Mastering the Effectively Connected Income Rules for Foreign Persons Engaged in Inbound Transactions

Mastering the Effectively Connected Income Rules for Foreign Persons Engaged in Inbound Transactions TUESDAY, SEPTEMBER 22, 2015 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

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Mastering the Effectively Connected Income Rules Sept. 22, 2015 Daniel R. Blickman Blank Rome blickman@blankrome.com Jeffrey M. Rosenfeld Blank Rome rosenfeld@blankrome.com James K. Sams KPMG jksams@kpmg.com

Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED 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 information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Effectively Connected Income Rules for Foreign Persons Engaged in Inbound Transactions Presented By: Jim Sams Daniel Blickman Jeffrey Rosenfeld September 22, 2015

JAMES K. SAMS, Principal Professional and Industry Experience JAMES K. SAMS Principal KPMG LLP 1676 International Drive McLean, VA 22101 Tel 703-286-8492 Fax 703-991-6423 Cell 703-582-3554 jksams@kpmg.com Function and Specialization Jim is a principal in KPMG s International Corporate Services practice in the Mid-Atlantic Area. Education, Licenses & Certifications A.B. International Relations and Economics, Brown University Juris Doctor, University of Michigan Law School Jim provides high-level technical assistance and tax consulting services to clients on a wide-range of complex inbound and outbound US international tax transactions and issues. Primary areas of practice include US-inbound financing and debt restructuring, IP planning, CFC and foreign tax credit planning, acquisition structuring/restructuring for multinationals, and acquisitions, dispositions and structuring for private equity and real estate/infrastructure funds. Jim joined KPMG LLP in December of 1993, in the Firm s Washington National Tax practice in Washington, DC, and has worked in the Firm s San Francisco and London practices. He returned to the Washington DC area in the summer of 2009. Jim began his tax career as a law clerk for the Honorable B. John Williams, Jr. of the United States Tax Court, following which he joined the Office of Associate Chief Counsel (International) in the Office of Chief Counsel of the IRS in the fall of 1987. He also served as Special Counsel to the Deputy Chief Counsel, as an advisor to the Deputy Chief Counsel and the Acting Chief Counsel on regulations, rulings and other matters for their review. Jim has published articles in Tax Management International Journal, International Tax Review, and other journals, and has been a speaker at such organizations as the Tax Executives Institute, ATLAS and Executive Enterprises, among others. He also has been an Adjunct Professor in the graduate tax law program at the Georgetown University Law Center, and was a Senior Visiting Fellow at the London School of Economics. Representative Industries Private Equity, Aircraft Leasing, Manufacturing and Retail, Pharmaceutical, Real Estate and Funds Structuring 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.

Daniel R. Blickman Daniel Blickman has substantial experience in a wide range of federal and state tax issues. He has represented large public companies, middle-market companies, small or start-up companies, and individuals in all aspects of: mergers and acquisitions issuance of securities reorganizations, redemptions, and liquidations, both domestic and international using corporations, partnerships, and joint venture structures Daniel R. Blickman Partner Blank Rome LLP 215.569.5373 Blickman@BlankRome.com He also has extensive experience in the formation of investment funds, real estate transactions, compensation issues, cross-border investments (both in-bound and outbound), securitizations, and capital market issues, including swap agreements. Education: New York University, LLM Tax Yale Law School, JD

Jeffrey Rosenfeld Jeffrey Rosenfeld concentrates his practice in the area of business tax law. Mr. Rosenfeld has significant experience counseling corporate clients and individuals in a broad array of tax matters including: Jeffrey M. Rosenfeld Associate Blank Rome LLP 215.569.5752 Rosenfeld@BlankRome.com Education: New York University, LLM Tax University of Pennsylvania, JD domestic and international tax matters; state and local tax planning; tax-efficient structuring of domestic and international mergers, acquisitions, divestitures, reorganizations, spin-offs, redemptions and liquidations; formation, operation and acquisition of Subchapter S Corporations, partnerships and limited liability companies; federal, state, and local criminal and civil tax controversies, including audits, administrative appeals, and litigation; and, issuances of equity-based compensation. Mr. Rosenfeld also counsels individual and corporate clients regarding undeclared foreign bank accounts, including FBAR reporting obligations, and has represented numerous clients in the Internal Revenue Service s Offshore Voluntary Disclosure Program. Mr. Rosenfeld frequently writes on issues related to the FBAR and FATCA rules and regulations and international tax compliance issues.

9 AGENDA Introduction Definition of ECI Trade or business, partnerships, beneficiary of trust engaged in business ECI contrasted with FDAP Form 1120-F Withholding requirements and exemptions Case study illustration

10 AGENDA Introduction Definition of ECI Trade or business, partnerships, beneficiary of trust engaged in business ECI contrasted with FDAP Form 1120-F Withholding requirements and exemptions Case study illustration

11 Overview U.S. Source FDAP income subject to 30% tax Collection via withholding by U.S. payer Key Exceptions Treaty Withholding Rates; and, Portfolio Interest Exception

12 Overview Nonresidents engaged in a U.S. trade or business: Subject to full graduated rates (currently 35% for corporations and 39.6% for individuals, trusts and estates) on income that is effectively connected with its U.S. trade or business ( ECI ) Deductions permitted U.S. tax returns need to be filed Branch Profits Tax

13 Overview Analytical steps for foreign taxpayers If the taxpayer is not engaged in a U.S. trade or business, it is FDAP income If FDAP Is it U.S. source or foreign source? If U.S. source, is there an applicable treaty? If trade/business income Is there a U.S. trade or business? Is there an applicable treaty? Permanent establishment? Income attributable to PE? Apply ECI rules

14 AGENDA Introduction Definition of ECI Trade or business, partnerships, beneficiary of trust engaged in business ECI contrasted with FDAP Form 1120-F Withholding requirements and exemptions Case study illustration

15 Trade/Business Investing (ECI) Foreign Corp. Foreign Corp. Foreign Corp. U.S. Branch (U.S. T/B) U.S. Partnership (U.S. T/B or U.S. Real Estate) U.S. Real Estate The technical term for income effectively connected with a U.S. trade or business is ECI (effectively connected income).

16 Contrast with FDAP Structure (30% Flat Tax) Cash investment in stock or debt Transaction Tax, if any Foreign Corp. Foreign country corporate tax Repatriation Tax Dividends or interest; U.S. Withholding Tax Repatriation Tax U.S. Corp. Operating income U.S. corporate income tax Operational Tax

What is ECI? 17 Income effectively connected with a U.S. trade or business Two Threshold Concepts U.S. Trade or Business, and Effectively Connected Income

U.S. Trade or Business 18 What is a U.S. trade or business? No definition Service not likely to issue private rulings on the matter Activity must be substantial, continuous, and regular Isolated transactions can be a U.S. trade or business

U.S. Trade or Business (cont d) 19 What is a U.S. trade or business? Ministerial, clerical, or collection-related activities, usually not sufficiently profit-oriented to constitute a U.S. trade or business. Scottish American Investment Co. v. Commissioner - Foreign trust has U.S. office to collect revenues, send revenues to foreign office, maintain records, exercise voting rights, and perform ancillary accounting functions. Major policy decisions were determined by the foreign office. U.S. activities do not arise to trade or business Spermacet Whaling and Shipping Co. v. Commissioner - Receiving monthly statements and correspondence and making certain payments were ministerial and did not rise to level of U.S. trade or business. Holding board meetings in U.S. insufficient.

U.S. Trade or Business (cont d) 20 What is a U.S. trade or business? Ministerial, clerical, or collection-related activities, usually not sufficiently profit-oriented to constitute a U.S. trade or business. (continued) Linen Thread Co. v. Comissioner - delivery of goods, handling of paperwork, and collection of payment by the U.S. office did not rise to the level of a trade or business.

U.S. Trade or Business (cont d) 21 What is a U.S. trade or business? Activity must be substantial. Isolated activities will generally be insufficient. Linen Thread Co. v. Commissioner two isolated transactions insufficient to create trade or business However, one transaction can create a U.S. trade or business if that activity is significant in relation to total activities Johansson v. United States - world championship bout by nonresident alien in the United States constituted a U.S. trade or business

U.S. Trade or Business (cont d) 22 What is a U.S. trade or business? Promotional activity (i.e., advertising) insufficient but solicitation of business can arise to level of U.S. trade or business Opening a bank account in the U.S. insufficient Mere purchase of goods in U.S. insufficient

U.S. Trade or Business (cont d) 23 What is a U.S. trade or business? Attribution through agents can cause a foreign person to be engaged in a U.S. trade or business Actions of employees usually can cause foreign person to be engaged in a U.S. trade or business Actions of agents that are not employees can cause a U.S. trade or business

U.S. Trade or Business (cont d) 24 What is a U.S. trade or business? Personal services performed in the U.S. create a U.S. trade or business Exception for: Nonresident individual Working for a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in trade or business within the United States Temporarily present in the U.S. for less than 91 days, and Receives $3,000 or less of compensation for such services

U.S. Trade or Business (cont d) 25 What is a U.S. trade or business? Trading in stock and securities through an independent agent is insufficient to create a U.S. trade or business Trading in stock and securities for taxpayer s own account is not a U.S. trade or business This exception does not apply to a dealer A dealer is a merchant regularly engaged in selling stock or securities to customers

U.S. Trade or Business (cont d) 26 What is a U.S. trade or business? Section 897 A foreign taxpayer with gain or loss from the disposition of U.S. real property interests are treated as if they were engaged in a U.S. trade or business for the taxable year, regardless of whether they were actually so engaged (discussed more later) Attribution from partnerships and trusts (discussed later)

Effectively Connected Income 27 Only income that is effectively connected with a U.S. trade or business (ECI) is subject to U.S. tax What is effectively connected income? First determine if income is U.S. source income or foreign source income Second, apply ECI statutory rules and regulations Generally all U.S. source income is considered to be effectively connected income If foreign source income, complicated rules apply

Determining U.S. Source 28 Interest Generally sourced to the residence of the payer (subject to exceptions discussed below) Dividends Generally sourced to the residence of the payer (subject to exceptions discussed below) Personal Services Generally sourced at the location where the services are performed Rents and Royalties Tangible property (location) Intangible property (use) Sale or Exchange of Real Property Location (special rules for USRPI) Sale or Exchange of Personal Property Generally sourced at residence of seller (special rules for inventory)

Determining U.S. Source 29 Sale or Exchange of stock Generally sourced at residence of seller

Sourcing Rule Exceptions 30 Interest from 80/20 Corporations treated as foreign source income Interest from deposits with a foreign branch of a U.S. corporation treated as foreign source income Certain portion of dividends from foreign corporations are treated as U.S. source if such foreign corporation has ECI that equals at least 25% of its worldwide income

Effectively Connected Income 31 Is investment income effectively connected income? Generally yes, if one of three tests are met: Asset-Use Test - ECI includes income from assets used in or held for use in the conduct of the foreign corporation's U.S. trade or business Business-Activities Test - The activities of the U.S. trade or business were a material factor in the realization of the income Active and Material Participation Test The income is effectively connected with the conduct of a banking or similar business in the United States

Effectively Connected Income 32 Can foreign sourced income be considered effectively connected income? Generally yes, under certain circumstances: Foreign-sourced income from Intangibles, A banking or securities business, and Sales of inventory property (unless the property is sold or exchanged for use, consumption, or disposition outside the U.S., and (2) a non-u.s. office/fixed place of business participated materially in the sale In each case, if the income is attributable to an office or other fixed place of business within the United States.

Effectively Connected Income 33 Determining existence of office or other fixed place of business Fixed Facilities - an office or other fixed place of business is a fixed facility, that is, a place, site, structure, or other similar facility, through which a nonresident alien individual or a foreign corporation engages in a trade or business Management activities - not considered to have an office or other fixed place of business merely because a person in control of business has an office or other fixed place of business from which general supervision and control over the policies of the business are exercised

Effectively Connected Income 34 Determining existence of office or other fixed place of business Employee (or dependent agent) activities activities of an employee can create an office or other fixed place of business if such employee: has the authority to negotiate and conclude contracts and regularly exercises that authority, has a stock of merchandise belonging to the nonresident alien individual or foreign corporation from which orders are regularly filed, or employee activities take place in an employer s fixed facilities Independent agent activities generally cannot create fixed place of business

Effectively Connected Income 35 Determining whether foreign income is attributable to fixed place of business: Office or fixed place of business must be a material factor in the realization of the income For intangibles, office is a material factor if it either: actively participates in soliciting, negotiating, or performing other activities required to arrange the lease or license that generates the income; or performs significant services incident to such lease or license

Effectively Connected Income 36 For intangibles, the following activities by a U.S. office are insufficient to cause foreign licensing income to be attributable to that office: Developing, creating, producing, or acquiring and adding substantial value to the intangible property; Collecting or accounting for the income; Exercising general supervision over the activities of the persons directly responsible for either soliciting, negotiating, or arranging the lease or license or performing significant services incident to such lease or license; Performing merely clerical functions incident to the lease or license; or Exercising final approval over the execution of the lease or license

Effectively Connected Income 37 For inventory, the office or fixed place of business must be a material factor in the realization of the income by actively participating in soliciting the order, negotiating the contract of sale, or performing other significant services necessary for the consummation of the sale, which are not the subject of a separate agreement between the seller and the buyer, and the income, gain, or loss is realized in the ordinary course of the trade or business carried on through the U.S. office or fixed place of business. The following activities, alone, are insufficient: The sale is made subject to the final approval of such office; The property sold is held in and distributed from such office; Samples of the property sold are displayed (but not otherwise promoted or sold) in such office; or Such office performs merely clerical functions incident to the sale

Branch Profits Tax 38 Intended to tax a U.S. branch of a foreign corporation similarly to a U.S. subsidiary of a foreign corporation Imposed on after-tax earnings that are not reinvested in a U.S. trade or business by the close of the tax year ( dividend equivalent amount ) 30% tax (unless reduced by treaty) Also, a 30% branch interest withholding tax on payments by U.S. branch to foreign payee

Branch Profits Tax Example 39

40 Inbound Investments in U.S. Real Estate Foreign Corp. A Foreign Corp. B U.S. Blocker Corp. 1 U.S. Real Estate Venture 1 U.S. Blocker Corp. 2 U.S. Real Estate Venture 2 U.S. Blocker Corp. 3 U.S. Real Estate Venture 3 U.S. Sub 1 U.S. Real Estate Venture 1 U.S. Holding Corp. U.S. Sub 2 U.S. Real Estate Venture 2 U.S. Sub 3 U.S. Real Estate Venture 3

41 Inbound Investments in U.S. Real Estate (con t) No U.S. Holding Corp. Con: Profits and losses on separate ventures cannot offset each other to reduce U.S. Operational Tax Pro: As each venture is sold, each U.S. Blocker Corp. can liquidate without U.S. WH Tax (no Repatriation Tax in U.S.) More likely to be used if ventures expected to be repatriated at different times U.S. Holding Corp. Pro: Profits and losses on separate ventures can offset each other within U.S. consolidated tax return Con: As each venture is sold, repatriation of proceeds may be subject to U.S. WH Tax More likely to be used for portfolio of assets with longer expected holding periods

42 Business Profits Treaty Effect Business Profits of a resident of one country are not taxable in the other country unless the company has a Permanent Establishment (PE) in the other country What is a PE?

43 Business Profits Treaty Effect A Permanent Establishment is generally a: a place of management; a branch; an office; a factory a workshop; etc. mining facility, or any other place of extraction of natural resources A building site or a construction, assembly or installation project constitutes a permanent establishment only if it lasts more than twelve months A business resulting from this combination is of a preparatory or auxiliary character

44 Business Profits Treaty Effect Notwithstanding the foregoing, the following are generally not a PE: the use of facilities solely for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise; the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display. or delivery; the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; (Continued on next slide)

45 Business Profits Treaty Effect the maintenance of a fixed place of business solely for the purpose of advertising, of the supply of information, of scientific activities, or of similar activities that have a preparatory or auxiliary character for the enterprise; or the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character

46 Business Profits Treaty Effect PE treaty provisions attempt to prevent company formed in one treaty country from inadvertently becoming subject to tax in the other country Independent Agency status vs. Dependent Agency status I.e., commission agent, broker, sales agent, etc. Use related corporations to insulate against tax Enter into intercompany agreements, limiting local authority

Trade/Business Investing Tax Reporting 47 IRS Foreign Corp. files U.S. tax return and pays U.S. branch profits tax Dividend equivalent Foreign Corp. No foreign tax? Foreign Gov t No foreign tax? Foreign Corp. Distributions of dividend equivalent IRS Foreign Corp. files U.S. tax return and pays U.S. corporate income tax and branch profits tax IRS Foreign Corp. files U.S. tax return and pays U.S. corporate income tax U.S. Branch or U.S. Real Estate (U.S. T/B) Operating Income Partnership U.S. T/B Operating Income Partnership Withholding IRS

Trade/Business Investing Tax Reporting (con t) 48 IRS Foreign Corp. files U.S. tax return and pays U.S. corporate income tax on gain Foreign Corp. U.S. Branch Assets/ U.S. Real Estate/ U.S. Partnership Interest Cash Buyer U.S. Branch U.S. Real Estate Partnership U.S. T/B Gain on sale of the U.S. T/B will not be subject to the Branch Profits Tax if Foreign Corporation terminates its U.S. T/B activities in year of sale

49 AGENDA Introduction Definition of ECI Trade or business, partnerships, beneficiary of trust engaged in business ECI contrasted with FDAP Form 1120-F Withholding requirements and exemptions Case study illustration

U.S. Trade or Business (cont d) 50 Section 875(1) If a partnership is engaged in a U.S. trade or business, its foreign partners also are treated as so engaged Rule applies to both general partners and limited partners Section 875(2) If a trust or estate is engaged in a U.S. trade or business, each of its foreign beneficiaries also is treated as so engaged

Disposition of Partnership Interest Consider treatment of income/gain from disposition by a partnership (with foreign partners) of its US business assets generally, treated as ECI to the foreign partners Query the treatment of income/gain from a disposition by the foreign partner of its interest in the partnership is characterization determined as aggregate or entity? Rev. Rul. 91-32: Stated broadly, the IRS has ruled that gain is characterized on the basis of the ECI attributes of the underlying partnership assets Capital/ordinary character (and amount) still governed by Sections 741/751. 51

Disposition of Partnership Interest (cont.) IRS analysis considers source and characterization rules of sections 864 and 865, as well as other provisions Key consideration: Capital gain is ECI if attributed to US office of foreign partner US business of partnership is treated as giving rise to US office (and PE) of foreign partner Ruling also holds that gain from disposition of partnership interest is attributed to that office Position has been challenged by taxpayers see, e.g., Field Attorney Advice 20123903F Principles of ruling also subject of Administration s proposed legislation 52

Trust ECI 53 Foreign beneficiary is taxable on share of trust's income that is effectively connected with such trade or business Income retains its character as business profits from a U.S. trade or business in the hands of the foreign beneficiary

54 AGENDA Introduction Definition of ECI Trade or business, partnerships, beneficiary of trust engaged in business ECI contrasted with FDAP Form 1120-F Withholding requirements and exemptions Case study illustration

55 Portfolio Investing (FDAP; Non-ECI) Foreign Corp. Foreign Corp. Cash investment in stock or debt Dividends or interest Contract Rent, royalties, payments for services, etc. U.S. Corp. U.S. Corp. The technical term for portfolio income is fixed or determinable annual or periodical income, profit, or gains (FDAP).

56 FDAP (Non-ECI) Structure (30% Flat Tax) Step 1: Cash investment in stock or debt Transaction Tax, if any Foreign Corp. Step 3: Foreign country corporate tax Repatriation Tax Dividends or interest; U.S. Withholding Tax Repatriation Tax U.S. Corp. Operating income Step 2: U.S. corporate income tax Operational Tax

57 FDAP Structure (cont d) Exit Tax in U.S., if any, and/or Foreign Country Foreign Corp. Step 4: Stock of U.S. Corp. Cash Buyer U.S. Corp.

58 FDAP Items enumerated in statute as FDAP: interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, and emoluments

59 FDAP Regulations define FDAP expansively: FDAP includes all income included in gross income under Section 61 (including original issue discount), except for the items specified in the regulations. The specified items are: gains from the sale of property, a specific type of insurance premium paid to a foreign insurer, and any other income that the Service publicly announces is not FDAP. Preamble - the statute contemplates very few exceptions to the concept of FDAP, and the only clear exception is for gain from the disposition of property.

60 FDAP Section 871/Treas. Reg. 1.871-10 Foreign investors in U.S. real property can elect to treat real property income as ECI instead of FDAP Benefit is that ECI permits deductions (including depreciation expense) FDAP is a 30% flat tax on rent

FDAP Treaty Effects 61 30% FDAP tax is subject to a lower treaty rate E.g., U.S.-UK Treaty - 5% dividends, 0% interest and royalties Must make sure treaty benefits are available Limitation of benefits clauses

62 Portfolio Investing Tax Reporting Foreign Corp. Foreign Country corporate income tax Provides Form W-8 Equity or debt Dividends or interest, net of WH Tax; and Form 1042-S U.S. Corp. WH Tax and Forms 1042 and 1042-S IRS Operating income U.S. Corporate income tax

63 Portfolio Investing Tax Reporting (cont d) Foreign Corp. Stock of U.S. Corp. Cash Buyer U.S. Corp. Generally no Exit Tax in U.S. on capital gains.

64 Portfolio Interest Exception 0% WH Tax Foreign Corp. Form W-8 Debt in registered form Portfolio Interest U.S. Corporation 0% WH Tax on Portfolio Interest. Portfolio Interest: registered form debt instrument; interest must not be contingent; must receive Form W-8; does not apply to: 10% owners; interest paid to banks in the ordinary course; or interest paid to CFCs by a related person

65 AGENDA Introduction Definition of ECI Trade or business, partnerships, beneficiary of trust engaged in business ECI contrasted with FDAP Form 1120-F Withholding requirements and exemptions Case study illustration

Agenda Filing for Inbound US Business Form 1120-F Form 5472 Form 8833 Form 1065 Withholding Tax Substantive Rules and Filing Requirements General principles Key Exceptions Filings for Non-Business Items: Forms W-8 family ; Form 1042 Filings for Business Items: Form 8288 (FIRPTA); Form 8804 (Partnership ECI) 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 66

Filing for Inbound US Business 67

General Background 68

Return Filing by Foreign Corporations General Requirements for Form 1120-F Engaged in trade or business in U.S. (ETB) Treated as engaged (e.g., FIRPTA ) Claim of Treaty Relief (Section 6114; Reg. sec. 301.6114-1(b)) Certain Exceptions (Reg. sec. 301.6114-1(c)) Penalties for failure to file Section 6712 ($10,000 foreign corps, $1,000 others) Generally, not required if only income is non-business FDAP, withholding satisfied, and no claim of treaty Sanctions for failure to file Form 1120-F Section 882(c): Loss of deductions and credits Statute of limitations does not commence until filing Protective Return only base information required To preserve deductions and start statute of limitations (Reg. sec. 1.882-4) 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 69

FIRPTA: Filings Often Required Even if No U.S. Tax Non-USRPI Certification Must rebut presumptions that stock of U.S. corporation is USRPI Reg. sec. 1.897-2(g), (h) Notice of Nonrecognition Transactions FIRPTA generally overrides nonrecognition Section 897(d) and (e) Substantive and procedural requirements under Reg. sec. 1.897-2(g) and (h) and, Reg. sec. 1.1445-2 Consequences for Failure to Make Required Filings Exceptions from withholding do not apply Withholding agent liability for taxes, penalties and interest Potential liability for interest even if no tax Reg. sec. 1.1445-1(e)(2)(ii) Foreign shareholder must file tax return Reg. sec. 1.897-2(g); Notice 89-57 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 70

TINs for Foreign Persons IRS Requires TINs More Often and Sooner Reduce or Avoid Chapter 3 Withholding Required for Most Treaty Benefits: Form W-8BEN, Form W-8BEN-E May use US or foreign TIN beginning in 2014 (Reg. sec. 1.1441-6T(c)(2)) FIRPTA Withholding Certificate Applications: Form 8288-B (US TIN) Nonrecognition or Non-USRPI Filings Seller/Transferor must provide TIN to Buyer/Transferee Form 8288 Proof of Payment for Credit or Refund Entity Classification Elections (Check the Box): Form 8832 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 71

TINs for Foreign Persons IRS Requires TINs More Often and Sooner (cont d) Return Filing E.g., Engaged in trade or business in U.S. (ETB) during year, regardless whether ECI arises Form 5472, Part II (25% Foreign Shareholder), Part III Related Party Protective Return Filing (Reg. sec. 1.882-4), e.g., not otherwise ETB Treaty Return Position Disclosure (Section 6114) Form 8833 attached to return Foreign Entities Apply Using Form SS-4 (EIN) Nominees not allowed as responsible party on application 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 72

Unique Reference Identification Numbers Unique Reference Identification Numbers (URI or Reference Identification Number) See Instructions to forms related to reporting as to certain foreign entities E.g., Forms 5472, 5471, 8861, 8865, 8858, 926 Mandatory after 2012 if no U.S. EIN for foreign entity Can include both EIN and URI http://www.irs.gov/businesses/corporations/new-identification-number- Implemented-for-Certain-Foreign-Information-Returns 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 73

Form 1120F, U.S. Income Tax Return of Foreign Corporation 74

Form 1120-F 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 75

Reporting of Income and Expense Ultimately, all of the technical and factual considerations reviewed earlier in this discussion boil down to a number inserted into a box on these forms. Special rules apply to interest expense, and a foreign corporation with ECI must to follow the general rules governing interest deductibility and its limitations, including 163(j) and 267(a)(2)/(3) Consideration also must be given to the determination of Branch Profits Tax and Branch Level Interest Tax Appropriate tax treaty disclosures also must be filed with the return Finally, any intercompany transactions are governed by 482 transfer pricing provisions 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 76

Form 1120-F Due Date Similar to US corporations, file by 15 th day of the third month after the end of the tax year Form 7704, Application for Automatic Six-month Extension of Time to File Certain Business Income Tax Returns Generally due on original due date; but, foreign corporation has free additional extension to 15 th day of sixth month to file Form 7704 ( 6081 and Reg. sec. 1.6081-5). NOTE: Max extension still only six months from original due date Tax due on original due date If no office or place of business in the U.S. Form 1120F is due on the fifteenth day of the sixth month after the end of the foreign corporation s tax year or file an extension File Form 7004 for additional three-month extension from Tax still due on original due date (15 th day of third month) 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 77

Earnings Stripping or Thin Cap Rules: 163(j) What is earnings stripping? Foreign parent may try to strip earnings out of its U.S. subsidiary by having subsidiary pay deductible interest, rather than dividends, thus avoiding U.S. taxation of subsidiary earnings and often reducing U.S. withholding tax 163(j) applies if a corporation has: A ratio of debt to equity exceeding 1.5 to 1, and Excess interest expense Excess interest equals: Net interest expense over 50% of corporation s income before interest, taxes, depreciation, and amortization 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 78

Earnings Stripping Rules: 163(j) (Cont d) What does 163(j) do? Applies to disallow disqualified interest (either one of two types) Interest paid to related parties if no tax imposed (tax-exempt payee or withholding tax reduced by treaty) Interest guaranteed by related party and paid to third parties if no gross basis tax is imposed (e.g., withholding tax reduced by treaty) The amount of interest disallowed is the lesser of the excess interest expense or the disqualified interest Special Rules Carryforward disallowed interest (indefinitely) Carryforward excess limitation (three years) Complicated rules if have U.S. affiliated group Filing: Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 79

Section 163(j): Form 8926 Computations on Form 8926 Follow Statute Instead of Proposed 163(j) Regulations Documents the following relevant elements of the determination Debt-Equity Safe Harbor Net Interest Expense Adjusted Taxable Income Identity of Related Persons Receiving Interest Carryforwards (disallowed interest; excess limitation) Form is required even if no disallowed deduction 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 80

IRC 482 Overview Transfer price amount charged in transaction between commonly controlled businesses E.g., sale of goods, provision of services, loans, rental/license of property Significance Potential for shifting income between US and non-us Authorizes IRS to re-allocate income and deductions among taxpayers under common control to prevent tax evasion or clearly reflect income Arm s length standard must be applied Substantial penalties where application of 482 by IRS results in underpayments 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 81

Form 5472, 25% Foreign-Owned U.S. Corp or Foreign Corp with Effective Trade or Business 82

Form 5472 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 83

Form 5472 Information Return The Form 5472 filing requirements apply to: 25% foreign-owned U.S. corporations (section 6038A) Foreign corporations engaged in a U.S. trade or business at any time during year (section 6038C) A U.S. corporation is 25% foreign-owned if at any time during the taxable year a foreign person owns at least 25% of its stock by vote or value Modified section 318 attribution rules apply A separate Form 5472 must be filed for each (U.S. or foreign) related party with which the reporting corporation has a reportable transaction during the year More information required for foreign related transaction Parts IV and V 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 84

Form 5472 Consolidation If a reporting corporation is a member of an affiliated group then a consolidated Form 5472 is permitted The common parent must attach to Form 5472 a schedule stating: Members of the U.S. affiliated group that are reporting corporations Which of those members are joining in the consolidated filing of Form 5472 The name, address, and employer identification number of each member who is including transactions on the consolidated Form 5472 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 85

Form 5472 Due Date Due Date Due date with the reporting corporation s U.S. income tax return ILM 200429007 Form 5472 Substantially Incomplete Return 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 86

Partnerships and ECI 87

Common Filing Issues: Foreign Partnerships Foreign Partnerships Forms W-8IMY and W-8 or W-9 for partners, plus allocation required to claim Treaty benefits on FDAP paid to foreign partnership. See Instructions to Forms W-8BEN, W-8BEN-E Form 1065 filing requirements Reg. sec. 1.6031(a)-1(b) Section 1446 filing requirements Foreign Hybrid Entities See Instructions to Form W- 8BEN W-8BEN, or W-8BEN-E if claiming Treaty benefits on own behalf W-8IMY if claiming Treaty benefits of its Owner 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 88

Foreign Partnerships - Form 1065 Partnership Return Form 1065 is used by both U.S. and foreign partnerships Generally, a foreign partnership files Form 1065 if it has gross income that is (Reg. sec. 1.6031(a)-1): effectively connected to a trade or business within the U.S. or derived from sources within the U.S. A foreign partnership required to file Form 1065 generally must report all of its foreign and U.S. source income (Form 1065 Instructions) A foreign partnership filing Form 1065 solely to make an election need only provide its name, address, and EIN on page 1 and attach the appropriate statement. 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 89

Form 1065 Exceptions To Filing by Foreign Partnerships Exceptions to Filing (Reg. sec. 1.6031(a)-1(b)(2) and (3)): Foreign partnerships that has U.S. source income equal to or less than $20,000 and has no ECI And only if: Less than 1% of any partnership item of income, gain, loss, deduction, or credit was allocable to direct U.S. partners Foreign partnership that has U.S. source income, but has no ECI and no U.S. Partners All required Forms 1042 and 1042-S were filed, The tax liability of each partner was withheld at the source (if applicable), and Not a withholding foreign partnership. Note: U.S. Partners may be required to provide statements, etc. Other foreign partnerships with no ECI may have modified filing obligations E.g., filing Form K-1 only for direct U.S. and U.S. or foreign passthrough partners: Reg. sec. 1.6031(a)-1(b)(3)(iii) 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 90

Foreign Partnerships Section 1446 Withholding Tax Filing Requirements Section 1446: US and foreign partnership must withhold and file returns to report ECI allocable to foreign partners Identify withholding rates on Form 8804 Trumps Section 1445(e)(1) Withholding by Partnerships Form 8813 Partnership Withholding Tax Payment Voucher (Section 1446) (Quarterly deposits based on partnership year) Form 8804 Annual Return for Partnership Withholding Tax (Section 1446) Form 8805 Foreign Partner s Information Statement of Section 1446 Withholding Tax Form 8804 Sch. A Penalty for Underpayment of Estimated Section 1446 Tax by Partnerships Form 8804-C Certificate of Partner-Level Items to Reduce Section 1446 Withholding Form 8804-W Installment Payments of Section 1446 Tax for Partnerships (Worksheet not filed) 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 91

Treaty Return Position Disclosures Section 6114 92

Common Filing Issues: Treaty Return Position Disclosures Section 6114 Treaty Return Position Disclosures 6114 Form 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) Annual Reg. section 301.6114-1(b) specifically requires reporting of reduced withholding on certain FDAP payments Overrides Reg. sec. 1.6012-2(g)(2)(i) exemption from filing Form 1120F when not ETB and tax fully withheld at source Many FDAP exceptions added, but other requirements remain $500,000 De Minimis Exemption - Reg. sec. 301.6114-1(c)(8) Section 6038A Exemption Reg. sec. 301.6114-1(c)(6) 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 93

Common Filing Issues: Treaty Return Position Disclosures Section 6114 Reg. section 301.6114-1(b) specifically requires reporting of the following non-fdap treaty-based return positions, including: Treaty nondiscrimination provision precludes application of Code provision (other than certain aspects of section 897(i)) Treaty reduces or modifies taxation of a U.S. real property interest Treaty exempts or reduces branch profits tax (section 884(a)) or the tax on excess interest (section 884(f)(1)(B)) Treaty exempts from, or reduces, U.S. tax on certain U.S. source interest or U.S. source dividends paid by a foreign corporation No permanent establishment and therefore exempt from U.S. tax on ECI Treaty alters the source of income or deduction Treaty grants foreign tax credit not allowed under the Code Residency of an individual is determined under a treaty not Code Certain related party FDAP payments and if other treaty requirements 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 94

95 AGENDA Introduction Definition of ECI Trade or business, partnerships, beneficiary of trust engaged in business ECI contrasted with FDAP Form 1120-F Withholding requirements and exemptions Case study illustration

Withholding and Associated Reporting 96

Review From Earlier Discussion US Taxation of FDAP Income Generally, U.S. source investment income Certain exceptions apply Taxed on gross basis Tax rate generally = 30% Or lower treaty rate Generally collected through withholding at source 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 97

FDAP Income Defined Fixed or determinable annual or periodical income Does not mean actually recurring Descriptive of character of the income Generally includes: Interest, OID, dividends, rents, royalties Payments received may vary in amount and frequency E.g., series of payments or lump sum 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 98

FDAP Income Summary Item Interest (including unstated interest & OID) Exceptions to U.S. Withholding Tax 1. Interest constituting ECI 2. Portfolio interest, i.e., most interest on debt instruments held by foreign persons in either registered or bearer ** form other than: a. Interest payable to a 10% or more owner (with test applied at partner level in case of debt held by a partnership) b. Interest payable to a bank on a loan c. Interest received by a CFC from related persons d. Contingent interest 3. Interest on obligations with original maturity of 183 days or less 4. Interest on deposits with banks and S&Ls 5. Tax-exempt interest 6. Interest paid by 80/20 company (Note repeal of 80/20 rule for post- 2010 years subject to grandfather rule) ** NOTE: For obligations issued after 3/18/12, bearer exception is no longer available. 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 99

FDAP Income Summary (Cont d) Item Dividends (Cash or Property) Exceptions to U.S. Withholding Tax 1. Dividends constituting ECI 2. Ratable portion of dividends of domestic corporation deriving 80%+ of gross income from active foreign business (Note repeal of 80/20 rule for post-2010 years subject to grandfather rule) 3. Dividends paid by a foreign corporation deriving 25%+ of its income from a U.S. business (treated as USSI under sourcing rules) 4. Interest-related dividends paid by RICs (i.e., dividends attributable to portfolio interest, bank deposit interest, short-term OID) other than: a. Amounts paid to 10% shareholder b. Where payee fails to provide Form W-8BEN c. Where payee is resident of blacklisted country d. Certain amounts paid to a CFC 5. STCG dividends paid by RICs 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 100

FDAP Income Summary (Cont d) Item Royalties (including contingent payment sales) Exceptions to U.S. Withholding Tax 1. Amounts constituting ECI 2. Net consideration method for qualified patent cross licensing arrangements Rents 1. Amounts constituting ECI 2. Real property income that taxpayer elects to treat as ECI 3. 10% withholding on gross proceeds from sale of USRPI Salaries & wages Gross income from annuities 1. Amounts constituting ECI 2. De minimis amounts (< $3,000) 1. Amounts constituting ECI 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 101

Payments to Partnerships Domestic partnerships Generally, no withholding on payment to partnership Partnership withholds on foreign partners distributive shares of FDAP income Withholding on earlier of date FDAP is distributed to foreign partner or original due date for Form 1065/K1 filing (or, if earlier, actual filing of forms). Reg. sec. 1.1441-5(b)(2) Foreign partnership Generally, withholding required on payment to a foreign partnership Exception (full or part relief) if foreign partnership has entered into agreement with IRS that it will withhold on foreign partners distributive shares (e.g., certain institutional funds), or Forms W- 8IMY filed by foreign partnership with accompanying Forms W-8 or W-9 for its partners. See instructions to Forms. 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 102

Filing Obligations Payees (to reduce potential WHT) Form W-8ECI effectively connected income Form W-8BEN or W-8BEN-E lower treaty withholding rates Form W-8EXP foreign government exception Form W-8IMY foreign intermediary Keep in mind FATCA overlay to all of the above (more below) Also, Form W-9 for US payees Payors Form 1042 withholding tax return Form 1042-S foreign person s U.S. source income subject to withholding Form 1042-T Form 1042-S transmittal 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 103

Section 1441/1442 Overview and Recent Developments IRS routinely requesting Form 1042 Related Information in Course of Audits IRS Compared Forms 5471 and 5472 With IRS Form 1042 Database IRS is contacting filers of Forms 5471 and 5472 that did not file Form 1042 FATCA Enacted in 2010 New withholding rules (new Chapter 4) for payments to foreign entities In addition to Chapter 3 Withholding (Sections 1441, 1442, etc.) New coordination rules (Chapter 4 generally takes priority over Chapter 3) 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 104

IRS Now Has Significant Interest in 1441 Compliance New Section 1441 Regulations Released in 1997 (Effective for Payments after 1/1/2001) ; Amended 2014 for FATCA Coordination Key to New Regulations is Documentation Family of Forms W-8 (W-8BEN; W-8BEN-E; W-8IMY; W-8ECI; and W- 8EXP) Due Diligence Requirements (No conflicting information with claims made) Mandatory Presumption Rules Where Documentation is Missing or Invalid More IRS examiners as a result of FATCA Chapter 4 implementation and enforcement Likely focusing on Chapter 3 issues, too 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 105

FAQ 1: What about the new forms? 106

Form W-8BEN-E [Used by Entities] Part I, Line 5, FATCA Classification Withhold 30% unless FATCA withholding exception applies May commonly see from financial payees. Will need to check GIIN on the IRS website. May commonly see from nonfinancial vendors. If direct reporting NFFE, will need to check GIIN on the IRS website. US or foreign income tax ID number is necessary for treaty relief 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 107

Form W-8BEN-E Part III Treaty Claim (Retained From Prior Version) Necessary for treaty claims (along with US or foreign income tax ID number noted on page 1) For claiming special rates 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 108

Form W-8BEN-E Supporting FATCA Representations Common nonfinancial vendor classifications must also be supported by representations (Supplements status shown on line 5) If this box is checked, the ownership disclosures on the last page should be completed. 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 109

Form W-8BEN-E Required Certifications Must be completed; form generally expires in 3 years Must be checked in all cases If item 40(c) is checked, this table must be completed (including TINs) 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 110

FAQ 2: What am I supposed to do with the new Form 1042-S? 111

Form 1042-S FATCA reporting applies to all kinds of typical payments, although some may be eligible for exceptions from withholding: Foreign Insurer Foreign 3P Law Firm US riskrelated premiums US source services fees US source dividends and (post- 2016) stock redemption proceeds public US Parent Corporation US source interest Foreign Bank Foreign 3P Vendor Interest on productrelated A/P Foreign Shipper US OpCo International shipping fees US source royalties Foreign IP Co 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 112

Form 1042-S US TIN or foreign income tax ID number necessary to claim treaty benefit Common Ch 3 exemption codes: 01 Effectively connected Income 04 Exempt under tax treaty 12 Payee subjected to chapter 4 withholding Ties to status noted on W-8BEN-E NOT required if the payment is eligible for a withholding exception If no other payment-related exemption applies and line 13i filled in, exemption code 15 (payee not subject to ch 4 withholding) should be used Common Ch 4 exemption codes: 14 Effectively connected Income 15 Payee not subject to chapter 4 withholding 16 Excluded nonfinancial payment 2014 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. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 113