TEI - International Tax Planning Update Foreign Tax Credit & Repatriation

Transcription

1 TEI - International Tax Planning Update Foreign Tax Credit & Repatriation Joe Allen, Partner Deloitte, Houston February 16, 2016

2 Discussion Outline - Repatriation Planning Today, we will discuss the following A framework for how to execute on repatriation planning projects: Information needed to diagnose the issue/opportunities Categories of planning strategies Specific strategies and when they may apply Note the following about strategies presented 2

3 Repatriation Planning Paradigm FTC-Based Repatriation Minimize Local-country Taxes Non FTC-Based Repatriation FTC-Based Repatriation Non-FTC Based Repatriation Maximize Indirect Credits Maximize Sec. 904/907 Limitations Structural Planning Situational Planning Minimize Expense Allocation/Appt. Increase FSI w/o Increasing TI Non-distribution Repatriation E&P Management/Retu rn of Basis Planning 3

4 Foundational Information Needed to Scope Repatriation/Cash Management Exercise Both currently, and as projected: Which entities have the cash, where is cash needed & when? What is the US group s tax position with respect to taking FTCs? Positive TI or NOLs OFL & ODLs FTC carryforwards by category What is approximate recurring net FSI position and components thereof What method of interest expense apportionment is being used? What is the effective rate of the tax pools where cash is located? How about overall offshore? Including withholding taxes? Based on the above, determine whether, tax pool management or limitation planning is indicated If we can t rely on FTC-based repatriation, drill down on facts related to non- FTC repatriation Tax basis in intercompany debt and especially stock Other strategy-specific ideas 4

5 Foundational Information Needed to Scope Repatriation/Cash Management Exercise (cont.) Both currently, and as projected: Other Questions What is the book position with respect to permanent reinvestment? What are the local country consequences of proposed plan including basics like withholding taxes Questions related to specific techniques e.g., stock option plan Are we sure transfer pricing is optimized? 5

6 Strategy Areas To Be Discussed Topic/Strategy Structural Blocking and Tackling 263A Planning Evolution of Triangular B Reorg Repatriation Partnership Manufacturer/Distributor Distribution of Loss Shares Repatriation Tactic Category Repatriation > Structural > E&P Management/Nondividend/Return of basis Repatriation > FTC Planning > Sec. 904 Limit Optimization > Expense Reduction > Foreign Asset Management Repatriation > Situational > Non-dividend/non-return of basis Repatriation > FTC Planning > Sec. 904 Limit Optimization > Sourcing of Income Repatriation > Structural > E&P Management/Nondividend/Return of basis Leveraged Partnership Repatriation > FTC Planning > Sec. 904 Limit Optimization > Sourcing of Income 6

7 Structural Blocking & Tackling Repatriation > Structural > E&P Management/Non-dividend/ Return of basis/principal 7

8 Structural Blocking and Tackling Non-US LP USCO2 (US) USCO1 (US) CFC 1 USCO3 (US) CFC 2 Facts: Tiered holdcos provide the opportunity to do return of capital planning especially where there is more than one chain of CFCs Consider just plain-vanilla onlending from the US. Given how low the US AFR is, it may be a cheap way to buy some repatriation capacity i.e., pay down principal instead of dividends CFC 3 CFC 4 May even be combined with proactive interesting netting planning. Multiple strategies rely of foreign partnerships 8

9 263A Planning Repatriation > FTC Planning > Sec. 904 Limit Optimization > Expense Reduction > Foreign Asset Management 9

10 Increase in Net FSI due to Interest Denial, Deferral, Capitalization Interest expense is one of the most significant allocable expenses of the US group A reduction in foreign assets should result in a reduction of allocated/apportioned interest expense for purposes of determining the Sec. 904/907 limits Reg. Sec T(f) and associated planning concepts 10

11 The Evolution of Triangular B Reorg Repatriation Repatriation > Situational > Non-dividend/non-return of basis 11

12 The Evolution of Triangular Cross-border B Reorgs & Related Repatriation Transactions: USP US1 FS US2 FT Original planning pre-law changes ( way back when ) FS purchased US1 parent shares for a note or cash and used such shares to acquire FT US1 Subsequent iterations of planning and law changes Where we are now FT Valuable CFCs 12

13 Partnership Manufacturer/Distributor Repatriation > FTC Planning > Sec. 904 Limit Optimization > Sourcing of Income 13

14 Summary of Transaction Sales of Goods USP PS is a US partnership that performs manufacturing activities and will not be part of the US consolidated group. CFC1 PS sells finished product to USP, which then sell to third party or related party customers. CFC2 Partnership Goods for Resale Benefits and burdens of ownership pass to customers outside of the US. Manufacturing 3 rd Party Customers Sales of Goods 14

15 Considerations Manufacturing Partnership Sales of Goods USP As PS is not part of USCo s US consolidated tax group, USCo is not considered to manufacture the goods. CFC1 Under 862(a)(6), USCo income on product sales considered foreign source. Consider application of Treas. Reg (h) (consolidated return antiavoidance rules). CFC2 Partnership Goods for Resale Consider use of CFC for distribution function. Under 367(d)(2)(C), deemed royalty from contribution of marketing IP likely foreign source. Important to model results based on relative margins. Manufacturing 3 rd Party Customers Sales of Goods 15

16 Domestic Partnership Contract Manufacturer Facts Unrelated Foreign Customers USCo manufactures in the US and sells outside the US. Goods USP USCo creates USP which manufactures goods and sells the goods to USCo. USP Cash FC Goods USCo actively markets the goods and sells the goods to FC, other related persons, or unrelated customers. On export sales, USCo passes all ownership rights in the goods outside the US. Facts The margin earned by USCo is treated as 100% foreign source. Determination of USCo income from sales activities not governed by 863(b) rules. Key Considerations: Transfer pricing Partnership anti-abuse regulation and consolidated return anti-abuse rule. State taxes Impact on 199 Qualified Production Activity deduction. 16

17 Foreign Source Income: Import Entity U.S. Customers Background: Alternative 1 Goods for Resale U.S. Parent US Parent and its subsidiaries currently acquire goods from unrelated suppliers and take title to those goods at the foreign port. Alternative 2 3 rd Party Suppliers Goods for Resale U.S. Customers Foreign Import Company Distribution and Logistics Activities and Possibly Related IP U.S. Parent Certain key functions and risks (e.g., distribution, logistics, or other functions) would be moved to an entity outside the US group ( Import Company ). We note that practically, these functions and risks may need to be associated with a more narrow area or line of goods rather than those associated with all foreign acquired goods. 3 rd Party Suppliers Goods for Resale Partnership Partnership Import Company Distribution and Logistics Activities and Possibly Related IP Import Company acquires the goods outside the US and earns margin consistent with its functions and risks (i.e., inventory risk and/or distribution and logistics functions). Goods would be resold to US Parent with title transfer occurring outside the US. 17

18 Foreign Source Income: Import Entity (cont.) U.S. Customers Intended Results: Alternative 1 3 rd Party Suppliers Goods for Resale Goods for Resale U.S. Parent Foreign Import Company Distribution and Logistics Activities and Possibly Related IP In the case of a foreign import company, the margin earned should generate foreign source subpart F income. In the case of a partnership import company, the margin flows through to the US return but sourcing would be determined based on where the partnership transferred title to US Parent. Alternative 2 U.S. Customers U.S. Parent Considerations: May be invasive to the current business model. Determine functions and risks that could be transferred. Transfer pricing 3 rd Party Suppliers Goods for Resale Partnership Partnership Import Company Distribution and Logistics Activities and Possibly Related IP The transfer could result in a deemed or actual outbound transfer of intangible property. Consider the impact of the resulting royalty stream. 18

19 Distribution of Loss Shares Repatriation > Structural > E&P Management/Non-dividend/ Return of basis 19

20 Distribution of Loss Shares US2 USP FS2 Facts FS2 owns preferred stock in FS1 which it received in a prior old & cold transaction Accruals and distributions on the preferred are such that the FMV of the preferred stock is less than FS2 s tax basis therein FS2 distributes the FS1 preferred stock to the US What are the consequences? FS1 FT 20

21 Leveraged Partnerships Repatriation > FTC Planning > Sec. 904 Limit Optimization > Sourcing of Income 21

22 Transaction Sale to Partnership CFC sells DRE1 shares to a foreign partnership ( FP ) in exchange for a note. 10% 90% DRE1 Shares DRE1 does not have a US trade or business. DRE1 has no subpart F producing assets. US Consolidation FP DRE1 CFC Loan DRE1 22

23 Considerations Sale to Partnership US Consolidation DRE1 10% FP 90% DRE1 Shares CFC DRE1 Loan Sale of DRE1 does not result in FPHCI due to active trade or business exception. But consider assets that do not qualify for an exception to subpart F income. If DRE1 owns personal property, sale could result in FBCSI unless, (i) bulk sale exception under Treas. Reg (a)(1)(i) is met, (ii) property sold will continue to be used in CFC s country of incorporation or (iii) property was produced in CFC s country of incorporation for the purposes of 954(d). Generally, under Treas. Reg (a), FP pays foreign source interest as long as it does not have a US trade or business. FP s share of interest expense generally is apportioned based upon the partner s assets, including its pro rata share of the partnership s assets. Treas. Reg T(e)(2). Consider impact of 901(m) as a result of sale of DRE. 23

24 Regulatory/Legislative Action 10% 90% DRE1 Shares As part of 2006 Preamble to 954(i) regulations, comments were requested on the relevance of certain items on determining whether loans from CFCs to foreign partnerships should be considered an investment in US property, including: consistency on loans to different types of entities, status as a foreign person, US Consolidation FP partner s liability under foreign law, use of loan proceeds, and Loan fact that earnings not deferred if earned by the partnership. DRE1 CFC DRE1 Recent comments by the IRS indicate that they are considering aggregate theory of partnerships, which would cause the loan from CFC to FP to be considered an investment in US property. 24

25 Transaction Additional Partnership Assets USP 10% CFC1 Shares Loan 90% 90% CFC1 Shares CFC1 is an income producing asset with built-in gain, which is owned 90% by and 10% by. FP is owned 90% by and 10% by. and contribute their respective interest in CFC1 to FP. There is no built-in gain in the shares of CFC2, which is owned by USP. USP transfers CFC2 to FP for a note. US Consolidation 10% FP CFC2 Shares CFC1 CFC2 25

26 Considerations Additional Partnership Assets USP Loan 90% CFC1 Shares Proposed Reg (d)-3 as currently written should not apply as there is no shift in ownership of affiliate stock. No disguised sale on USP transfer of CFC2 shares as USP is not a partner in FP. 10% CFC1 Shares 90% US Consolidation 10% FP CFC2 Shares CFC1 CFC2 26

27 Regulatory/Legislative Action USP Loan 90% CFC1 Shares Proposed 337(d) regulations may be finalized soon, however unclear what the final regulations will say, especially related to the retroactive date. As currently written, the proposed 337(d) regulations would apply for any transaction occurring after March 9, 1989 and may apply to a broad scope of transfers made into a partnership. 10% CFC1 Shares 90% US Consolidation 10% FP CFC2 Shares CFC1 CFC2 27

28 Leveraged Partnership Sourcing Interest Income 10% Interest US Consolidation Loan PS FCs 90% Under Reg (a), a partnership that is not engaged in a US trade or business at any time during its taxable year pays foreign source interest. Note that this is the case regardless of whether the partnership is US or foreign. If a US partnership is engaged in a US trade or business at any time during its taxable year, the interest that it pays is 100% US source. If a foreign partnership is predominantly engaged in the active conduct of a foreign trade or business and also has a US trade or business, any interest (i) not paid by the US trade or business and (ii) not allocable to ECI is foreign source. 861(a)(1)(C). 28

29 Leveraged Partnership Sourcing Interest Income (cont.) US Consolidation US Business Loan Interest 10% USCo3 PS 90% FCs Facts: PS owns a US trade or business but wishes to pay foreign source interest to. PS contributes the US business to a US corporation. Even though PS holds a US asset, the asset is not a US trade or business and the interest is thus generally foreign source (but see later discussion of 904(h)). Note that dividends from USCo3 are eligible for an 80% DRD (not 100% because USCo3 is not an affiliate) and thus USCo3 earnings are subject to additional US tax of 4.6% ((100%- 35%) x 20% x 35%). Also, USCo3 can not be included in s consolidated return. 29

30 Leveraged Partnership Apportioning Interest Expense A partner s distributive share of interest expense generally is apportioned based upon the partner s assets, including its pro rata share of the partnership s assets. Reg T(e)(2). 90% 10% US Consolidation Interest PS Loan FCs 30

31 Leveraged Partnership Basketing Interest Income 10% 90% Interest paid by a partnership to its 10% partner (or a member of the partners US affiliated group (expanded to reduce the ownership requirement to more than 50% rather than 80%)) is characterized in baskets to the extent that the payment is attributable under the principles of Regs and [ ] to income earned or accrued by the partnership in each basket. US Consolidation Interest PS Loan FCs 31

32 Leveraged Partnership Basketing Interest Income (cont.) US Consolidation Foreign Bond Loan $100 Interest 10% $100 Passive Interest Income PS 90% FCs $100 General Basket Dividend What are the principles of Regs and [ ]? Do they include the passive-first rule of Reg (c)(2)(ii)(C)? If so, the $100 interest income would be entirely passive basket. Note that interest expense could be apportioned almost exclusively to US and foreign general income but the corresponding interest income would be entirely passive, reducing the general basket limitation. 32

33 Leveraged Partnership Basketing Interest Income (cont.) 10% 90% Same passive first issue if US partnership is the US shareholder of CFCs that earn passive subpart F income. Compare a foreign partnership, in which case the subpart F would hopscotch directly to the partners. US Consolidation $100 Interest PS $100 Passive Subpart F Income $100 General Basket Dividend Loan FCs 33

34 Leveraged Partnership Basketing Interest Income (cont.) US Consolidation FCs Loan 10% PS $100 General Basket Dividend 90% $100 Interest US Bond FC1 $100 Passive US Source Interest Income In the case of a loan from a non-partner related look-through entity to a partnership, the principles of [Reg ] apply. Reg (i)(1). Accordingly, the passive-first rule presumably would apply. Does this include the principles of Reg (m) (US source look-through under 904(h))? In the diagram this would mean that the interest paid by the partnership to FC1 would be entirely US source passive income and USCo would have $100 US source subpart F income under 904(h)(2)? 34

35 Uses for Leveraged Partnership Foreign Acquisition or Expansion The most common use for a leveraged partnership structure is a foreign acquisition or foreign expansion. US Consolidation Loan 10% Foreign Target PS 90% FCs Contribution In the diagram, PS borrows from to acquire foreign target or to contribute funds to foreign corporations for their expansion needs. Note that if PS is a foreign partnership, PS s basis in the CFCs apparently is not increased under 961 if the CFCs earn subpart F income this could be problematic if PS later sells a CFC. On the other hand, if PS is a US partnership, PS would be the US shareholder including the subpart F in income and thus would increase basis under 961(a). In all cases, the partnership anti-abuse rule must be considered and a sub K specialist consulted. 35

36 Uses for Leveraged Partnership US Stock Acquisition PS borrows from to purchase 19% of US Target from unrelated seller. Loan for 19% of US Target If a member of the consolidated group holds at least 80% of the vote and value of US Target, then US Target qualifies as a member of the consolidated group. 81% 19% US Target PS FCs Dividends Furthermore, the US members distributive shares of dividends paid by US Target are apparently eligible for a 100% dividends received deduction. US Consolidation Note that dividends paid by US Target could implicate the passive first rule as well as 904(h), as described above. 36

37 Uses for Leveraged Partnership Affirmative Use of 956 CFCs often affirmatively use 956 to repatriate earnings to the US. US Consolidation 10% PS 90% $100 Interest FC1 Loan Until the repeal of the 80/20 rules, loans by CFCs to 80/20 companies were often used to create US property but avoid withholding and US source subpart F income. FCs Now, US partnerships can be used for this purpose, so long as the US partnership does not have a US trade or business. 37

38 Leveraged Partnership Doubling of Foreign Assets Loan $100 Interest 10% 90% Basis: $1000 US Consolidation US Consolidation Basis: $1000 PS Foreign Target FC1 US1 purchases foreign target. Asset: $1000 basis in Foreign Target loans $1000 to PS, which purchases Foreign Target. Assets: $1000 basis in loan plus $1000 basis in foreign target 38

39 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2015 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited This presentation contains general information only, and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.