AHLA A. The Globalization of Health Care Opportunities and Potential Pitfalls Michael Domanski Honigman Miller Schwartz and Cohn LLP Detroit, MI Timothy A. A. Stiles KPMG LLP New York, NY Tax Issues for Health Care Organizations October 20-22, 2013
TAX ISSUES FOR HEALTH CARE ORGANIZATIONS TAX REQUIREMENTS OF ALTERNATIVE INVESTMENTS The Globalization of Health Care: Opportunities and Potential Pitfalls Michael Domanski Honigman Miller Schwartz and Cohn LLP mdomanski@honigman.com Overview Fundamentals and Glossary of Terms / Concepts Applicable to Cross-Border Structures US Outbound Tax Planning Individuals (e.g., US citizens / permanent residents, expatriates) US-based companies establishing foreign subsidiaries / entering into foreign joint ventures US Inbound Tax Planning Individuals (e.g., non-us citizens / non-residents / limited-term work permits / visas) Foreign-based companies or foreign affiliates of US parent companies establishing US subsidiaries or entering into US joint ventures 1
A. Double Taxation 1. Involves two countries imposing taxes on the same item of income 2. Normally occurs because a party is a resident of one country and arguably earns income in another 3. Possible relief available in the form of income tax treaties and foreign tax credits B. Residence 1. Different standards apply to individuals and corporations 2. US approach is contrary to many countries 3. Treaties can provide tie-breaker rules 2
C. Methods of Taxation 1. Individuals and companies treated as residents or otherwise involved in a significant local activities are typically taxed on a net basis (after deductions; tax returns are required / filed) 2. Individuals and companies treated as non-residents with limited local activities are generally taxed on a gross basis (no deductions; no tax returns required / filed) through withholding taxes 3. With the advent of FATCA, the US has created two parallel withholding tax regimes 4. Other countries may implement their own version of FATCA D. Sourcing of Income 1. Can determine whether a country can impose tax on an item of income earned by a non-resident 2. Withholding tax often will apply to such income 3. In the US (and most countries), each type of income is governed by a separate rule 3
E. Transfer Pricing 1. Requirement that related parties enter into arrangements and treat each other in a manner similar to third parties 2. Most notable example involves related party charges / fees for services, loans, and transfers of assets 3. Countries have concerns of pricing manipulation for the purpose of shifting income from high to low tax countries F. Entity Classification 1. Corporations vs. pass-through entities (partnerships, disregarded entities) 2. US check the box rules 3. Foreign countries instead consider entity characteristics (generally similar to old US four factor test) 4. Can result in trapped losses or foreign tax credits 4
G. Pass-Through Structures 1. Immediate inclusion / consolidation of income or loss of subsidiary with parent company / owner of subsidiary 2. Often achieved through check-the-box planning 3. Branches, partnerships, LLCs in the US 4. ULCs, GmbHs, Srls often used outside the US H. Deferral Structures 1. Same as blocker structures often used for UBIT purposes 2. no consolidation of subsidiary losses with parent / owner of subsidiary 3. non-recognition of income / gains until profits are repatriated (e.g., dividends) 4. Consideration of anti-deferral regimes (e.g., Subpart F / controlled foreign corporations ( CFCs ); passive foreign investment companies ( PFICs ) in the US) 5
I. Foreign Currency Gain or Loss / Translation Issues 1. Based on functional currency of entity 2. Non-functional currency is simply another asset that can appreciate or depreciate (for US companies, when compared to the value of the US dollar) 3. Gain or loss frequently arises in context of foreign pass-through entities and cross-border loans J. Investment Techniques 1. Loans can provide interest expense deductions that can erode the tax base; however, they can attract: a) withholding taxes b) transfer pricing issues c) thin capitalization limitations d) foreign currency issues 2. Equity contributions can be simpler but: a) can attract capital taxes in certain countries b) provide one less option for repatriation c) do not generate interest expense deductions 6
K. Repatriation Techniques 1. Deductible payments are generally more tax-efficient a) royalties b) management fees c) Interest 2. Non-deductible payments such as dividends can also be considered 3. Be aware of: a) withholding taxes b) earnings and profits from a tax accounting perspective c) treaties d) transfer pricing US Outbound Planning - Individuals A. Foreign Perspective 1. Income tax a. Tax residency b. Income tax treaties / tie-breaker rules c. Foreign source income / withholding tax d. Tax returns 2. Social security tax a. Totalization agreements b. Certificates of coverage c. Compare US and foreign rates 7
US Outbound Planning - Individuals B. U.S. Perspective 1. Permanent relocation a. Expatriation to avoid tax as a U.S. tax resident b. Can be subject to an alternative tax 2. Temporary relocation a. Possible exclusion of certain foreign income from US tax b. Foreign tax credits US Outbound Planning - Companies A. Foreign Perspective 1. Tax residency 2. Treaties 3. Trade or business / permanent establishment / taxable presence 4. Foreign source income / withholding tax 5. Base erosion / thin capitalization 6. Transfer pricing 7. Foreign tax returns 8
US Outbound Planning - Companies B. U.S. Perspective 1. Blocker / deferral vs. pass-through structure 2. Check-the-box regulations 3. Subpart F income 4. Foreign currency / branch loss remittances 5. Foreign tax credits 6. Toll charges for outbound property transfers 7. Transfer pricing 8. Repatriation / exit strategy 9. Tax reporting / tax return elections / disclosures US Inbound Planning - Individuals A. Foreign Perspective 1. Income tax a. Tax residency / tax on worldwide income b. Possible departure tax c. Tax credits for US tax d. Tax returns 2. Social security tax a. Totalization agreements b. Certificates of coverage c. Compare US and foreign rates 9
US Inbound Planning - Individuals B. U.S. Perspective 1. Income tax a. Residency Green card / substantial presence / day count rules US resident election Income tax treaties / tie-breaker rules tax on worldwide income / benefits of residency status Treatment of spouse b. Non-residency - Tax on US source income only - Limited deductions 2. Social security tax US Inbound Planning - Companies A. Foreign Perspective 1. CFC equivalent rules 2. Tax credits for US taxes 3. Trapped losses 4. Repatriation / exit strategy 5. Transfer pricing 6. Foreign tax returns 10
US Inbound Planning - Companies B. U.S. Perspective 1. Blocker vs. pass-through structure 2. Treaty shopping 3. Check-the-box regulations 4. Trade or business / permanent establishment / taxable presence 5. Two levels of tax (in corporate or in branch form) 6. Withholding tax 7. Sandwich structures 8. Base erosion / thin capitalization 9. Transfer pricing 10. Tax returns / reporting Notices / Disclosures These materials have been prepared for informational purposes only. These materials do not constitute legal advice and cannot be relied upon for the purpose of avoiding federal tax penalties. ****************************************************************************************** IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding tax-related penalties or (ii) promoting, marketing or recommending to another person any transaction or matter addressed in this communication 11