State tax consequences of international restructurings · 2021. 3. 2. · State tax consequences of...

The 2019 National Multistate Tax SymposiumState tax reboot—The age of Multistate

February 6-8, 2019

State tax consequences of international restructuringsJeff Friedman, Eversheds Sutherland (US) LLPSarah Murray, Deloitte Tax LLP

February 6-8, 2019

3

Common International and Domestic Restructurings and the Potential Impact to State Tax

4The National Multistate Tax Symposium: February 6-8, 2019Copyright © 2019 Deloitte Development LLC. All rights reserved.

Tax Reform—Multistate Considerations for Multinational EntitiesCommon International and Domestic Restructurings

• “Out from Under” Transaction

• Migration of Income/Assets to the US

• IP Migration

• U.S. Sales Office for Foreign Self-Manufactured Goods

• Split Ownership Structures

• Interest Expense Limitation

• GILTI Holding Company


Tax Reform—Multistate Considerations for Multinational Entities“Out from Under” Transaction

• Federal Tax Treatment

− Gain on the transfer of the stock of CFC is recharacterized as a dividend under Section 1248 to the extent of the CFC’s E&P

− Dividend generally treated as either PTI or eligible for a 100% DRD under Section 245A

◦ Consider impact of Section 59A

• State Tax Treatment

− Most states conform to Section 1248, but there are SIGNIFICANT exceptions, e.g., California

− There may be federal/state basis differences due to Section 961 and state non-conformity to GILTI/ Section 965

− If a state does not conform to Section 245A, there may be a limit to the amount of DRD or the taxpayer may be required to make an interest offset adjustment

US

Foreign Parent

CFC

CFC

CFC

stock


Tax Reform—Multistate Considerations for Multinational EntitiesMigration of Income/Assets to US – “Check the Box”


− The “check the box” election of Foreign Entity is deemed to be a liquidation

− Because Foreign Entity is foreign, the liquidation does not qualify as a nontaxable liquidation under Section 332, and US is treated as if it received a dividend of all of Foreign Entity’s E&P under Section 367(b)

− The dividend is generally treated as either previously taxed income or eligible for a 100% DRD under Section 245A

◦ Consider impact of Section 59A

− CFCs that are converted to disregarded entities will become fully taxable, but may create the potential to generate additional FDII deduction due to foreign sales


− If a state does not conform to Section 245A, there may be a limit to the amount of DRD or the taxpayer may be required to make an interest offset adjustment

− Constitutionality of Section 367(b) recast

US

Foreign Entity


Tax Reform—Multistate Considerations for Multinational EntitiesIP Migration


− Often done to transfer IP from a low-tax jurisdiction in accordance with BEPS

− CFC 1 recognizes gain on the sale to CFC 2, and CFC 2 gets an amortizable fair market value basis in the IP

− If the gain was recognized prior to CFC 1 being subject to GILTI, the gain was thought to not be required to be included in US shareholder income, however GILTI regulations include an anti-abuse provision denying the amortization if the gain was recognized in a GILTI-free period.


− In states where the taxpayer files on a worldwide basis, the transaction gain may be deferred under the federal consolidated group return principle, e.g., Treas. Reg. §1.1502-13, and may be subject to subsequent recognition events

− If the taxpayer files in a state where CFC 1 is subject to inclusion in a combined group under “tax haven” rules, the gain may be included in the state’s taxable income unless an exception applies

US

CFC 1 CFC 2

Sale of IP


Canco

Tax Reform—Multistate Considerations for Multinational EntitiesU.S. Sales Office for Foreign Self-Manufactured Goods

• Facts

− Canco, CanSub or CFA (ForeignCo) manufactures finished goods (FG) outside the U.S. that it intends to sell to U.S. customers

− US LLC, a disregarded entity, has a U.S. office or fixed place of business (U.S. Office) for U.S. federal tax purposes, through which it conducts marketing, sales and distribution activities

− ForeignCo sells FG to LLC

− LLC sells FG directly to customers (or to a domestic affiliate)

Customers

FG FG

Manufacturing offinished goods

Sales of finishedgoods through a

U.S. office

CanSub

or CFAUS LLC


Canco

Tax Reform—Multistate Considerations for Multinational EntitiesU.S. Sales Office for Foreign Self-Manufactured Goods (continued)


− Relevant Income is sourced solely on the basis of production activities, instead of the place of sale, under Section 863(b)

◦ Income sourced on the basis of the location of the production assets is 100% of the Relevant Income, under section 863(b)(2); the portion of the income that is U.S. source is zero

− LLC’s income likely would be 100% foreign source

− Possible that none of this foreign source income would be effectively connected income (ECI)


− Nexus of U.S. Office based on physical and economic nexus

− State taxation of an entity with no ECI and state income tax starting point (i.e. worldwide income)

− Non-income tax implications and reporting requirements

• Consider Foreign Tax Implications and Transfer Pricing

Customers

FG FG

Manufacturing offinished goods

Sales of finishedgoods through a

U.S. office

CanSub

or CFAUS LLC



− Due to the changes to the attribution rules of Section 958(b), the 60% ownership of Foreign Sub by Foreign Affiliate is attributed to US

− US is required to recognize a pro-rata share of GILTI generated by Foreign Sub


− US’s ownership percentage may be too low to claim a full state DRD under the state’s foreign source DRD (or Section 245A, in conforming states)

− How do the rules of Section 958 that enable Section 318 attribution for purposes of Subpart F/GILTI interact with state DRD rules?

− Consider apportionment impact

− Consider “tax havens”

Tax Reform—Multistate Considerations for Multinational EntitiesSplit Ownership Structures

US

Foreign Parent

Foreign Affiliate

Foreign Sub

40%

60%



− Interest expense of members of the US consolidated group is capped at 30% of adjusted taxable income (ATI) under revised Section 163(j)

− Limitation determined at consolidated group level, including consolidated ATI, which excludes Foreign Sub


− How will the income and interest expense of Foreign Sub, as an 80/20 company, impact state Section 163(j) limitation of members of the US consolidated group?

Tax Reform—Multistate Considerations for Multinational Entities Interest Expense Limitation

Foreign Parent

Foreign Sub

80/20 Co.

USCons. Grp.



− Interest expense related to Acquisition Debt is capped at 30% of ATI under revised Section 163(j)

− Limitation determined at consolidated group level, including consolidated ATI


− Potential requirement for separate interest expense limitation calculation for US Acquisition Sub in separate reporting states/differing combined v. consolidated groups

◦ Potential for state limitation where no federal limitation

− Interplay with existing state interest expense add-back regimes

Tax Reform—Multistate Considerations for Multinational Entities Interest Expense Limitation (continued)

USCons. Grp.

Foreign Parent

Parent

Acquisition

Debt

Bank

US Acq.Sub

Target

$

Target Stock



− Federal GILTI recognition is based on the consolidated group before and after the transfer


− GILTI is recognized by Holdco, which may be eligible for exclusion as an 80/20 company

− Should be considered in the context of an overall reorganization

◦ Importance of business purpose and economic substance

◦ Requires state tax liability analysis of old structure (CFC under Opco) vs. new structure (CFC under Holdco), e.g., nexus, filing methodology, apportionment, state treatment of GILTI deduction and FDII deduction (Section 250)

− Consider how will GILTI income be sourced for apportionment purposes, impact to Holdco, and potential 80/20 treatment

◦ Potential state approaches to factor representation:

− Detroit Formula

− Include the gross 951A amount in the sales factor

− Include GILTI net of the 50% deduction pursuant to Section 250 (in states that allow)

− Exclude GILTI

Tax Reform—Multistate Considerations for Multinational EntitiesGILTI Holding Company

Holdco

Opco

CFC

CFC

CFC

stock


Contact information

Jeff Friedman

Eversheds Sutherland (US) LLP

[email protected]

Sarah Murray

Deloitte Tax LLP

[email protected]

mailto:[email protected]

mailto:[email protected]


This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.

As used in this document, “Deloitte” means Deloitte Tax LLP a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte USA LLP, Deloitte LLP and their respective subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2019 Deloitte Development LLC. All rights reserved.

http://www.deloitte.com/us/about

State tax consequences of international restructurings · 2021. 3. 2. · State tax consequences of...

Documents

Transcript of State tax consequences of international restructurings · 2021. 3. 2. · State tax consequences of...