BDO KNOWLEDGE Tax Webinar Series International Tax ... · BDO KNOWLEDGE Tax Webinar Series ‒...

BDO KNOWLEDGE Tax Webinar Series ‒ International Tax: Avoiding Common Traps and Foot Faults

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO KNOWLEDGE Tax Webinar Series International Tax: Avoiding Common Traps and Foot Faults Robert Pedersen ‒ Partner, International Tax Services, BDO USA, LLP William F. Roth III ‒ Partner, National Tax Office ‒ International Tax, BDO USA, LLP September 19, 2013


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WITH YOU TODAY

Robert C. Pedersen, CPA Tax Partner, International Tax Consulting Group Practice Leader 100 Park Avenue New York, NY 10017 Direct: 212-885-8398 Fax: 212-697-1299 [email protected]

William F. Roth III Partner, National Tax Office ‒ International Tax 99 Monroe N.W., Suite 800 Grand Rapids, MI 49503-2654 Direct: 616-776-3761 Fax: 616-776-3680 [email protected]

https://bdoworld-dept.bdo.com/sites/BDSPortal/Headshot Library/Pedersen, Bob.tax ptr.NY.jpg

https://bdoworld-dept.bdo.com/sites/BDSPortal/Headshot Library/Roth, Bill III.tax ptr.GR.JPG


INTERNATIONAL TAX SERVICES Overview

• Cross-border financing and restructuring

• Foreign tax credit planning

• Controlled foreign companies planning

• Income repatriation planning

• International holding company structures

• Foreign loss utilization

• Income tax treaty

• Intellectual property transfers

• Supply chain planning

• Tax provision review for multinationals

• U.S. international tax disclosure compliance


AGENDA

• The §956 Trap: Deemed Dividends

• Loss-Making Foreign Subsidiaries Can Be Valuable

- Accessing Foreign funds without APB 23

- Lowering US taxes

• Reduction of Overseas E&P

• Late Relief for International Items

• Withholding Taxes

• International Compliance

• International Tax: What’s on the Horizon?

- The “Apple” Effect

- Territorial System

- VAT


§956: DEEMED DIVIDENDS FROM FOREIGN SUBSIDIARIES

• Deemed dividends from foreign subsidiaries

• Foreign Subsidiary E&P Limit/Loan Amount

• “Gross” versus “Net” and allowance of “Netting”

• Lending transactions, collateral, pledges, guarantees & unpaid trade payables

• Cross-Defaults, Cross Guarantees & Cash Pooling

• Safe harbor: <66 2/3% CFC voting shares

US Inc.

Foreign Subsidiary

Bank Loan


LOSS-MAKING FOREIGN SUBSIDIARIES: VALUABLE TAX ATTRIBUTES

• Reduction in current US tax (via check-the-box)

• Reduction of overseas E&P (to foster non-dividend repatriation)

• Current worthless-stock deduction (§165(g))


CHECK-THE-BOX ON LOSS-MAKING FOREIGN SUBSIDIARIES

• Trap: Dual Consolidated Losses & Mid-Year Check-the-Box Election

- Facts

US parent with 12/31 YE

US parent owns CFC

US parent files Form 8832 for pre-existing loss making CFC

- IRS Position

Losses are unusable DCLs

- Query

Are losses still unusable if foreign company’s tax year is closed for local tax purposes on the effective date for check-the-box election?

Can losses (or expenses) be attributed to only one period under foreign law

US Parent

FC Loss Making


CHECK-THE-BOX ON LOSS-MAKING FOREIGN SUBSIDIARIES

• Planning

- Push down assets associated with timing attributes to a lower tier subsidiary

- FC leases/licenses certain assets from CFC

US Parent

FC Has losses

CFC – Has depreciable assets

– Receives rental / licensing income


FOREIGN SUBSIDIARY WITH BUILT-IN LOSSES: §165(G) WORTHLESS STOCK LOSS

USCo

FC

FC elects to treated as a

branch

• Facts

- USCo has high tax basis in FC

- FC is insolvent (liabilities in excess of assets) has no value

• Requirement to Obtain a §165(g)(3) Loss Deduction

- Shares in FC must be worthless

- The security became worthless in the year claimed

Morton vs. Commissioner, established a two-part test for the finding of worthlessness of stock

- Stock must cease to have liquidating value, and

- There is no “reasonable hope and expectation” that the stock would become valuable at some point in the future

• There must be an identifiable event which triggers rationalization of the loss

- Rev. Rul. 2003-125 recognizes a check-the-box election is identifiable event

• Loss is ordinary if:

- USCo directly owns 80% or more of the voting and non-voting stock of FC; and

- More than 90% of FC’s gross receipts are from active trade or business income


FOREIGN SUBSIDIARY WITH BUILT-IN LOSSES: §165(G) WORTHLESS STOCK LOSS (CONTINUED)

USCo

FC

FC elects to treated as a

branch

• Considerations

- Debt/equity issues if related party debt between FC and USCo

- Impact of GLAM 2009-11 (DCL limitations) on future losses

- Reportable transaction disclosure if loss of $10M or more for C corporations


REDUCTION OF OVERSEAS E&P (TO FOSTER NON-DIVIDEND REPATRIATION)

• Built in loss of FC2 shares reduces E&P of FC1

• Allows repatriation to USCo from FC1 without triggering dividend to USCO

• Future losses of FC2 could reduce FC1 E&P

• Watch for Limits on prior losses in E&P

• APB 23?

• CV/BV structures

• Can combine this E&P Planning to reduce §956 exposures

USCo

FC1

E&P: $100

Cash: $100

FC2

• High basis in shares

• High losses/NOL’s

• May be expected to leave future losses

USCo

FC1

FC2

E&P: $0

Current Proposed


LATE RELIEF FOR INTERNATIONAL ITEMS

Dual consolidated loss Treas. Reg. 1.1503(d)- 8(b)(3)(i)

Entity Classification Election (“Check the Box”) Rev. Proc. 2009-41

5471/5472/8865/8858,etc. OVDP FAQ 18

Section 338 election Rev. Proc. 2003-33

Form TD. F. 90.22-1 (“FBAR”) ODVP FAQ 17


WITHHOLDING TAX ISSUES

• Impacts both payee and payers of payments

• U.S. uses Form W-8 series, foreign countries may have there own forms or required documentation (e.g., Canada uses NR301, NR 302. and NR303, UK has Form US-Company 2002 and Form US-Individual 2002)

• Claiming treaty benefits requires analysis of both Treaty provisions allowing for reduced taxes or exemptions and analysis of qualification for Treaty benefits

• Claiming foreign treaty benefits for U.S. taxpayer may require IRS certification of U.S. status (Form 6166) and require taxpayer request to IRS on Form 8802

• Information reporting requirements (Form 1042 series of forms in U.S.)


WITHHOLDING TAX ISSUES (CONTINUED)

• Common errors that may invalidate any claim of treaty benefits include:

- Relying on expired forms

- Relying on copy without original signature

- Withholding certificate is not received by date of payment

- Incomplete certificate (e.g., no US taxpayer ID number, no US address)

- Treaty exemption information including LOB provision not indicated

- Certificate not signed or dated

- Incomplete information on partnership owners if payment is to a foreign partnership


INTERNATIONAL TAX COMPLIANCE Tax and Information Return / Disclosures

U.S. persons with foreign activities Foreign persons with U.S. activities

5471 8865 8858 8938 TDF 90-22.1 5471 8865 8938 926 GRA Annual certification (GRA) 8838 §367(a) reporting statement §367(b) notice 8806 5471 (Schedule O) 8865 (Schedule O) 8858 (Schedule M) 1042, 1042-S, 1042-T 8288, 8828-A 8804, 8813, 8805 8926

Holding foreign bank accounts, holding

interests in foreign entities

Ownership interests in foreign entities

Transferring property to foreign entities

Making payments of U.S. source income to foreign

persons

1120-F or protective 1120-F 8833 5472 1065 1040NR Transfer pricing 8832 8426 W-8BEN W-8ECI W-EXP W-8IMY 8288-Y 8288-B 8233

Doing business, owning real estate in the U.S.

or receiving U.S.-source income

Exemption certificates for U.S. tax withholding

purposes


INTERNATIONAL TAX On the Horizon

• “Apple” and “Google” effect

- OECD “BEPS” Program

- Irish Structure

- Renewed focus on business substance

• Territorial system

• VAT


Questions?


Speaker Biographies


BIOGRAPHY Robert C. Pedersen, CPA Robert C. Pedersen, CPA

Tax Partner, International Tax Consulting Group Practice Leader 100 Park Avenue New York, NY 10017 Direct: 212-885-8398 Fax: 212-697-1299 [email protected]

Bob has over 25 years of public accounting experience which includes 18 years of experience in the taxation area. He has been a member of the International Tax Consulting Group of the New York office for over 20 years. Bob's primary role is advising clients regarding multinational reorganizations and formation of foreign enterprises. His focus is advice relating to creating tax efficient structures for both inbound and outbound financing. In addition, Bob has significant experience successfully representing taxpayers during international tax examinations.

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BIOGRAPHY William F. Roth III

William F. Roth III Partner, National Tax Office ‒ International Tax 99 Monroe N.W., Suite 800 Grand Rapids, MI 49503-2654 Direct: 616-776-3761 Fax: 616-776-3680 [email protected]

Bill has been with BDO nearly 30 years and has significant experience with large multinational groups. He has assisted in the design, implementation and review of cross border structures, repatriation planning, foreign tax credit planning, and tax advantaged financing structures, and the use of strategies that minimize subpart F income and reduce both U.S. and local country taxation. Bill heads up the US firm’s participation the US-Canada Tax Desk and is the BDO USA Country Coordinator for Canada and in both roles has significant interaction with BDO professionals in Canada. Bill is a member of BDO’s Washington National Tax Office and his responsibilities include serving as the lead technical reviewer of all international tax advice, consulting and planning within BDO’s International Tax Services group. In this position, Bill is actively involved in the critique, design and implementation issues connected with cross border mergers, acquisitions, financing and other high level cross border planning being performed by BDO for its multinational clients. He is also responsible for the curriculum of all international related continuing education and is the editor of many internal and external communications on international tax issues published by the Firm.

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BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 41 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,204 offices in 138 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. www.bdo.com To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be 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 tax-related penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Material discussed in this publication is meant to provide general information and should not be acted on without professional advice tailored to your individual needs. © 2013 BDO USA, LLP. All rights reserved. www.bdo.com

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