Recent developments in international tax

Transcription

1 Recent developments in international tax

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the 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. This presentation is 2014 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 Ninth Annual International Tax Reporting Conference New York 30 May 2014

3 Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 3 Ninth Annual International Tax Reporting Conference New York 30 May 2014

4 Today s presenters Jeff Michalak Ernst & Young LLP Detroit, MI Tracee Fultz Ernst & Young LLP New York, NY Craig Hillier Ernst & Young LLP New York, NY Page 4 Ninth Annual International Tax Reporting Conference New York 30 May 2014

5 Agenda US legislative developments update on 2014 activity Global tax trends Organisation for Economic Co-operation and Development (OECD) and base erosion and profit shifting (BEPS) Country-by-country (CbC) reporting What can you do now? Opportunities in the current environment Page 5 Ninth Annual International Tax Reporting Conference New York 30 May 2014

6 US tax legislative update Highlights of Federal budget/debt limit debate 2. Congressional mid-term elections 3. The Obama Administration s FY2015 budget proposals (released early March) 4. Chairman Camp s proposals February Chairman Baucus s international tax reform proposal (introduced late last year) 6. Expiration of key extenders, including research credit and controlled foreign corporation (CFC) look-through Finance Committee approved extenders package 3 April Retroactive two-year extension (2014, 2015) of most provisions that expired at the end of 2013 Fate of extenders less certain in the House Lawmakers seem to agree on lowering the corporate income tax rate, broadening the corporate tax base, and addressing potential for base erosion, but consensus remains elusive on the details and timing of tax reform. Page 6 Ninth Annual International Tax Reporting Conference New York 30 May 2014

7 Chairman Camp s proposals Highlights 1. Top corporate rate to drop to 25% (phased in over five years) 2. 95% exemption for foreign dividends 3. Effective 8.75% toll charge on tax-deferred foreign earnings held in cash or cash equivalents 4. Certain temporary reliefs made permanent (including CFC look-through and research and development (R&D) credit system) 5. Extension of active financing exception (where subject to at least 12.5% effective rate) Similarity to Baucus proposals and contrast with Administration budget proposal Page 7 Ninth Annual International Tax Reporting Conference New York 30 May 2014

8 Chairman Camp s Proposals international tax provisions International tax reform follows broad outlines of Chairman Camp s 2011 discussion draft, with some significant refinements to proposed exemption system, addition of more substantial reforms to Subpart F regime, and new changes to taxation of inbound investors Establishes a new foreign dividend exemption system: Provides 95% deduction for dividends received from certain foreign subsidiaries Reduces losses on disposition of foreign subsidiaries and requires additional recapture of foreign branch losses Makes CFC look-through rule permanent Includes transition rule requiring deemed inclusion of deferred foreign earnings at two-tiered effective tax rate 8.75% for earnings invested in cash, cash equivalents and other short-term assets 3.5% for other earnings Page 8 Ninth Annual International Tax Reporting Conference New York 30 May 2014

9 International tax provisions Modifications to existing foreign tax credit (FTC) system: Repeals section 902 deemed paid FTCs Provides non-pooled approach to section 960 FTCs Modifies FTC to require reduction for directly allocable expenses only Revises two-basket FTC system mobile income and active income Requires inventory sales income to be sourced based on place of production activities Substantial reforms to existing Subpart F anti-deferral regime: Provides new foreign effective tax rate thresholds for Subpart F inclusions Provides full or partial exclusion from foreign base company sales income based on eligibility for treaty benefits or foreign effective tax rate threshold Extends active financing exception for five years but curtails availability based on foreign effective tax rate threshold Page 9 Ninth Annual International Tax Reporting Conference New York 30 May 2014

10 International tax provisions (continued) Provisions aimed at prevention of base erosion: Treats deemed intangible income as Subpart F inclusion and makes deemed foreign intangible income (a newly created sub-category of intangible) subject to US tax at reduced rate of 15% Denies deductions for excess interest expense determined based on domestic leverage ratio exceeding 110% of worldwide leverage ratio and net interest expense exceeding 40% of adjusted taxable income Provisions affecting foreign investors: Denies deductions for reinsurance premiums paid to an affiliate not subject to US tax on such premiums Tax on income from operation of passenger cruise ships in US waters Restricts availability of insurance business exception to the passive foreign investment company rules Tightens section 163(j) earnings stripping rules by lowering net interest threshold to 40% of adjusted taxable income and eliminating excess limitation carryforward Restricts treaty-based withholding tax reductions for deductible payments that are made by a US person to foreign related party Page 10 Ninth Annual International Tax Reporting Conference New York 30 May 2014

11 FY2015 President s budget, international tax recycled proposals Determine foreign tax credit (FTC) on CFC pooling basis $75 billion Defer deduction of interest expense related to deferred income Tax currently excess returns associated with transfers of intangibles offshore/limit shifting of income through intangible property transfers Modify foreign tax credit rules for dual-capacity taxpayers Disallow deduction for non-taxed reinsurance premiums paid to nontaxed foreign affiliates Prevent use of leveraged distributions from related corporations to avoid dividend treatment Tax gain of a nonresident from the sale of a partnership interest on a look-through basis Extend Sec. 338(h)(16) to certain asset acquisitions Remove foreign taxes from a Sec. 902 corporation s foreign tax pool when earnings eliminated $43 billion $29 billion $10 billion $8 billion $4 billion $3 billion $1 billion $.5 billion Source: Treasury FY2015 Green Book Page 11 Ninth Annual International Tax Reporting Conference New York 30 May 2014

12 FY2015 President s budget, international tax new proposals Denial of deduction for excessive interest of US member of a worldwide consolidated group (Similar to Camp s excess interest proposal) Expand Subpart F to cover CFC s income from sales of goods manufactured by related service provider Create a new category of Subpart F income for transactions involving digital goods or services Expand Subpart F to cover transactions involving a reverse hybrid entity that receives foreign-deducted payments Denial of deduction for payments under hybrid arrangements that would otherwise create stateless income Expand the scope of section 7874 (anti-inversion rule) Single 50% ownership continuity test Central management and control test of residence after acquisition of US target, regardless of ownership continuity $49 billion $25 billion $12 billion $1 billion $1 billion $17 billion Source: Treasury FY2015 Green Book Page 12 Ninth Annual International Tax Reporting Conference New York 30 May 2014

13 Chairman Baucus s International Tax Reform Discussion Draft overview Corporate tax rate would be reduced, but is not specified in the draft. E.g., 28% Revenue estimates are not given. Goal is revenue neutrality in the long-term. One-time revenue raisers deemed repatriation should not count towards revenue impact of overall package Main feature of the draft is repeal of tax deferral for income of CFCs. CFC income would be taxed in the US either immediately or not at all. Ends the so-called lockout effect. Reduced tax rate would apply to some CFC income from active business in foreign markets. Two options: Option Y and Option Z Page 13 Ninth Annual International Tax Reporting Conference New York 30 May 2014

14 Baucus s International Tax Reform Discussion Draft main features CFCs income taxed currently or not at all. CFC income from sales into US, and passive income taxed at full US rate. Option Y CFC income from sales in foreign markets: exempt if effective foreign tax rate is at least 80% of top US corporate rate; otherwise taxable currently at 80% of top US corporate rate Option Z CFC income from active business in foreign markets: taxable currently at 60% of top US corporate rate No FTCs for tax-exempt foreign income Full FTCs for income taxed at 80% of top US corporate rate Six separate baskets for FTC limitation US corporate parent cannot deduct interest attributable to tax-exempt income of the CFC 20% US tax on CFCs tax-deferred pre-enactment foreign earnings, subject to scaled-down FTCs Subpart F Repeal of check-the-box election for entities owned wholly or partly by a CFC. CFC look-through (except dividends) not continued Active financing exception permanent, modified Base erosion Definition of intangible property for purposes of sections 367(d) and 482 would be expanded Deferral of deductions for offshore affiliate reinsurance of US property and casualty risks Denial of deductions for related party payments in a base erosion arrangement Repeal portfolio interest exemption for US corporate debt if no reciprocal treaty exemption No FTCs for untaxed portion (40%) of active foreign market income. Three separate baskets for FTC limitation. Corporate US shareholder of a CFC cannot deduct interest or other expenses attributable to 40% taxexempt portion of CFC's active foreign market income. Page 14 Ninth Annual International Tax Reporting Conference New York 30 May 2014

15 Global trends in international tax 1. Unilateral tax reform (Mexico, Canada, Switzerland) 2. Anti-hybrid rules 3. Anti-haven rules 4. General Anti- Avoidance Rules (GAARs) Increased tax competitiveness 1. Reduction in headline rates 2. Incentive regimes for intangible property and R&D 3. Conclusion of tax treaties for key markets 4. Extended availability of ruling processes Protection of local country tax base Common themes Response to global scrutiny 1. OECD BEPS project 2. Treaty amendments/ renegotiation 3. High pace of legislative change 1. CbC reporting 2. Exchange of information Transparency and cooperation Page 15 Ninth Annual International Tax Reporting Conference New York 30 May 2014

16 OECD and BEPS Page 16 Ninth Annual International Tax Reporting Conference New York 30 May 2014

17 BEPS action plan changes to the international tax landscape Action 14: Making dispute resolution mechanisms more effective 9/15 Action 1: Address the tax challenges of the digital economy 9/14 (revised to 3/14) Action 15: Develop a multilateral instrument for amending bilateral tax treaties 9/14; 12/15 Action 11: Establish methodologies to collect and analyse data on BEPS and actions addressing it 9/15 Action 12: Require taxpayers to disclose their aggressive tax planning arrangements 9/15 Action 13: Re-examine transfer pricing (TP) documentation, TP master file and CbC reporting 9/14 (revised to 2/14) Action plan on Base Erosion and Profit Shifting (BEPS) Action 8: Consider transfer pricing for intangibles 9/14; 9/15 (revised to 5/14) Action 9: Consider transfer pricing for risks and capital 9/15 Action 10: Consider transfer pricing for other highrisk transactions 9/15 Action 2: Neutralize the effects of hybrid mismatch arrangements 9/14 (revised to 4/14) Action 3: Strengthen CFC rules 9/15 Action 4: Limit base erosion via interest deductions and other financial payments 9/15; 12/15 Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance 9/14 Action 6: Prevent treaty abuse 9/14 (revised to 3/14) Action 7: Prevent the artificial avoidance of permanent establishment status 9/15 Page 17 Ninth Annual International Tax Reporting Conference New York 30 May 2014

18 Upcoming OECD activity on 2014 projects Action 1 Digital economy Discussion Draft released 24 March Comments by 14 April and public consultation 23 April Action 2 Hybrid mismatch arrangements Discussion Draft released 19 March Comments by 2 May and public consultation May Action 5 Harmful tax practices Finalization of OECD review of member country regimes September 2014 Action 6 Treaty abuse Discussion Draft released 17 March Comments by 11 April and public consultation April Action 8 Transfer pricing for intangibles Discussion draft released 30 July 2013 Comments were due 1 October 2013 Action 13 Re-examine TP documentation Discussion draft released 30 January Comments were due by 23 February Page 18 Ninth Annual International Tax Reporting Conference New York 30 May 2014

19 CbC reporting Page 19 Ninth Annual International Tax Reporting Conference New York 30 May 2014

20 OECD Discussion Draft on Transfer Pricing Documentation and CbC Reporting (released 30 January 2014) Increased reporting is highest priority for OECD and many other countries Intended to: Enable tax authorities to gain transparency regarding a multinational corporation s (MNC s) global operations as a whole Reduce compliance burdens for MNCs through harmonized TP documentation Develop a framework for high-level risk assessment purposes Relevant to all 15 BEPS actions Tiered approach focused on both global (master file) and local attributes (local file) Page 20 Ninth Annual International Tax Reporting Conference New York 30 May 2014

21 Scope of OECD draft CbC reporting template Draft originally required reporting for each entity in MNC group arranged by country of organization, with branches treated as entities for this purpose Current discussion of consolidating legal entities into country by country as originally proposed Information required in draft template: Place of effective management Important business activity codes Revenues Earnings before income tax Income tax paid on cash basis to country of organization and to all other countries Total withholding tax paid Stated capital and accumulated earnings Number of employees and total employee expense Information proposed but currently anticipated to be dropped Tangible assets (other than cash and cash equivalents) Royalties paid to and received from related entities Interest paid to and received from related entities Service fees paid to and received from related entities Page 21 Ninth Annual International Tax Reporting Conference New York 30 May 2014

22 CbC reporting template Country Constituent Entities Organized in the Country Place of Effective Management Important business activity code(s) Revenues Earnings Before Income Tax Income Tax Paid (on Cash Basis) (a) To Country of Organization Countries (b) To All Other Total Withholding Tax Paid Stated capital and accumulated earnings Number of Employees Total Employee Expense Tangible Assets other than Cash and Cash Equivalents Royalties Paid to Constituent Entities Royalties Received from Constituent Entities Interest Paid to Constituent Entities Interest Received from Constituent Entities Service Fees Paid to Constituent Entities Service Fees Received from Constituent Entities Total: Total: Total: Total: Page 22 Ninth Annual International Tax Reporting Conference New York 30 May 2014

23 Global information TP master file Global information is aimed at providing a clear understanding of MNC s entire operations. OECD asserts current documentation practice typically does not provide big picture available for risk assessment purposes. Particular focus on features that may indicate significant transfer pricing risk: Significant transactions with a low tax jurisdiction Transfers of intangible property to related parties Business restructurings Specific types of related party payments Year-on-year loss making Poor or non-existent documentation Excessive debt Master file likely to be required to be prepared contemporaneously with tax return (although CbC reporting template may be permitted to be filed with a one-year lag). Entire template, with all entity and country information, would be provided to the tax authority in each country in which the MNC has an entity or branch but it is unclear whether the distribution will happen within or separate from the master file. Page 23 Ninth Annual International Tax Reporting Conference New York 30 May 2014

24 Summary of OECD recommended master file content Organizational structure MNC s intangibles Chart of legal and ownership structure and location of operating entities Descriptions of MNC s major business lines Description of group TP policy related to R&D and IP Description of internal transfers of interests in IP during the relevant year (entities, location and compensation) List of profit drivers MNC s intercompany financial activities Chart of supply chain Chart of non-r&d intercompany service arrangements Description of main geographic markets Description of group financing, including important arrangements with unrelated lenders Identification of central financing entities and their place of organization and operation Functional analysis describing value contributions by individual entities Description of restructuring, acquisitions and divestitures during the relevant year List of 25 most highly compensated employees with title and location MNC s intangibles Description of strategy for development, ownership and exploitation of intellectual property (IP) including location of R&D facilities and management List of material intangibles and ownership List of related party arrangements related to IP Description of TP policies for intercompany financing arrangements MNC s financial and tax positions MNC s annual consolidated financial statement List and description of MNC group s applicable advance pricing agreements (APAs) List and description of other relevant tax rulings related to the allocation of income to particular jurisdictions List and description of transfer pricing matters pending under treaty methodology for assessing procurement systems (MAP) processes or resolved in MAP during the last two years CbC reporting template Page 24 Ninth Annual International Tax Reporting Conference New York 30 May 2014

25 Key content differences between typical current state and OECD proposed documentation Proposed OECD master file content Typical current documentation content Global scope Regional or transactional scope Industry and business overview dependent on analyst reports and annual statements Coverage of majority of transactions required Materiality to be considered Overall view provided through global supply chain chart and CbC reporting template Required to list transactions related to intangibles, intercompany loans, business restructurings Description of transfer pricing policy and financial systems used to implement policy required List of all APAs (unilateral or bilateral) List of tax rulings Global Legal Entity Chart Industry and business overview tailored to transaction including some public and private information Does not necessarily cover all or majority of transactions or consider materiality Global profit analysis and global supply chain chart not typically provided Transactions related to intercompany loans, intangibles, business restructurings, loss entities and low-tax jurisdictions only covered in relevant country documentation Description of company s financial systems and transfer pricing policy typically not included APAs not listed unless relevant to covered transaction in country documentation Tax rulings not typically listed or described Page 25 Ninth Annual International Tax Reporting Conference New York 30 May 2014

26 Local developments on BEPS Page 26 Ninth Annual International Tax Reporting Conference New York 30 May 2014

27 Unilateral activity on BEPS BEPS-related activity is happening already in many countries, including: Focus on digital economy Italy enacted TP law on purchase of online advertising space France, India and Japan investigate taxation of digital economy Increase in information reporting France enacted requirement to provide foreign tax rulings, Denmark made certain taxpayer information public, Australia proposes to introduce public reporting of taxes paid by large companies New anti-hybrid measures France and Mexico introduced subject to tax requirements for certain deductions, similar draft legislation was tabled in Austria, Ireland legislated to prevent certain Irish incorporated companies being stateless in terms of their tax residence Several EU countries already have anti-hybrid legislation in place (Denmark, Germany, Italy, UK) Page 27 Ninth Annual International Tax Reporting Conference New York 30 May 2014

28 Unilateral activity on BEPS Tightened limits on interest deductibility Canada and France recently introduced rules against foreign affiliate dumping or leveraged acquisitions, France introduced a net interest cap, Japan introduced and Finland tightened earnings stripping rules, several countries tightened thin cap legislation Restrictions on treaty benefits Germany introduced specific anti treaty/directive shopping rules and switch over rules, Canada released a consultation paper on treaty shopping, Mexico increased requirements for treaty eligibility New CFC legislation to come Taiwan, India and Russia are considering the implementation of CFC rules BEPS issues are an increasing focus of tax authorities in their current international tax enforcement activity BEPS focus also is affecting APAs and cross-border tax rulings in some countries Page 28 Ninth Annual International Tax Reporting Conference New York 30 May 2014

29 EU activity on BEPS European Commission Recommendation on Aggressive Tax Planning (6 December 2012) List of actions and recommendations to Member States on the blacklisting of tax havens, double deduction/non taxation, anti-abuse provisions, exchange of information and administrative cooperation Hybrid mismatch arrangements European Commission proposed amending the Parent Subsidiary Directive (25 November 2013) to tackle hybrid loan mismatches and introduce a general anti-abuse provision. Automatic exchange of information and CbC reporting European Commission proposed automatic exchange of information on dividends, capital gains and financial income and account balances (12 June 2013); 2013 Directives introduced CbC reporting for banks and certain extractive and logging companies; the Commission was asked to report back on CbC reporting by Digital economy VAT Directive moves to consumer country taxation for internet services (effective 1 January 2015), European Commission High Level Expert Group on Taxation of the Digital Economy, first report expected in the first half of 2014). Harmful tax competition EU Code of Conduct (1 December 1997) and State aid regulations 2009 present: EU Code of Conduct Group is actively monitoring and discussing potentially harmful EU regimes and mismatches (hybrids, IP regimes, Gibraltar tax regime, etc.). Page 29 Ninth Annual International Tax Reporting Conference New York 30 May 2014

30 US perspective on BEPS and tax update Page 30 Ninth Annual International Tax Reporting Conference New York 30 May 2014

31 US perspective on BEPS Addressing concerns about base erosion has been a key element of US international tax reform proposals since before the commencement of the OECD BEPS project Administration s budgets proposals denying interest deductions, creating new Subpart F income category for excess returns on transferred intangibles, and imposing a minimum tax on foreign earnings Chairman Camp s international tax reform discussion draft Options A, B and C expanding Subpart F income with particular focus on intangible income and thin capitalization provision denying deductions for excess interest Chairman Baucus s international tax reform discuss draft Options Y and Z effectively repealing deferral for income of CFCs, denial of deductions and provision denying deductions for payments in connection with hybrid instruments, hybrid entities, exemption arrangements or conduit financing arrangements US domestic law and treaties already include significant anti-base erosion measures of the type under consideration by the OECD. Page 31 Ninth Annual International Tax Reporting Conference New York 30 May 2014

32 What can you do? Page 32 Ninth Annual International Tax Reporting Conference New York 30 May 2014

33 BEPS: What can you do to be ready? Holistic review of your operations, with full value chain transparency and with focus on the BEPS actions will help you to be ready by identifying the main risks, prioritizing the impact, enabling to take mitigating actions if required Review of intra group financing ng structures Review of potential permanent nt establishment (PE) risk areas (implementation and execution of limited sales or manufacturing structures) Comparative analysis statutory financial results of local operating entities (value chain analysis) Review TP policy and guidelines Review transfer pricing processes Review of existing TP documentation Review of intercompany contracts Review of key performance indicator (KPI) frameworks and organization Country-by-country reporting assessment Comparative review of authorization matrixes and entity characterization Location of significant people functions Comparative analysis statutory financial results of local operating entities (value chain analysis) Existing TP documentation and APAs and mapping against business operations in all areas (people, processes, systems ) Page 33 Ninth Annual International Tax Reporting Conference New York 30 May 2014

34 What does this mean for you? Get ready for increased reporting Do you have the data? Do you have the resources? What conclusions might tax authorities draw from the information provided? Is tax part of your published corporate governance framework? Prepare for change of tax authority approach Review group structure for high risk areas or jurisdictions Consider intercompany transactions How stable are your transfer pricing governance and monitoring processes? How robust and integrated are your current global controversy management processes? Establish contemporaneous transfer pricing monitoring and management Tax authority engagement Get actively involved in the debate get involved in discussions with local authorities Develop strategies for controversy mitigation (e.g., APAs, rulings) Evaluate current and future planning: Is it fit for purpose? Will it withstand law change? Is there an exit strategy? Page 34 Ninth Annual International Tax Reporting Conference New York 30 May 2014

35 Opportunities in the current environment Page 35 Ninth Annual International Tax Reporting Conference New York 30 May 2014

36 Centralized offshore IP ownership: update Offshore IP ownership structures have been contemplated and used for many years and have business benefits of co-locating IP and IP management in the same location Low-taxed entity R&D US Inc IPCo Principal Manufacturer/ service provider (i) Sale, (ii) License, or (iii) Cost-sharing Access to IP Distributor Key attributes Centralization of (economic ownership) of (non-us) IP Low effective tax rate (ETR) on IP profits Mitigation of PE risk in limited risk distributor (LRD) entities Established ruling practice in many countries: tried and tested structures Considerations Beneficial ownership requirements of sub-license income and substance give rise to some risk Public scrutiny considerations recent media coverage Ongoing OECD project on intangibles and associated transfer pricing treatment BEPS report Increasingly aggressive and sophisticated challenge by source country tax authorities Page 36 Ninth Annual International Tax Reporting Conference New York 30 May 2014

37 Onshore IP ownership: an opportunity? Ongoing developments mean onshore IP ownership could be attractive option for some groups US Inc Principal and IP owner OpCos (i) Sale, (ii) License, or (iii) Cost-sharing Key attributes Allows for increased flexibility in ETR driven by incentive and beneficial regimes for innovation (R&D credits, innovation boxes, etc.) Flexible structure provides greater opportunity for business/functional alignment with IP ownership Potentially better outcome in the context of the contemplated US law changes Transparency of IP ownership and legal protection Improved treaty protection in the absence of tax haven entities UK, Netherlands, Switzerland, Luxembourg, Belgium, Canada, Ireland are potential ownership jurisdictions Considerations Increasing and differing reporting requirements in different jurisdictions Migration from offshore to onshore IP ownership structure Accounting treatment of IP Exit strategies for IP Page 37 Ninth Annual International Tax Reporting Conference New York 30 May 2014

38 Opportunities for financing There are still opportunities for efficient financing of investment. Overview Many jurisdictions allow financing with debt or interest limitations Recent introduction of rules in respect of hybrid or exempt lenders (e.g., France) Ability to finance for commercially driven transactions, e.g., acquisition of valuable assets or business expansion CFC rules often permit intra-group financing between CFCs (e.g., UK or US council tax benefit (CTB)) Proposal to make permanent US Subpart F rule on active financing Considerations Holding company location and financing activity should be aligned with commercial objectives of the group Increasing expectation that business purpose is documented as part of any transaction (including financing) Ability to obtain advance confirmation from tax authorities on treatment ( ruling ) Ability to utilize credit mechanisms for withholding tax (WHT) to lower overall ETR on financing Foreign exchange Building in additional flexibility to allow for changes in domestic law Alternative transactions which have similar results could be considered, e.g., leasing Page 38 Ninth Annual International Tax Reporting Conference New York 30 May 2014

39 Contacts Jeff Michalak Ernst & Young LLP Detroit, MI Tracee Fultz Ernst & Young LLP New York, NY Craig Hillier Ernst & Young LLP New York, NY Page 39 Ninth Annual International Tax Reporting Conference New York 30 May 2014