Managing Effective Tax Rate: Global Tax Reform Tax Executive Institute. May 1, 2017 Houston, TX

Managing Effective Tax Rate: Global Tax Reform Tax Executive Institute May 1, 2017 Houston, TX

Notice The content presented in this presentation is for discussion purposes only and is not intended to be "written advice concerning one or more Federal tax matters" within the scope of the requirements of section 10.37(a)(2) of Treasury Department Circular 230. To the extent that you decide to act, or not to act, based on any information contained in this presentation you acknowledge that the information was prepared based on facts, representations, assumptions, and other information you provided to us, the completeness and accuracy of which we have relied on you to determine. In addition, the information contained herein is based on tax authorities that are subject to change, retroactively and/or prospectively, and any such changes could affect the observations made or any conclusions reached that are contained herein. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The advice or other information in this document was prepared for the sole benefit of KPMG s client and may not be relied upon by any other person or organization. KPMG accepts no responsibility or liability in respect of this document to any person or organization other than KPMG s client. Any advice in this document is preliminary in nature and is should not be construed as final. In various parts of the document, for ease of understanding and as a stylistic matter, we might use language (such as should ) that could suggest that we reached a final conclusion on an issue. Such language should not be so construed. No inference should be drawn on any matter not specifically opined on. 2

Agenda I. Overview of Global Legislative Landscape II. US Legislative Environment III. Certain Select Regulations IV. BEPS Update 3

Overview of Global Legislative Landscape

Overview of Global Legislative Landscape US Tax Legislative Environment Tax Reform Trump Administration Proposals House Blueprint Preparing for Tax Reform Recently Issued Final Regulations Section 987 Regulations Section 385 Regulations Pres. Trump s Executive Order 13789 Base Erosion Profit Shifting ( BEPS ) Multilateral Instrument Other Initiatives 5

US Legislative Environment

Comparison of Key Proposals Trump Administration Proposal House Blueprint Reduce the corporate tax rate 15% rate 20% rate Modify the current tax system Transitional repatriation Encouraging domestic growth Prevent base stripping Border adjustability Move to territorial system, a deviation from the previous plan Deemed foreign dividend repatriation with [X%] rate Provide an election to expense assets or retain interest deduction Repeal variety of deductions, credits and preferences, including unspecified corporate loopholes No border adjustment tax, as initially proposed Move to territorial, destination-based cash flow tax with base of receipts minus purchases Mandatory repatriation (8.75% rate on cash/3.5% rate on non-cash property) Immediate expensing of assets; retain wage deductions and R&D credit Disallow net interest expense and eliminate NOL carryback Include border tax adjustment to disallow COGS deductions for imports and exclude exports 7

Trump Administration Proposals

Trump Administration Proposals Goal President Trump s goal is to make this tax reform one of the biggest tax cuts in American history. Overview Lower corporate tax rate 15% Eliminating business tax breaks for special interests, specifics TBD Previously wanted election to expense assets or retain interest deduction International business taxation Territorial system Repatriation of foreign earnings, tax rate TBD Previously 10% 15% tax applies to businesses carried through LLCs, S Corps, and partnerships Likely will have anti-abuse provisions 9

Overview of House Blueprint

The House Blueprint Moving from an income tax to a consumption tax Lower rate 20% Consumption features Immediate expensing of investment costs (e.g., tangible and intangible assets, but not land) No deduction for net interest expense Net operating losses ( NOLs ) Not carried back Carried forward indefinitely Indexed for inflation Can offset only 90% of ATI in a given year Wages are deductible (not a traditional consumption tax feature) Intended to be revenue neutral 11

The House Blueprint (continued) Territorial tax system Border adjustable Significant revenue raiser Tax jurisdiction focuses on a U.S. trade or business Tax base comprised only of business transactions with other U.S. taxpayers In the base business expenses paid to and business income from other U.S. taxpayers Out of the base business expenses paid to and business income from non-u.s. taxpayers Generally favors exports over imports, including within the value chain Foreign subsidiary earnings not taxed Eliminates Indirect FTC Transition tax on old earnings (see slides below for more detail) 8.75% on cash / 3.5% on non-cash property 8 years to pay tax (appears to apply to cash and non-cash liabilities) 12

Mandatory Repatriation What is the model for additional transition tax Reference to Camp s new Section 965 proposal as starting point to illustrate concepts and frame planning considerations Overview Camp s new Section 965 would have subjected any U.S. Shareholder ( USSH ) that owned 10% of a foreign corporation to a deemed repatriation of the corporation s undistributed and untaxed post-1986 foreign earnings ( deferred E&P ) for the last tax year of the foreign corporation which began before the year in which the participation exemption system would have applied. Deferred E&P becomes subpart F income Inclusion by USSHs based on Section 951 pro rata share rules Deferred E&P would not have been reduced for dividends distributed in such year (i.e., add-back of current year dividends) Impact of tax year end changes (e.g., 11/30 year ends) PTI excluded Includes both CFCs and 10-50 companies A deduction would have been allowed, determined by reference to the portion of the deferred E&P related to foreign cash position (75%) vs. other assets (90%) Leads to 8.75% and 3.5% rates 13

Mandatory Repatriation (continued) E&P deficits Under Camp s proposal, USSH s pro rata share of E&P deficits in foreign corporations would have been aggregated Aggregate E&P deficits then allocated among those foreign corporations with deferred E&P Treatment of hovering deficits for this purpose Alternatives to access FTCs in deficit companies Impact of deficit allocation on FTC utilization FTC Under Camp s proposal, FTC disallowed to the extent attributable to amount for which a deduction was allowed (75% - foreign cash position)/ 90% (other assets) Commensurate reduction in Section 78 gross-up Consider impact of current year dividend add back and E&P deficit allocations Potential separate basketing Use of existing excess FTC carry-forwards 14

Mandatory Repatriation (continued) Foreign cash position (under Camp Proposal) Defined, under Camp Proposal, as including cash, foreign currency, net account receivables, CODs, commercial paper, US, state, and foreign government securities, short term obligations (<1 year), and other assets Treasury determines as being economically similar Appears to exclude loan receivables (e.g., application to PTI protected 956 loans) Cash positions of foreign pass-through entities are taken into account Determined, as the greater of: Aggregate foreign cash position as of the close of the last taxable year which began before the tax year in which the participation exemption system would have applied; or Average aggregate foreign cash position for the prior two years Anti-abuse rule to disregard a transaction if the principal purpose of the transaction was to reduce aggregate foreign cash position 15

Mandatory Repatriation (continued) Taxable Year Considerations (under Camp Proposal) Based on the Camp model, the transition year for mandatory repatriation is the last tax year beginning before the tax reform begins (assume 1/1/18) For 12/31 CFCs, all of 2017 would be the transition year, so mandatory subf inclusion would make all distributions out of PTI and may limit planning 11/30 CFCs would transition for the YE 11/30/18; YE 11/30/17 planning would be unaffected by subf treatment Note that the JCT Explanation associated with Camp contemplates a YE 12/31/16 transition year. 16

Observations & Key Opportunities If there is tax reform, there is probably mandatory repatriation Repatriate high taxed earnings Eliminate E&P wherever possible Use built in loss property and E&P deficits offshore that could facilitate these objectives Continue to reduce foreign income tax The elimination of ARB 51 presents a short window to engage in transactions whose upfront tax cost will go through retained earnings but long term benefits will run through rate as part of the FASB s convergence of GAAP to IFRS 17

Examples

Section 312(a)(3) Planning and Other Related Planning

Section 312(a)(3) Planning: BIL Distribution Facts USP CFC 2 distributes Asset A, which has a BIL, to CFC 1 Considerations FV $10 AB $50 E&P $75 CFC 1 CFC 2 Asset A The distribution generally can qualify for the exception from subpart F income under Section 954(c)(6). CFC 1 has $10 of dividend income and increases its E&P by $10 The distribution causes CFC 2 s E&P to be reduced under Section 312(a)(3) by $50, from $75 to $25 Accordingly, the built in loss in Asset A has been used to eliminate $40 of E&P Timing of Section 312(a)(3) Reductions Cannot create deficits Asset A Other Assets 20

Realignment of Assets Facts USP CFC 2 sells Asset A, which has a BIL, to PS Considerations FV $10 AB $50 E&P $75 CFC 1 CFC 2 Asset A CFC 3 PS Loss not deferred, but disallowed since the deferral rule for E&P is only for transactions within the Section 267(f) group. However, a partnership is not part of this group (and therefore the rule in Treas. Reg. Section 1.312-7 applies) Timing of E&P deductions Can create a deficit in CFC2 (if basis was $100) Existing partnership and business rationale Asset A Other Assets Asset A 21

Section 312(a)(3) Planning: Section 304 Facts E&P $100 CFC 3 FV $100 AB $200 USP CFC 1 CFC 2 Cash and CFC 4 stock CFC 5 CFC 4 CFC 5 CFC 5 E&P $200 CFC3sellsthestockofCFC5,whichhasaBIL,toCFC4 in exchange for $90 of cash and $10 of CFC 4 stock Considerations Section 304 transaction should be treated as a deemed distribution of $90 to CFC 3 sourced from the E&P of CFC 4 The deemed distribution generally can qualify for the exception from subpart F income under Section 954(c)(6). $90 of E&P shifts from CFC 4 to CFC 3 CFC 3 s historic tax basis in CFC 5 hops to its CFC 4 stock, leaving CFC 3 with CFC 4 stock with a fair market value of $10 and a tax basis of $200 Subsequent to the transaction, CFC 3 should be able to reduce its E&P by $200 (from $200 to $0) under Section 312(a)(3) by distributing its CFC 4 shares to CFC 2. CFC 2 should only recognize $10 of dividend income Accordingly,thebuilt-inlossinCFC5stockhasbeenused to eliminate $190 of E&P 22

Section 312(a)(3) Planning: Boot D (First Tier) FV $100 AB $100 CFC 1 E&P $110 Foreign Taxes $25 USP $100 CFC 1 CFC 2 CFC 1 E&P $0 Foreign Taxes $0 Facts USP sells the stock of CFC 1 to CFC 2 in exchange for cash CFC 1 converts to a disregarded entity for U.S. federal tax purposes Considerations Because USP has a tax basis in its CFC 1 stock equal to fair market value, none of the $100 consideration paid by CFC 2 is taxable to USP. Pursuant to Rev. Rul. 72-327, CFC 1 likely reduces its E&P by the full $100. Under Section 312(a)(3), E&P is generally reduced by the adjusted basis of the property distributed CFC 1 s deemed distribution of $100 to USP under Section 361(c) may cause CFC 1 s E&P to be reduced from $110 to $10 CFC 1 s Section 902 E&P pool is reduced under Section 312. Thus, CFC 1 s Section 902 E&P pool amount, which carries over to CFC 2 under Sections 381 and 367(b), is $10 Although not free from doubt, it appears CFC 1 s Section 902 tax pool is only reduced by dividends. Since the distribution of the $100 is not a dividend, there is no corresponding reduction in CFC 1 s Section 902 tax pool Therefore, $100 of E&P has been eliminated. CFC 2 has $10 of E&P and $25 of taxes, resulting in a high-taxed pool of earnings 23

Section 312(a)(3) Planning: Boot D (Lower Tier) Facts CFC 2 sells the stock of CFC 3, which has a built in loss, to CFC 4 in exchange for $90 of cash and $10 of CFC 4 stock CFC 3 converts to a disregarded entity for U.S. federal tax purposes Considerations Because CFC 2 has a tax basis in its CFC 3 stock greater than fair market value, none of the cash paid by CFC 4 is taxable to CFC 2. Section 356(a) (boot within gain rules) The share(s) of CFC 4 received by CFC 2 as consideration should have a basis equal to $110 and fair market value of $10. The shares of CFC 4 should be considered a separate block of shares under Treas. Reg. Section 1.358-2(a)(2) Nominal acquirer stock (Treas. Reg. Section 1.368-2(l)) vs. actual acquirer stock Subsequent to the transaction, CFC 2 should be able to reduce its E&P by $110, from $200 to $90 under Section 312(a)(3) by distributing those shares to CFC 1. CFC 1 would have only $10 of dividend income Accordingly, the built in loss in CFC 3 has been used to eliminate $100 of E&P CFC 3 s E&P likely reduced to the extent of the boot. See Rev. Rul. 72-327. Query whether CFC 3 s tax pool is also reduced USP CFC 1 FV $100 AB $ 200 CFC 3 E&P $200 CFC 2 Cash and CFC 4 stock CFC 4 CFC 3 CFC 3 24

Granite Trust (First-tier CFC) 25% of CFC 1 E&P $100 USP CFC 1 FV $10 AB $100 E&P [$X) CFC 2 Facts USP transfers 25 percent of CFC 2 to CFC 1 CFC 2 converts to a partnership for U.S. federal tax purposes Considerations CFC 2 s conversion to a partnership is a taxable liquidation under Section 331. CFC2 will recognize gain on its assets (if any) under Section 336 and, as such, need to consider relevant Subpart F implications, if any. USP recognizes capital loss upon the liquidation of CFC2. E&P of CFC1 should be reduced by $22.5 loss recognized upon the liquidation of CFC2. The loss should be treated as passive basket loss, however, any deficit in the passive basket should reduce the E&P of CFC1 for purposes of determining section 902/960 taxes on any future distributions/deemed distributions from CFC1 25

Granite Trust (Lower-tier) 25% of CFC 3 E&P $(40) E&P $(90) USP CFC 1 CFC 2 FV $100 AB $50 E&P $100 CFC 3 Facts CFC 1 transfers 25 percent of CFC 3 to CFC 2 CFC 3 converts to a partnership for U.S. federal tax purposes Considerations CFC 3 s conversion to a partnership is a taxable liquidation under Section 331. CFC3 will recognize gain on its assets under Section 336 and, as such, need to consider relevant Subpart F implications, if any CFC 1 s and CFC 2 s aggregate $50 of gain under Section 331 is recharacterized as a dividend under Section 964(e) The deemed distribution generally can qualify for the exception from subpart F income under Section 954(c)(6). CFC 1 and CFC 2 can use their deficits to offset the increase in E&P as a result of the deemed dividend The remainder of CFC 3 s E&P (i.e., the $50 of E&P in excess of the built in gain, plus E&P generated on the taxable distribution by CFC 3) disappears 26

FTC / Deficit Planning

Deficit Planning: Section 304 Facts CFC 2 has an accumulated E&P deficit of $90. CFC 3 has E&P of $100 CFC 2 sells CFC 4 to CFC 3 in exchange for cash Considerations This is a Section 304 transaction that is treated as a deemed distribution. The deemed distribution to CFC 2 is sourced first from the E&P of CFC 3, the acquiring corporation The deemed distribution generally can qualify for the exception from subpart F income under Section 954(c)(6). $100 of E&P shifts from CFC 3 to CFC 2 After the close of the taxable year, CFC 2 s deficit offsets $90 of the $100 of E&P it received as a result of CFC 3 s deemed distribution. Going forward, CFC 2 has E&P of $10 Accordingly, CFC 2 s E&P deficit has been used to eliminate $90 of E&P A subsequent distribution by CFC 2 would move all or a portion of CFC 2 s Section 902 pool (including that received via the CFC 3 deemed dividend) Current year (i.e., nimble dividend) versus subsequent year CFC 2 distribution USP CFC 1 E&P $(90) FV $100 AB $100 CFC 2 CFC 4 Cash CFC 3 E&P $100 CFC 4 CFC 4 28

Deficit Planning: Boot D Facts CFC 2 sells the stock of CFC 4, which has a built in gain of $100, to CFC 3 in exchange for $100 of cash CFC 4 converts to a disregarded entity for U.S. federal tax purposes Considerations CFC 2 recognizes $100 of gain on the transaction, which is converted into $100 of dividend income under Section 356(a)(2) The deemed distribution generally can qualify for the exception from subpart F income under Section 954(c)(6). $100 of E&P shifts to CFC 2 After the close of the taxable year, CFC 2 s deficit offsets $90 of the $100 of E&P it received as a result of the deemed distribution. Going forward, CFC 2 has E&P of $10 Accordingly, CFC 2 s E&P deficit has been used to eliminate $90 of E&P A subsequent distribution by CFC 2 would move all or a portion of CFC 2 s Section 902 pool (including that received via the CFC 3 deemed dividend) Current year (i.e., nimble dividend) versus subsequent year CFC 2 distribution X3 CFC 1 CFC 2 CFC 4 Cash CFC 3 E&P $(90) FV $100 AB $0 CFC 4 E&P $100 CFC 4 E&P $100 29

Access of High-Tax Earnings: Section 304 Transaction Facts USP CFC2 acquires CFC3 from USP (or another one of USP s domestic affiliates) in return for $100 of cash (i.e., sized to be greater than CFC2 E&P, including PTI) in a Section 304 transaction Considerations CFC 3 CFC 1 [$] US$ 100 (c)(3) E&P US$ 100 PTI US$ 10 tax pool The Section 304 transaction results in a deemed distribution from CFC2 to USP, first treated as a PTI distribution ($10), and the balance ($90) a taxable dividend (moving CFC2 s FTC pool of $100) to USP (to offset its existing excess foreign source income) If local country issues, consider an F reorganization of CFC2 followed by the section 304 transaction. CFC 2 US$ 90 (c)(3) E&P US$ 10 PTI US$ 100 tax pool CFCs 30

Repatriation Using Tax Basis: Related Party Leverage Transaction Steps Step 1: CFC1 borrows [$] from CFC 3 and [$] from CFC 4. US$ 100 basis (plus $ 50 Section 961 PTI basis) USP 2 [$] Step 2: CFC1 distributes borrowed funds to USP. Step 3: CFC1 uses future earnings to repay debt. Anticipated U.S. Tax Consequences CFC 3 [$] Note CFC 1 1 CFC 2 [$] US$ 0 (c)(3) E&P US$ 100 (c)(3) E&P US$ 50 PTI The distribution should be a tax-free return of basis under Section 301(c)(2). Interest payments from CFC1 to CFC3 and CFC4 may qualify for an exception to subpart F under Section 954(c)(6). See Page v. Haverty, 129 F.2d 512 (5th Cir. 1942) (holding company with no E&P funded a distribution by borrowing from certain subsidiaries). Consider Illinois Tool Works, Inc. v. Comm r, Tax Court Docket No. 10418-14 (upstream loan fact pattern currently being litigated by the government). Note CFCs CFC 4 3 31

Use of PTI: Section 956 Loan Transaction Steps Step 1: CFC3, which has $100 of PTI, loans $100 to USP. USP Anticipated U.S. Tax Consequences CFC1 CFC2 $100 Loan 1 An investment in U.S. property (e.g., debt of a U.S. person) that does not exceed the amount of a CFC s PTI is excluded from the income of such a CFC s USSH under Section 956. Accordingly, CFC3 s loan of $100 to USP does not result in an income inclusion to USP. Consider other transactions to potentially use and/or access PTI. $100 PTI CFC3 32

Use of PTI: Inbound Domestication/Liquidation Basis Limitation 2 Basis = $0 USP CFC1 CFC2 $100 1 PTI = $100 Transaction Steps Step 1: CFC2 makes a distribution of $100 (an amount equal to its PTI) to CFC1. Step 2: CFC1 subsequently domesticates through either: an F reorganization or liquidation. - Due to prior transactions (e.g., distributions, reorganizations), USP s basis in CFC1 stock is less than the total PTI at CFC2. Anticipated U.S. Tax Consequences Transfer of $100 from CFC 2 to CFC 1 should be treated as a tax-free distribution of PTI. Pursuant to Section 367(b) and Treas. Reg. Section 1.367-3(b), CFC 1 s U.S. shareholder (i.e., USP) should include CFC 1 s all-e&p amount in income (excluding PTI). Consider application of Notice 2016-73. 33

Certain Select Regulations

Overview of the Section 987 Regulation Package Income Calculation 987 Gain/Loss Loss Disallowance Rules Section 988 Profit and loss statement translated into the owner s functional currency Retains Balance Sheet approach proposed in 2006 Simplifying Effective immediately Loss Deferral for related party loans with respect to principal purpose transaction Election to mark to market 988 items Final regulations adopt the general framework of the Proposed 2006 Section 987 Regulations 35

Scope of the 987 Regulations Regulations apply to 987 QBUs of individual or corporation 987 QBU QBU with functional currency different from owners QBU does not include holding companies Regulations apply to U.S. corporations and CFCs alike 36

Effective Dates of the 987 Regulations 2016 2017 2018 Election to apply to tax years on or after January 1, 2017 Tax years beginning on or after January 1, 2018 General Effective Dates Loss Deferral Rules Effective date of December 7, 2016 for transactions entered into with a principal purpose of recognizing Section 987 loss Apply generally to transactions entered into after January 6, 2017 37

987: 2017 CFC Planning, Unrecognized 987 Loss USP CFC QBU Unrecognized 987 Loss Facts - CFC complies with 987 using an accepted method (e.g., proposed 1991 regulations, earnings only) - CFC has an unrecognized 987 loss in QBU as of 12/31/16. Considerations - Under the fresh start rules of the Section 987 Final Regulations, the unrecognized 987 loss (as calculated under the previous method) will be eliminated on the last day prior to the effective date (first tax year beginning on or after 1/1/18 (e.g. 12/31/17 for a calendar year taxpayer). - Prior to the effective date taxpayers can recognize section 987 losses under the current method of accounting subject to certain limitations. - Transactions that would result in recognition of section 987 loss (and reduction of CFC s E&P) Remittances from QBU to CFC owner (e.g., legal dividend) - Percentage of built in loss recognized is generally proportionate to the percentage of 987 equity pool distributed - However, distribution of substantially all of a QBU s assets will result in deferral and likely nonrecognition of the loss. Substantially all is a facts and circumstances determination, but general ruling guideline: 90% net assets and 70% gross assets (FMV basis) Incorporation of QBU (e.g., election under the Check the Box Regulations) - The incorporation will be treated as a termination of the QBU, resulting in the full recognition of the unrecognized 987 loss. - The outbound loss deferral rules, which would result in nonrecognition of loss to a US corporation that elects to incorporate its QBU, do not apply 38

385 Overview On October 21, 2016, the Treasury Department and the IRS published final Section 385 regulations (the Final Regulations ) that follow up on the proposed Section 385 regulations issued on April 4, 2016 (the Proposed Regulations ) The Final Regulations primarily affect inbound related-party instruments and non-consolidated related-party instruments The Final Regulations include rules regarding: Documentation of related-party instruments (the Documentation Rules ) Recharacterization of related-party instruments issued in certain restructuring transactions (the Recast Rules ) Regulation package also includes: Temporary regulations addressing the application of the Recast Rules to: Certain types of related-party instruments (e.g., short-term and ordinary course instruments) and partnership-issued related-party instruments U.S. consolidated groups (the Consolidated Group Rules ) Proposed regulations regarding partners share of recourse liabilities Satisfying the Final Regulations does not guarantee that a related-party instrument will be treated as debt for U.S. federal income tax purposes 39

Tax Reform Considerations - Executive Order - The White House released Executive Order 13789 on April 21, 2017 entitled Identifying and Reducing Tax Regulatory Burdens - The purpose is to reduce the burden of the existing tax regulations - Requires reviewing all significant tax regulations issued on or after January 1, 2016 to identify regulations that: - Impose an undue financial burden; - Add undue complexity; or - Exceed the statutory authority of the Internal Revenue Service. - Interim report identifying such regulations due June 20 - Final report due September 18 containing specific recommendations to mitigate the burdens imposed by the identified regulations - Impact - Section 385 and Section 987 regulation s effective date could be delayed, suspended, or rescinded 40

BEPS Update

Multilateral Instrument

Objective of the MLI Action 15 Provide a vehicle for the swift implementation of the BEPS tax treaty based measures: - Hybrid mismatches (Action 2) - Treaty abuse (Action 6) - Artificial avoidance of PE (Action 7) - Improving dispute resolution and arbitration (Action 14) Implements agreed final recommendations without modification except certain conforming exceptions U.S. position 43

Signature and entry into force 99 jurisdictions participated, but no commitment to sign - Open for signature as of December 31, 2016; - Signing ceremony June 2017 Enters into force on first day of the month following three months after five Signatories deposit instruments of ratification - Example: if five deposits made in January 2017, then first five Signatories are parties starting May 1, 2017 - Subsequent Signatories have same three-month period following their deposit Withholding tax: takes effect for the first day of the year after both parties to a CTA have MLI enter into force All other taxes: taxes levied with respect to taxable periods beginning on or after six months after the MLI enters into force for the two parties 44

Flexibility Selectivity with respect to Covered Tax Agreements (CTAs) Alternative options for meeting minimum standard Ability to opt out completely or partially of certain provisions Ability to apply reservations to a subset of CTAs Flexibility to apply optional or alternative provisions 45

BEPS Action 6 Treaty abuse Most countries likely to adopt principal purpose test ( PPT ). Some consideration of pairing PPT with simplified LOB. - Impact of derivative benefits provision? No immediate conclusions on non-collective investment vehicles non-civs. - Possibility of three examples to be incorporated into OECD Model Tax Convention Commentary next year. - Examples do not address a look-through approach. - Unclear whether substance can be shared among related entities. Pension funds to be provided with resident status under model provision Issues for consideration - Lack of uniformity with regard to the treatment of CIVs, the definition of CIVs and their entitlement to treaty benefits. Will create complexity and uncertainty. - Bilateral negotiation required to finalize CIV treatment on a treaty by treaty basis where LOB approach adopted. - EU countries most likely to adopt PPT in preference to LOB test. - Uncertainty for non-civs due to deferred decision on treatment. 46

Anti-Tax Avoidance Directive (ATAD)

EU s response to BEPS action items What is in the package? EU Anti-Tax Avoidance Package Anti Tax Avoidance Directive ( ATAD ) Recommendation on tax treaties Revised administrative cooperation directive Communication on external strategy Legally binding anti avoidance measures to be implemented in domestic law of the EU member states. The directive is intended to provide a minimum level of protection for the internal market and strengthen the average level of protection against aggressive tax planning. Advice on how to revise national tax treaties against abuse. Implementation of: BEPS 6: principal purpose test in modified version; a genuine economic activity should not be tackled (to align with EU case law); BEPS 7: tackling artificial avoidance of PE. Country-by-Country reporting between tax authorities (implementation of BEPS 13 in EU). Measures to promote tax good governance internationally, including a common approach listing third countries ( EU tax haven blacklist ) and counter measures against third countries. On September 14, 2016, the Commission completed the first step: a Scoreboard of all third country jurisdictions for tax purposes. Adopted on July 12, 2016 Adopted on May 25, 2016 Application date: January 1, 2019 (2020 for exit taxation rules) 48

Anti-tax avoidance directive BEPS Action item Interest deduction limitation rule 4 Exit taxation CFC rules 3 GAAR Hybrid mismatches 2 49

Anti-tax avoidance directive (continued) Aims to discourage base erosion and profit shifting through excessive interest payments Bank Interest limitation rule BEPS Action item 4 EU/Non-EU EU Sub I/C loan Interest limitation rule: OECD (BEPS Action item 4): Comparable approach (other exceptions and group ratios) Applies irrespectively whether financing is from (low taxed) affiliates or third parties (unless taxpayer is a qualifying stand-alone entity) Grandfathering of loans concluded before June 17, 2016 possible Net borrowing costs are deductible up to highest of 30% EBITDA Fixed Ratio Rule (with tax adjustments) with a de minimis level of EUR 3 million Option to introduce: Alternative group ratio rules: balance sheet based test of equity over asset (all or nothing) or third party debt over group EBITDA test Option to exclude financial undertakings and loans used to fund qualifying long-term public infrastructure projects in the European Union Option to carry forward exceeding non-deductible borrowing costs and potential carry back three years Option to carry forward unused interest capacity for five years Member States which already have national targeted rules (e.g., thin capitalization rules) which are equally effective to the proposed interest limitation rule will have up to January 1, 2024 to implement this provision and phase out their domestic rules, unless an agreement is reached on interest limitation rules at OECD level prior to this date 50

Interest deduction restriction EU implementation effective January 1, 2019 UK impementation effective April 1, 2017 Possible deferral if equally effective rules to January 1, 2024 Source: KPMG International 2016 51

Anti-tax avoidance directive Rule tries to prevent taxpayers from reducing taxes by moving residence and/or assets to low-tax jurisdictions Exit Taxation EU/Non-EU EU Transfer of assets or tax residence Exit tax: OECD: No comparable requirement Main rule: cross-border transfers of assets between the head office and PE or tax residence within the EU or to non-eu countries shall be subject to tax In case of transfer within the EU/EEA: - Tax deferral mechanism of 5 years with possible interest; may require guarantee - Transfer at market value between Member States for tax purposes (Exit and Step Up), dispute possible - Broadly reflects EU case law Exception for temporary asset transfers within a 12 month period for the purposes of liquidity management, capital requirements, securities financing transactions or posted as collateral Member States may defer the enter into force date to 2020 (instead of 2019 for the other provisions) 52

Exit taxation Deemed disposal at market value where Member State loses taxing rights as a result of: Transfer of assets from Head Office to foreign PE Transfer of assets from PE to Foreign Head Office or Foreign PE Deferral + interest/guarantee for EU/EEA transfer Exclusion for <12 month transfer for: Financing of securities Collateral Prudential capital requirements Liquidity management Transfer of residence Transfer of business from local PE Option to Defer Implementation until 2020 Source: KPMG International 2016 53

Anti-tax avoidance directive CFC Rule BEPS Action item 3 EU/Non-EU EU Sub PE CFC rule aims to prevent shifting of profits from parent companies to low-taxed subsidiaries CFC Rule: OECD (BEPS Action item 3): No minimum standards but 6 building blocks (CFC Definition, Exemptions and Thresholds requirements, Income Definition, Computation, and Attribution, Prevention of Double Taxation) Applicable to controlled entities and PE s of which the profits are not subject to tax or exempt from tax at the level of the EU taxpayer CFC definition: A) ownership (>50% of voting rights/capital/profit entitlement) and B) the actual corporate tax paid by the entity or PE is less than 50% of the home jurisdiction Where an entity or PE is treated as a CFC the taxpayer shall include in the tax base: a. a specific list of non-distributed income categories ( passive income ) - Exception for EU/EEA CFCs carrying on substantive economic activity supported by staff, equipment, assets and premises (and optional for third country CFCs) - Option for de-minimis exception if the passive income is 1/3 or less of income accruing to the CFC; OR b. the non-distributed income arising from tax motived transactions - Aimed to pick up profits artificially diverted from Member State to CFC - Option for de-minimis exception for accounting profits below certain thresholds 54

Anti-tax avoidance directive deny deduction Hybrid mismatch BEPS Action item 2 EU/Non-EU EU No inclusion Rule tries to combat hybrid mismatches within the EU and third countries Hybrid Mismatch: OECD (BEPS Action item 2): Mismatch neutralized for tax purposes Only intra-eu situations involving hybrid entities and hybrid financial instruments? D/D situation: deduction only in Member State where such payment has its source D/NI situation: Member State of payer shall deny the deduction of such payment Hybrids involving third countries: Per announcement on October 25, 2016, it is proposed that the ATAD will be amended to deal with mismatches in relation to third countries, imported mismatches and permanent establishments deduction EU Sub deny deduction 55

BEPS Examples

Payment of disregarded entity The EU Member State should deny the deduction of the interest payment O Interest payment US US - EU EU + EU 57

Payment to exempt company US Cayman Co Loan EU Interest payment 58

Payment to a Reverse Hybrid O US US The BV should deny the deduction O - Interest payment CV BV NL 59

Lux - US Branch structure Luxembourg should tax and not exempt the profits attributed to reverse hybrid PE No active trade or business in the US LuxCo US Luxembourg US Loans to third countries 60

Imported mismatch Member State should deny the deduction of interest to the extent of a the deduction without inclusion O +/- PEC / PPL US HoldCo US State II * It is noted that the imported mismatch rules do not apply to any payment that is made to a corporate payee in a Member State as Member States should have implemented other hybrid mismatch rules - Interest payment Member State EU 61

UK Hybrid Rules US US Effective January 1, 2017, the UK will deny the COGS deduction Royalty CV NL UK OpCo Sale of Goods BV 62

What Questions Do You Have?

Presenters Peter Blessing KPMG LLP (212) 954-2660 phblessing@kpmg.com Chetan Vagholkar KPMG LLP (713) 319-2025 cvagholkar@kpmg.com 64

Thank you

kpmg.com/socialmedia The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 660290 The KPMG name and logo are registered trademarks or trademarks of KPMG International.