Tax for the Non-Tax Lawyer Tuesday, September 9, 2014 Presented By: Thomas May, Partner, Baker & McKenzie LLP Alan Zoccolillo, Partner, Baker & McKenzie LLP 1
Agenda 2
Topics to be covered: Overview of corporate structure including disregarded entities for federal tax purposes and check the box General tax issues and pitfalls involved with internal restructurings and conversions from Corps to LLCs and vice versa Primary differences in tax treatment of Stock vs. Asset deals (including section 338 elections) State & local tax issues don t let them catch you by surprise Tax trips and traps in credit facilities and cash pooling arrangements Intercompany agreements, IP licensing, supply chain and other transfer pricing considerations Cross-Border Privilege Issues 3
Check the Box 4
Overview of U.S. Check the Box Rules How do U.S. check the box rules work Per se corporations (US corporations and list of foreign corporations including German AGs, UK public limited companies, etc.) provide the least flexibility In certain jurisdictions (e.g., Canada), may have to resort to unlimited liability company or limited partnership Default rules Other than per se corporations, all business entities default to a partnership if there is more than one owner and to a disregarded entity if there is a sole owner except that foreign business entities where no owner has unlimited liability default to corporations Cross-Border Privilege Issues 5
Overview of U.S. Check the Box Rules How do U.S. check the box rules work Other than per se corporations, all business entities may elect their tax classification as follows: 1) corporation; 2) partnership if more than one owner; or 3) disregarded entity if sole owner Trust and other arrangements to create sole owner Election is made by corporation or its shareholders but signature of former shareholders may also be required if election retroactive A business entity that has elected a certain status can t elect to change its status for 60 months after such election so, for example, covenant may be required in share purchase agreement Exception: An initial entity classification election, which must be made within 75 days of formation (or relevance), doesn t count for purposes of this rule Cross-Border Privilege Issues 6
Overview of U.S. Check the Box Rules Boxes, circles and triangles Corporation Hybrid Disregarded Entity Actual Branch Partnership Reverse Hybrid Entity Cross-Border Privilege Issues 7
Overview of U.S. Check the Box Rules Disregarded entity planning Assets and liabilities of UK Holdco are considered to be assets and liabilities of US Parent and transactions between two entities are disregarded for most U.S. federal income tax purposes US Parent UK Holdco Loan UK Opco Cross-Border Privilege Issues 8
Internal Restructurings 9
Internal Restructurings Benign corporate actions that could have profound direct or indirect tax consequences Capitalization of debt including intercompany loans and trade receivables Discharge of indebtedness income? Triangular dividend? VAT? US Parent Loan Foreign Opco Loan Foreign Opco Cross-Border Privilege Issues 10
Internal Restructurings Benign corporate actions that could have profound direct or indirect tax consequences Real estate transfer tax? Loss of tax losses? Shares of Foreign Opco 2 US Parent Foreign Opco 1 Foreign Opco 2 Foreign Opco 2 Cross-Border Privilege Issues 11
Internal Restructurings Benign corporate actions that could have profound direct or indirect tax consequences Real estate transfer tax? Loss of tax losses? US Parent State A Opco Merger State B Opco Cross-Border Privilege Issues 12
Internal Restructurings Benign corporate actions that could have profound direct or indirect tax consequences Change of directors, place of directors meetings, or place of signature of important documents Nowhere income under BEPS? US Parent Foreign Opco Cross-Border Privilege Issues 13
Internal Restructurings Change in entity classification Corporation to disregarded entity Conversion of per se corporation (e.g., Delaware corporation) to entity that defaults to a disregarded entity (e.g., Delaware LLC) (assuming no election to be treated as a corporation is made) Entity that is treated as a corporation under the default rule or has previously elected to be treated as a corporation now elects to be treated as a disregarded entity Treatment where corporation is owned by another corporation Disregarded entity deemed to liquidate for U.S. federal income tax purposes in tax-free transaction (with exceptions see next slide) Assets, liabilities and tax attributes travel up to the sole owner for U.S. federal income tax purposes Cross-Border Privilege Issues 14
Internal Restructurings Change in Entity Classification Income inclusion of untaxed E&P US Parent UK Holdco US Parent UK Holdco Assets, Liabilities and Tax Attributes (e.g, untaxed E&P) UK Opco UK Opco Cross-Border Privilege Issues 15
Internal Restructurings Change in entity classification Disregarded entity to corporation Conversion of disregarded entity (e.g., Delaware LLC) (assuming no election to be treated as a corporation was made) to per se corporation (e.g., Delaware corporation) Entity that is treated as a disregarded entity under the default rule or has previously elected to be treated as a disregarded entity now elects to be treated as a corporation Treatment where corporation owned by another corporation Disregarded entity deemed to incorporate for U.S. federal income tax purposes in tax-free transaction (with exceptions see next slide) Assets and liabilities travel down to new corporation for U.S. federal income tax purposes Cross-Border Privilege Issues 16
Internal Restructurings Change in Entity Classification Deemed asset transfer, branch recapture, springing debt, etc. US Parent UK Opco US Parent UK Opco Assets and Liabilities UK Opco UK Opco Cross-Border Privilege Issues 17
Stock v. Asset Deals 18
Stock versus Asset Deals Due Diligence Asset deals Limited due diligence Loss of tax incentives Liens and successor liability Stock deals Financial statements are a good starting place including analysis of tax provision Differences in judgment Unforeseen liabilities in direct and indirect taxes Failure to file and open statute of limitations VAT, GST, sales tax, customs, etc. Unclaimed property Loss of tax incentives Tax insurance Cross-Border Privilege Issues 19
Stock versus Asset Deals Contractual provisions Asset deals Withholding taxes Limited to indemnification for liens and successor liability Transfer taxes associated with transactions Stock deals Withholding taxes Division of tax liabilities (direct and indirect) based on pre-closing and post-closing periods including straddle periods Representations and warranties regarding compliance with tax reporting requirements, payment of taxes shown or properly due thereon, etc. Covenants regarding tax matters between signing and closing Cooperation with tax reporting requirements, audits, information sharing Indemnification for properly divided tax liabilities and breaches in representations, warranties, and covenants Transfer taxes associated with transactions Cross-Border Privilege Issues 20
Stock versus Asset Deals Convergence of stock and asset under section 338 Section 338 allows a corporate. taxpayer to treat its stock acquisition from an unrelated party as an acquisition of assets Section 338(g) election primarily for foreign corporate targets is unilateral at the option of the purchaser so if a seller does not want the election made (because it would have negative tax consequences to the seller), the seller better get a covenant in the share purchase agreement from the purchaser that the election will not be made Section 338(h)(10) election primarily for U.S. corporate targets requires the consent of the seller and the purchaser so if the election is intended to be made, the parties should include a mutual provision in the share purchase agreement Alternative to section 338 election would be to have buyer make an election to treat target as a disregarded entity effective prior to the date of closing Such election would require action or consent of seller so, again, a contractual issue Cross-Border Privilege Issues 21
Stock versus Asset Deals Asset deals Presumably assets would be acquired where they will finally rest Stock deals Will likely require post-acquisition integration so be certain to acquire the stock in the right place Shot-form merger versus brother-sister merger Cross-Border Privilege Issues 22
State and Local Taxes 23
State and Local Taxes State and local doesn t always follow federal Nexus versus U.S. trade or business versus permanent establishment Treaties don t address state and local taxes Consolidated versus combined Intercompany items Differing rules and interpretations Cross-Border Privilege Issues 24
Credit Facilities and Cash Pooling 25
Credit Facilities and Cash Pooling Section 956 deemed dividends Controlled foreign corporations Deferral Earnings and profits Investments in U.S. property Stock of U.S. shareholder Obligations of U.S. shareholder Pledges and guarantees of obligations of U.S. shareholders Includes pledges of 662/3 percent of stock of controlled foreign corporation accompanied by one or more negative covenants or similar restrictions Cross-Border Privilege Issues 26
Credit Facilities and Cash Pooling Cash pooling arrangement Deposits of members are pledged as collateral to support loans to other members US Parent US Parent UK Opco Cash Pooling UK Opco Cash Pooling German Opco German Opco Cross-Border Privilege Issues 27
Transfer Pricing 28
Transfer Pricing Arm s length standard Section 482 Comparable uncontrolled transaction Comparable profits method Others Role of Organization for Economic Co-operation and Development (OECD) and other international organizations Base erosion and profit shifting initiative Importance of intercompany agreements Cross-Border Privilege Issues 29
Q&A 30
Baker & McKenzie Contacts Thomas May 452 Fifth Avenue New York, New York 10018 Tel: +1 212 891 3983 thomas.may@bakermckenzie.com Alan Zoccolillo 452 Fifth Avenue New York, New York 10018 Tel: +1 212 626 4374 alan.zoccolillo@bakermckenzie.com 2014 Baker & McKenzie 31