24 th Annual Health Sciences Tax Conference

Transcription

1 24 th Annual Health Sciences Tax Conference What s shaking? State and local tax hot topics for the life sciences industry December 8, 2014

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 LLP is a client-serving member firm of Ernst & Young Global Limited operating in the U.S. 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 U.S. 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 those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Mollie Miller Director, State Tax Fresenius Medical Care Waltham, MA Keith Eisenstein Ernst & Young LLP New York, NY Dan Lipton Ernst & Young LLP Boston, MA Page 3

4 Agenda New York tax reform Virtual partnerships through collaboration agreements Massachusetts sourcing changes Other significant state tax developments Page 4

5 New York tax reform Page 5

6 Manufacturing companies New law (effective January 1, 2014) 0% income tax rate Maximum capital tax = $350,000 Taxpayer must be principally engaged in the production of goods More than 50% of gross receipts are from the sale of goods produced by manufacturing, processing, etc. Must have New York (NY) Investment Tax Credit (ITC) eligible property with > $1m adjusted basis or 100% of its property is in NY If principally engaged test is not met, the taxpayer or combined group may still qualify if it has at least 2,500 NY manufacturing employees and NY manufacturing property with an adjusted basis of $100m Old law 3.25% 6.5% income tax rate Maximum capital tax = $350,000 Taxpayer must be principally engaged in the production of goods More than 50% of gross receipts are from the sale of goods produced by manufacturing, processing, etc. Must have NY ITC-eligible manufacturing property with > $1m adjusted basis or 100% of its property in NY Focused on small, upstate manufacturers: Have a metropolitan commuter transportation district (MCTD) allocation percentage of < 15% Average of 100 or fewer full-time employees in NY during the tax year Page 6

7 Manufacturing companies Considerations Tests are applied on a separate or combined group basis; consider interplay with combined reporting with respect to: Principally engaged test Manufacturing v. distribution activity Alien companies The $1m NY property requirement is based on ITC-eligible assets; consider the following: Depreciation of assets Placed in service requirement Type of property Contract manufacturing consider level of involvement and asset test Nature of receipts tangible v. intangible Page 7

8 Net operating losses (NOLs) Pre-2015 NOLs: subtraction conversion pool Provisions All pre-2015 tax year pre-apportionment NOL carryovers unused on a taxpayer s 2014 return must be recomputed into a post-apportionment subtraction conversion pool deduction. Existing losses are grossed up using a.071/.065 ratio and then multiplied by a taxpayer s 2014 business allocation percentage. Such a pool can be deducted over a 20-year period commencing with the 2015 tax year. The 20-year carryover period applies regardless of the year the NOL originated. No more than 10% of the pool may be deducted in any year, but if the 10% is not used in a year, it may be aggregated in a subsequent year. Accordingly, it will take at least 10 years to utilize the conversion pool. Taxpayers can elect to deduct 50% of the conversion pool in 2015 and 50% of the conversion pool in However, any unused conversion pool is forfeited. Page 8

9 Net operating losses Pre-2015 NOLs: subtraction conversion pool Considerations Position to recalculate pre-2015 NOL carryforwards to remove IRC Section (Sec.) 382 limitations Maximizing the NOL pool evaluate changes to sourcing rules and filing methodology Modeling of anticipated 2015 and 2016 New York apportioned business income to evaluate the 2-year election v. the 20-year carryforward Timing regarding cash tax v. financial statement Revocable v. irrevocable election Page 9

10 Net operating losses Post-2014 net operating losses Provisions Post-2014 NOLs are no longer limited to federal NOL deduction (NOLD). Post-2014 NOLs are subject to a 3-year carryback (but not to years preceding 2015) and a 20-year carryforward. The New York NOLD is computed as if the combined group is a single corporation, although federal limitations on the deductibility of such losses to consolidated groups (e.g., separate return limitation year (SRLY) limitations) apply to New York. Note that the SRLY limitation applies even if federal non-consolidated returns are filed as long as combined New York filings are made. Page 10

11 Filing methodologies Combined reports Pre-2015 (Article 9-A) 80% direct or indirect ownership of voting stock Other criteria substantial intercorporate transactions or distortion Alien corporations excluded from combined report Excluded entities Article 32 (banks); Article 9 (utilities); Article 33 (insurance); entities with different tax year or apportionment 2015 forward Ownership criteria reduced to more than 50% Other criteria unitary business Alien corporations (i.e., not treated as domestic corporations under the Internal Revenue Code (IRC)) included to the extent of US effectively connected income (without regard to a tax treaty) Excluded entities Article 9 (utilities); Article 33 (insurance) Controlled group election seven-year election Page 11

12 Filing methodologies Combined reports Considerations The term unitary business is not defined by New York statute Evaluate the traditional indicia of a unitary business (centralized management, etc.) to exclude/include entities Review for consistency with other traditional unitary states Modeling of the benefit/detriment of the controlled group election Consider forecasts due to seven-year binding term Provides certainty and mitigates controversy risk May be advisable if there are holding companies within the group Review the impact of the inclusion of alien companies to the extent of US effectively connected income (regardless of a tax treaty) Consider interplay with qualified NY manufacturer provisions Page 12

13 Alien corporations Provision Pre-2015 Taxed on a worldwide basis Excluded from combined returns 2015 forward Taxed to the extent of US effectively connected income (regardless of a tax treaty) unless treated as a domestic corporation under the IRC Includable in combined returns Considerations Modeling of tax posture of alien corporations subject to tax on a separate company basis or through inclusion in a combined return Interplay with economic nexus, combined reporting and manufacturing provisions Page 13

14 Tax rates and bases Provisions 2015 forward Metropolitan Transit Authority surcharge increased from 17% to 25.6% of pre-credit New York state (NYS) liability Investment income and capital now exempt, but limited (i.e., no debt instruments) Other exempt income tax-free distributions (dividends from noncombined domestic and foreign affiliates; Subpart F income; Sec. 78) Expense attribution only interest with 40% safe harbor election Subsidiary income and capital all aspects of this regime repealed Only tax on business capital; set to phase out in 2021; cap = $5 million 2016 forward Income tax rate reduced from 7.1% to 6.5% Page 14

15 Tax rates and bases Considerations Application to significant treasury functions and investment companies Timing of sale of subsidiaries Modeling of tax impact and elections Documentation requirements for interest expense attribution Page 15

16 Receipts sourcing Provision Applicable to services and other business receipts Pre-2015 generally cost of performance rules 2015 forward hierarchy of market-based rules (e.g., the location where the customer takes benefit, customer location) Considerations Receipt of benefit implies ability to allocate to more than one location; consider services where benefit is overseas Customer location presumably its commercial domicile Other backup rules exist Availability of information (data sources, systems, etc.) Taxpayers are required to use the hierarchy unless information is not available for each tier of the rule, but must substantiate that information is not available Page 16

17 Economic nexus Provision $1,000,000 or more of receipts Or If a taxpayer has at least $10,000 in New York receipts but is a member of a combined group that, in aggregate, meets the $1,000,000 or more threshold Considerations Interaction with Public Law (PL) and the federal constitution Consider interplay with the new market-based sourcing provisions Impact of new combined reporting rules and the Finnigan Rule for single sales factor purposes Application to alien corporations and partnerships Modeling of potential Accounting Standards Codification (ASC) 740 reserves Page 17

18 Collaboration agreements Page 18

19 Background What is a collaboration agreement? An arrangement among parties as to the research, development, manufacture and ultimate sale/exploitation of a product Examples Licensing agreements (in-license or out-license) Contract research or contract manufacturing Risk sharing arrangements (co-development or co-promotion) Joint venture or partnership Option-based collaboration with option to ultimately acquire smaller entity Any combination of above Page 19

20 Background Typically, the collaboration agreement will provide for: Joint governance, usually in the form of a board comprising persons from both collaborators, but, on many issues, requiring unanimous consent Sharing of some elements that comprise net bottom-line profit A providing and acknowledgement of the creation of joint property, such as intangible property In some situations in which there is not a sharing of net bottom-line profits, there is a sharing of some above-theline gross income and cost of goods sold items, as well as some sharing of development costs. Page 20

21 Background Increase in collaboration agreements Selective licensing by life sciences companies looking to fill in drug development pipelines, identify additional sources of revenue, expand into emerging technologies and remain competitive Source of funding for biotechnology development due to lack of initial public offering market and venture capital funding opportunities Dollar amount of up-front license fees and milestone payments significantly increasing Deals occurring earlier in biotech life cycle Page 21

22 Issues to consider: benefits and burdens When a virtual partnership is created, both parties share the benefit and burden from the characterizations of the other party. Example of sale and manufacturer collaborators Federal impact Guidance regarding ability for sales partner to share in manufacturing partner s 199 deduction State issues to consider Nexus (86-272, economic nexus, partner flow-through) Effectively connected income for alien corporations Sourcing rules partner flow-through, etc. Manufacturing classification 199 addbacks Tax credits (research and development, ITC) Page 22

23 Significant apportionment and sourcing changes Page 23

24 Massachusetts (MA) sourcing changes Services now sourced using a market approach License or lease of intangible property Similar to prior law, receipts from intangibles are sourced to MA if the intangible is used in MA Throwout rule applies for tax years beginning on or after January 1, 2014, if: The taxpayer is not taxable in the destination state. The destination state cannot be determined. For combined filers, application of the Finnigan Rule may reduce application of the throwout rule Unlike throwback as applied to tangible personal property, foreign sales can be subject to throwout Page 24

25 MA sourcing: rules of reasonable approximation Taxpayer must consider all available information Method of reasonable approximation must be determined and applied in good faith and must be used consistently year over year Methodology cannot change without permission and is subject to Commissioner s right to change Taxpayer must maintain contemporaneous records Unassigned sales (sales where taxpayer cannot reasonably approximate the market) will be assigned in the same proportion as assigned sales so long as the taxpayer reasonably believes that the geographic distribution of the unassigned sales follows the assigned sales Page 25

26 Continued trend to market-based sourcing Pennsylvania (PA) effective for tax years after December 31, 2013 A sale of a service is in PA if the service is delivered to a location in PA based upon the percentage of total value of the service delivered to a location in Pennsylvania. Nebraska (NE) effective January 1, 2014 A sale of a service is in NE if the sale is derived from a buyer within NE. Sales of intangible property are in NE if the buyer uses the intangible property at a location in the state (if property is used within and without the state, the sales are apportioned between this state in proportion to the use of the intangible property in NE and the other state). Page 26

27 Alternative apportionment consideration Ultimate destination Kentucky (KY) Sales of goods destined for delivery outside of KY shall not be assigned to KY, irrespective of method of shipment or delivery. If title passes to another distributor in the state, the sale of tangible personal property may be sourced to KY. There may be specific facts and circumstances. Currently, other alternative apportionment methods are being pursued. Ohio If property is delivered by common carrier or other transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered as the place at which such property is received by the purchaser. Page 27

28 Alternative apportionment considerations Other considerations for life sciences companies Illinois Receipts from licenses, royalties or other similar intangibles are excluded from the numerator and denominator only if such receipts comprise more than 50% of the taxpayer s total gross receipts. Mississippi Effective January 1, 2014, a major medical or pharmaceutical supplier of a Mississippi distribution facility must use an apportionment formula consisting of double-weighted payroll and property factors and a single-weighted sales factor. A major supplier is defined as a company or group of affiliated companies that ship (at least $100 million annually) medical or pharmaceutical products to a Mississippi distribution facility. A Mississippi distribution facility is defined as a distribution facility that received funding from the Mississippi Industry Incentive Financing Revolving Fund to open a facility in Mississippi and construction on the facility began between July 1, 2010 and December 31, Page 28

29 Other state and local tax (SALT)/life sciences hot topics Page 29

30 Other SALT hot topics Rhode Island tax reform (effective January 1, 2015) Life sciences tax rate = 4% (v. reduction from 9% to 7%) Mandatory unitary combined reporting 80/20 rule and tax haven provision Five-year federal consolidated group election Pre-2015 NOLs and credits cannot be shared Single sales factor with throwback and market-based sourcing Repealed related-party expense addback Page 30

31 Other SALT hot topics Virginia Ruling No (August 2014) Detailing services protected under PL Clinical trial conducted by an independent third-party research organization does not create nexus if an independent contractor Employees presence in Virginia to recruit clinical trial participants and relating to medical education, lobbying and outreach to state associations and licensing boards is not likely to be de minimis Page 31

32 Questions? Page 32

33 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. 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 ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved