attribute planning and reporting for strategic transactions · attribute planning and reporting for...

Attribute planning and reporting for strategic transactions Mike Medley, Ernst & Young LLP Marc Ganz, Ernst & Young LLP Sue Lippe, Ernst & Young LLP John Morris, Ernst & Young LLP

Eighth Annual Global Compliance and Reporting Conference | New York | 2 April 2013

Disclaimer

► Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

► This presentation is © 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

► Views expressed in this presentation are not necessarily those of Ernst & Young LLP.

Your presenters

► Mike Medley Ernst & Young LLP Iselin, NJ

► Marc Ganz Ernst & Young LLP New York, NY

► Sue Lippe Ernst & Young LLP Chicago, IL

► John Morris Ernst & Young LLP Washington, DC

Objectives

► Intangible property (IP) partnership planning — attribute and reporting nuances

► Gain recognition agreement (GRA) considerations

► New proposed GRA compliance regulations ► Don’t forget these important reporting

requirements … ► Section 901(m)

IP partnership considerations


Simplified corporate structure Pre-transaction structure

Finance 2 has loans outstanding to limited risk distributors (LRDs). Finance 1 has loans outstanding to Operating BV. LRDs have loans outstanding to Operating BV. Operating BV pays a royalty to US Parent for various trademarks and licenses.

Parent (US)

Holding CV (NL)

Holding BV (NL)

Operating BV (NL)

LRDs

Finance 2 (Non-US)

Non-CTB Subs (Various)

Finance 1 (Non-US)

1

2

3

Creditor Debtor

1

2

3

4

Royalty

Non-check-the- box (CTB) Subs

(Various)


Simplified post-transaction structure Transaction ► Together, Holding CV and Parent form New CV, an entity that

would be treated as a partnership (i.e., look-through) for US and foreign purposes: ► Holding CV contributes its interest in Holding BV,

Finance 1 and Finance 2 to New CV in exchange for an interest in New CV.

► Parent contributes IP to New CV in exchange for an interest in New CV.

Issues/considerations 1. Business purpose 2. Valuation; IP and subsidiaries 3. Transfer pricing 4. Basis computations 5. Dual consolidated loss 6. Subpart F 7. Partnership considerations ► Application of Sections 702, 704, 721, 901 and 909 8. Foreign currency (Section 987) 9. Foreign tax credit (FTC) considerations ► Overall foreign loss (OFL) and

separate limitation loss (SLL) ► Application of Sections 901(m), 902 and 904 10. Non-US issues ► Amortization/deduction ► Transfer and capital gain taxes ► Partnership status 11. Tax-accounting considerations 12. Tax compliance

Transaction structure — issues and considerations

Parent (US)

Holding CV (NL)

Holding BV (NL)

Operating BV (NL)

LRDs

Finance 2 (Non-US)


Finance 1 (Non-US)

Debtor

Royalty


Creditor

New CV


Simplified structure Transaction

► Together, Holding CV and Parent form New CV, an entity that would be treated as a partnership (i.e., look-through) for US and foreign purposes.

Transaction step reporting requirements

► Determination of foreign partnership status ► In general, a foreign partnership is a partnership that is

not created or organized in the United States. New CV is a partnership organized in the Netherlands, so it will be considered a foreign partnership for US federal income tax purposes.

► Similarly, a foreign eligible entity is, by default, a partnership if it has two or more members and at least one member does not have limited liability. Since New CV will have at least one member that does not have limited liability, New CV should default to a partnership for US federal income tax purposes. However, a protective entity classification election (Form 8832) should be filed for New CV to further ensure treatment as a partnership for US federal income purposes.

Formation of New CV — reporting requirements Parent

(US)

Holding CV (NL)

Holding BV (NL)

Operating BV (NL)

LRDs

Finance 2 (Non-US)


Finance 1 (Non-US)

Debtor

Royalty


Creditor

New CV


Formation of New CV — reporting requirements (cont.)

Simplified structure Transaction reporting requirements (cont.)

► Determination of controlled foreign partnership status ► A controlled foreign partnership (CFP) is a foreign

partnership that is controlled by a US person at any time during such partnership’s tax year. Control is defined as more than a 50% interest in such partnership. A 50% interest in a partnership is an interest equal to 50% of the capital, 50% of the profits, or 50% of the deductions or losses. Section 267(c) constructive ownership rules apply.

► Parent, a US person, directly owns a less than 25% interest in New CV. However, Parent is also considered to constructively own a 100% interest in New CV under Section 267(c) such that New CV should be considered a CFP. As such, Parent is both a 10% direct US partner and is a controlling US partner of New CV.

► Form 8865 filing requirement ► Parent will be the filer of New CV Form 8865 as category

1, 3 and 4 filers including page 1 of Form 8865, Schedule A, A-1, A-2, B, D, K, L, M, M-1, M-2, N, K-1, O and P.

► Since New CV is a CFP, a Form 8858 (Information Return of US Persons With Respect to Foreign Disregarded Entities (DRE)) for each DRE under New CV needs to be attached to the Form 8865 for New CV to reflect tax owner and direct owner.

Parent (US)

Holding CV (NL)

Holding BV (NL)

Operating BV (NL)

LRDs

Finance 2 (Non-US)


Finance 1 (Non-US)

Debtor

Royalty


Creditor

New CV



► Form 1065 filing requirement ► A foreign partnership may also be required to file Form

1065 if such foreign partnership has gross income effectively connected with the conduct of a trade or business within the United States, or has gross income derived from sources within the United States, even if its principal place of business is outside of the US. However, there is an exception to the Form 1065 filing requirement if the foreign partnership had no effectively connected income during its tax year, had US source income of $20,000 or less during its tax year, allocated less than 1% of any partnership item of income, gain, loss, deduction or credit in the aggregate to direct US partners at any time during its tax year and the partnership is not a withholding foreign partnership.

► Note: If New CV has any US source income in its tax year, it will be required to file Form 1065 due to the fact that New CV allocates more than 1% of its partnership items to Parent, a US direct partner.

► If New CV is required to file Form 1065, overlapping schedules may be used to replace equivalent schedules under Form 8865. Standard first-year partnership elections should be attached to New CV Form 1065, if filed.


Parent (US)

Holding CV (NL)

Holding BV (NL)

Operating BV (NL)

LRDs

Finance 2 (Non-US)


Finance 1 (Non-US)

Debtor

Royalty


Creditor

New CV



► Disclosure statements ► No additional disclosure statement is required for the

Section 721 partnership formation transaction.

► Section 704(c) analysis ► If Form 1065 is filed, the contribution of built-in gain or

loss property will need to be reported on each partner’s Schedule K-1 (Item M with supporting K-1 footnote).

► TI calculation for US partner vs. earnings and profits (E&P) for foreign partner ► All items of income, gain, loss and deduction reported on

various schedules of Form 8865 or Form 1065 are calculated based on US taxable income principles. If a controlled foreign corporation (CFC) is a partner of a CFP, the distributive share of its income, gain, loss and deduction from such CFP should be adjusted to reflect such CFC’s earnings and profits.

► Continuation of GRA ► You would need to confirm that Non-CTB Subs are or

are not subject to annual GRA certification filing. The contribution of shares of the foreign subsidiaries to New CV by Holdings CV does not constitute a triggering event if there is still a GRA in effect. However, a continuation of a GRA statement would need to be filed for the contribution.


Parent (US)

Holding CV (NL)

Holding BV (NL)

Operating BV (NL)

LRDs

Finance 2 (Non-US)


Finance 1 (Non-US)

Debtor

Royalty


Creditor

New CV


Simplified structure Quantitative modeling considerations

► Detailed modeling to understand the Section 704(c) allocation method should be performed ► Detailed basis study should be performed

► Analysis of current and future E&P

► Analysis of current and future Section foreign tax credit (FTC) pools

► Detailed US foreign tax credit computation

Formation of New CV — quantitative considerations

Parent (US)

Holding CV (NL)

Holding BV (NL)

Operating BV (NL)

LRDs

Finance 2 (Non-US)


Finance 1 (Non-US)

Debtor

Royalty


Creditor

New CV

GRA considerations


GRA considerations

► Year 1: ► USP (US transferor, or

UST) contributes CFC2 (transferred corporation, or TFD) to CFC1 (transferee foreign corporation, or TFC) in a Section 351 exchange.

► USP files a GRA with respect to CFC2.

USP

CFC HoldCo1

USS CFC2 CFC1

CFC2

CFC HoldCo2


GRA considerations (cont.)

► Year 2: ► A. CFC HoldCo1 acquires

stock of USS for cash. ► B. USP transfers CFC1 to

CFC HoldCo 1 in return for USS stock — Triangular B reorganization.

► C. CFC HoldCo1 contributes CFC1 to CFC HoldCo2 in a Section 351 exchange.

USP

CFC HoldCo1

USS CFC1

CFC2

CFC HoldCo2

A.Cash

A.Stock of USS

B.Stock of CFC1

B.Stock of USS

CFC1

CFC2 CFC1

CFC2

C.Stock of CFC1


GRA considerations (cont.)

► Year 2: ► USP files a gain recognition

agreement with respect to CFC1.

► What about CFC2? ► USP files a new GRA with

respect to CFC2 stock transferred outbound in Year 1 as a result of Step B.

► What about Step C? ► USP files a new GRA with

respect to: ► Stock of CFC2 transferred

outbound in Year 1 ► Stock of CFC1 transferred

outbound in Year 2

USP

CFC HoldCo1

USS CFC1

CFC2

CFC HoldCo2

A.Cash

A.Stock of USS

B.Stock of CFC1

B.Stock of USS

CFC1

CFC2 CFC1

CFC2

C.Stock of CFC1

New proposed GRA compliance regulations


New proposed GRA compliance regulations

► On 31 January 2013, the Internal Revenue Service (IRS) issued new proposed regulations that would amend the existing rules under §§ 367(a) and 6038B governing the consequences to US persons for failing to file GRAs and related documents. ► New proposed regulations provide:

► Changing the requirement for taxpayers to establish reasonable cause when seeking relief from gain recognition after failing to properly file a GRA to a standard based on willful failure. ► “Willful failure” includes intentionally not providing adjusted basis and/or fair

market value, including noting that information is “available upon request.” ► Now require limited Form 926 (“Return by a US Transferor of Property

to a Foreign Corporation”) reporting with all GRAs. ► § 6038B penalty would now apply to GRAs and associated

documents. ► Current reasonable cause standard would continue to apply to US

transferors seeking relief from the § 6038B penalty.


New proposed GRA compliance regulations (cont.)

► Same willful standard for GRAs and similar relief from such penalties would now apply for failure to file or comply with notices required under § 367(e)(2) for liquidating distributions, as well as notices required under Treas. Reg. § 1.367(a)-3 in connection with certain outbound transfers of stock, securities or assets of domestic corporations.

► Proposed regulations would apply to GRAs and notices under § 367(e)(2) and Treas. Reg. § 1.367(a)-3 that are required to be filed with a timely filed return on or after the date final regulations are published, as well as for any requests for relief for failures to file or failures to comply, if the requests are submitted on or after the date final regulations are published.

► July 2010 Industry Director Directive, LMSB-4-0510-017, relating to relief for GRAs, remains in effect for the time being. ► The IRS has indicated that it will be withdrawn in the near term.

Don’t forget these important reporting requirements …


Frequently missed statements

► GRAs and related filings (e.g., “new” GRAs, annual certifications, Form 8838), including for indirect stock transfers ► Applicable regulations and GRA formats can depend on initial

outbound transfer date: ► New final regulations under Section 1.367(a)-8 generally apply to

GRAs with respect to transfers of stock or securities occurring on or after 13 March 2009

► Transfers occurring on or after 7 March 2007 but before 13 March 2009 — Section 1.367(a)-8T applies

► Transfers occurring on or after 20 July 1998 but before 7 March 2007 — Section 1.367(a)-8 applies

► Form 926 and related Section 6038B statement ► Treas. Reg. § 1.6038B-1(c) and 1.6038B-1T(c) ► Treas. Reg. § 1.6038B-1(e)(3) for certain Section 355 transactions ► Partners file for transfers by partnerships. See AM 2008-006.


Frequently missed statements (cont.)

► Section 367(b) notices ► Treas. Reg. § 1.367(b)-1(c) ► May be required to be attached to both the Form 1120 and

applicable Form 5471 (see Treas. Reg. § 1.367(b)-1(c)(3)(ii)) ► Foreign-to-foreign liquidations

► Foreign Investment in Real Property Tax Act (FIRPTA) statements ► Treas. Reg. § 1.897-2(g) and (h) and 1.1445-2 ► Request for relief for late filings; see Rev. Proc. 2008-27

► Dual consolidated loss (DCL) elections, agreements and statements ► Treas. Reg. § 1.1503(d)-6 ► Treas. Reg. § 1.1503-2(g)(2)(iii)(3) ► Reasonable cause for late filings



► High-tax exception statements ► Section 954(b)(4) and Treas. Reg. § 1.954-1(d)(5)

► Tax-free reorganization statements ► Treas. Reg. § 1.368-3(a) and (b)

► Section 956(c)(2) statement ► Treas. Reg. § 1.956-2(b)(2)



► Form 952 for multi-year liquidations ► Treas. Reg. § 1.332-4

► Form 966 for amendments to adopted plan of liquidation ► Treas. Reg. § 1.6043-1

► Section 1248 schedule ► Treas. Reg. § 1.1248-7

► Section 959 — successor in interest statement ► Treas. Reg. § 1.959-1(d) and Prop. Treas. Reg. § 1.959-1(b)(5)

► Cost-sharing agreement (CSA) statements ► Treas. Reg. § 1.482-7T(k)(4) is effective 5 January 2009 ► FSA 200011021 provides importance of administrative

requirements to ensure that CSA is “qualified”

Section 901(m)


Section 901(m) Denial of FTCs in case of covered asset acquisitions

Overview of provision ► General rule:

► A portion of foreign income tax attributable to income from foreign assets acquired in a “covered asset acquisition” is non-creditable.

► Disqualified portion equals: ► Aggregate basis differences allocable to such taxable year with

respect to all relevant foreign assets divided by income on which the foreign income tax is determined

► Amortization related to a covered asset acquisition remains deductible for E&P purposes, as do the non-creditable foreign taxes. ► Sections 275 and 78 do not apply to any non-creditable tax.


Section 901(m) Denial of FTCs in case of covered asset acquisitions (cont.)

Overview of provision ► Definitions:

► “Covered asset acquisitions” include: ► Qualified stock purchases to which Section 338(a) applies ► Transactions which are treated as acquisitions of assets for US tax purposes and as

acquisitions of stock (or are disregarded) for foreign tax purposes ► Acquisitions of partnership interests (where the partnership has a Section 754 election

in effect) ► Any other similar transaction

► “Basis difference” means, with respect to any relevant foreign asset, the excess of (1) the adjusted basis of such asset immediately after the covered asset acquisition over (2) the adjusted basis of such asset immediately before the covered asset acquisition. ► US tax basis ► Allocate basis difference to a taxable year using the applicable cost-recovery method

under US tax rules ► “Relevant foreign asset” means, with respect to any covered asset acquisition, an asset

only if any income, deduction, gain or loss attributable to such asset is taken into account in determining foreign income tax in the relevant jurisdiction


Section 901(m) Denial of FTCs in case of covered asset acquisitions (cont.)

Overview of provision ► CFC acquisition of Target stock in a

qualified stock purchase ► CFC purchases Target after

31 December 2010 and makes a Section 338 election

► Total stepped-up basis is US$1,500,000 (all assets have a 15-year life)

► Basis immediately prior equals 0 ► Target foreign income for year = US$1

million; pays taxes of US$500,000

US

US$ CFC

Target Target

Target shareholders

Disqualified portion of tax = US$100,000 [US$1,500,000 ÷ 15] x US$500,000 [foreign taxes] US$1,000,000 [foreign income] Which equals US$50,000 of foreign taxes disallowed


Covered asset acquisitions Still can be beneficial — to make a Section 338 election

US tax calculation

(Samples)

No Section 338 election — 901(m)

does not apply

Section 338 election — 901(m)

applies

Income 100 100 Depreciation 0 -20 Income before tax 100 80 Tax -35 -35 E&P 65 45 Distribution 65 45 Gross-up 35 35 Disqualified portion -7 Taxable dividend 100 73 Tax rate 35.00% 35.00% Tax 35 25.55 Foreign tax credit -35 -28 Tax due/(excess cr) 0 (2.45)

Fair market value

Section 197 depreciation

Equipment (5 yrs) 50.00 10.00

Goodwill (15 yrs) 150.00 10.00

Total 200.00 20.00

Step-up in basis

US depreciation 20.00

Income 100.00

Percentage 20%

Taxes 35.00

Disqualified portion 7.00

Disqualified tax

Local country tax 100 income x 35% tax rate = $35 tax

Questions?

Contacts

► Mike Medley

Ernst & Young LLP Iselin, NJ +1 732 516 4462 [email protected]

► Marc Ganz

Ernst & Young LLP New York, NY +1 212 773 2229 [email protected]

► Sue Lippe

Ernst & Young LLP Chicago, IL +1 312 879 4254 [email protected]

► John Morris Ernst & Young LLP Washington, DC +1 202 327 8026 [email protected]

Ernst & Young

Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. © 2013 Ernst & Young LLP. All Rights Reserved. ED None 1301-1002270 BOS

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