Transcript Slide 1

Increase Shareholder Value:
International Tax Planning
And Structuring
For Clean Tech Companies
Tom Phalen, Former VP Tax at First Solar
Sang Kim, International Tax Partner at DLA Piper
Mark Radcliffe, Corporate and IP Partner at DLA Piper
“This material is provided for informational purposes only,
and the content should not be construed as legal advice on any matter.”
Tax Analytical Framework
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In the US
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Transfer pricing - including valuation and compensation for IP
and know-how
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Deferral from US taxation
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Direct US taxation
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Repatriation
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Note: Also need to consider impact of Obama/Treasury
international tax reform proposals
Outside the US
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Transfer pricing
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Management and control
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Permanent establishment
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Tax rulings/incentives
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US – Transfer Pricing
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Focus on IP – Typical Models
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US owns IP and licenses to foreign affiliate(s) for royalties
US and non-US affiliate jointly fund (and bear risk) of development (i.e.,
R&D cost-sharing arrangement)
IP Definition – What is “IP”?
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IRS wants to define broadly to include goodwill, going concern and
workforce in place
Current “IP” includes patents, copyrights, trademarks, trade secrets, knowhow, among others
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IP Valuation - Methodologies
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IRS prefers methods that allocate most income to early R&D performed
solely by US company (regardless of the actual facts!)
Issued new R&D cost-sharing regulations in January 2009 to eliminate
methodology preferred by taxpayers, namely “residual profits split method”
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The new regulations did provide grandfathering for pre-existing cost-sharing
arrangements, subject to certain conditions
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US – Deferral from US Taxation
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Subpart F – Anti-Deferral Regime
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Applicable rule within Subpart F regime depends on type of income
generated offshore – most common are:
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Sales
Royalties
Services
Many companies have multiple types of revenues (e.g., sale of tangible
products as well as services)
Product sales – Deferral possible if a foreign affiliate is a manufacturer
(subject to additional testing and income allocation to such
manufacturing affiliate)
Services – Deferral possible if theUS parent is not overly involved in
delivery or performance of the services
Royalties – Deferral possible if there is active R&D or active marketing
by the foreign affiliate outside the US
Note: Interest income on low-taxed earnings is generally not eligible for
deferral unless the amount is de minimis
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US – Direct US Taxation
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Effectively Connected Income (ECI) of Foreign Affiliate
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Derives from US sourcing rules
Effective US tax for ECI may be almost 55% (US corporate tax + branch
profits tax)
Generally “all or nothing” rule – a blunt instrument
US-sourced income of foreign affiliate will generally be subject to US tax
(foreign affiliate must file a US tax return)
Foreign-sourced income of foreign affiliate may be ECI (and taxable in
the US), but there are exceptions
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Sale of tangible products – not ECI if foreign affiliate materially participates in
the solicitation, negotiation and other relevant activities leading up to a PO
from a customer
Royalties – not ECI if US parent is not a material factor in securing the PO
from a customer
Services – not ECI if services are performed outside the US
Tax Treaty Override
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Bilateral tax treaties may mitigate ECI risk as tax treaties may limit
amount of income allocable to US assistance or involvement in sales
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US – Repatriation
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Generally - Dividend to US Parent
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Taxable income to the US parent at normal rate of 35%
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US Receivables
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Repayment of payables of foreign affiliate to US parent is not income in
the US
Bona fide indebtedness – intercompany debt must meet the criteria as
legitimate debt instrument
May be created as consideration for (1) access to IP owned by US
parent; (2) acquisition of other foreign affiliates as part of creating a
holding company structure; (3) post-acquisition integration
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Section 965 one time “special” dividend in 2004/2005 was an exception
1032 Equity Compensation
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Equity compensation of foreign employees in the form of shares or
options of US parent
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Vested restricted stock, ESPP and option exercises
RSUs not eligible
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US – Key Obama/Treasury Proposals
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Tighten “check the box” rules for entity classification
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Planning and structuring could become more challenging/rigid
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Will be difficult to use tax havens such as Cayman, Bermuda
Defer US deduction to the extent income deferred from US taxation
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May have minimal impact for high-operating-margin tech-driven
companies
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For others, may significantly impair benefits of income deferral outside
the US
Expansive definition of IP
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Codify the definition to include goodwill, going concern and workforce in
place
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Would provide IRS further ammo and will make it more tax expensive
for companies to do planning involving IP
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May be used by foreign-based companies to further erode tax base in
the US (thus making the US-based companies even less competitive)
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Outside the US – Transfer Pricing
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Most countries around the world have some form of transfer pricing
and/or arm’s length standard
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Transfer pricing seen as tool of choice to defend tax base
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Level of sophistication increasing as well as enforcement (e.g., HK)
Recent OECD Business Restructuring draft a example of the trend to
impute additional business value, resulting in potential exit tax if certain
functions move or business model changes in a given jurisdiction
Bilateral transfer pricing disputes are getting more difficult to
resolve through competent authority mechanisms provided in tax
treaties
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Consider Advanced Pricing Agreements to address transfer pricing
issues up front
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Consider jurisdictions that are more flexible with transfer pricing (e.g.,
Ireland, Netherlands)
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Outside the US – Management/Control & PE
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Residency-based taxation
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While corporate domicile tends to be the default rule, residency
is critical to which jurisdiction has the upper hand to tax an entity
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For example, a German company with management in Belgium may
be taxable in Belgium (potentially lower tax) and not Germany
(potentially higher tax)
Permanent Establishment (PE)
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Where one entity in a given country X has a taxable presence or
PE in another country Y, country Y may argue that some of the
income of the entity should be taxable in Y
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PE may be created by (1) direct presence in Y through
employees or office; or (2) engaging an agent in Y that is given
the authority to conclude contracts on behalf of the principal in X
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Key is to minimize PE risk in a third country for a foreign affiliate
in low tax jurisdiction with significant income or income potential
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Outside the US – Tax Rulings/Incentives
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Various jurisdictions provide favorable tax treatment with
certainty for a defined period of time, as long as various
substantive milestones are met
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Tax rates can be as low as zero for 10 to 15 years
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Some key jurisdictions include:
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Switzerland
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Singapore
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Malaysia
China and India also provide tax incentives, but, due to
difficulties in accessing earnings, they are not typically
considered as a primary jurisdiction for deferral planning
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Case Study: Evolution of a Solar
Company
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Formation Stage – Overview
1. Capital intensive
2. R&D
3. R&D test manufacturing facility
4. Establish replication team
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Formation Stage – Overview
 Funding – support:
 Equipment purchases
 R&D
 Working capital
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Formation Stage - R&D
 Manufacturing R&D – small projects, incremental steps to
improve product efficiency and yields
 NREL funding important
 R&D tax credit – Document projects, costs and NREL funding
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Formation Stage R&D Test Manufacturing Facility
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Choose your location wisely because many states grant:
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Sales and use tax exemptions on manufacturing equipment
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R&D tax credits
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Property tax exemptions
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Training grants
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Loans
Base for domestic expansion
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Formation Stage –
Establish Test Manufacturing Facility
 Document all processes such as manufacturing, procurement,
testing, quality control, audit, cleaning, plant layout, square
footage.
 Establish a site selection manual that covers all disciplines
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The Leap Overseas – Overview
1. Document IP
2. Determine whether to sell IP (with cost-sharing arrangement)
or license IP
3. Manufacturing locations outside the US
4. Business model
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The Leap Overseas - Document IP
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Obtain a robust valuation of existing IP (product and
manufacturing)
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Has company paid royalties?
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Purchased IP?
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Know if unrelated entities license IP?
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The Leap Overseas –
Sell or License IP
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Determine whether to sell IP (with cost-sharing arrangement)
or license IP – consider:
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High-tax-rate foreign country v. low-tax-rate foreign country
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Foreign withholding tax
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US foreign tax credit position
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The Leap Overseas –
Foreign Manufacturing Locations
 East Germany
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Close to EU markets
Good workforce – engineers, logistics, accounting, etc.
Low interest loans, no incentives, tax rate approximately 25%
Good treaty structure
Debt-to-equity limitations
Form a distribution subsidiary and file consolidated German tax return
Check the Box via Switzerland or Netherlands
 Far East (Malaysia and Singapore)
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Tax holidays - 10 to 15 years
Training grants and R&D reimbursement with limits
Withholding tax on royalties, service fees, etc.
Supply chain longer and costlier
Check the Box via Netherlands or Singapore for Malaysia
 Mexico
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No tax holiday and alternative minimum tax
Cash grants, facilities, training grants, etc.
Close to US market
Withholding tax on dividends, royalties, etc.
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The Leap Overseas - Business Model
 Provider of solar panels through long term supply agreements
 Provider of solar energy through partnerships utilizing energy
credits and bonus depreciation
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