Global tax attribute tracking: Please disable pop-upblocking software before viewing this webcast Issues and opportunities Thursday, April 21, 2016 3 4 p.m. ET We will be starting soon 2016 Grant Thornton LLP. All rights reserved.
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Today s Presenters Douglas Wood East Region Practice Leader International Tax Services Charlotte, NC +1 704 632 6837 douglas.wood@us.gt.com Cory Perry Manager Washington National Tax Office Washington, D.C. +1 202 521 1509 cory.perry@us.gt.com Chris Summer Senior Manager International Tax Services Charlotte, NC +1 704 632 3499 chris.summer@us.gt.com Sara Yip Director International Tax Services Seattle, WA +1 206 398 2433 sara.yip@us.gt.com 2016 Grant Thornton LLP. All rights reserved. 5
Learning objectives Identify common global tax attribute misconceptions and pitfalls Illustrate the importance of global tax attributes in an international setting Interpret recent law changes impact on multinational companies that operate on a global platform 2016 Grant Thornton LLP. All rights reserved. 6
Agenda Introduction Financial statements, the importance of attribute tracking and accounting methods Foreign currency risk Data analytics and value creation Final thoughts and questions 2016 Grant Thornton LLP. All rights reserved. 7
Introduction The importance of global tax attributes in the international tax arena shouldn't be underestimated Tax attributes are the foundation for cross-border transactions, M&A and financial reporting Time is not always on your side deals, transactions and planning often move fast and as the saying goes, "Tax is always last to know." 2016 Grant Thornton LLP. All rights reserved. 8
Agenda Introduction Financial statements, the importance of attribute tracking and accounting methods Foreign currency risk Data analytics and value creation Final thoughts and questions 2016 Grant Thornton LLP. All rights reserved. 9
Global tax attributes and financial statements in the news "For years, Pfizer has been stockpiling profits overseas, using the same accounting method most companies use. It has $74 billion that it has declared permanently reinvested overseas." ~ WSJ 11/8/2015 "Another leading driver of cross-border deals, many of which are inversions, is the large cash stockpiles U.S. companies are hoarding overseas." ~ WSJ 8/5/2014 " of the Fortune 500 companies that disclosed information about undistributed foreign earnings, only 11% provided an amount of the estimated tax on those undistributed foreign earnings. The remaining 89% did not disclose the liability associated with these earnings because those companies say it is not practicable to do so." ~ FASB 3/23/2016 2016 Grant Thornton LLP. All rights reserved. 10
Global tax attributes and financial statements U.S. multinational companies are continuing to expand their global footprint, which increases tax risks for financial reporting purposes U.S. regulators such as the Public Company Accounting Oversight Board (PCAOB), FASB and the SEC have increasingly focused on foreign earnings and related disclosures Financial statement presentation, or lack thereof, may also carry reputational risks and may cause damage to a company's brand 2016 Grant Thornton LLP. All rights reserved. 11
Global tax attributes and financial statements July 2015 report issued by the U.S. Senate Committee on Finance International Tax Reform Working Group observed that 54% of the income of U.S. multinational companies in 2012 was earned outside the U.S. In its April 30, 2015, report, the Congressional Research Service stated that U.S. companies generated $1.2 trillion in overseas profits in 2012, with $600 billion attributed to seven tax havens 2016 Grant Thornton LLP. All rights reserved. 12
Global tax attributes in concert Properly tracking global tax attributes often acts in concert with preparation of financial statements and related disclosures: Stock basis computations Foreign tax credit pools Earnings and profits Subpart F All of these items are often the foundation for preparation of the tax return, tax planning, and M&A activity The most prominent financial statement risk associated with global tax attributes is the concept of unremitted earnings 2016 Grant Thornton LLP. All rights reserved. 13
U.S. GAAP accounting for foreign earnings The accounting guidance related to unremitted earnings of a foreign subsidiary is commonly referred to as APB 23 Later codified as ASC 740-30-25 APB Opinion No. 23 (APB 23) was issued in April 1972 A deferred tax liability (DTL) is normally recognized for the excess of the financial reporting amount over the tax basis of the investment APB 23 provides a presumption that all undistributed foreign earnings included in consolidated income will be transferred to the parent company 2016 Grant Thornton LLP. All rights reserved. 14
APB 23: Example 1 USP owns 100% of ForCo1 USP is a U.S. corporation ForCo1 is regarded as a corporation for U.S. and foreign tax purposes USP has a book-tax outside basis difference in ForCo1 related to unremitted earnings USP is not asserting permanent reinvestment in ForCo1 What factors go into the computation of USP's APB 23 DTL? 2016 Grant Thornton LLP. All rights reserved. 15
APB 23: Example 1 - Continued 1. What is the amount of undistributed earnings in ForCo1? It may not line up with E&P 2. How will the difference reverse (e.g., sale, distribution, other)? 3. Data needed to compute the U.S. tax liability: 1. E&P of ForCo1 2. Tax basis in ForCo1 (Return of capital, gain) 3. Tax pools 4. Withholding tax on a distribution from ForCo1 (may require a foreign determination of dividend treatment) 5. Any strategies to return the earnings on a tax-free basis 6. What is USP's net operating loss (NOL), foreign tax credit (FTC) and overall foreign loss (OFL) position? 2016 Grant Thornton LLP. All rights reserved. 16
APB 23: Example 2 USP owns 100% of ForCo1 ForCo1 owns 100% of ForCo2 USP is a U.S. corporation ForCo1 and ForCo2 are regarded as corporations for U.S. and foreign tax purposes and organized in different countries USP has a book-tax outside basis difference in ForCo1 related to unremitted earnings USP is not asserting permanent reinvestment in ForCo1 2016 Grant Thornton LLP. All rights reserved. 17
APB 23: Example 2 - Continued ForCo2 was contributed to ForCo1 in the current year USP has a tax basis of $x in ForCo1, which includes its historic basis in both ForCo1 and ForCo2 How could this affect the APB 23 computation? Is the ForCo1 stock basis blended as a result of the ForCo2 contribution? This could result in a materially different result on a potential distribution USP will need to ensure it evaluates the DTL on a bottomup basis. Does ForCo2 have a withholding tax to ForCo1? 2016 Grant Thornton LLP. All rights reserved. 18
U.S. GAAP accounting for foreign earnings However, a DTL is not recognized for temporary differences related to the outside basis difference of an investment in a foreign subsidiary that is shown to not reverse in the foreseeable future This is often called the indefinite reversal criteria If the presumption has been overcome, then the "indefinite reversal exception" (or "APB 23 exception") applies to not record the deferred tax liability on the undistributed foreign earnings The frequency of SEC comment letters on APB 23 is increasing, which may make assertions that it is not practicable to estimate the unrecognized deferred tax liability increasingly difficult to defend 2016 Grant Thornton LLP. All rights reserved. 19
Common misconceptions and pitfalls APB 23 is not an "election" It is based on specific facts requiring both intent and ability APB 23 is not an "all or nothing" decision by management It may vary by year It may vary by jurisdiction It may vary by entity/subsidiary It may vary by amount (i.e., partial reinvestment) There are numerous outside basis components beyond E&P For example, certain items in OCI Increasing focus on accurate reporting of unremitted foreign earnings adds to the pressure to get the computations done right, the first time 2016 Grant Thornton LLP. All rights reserved. 20
SEC comment letters SEC staff comments included in the 422 comment letters related to income taxes for 2015 that were made public include the following comments regarding the indefinite reinvestment of foreign earnings: Whether the assertion is consistent with other disclosures within the Management Discussion and Analysis discussion, financial statement footnotes, and other publicly available information Additional disclosure in the liquidity section of the MD&A discussion of the potential tax effects of repatriating offshore cash and cash equivalents An explanation as to why it is not practicable to disclose an estimate of the unrecognized deferred tax liability related to indefinitely reinvested foreign earnings, particularly where the registrant was able to estimate the tax impact of recent repatriations of foreign earnings Information about the evidence evaluated and maintained by management regarding its specific plans to reinvest foreign earnings Information about when there has been a repatriation of current foreign earnings but an assertion that other foreign earnings are indefinitely reinvested 2016 Grant Thornton LLP. All rights reserved. 21
SEC comment letters What keeps companies from disclosing the potential liability on unremitted earnings: Lack of insight into future U.S. tax position OFL not fully quantified Insufficient insight into E&P or tax pools of foreign operations Lack of accurate, timely, reliable data to make confident decisions 2016 Grant Thornton LLP. All rights reserved. 22
The importance of tracking global tax attributes US Global tax attributes Foreign tax credit NOL OFL/ODL CFC Earnings and profits Tax pools Previously taxed income Foreign stock basis Financial statement implications Essential in planning your global tax strategy to achieve your goals Mandatory compliance 2016 Grant Thornton LLP. All rights reserved. 23
The importance of tracking global tax attributes Global tax goal: Reduce global ETR US CFC Global tax attributes Foreign tax credit NOL OFL/ODL Earnings and profits Tax pools Previously taxed income Foreign stock basis ITS strategy Excess FTC: Increase foreign-source income Decrease foreign-source expense Borrow offshore Repatriate low-taxed E&P Excess limitation: Borrow in the U.S. Repatriate high-taxed E&P Consolidate foreign losses into the U.S. return 2016 Grant Thornton LLP. All rights reserved. 24
Why is E&P important? General Characterization of the distribution (i.e., dividend, return of capital and capital gain) Potential nimble dividend ( 316(a)(2)) U.S. shareholders of CFC Limits Subpart F income inclusion ( 952) and investment in U.S. property income inclusion ( 956) Foreign corporations Deemed paid FTC ( 902, 960) Sale of CFC shares ( 1248) Certain reorganizations ( 367) Interest expense apportionment ( 864(e)) Filing requirements ( 6038) 2016 Grant Thornton LLP. All rights reserved. 25
The significance of "significant" E&P Actions on behalf of a foreign corporation to make certain elections, adopt a tax year, or adopt methods of accounting are not required until E&P is "significant" from a U.S. federal tax perspective Treas. Regs. Sec. 1.964-1(c)(6) defines significant to include, among others, the following events (commonly referred to as a "significant event"): An actual distribution An amount includible in income under Subpart F or Sec. 956; The foreign corporation's controlling domestic shareholders use the tax book value (or alternative tax book value) method of allocating interest expense under Sec. 864(e)(4); and A sale or exchange of the foreign corporation's stock of the controlling domestic shareholders resulting in the recharacterization of gain under Sec. 1248 2016 Grant Thornton LLP. All rights reserved. 26
The significance of "significant" E&P Once E&P becomes significant, the foreign corporation must adopt U.S. tax accounting methods and/or make certain elections (e.g., Sec. 441, Sec. 446, Sec. 471, Sec. 472, Treas. Regs. Sec. 1.312-15, etc.) When a significant event occurs, the E&P must be adjusted as if methods had been adopted in the initial year, and accumulated E&P must reflect the proper amount with methods and elections being applied retroactively Going forward, the foreign corporation must continue to apply the methods and fully compute E&P annually 2016 Grant Thornton LLP. All rights reserved. 27
The significance of "significant" E&P Taxpayers may find that significant events have occurred unknowingly, which resulted in the adoption of accounting methods by a foreign corporation Correcting an error may require an IRS method change and may have financial statement implications Proactive maintenance of E&P may help companies avoid pitfalls and may also allow for better tax planning If E&P is not properly computed and reported on Form 5471, the form may not be considered to substantially comply with Sec. 6038 2016 Grant Thornton LLP. All rights reserved. 28
Agenda Introduction Financial statements, the importance of attribute tracking and accounting methods Foreign currency risk Data analytics and value creation Final thoughts and questions 2016 Grant Thornton LLP. All rights reserved. 29
Functional currency The Canadian dollar is down more than 23% against the U.S. dollar in the past two years The Australian dollar is down more than 18% against the U.S. dollar The Wall Street Journal's U.S. Dollar Index increased 24% since July 2014 "After a two-year rally, investors are playing down their expectations for the U.S. currency in 2016." ~ The Wall Street Journal, Jan. 2, 2016 2016 Grant Thornton LLP. All rights reserved. 30
Currency Global tax attributes Responding to the current state of foreign exchange fluctuations and risks Repatriation and branch remittances Effective tax rate considerations Hedging 2016 Grant Thornton LLP. All rights reserved. 31
History of Section 987 History of Section 987 regulations Proposed regulations in 1991 Proposed regulations in 2006 IRS - current regulation project "active and in flux" and final regulations are anticipated "soon." Section 987 regulations are on 2016 priority guidance plan 2016 Grant Thornton LLP. All rights reserved. 32
Section 987 planning & considerations Ability to recognize FX losses Example 1 Transition methods under 2006 proposed regulations Fresh start transition Deferral transition Why act now? Implications of an unreasonable method Based on currency trends, companies may have significant loss pools Financial statement risks Distribution out of a pool with an FX gain. Distribution out of a pool with an FX gain. Domestic entity Offshore Offshore DRE DRE Entity Entity (non-u.s.) (CFC) (non-u.s.) (CFC) Example 2 CFC Offshore Offshore DRE DRE Entity Entity (non-u.s.) (CFC) (non-u.s.) (CFC) Distribution out of a pool with an FX loss. Distribution out of a pool with an FX loss. 2016 Grant Thornton LLP. All rights reserved. 33
Net investment hedge (Hoover hedge) Net investment hedge - GAAP accounting and financial reporting of hedges of a net investment in a foreign operation (ASC 815-20) Net investment hedge the gain or loss attributable to a net investment hedge is generally reported in OCI In many cases tax and GAAP treatment will not be the same Generally, a net investment hedge is not a "hedge" for U.S. tax purposes Consider the following tax consequences: timing; ordinary or capital gains; source for withholding, foreign tax credit and other purposes 2016 Grant Thornton LLP. All rights reserved. 34
Net investment hedge Forward contract is at the U.S. parent level Consider tax treatment: Consider straddle rules, Section 1256, Section 988, etc. Planning considerations Moving hedge to a different entity May elect capital treatment, which could be favorable in certain situations Consider how the hedge could be modified to qualify as a "tax hedge" Equity investment Domestic entity Offshore Offshore Entity entity (CFC) (CFC) Example Forward contract Bank Hedge of equity investment in foreign subsidies 2016 Grant Thornton LLP. All rights reserved. 35
Net investment hedge Forward contract is at the CFC level Consider tax treatment: Subpart F Section 954(c) foreign personal holding company income Potential whipsaw Taxed on excess gains over losses, but may not necessarily benefit from excess losses over gains Domestic entity Holding company (CFC) Equity investment Offshore Offshore Entity entity (CFC) (CFC) Example Forward contract Bank CFC's hedge of equity investment in foreign subsidies Business needs exception may not apply Impact on effective tax rate and global tax attributes 2016 Grant Thornton LLP. All rights reserved. 36
Agenda Introduction Financial statements, the importance of attribute tracking and accounting methods Foreign currency risk Data analytics and value creation Final thoughts and questions 2016 Grant Thornton LLP. All rights reserved. 37
What is data analytics? The science of examining raw data with the purpose of drawing conclusions about that information Data analytics allows companies to make better, more informed business and tax decisions Often by using data that is already being collected for various tax reporting functions 2016 Grant Thornton LLP. All rights reserved. 38
Data analytics - Unlocking value Harnessing data empowers tax departments to more accurately plan, understand and communicate global tax attributes Benefits of data analytics in international tax include: Effective tax attribute management Effective tax rate planning Risk assessment Efficiently address changes in the environment (business, legislative, etc.) Enhanced international tax planning and M&A activity 2016 Grant Thornton LLP. All rights reserved. 39
International tax: Data analytics 2.0 Transfer pricing Income & CbC reporting Tax accounting & ERP systems Nextgeneration data collection Better business decisions 2016 Grant Thornton LLP. All rights reserved. 40
Why now? Why is now the time to improve the process of tracking global tax attributes and performing analytics? BEPS, CbC reporting and global tax transparency Increased pressure on transfer pricing Global tax uncertainty Improvements in technology (it's never been easier!) 2016 Grant Thornton LLP. All rights reserved. 41
Agenda Introduction Financial statements, the importance of attribute tracking and accounting methods Foreign currency risk Data analytics and value creation Final thoughts and questions 2016 Grant Thornton LLP. All rights reserved. 42
Final thoughts Global tax attributes and data analytics have moved beyond the tax department into the C- suite Software, data analytics and automation are becoming staples of tax planning for international operations Computing and maintaining foreign tax attributes may seem simple, but in reality it is often complex with a wide variety of pitfalls for the unprepared 2016 Grant Thornton LLP. All rights reserved. 43
Continue the discussion? If you would like more information on global tax attribute tracking - use the Q&A button now and type: Please contact me 2016 Grant Thornton LLP. All rights reserved. 44
Comments? Questions? 2016 Grant Thornton LLP. All rights reserved. 45
Today s Presenters Douglas Wood East Region Practice Leader International Tax Services Charlotte, NC +1 704 632 6837 douglas.wood@us.gt.com Cory Perry Manager Washington National Tax Office Washington, D.C. +1 202 521 1509 cory.perry@us.gt.com Chris Summer Senior Manager International Tax Services Charlotte, NC +1 704 632 3499 chris.summer@us.gt.com Sara Yip Director International Tax Services Seattle, WA +1 206 398 2433 sara.yip@us.gt.com 2016 Grant Thornton LLP. All rights reserved. 46
Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters, and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For additional information on matters covered in this presentation, contact your Grant Thornton LLP professional. 2016 Grant Thornton LLP. All rights reserved. 47
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