back to business in iran after the nuclear deal...

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Presenting a live 90-minute webinar with interactive Q&A

Back to Business in Iran After the Nuclear

Deal: Maximizing Opportunity and

Minimizing Liability Risks Navigating Remaining Sanctions and Customs Controls,

Obtaining Necessary Licenses, and International Tax Planning

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, OCTOBER 13, 2015

Mehrdad Ghassemieh, Partner, Harlowe & Falk, Tacoma, Wash.

Nnedinma C. Ifudu Nweke, Senior Counsel, Akin Gump Strauss Hauer & Feld, Washington, D.C.

Barbara D. Linney, Member, Miller & Chevalier Chartered, Washington, D.C.

David B. Woodward, President & CEO, Associates in Cultural Exchange, Seattle

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David B. Woodward President & CEO Associates in Cultural Exchange

1856 -The Treaty of Commerce and Navigations signed (lasted until 1926) between the U.S. & Persia

1856 – Nasserredin Shah Qajar of Persia sent 1st Persian ambassador to the U.S., Mirza Abolhassan Shirazi

1883 – Samuel Benjamin 1st U.S. envoy appointed to Persia under the title American Minister to Persia

1908 – Oil discovered in SW Persia by British speculator, Willam D’Arcy

1909 – Anglo-Persian Oil Company Established 1909 – Howard Baskerville, American missionary, died

attempting to support the constitutional revolution

6

1911 – American financial consultant, Morgan Shuster, appointed by Persian parliament Treasurer General of Persia

1911 – British and Imperial Russian governments force Persia to expel Shuster from office

1921 – British coup installs Reza Shah Pahlavi as commander in chief of military

1925 – Reza Shah Pahlavi assumes role of Shah of Iran 1941 –British and Soviets invade Iran; Reza Shah deposed &

son Mohammad Reza installed as new Shah

7

1947 – Post WWII Cold War era begins & U.S. begins to counter Soviet interests in Iran

1951 – Mohammad Mosaddegh appointed Prime Minister of Iran, nationalizes Anglo-Iranian Oil Company (later British Petroleum)

1952 – unknown to Truman, CIA office in Tehran begins covert activities designed to remove Mosaddegh from office

8

1953 – CIA instigates overthrow of Mossadegh via “Operation Ajax”; Mohammed Reza Shah returns from brief exile; U.S. consolidates control over Iranian affairs Madeleine Albright, U.S. Secretary of State commenting on the

overthrow of Mossadegh in 2000 said “In 1953 the United States played a significant role in orchestrating the overthrow of Iran's popular

Prime Minister, Mohammad Mossaddegh. The Eisenhower Administration believed its actions were justified for strategic reasons; but the coup was clearly a setback for Iran's political development. And it is easy to see now why many Iranians continue to resent this intervention by America in their internal affairs.”

1953 – 1973 a period of stability in U.S. – Iran relations; rise of Mohammad Reza Shah as regional leader; vast growth in oil wealth; modernization & suppression of intellectuals and religious leaders

1957 – U.S. initiates nuclear Atoms for Peace in Iran

9

1974 – 1979 Post Yom Kippur war and subsequent OPEC Oil embargo of 1973, U.S. confidence in Mohammad Reza Shah wanes; the Shah becomes more autocratic

1979 - Islamic revolution in Iran causes Shah to go into exile in the U.S.; Ayatollah Ruhollah Khomeini assumes power and installs theocracy

1979 - Hostage crisis commences with takeover of U.S. Embassy by “students” and lasts from Nov 4, 1979 to Jan 20, 1981

1980 – “Operation Eagle Claw” fails to rescue hostages

10

1980 – 1988 – Iran–Iraq war launched by Iraq toward end of Carter administration; Reagan and Bush administrations actively supported Saddam Hussein’s government in war effort including authorizing sale of chemical & biological weapons

1983 – U.S. claims that Hezbollah bombings in Beirut were supported by Iran

1986 – Iran-Contra Affair - Reagan administration sells weapons to Iran to covertly support Nicaraguan rebels

1987 & 1988 – U.S. naval attacks on Iranian oil facilities 1988 – USS Vincennes shoots down Iran Air Flt 655 killing 290

civilians

11

1989 – 1990 U.S. continues support for Saddam Hussein regime

1990 – Iraq invades Kuwait 1990 – 1991 – Gulf War; U.S. leads coalition

to oust Iraq from Kuwait 1990 – 2003 – Sanctions imposed on Iraq

12

1995 – Total embargo imposed by Clinton administration 1998 – Newly elected President Khatami reaches out to U.S.

to open dialogue 2000 – 4 U.S. Congressmen hold informal talks with 5

members of Iranian parliament in New York

13

2001 - 9/11; Bush states on 9/20/11 “Either you are with us, or you

are with the terrorists.” ;U.S. invades Afghanistan 2002 – Bush gives “Axis of Evil Speech 2003 – U.S. invades Iraq 2003 – Iranian government proposes “Grand Bargain” to

promote dialogue between U.S. & Iran, Bush administration rejects overture

2003 – IAEA launches investigation of Iran’s uranium enrichment program

2005 – 2008 U.S. escalates covert operations against Iran 2006 – U.S. passes Iran Freedom & Support Act 2007 – U.S. raids Iranian consulate in Irbil, Iraq

14

2009 – Presidential elections in Iran; Green Revolution; crackdown by Revolutionary Guard

2009 – U.S. hikers cross into Iran and arrested 2011-2012 – Iranian military leaders threaten closure of

access to Persian Gulf 2013 – Hassan Rouhani elected president; visits UN in

September, speaks with Obama by phone – 1st contact between heads of state in 34 years

2006 – 2015 P5+1 (UN Sec Council + Germany) negotiations with Iran conclude on July 14, 2015

2015 – Congress unable to pass resolution opposing nuclear deal

15

Key themes in U.S. – Iran relations include: Mutual economic & social interests over 150 years

Mutual mistrust of Russian & British activities for 100 years

Iran as major source of oil

Iran as centerpiece of Western Cold War strategy

U.S. overthrow of constitutional government in 1953

Iran’s attempts to reject external control

Islamic revolution

Hostage crisis

36-year standoff

Nuclear deal

Political re-engagement

16

David B. Woodward President & CEO Associates in Cultural Exchange 200 West Mercer Street, Suite 108 Seattle, WA 98119 (206) 217-9644 [email protected]

17

* This PowerPoint presentation covers developments through October 9, 2015, the cut-off date for submission to Strafford for distribution. Any subsequent developments

will be covered during the live webinar.

Back to Business in Iran After the Nuclear Deal:

Maximizing Opportunity and Minimizing Liability Risk

U.S. Sanctions Considerations

October 13, 2015*

presented by

Barbara D. Linney Member Miller & Chevalier Chartered

Strafford Live CLE Webinar

Agenda

1. U.S. sanctions prior to the Iran nuclear deal

2. U.S. sanctions relief under the deal

3. Timing of sanctions relief

4. U.S. sanctions after implementation of the deal

5. Potential licenses that must be obtained when dealing with Iran

6. Enforcement risks

7. Benefits and risks of deal for U.S. persons

U.S. SANCTIONS CONSIDERATONS | 19

U.S. sanctions prior to the Iran nuclear deal

Primary and secondary sanctions regimes

Primary sanctions = comprehensive embargo

• U.S. persons prohibited from engaging in most transactions with or for the benefit of Iran or persons in Iran

- Limited exemptions (e.g., personal communications, travel, information and informational materials) and exceptions authorized by general or specific licenses (e.g., exports of agricultural commodities, food, medicine & medical devices)

• Assets of Government of Iran and various specially designated nationals blocked under various OFAC programs

Secondary sanctions = actions against foreign persons who engage in sanctionable conduct

• Most secondary sanctions authorized by legislation (e.g., Iran Sanctions Act, CISADA, NDAAs, etc.)

• Some authorized by Executive Order (e.g., E.O. 13590)


U.S. sanctions relief under the deal

Joint Comprehensive Plan of Action (JCPOA)

• Decided upon by United States, European Union, 3 EU Member States (France, Germany, United Kingdom), Russia, China, and Iran

• Goal is to ensure peaceful nuclear program in Iran

United Nations endorsed on July 20, 2015

• UNSCR 2231 (2015) urges implementation on timetable established in JCPOA

Becomes effective on “Adoption Day” no later than October 18, 2015, provided Iran makes specified progress towards addressing past and present outstanding issues of concern under a “roadmap” agreement with the International Atomic Energy Agency (IAEA)

Full implementation subject to approval of the U.S. Congress (termination of sanctions legislation enacted by Congress) and the Iranian Parliament (IAEA Additional Protocol to Safeguards Agreement)


U.S. sanctions relief under the deal (cont’d) On the Implementation Date:

• UN Security Council will terminate UN sanctions, subject to “snap back” until 10 years after Adoption Day in event of “significant non-performance” of Iran’s JCPOA commitments

• European Union will suspend most EU sanctions (but export controls and certain human rights sanctions will remain in force)

• United States will

- suspend certain U.S. sanctions against foreign persons (i.e., “secondary sanctions”)

- implement favorable licensing policy for

o export of commercial passenger aircraft and related parts and services by U.S. persons

o import of Iranian-origin carpets and foodstuffs into the United States

o certain activities of foreign subsidiaries of U.S. persons


Timing of sanctions relief

Interim relief put in place on January 20, 2014 and extended pending negotiation of JCPOA remains in place for now

• i.e., certain relief under U.S. secondary sanctions and favorable temporary licensing policy for U.S. persons engaged in safety-related export of parts and services for Iranian commercial passenger aircraft

No additional changes in U.S. or EU sanctions for approximately 6 to 9 months or more until “Implementation Date”

• i.e., the date of IAEA-verified implementation by Iran of agreed nuclear-related measures

Termination of sanctions will not occur until “Transition Date”

• i.e., approximately 8 years from now, when IAEA submits favorable report regarding Iran’s pursuit of only peaceful nuclear activities

Iran controls timetable

Termination of U.S. statutory sanctions controlled by Congress


U.S. sanctions after implementation of the deal

U.S. embargo prohibiting trade with Iran by U.S. persons and their foreign subsidiaries will remain in place, except as authorized by general or specific licenses

• Licenses may be available for activities of foreign subsidiaries in sectors in which primary and secondary sanctions are suspended or lifted

• Consistent with existing provisions of the Iranian Transactions and Sanctions Regulations, certain exceptions will apply to transactions relating to U.S.-origin raw materials or components when incorporated into manufactured products or substantially transformed in a third country by a person other than a U.S. person

• But restrictions on facilitation will remain

- e.g., no alteration of operating policies and procedures of U.S. companies or their foreign affiliates or referral of opportunities to foreign persons

U.S. arms embargo and export controls on dual-use items will remain in place


Potential licenses that must be obtained when dealing with Iran

OFAC has stated intention to issue General Licenses authorizing importation of food and carpets and certain activities of foreign subsidiaries

Specific licenses will be required for export of commercial passenger aircraft and related parts and services

Secondary sanctions relief will be implemented through statutory waivers, joint DOS/OFAC guidance, and termination (in whole or in part) of various Executive Orders


Enforcement risks

Media coverage of deal has caused considerable confusion about what sanctions currently apply, leading to heightened risk of inadvertent violations

JCPOA provides that ongoing investigations of possible infringements of sanctions lifted under the JCPOA “may be reviewed in accordance with applicable national laws”

• Review is discretionary and applies only to investigations involving sanctions that are lifted

• U.S. will continue to enforce sanctions “vigorously”


Relief from primary sanctions for U.S. companies and their foreign subsidiaries is limited to certain sectors

• Foodstuffs, carpets, civil passenger aviation

• Not known yet whether relief for foreign subsidiaries will be broader

JCPOA will preserve and widen gap between EU and U.S. sanctions

• UN and EU sanctions originally were narrower in scope than U.S. sanctions

• JCPOA interim and ultimate relief from EU sanctions and U.S. secondary sanctions will be much broader than U.S. sanctions relief for U.S. persons

Companies entering Iranian market will face other challenges (lack of transparency, corruption, terrorism, etc.)

Benefits and risks of deal for U.S. persons


Benefits and risks of deal for U.S. persons (cont’d)

Risk of “snap back” remains for 10 years from Adoption Date

• Will not apply retroactively but

• Contracts entered into after Implementation Date but prior to snap back will not be grandfathered

Change in Administration could impact ongoing implementation

U.S. Congress has not abandoned efforts to prevent or delay implementation

• Waivers of statutory secondary sanctions must be “consistent with existing statutory requirements for such action”

• Failed to pass joint resolution of disapproval pursuant to Iran Nuclear Agreement Review Act of 2015

- Review period has expired but various reporting and certification requirements remain

• Bill passed in House of Representatives on October 1 and received in the Senate and referred to the Committee on Foreign Relations on October 5 would delay implementation until Iran pays judgments against it for terrorists acts for which it was not immune from jurisdiction of U.S. courts


Questions?

Barbara D. Linney Miller & Chevalier Chartered 655 Fifteenth Street, NW Suite 900 Washington, DC 20005 202.626.5806 202.626.5801 (fax) [email protected] www.millerchevalier.com


mailto:[email protected]

http://www.millerchevalier.com/

BACK TO BUSINESS IN IRAN AFTER THE NUCLEAR DEAL

Strafford CLE Seminar

October 13, 2015

Nnedi Ifudu Nweke

Akin Gump Strauss Hauer & Feld

U.S. Export Controls Before and After the Iran Deal

Agenda

Overview

OFAC Sanctions vs EAR and ITAR Export Controls

Export Enforcement Against Non-U.S. Companies

Practical Implications

31

Overview

Overview

• U.S. laws and regulations that impose restrictions on international transfers of U.S.

goods, technology or services include not only the Departments of State and

Treasury’s sanctions laws and regulations but also the Export Administration

Regulations (EAR) and the International Traffic in Arms Regulations (ITAR), among

others.

• As of today and until further notice, EAR and ITAR export restrictions pertaining to

Iran remain in place and continue to be vigorously enforced.

• The Joint Comprehensive Plan of Action (JCPOA) sanctions relief, if fully

implemented, is not expected to change export controls imposed under the EAR

and the ITAR.

• All ITAR-controlled items and nearly all EAR-controlled items require authorization

to be exported to Iran. Such requests are generally denied with limited exceptions

for humanitarian trade. These restrictions also apply to non-U.S. persons.

• Vigorous enforcement for violations of the ITAR and EAR, particularly against non-

U.S. companies.

33

OFAC Sanctions vs EAR and ITAR Export Controls

Export Controls vs. Sanctions What’s the Difference?

35

Export Controls – controls on the international movement of goods, software, and technology (collectively, “items”) and sometimes services

• Laws apply to the nationality of the item

• Typically focused on strategic items, but some controls on embargoed countries can apply to any item

• More than one set of rules may apply to a single transaction (e.g., U.S. and EU controls)

Sanctions – restrictions on dealings (not necessarily involving items) with other countries, persons or entities based on security or policy concerns.

• Laws apply to U.S. persons wherever located, and sometimes directly to non-U.S. persons (Iran and Cuba)

• Not limited to goods / software / technology

• Coverage may include financial transactions, commercial agreements, or assistance more broadly

ITAR and EAR Export Controls

36

• ITAR contains the United States Munitions List (USML), which enumerates the military items that fall within the scope of the ITAR

• The USML generally includes items specifically designed, developed or adapted for military application with no predominant civilian application or performance equivalent

• EAR governs exports of all commercial or dual-use items

• Products and technology that are controlled under the EAR are listed on the Commerce Control List (CCL)

• EAR-controlled items may require a license for export or reexport, depending the classification of item on the CCL, the country of export, and the end-user/end-use. For Iran, most EAR-controlled items require a license.

International Traffic in Arms Regulations Implements the Arms Export Control Act (AECA)

Export Administration Regulations

Determining the export jurisdiction (i.e., whether an item is ITAR or EAR controlled) is the first step to determining whether an export requires a license.

U.S. Export Controls on Military Items: ITAR

• The U.S. Department of State’s Directorate of

Defense Trade Controls enforces a complete arms

embargo against Iran, meaning that licenses for

defense articles or services enumerated on the

U.S. Munitions List, irrespective of origin, to Iran

will be denied. (ITAR § 126.1)

• These restrictions apply to both U.S. persons and

non-U.S. persons .

• U.S. sanctions relief under the JCPOA does not

remove these restrictions.

37

U.S. Export Controls on Dual-Use Items: EAR

• U.S. persons and non-U.S. persons must comply with

the EAR when exporting, reexporting, or transferring

(in-country) items subject to the EAR:

• U.S.-origin items (wherever located)

• certain foreign-origin items incorporating more than a

de minimis amount of U.S. content or that are direct

products of certain U.S. technology

• items located in or moving in-transit through United

States

• JCPOA sanctions relief does not alter export controls

imposed on Iran provided in the EAR, meaning that

most controlled dual-use items subject to the EAR

cannot be exported to Iran.

38

U.S. Export Controls on Dual-Use Items: EAR

• Iran remains an Embargoed Country under the EAR

• Iran remains an “Embargoed Country” under EAR § 746.7, meaning that the export

or reexport of nearly all EAR-controlled dual-use items require a license, which will

generally be denied.

• End User/ End Use Controls Remain in Place

• Denial of licenses of EAR-controlled items for certain persons sanctioned under

Iran-Iraq Arms Nonproliferation Act of 1992; Iran, North Korea, and Syria

Nonproliferation Act; and Iran Sanctions Act of 1996 (EAR § 744.19)

• A large number of Iranian companies and individuals are listed on BIS’ Entity

List. A license is required to export all items subject to the EAR (including

EAR99 items) to these persons, which will generally be denied.

39

OFAC Restrictions on Exports and Reexports to Iran

• Although BIS maintains a license requirement for Iran,

OFAC is responsible for administering Iran sanctions.

• JCPOA sanctions relief does not alter OFAC’s general

prohibition on U.S. persons and non-U.S. persons

owned or controlled by U.S. persons transacting any

business with Iran, including exports or reexports of

any item, without specific or general authorization

from OFAC.

• OFAC is expected to establish a General License for non-

U.S. persons owned or controlled by a U.S. person to

engage in “activities consistent with the JCPOA”

• Unclear what “activities consistent with the JCPOA” will

be subject to General License

• Unclear how such licensing will impact BIS Licensing

40

Costs of Non-Compliance

41

• The United States takes export controls enforcement seriously.

• Costs of non-compliance with U.S. export control laws can be significant

• U.S. government will continue to enforce export controls against U.S. and non-

U.S. companies

• :

Monetary Penalties

Significant civil and criminal penalties for corporations and

individuals

Administrative Actions

• Denial of export privileges

• Debarment from government contract eligibility

• Restriction on ability to receive U.S. exports

• Appointment of a government monitor

• License revocation, suspension, or renewal delay

Damage to Reputation Consumers and business partners may be reluctant to work

with you or may impose additional conditions on contracts

Business Hurdles Impact on future license applications

Costs of Investigation Significant, regardless of outcome

Export Enforcement Against Non-U.S. Companies

Fokker Services B.V. (June 2014)

• Dutch aerospace services company accused of 253 violations of the EAR for illegally exporting

and re-exporting aircraft parts, technology, and services to Iran and Sudan, countries subject to

U.S. sanctions.

• Items are controlled for national security, missile technology, and antiterrorism purposes.

• Transactions involved Iranian military end-users.

• This violated terms of temporary denial order against Iran Air.

• It systematically attempted to avoid detection by U.S. investigators.

• $10.5 million civil settlement agreement reached.

• However, in February 2015, a U.S. federal judge rejected the plea agreement, stating:

• “It would undermine the public’s confidence in the administration of justice and

promote disrespect for the law for it to see a defendant prosecuted so anemically for

engaging in such egregious conduct for such a sustained period of time and for the

benefit of one of our country’s worst enemies.”

• Fokker and DOJ appealed to D.C. Circuit on theory judge invaded prosecutorial discretion

• Oral argument took place on September 11, 2015

• Decision will clarify how much discretion courts should have to reject a deal

43

Weatherford International Ltd. (November 2013)

• Weatherford, an international oil and natural gas services company

incorporated in Switzerland, agreed to pay $50 million civil penalty for exports

of oil and gas equipment to Iran, Syria, Sudan, and Cuba in violation of the EAR

and OFAC sanctions regulations and for exports of items controlled for nuclear

non-proliferation reasons to Venezuela and Mexico without a license

• Largest civil penalty levied by BIS

• Combined with DOJ penalties for a combined total penalty of $100 million from

U.S. government for export violations

44

http://www.google.com/url?sa=i&source=imgres&cd=&cad=rja&uact=8&ved=0CAkQjRwwAGoVChMI89KyzoisyAIViZyACh0v9Qgx&url=https://en.wikipedia.org/wiki/Weatherford_International&psig=AFQjCNHddoTjQ3pEq0KwkZpaO7-GvfZdzQ&ust=1444159796173634

Other Notable Enforcement Actions

• Online Micro LLC (2012) – Joint enforcement action by DOJ, BIS, and OFAC regarding the

shipment of unlicensed computer-related goods to Iran through the United Arab Emirates.

Settlement agreement resulted in the forfeiture of $1.9 million and a ten-year denial of export

privileges.

• Sunrise Technologies (2011) – Joint enforcement action by DOJ, BIS, and OFAC regarding

unlicensed exports of computer-related goods from U.S. to Iran. Settlement agreements

provided for temporary loss of EAR exporting privileges and money judgments of over $1

million.

• Flowserve Corporation (2011) – Joint enforcement action by BIS and OFAC against Flowserve

Corporation and its various subsidiaries regarding unlicensed exports of pumps, valves, and

related components to Sudan, Iran, and Cuba, as well as other countries, including China,

Taiwan, Hong Kong, Singapore, India, Malaysia, and Brazil. Settlement involved a $2.5 million

penalty paid to BIS for violations of the EAR and $502,408 penalty paid to OFAC for violations of

Iran, Cuban, and Sudan sanctions.

• Balli Group/Aviation PLC. (2010) – Joint enforcement action by OFAC, BIS, and DOJ for exports

of commercial airliners to Iran in violation of the EAR and Iran sanctions. Settlement included

$15 million settlement amount to OFAC and BIS and $2 million criminal fine to DOJ.

45

Practical Implications

Looking Forward

U.S. Persons: No significant change

• Comprehensive embargo under ITSR remains

• U.S. persons are still restricted from doing business with Iran

• BIS/DDTC will continue to vigorously enforce the EAR and ITAR

Non-U.S. Persons: Easing of secondary sanctions

• Non-U.S. persons will have an authorized path to renew business with Iran

• But must be aware of possible U.S. nexus, including supply chain and third

party relationships. It will be important to understand what goods,

technology or services from the United States can and cannot be used as

non-U.S. companies look to resume business with Iran.

47

Questions?

Nnedi Ifudu Nweke

Washington, D.C.

Tel: +1 (202) 887-4013

[email protected]

48

mailto:[email protected]

Back to Business in Iran After the Nuclear Deal: Maximizing Opportunity and Minimizing Liability Risks

Tax Considerations

Mehrdad Ghassemieh

October 13, 2015

49

Agenda

• United States International Tax Rules – The Basics • Special U.S. Tax Rules Applicable to Iran

• Common IRS Tax Forms • IC-DISC – Tax Planning for Exports to Iran

50

United States International Tax Rules Special Rules Applicable to Iran

51

U.S. International Taxation - Basics

• Taxation • U.S. Persons are taxable on their “worldwide

income”

• Corporate tax residency • tax resident where incorporated. Sec. 7701(a)(30); Sec. 7701(a)(4).

• Corporation Separate Tax Person

52

U.S. International Taxation - Basics U.S. tax classification of a foreign entity

What is the default U.S. tax classification of a foreign entity?

If all members have limited liability, default classification is a corporation. Reg. Sec. 7701-3(b). May elect alternate classification by filing a Form 8832 (check-the-box rules). Reg. Sec. 7701-3(a). Per Se Corporation

Reg. Sec. 301.7701-2(b)(8) provides list of “per se” corporations Not eligible for check-the-box

53

U.S. Person – Foreign Investments Dividends Received

What tax rate applies to dividend income received from foreign corporation, ordinary or qualified dividend rate (“QDI”)?

Dividends are QDI only if: Sec. 1(h)(11)(C).

Comprehensive income tax treaty Eligible for benefits under the treaty

No Treaty with Iran – Dividends will be ordinary income.

54

U.S. Person – Foreign Investments

Subpart F – Anti –Deferral Provisions

Is the foreign corporation a CFC? CFC if: U.S. Shareholders own more than 50% of vote or value. Sec. 957 U.S. Shareholder if: U.S. person with 10% or more of vote. Sec. 951(b).

Is there Subpart F income?

Foreign Personal Holding Company. Sec. 954(c). Passive income such as dividends, interest, royalties, etc.

Foreign Base Company Sales Income. Sec. 954(d). Purchase or sale of property that is: (1) manufactured, produced, extracted outside the country where the CFC is incorporated, and (2) sold outside the country where CFC incorporated.

Foreign Base Company Services Income. Sec. 954(e). Services performed: (1) for or on behalf of related party; (2) outside of CFC country of incorporation.

Investment of CFC earnings in US property. Sec. 956. Income from 901(j) Countries - the income of such corporation derived from any foreign country during any period during which section 901(j) applies to such foreign country. Sec. 952(a)(5).

55

U.S. Person – Foreign Investments Foreign Tax Credit

•“income tax” - “likely to reach net gain [in] the normal circumstances in which it applies.” Treas. Reg. § 1.901-2(a)(3)(i).

•Likely to reach net gain if and only if the tax satisfies each of the realization, gross receipts and net income requirements. § 1.901-2(b)(1)

• 1) the foreign tax law must generally adhere to a realization concept similar to the realization doctrine of the U.S. income tax (the realization requirement);

• (2) tax computations must usually begin from actual gross receipts,

rather than from notional amounts (the gross receipts requirement); and

• (3) costs incurred in earning these gross receipts must be allowed as

deductions (the net income requirement). Treas. Reg. § 1.901-2(b)(1) – (4).

56


IRC 901(j) Under 26 U.S.C. § 901(j)(2)(A) and (B), a foreign tax credit is denied for taxes paid to a foreign country if one of the following is true with respect to the country: • the United States does not recognize the government of the country; • the United States has severed diplomatic relations with the country; • the United States has not severed diplomatic relations with the country, but

does not conduct such relations; or • the Secretary of State has designated the country as one that repeatedly

supports acts of international terrorism.

57


Doing Business with Iran – U.S. Tax Disadvantages • No Deferral. Sec. 952(a)(2). • No Foreign Tax Credits. Sec. 901(j). • No Qualified Dividend Income. Sec. 1(h)(11).

58


Presidential Waiver Power • Sec. 901(j)(5). President may grant a waiver to the restrictions of Sec.

901(j) if doing so “ is in the national interest of the United States,” and expands trade and investment opportunities for U.S. companies. • President must give Congress 30 days’ notice before granting the waiver.

• Letter from Congressman Paul Ryan to President Obama dated September 22, 2015, requesting whether the President has made any promise to exercise waiver power.

59

IRS Filings Common Forms

60

IRS Filing Requirements

Common International Filing Requirements:

TD F 90-22.1 – Foreign Bank Account Reporting (“FBAR”) Form 5471 – Information Filing with Respect to Certain Foreign Corporations Form 8621 – Information return for shareholder of PFIC Form 8865 - Foreign partnership Form 8858 - Foreign DRE (e.g., single member LLC) Form 8938 - Foreign Account Tax Compliance Act (“FATCA”) Form 5713 – International Boycott Report

61

Form 5713 – Boycott Report Form 5713 - IRC Section 999 Who Must File: You must file Form 5713 if you are a U.S. person (defined in section 7701(a)(30)) that has operations (defined on page 2) in or related to a boycotting country, or with the government, a company, or a national of a boycotting country. The following U.S. persons also must file Form 5713: • A member of a controlled group (as defined in section 993(a)(3)), a member of which has operations • A U.S. shareholder (within the meaning of section 951(b)) of a foreign corporation that has operations

(but only if you own (within the meaning of section 958(a)) stock of that foreign corporation); • A partner in a partnership that has operations; or • A person treated (under section 671) as the owner of a trust that has operations.

Penalties Willful failure to file Form 5713 may result in: • A $25,000 fine, • Imprisonment for no more than 1 year, or • Both.

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IC-DISC Tax Planning for Exports to Iran

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IC-DISC Basics • IC-DISC - Interest charge domestic international sales

corporation

• Domestic corporation

• Elect to be treated as an IC-DISC by filing IRS Form 4876-A

• An IC-DISC is not subject to federal income tax (IRC 991).

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Structure without IC-DISC

Individual Owners

Foreign Customers US

MFG

Flow Through Income

(taxed to individual at

marginal rates ) $ for goods

Export goods

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Structure with IC-DISC

Individual Owners


MFG

Flow Through Income

(taxed to individual at

marginal rates)

$ for goods

Export goods

IC-DISC

Commission

Dividend (taxed at dividend

rates)

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Example without IC-Disc Structure

Individual Owners


MFG

$200

Export goods

Flow Through TI $100 * Marginal tax rate 40% Tax $40

Export Receipts $200 Export Expenses $100 Export TI $100

Total Tax $40

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Example with IC-Disc Structure

Individual Owners


MFG

$200

Export goods

IC-DISC

Commission

Export receipts $200 Export expenses $100 Export TI $100

$50

Flow through TI $50 * Marginal tax rate 40% Tax $20

Dividend income $50 * Dividend tax rate 23.8% Tax $12

Commission receipts $50 * DISC tax rate 0% Tax $0

Total Tax $32

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Amounts paid by an operating company to its related IC-DISC (usually commissions) are deductible to the operating company. An IC-DISC does not pay corporate income tax on its income. This yields two primary benefits:

1) Lower Tax Rate: Companies without an IC-DISC realize income at ordinary rates. Income permitted to flow through the IC-DISC reduces the income taxed at these rates, and such income is not taxed in the hands of the IC-DISC. When the IC-DISC distributes earnings to the shareholders, they represent dividend income, which may be taxable at qualified rates.

2) Tax Deferral (typically) - An IC-DISC is permitted to retain earnings attributable to the first $10,000,000 of gross receipts, deferring taxation to its shareholders.

3) NO Tax Deferral Available on Exports to Iran. Sec. 995(b)(1)(F)(ii).

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IC-DISC Benefits

DISC Requirements Treas. Reg. 1.992-1(a)

• Corporation incorporated within the United States • Single class of stock • Stock par value > $2,500 on each day of tax year • Elect to be treated as IC-DISC (F4876A) • Not in same controlled group as a foreign sales corp (FSC) • Maintain own books and records • 95% of receipts must be “qualified export receipts” • 95% of adjusted basis of assets must be “qualified export assets” at the

end of the tax year.

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DISC – Qualified Export Property Treas. Reg. 1.993-3(a) • Produced in U.S. Test: Manufactured, produced, grown or

extracted in the U.S. by a party other than a DISC • Destination Test: Held primarily for sale, lease or rental, in

the ordinary course of trade or business, by or to a DISC for direct use, consumption or disposition outside the U.S.

• FMV Test: Less than 50% of the fair market value of which

is attributable to articles imported into the U.S.

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DISC – Manufactured or Produced Treas. Reg. 1.993-3(c) • Substantial Transformation. If property “substantially

transformed”; Examples woodpulp to paper, steel rod to screws, canning of fish.

• Operations Generally Constitute Manufacturing: Activity

is “substantial in nature” and generally constitutes manufacturing.

• Value Add Test: property conversion costs (direct labor and

factory burden including packaging and assembly) accounts for 20% or more of the COGS.

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IC-DISC – Destination Test • Destination Test: property must be “sold or leased for

direct use, consumption or disposition outside the United States”.

• Direct delivery outside of the United States; or

• if property is delivered “[w]ithin the United States to a purchaser or

lessee, if such property is ultimately delivered, directly used, or directly consumed outside the United States (including delivery to a carrier or freight forwarder for delivery outside the United States) by the purchaser or lessee (or a subsequent purchaser or sublessee) within 1 year after

such sale or lease.”

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IC-DISC – Proof of Compliance Test • Proof of Compliance Test: appropriate documentation must be

maintained confirming delivery. Documentation may be in form of:

• A facsimile or carbon copy of the export bill of lading issued by the carrier who delivers the property,

• A certificate of an agent or representative of the carrier disclosing delivery of the

property outside the United States, • A facsimile or carbon copy of the certificate of lading for the property executed by a

customs officer of the country to which the property is delivered, • If such country has no customs administration, a written statement by the person to

whom delivery outside the United States was made, • A facsimile or carbon copy of the shipper's export declaration, a monthly shipper's

summary declaration filed with the Bureau of Customs, or a magnetic tape filed in lieu of the Shipper's Export Declaration, covering the property,

• Any other proof (including evidence as to the nature of the property or the nature of the

transaction) which establishes to the satisfaction of the Commissioner that the property was ultimately delivered, or directly sold, or directly consumed outside the United States within 1 year after the sale or lease.

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IC-DISC – Qualified Export Assets Treas. Reg. Sec. 1.993-2. • Export property (i.e., inventory) • Export property assets • Accounts receivable • Temporary investments of working capital • Producer’s loans • Stock or securities in a related foreign export corporation • Export-Import Bank and Foreign Credit Insurance

Association obligations • Export sales finance obligations • Temporary bank deposits in U.S.

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IC-DISC – Typical DISC Structure • U.S. Manufacturer (Partnership or S Corp) directly exports

product

Individual Owners

Foreign Customers

US MFG

$ for goods

Export goods

IC-DISC

Commission Dividend

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IC-DISC – Typical DISC Structure • U.S. Manufacturer (C Corp) directly exports product

77

Individual Owners

Foreign Customers

$ for goods

Export goods

IC-DISC Commission US MFG

Dividend

IC-DISC – Middle Man Structure • U.S. Manufacturer that indirectly exports goods


MFG

$ for goods

Export goods

Buy/Sell Distributor

$ for goods

Export goods

• Goods must be exported within 1 year of sale; • Need agreement of Distributor to meet the “proof of

compliance test”.

IC-DISC

Commission

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IC-DISC – Operating DISC Structure • Buy/Sell distributor involved in exports


MFG

$ for goods

Export goods

Buy/Sell Distributor

$ for goods

Export goods

• Distributor enters into buy/sell agreements with unrelated third parties;

• Use of 482 method; • Maximize DISC Benefit

DISC Company

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IC-DISC – Operating DISC Structure • Broker for export sales


MFG

$ for goods

Broker

$ Commission

Export goods

• Broker earns commission for export sales; • Use of 482 method; • Broker company can be DISC company, all export commissions

DISC eligible; • Need agreement of US MFG to meet proof of compliance test.

DISC Company

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IC-DISC – Exports to Iran • IC-DISC for Exports to Iran – Remember:

• No Deferral – Sec. 995(b)(1)(F)(ii).

• Must file Form 5713

• Certain Disclosures Required on the Form 1120-IC-DISC

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Contact Information

Mehrdad Ghassemieh • Harlowe & Falk LLP

• Phone: (253) 284-4424

• Email: [email protected]

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