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Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional.

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Presentation on theme: "Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional."— Presentation transcript:

1 Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. Kalamazoo Chapter Repatriation Planning Peter M. Daub, Baker & McKenzie, LLP Tax Executives Institute Thursday, March 17, 2011 Your Trusted Tax Counsel

2 2 Presenter Peter M. Daub (Washington, D.C.) (202)

3 3 AGENDA Defining the Repatriation Problem Restructuring to Avoid Anti-Hopscotch Prepayment Strategies Return of Capital Distributions All Cash “D” Reorganizations Section 368(a)(2)(D) Reorganization of Domestic Target Outbound “F” Reorganization of Domestic Target Purchase of Parent Stock Used in Foreign Acquistion Stock Compensation Strategies Transfer Pricing Approaches Dueling Loans Rate Hyping

4 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; and  Violating the company’s APB 23 assumption For 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 5 Restructuring to Avoid Anti-Hopscotch -- Section 304 Transactions and Other Internal Restructurings When  Anytime (under current law) How  Section 304 Transaction to hopscotch low-tax E&P pools over high tax pools, or vice versa  Spin-offs and other internal restructurings Why  Need longer-term solution that warrants restructuring

6 6 U.S. Parent CFC-1 (Low-tax) CFC-2 (High-tax) CFC-3 $ shares Advantages –Section 304 deemed dividend from CFC-2 earnings direct to US parent –No GRA needed. Treas. Reg. §1.367(a)-9T However… –Dividend constrained by value of CFC-3 –CFC-2 may not be desirable holdco Variations –Sell CFC-1 stock to CFC-2 –CFC-3 sells other CFC shares to CFC-1 –Recap shares of transferred CFC into preferred to minimize valuation issues Restructuring to Avoid Anti-Hopscotch Example -- Section 304 Transaction

7 7 LT CFC HT CFC Hold Co HT CFCs After Steps –US contributes LT CFC stock to HT CFC Hold Co in exchange for HT CFC Hold Co common and preferred stock –Dividends on preferred stock can be paid directly to US without distribution to LT CFC Key Points –Foreign-to-foreign section 351 exchange or “B” reorganization –Need GRA –Need business purpose –Valuation considerations –Can be long term solution Restructuring to Avoid Anti-Hopscotch Internal Foreign-to-Foreign Inversion US HT CFC Hold Co US HT CFCs LT CFC Before common and preferred stock Hook stock

8 8 LTC CFC HT CFC Hold Co HT CFCs Steps –LT CFC distributes stock of HT CFC Holdco to US Key Points –Can qualify as tax free section 355 spin-off –Need business purpose –No GRA or e&p pick-up –Most elegant long term solution Restructuring to Avoid Anti-Hopscotch Spin-off of High Tax Group US HT CFC Holdco stock

9 9 Prepayment Strategy Inventory Prepayment Transaction Cash equal to two years’ worth of inventory, discounted to reflect the fact that the money is advanced earlier than normal Must be nonrefundable USCO Swiss Subsidiary

10 10 Prepayment Strategy Broader Prepayment Issues Can be used for inventory, services, royalties and cost sharing payments Can 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 11 Third Party Lender cash loan 12/28/Y1 Buyer return of capital distribution 12/30/Y1 Return of Capital Distribution cash dividend 1/2/Y2 repay loan with cash on 1/2/Y2 sale of assets 1/1/Y2 US Parent Foreign Holdco Foreign Sub     

12 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 13 All-Cash “D” Reorganization Value $100 Basis$ 80 E&P / Section 1248 Amt.$ 20 effective rate in pool of 35% low-tax earnings OPCO’s attributes are key to ensuring this structure works USCO Holding Company (Dutch) OPCO (Ireland) OPCO (Country X)

14 14 All-Cash “D” Reorganization Value $100 Basis$ 80 E&P / Section 1248 Amt.$ 20 effective rate in pool of 35% dividends to Holdco to pay off note USCO Holding Company (Dutch) OPCO (Ireland) OPCO (Country X) OPCO (Country X)  OPCO c/s for $100 note   Consequences –$80 recovery of basis –$20 OPCO (X) e&p pick-up CTB election

15 15 Section 368(a)(2)(D) Reorganization of Domestic Target merger merger consideration 40% FA stock and 60% cash merger consideration of FA stock and cash Assume US Parent has a full FMV basis in the shares of Target US Parent (US) FA (Non-US) US Sub (US) Target (US)

16 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 corporation Cash boot can be received tax-free by US Parent because there is no gain in the shares of Target

17 17 Outbound “F” Reorganization of Domestic Target Convert recently acquired/purchased U.S. target into a foreign company Allows repatriation of pre-acquisition E&P via DRD  DRD available because the earnings have already been subject to US tax Allows repatriation through return of capital/basis  High/FMV basis in recently purchased entity Target must repatriate cash before new low taxed earnings accrue in the foreign target  Must manage the E&P pools  Must fund the distribution

18 18 Outbound “F” Reorganization of Domestic Target (Cont.) Key Costs  Basis 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 1059 Issues arising from the US tangible assets  Dividend them up and recognize section 311(b) gain and related issues, OR  Live with two separate U.S. tax returns

19 19 Outbound “F” Reorg. Example – Step 1 Assume that most appreciation is in Target intangibles or CFCs, not US operating assets US Tax Consequences Treated as a taxable stock purchase US Parent takes a full FMV basis in the target stock merge Target Shareholders Target (US) Target CFCs US Parent Merger Sub (US) Third Party Bank Debt? cash 

20 20 US Tax Consequences Treated as an outbound “F” reorganization Outbound “F” Reorg. Example – Steps 2 and 3 shares of Target US Parent Foreign Newco Target LLC Target CFCs Conversion to LLC (deemed liquidation)  

21 21 Outbound “F” Reorg. Example – Step 4 US Parent Foreign Newco Target LLC Target CFCs IP and CFC shares 

22 22 Outbound “F” Reorg. Example – Step 5 Foreign Newco contributes Target LLC to US Newco US Newco assumes Target LLC liabilities such that Foreign Newco takes a $0 stock basis in US to avoid section 956 US Parent (US) US Newco Target LLC Target CFCs Foreign Newco

23 23 Parent CFC Shareholders $ Parent Stock Foreign Target Foreign Target Stock Parent Stock Purchase of Parent Stock Used in Foreign Acquisition Key Points –CFC purchase of new Parent stock non-taxable under section 1032 –CFC use of Parent stock in acquisition triggers no gain due to FMV basis –Anti-"killer B" Notices not applicable if no tax-free reorganization  

24 24 Stock Compensation Strategies Foreign Sub grants stock options to its employees US Parent provides stock to Foreign Sub’s employees Foreign Sub reimburses US Parent for difference between FMV of stock and employee payment PLR concludes the reimbursement is not a dividend to extent of section 83 spread Questions -  Is an advance agreement to reimburse required?  GAAP implications?

25 25 Transfer Pricing Approaches Consider expanding scope of expense charge-outs  If can get foreign deduction  E.g., stewardship expense, guarantee fees IP ownership Consider prepayments of royalties, service fees, cost sharing payments, inventory purchases  Does not impact basic transfer pricing approach, but …  Need to reflect risk factor and time value of money  Discount rate versus bond rate versus AFR  Is discount above or below the line? Rev. Proc repatriation of agreed section 482 adjustments

26 26 USCO CFC OPCO 1 (Low-Tax) Dueling Loan Strategy CFC OPCO 2 (Low-Tax) 12/31 Year end 11/30 Year end 1A 1B 2A 2B

27 27 Dueling Loan Strategy 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 Two –12/01/03-01/14/04 X –01/15/04-02/28/04X –03/01/04-04/14/04X –04/15/04-05/31/04X –06/01/04-07/14/04X –07/15/04-08/30/04X –09/01/04-10/14/04X –10/15/04-11/31/04X

28 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 (9 th Cir. 1999).  Reg § – IT(b)(4)  Section 269  Conduit  Section 7701 (o)

29 29 Rate-Hyping n Example 1. USCO has $100 of U.S. Source Income and $100 of Foreign Source Income subject to $0 of foreign tax Income$200 Tentative U.S. Tax$ 70 Tentative FTC$ 0 Section 904 Limitation $35 * FTC($ 0) Total U.S. Tax$ 70 * Assumes all foreign source income is in the general basket  Example 2. Same as 1, but USCO triggers a $100 foreign source dividend subject to $70 of foreign tax credits Income$300 Tentative U.S. Tax$105 Tentative FTC$70 Section 904 Limitation $70 * FTC($70) Total U.S. Tax$ 35 * Assumes all foreign source income is in the general basket OBJECTIVE: MOVE FROM EXAMPLE 1 to EXAMPLE 2 WITHOUT PAYING MORE FOREIGN TAX

30 30 Rate-Hyping USCO CFC 1 CFC 2 $70 E&P $30 Taxes CFC 1 CFC 1 Stock Contributed

31 31 Hovering – Rate Hyping EXAMPLE: CFC2 acquires all of the assets of a CFC 1 in a tax-free transaction on December 31, Each has the following attributes as of December 31, 2006: AcquirerTarget PoolE&P TaxesPoolE&PTaxes General Basket $ 70 $ 30 General Basket($70) $ 0 Assume the Surviving Corporation is a CFC, the attributes carry over as follows:(Hovering) Pool E&PTaxes(Deficit)(Taxes) General Basket$ 70$ 30($ 70)($0) If Surviving Corporation earns another $100 in 2007, subject to $30 of taxes, the $100 will be eaten up by $100 of hovering deficit.(Hovering) Pool E&PTaxes(Deficit)(Taxes) General Basket$ 70$ 60($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.


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