Transcript Slide 1
U.S. INBOUND INVESTMENT
February 2015
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 law
provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
ABOUT BDO
100-Year history in the United States
BDO USA, LLP
Statistics
(Financial highlights are as of and for the year ended 6-30-14;
location statistics as of 1-1-15.)
Revenues:
$833 million
Business Line Breakdown:
Accounting & Auditing
Tax
Consulting, Corp. Fin., Other
58%
32%
10%
Total Partners:
346
Culture built around a hands-on accessible service team with
significant partner and manager involvement
BDO performs audits and/or EBP audits for 10 Fortune 1000
clients
BDO Organization Structure
Streamlined, accessible organizational structure
Direct access to national technical resources
Excellent staff-to-partner ratio
Total Professional Personnel:
2,968
Foundation of core values
Total Personnel:
4,041
Number of Offices:
58 BDO USA offices
More than 400 independent Alliance firm locations
nationwide.
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.
Source: BDO USA, LLP
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Honesty & Integrity, Competence, Dedication,
Professionalism, Responsibility & Accountability
Member firm of BDO International Limited
Fifth largest accounting & consulting
network in the world
U.S. LOCATIONS
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BDO INTERNATIONAL LIMITED
Fifth largest assurance and tax
consulting network in the world
BDO GLOBAL NETWORK
Worldwide Statistics
(as of and for the year ended September 30, 2014)
Revenues:
$7.02 billion
Business Line Breakdown:
Accounting & Auditing
Tax
Advisory (Consulting, Corp. Fin., Other)
57.5%
20.6%
21.9%
Total Partners:
5,037
Total Professional Personnel:
45,940
Total Personnel:
59,428
Number of Offices:
1,328 in 152 countries
Service provision within the international BDO network of independent
member firms (‘the BDO network’) is coordinated by Brussels Worldwide
Services BVBA, a limited liability company incorporated in Belgium with
its statutory seat in Brussels.
Each of BDO International Limited (the governing entity of the BDO
network), Brussels Worldwide Services BVBA and the member firms is a
separate legal entity and has no liability for another such entity’s acts or
omissions. Nothing in the arrangements or rules of the BDO network
shall constitute or imply an agency relationship or a partnership
between BDO International Limited, Brussels Worldwide Services BVBA
and/or the member firms of the BDO network.
BDO is the brand name for the BDO network and for each of the BDO
member firms.
Source: Brussels Worldwide Services BVBA
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Seamless, cohesive global network
Over 25,000 clients in the U.S. alone
1,328 BDO offices located in 152
countries
Advancing compliance with national
regulations and legal requirements in
proximity to our clients and in the
local language
BDO WORLDWIDE LOCATIONS
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U.S. TRADE OR BUSINESS
A nonresident alien individual or foreign corporation generally pays U.S. income
tax at the regular U.S. rates on the income (including certain foreign-source
income) that is effectively connected with a U.S. trade or business.
Threshold for what constitutes a U.S. trade or business is low.
No statutory definition; reliance on case law and IRS rulings.
Determination of what income is effectively connected with the conduct of a
U.S. trade or business.
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PERMANENT ESTABLISHMENT
Most income tax treaties exempt the business profits of a resident of a treaty
country from U.S. tax unless those profits are attributable to a taxpayer's U.S.
“permanent establishment” (“PE”).
These treaties allow foreign persons to conduct limited commercial activities in
the U.S. without being subject to U.S. tax (PE threshold higher than “U.S.
Trade or Business”).
In general, a PE is a “fixed place of business” through which the business of an
enterprise is carried on in whole or in part.
Activities of a dependent agent may also create a PE.
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EFFECTIVELY CONNECTED INCOME (“ECI”)
Nonresident alien individuals and foreign corporations are taxed on a net basis
ECI less allowable deductions allocable to that income.
This net business income is subject to income tax at regular rates.
Income or gains from foreign sources will not be treated as effectively
connected with U.S trade or business unless the nonresident alien or foreign
corporation maintains a U.S. office/other fixed place of business in the U.S. In
which case, following foreign sourced income can be treated as effectively
connected with U.S. trade or business.
- Rents and royalties derived from use of intangible property;
- Income from sale of inventory or personal property held for sale in normal
course of business through U.S. office.
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BRANCH PROFIT TAX
30% tax on a foreign corporation’s “dividend equivalent amount”.
Essentially, profits that are not reinvested (deemed repatriated) are subject to
branch profits tax.
BPT may be reduced under a tax treaty (typically to the same rate as dividend
withholding tax).
No BPT when branch is terminated.
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BRANCH OR SUBSIDIARY
Both are essentially subject to the same tax rates: up to 35% Federal corporate
income tax plus State income tax plus dividend withholding tax (or branch
profits tax) upon repatriation.
A branch will require the foreign owner(s) to file US tax returns.
Allocation between US and worldwide income and expenses adds to the
complexity of a branch return (especially at the State and local tax level).
Corporate form provides for income deferral in home country.
“Check-the-box” elections and hybrid entities.
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LIMITED LIABILITY COMPANY (LLC)
Transparent for US tax purposes unless an election is made to treat the LLC as
a corporation.
Characterization may be difficult in the shareholder’s jurisdiction.
Check-the-box regime allows for substantial flexibility and sometimes planning
opportunities.
Single-member LLC is disregarded for US tax purposes.
Transactions between single-member LLC and its owner are therefore also
disregarded for US tax purposes.
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BASIC STRUCTURING ALTERNATIVES
T1
T2
TR Co
US Sub
US Sub files US tax
return
Dividend withholding tax
No exposure for TR Co,
T1 and T2
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T1
T2
TR Co
US LLC
TR Co files US branch
return
Branch profits tax
No exposure for T1 and
T2
T1
T2
TR LP
US LLC
T1 and T2 file individual
US tax returns
TR LP files US
partnership tax return
No dividend withholding
tax or BPT
Individual income tax
rates
CONSOLIDATED RETURNS
T1
T2
TR Co
US Sub
US Sub
T1
T2
T1
TR Co
T2
TR Co
US Hold Co
US
LLC
US Sub
NO
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US
LLC
US Sub
YES
YES
NON-BUSINESS INCOME/WITHHOLDING
Generally, there is a 30% U.S. withholding tax from certain types of (nonbusiness) income from U.S. sources paid to foreign persons.
This applies to payments of fixed or determinable annual or periodical
(“FDAP”) income from U.S. sources.
FDAP income generally includes interest, dividends, rents, royalties and any
other annual or periodical gain, profit or income.
Income tax treaties between the U.S. and foreign countries may reduce or
eliminate withholding tax on various types of FDAP income.
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WITHHOLDING CERTIFICATES
Determination by a U.S. withholding agent of the status of a payee (e.g.,
beneficial ownership, entitlement to reduced tax rates under a treaty) is made
on the basis of a withholding certificate.
Withholding certificate required from beneficial owner prior to payments being
made.
In absence of being provided with withholding certification, U.S. withholding
agent must withhold at 30% (or, in some instances, assume that the payee is a
U.S. person and apply “backup withholding”).
No requirement to submit the withholding certificates to the IRS.
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WITHHOLDING CERTIFICATES
Form W-8BEN – for nonresident aliens and foreign corporations receiving FDAP
income;
Form W-8BEN-E – for foreign entities receiving FDAP income as beneficial
owners;
Form W8-ECI – for persons claiming that income received is effectively
connected with U.S. business;
Form W8-EXP – foreign governments, central banks of issue, international
organizations, foreign private foundations claiming tax exempt status;
Form W-8IMY- applies to payments made to intermediaries (e.g., partnerships,
qualified intermediaries);
Form W-9 – for U.S. citizens and residents;
Form 8288-B- applies to transfers of U.S. real property interest; and
Form 8233 – certain compensation for personal services.
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TIPS FOR THE PRACTITIONER
Compliance with withholding tax rules is a tier 1 exam issue.
Completion of W-8 Forms has become more complex due to the Foreign
Account Tax Compliance Act (FATCA)
Withholding agent (e.g. US subsidiary) is liable for withholding tax.
If US Co makes a payment to its foreign parent: always check parent’s
eligibility for treaty benefits under the treaty’s “limitation on benefits” (LOB)
clause
Dividends can be fully exempt under some newer treaties (again: a complex
LOB analysis may be necessary).
Make sure you understand a foreign entity’s classification for U.S. tax purposes.
Form W-8BEN and W-8BEN-E must generally include foreign person’s US
taxpayer ID if treaty benefits are claimed (exception: dividends or interest
from publicly traded US companies)
Don’t automatically rely on foreign person’s claim not to be engaged in a U.S.
trade or business; better file a protective return (best practice)
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TREATY BASED RETURN POSITIONS
A taxpayer who, with respect to any tax imposed, takes the position that a
treaty of the U.S. overrules (or otherwise modifies U.S. tax law) is generally
required to disclose such position on a U.S. tax return.
If no tax return filing is otherwise required, disclosure is made by filing a
return. Return need only include required disclosure, taxpayers name, address,
and taxpayer identification number.
The required disclosure is made on Form 8833, attached to the return.
Exceptions from the Form 8833 reporting requirement include certain amounts
that are reported on Form 1042-S (e.g. dividends) and that do not total more
than $500,000 for the tax year.
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FOREIGN INVESTMENT IN U.S. REAL PROPERTY TAX
ACT (“FIRPTA”) RULES
Foreign persons are not generally subject to U.S. tax on gains from dispositions
of capital assets.
However, under the FIRPTA rules, a nonresident alien individual or foreign
corporation disposing of a U.S. real property interest (“USRPI”), will be taxed
on the net gains from such a disposition as if such gains or losses were
effectively connected with the conduct of the U.S. business.
Special withholding regime under FIRPTA:
- 10% of amount realized; or
- 35% of gain.
Complex interplay with corporate reorganization rules.
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US REAL PROPERTY INTEREST (USRPI)
USRPI includes:
Any interest in real property located in the U.S. or the U.S. Virgin Islands; and
Any interest (other than solely creditor) in a domestic corporation that is a U.S.
real property holding company (USRPHC) at any time during the 5 year period
ending on date of disposition of the interest.
For this purpose, a corporation is considered to own a proportionate share of
assets held through a partnership, trust or estate, as well as a domestic or
foreign corporation in which it holds a controlling interest.
Generally, a corporation is a USRPHC if the FMV of its USRPI is at least 50% of
the FMV of all its real property interests and any other property used in its
business.
Taxpayer must prove that corporation is NOT a USRPHC.
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FIRPTA WITHHOLDING
The nonresident individual or foreign corporation will be subject to U.S. income
tax at the regular rates on the net gains derived from the disposition of U.S.
real property interests.
The transferee is generally required to withhold 10 % of the amount realized
when a foreign person disposes of a U.S. real property interest.
Sellers can obtain a certificate from the IRS to certify the actual U.S. tax
liability due on the disposition of the U.S. real estate, in which case, the
transferee should withhold the actual tax liability due from the amount
realized upon disposition.
Certification can be obtained by filing a Form 8288-B (Application for
Withholding Certificate for Dispositions by Foreign Persons of U.S. Real
Property Interests).
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SALT ISSUES IMPACTING FOREIGN ENTITIES
Impact of US Tax Treaty is Complex
- Even if the company does not have PE under the Treaty it still needs to
evaluate if it is “doing business” within the states.
- P.L. 86-272 only applies to “interstate” commerce so the immunities
available within this law are not available to foreign organized entities
- Some states have extended the immunities to foreign organized
entities but a state is not obligated to provide these same
immunities to foreign entities
- The taxable income starting point can be difficult to determine because
a treaty protected foreign entity definitionally has zero FTI
- Need to be careful because some states (e.g., NY and NJ) have
worldwide income modifications in spite of the fact that the
“starting” point is FTI
Critical to consider state elections
- Foreign entities must consider making “waters edge” elections in states
(e.g., California) that require worldwide combined reporting because
the failure to make these elections may require the foreign entity to
file on a combined basis with all of its foreign affiliates.
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SALT ISSUES IMPACTING FOREIGN ENTITIES (CONT.)
Taxes that are based on something other than net income create the most
significant exposures for foreign entities
- Sales/Use Taxes
- If the foreign entity has any employees or independent contractors
visit a state then it will be required to collect sales/use tax on
transactions that are classified as being taxable transactions.
- It is critical to remember that sales/use taxes are the customer’s tax
but the vendor is put into a position to administer/collect the taxes.
If the vendor (i.e., foreign entity) fails to collect the tax then the
vendor is held responsible for the taxes.
- Non-Income based taxes
- The type of non-income based tax that may produce the largest
exposure for foreign entities are state taxes based on gross receipts
(e.g., Washington B&O, Ohio Commercial Activity Tax)
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MICHAEL R. WHITACRE
Atlanta Office
PARTNER- TAX SERVICES
EXPERIENCE
Mike has more than 25 years of experience in auditing and taxation in public accounting
with BDO. Mike has worked proactively with a variety of businesses including clients in the
technology, service and distribution sectors. He has assisted clients with federal, state
and international tax issues including mergers and acquisitions, controversy and tax
minimization.
Phone: 404-979-7116
Email: [email protected]
Mike’s areas of specialization include: corporate taxation, mergers and acquisitions, and
taxation of pass-through entities.
PROFESSIONAL AFFILIATIONS
American Institute of Certified Public Accountants
connex (America Israel Business Connector) Board of Directors
Business Forums International
Financial Executives Institute (FEI)
Georgia Society of Certified Public Accountants
EDUCATION
B.S., Accounting, Indiana University – Kelley School of Business
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