1. 2008 OFII Tax Conference La Quinta, CA 1 U.S. Inbound Pre- and Post- Acquisition Planning: Issues and Considerations Ronald Bordeaux PricewaterhouseCoopers Washington, DC This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. James R. Barry Mayer Brown LLP Chicago, IL May 2008

2. 2008 OFII Tax Conference La Quinta, CA 2 Introduction and Overview Pre-Acquisition Planning –Stock vs. Asset Acquisition –Financing the Acquisition –Repatriation Strategies –U.S. Grouping Post-Acquisition Planning –Post-Deal Integration –CFC Restructuring –Post-Acquisition Planning for Intangibles

3. 2008 OFII Tax Conference La Quinta, CA 3 Section 338 Elections Section 338 Consistency Rules Section 7874 –What is “substantial activity” under IRC Sec. 7874? Can Assets or Shares of the U.S. subsidiary be acquired separately from the foreign target? Decontrol Transactions Stock v. Asset Acquisitions Selected Topics

4. 2008 OFII Tax Conference La Quinta, CA 4 Section 338 permits corporate purchasers of 80% or more of the stock of a target corporation (a “qualified stock purchase”) to elect to treat the transaction as if assets were purchased instead of stock. –Benefits of election. –Other means to get basis increase – check the box election. Special International Issues. –Seller of foreign target treated as shareholder at end of acquisition date. Thus, shareholders of foreign target must take into account the consequences of deemed sale. Increased E&P for section 1248 purposes, Potential subpart F income, Income under PFIC rules. –Treatment of deemed sale for foreign tax credit purposes. Generally do not determine source and character by virtue of deemed sale. Stock v. Asset Acquisitions Section 338 Elections

5. 2008 OFII Tax Conference La Quinta, CA 5 Affects benefits of purchasing subsidiaries or assets separately. Application of consistency rules. –If apply, get carryover basis in asset purchased. –If target affiliate of domestic corporation seller is a CFC and buy asset where gain would be reflected in CFC stock basis, then purchaser gets carryover basis in purchased asset. Stock v. Asset Acquisitions Section 338 Consistency Rules

6. 2008 OFII Tax Conference La Quinta, CA 6 Stock v. Asset Acquisitions Section 7874 Section 7874. Rules Relating to Expatriated Entities and Their Foreign Parents. Section 7874 was intended to negate the effect of certain "inversion" transactions also results in encompassing many unintended “non-inversion” transactions, such as: –internal restructuring transactions entered into by publicly traded foreign multinational corporations, or –joint ventures entered into by publicly traded foreign multinational corporations. In both instances, there exists absolutely no U.S. nexus except that a U.S. target corporation is being acquired in a tax-free exchange.

7. 2008 OFII Tax Conference La Quinta, CA 7 Stock v. Asset Acquisitions Section 7874, continued Key Issues –Acquisitions of larger U.S. companies by foreign companies. Can inadvertently trigger section 7874. –Definitions “Substantially All The Properties.” “Substantial Business Activities.”

8. 2008 OFII Tax Conference La Quinta, CA 8 Assets Acquired Separately Potential Benefits –Increased basis. –Avoid post acquisition restructuring. Issues –Section 338 Consistency rules. –Staged Acquisitions. US day one, foreign parent day two. –Section 304? –Respect Steps?

9. 2008 OFII Tax Conference La Quinta, CA 9 Decontrol Transactions Interest Expense Allocation – breaks affiliated group. Section 904(j). –Applies if two or more domestic corporations would be members of the same affiliated group if (1) 1504(b) were applied without exceptions (e.g., foreign corporations and 936 corporations and (2) the section 1563 attribution rules applied. –Avoid by setting up on day one because not deconsolidating? Foreign Person 79%21% Domestic Corp

10. 2008 OFII Tax Conference La Quinta, CA 10 Decontrol Transactions, continued Preferred Stock Freezes (see diagram) Redemptions Foreign Person Domestic Corp Preferred Stock 79% Common Stock 21%

11. 2008 OFII Tax Conference La Quinta, CA 11 Financing the Acquisition Tax efficient financing structures. Considerations include: –Debt-Equity, –Treaty qualification, –Anti-conduit rules, –Section 163(j) Issues, –Integration of public borrowing into the overall financing structure. Multiple country financing structures. IRS audit activity.

12. 2008 OFII Tax Conference La Quinta, CA 12 Financing the Acquisition Tax Efficient Financing Structures Third-Party Borrowing –DGP Structure (e.g., Australia, Germany, Luxembourg), or Canadian “Tower” Structure (subject to impact of pending protocol to the U.S.- Canada Treaty, to take effect no earlier than 1/1/2010, and Canadian restricted interest proposal). Consider U.S. earnings stripping and foreign thin capitalization requirements. Consider domestic reverse hybrid rules. Consider foreign exchange implications. –Swiss structure.

13. 2008 OFII Tax Conference La Quinta, CA 13 Financing the Acquisition Tax Efficient Financing Structures Related-Party Borrowing. –Sale and repurchase (“repo”) transactions (e.g., Germany, Luxembourg, France, Australia). –Disregarded loan structures (e.g., Germany, UK). Consider UK anti-arbitrage rules, and U.S. DCL rules. –Notional interest deduction structures (e.g., Belgium, Switzerland). Ruling may be needed in foreign jurisdiction.

14. 2008 OFII Tax Conference La Quinta, CA 14 Financing the Acquisition Conduit Issues Intermediate party withholding, Public debt, Portfolio Interest Exception, Bank syndicate loans. Treasury Center / Cash Pooling.

15. 2008 OFII Tax Conference La Quinta, CA 15 US Groupings Section 163(j) Proposed Regulations “Cherry picking” with respect to Section 163(j) proposed regulations. The Service is not permitted to take positions inconsistent with proposed regulations if there are no final or temporary regulations that are currently applicable to the particular matter. Guidance indicates taxpayers need not follow positions in the proposed regulations. Issues related to multiple affiliated groups.

16. 2008 OFII Tax Conference La Quinta, CA 16 Financing the Acquisition Third Party Debt Potential issue under Section 956 by reason of the CFCs serving indirectly as security for U.S. borrowing. Concept of “remoteness” implicit in Section 956. –Little direct guidance. Difference between general financial guarantee and handing over stock. Foreign Parent US Sub CFCs Third Party Loan with Guarantee by Foreign Parent

17. 2008 OFII Tax Conference La Quinta, CA 17 Financing the Acquisition IRS Audit Issues Continued focus on hybrid securities. –Sale and Repurchase (“Repo”) transactions. Currently a Tier 1 issue. –We are not aware of any adverse adjustments. Purchase price allocation. –Company purchased a company with U.S. and foreign assets. IRS is disputing the purchase price allocation, asserting that the taxpayer allocated too much to the U.S. group. Calls into question third party agreed-upon purchase price allocations.

18. 2008 OFII Tax Conference La Quinta, CA 18 Repatriation Strategies Modeling cash repatriation for alternative structures. U.S. and foreign withholding taxes. Distribution of a note or cash. –Respected as valid debt. –Withholding taxes. –E&P analysis. –Potential codification of economic substance.

19. 2008 OFII Tax Conference La Quinta, CA 19 Parent Co USCo OpCo Sub (non-U.S.) SPV (U.S.) HCo (non-US) Repatriation Strategies Reverse Hybrid Structure Considerations HCo is a flow through entity for foreign tax purposes and a corporation for U.S. tax purposes. OpCo Sub loans cash to HCo. OpCo Sub can claim an interest deduction on the interest payments on the Loan. There may be U.S. withholding tax on the payments. Potentially no Subpart F inclusion under the same-country exception. Loan

20. 2008 OFII Tax Conference La Quinta, CA 20 U.S. Groupings Selected Topics Consideration of whether it is more advantageous to have multiple U.S. consolidated return groups. Consider impact on: –foreign tax credit, –Section 163(j) calculations, –debt-equity implications.

21. 2008 OFII Tax Conference La Quinta, CA 21 Post-Acquisition Planning Material tax issues to consider after the completion of the acquisition of a U.S. target group by a non-U.S. based acquirer. –Post-deal integration, –CFC restructuring, –Post-acquisition planning for location and ownership of intangibles. –Financing.

22. 2008 OFII Tax Conference La Quinta, CA 22 Integration of the U.S. target operations with the operations of the non-U.S. acquirer, including: –New non-U.S. holding companies and mergers. Simplify and integrate the organizational structure, facilitate cash repatriation. Whether U.S. target might receive a preferred interest in a new holding company. Foreign tax credit implications, potential check-the-box planning. Post-Acquisition Planning Post-Deal Integration

23. 2008 OFII Tax Conference La Quinta, CA 23 Post-Deal Integration Cash “D” Reorganization Foreign Parent US OpCo1US OpCo2 Step 1 - US OpCo1 shares and cash for all of US OpCo2 assets US OpCo2 Step 2 – Deemed or actual liquidation of US OpCo2 Cash Considerations Merges U.S. target with existing U.S. group. Business purpose. Other reorganization requirements. Basis implications. Treaty implications.

24. 2008 OFII Tax Conference La Quinta, CA 24 CFC Restructuring Preferred Share Structure Steps 1.US transfers CFC to FC in exchange for preferred stock of FC. 2.Disregarded entity election made for CFC. Considerations Preferred stock cannot be non-qualified preferred stock Annual dividend based on FMV of CFC at the time of the transfer CFC status may remain based on value. –If not, US must include Sec. 1248 amount in income. US must own at least 10% of FC for foreign tax credit purposes Other possibilities: hyped foreign tax credits, selectively bring up dividends, financing (high- low planning). Foreign Parent FC (non-U.S.) CFC (non-U.S.) CFC (non-U.S.) 1 2 Preferred stock US

25. 2008 OFII Tax Conference La Quinta, CA 25 CFC Restructuring Section 304(a)(1) – Version 1 Steps 1.(A) Foreign Parent transfers non-CFC foreign assets, and USS transfers CFC assets to a new foreign holding company (New FHC), which might or might not be a CFC. (B) CFC and non-CFC elect to be treated as disregarded for U.S. federal tax purposes. Foreign Parent FSubUSS CFC New FHC CFCFSub A A BB

26. 2008 OFII Tax Conference La Quinta, CA 26 CFC Restructuring Section 304(a)(1) – Version 1, continued Steps 2.Foreign Parent sells its interest in New FHC to a foreign affiliate (FA) for cash or a note. Considerations Business purpose. Long-term tax efficiency. U.S. withholding tax. Foreign tax. Subpart F. Fast pay regulations. CFCFSub FA Foreign Parent USS New FHC

27. 2008 OFII Tax Conference La Quinta, CA 27 CFC Restructuring Section 304(a)(1) – Version 2 Steps 1.Foreign Sub2 purchases US NewCo from an unrelated party. A valid Section 338 election is made with respect to US NewCo. 2.CFC elects to be treated as disregarded for U.S. federal income tax purposes. 3.Foreign Sub1 transfers CFC to Foreign Sub2 in exchange for US NewCo. Foreign Parent USCo Foreign Sub1 Foreign Sub2 US NewCo 1 CFC (non-U.S.) 2 3 US NewCo 3 CFC 3

28. 2008 OFII Tax Conference La Quinta, CA 28 CFC Restructuring Section 304(a)(1), Version 2 - continued Considerations Steps 2 and 3 (check the box election and sale of CFC to Foreign Sub2) are expected to be a sale of assets. See Dover v. Comm., 122 T.C. 324 (2004). No subpart F income expected if assets are business assets for Sec. 954(c). Section 304(a)(1) applies to the Step 3 transfer. The transfer of CFC to Foreign Sub2 is treated as a dividend to Foreign Sub2, first from Foreign Sub1 to the extent of its E&P, and then from US NewCo to the extent of its E&P. Business purpose, fast-pay regulations, subpart F, U.S. withholding tax, foreign tax, long-term tax efficiency. Foreign Parent USCo Foreign Sub1 Foreign Sub2 US NewCo Former CFC

29. 2008 OFII Tax Conference La Quinta, CA 29 CFC Restructuring Section 304(a)(2) Steps 1.USCo forms Foreign Sub. Foreign Sub issues common stock to USCo. 2.USCo transfers common shares of CFC to Foreign Sub in exchange for common shares of Foreign Sub. 3.CFC elects to be disregarded. 4.Foreign Sub transfers all of the common shares of CFC to Foreign Parent in exchange for common shares of USCo. Foreign Parent USCo CFC Foreign Sub CFC 1 2 4 3 4

30. 2008 OFII Tax Conference La Quinta, CA 30 CFC Restructuring Section 304(a)(2), continued Considerations The transfer in Step 4 is recharacterized under Sec. 304 as a distribution by Foreign Sub to Foreign Parent in redemption of USCo’s stock. –Foreign Sub recognizes gain / realizes loss, if any. –Foreign Parent is treated as receiving a Sec. 301 distribution (FMV of CFC). Business purpose is required. Foreign tax consequences. Long-term implications. Subpart F considerations. OFL recapture rules. Fast-pay regulations. Withholding tax considerations. Foreign Parent USCo Foreign Sub Former CFC

31. 2008 OFII Tax Conference La Quinta, CA 31 Foreign Parent Foreign Sub US Sub (U.S.) CFC CFC Restructuring Share Contribution with Redemption Steps 1.Foreign Parent transfers Foreign Sub shares to CFC in exchange for CFC common shares. 2.Foreign Sub liquidates / elects to be treated as disregarded for U.S. federal income tax purposes (a deemed liquidation). 3.CFC redeems its shares held by US Sub. Considerations Business purpose required. May be able to freeze the value of the CFC stock held by US Sub. Fast pay, FTCs, Sec. 861 allocations, E&P. Step 1 – Foreign Sub shares for CFC shares Foreign Sub Step 2 – Deemed Liquidation Step 3 – Share Redemption

32. 2008 OFII Tax Conference La Quinta, CA 32 CFC Restructuring Steps Foreign Parent and CFC form a Foreign Partnership, and each contributes business in exchange for a common (FP) and preferred partnership interest (CFC). Considerations Special allocations - allocate higher taxed E&P to CFC to facilitate FTC recovery. Consider special allocation of Subpart F income to Foreign Parent. Consider allocation of R&D deductions to CFC. No special constraints under Sec. 367 or the partnership rules because under Sec. 704(c) the pre-contribution gain is taxed back to the contributor.

33. 2008 OFII Tax Conference La Quinta, CA 33 Post-Acquisition Planning for Intangibles Integration with non-U.S. entrepreneur structures. Transfer of IP out of the United States. Use of foreign partnerships for holding IP.

34. 2008 OFII Tax Conference La Quinta, CA 34 Foreign Parent USCo CFC Foreign Partnership Steps 1. Foreign Parent and USCo form a Foreign Partnership (“FP”). 2. Foreign Parent contributes $5M cash and a promise to contribute another $50M at a future time in exchange for a 55% interest in the FP. 3. U.S. transfers worldwide IP rights to FP in exchange for a 45% interest in FP valued at $45M. 4.FP funds the development of IP rights. 55% 45% 1 2 3 Offshore IP

35. 2008 OFII Tax Conference La Quinta, CA 35 Foreign Parent USCo CFC Foreign Partnership 55% 45% Offshore IP Considerations, continued Business purpose required. Consider whether contribution would qualify for Section 721 tax-free treatment. Section 367 not expected to apply. Section 482 likely applies to the valuation of initial contributions to FP and to the ongoing allocations. Consider how Section 704(c) special allocation rules would apply. Consider whether R&D costs would qualify for Section 174 treatment.