23

24 Acquisition Inversion Post-Acquisition Structure Public A Public B X% Y% New Country X The relevant ownership in New is that of Public A, the former shareholders of USP Stock owned by all Public A shareholders (not just US shareholders) is relevant Stock owned by Public B shareholders is favorable for inversion purposes. USP Target In determining whether substantial business activities exist in Country X, the business activities of the worldwide group are taken into account (including all USP and Target subsidiaries) US Subs CFCs US Subs Subs Page 24

25 Acquisition Inversion Corporate and Shareholder Consequences Former USP Shareholders Ownership 80% > 60% but < 80% > 50% but < 60% < 50% New Respected as Corporation No, treated as domestic Yes Yes Yes Shareholder Level Gain on Stock Exchange - Yes Yes No Excise Tax on Certain Deferred Equity Comp - Yes No No USP Subject to Inversion Gain Rules - Yes No No Page 25

26 Trend in Recent Public Transactions Most companies cannot satisfy the new 25% substantial business assets rule, so they have to rely on not meeting the 80% continuity requirement (the 60% threshold which restricts certain attributes is not usually a serious obstacle) The Section 367(a) shareholder level tax is not generally a real issue US Acquiror Target New Global HQ Premium Paid Tax Savings Liberty Global Virgin Media (UK) UK 24% 21% UK rate vs. 35% US rate Endo Health Paladin Labs (Canada) Ireland 20% ETR drop from 28% to 20% Perrigo Elan (Ireland) Ireland 10.5% ETR drop from 30% to 17% Applied Materials Tokyo Electron (Japan) Netherlands 5% ETR drop from 22% to 17% Page 26

27 President Obama FY 15 Budget Proposal Replace the 60% and 80% tests with a greater than 50-percent test Regardless of the level of shareholder continuity, an inversion transaction will occur if the affiliated group that includes the foreign corporation has substantial business activities in the US and the foreign corporation is primarily managed and controlled in the US The definition of substantial business activities in the US uses a similar 25% threshold but a broader standard looking at 25% or more of employees, sales and income, or assets. An inversion transaction can occur if there is an acquisition either of substantially all of the assets of a domestic partnership (regardless of whether such assets constitute a trade or business) or of substantially all of the assets of a trade or business of a domestic partnership. Page 27

28 Levin Anti-Inversion Bill Stop Corporate Inversions Act of 2014, introduced in the Senate May 20, 2014 Resembles Administration s FY 2015 budget proposal, except that the Obama proposal, if enacted, would not apply to transactions closed by December 31, 2014 Senate bill contains a two-year sunset clause (i.e., through 2016) Companion bill to be introduced in the House would be a permanent restriction on inversions Page 28

29 Acquisition Inversion Public A Public B The relevant ownership in New is that of Public A, the former USP shareholders X% Y% New Country X What planning is available to reduce Public A s ownership in New? Public offering/private placement of New stock? USP Target Cashing out some of Public A shareholder group? Can New provide the cash? What about USP? What if Public A purchases New stock from Public B? US Subs CFCs US Subs Subs What if Public B sells some its stock on the market? What if New redeems some of the Public B shareholders? Page 29

30 Recent Developments Reducing Value of Stock Received in Exchange for USP Stock Public A Public B 1 Distribution USP New FP Stock New 2 Target 3 USP merges into US Merger Sub US Merger Sub Target 1. USP pays a special dividend or authorizes an increase in its share buyback program. 2. New acquires Target in a share-for-share exchange. 3. USP is merged with and into US Merger Sub, with USP s former shareholders receiving shares of New stock in a transaction that qualifies as a reorganization under section 368(a)(1)(A) and (a)(2)(d). 4. What if USP shareholders receive cash as boot in New s acquisition of USP? Page 30

31 Recent Developments Target Asset Sale Public A USP New FP Stock New 2 Public B Target 1 Assets Purchaser Cash/Note 3 USP merges into US Merger Sub US Merger Sub Target 1. Target sells or licenses all or a portion of its trade or business assets to an unrelated purchaser in exchange for cash, a note, or other consideration. 2. New acquires Target in a share-for-share exchange. 3. USP is merged with and into US Merger Sub, with USP s former shareholders receiving shares of New stock in a transaction that qualifies as a reorganization under section 368(a)(1)(A) and (a)(2)(d). 4. What is the impact of Section 7874(c)(4) and/or Temp. Reg T(c)(1)(i)? Page 31

32 Recent Developments Expatriating via a Triangular Reorganization Public A USP New FP Stock US Merger Sub Purchases New FP Stock New 1 Public B Target 3 USP merges into US Merger Sub 2 US Merger Sub Target 1. New acquires Target in a share-for-share exchange 2. US Merger Sub acquires New Stock in exchange for a note 3. USP is merged with and into US Merger Sub, with USP s former shareholders receiving shares of New stock (some portion of which were acquired by US Merger Sub in prior step) in a transaction that qualifies as a reorganization under section 368(a)(1)(A) and (a)(2)(d). 4. Changes to section 367(b) priority rule announced in Notice Page 32