Presentation on theme: "Tax Executives Institute"— Presentation transcript:
1 Tax Executives Institute Kalamazoo ChapterRepatriation PlanningPeter M. Daub, Baker & McKenzie, LLPThursday, March 17, 2011Your Trusted Tax Counsel
2 Presenter Peter M. Daub (Washington, D.C.) (202)
3 AGENDA Defining the Repatriation Problem Restructuring to Avoid Anti-HopscotchPrepayment StrategiesReturn of Capital DistributionsAll Cash “D” ReorganizationsSection 368(a)(2)(D) Reorganization of Domestic TargetOutbound “F” Reorganization of Domestic TargetPurchase of Parent Stock Used in Foreign AcquistionStock Compensation StrategiesTransfer Pricing ApproachesDueling LoansRate Hyping
4 Defining the Repatriation Problem For those companies that are not in an overall foreign loss (OFL) position, the issue is typically how to get access to low-tax cash without:Incurring a significant residual U.S. tax liability; andViolating the company’s APB 23 assumptionFor those companies in an OFL, the objective may be to get access to low-tax or high tax cash without significant residual tax or violating APB 23 assumption
5 Restructuring to Avoid Anti-Hopscotch -- Section 304 Transactions and Other Internal Restructurings WhenAnytime (under current law)HowSection 304 Transaction to hopscotch low-tax E&P pools over high tax pools, or vice versaSpin-offs and other internal restructuringsWhyNeed longer-term solution that warrants restructuring
6 Restructuring to Avoid Anti-Hopscotch Example -- Section 304 Transaction AdvantagesSection 304 deemed dividend from CFC-2 earnings direct to US parentNo GRA needed. Treas. Reg. §1.367(a)-9THowever…Dividend constrained by value of CFC-3CFC-2 may not be desirable holdcoVariationsSell CFC-1 stock to CFC-2CFC-3 sells other CFC shares to CFC-1Recap shares of transferred CFC into preferred to minimize valuation issuesU.S. ParentCFC-1(Low-tax)$CFC-3CFC-3sharesCFC-2(High-tax)
7 Restructuring to Avoid Anti-Hopscotch Internal Foreign-to-Foreign Inversion BeforeAfterStepsUS contributes LT CFC stock to HT CFC Hold Co in exchange for HT CFC Hold Co common and preferred stockDividends on preferred stock can be paid directly to US without distribution to LT CFCKey PointsForeign-to-foreign section 351 exchange or “B” reorganizationNeed GRANeed business purposeValuation considerationsCan be long term solutionUSUScommon andpreferred stockLTCFCHT CFC Hold CoHook stockHT CFCHold CoLTCFCHTCFCsHTCFCs
8 Restructuring to Avoid Anti-Hopscotch Spin-off of High Tax Group USStepsLT CFC distributes stock of HT CFC Holdco to USKey PointsCan qualify as tax free section 355 spin-offNeed business purposeNo GRA or e&p pick-upMost elegant long term solutionHT CFC Holdco stockLTCCFCHT CFCHold CoHTCFCs
9 Prepayment Strategy Inventory Prepayment Transaction USCO Cash equal to two years’ worth of inventory, discounted to reflect the fact that the money is advanced earlier than normalMust be nonrefundableSwiss Subsidiary
10 Prepayment Strategy Broader Prepayment Issues Can be used for inventory, services, royalties and cost sharing paymentsCan USCO defer the income pursuant to Treas. Reg. § or Rev. Proc ?If deferral is possible, how long? Could immediate income be a benefit?Is the discount that foreign subsidiary receives subpart F income or is it a reduction in expense?Can you repeat?
11 return of capital distribution 12/30/Y1 US Parentreturn of capital distribution 12/30/Y1cash loan 12/28/Y1Foreign HoldcoThird Party Lenderrepay loan with cash on 1/2/Y2cash dividend 1/2/Y2Foreign SubBuyersale of assets 1/1/Y2
12 Return of Capital Distribution Can IRS assert subsequent distribution really boot in the section 351 transaction in which new Foreign Holdco formed?Could the return of capital distribution trigger any GRAs entered into on the set up?Will the bank demand a parent guarantee or pledge of subsidiary assets to support the loan?
13 All-Cash “D” Reorganization Value $100Basis $ 80E&P / Section 1248 Amt. $ 20USCOOPCO(Country X)Holding Company(Dutch)effective rate in pool of 35%OPCO(Ireland)low-tax earningsOPCO’s attributes are key to ensuring this structure works
14 All-Cash “D” Reorganization Value $100Basis $ 80E&P / Section 1248 Amt. $ 20USCOOPCO c/s for $100 noteOPCO(Country X)Holding Company(Dutch)dividends to Holdcoto pay off noteeffective rate in pool of 35%Consequences$80 recovery of basis$20 OPCO (X) e&p pick-upOPCO(Country X)OPCO(Ireland)CTB election
15 Section 368(a)(2)(D) Reorganization of Domestic Target US Parent(US)merger consideration 40% FA stock and 60% cashmerger consideration of FA stock and cashTarget(US)FA(Non-US)US Sub(US)mergerAssume US Parent has a full FMV basis in the shares of Target
16 Section 368(a)(2)(D) Reorganization Issues Outside the scope of Notice because it is a section 361 transfer from one US corporation to another US corporationCash boot can be received tax-free by US Parent because there is no gain in the shares of Target
17 Outbound “F” Reorganization of Domestic Target Convert recently acquired/purchased U.S. target into a foreign companyAllows repatriation of pre-acquisition E&P via DRDDRD available because the earnings have already been subject to US taxAllows repatriation through return of capital/basisHigh/FMV basis in recently purchased entityTarget must repatriate cash before new low taxed earnings accrue in the foreign targetMust manage the E&P poolsMust fund the distribution
18 Outbound “F” Reorganization of Domestic Target (Cont.) Key CostsBasis step down for the built-in gain in the tangible assets (but not the IP)DRD at 80% or 100%?Potential waiting period under section 1059Issues arising from the US tangible assetsDividend them up and recognize section 311(b) gain and related issues, ORLive with two separate U.S. tax returns
19 Outbound “F” Reorg. Example – Step 1 US ParentTargetShareholderscashThird Party Bank Debt?Merger Sub(US)Target(US)mergeTarget CFCsAssume that most appreciation is in Target intangibles or CFCs, not US operating assetsUS Tax ConsequencesTreated as a taxable stock purchaseUS Parent takes a full FMV basis in the target stock
20 Outbound “F” Reorg. Example – Steps 2 and 3 shares of TargetUS ParentForeign NewcoTarget LLCTarget CFCsConversion to LLC (deemed liquidation)US Tax ConsequencesTreated as an outbound “F” reorganization
21 Outbound “F” Reorg. Example – Step 4 US ParentForeign NewcoTarget LLCTarget CFCsIP and CFC shares
22 Outbound “F” Reorg. Example – Step 5 Foreign Newco contributes Target LLC to US NewcoUS Newco assumes Target LLC liabilities such that Foreign Newco takes a $0 stock basis in USto avoid section 956US Parent(US)US NewcoTarget LLCTarget CFCsForeign Newco
23 Purchase of Parent Stock Used in Foreign Acquisition ParentStockKey PointsCFC purchase of new Parent stock non-taxable under section 1032CFC use of Parent stock in acquisition triggers no gain due to FMV basisAnti-"killer B" Notices not applicable if no tax-free reorganizationParentShareholdersTargetStock$CFCForeignTargetParentStockForeignTarget
24 Stock Compensation Strategies Foreign Sub grants stock options to its employeesUS Parent provides stock to Foreign Sub’s employeesForeign Sub reimburses US Parent for difference between FMV of stock and employee paymentPLR concludes the reimbursement is not a dividend to extent of section 83 spreadQuestions -Is an advance agreement to reimburse required?GAAP implications?
25 Transfer Pricing Approaches Consider expanding scope of expense charge-outsIf can get foreign deductionE.g., stewardship expense, guarantee feesIP ownershipConsider prepayments of royalties, service fees, cost sharing payments, inventory purchasesDoes not impact basic transfer pricing approach, but …Need to reflect risk factor and time value of moneyDiscount rate versus bond rate versus AFRIs discount above or below the line?Rev. Proc repatriation of agreed section 482 adjustments
26 Dueling Loan Strategy USCO 2A 1B 2B 1A CFC OPCO 1 (Low-Tax) 12/31 Year end11/30 Year end
27 Dueling Loan Strategy OPCO One OPCO Two OPCO 2 will have an 11/30 year end, as permitted under section 898 of the Code. The low-tax partners will lend all of their cash back to the United States parent at the following intervals:OPCO One OPCO Two12/01/03-01/14/ X01/15/04-02/28/04 X03/01/04-04/14/ X04/15/04-05/31/04 X06/01/04-07/14/ X07/15/04-08/30/04 X09/01/04-10/14/ X10/15/04-11/31/04 X
28 Dueling Loan Strategy Potential risks: Debt v. Equity – unlikely to be successful, provided loans are repaid on time and advances have the formal indicia of debt.Step-Transaction – at what point will a reviewing court step the advances together and treat them as one loan?Rev. Rul , C.B. 258 (2 months not ok, but 6 months ok)Jacob’s Engineering v. Commissioner, 97-1 USTC ¶50,340 (C.D. Cal. 1997), aff’d 99-1 USTC ¶50,335 (9th Cir. 1999).Reg § – IT(b)(4)Section 269ConduitSection 7701 (o)
29 Rate-HypingExample 1. USCO has $100 of U.S. Source Income and $100 of Foreign Source Income subject to $0 of foreign taxIncome $200Tentative U.S. Tax $ 70Tentative FTC $ 0Section 904 Limitation $35 *FTC ($ 0)Total U.S. Tax $ 70* Assumes all foreign source income is in the general basketExample 2. Same as 1, but USCO triggers a $100 foreign source dividend subject to $70 of foreign tax creditsIncome $300Tentative U.S. Tax $105Tentative FTC $70Section 904 Limitation $70 *FTC ($70)Total U.S. Tax $ 35* Assumes all foreign source income is in the general basketOBJECTIVE: MOVE FROM EXAMPLE 1 to EXAMPLE 2 WITHOUT PAYING MORE FOREIGN TAX
31 Hovering – Rate HypingEXAMPLE: CFC2 acquires all of the assets of a CFC 1 in a tax-free transaction onDecember 31, Each has the following attributes as of December 31, 2006:Acquirer TargetPool E&P Taxes Pool E&P TaxesGeneral Basket $ $ General Basket ($70) $ 0Assume the Surviving Corporation is a CFC, the attributes carry over as follows:(Hovering) (Hovering)Pool E&P Taxes (Deficit) (Taxes)General Basket $ 70 $ ($ 70) ($0)If Surviving Corporation earns another $100 in 2007, subject to $30 of taxes, the $100 will be eaten up by $100 of hovering deficit.General Basket $ 70 $ ($0) ($0)If, in 2008, Surviving Corporation does not earn any net income, and a $100 dividend is declared, it will bring with it $60 of taxes, a 46% effective rate.