University of Chicago Law School. The 66 th Annual Federal Tax Conference Inversion Transactions. November 8, Hal Hicks. Beijing.

Transcription

1 University of Chicago Law School The 66 th Annual Federal Tax Conference Inversion Transactions November 8, 2013 Hal Hicks Beijing Houston Palo Alto Tokyo Boston London Paris Toronto Brussels Los Angeles São Paulo Vienna Chicago Moscow Shanghai Washington, D.C. Frankfurt Munich Singapore Wilmington Hong Kong New York Sydney 1

2 Introduction and Overview Corporate migrations or inversions have tended over the years to come in waves of activity A wave of transaction activity is typically followed by a government response, followed by a period of inactivity, followed by renewed activity as transactional adjustments are made, followed by a government response and so forth McDermott inversion of a U.S. corporation under its existing CFC in a tender transaction in the 1980 s» Followed by the government response of section 1248(i) that required income inclusion by the U.S. corporation for certain earnings of the CFC 2

3 After a period of inactivity, the Helen of Troy inversion occurred in the mid 1990 s using a newly formed foreign corporation and avoiding section 1248(i) Followed by government response in Treas. Reg (a)-3(c) that requires a shareholder level gain recognition for most inversion transactions (and many combination transactions) Eventually, the shareholder level tax was outweighed by potential benefits including (1) future growth outside the U.S., (2) efficiently leveraging the U.S. operations and (3) various out from under and other planning Another period of relative inactivity was followed by the rebirth of these transactions in the late 1990 s and early 2000 s when for a variety of reasons the shareholder level tax of section 367 lost its punch (Ingersoll Rand, Cooper Industries, etc.) Followed by government response in 2004 of section 7874, which in certain circumstances can, among other things, treat the new foreign parent as a domestic corporation for U.S. tax purposes Keys off of (1) substantial business activities requirement and (2) shareholder continuity requirements 3

4 Eventually followed by another wave of activity as corporations were able to satisfy for example the substantial business activities requirement of section 7874 and the underlying regulations Ensco, Aon, Rowan, Sara Lee, etc. Ongoing changes to the section 7874 regulations in this regard 1) First had a facts and circumstances test and a safe harbor (10% test) 2) Then eliminated the safe harbor 3) Then eliminated the facts and circumstances test and replaced it with a bright line 25% test Liberty Global/Virgin Media combination satisfied the 25% test In mid to late 2000 s also saw the redomicilation of many previously inverted corporations from, e.g., Bermuda with Barbados tax residence to Ireland or Switzerland (Ingersoll, Cooper, Transocean, Foster Wheeler), etc. Change in relevant treaties, legislative proposals, and other reasons 4

5 A different and current wave involves cross border combination transactions that while often not satisfying the substantial business activities requirement, are able to satisfy the shareholder continuity requirement (generally by having less than 80 percent continuity) Biovail/Valeant, Eaton/Cooper, Actavis/Warner, Perrigo/Elan, etc. Key jurisdictions considered for foreign parent of the combined group include the U.K., Ireland and Switzerland Related considerations include skinny down dividends of the U.S. corporation for section 367(a) purposes and the coordination rule for Treas. Reg (a)-3(c) and Treas. Reg (b)-10 5

6 Expecting additional and updated guidance under section 7874 Notice : guidance and notice of future regulations regarding stock of a foreign corporation that will be disregarded for purposes of the section 7874 ownership tests (the 80% threshold) certain transactions for example involving stock acquired for cash or other nonqualified property Always the potential subject of legislation and other proposals the Levin mind and management proposal, earning stripping proposals, etc. 6

7 Panel will address in more detail the history of transactional structures, followed by government responses, followed by modified structures, followed by government responses, etc. Culminates in the current focus on combination transactions of unrelated corporations and the 80% continuity threshold However, the discussion will also address underlying policy and administrative considerations of this area of cross-border migration and combination Going abroad at birth versus mid-life? Comparison of U.S. and U.K. responses to these migrations Included in this will be considerations of the factors that drive these transactions Failure of U.S. to reform its tax system? Creation of a level playing field with non-u.s. tax systems? Other 7

8 Main presentation will be by Steve Surdell of Ernst & Young Commentary provided by Lew Steinberg of Credit Suisse John Merrick of IRS Chief Counsel to provide Government views and reactions 8