25th Annual Health Sciences Tax Conference

Transcription

1 25th Annual Health Sciences Tax Conference International issues including foreign operations and captive insurers December 7, 2015

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 US. This presentation is 2015 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 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 1

3 Presenters Karey Dearden Ernst & Young LLP New York, NY Neelu Mehrotra Ernst & Young LLP Providence, RI Bob Lammey Ernst & Young LLP Boston, MA Page 2

4 Agenda Selected international topics Going global for health care-exempt organizations Understanding activities and telemedicine Foreign captives and risks Permanent establishment (PE) What happens when you create a PE? Tax treaties Local taxation/indirect issues Expatriate taxation Page 3

5 Definition of insurance Insurance is neither defined in the statute nor in the Treasury regulations. Judicial precedent provides the following framework for evaluating whether a scenario is an insurance arrangement: Presence of insurance risk Risk shifting Risk distribution Commonly accepted notions of insurance All the elements must be satisfied to have an insurance arrangement. Page 4

6 Captive insurance company common structures US federal income tax (risk shifting and risk distribution) Parent/subsidiary Brother/sister Third-party risks Parent Parent Premiums Parent Premiums Third-party risk premiums Premiums Captive Parent has not shifted its risk to Captive (balance sheet approach). Premiums paid from Parent to Captive are not deductible. Captive is not considered an insurance company. Subs Subs Premiums Captive Parent Parent has not shifted its risk to Captive (balance sheet approach). Premiums paid from Parent to Captive are not deductible. Subs Subs generally shift risk to Captive. Elements are in place to satisfy risk distribution. Premiums paid from Subs to Captive are generally deductible provided certain bona fides are satisfied: premiums are arm s length, the Captive is adequately capitalized, and the Captive is not propped up. Captive Generally treated as an insurance company. Parent Subs Subs Premiums Captive Parent generally shifts its risk to Captive, provided sufficient third-party risk is present. Third-party risk benchmark > 30% of total premium. Elements are in place to satisfy risk distribution. Premiums paid from Parent to Captive are generally deductible, provided bona fides are satisfied. Subs Subs generally shift risk to Captive. Elements are in place to satisfy risk distribution. Premiums paid from Subs to Captive are generally deductible, provided bona fides are satisfied. Captive Generally treated as an insurance company. Page 5

7 Recent developments and IRS position The Tax Court decided three cases in the last two years that refined the judicial framework of insurance: Rent-A-Center, Securitas and R.V.I. Guaranty Refinement to insurance risk Acceptance by regulators Acceptance by external auditors Refinement to risk shifting Use of a guaranty Use of cash Netting of payments Page 6

8 Recent developments and IRS position (cont d) Refinement to risk distribution Statistical, independent risks IRS view risk distribution Revenue Ruling Revenue Ruling Refinement to common notions of insurance Insurance defined in the commonly accepted sense Fortuity Page 7

9 Next steps The recent decisions provide a health care organization the opportunity to: Review current risk management practices Consider how the captive can be used to meet risk management objectives Review the current structuring of the captive insurance arrangement to ensure desired characterization Page 8

10 Permanent establishment OECD model guidelines Organisation for Economic Co-operation and Development (OECD) model tax convention on income and on capital 2010: Article 5 permanent establishment Permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 7 business profits The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. Page 9

11 Basic PE flowchart Fixed place Construction Agency Services Preparation or auxiliary activities Incomegenerating activities PE (if lasts beyond certain time) Independent agent Dependent agent PE (if lasts beyond certain time) No PE PE No PE PE (if certain criteria met) Page 10

12 What happens when a PE is created? When a PE is created, the US entity becomes subject to tax in the foreign country. This can include federal and local income tax as well as valueadded tax (which might be due even if no PE is created). The US entity likely will need to register with some governmental agency or tax authority in order to file the tax return(s) due. Depending upon the frequency of employee trips to the local country, the individual employees of the US entity may have local tax filing requirements. Secondment agreements should be in place. Page 11

13 Impact of PE on individuals Corporate PE may create individual tax responsibilities for employees. Once a corporation creates a PE, this could cause the employees working in the country with the PE to have their own individual filing obligations. If a PE is created, an individual may be subject to certain country-specific tax provisions. Each country has its own specific rules (by treaty or local law) as to when an employee working in such country has individual tax filing obligations. This is different from when an employee becomes a tax resident, as even nonresidents can have filing obligations. These are in addition to other employee-specific requirements, such as work permits, visas and other immigration matters not considered here. Page 12

14 Tax treaty-making process It is negotiated by the US Treasury. An administration official signs the treaty. There is a hearing before the Senate Foreign Relations Committee. The Treasury Technical Explanation (TE) is issued. The Senate must advise and consent to ratification by a two-thirds vote. The Senate may give conditional consent by means of a reservation or understanding. The President signs, and instruments of ratification are exchanged. Amendments to existing treaties, called protocols, are subject to the same approval procedures as full treaties. Page 13

15 Model income tax treaties OECD Model Tax Convention on Income and on Capital Commentary to OECD model provides important guidance for interpreting treaty provisions US Model Income Tax Treaty of 2006 Exemplifies US treaty policy (in general terms) Starting point for negotiating treaty Recent US treaties generally conform to 2006 model United Nations model double-taxation convention between developed and developing countries Caution: each treaty is separately negotiated and is unique Page 14

16 Key treaty concepts Importance of residence US Model, Article 1(1) This Convention shall apply only to persons who are residents of one or both of the Contracting States Definition of residence, US Model, Article 4(1): Individuals: subject to tax by reason of domicile, residence or citizenship Corporations: subject to tax by reason of place of management or place of incorporation Certain tax-exempt entities (for example, pension plans) Qualified governmental entities A resident does not include a person who is subject to tax in the country with respect only to either: Income derived from sources within the country Profits attributable to a PE located in the country Page 15

17 Other considerations Non-treaty country PE considerations Triggering factors tend to focus more heavily on executing contracts locally and employees negotiating and soliciting local business opportunities Location of services May be able to reduce tax burden if services are bifurcated between US and location of project Performed in the US/US source income, which often can reduce the foreign tax base Nature of income Consulting or management fees Royalties (currently) are not subject to tax when earned by an exempt organization (transfer pricing work necessary to value intangible property) Use of an intangible (hospital name, processes, procedures, etc.) Page 16

18 Telemedicine and international taxation Telemedicine is an increasingly important area of medical services. With the rising cost of health care, telemedicine provides a more affordable means of diagnosis and care. Additionally, the cross-border implications (both domestically and internationally) are significant since, unlike traditional medical care, patients can be seen from anywhere in the world. Page 17

19 Telemedicine and international taxation (cont d) Telemedicine will have various international tax implications and questions to think about. Under US law, the source of personal service income is usually where the person performing the services is physically present. Is any of the income from the sale of equipment or IP rather than services? What does the law of the foreign jurisdiction say about the source of the income? Is there a tax treaty in place that affects the tax result? Are there PE and/or indirect tax implications based on the contract? Do we have any US 990T information filing requirements? Page 18

20 Short-term business travelers Rules of when a US employee may trigger individual tax reporting (and social insurances) vary by country. Factors to consider (individual taxes only): Is the country of travel a treaty country with the US? Does the company have a PE based on activities? Will the employee be traveling for longer than a business trip? Is a local organization sponsoring your employee s visa? US treaty countries tend to provide tax relief in the host country for days in a 12-month period. Non-treaty countries may impose nonresident tax liability from day 1, practically applied if more than a business trip. Page 19

21 Immigration considerations These apply to any foreign national crossing a border Without correct visa, employee is illegally in country Tourist visas are generally not a compliant form of documentation for employees working in a foreign country The US company may be considered responsible if employee is traveling on company business Business visas often require a local host to sponsor Tax treaties do not provide exemptions for immigration Page 20

22 Expat considerations (long-term assignments and secondments) Often different immigration requirements Can be very expensive to support (two to three times base salary) Shadow payroll, tax equalization, hypo tax all complicated issues that require third-party assistance Employer usually responsible for tax and social insurance withholdings and remittance Normally, a US citizen can credit any income taxes paid to the foreign country against his or her US income tax liability; US citizens also may be eligible for the foreign earned income exclusion FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) Page 21

23 Questions? Page 22

24 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 ED None