Attribute planning and reporting for strategic transactions

Transcription

1 Attribute planning and reporting for strategic transactions Mike Medley, Ernst & Young LLP Stephen O Neil, Ernst & Young LLP Sue Lippe, Ernst & Young LLP John Morris, Ernst & Young LLP

2 Disclaimer Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP. Page 2 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

3 Your presenters Mike Medley Ernst & Young LLP Iselin, NJ Sue Lippe Ernst & Young LLP Chicago, IL Stephen O Neil Ernst & Young LLP New York, NY John Morris Ernst & Young LLP Washington, DC

4 Objectives Intangible property (IP) partnership planning attribute and reporting nuances Gain recognition agreement (GRA) considerations New proposed GRA compliance regulations Don t forget these important reporting requirements Section 901(m)

5 IP partnership considerations

6 Simplified corporate structure Pre-transaction structure Finance 2 has loans outstanding to limited risk distributors (LRDs). Finance 1 has loans outstanding to Operating BV. LRDs have loans outstanding to Operating BV. Operating BV pays a royalty to US Parent for various trademarks and licenses. Royalty Non-CTB Non-check-the- Subs box (Various) (CTB) Subs (Various) Creditor 3 Parent (US) Holding CV Holding BV Operating BV LRDs 2 1 Debtor Finance 1 (Non-US) Finance 2 (Non-US) Page 7 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

7 Transaction structure issues and considerations Royalty Non-CTB Subs Non-CTB (Various) Subs (Various) Creditor Simplified post-transaction structure Parent (US) Holding CV New CV Holding BV Operating BV LRDs Debtor Finance 1 (Non-US) Finance 2 (Non-US) Transaction Together, Holding CV and Parent form New CV, an entity that would be treated as a partnership (i.e., look-through) for US and foreign purposes: Holding CV contributes its interest in Holding BV, Finance 1 and Finance 2 to New CV in exchange for an interest in New CV. Parent contributes IP to New CV in exchange for an interest in New CV. Issues/considerations 1. Business purpose 2. Valuation; IP and subsidiaries 3. Transfer pricing 4. Basis computations 5. Dual consolidated loss 6. Subpart F 7. Partnership considerations Application of Sections 702, 704, 721, 901 and Foreign currency (Section 987) 9. Foreign tax credit (FTC) considerations Overall foreign loss (OFL) and separate limitation loss (SLL) Application of Sections 901(m), 902 and Non-US issues Amortization/deduction Transfer and capital gain taxes Partnership status 11. Tax-accounting considerations 12. Tax compliance Page 8 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

8 Formation of New CV reporting requirements Simplified structure Parent (US) Transaction Together, Holding CV and Parent form New CV, an entity that would be treated as a partnership (i.e., look-through) for US and foreign purposes. Royalty Holding CV Transaction step reporting requirements Non-CTB Subs Non-CTB (Various) Subs (Various) New CV Holding BV Operating BV LRDs Finance 1 (Non-US) Finance 2 (Non-US) Determination of foreign partnership status In general, a foreign partnership is a partnership that is not created or organized in the United States. New CV is a partnership organized in the Netherlands, so it will be considered a foreign partnership for US federal income tax purposes. Similarly, a foreign eligible entity is, by default, a partnership if it has two or more members and at least one member does not have limited liability. Since New CV will have at least one member that does not have limited liability, New CV should default to a partnership for US federal income tax purposes. However, a protective entity classification election (Form 8832) should be filed for New CV to further ensure treatment as a partnership for US federal income purposes. Creditor Debtor Page 9 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

9 Formation of New CV reporting requirements (cont.) Simplified structure Transaction reporting requirements (cont.) Royalty Parent (US) Holding CV New CV Determination of controlled foreign partnership status A controlled foreign partnership (CFP) is a foreign partnership that is controlled by a US person at any time during such partnership s tax year. Control is defined as more than a 50% interest in such partnership. A 50% interest in a partnership is an interest equal to 50% of the capital, 50% of the profits, or 50% of the deductions or losses. Section 267(c) constructive ownership rules apply. Non-CTB Subs Non-CTB (Various) Subs (Various) Holding BV Operating BV LRDs Finance 1 (Non-US) Finance 2 (Non-US) Parent, a US person, directly owns a less than 25% interest in New CV. However, Parent is also considered to constructively own a 100% interest in New CV under Section 267(c) such that New CV should be considered a CFP. As such, Parent is both a 10% direct US partner and is a controlling US partner of New CV. Form 8865 filing requirement Parent will be the filer of New CV Form 8865 as category 1, 3 and 4 filers including page 1 of Form 8865, Schedule A, A-1, A-2, B, D, K, L, M, M-1, M-2, N, K-1, O and P. Creditor Debtor Since New CV is a CFP, a Form 8858 (Information Return of US Persons With Respect to Foreign Disregarded Entities (DRE)) for each DRE under New CV needs to be attached to the Form 8865 for New CV to reflect tax owner and direct owner. Page 10 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

10 Formation of New CV reporting requirements (cont.) Simplified structure Transaction reporting requirements (cont.) Royalty Parent (US) Holding CV New CV Holding BV Form 1065 filing requirement A foreign partnership may also be required to file Form 1065 if such foreign partnership has gross income effectively connected with the conduct of a trade or business within the United States, or has gross income derived from sources within the United States, even if its principal place of business is outside of the US. However, there is an exception to the Form 1065 filing requirement if the foreign partnership had no effectively connected income during its tax year, had US source income of $20,000 or less during its tax year, allocated less than 1% of any partnership item of income, gain, loss, deduction or credit in the aggregate to direct US partners at any time during its tax year and the partnership is not a withholding foreign partnership. Operating BV Finance 1 (Non-US) Finance 2 (Non-US) Note: If New CV has any US source income in its tax year, it will be required to file Form 1065 due to the fact that New CV allocates more than 1% of its partnership items to Parent, a US direct partner. Non-CTB Subs Non-CTB (Various) Subs (Various) LRDs If New CV is required to file Form 1065, overlapping schedules may be used to replace equivalent schedules under Form Standard first-year partnership elections should be attached to New CV Form 1065, if filed. Creditor Debtor Page 11 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

11 Formation of New CV reporting requirements (cont.) Simplified structure Transaction reporting requirements (cont.) Parent (US) Disclosure statements No additional disclosure statement is required for the Section 721 partnership formation transaction. Royalty Holding CV Section 704(c) analysis If Form 1065 is filed, the contribution of built-in gain or loss property will need to be reported on each partner s Schedule K-1 (Item M with supporting K-1 footnote). New CV Holding BV Operating BV Finance 1 (Non-US) Finance 2 (Non-US) TI calculation for US partner vs. earnings and profits (E&P) for foreign partner All items of income, gain, loss and deduction reported on various schedules of Form 8865 or Form 1065 are calculated based on US taxable income principles. If a controlled foreign corporation (CFC) is a partner of a CFP, the distributive share of its income, gain, loss and deduction from such CFP should be adjusted to reflect such CFC s earnings and profits. Non-CTB Subs Non-CTB (Various) Subs (Various) LRDs Continuation of GRA You would need to confirm that Non-CTB Subs are or are not subject to annual GRA certification filing. The contribution of shares of the foreign subsidiaries to New CV by Holdings CV does not constitute a triggering event if there is still a GRA in effect. However, a continuation of a GRA statement would need to be filed for the contribution. Creditor Debtor Page 12 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

12 Formation of New CV quantitative considerations Simplified structure Quantitative modeling considerations Parent (US) Detailed modeling to understand the Section 704(c) allocation method should be performed Detailed basis study should be performed Royalty Holding CV Analysis of current and future E&P Analysis of current and future Section foreign tax credit (FTC) pools New CV Detailed US foreign tax credit computation Holding BV Operating BV Finance 1 (Non-US) Finance 2 (Non-US) Non-CTB Subs Non-CTB (Various) Subs (Various) LRDs Creditor Debtor Page 13 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

13 GRA considerations

14 GRA considerations USS CFC HoldCo1 CFC HoldCo2 USP CFC1 CFC2 CFC2 Year 1: USP (US transferor, or UST) contributes CFC2 (transferred corporation, or TFD) to CFC1 (transferee foreign corporation, or TFC) in a Section 351 exchange. USP files a GRA with respect to CFC2. Page 15 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

15 GRA considerations (cont.) A.Stock of USS USS CFC HoldCo1 CFC HoldCo2 A.Cash USP B.Stock of USS B.Stock of CFC1 C.Stock of CFC1 CFC1 CFC1 CFC2 Year 2: A. CFC HoldCo1 acquires stock of USS for cash. B. USP transfers CFC1 to CFC HoldCo 1 in return for USS stock Triangular B reorganization. C. CFC HoldCo1 contributes CFC1 to CFC HoldCo2 in a Section 351 exchange. CFC1 CFC2 CFC2 Page 16 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

16 GRA considerations (cont.) A.Stock of USS USS CFC HoldCo1 CFC HoldCo2 CFC1 CFC2 A.Cash USP B.Stock of USS B.Stock of CFC1 C.Stock of CFC1 CFC1 CFC2 CFC1 CFC2 Year 2: USP files a gain recognition agreement with respect to CFC1. What about CFC2? USP files a new GRA with respect to CFC2 stock transferred outbound in Year 1 as a result of Step B. What about Step C? USP files a new GRA with respect to: Stock of CFC2 transferred outbound in Year 1 Stock of CFC1 transferred outbound in Year 2 Page 17 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

17 New proposed GRA compliance regulations

18 New proposed GRA compliance regulations On 31 January 2013, the Internal Revenue Service (IRS) issued new proposed regulations that would amend the existing rules under 367(a) and 6038B governing the consequences to US persons for failing to file GRAs and related documents. New proposed regulations provide: Changing the requirement for taxpayers to establish reasonable cause when seeking relief from gain recognition after failing to properly file a GRA to a standard based on willful failure. Willful failure includes intentionally not providing adjusted basis and/or fair market value, including noting that information is available upon request. Now require limited Form 926 ( Return by a US Transferor of Property to a Foreign Corporation ) reporting with all GRAs. 6038B penalty would now apply to GRAs and associated documents. Current reasonable cause standard would continue to apply to US transferors seeking relief from the 6038B penalty. Page 19 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

19 New proposed GRA compliance regulations (cont.) Same willful standard for GRAs and similar relief from such penalties would now apply for failure to file or comply with notices required under 367(e)(2) for liquidating distributions, as well as notices required under Treas. Reg (a)-3 in connection with certain outbound transfers of stock, securities or assets of domestic corporations. Proposed regulations would apply to GRAs and notices under 367(e)(2) and Treas. Reg (a)-3 that are required to be filed with a timely filed return on or after the date final regulations are published, as well as for any requests for relief for failures to file or failures to comply, if the requests are submitted on or after the date final regulations are published. July 2010 Industry Director Directive, LMSB , relating to relief for GRAs, remains in effect for the time being. The IRS has indicated that it will be withdrawn in the near term. Page 20 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

20 Don t forget these important reporting requirements

21 Frequently missed statements GRAs and related filings (e.g., new GRAs, annual certifications, Form 8838), including for indirect stock transfers Applicable regulations and GRA formats can depend on initial outbound transfer date: New final regulations under Section 1.367(a)-8 generally apply to GRAs with respect to transfers of stock or securities occurring on or after 13 March 2009 Transfers occurring on or after 7 March 2007 but before 13 March 2009 Section 1.367(a)-8T applies Transfers occurring on or after 20 July 1998 but before 7 March 2007 Section 1.367(a)-8 applies Form 926 and related Section 6038B statement Treas. Reg B-1(c) and B-1T(c) Treas. Reg B-1(e)(3) for certain Section 355 transactions Partners file for transfers by partnerships. See AM Page 22 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

22 Frequently missed statements (cont.) Section 367(b) notices Treas. Reg (b)-1(c) May be required to be attached to both the Form 1120 and applicable Form 5471 (see Treas. Reg (b)-1(c)(3)(ii)) Foreign-to-foreign liquidations Foreign Investment in Real Property Tax Act (FIRPTA) statements Treas. Reg (g) and (h) and Request for relief for late filings; see Rev. Proc Dual consolidated loss (DCL) elections, agreements and statements Treas. Reg (d)-6 Treas. Reg (g)(2)(iii)(3) Reasonable cause for late filings Page 23 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

23 Frequently missed statements (cont.) High-tax exception statements Section 954(b)(4) and Treas. Reg (d)(5) Tax-free reorganization statements Treas. Reg (a) and (b) Section 956(c)(2) statement Treas. Reg (b)(2) Page 24 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

24 Frequently missed statements (cont.) Form 952 for multi-year liquidations Treas. Reg Form 966 for amendments to adopted plan of liquidation Treas. Reg Section 1248 schedule Treas. Reg Section 959 successor in interest statement Treas. Reg (d) and Prop. Treas. Reg (b)(5) Cost-sharing agreement (CSA) statements Treas. Reg T(k)(4) is effective 5 January 2009 FSA provides importance of administrative requirements to ensure that CSA is qualified Page 25 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

25 Section 901(m)

26 Section 901(m) Denial of FTCs in case of covered asset acquisitions Overview of provision General rule: A portion of foreign income tax attributable to income from foreign assets acquired in a covered asset acquisition is non-creditable. Disqualified portion equals: Aggregate basis differences allocable to such taxable year with respect to all relevant foreign assets divided by income on which the foreign income tax is determined Amortization related to a covered asset acquisition remains deductible for E&P purposes, as do the non-creditable foreign taxes. Sections 275 and 78 do not apply to any non-creditable tax. Page 27 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

27 Section 901(m) Denial of FTCs in case of covered asset acquisitions (cont.) Overview of provision Definitions: Covered asset acquisitions include: Qualified stock purchases to which Section 338(a) applies Transactions which are treated as acquisitions of assets for US tax purposes and as acquisitions of stock (or are disregarded) for foreign tax purposes Acquisitions of partnership interests (where the partnership has a Section 754 election in effect) Any other similar transaction Basis difference means, with respect to any relevant foreign asset, the excess of (1) the adjusted basis of such asset immediately after the covered asset acquisition over (2) the adjusted basis of such asset immediately before the covered asset acquisition. US tax basis Allocate basis difference to a taxable year using the applicable cost-recovery method under US tax rules Relevant foreign asset means, with respect to any covered asset acquisition, an asset only if any income, deduction, gain or loss attributable to such asset is taken into account in determining foreign income tax in the relevant jurisdiction Page 28 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

28 Section 901(m) Denial of FTCs in case of covered asset acquisitions (cont.) Overview of provision CFC acquisition of Target stock in a qualified stock purchase CFC purchases Target after 31 December 2010 and makes a Section 338 election Total stepped-up basis is US$1,500,000 (all assets have a 15-year life) Basis immediately prior equals 0 Target foreign income for year = US$1 million; pays taxes of US$500,000 Target shareholders Target US$ US CFC Target Disqualified portion of tax = US$100,000 [US$1,500,000 15] x US$500,000 [foreign taxes] US$1,000,000 [foreign income] Which equals US$50,000 of foreign taxes disallowed Page 29 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

29 Covered asset acquisitions Still can be beneficial to make a Section 338 election Step-up in basis Fair market value Section 197 depreciation Equipment (5 yrs) US tax calculation No Section 338 election 901(m) does not apply Section 338 election 901(m) applies Goodwill (15 yrs) Total Local country tax 100 income x 35% tax rate = $35 tax Disqualified tax US depreciation Income Percentage 20% Taxes Income Depreciation 0-20 Income before tax Tax E&P Distribution Gross-up Disqualified portion -7 Taxable dividend Tax rate 35.00% 35.00% Tax Foreign tax credit Tax due/(excess cr) 0 (2.45) Disqualified portion 7.00 (Samples) Page 30 Eighth Annual Global Compliance and Reporting Conference Boston 4 April 2013

30 Questions?

31 Contacts Mike Medley Ernst & Young LLP Iselin, NJ Sue Lippe Ernst & Young LLP Chicago, IL Stephen O Neil Ernst & Young LLP New York, NY stephen.oneil@ey.com John Morris Ernst & Young LLP Washington, DC john.morris@ey.com

32 Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. ED None BOS