Transcript US Tax Planning for Cross Border Financing

US TAX PLANNING FOR
CROSS BORDER
FINANCING
Chicago Tax Club
February 27, 2012
US Tax Planning For Cross Border Financing
• Presenters
• William Henson
• [email protected]
• Randall Janiczek
• [email protected]
• Moderator
• Wes Cornwell
• [email protected]
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New IRS Approach to International Issues
• Current “Tiered” Approach
• Tier 1
• High Strategic Importance
• Tier 2
• Significant Compliance Risk
• Tier 3
• Industry Risk
• New “Issue Practice Group” Approach
• Subject Matter Experts
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International Business Compliance (Inbound)
International Business Compliance (Outbound)
International Individual Compliance (Inbound)
International Individual Compliance (Outbound)
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New IRS Approach to International Issues
• International Business Compliance (Inbound)
• Inbound Shifting
• Transfer Pricing
• Inbound Financing
• Intercompany loans
• Interest Expense
• Repatriation/Withholding
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New IRS Approach to International Issues
• International Business Compliance (Outbound)
• Outbound Shifting
• Transfer Pricing
• Deferral Planning
• CFC’s
• PFIC’s
• Foreign Tax Credits
• Sourcing
• Expense Allocation
• Repatriation
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New IRS Approach to International Issues
• More specialists assigned to international issues
• Extended timeline to conclude examinations
• Use of taxpayer resources
• Importance of contemporaneous documentation
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Common Cross Border Finance Issues
• Debt v. Equity classification
• “Outbound” Issues
• Anti – Deferral Rules under IRC Section 956
• Outer limits of loan covenants
• Exceptions
• Cash pooling arrangements
• US residency certification for “flow through” entities
• “Inbound” Issues
• Interest Deductibility
• Withholding tax compliance
• Informal disclosure process
• Treaty issues
• LOB provisions
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Cross Border Financing – Debt vs. Equity
• Historical IRS Approach
• Confirm requirements of 163(j), 267, and 482 have been met
• Current IRS Approach
• Confirm status as “indebtedness”
• Standard “Debt vs. Equity” IDR
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Cross Border Financing – Debt vs. Equity
• Debt vs. Equity Determination – IRC §385
• FSA 200205031
• Case Law – Multiple Factors
• Written agreement
• Identity of interest
• Fixed maturity date
• Ability to obtain
• Source of interest
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payments
Enforcement rights
Participation in
management
Subordination
Capital structure
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outside credit
Use of advanced
funds
Failure to repay
Intent of parties
Convertibility
Business purpose
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Cross Border Financing – Debt vs. Equity
• Debt vs. Equity Determination – IRC §385
• Written agreement
• Name given to instrument and presence of a written agreement
• Fixed maturity date
• Absence of fixed date problematic
• Source of interest payments
• Reasonable anticipation of cash flow supports debt characterization
• Enforcement rights
• Often meaningless in controlled context
• Increased participation in management
• Voting power increase problematic
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Cross Border Financing – Debt vs. Equity
• Debt vs. Equity Determination – IRC §385
• Subordination
• Inferior status may indicate equity
• Capital structure
• 4 to 1 debt to equity has been tolerated by courts
• Identity of interest between creditor and stockholder
• Proportional advances by stock owners may indicate equity
• Ability to obtain outside credit
• Should be documented to support debt classification
• Use of funds
• Capital acquisitions may indicate equity
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Cross Border Financing – Debt vs. Equity
• Debt vs. Equity Determination – IRC §385
• Failure to repay
• Intent of parties
• Difficult to determine
• Convertibility
• Convertibility feature may indicate equity intent
• Business purpose
• Excessive debt to equity ratios may be supportable
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Cross Border Financing – Debt vs. Equity
• Best Practices
• Document §385 factors contemporaneously
• At a minimum, have a loan document
• Follow the terms of the loan
• Potential Problems
• Potential for IRS whipsaw
• Application of “Danielson rule”
• Corresponding relief for examination adjustment
• Competent authority process is slow and expensive
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Cross Border Financing – §956
• §956 Basics
• US Shareholder required to currently include in income CFC’s
basis in investment in US property
• Tangible property in US
• Stock of US corporation
• Obligations of US person
• Rights to use intangible asset in US
• Obligations of US person
• Loan from CFC to US person
• CFC guarantee of US debt
• Pledge of CFC assets as collateral on US debt
• Pledge in excess of 66 2/3% of CFC stock as collateral on US debt
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Cross Border Financing – §956
• Increase Security Demands from Banks
• Potential requirement to pledge CFC stock
• Multiple subsidiaries increase income inclusion
• Novel loan covenants
• Ability to compel dividend payments from CFC may trigger full §956
inclusion
• Requirement to perform Foreign Tax Credit projection analysis to
show potential §956 inclusion would be harmful
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Cross Border Financing – §956
• Short Term Obligation Exception
• 30/60 rule
• Collected within 30 days
• Outstanding no more than 60 days in tax year
• 60/180 rule
• Expired
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Cross Border Financing – §956
• Cash Pooling Arrangments
• “Actual” cash pooling
• Legal entity sweeps cash and issues loans
• Potential Issues
• Subpart F
• Look-through rules
• Active financing
• §956 if US is involved in cash pool
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Cross Border Financing – §956
• Cash Pooling Arrangments
• “Virtual” cash pooling
• Local branches of global bank
• Overdrafts secured by excess deposits in other jurisdictions
• Potential issues
• § 956 issues if CFC secures US overdraft
• Transfer pricing
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Cross Border Financing – Inbound
• Interest Deductibility – The Usual Suspects
• IRC § 267
• Interest paid to related party deductible when paid
• IRC § 163(j)
• Thin-capitalization limitations
• Consolidation rules
• IRC § 482
• Interest rate must be arm’s length
• AFR / commercial rate disparity
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Cross Border Financing – Inbound
• Withholding Tax IRS Enforcement
• Compliance
• 1042
• W-8BEN
• 1120-F
• Withholding will be examined
• IDR routinely issued on inbound exams
• Informal “Voluntary Disclosure” available
• Policy identifying when withholding/reporting required will be
requested
• Sourcing rules
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Cross Border Financing – Inbound
• Potential “Traps”
• Payments to flow-through entities
• Look-through to beneficial owner
• Form W-8IMY
• Tax Treaties - Limitation on Benefits
• Prevent treaty shopping
• Ownership/substance requirements
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Limitation on Benefits - Overview
• In general, eligible persons to treaty benefits include:
• Individuals who are residents of contracting state,
• Publicly Traded Companies of contracting state,
• Private Companies meeting certain tests.
• Limitation on Benefits typically contains a(n)
• Publicly traded test,
• Ownership and base erosion test,
• Active trade or business test,
• Derivatives benefits test, and
• Competent authority procedures
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Cross Border Financing – Proposals
• 163(j) Restrictions
• Eliminate debt/equity safe harbor
• Reduce 50% adjusted taxable income threshold to 25%
• Carry-forward limited to 10 years
• Eliminate carry-forward of excess limitation
• Interest Deduction Disallowance
• Interest allocated to stock of foreign corporation
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