FROM PRINCIPLES TO PLANNING

FROM PRINCIPLES TO PLANNING
Effective Tax Rate Planning

Effective Tax Rate Planning Roy Deaver, Moss Adams LLP
Will James, BKD LLP Tim Bloos, MNP LLP

Holding Company Structures: Managing Worldwide Effective Tax Rates
Tim Bloos, MNP LLP

Fundamental Elements: Strategic Global Tax Plan
Effective Tax Rate Planning: Holding Company Structures Fundamental Elements: Strategic Global Tax Plan Tax Attributes Organizational Structure Earning Objectives Finance Management Considerable overlaps and interdependencies Companies should adopt coordinated approach to developing, implementing and monitoring a comprehensive global tax strategy

Effective Tax Rate Planning: Holding Company Structures
Managing a Company’s Structural Tax Rate TAX ATTRIBUTES: U.S. & Foreign Tax Attributes Treaty Planning In-Country Planning ORGANIZATION STRUCTURE: Legal Entity Structure Business Operations Supply Chain Personnel Organization Acquisition Planning Monitoring EARNINGS OBJECTIVES: Profit Alignment Tax Base Management Transfer Pricing FINANCE MANAGEMENT: Treasury & Cash Needs Debt Financing (Intracompany & Third Party) Tax Attributes Foreign Tax Credits CFC Planning Holding Companies Foreign Currency Exchange Mergers, Acquisitions & Restructurings Cash Redeployment STRATEGIC GLOBAL TAX MANAGEMENT Organization Deferral Positions E&P/Loss Planning Finance Legal Entity Rationalization Treasury Management Business & Supply Chain Planning IP & Royalty Planning Tax Efficient Financing Transfer Pricing Planning Earnings

Techniques Effective Tax Rate Planning: Holding Company Structures
Various techniques can be used as part of a Strategic Global Tax Management Plan, including: Entity Classification (Check-the-Box) Planning Withholding Tax Management Tax Efficient Financing & Licensing Local Tax Management Ultimate goal Integrated structure to meet objectives of the business while minimizing global effective tax rate

Structure Without Strategic Global Tax Management Plan
Effective Tax Rate Planning: Holding Company Structures Structure Without Strategic Global Tax Management Plan U.S Parent US Operations DE Subsidiaries CFC Subsidiaries International Operations

Structure with Strategic Global Tax Management Plan
Effective Tax Rate Planning: Holding Company Structures Structure with Strategic Global Tax Management Plan U.S. Parent US Operations DE Subsidiaries Tax Favored Global Hold Co Holding Companies Financing Companies IP Companies & Entrepreneurs International Operations Tax Favored Sub-Hold Co Tax Favored Finance Co Subsidiaries Entrepreneur / Principal Co

Entity Classification (Check-the-Box) Planning
Effective Tax Rate Planning: Holding Company Structures Entity Classification (Check-the-Box) Planning Deferral vs. Flow-Through Structures The “check-the-box” regulations generally provide that a wide range of entities, including foreign entities such as a foreign limited liability company, are entitled to elect their classification for U.S. federal tax purposes Elections may be made to treat an eligible entity as a corporation, as a disregarded entity (if it has a single owner), or as a partnership (if it has more than one owner) for U.S. federal income tax purposes Under Treas. Reg. § , certain entities are considered “per se” corporations and a check-the-box election cannot be made to treat a per se corporation as a partnership or disregarded entity If an entity elects to be treated as a corporation, its income will be deferred for U.S. income tax purposes until repatriation and should not be currently includible in the shareholder's U.S. taxable income, subject to certain anti-deferral rules (e.g., Subpart F) If an entity elects to be treated as a disregarded entity or a partnership, its income will not be deferred and should be currently includible in the owner’s U.S. taxable income

Entity Classification (Check-the-Box) Planning (cont’d)
Effective Tax Rate Planning: Holding Company Structures Entity Classification (Check-the-Box) Planning (cont’d) Foreign Tax Credit Considerations Entity elects to be treated as a corporation. Foreign tax credits are generally available to corporate shareholders (but not individual or flow-through owners) to offset U.S. tax when income is repatriated or deemed repatriated. Income of all flow-through subsidiaries are “pooled” at the level of the first regarded CFC, thus creating blended E&P and foreign tax pools for purposes of U.S. foreign tax credits. Choosing between corporate and flow-through status for foreign subs can therefore provide the opportunity to manage E&P and tax pools so that U.S. corporate shareholders may be able to avoid excess credit/excess limitation positions If an entity elects to be treated as a disregarded entity or a partnership, foreign tax credits should be available to owners to offset U.S. tax paid on foreign source income Ability to take foreign tax credits to offset U.S. tax is subject to the foreign tax credit limitation calculation

Entity Classification (Check-the-Box) Planning (cont’d)
Effective Tax Rate Planning: Holding Company Structures Entity Classification (Check-the-Box) Planning (cont’d) Tax Attribute Management Foreign tax credit optimization E&P optimization basis planning Organization Structure Achieve tax efficiency without undesirable structuring implications Earnings Objectives U.S. federal tax minimization through deferral and use of low tax holding and finance companies Generate earnings in desired jurisdictions without creating U.S. tax impact Finance Management Manage Deferral Positions (APB 23) Efficient Offshore Cash Management Efficient Repatriation of Offshore Cash U.S. Parent DE Subsidiaries Tax Favored Global Hold Co Tax Favored Sub-Hold Co Tax Favored Finance Co CFC Subsidiaries DE Subsidiaries

Tax Efficient Intercompany Payment Flows (Withholding)
Effective Tax Rate Planning: Holding Company Structures Tax Efficient Intercompany Payment Flows (Withholding) Tax Attributes Local country tax minimization including treaty planning to manage withholding on dividends Foreign tax credit planning Organization Structure Manage payment flows without impacting legal entity structure Earnings Objectives Intangible property & transfer pricing planning to avoid withholding on royalty payments Tax efficient internal debt avoids withholding on interest payments Finance Management Efficient offshore cash management Efficient repatriation of offshore cash U.S. Parent Tax Favored Global Hold Co Loan Tax Favored Sub-Hold Co Royalties Interest Tax Favored Finance Co Dividends CFC/DE Subsidiaries Entrepreneur/ Principal Co

Tax Efficient Financing, Licensing & Local Tax Management
Effective Tax Rate Planning: Holding Company Structures Tax Efficient Financing, Licensing & Local Tax Management Holding Activities Dividends and capital gains from foreign participations exempt from tax in holding company jurisdictions under participation exemption conditions Intra-Group Financing Activities Interest income taxed at very low rates and/or ability to do back-to-back financing through a financing company to fund foreign subsidiaries (income taxable on small spread only, so very low ETR even if higher nominal tax rate) Debt pushdown creates interest deductions in jurisdiction of debtor (high tax) with interest income pick-up at jurisdiction of lender (low tax) Hybrid instrument planning may allow interest deduction in jurisdiction of debtor (high tax) with no corresponding interest income pick-up in jurisdiction of lender as instrument is considered capital investment Licensing and Intra-Group Royalties Royalty income taxed at very low rates and/or ability to do back-to-back licensing through an IP company to license IP to foreign subsidiaries (income taxable on small spread only, so very low ETR even if higher nominal tax rate) Incentives and tax holidays to reduce local country tax rates No exit cost or recapture of amortization, allowing for permanent tax savings

Tax Efficient Financing, Licensing & Local Tax Management (cont’d)
Effective Tax Rate Planning: Holding Company Structures Tax Efficient Financing, Licensing & Local Tax Management (cont’d) Tax Attributes Local country tax minimization through low tax holding, financing & IP company Organization Structure Entrepreneur structure and supply chain management to manage tax base in line with business needs and desired legal entity structure Earnings Objectives Intangible property & transfer pricing Planning to manage tax base Treasury Management Tax Efficient Internal Debt Efficient Offshore Cash Management U.S. Parent Tax Favored Global Hold Co Tax Favored Sub-Hold Co Loan License Dividends Interest Royalties Dividends Interest Tax Favored Finance Co Loan Loan Sub-License CFC/DE Subsidiaries Entrepreneur/ Principal Co

Effective Tax Rate Planning: Holding Company Structures
Selection of Holding Company Jurisdiction Business needs Treaty network Quality of Advisors, service providers Banking and other treasury infrastructure Regulatory regime – capitalizing/unwinding structure Cost of doing business

Attributes of Ideal Holding Company Jurisdiction
Effective Tax Rate Planning: Holding Company Structures Attributes of Ideal Holding Company Jurisdiction Standing in the international business community Politically and economically stable “Tried and Tested” as a holding company location Efficient from a tax, treasury and corporate law perspective Availability of desirable “eligible entity” for check-the-box planning Attractive in terms of low establishment and operating costs: Minimal or manageable substance requirements Minimal or manageable accounting / reporting requirements Availability of well qualified and trained workforce at competitive salaries

Business Functions that can be migrated to a lower tax jurisdiction
Effective Tax Rate Planning: Holding Company Structures Business Functions that can be migrated to a lower tax jurisdiction Holding of investments Financing / granting loans Treasury / cash management: Cash pooling / netting Centralizing group-wide currency risks, etc. Re-invoicing Exploitation of intangibles Insurance, re-insurance, captive insurance Factoring Leasing

Possible Jurisdictions
Effective Tax Rate Planning: Holding Company Structures Possible Jurisdictions Europe Luxembourg Netherlands Ireland Switzerland UK Spain Cyprus Portugal (Madeira) Other Singapore Hong Kong Mauritius Malaysia (Labuan) UAE Barbados

Use of Transfer Pricing Planning to Manage Worldwide Effective Tax Rate
Will James, BKD LLP

Intangible Property (IP) and Supply Chain Structures
Effective Tax Rate Planning: Transfer Pricing Intangible Property (IP) and Supply Chain Structures IP Licensing Cost sharing Supply chain structures

XYZ U.S. (Research & Development Co.) XYZ Low Tax (Manufacturing Co.)
Effective Tax Rate Planning: Transfer Pricing Intangible property transfer - example Transfer of technology intangibles Know-how Patents Processes Formulations Copyrights, etc. Transfer of marketing intangibles Trademarks Trade names Brand names Reputation Customer relationships Customer lists Sales force, etc. XYZ U.S (Research & Development Co.) License of technology Payment of royalty (transfer price) Market price for sale of goods XYZ Low Tax (Manufacturing Co.) Third Parties

Intangible Property Transfers (cont’d)
Effective Tax Rate Planning: Transfer Pricing Intangible Property Transfers (cont’d) Transfer IP through licensing arrangement or outright sale of the IP: IP can be licensed to an entity in a low tax jurisdiction – who either exploits the IP itself or then sublicenses it Licensor receives a royalty payments (generally a percentage of sales of the licensee) It is also possible to sell the IP for a lump sum payment Once the IP has been transferred, the new owner is free to exploit the IP The IP has to be valued using transfer pricing valuation techniques

Intangible Property Transfers (cont’d)
Effective Tax Rate Planning: Transfer Pricing Intangible Property Transfers (cont’d) Benefits Excess profits after royalty payments would be subject to deferral As foreign sales increase – benefit will also increase accordingly Relatively simple to administer The licensing of the IP can help avoid Subpart F Potential Issues An outright sale requires a valuation which would be heavily scrutinized by the IRS Might not generate significant savings in the case of a licensing arrangement

Cost Sharing Effective Tax Rate Planning: Transfer Pricing
U.S. Parent 1. Purchases (Buys-in) Rights to Current Intangibles Tax Favored Global Hold Co 2. Shares all Future IP Development Costs under Cost Sharing Arrangement Tax Favored Sub-Hold Co 3. License under a Royalty Arrangement Tax Favored Finance Co 3. Sublicense under a Royalty Arrangement Entrepreneur / Principal Co

Cost Sharing (cont’d) Effective Tax Rate Planning: Transfer Pricing
A NEW ENTITY (Tax Favored Sub-HoldCo), in a low tax jurisdiction, and U.S. Parent would enter into a qualified cost sharing agreement: Tax Favored Sub-HoldCo “buys-in” to existing intangibles owned by U.S. Parent giving Tax Favored Sub-HoldCo legal and economic rights to use the intangibles in a pre-defined territory U.S. Parent and Tax Favored Sub-HoldCo share future development costs, based on expected future benefit, and have legal and economic rights to use the developed intangibles in pre-defined territories Tax Favored Sub-HoldCo then licenses the intangibles to Tax Favored FinanceCo Tax Favored FinanceCo then sublicenses the intangibles to Entrepreneur/Principal Co. Possible jurisdictions for Entrepreneur/Principal Co. include Singapore, Ireland or Switzerland

Cost Sharing (cont’d) Effective Tax Rate Planning: Transfer Pricing
Benefits All profits on non-U.S. sales would be subject to deferral As foreign sales increase – benefit will also increase accordingly Potential Issues Buy-in would result in significant income to U.S. Parent Buy-in subject to challenge by IRS as it is a Tier 1 issue Final and temporary cost sharing regulations are onerous and are designed to reduce the desirability of cost sharing Requires significant business change and substance

Entrepreneur/Principal Structure
Effective Tax Rate Planning: Transfer Pricing Entrepreneur/Principal Structure 3. Toll Manufacturer Contract Manufacturer Country HoldCo Entrepreneur/ PrincipalCo Contract Manufacturer Country HoldCo 1. Manufacturing Services 2. Distribution Activities Low Risk Distributor Country Distributor 4. Distribution Activities 3. Sublicense under a Royalty Arrangement

Entrepreneur/Principal Structure (cont’d)
Effective Tax Rate Planning: Transfer Pricing Entrepreneur/Principal Structure (cont’d) Entrepreneur/principal is located in a low tax jurisdiction Possibilities include Ireland, Singapore or Switzerland Can obtain advance rulings in certain countries Distributors & manufacturers are set-up as low risk entities Distributors can be limited risk distributors or commissionaires Manufacturers can be contract or toll manufacturers

Entrepreneur / Principal Structure (cont’d)
Effective Tax Rate Planning: Transfer Pricing Entrepreneur / Principal Structure (cont’d) Entrepreneur/principal pays distribution and manufacturing fees to distribution and manufacturing entities, respectively Limited risk distributors can receive low operating margin/commissionaires can receive a cost plus Contract and toll manufacturers receive a mark-up on their total costs Residual profits accrue in entrepreneur/principal after paying low-level fees to distribution and manufacturing entities Entrepreneur/Principal needs to obtain the rights to the intangible property (IP) Enters into a sub-licensing arrangement with Tax Favored Finance Co Otherwise it cannot grant royalty-free rights to the manufacturers in order to produce goods on its behalf

Effective Tax Rate Planning: Transfer Pricing Entrepreneur/Principal Structure (cont’d) There needs to be substance in the entrepreneur/principal Can’t be a “sham” or brass name plate company as it needs to be seen as performing valuable functions Significant decisions need to be made by the entrepreneur/principal

Effective Tax Rate Planning: Transfer Pricing Entrepreneur/Principal Structure (cont’d) Benefits Defers income in principal/entrepreneur & reduces overall effective tax rate Can have operational efficiencies Can eliminate subpart F income Potential issues Disposal of goodwill in existing entities Need for substance Increase in import price & increase customs duty incurred by distribution entities VAT can be impacted with commissionaire structures Entrepreneur/principal can be views has having a permanent establishment in other countries

Roy Deaver, Moss Adams LLP
Other Planning: Managing Worldwide Effective Tax Rates Roy Deaver, Moss Adams LLP

Effective Tax Rate Planning: Other
Foreign Tax Credit Planning DPAD – Section 199 R&E Credit – Section 41 Other 33

Foreign Tax Credit Issues Income Sourcing Rules Deduction Sourcing Rules Creditable Foreign Income Taxes

Foreign tax credit limitation (§904): U.S. tax on Foreign-source taxable income worldwide X income Worldwide taxable income Foreign-source taxable income = FS gross income – deductions allocated to FSI FTC limitation is increased by increasing foreign-source taxable income Increase FS gross income and/or Decrease deductions allocated to FSI ¶ B1.05A[1] Introduction To encourage production in the United States, Congress added Section 199 to the Code. 1 Section 199 allows a deduction equal to a percentage of the “qualified production activities income” (or taxable income if less). 2 “Qualified production activities income” arises from “domestic production gross receipts.” 3 Such gross receipts may arise from the sale of certain property manufactured in whole or in significant part within the United States. 4 Issues at the interface of domestic and international production will arise when property is brought into the United States 5 or is exported for further manufacturing. 6 Section 199(c) limits the deduction to 50 percent of certain wages paid during the taxable year. It remains unclear whether this provision will do much of anything to achieve its goals of helping to revitalize U.S. manufacturing activities and increase U.S. jobs in the manufacturing sector. However, it does seem clear that by adding a complex tax preference for U.S. production activities to the tax code, this provision should help increase U.S. job opportunities for tax lawyers and accountants. Any serious proposal for tax reform should recommend repeal of this poorly advised provision. ¶ B1.05A[2] Basic Amount of the Deduction As mentioned above, Section 199 reduces the effective rate of tax on U.S. manufacturing income by allowing a deduction equal to a specified percentage of a taxpayer's “qualified production activities income,” for taxable years starting after The specified percentage is 3 percent for taxable years starting in 2005 or 2006, 6 percent for taxable years starting in 2007, 2008, or 2009, and 9 percent for taxable years starting in 2010 and thereafter. 8 Note, however, that the base for the deduction is taxable income, if the taxpayer's taxable income is less than the taxpayer's qualified production activities income for the year. 9 ¶ B1.05A[3] Limitation on the Deduction Based on a Percentage of Wages Section 199(b)(1) limits the amount of the deduction to 50 percent of the taxpayer's “W-2 wages” for the taxable year. Section 199(b)(2), in turn, defines “W-2 wages” to mean with respect to any person for any taxable year of such person, the total of the amounts described in Sections 6051(a)(3) and 6051(a)(8) paid by the person with respect to employment of employees by the person during the calendar year ending during such taxable year. 10 W-2 wages do not include any amount that is not properly allocable to domestic production gross receipts for Section 199(c)(1) purposes In addition, W-2 wages do not include any amount that is not properly included in a return filed with the Social Security Administration on or before the sixtieth day after the due date for the return (including extensions) Section 199(b)(3) authorizes the Treasury and the Service to issue regulations that apply this provision “in cases where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.” 35

Foreign Source Income - §863 (b)
Effective Tax Rate Planning: Other Foreign Source Income - §863 (b) Source of Income 50% based on place of manufacturing 50% based on title passing Focus on whether manufacturing is done outside of the U.S. Check the passage of title outside the U.S. which may involve bearing the shipping costs (but these costs can be added to the sale price) U.S. Manufacturer Sales outside the U.S. Manufacturing in the U.S. FORCO

Foreign Source Income Effective Tax Rate Planning: Other
Other FSI planning opportunities Income Flash title on Foreign Manufactured goods Factoring of CFC receivables Advanced payments Sale of Purchased inventory Guarantee fees Deductions Interest Expense Alternative tax book value method Fair market value method R&D Expense Sales Gross Income

High Low Tax Countries and FTC
Effective Tax Rate Planning: Other High Low Tax Countries and FTC U.S. High low foreign tax operations Foreign subsidiaries may be in low-tax countries that offer e.g. special tax incentives to MNCs Or they may be in countries that have a high tax rate By repatriating a mix of earnings from high and low tax foreign operations, the FTC system allows low-rated manufacturing profits to be averaged with higher taxed profits Dividends Low- Taxed High-Taxed Low-Taxed

Preventing Splitting Foreign Tax Credits From Related Foreign Income Section 909 Under the matching rule, if a “foreign tax credit splitting event” occurs: The taxpayer may not take into account the split-off foreign income taxes for U.S. tax purposes until the taxable year in which the taxpayer takes into account the related foreign income for U.S. tax purposes With respect to foreign income taxes paid or accrued by a foreign corporation for which a U.S. corporate shareholder is eligible for a section 902 credit, the split-off foreign taxes may not be taken into account for purposes of sections 902, 960 or 964(a) until the taxable year in which such foreign corporation or such U.S. corporate shareholder takes into account the related foreign income for U.S. tax purposes

Example of Splitting Arrangement Guardian Industries Corp. v. U.S., 477 F.3d 1368 (Fed. Cir. 2007). Interguard Holding Corp. (U.S) Member of Guardian Industries Corp.’s U.S. consolidated group 100% U.S. Luxembourg Guardian Industries Europe S.a.r.l. (“GIE”) (Luxembourg) GIE Disregarded entity for U.S. tax purposes Corporation for Luxembourg tax purposes Lux Sub 1 Lux Sub 2 Lux Sub 3 Lux Sub 4 Lux Subs 1-4 are corporations for both U.S. and Luxembourg tax purposes.

Guardian Industries (cont’d)
Effective Tax Rate Planning: Other Guardian Industries (cont’d) For 2001, GIE filed a consolidated Luxembourg tax return on behalf of itself and Lux Subs 1-4 GIE paid Luxembourg income taxes on its income and on the income of Lux subs 1-4 Lux Subs 1-4 did not dividend their 2001 income to GIE The Guardian Industries U.S. consolidated group claimed section 901 credit on its 2001 Form for Luxembourg income taxes GIE paid on the income of Lux Subs 1-4, even though such income was not included on the 2001 Form 1120 for the Guardian Industries U.S. consolidated group Federal Circuit held: Under Luxembourg tax law, GIE was the person liable for the Luxembourg income tax on the income of Lux Subs 1-4 (no joint and several liability, either) The technical taxpayer rule of Teas. Reg. § (f)(1) looks at which entity bears the imposition of the foreign income tax, not which entity earned the foreign income The Guardian Industries U.S. consolidated group was entitled to the section 901 credit

Domestic Production Activity Deduction Section 199 allows a deduction equal to a percentage of the qualified production activities income (QPAI) (or taxable income if less) Section 199 reduces the effective rate of U.S. tax on U.S. manufacturing income by allowing this deduction that is equal to 9% of QPAI for taxable years starting in 2010 and thereafter Section 199(b)(1) limits the amount of the deduction to 50 percent of the taxapayer’s W-2 wages for the taxable year ¶ B1.05A[1] Introduction To encourage production in the United States, Congress added Section 199 to the Code. 1 Section 199 allows a deduction equal to a percentage of the “qualified production activities income” (or taxable income if less). 2 “Qualified production activities income” arises from “domestic production gross receipts.” 3 Such gross receipts may arise from the sale of certain property manufactured in whole or in significant part within the United States. 4 Issues at the interface of domestic and international production will arise when property is brought into the United States 5 or is exported for further manufacturing. 6 Section 199(c) limits the deduction to 50 percent of certain wages paid during the taxable year. It remains unclear whether this provision will do much of anything to achieve its goals of helping to revitalize U.S. manufacturing activities and increase U.S. jobs in the manufacturing sector. However, it does seem clear that by adding a complex tax preference for U.S. production activities to the tax code, this provision should help increase U.S. job opportunities for tax lawyers and accountants. Any serious proposal for tax reform should recommend repeal of this poorly advised provision. ¶ B1.05A[2] Basic Amount of the Deduction As mentioned above, Section 199 reduces the effective rate of tax on U.S. manufacturing income by allowing a deduction equal to a specified percentage of a taxpayer's “qualified production activities income,” for taxable years starting after The specified percentage is 3 percent for taxable years starting in 2005 or 2006, 6 percent for taxable years starting in 2007, 2008, or 2009, and 9 percent for taxable years starting in 2010 and thereafter. 8 Note, however, that the base for the deduction is taxable income, if the taxpayer's taxable income is less than the taxpayer's qualified production activities income for the year. 9 ¶ B1.05A[3] Limitation on the Deduction Based on a Percentage of Wages Section 199(b)(1) limits the amount of the deduction to 50 percent of the taxpayer's “W-2 wages” for the taxable year. Section 199(b)(2), in turn, defines “W-2 wages” to mean with respect to any person for any taxable year of such person, the total of the amounts described in Sections 6051(a)(3) and 6051(a)(8) paid by the person with respect to employment of employees by the person during the calendar year ending during such taxable year. 10 W-2 wages do not include any amount that is not properly allocable to domestic production gross receipts for Section 199(c)(1) purposes In addition, W-2 wages do not include any amount that is not properly included in a return filed with the Social Security Administration on or before the sixtieth day after the due date for the return (including extensions) Section 199(b)(3) authorizes the Treasury and the Service to issue regulations that apply this provision “in cases where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.” 42

R & E An expenditure for research and development activities in the experimental or laboratory sense, and not for literary, historical, or similar research projects. Treas. Reg. § (a)(1) ; Rev. Rul , CB 72 The regulations expressly include costs incident to the development of an experimental or pilot model, a plant process, a product, a formula, an invention, or similar property, and the improvement of already existing property It excludes the cost of testing products or materials for quality control, efficiency surveys, management studies, consumer surveys, advertising, or promotional activities. Treas. Reg. § (a)(1) The R&E credit is a non-refundable credit The R&E credit was recently extended for QRE paid through 12/31/13 ¶ B1.05A[1] Introduction To encourage production in the United States, Congress added Section 199 to the Code. 1 Section 199 allows a deduction equal to a percentage of the “qualified production activities income” (or taxable income if less). 2 “Qualified production activities income” arises from “domestic production gross receipts.” 3 Such gross receipts may arise from the sale of certain property manufactured in whole or in significant part within the United States. 4 Issues at the interface of domestic and international production will arise when property is brought into the United States 5 or is exported for further manufacturing. 6 Section 199(c) limits the deduction to 50 percent of certain wages paid during the taxable year. It remains unclear whether this provision will do much of anything to achieve its goals of helping to revitalize U.S. manufacturing activities and increase U.S. jobs in the manufacturing sector. However, it does seem clear that by adding a complex tax preference for U.S. production activities to the tax code, this provision should help increase U.S. job opportunities for tax lawyers and accountants. Any serious proposal for tax reform should recommend repeal of this poorly advised provision. ¶ B1.05A[2] Basic Amount of the Deduction As mentioned above, Section 199 reduces the effective rate of tax on U.S. manufacturing income by allowing a deduction equal to a specified percentage of a taxpayer's “qualified production activities income,” for taxable years starting after The specified percentage is 3 percent for taxable years starting in 2005 or 2006, 6 percent for taxable years starting in 2007, 2008, or 2009, and 9 percent for taxable years starting in 2010 and thereafter. 8 Note, however, that the base for the deduction is taxable income, if the taxpayer's taxable income is less than the taxpayer's qualified production activities income for the year. 9 ¶ B1.05A[3] Limitation on the Deduction Based on a Percentage of Wages Section 199(b)(1) limits the amount of the deduction to 50 percent of the taxpayer's “W-2 wages” for the taxable year. Section 199(b)(2), in turn, defines “W-2 wages” to mean with respect to any person for any taxable year of such person, the total of the amounts described in Sections 6051(a)(3) and 6051(a)(8) paid by the person with respect to employment of employees by the person during the calendar year ending during such taxable year. 10 W-2 wages do not include any amount that is not properly allocable to domestic production gross receipts for Section 199(c)(1) purposes In addition, W-2 wages do not include any amount that is not properly included in a return filed with the Social Security Administration on or before the sixtieth day after the due date for the return (including extensions) Section 199(b)(3) authorizes the Treasury and the Service to issue regulations that apply this provision “in cases where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.” 43

Flowchart Explanation
Effective Tax Rate Planning: Other IC- DISC Flowchart Explanation 1. The export company operates as normal, generating revenue from export sales 2. The export company may then elect to pay the IC-DISC a commission based on a qualified calculation method, as defined under the Internal Revenue Code and Treasury Regulations promulgated there under. These commissions are deductible to the export company and not subject to regular U.S. corporate income taxes for the IC-DISC under IRC §991 of the Internal Revenue Code 3. The IC-DISC then pays the export company’s shareholders in the form of qualified dividends which is subject to 20 percent tax, under current law (this does not include the state tax or any applicable medicare surcharge) 3. $$ Dividends $$ “Shareholders” Export Company IC-DISC 2. $$ Commissions $$ Customers 1. $$ Revenue $$ $$ Export Sales $$

Other ETR opportunities SALT planning Attribute refresher transactions e.g., sale-leaseback transactions Section 59(e) elections

IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Questions?

Roy Deaver, MossAdams LLP
Contact Information Roy Deaver, MossAdams LLP Will James, BKD LLP Tim Bloos, MNP LLP

FROM PRINCIPLES TO PLANNING

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