Staying one step ahead seminar

Staying One Step Ahead

Proper Tax Planning and Compliance for Tax Audits

Miriam C. KonstamCorporate Tax Services Manager

July 22, 2009

Tax Planning

• Debt vs. equity • Delaware franchise taxes• Establishing US operations

– State tax implications– Incentives or grants available

Agenda

Tax Compliance

• Forms W-8 Series• Sales Tax Issues and Audits

Debt vs. Equity

• IRC § 385 governs this issue

• Debt appears to have flexibility

• Debt must accrue interest and comply with

withholding requirements

• Taxpayer is bound by his decision, IRS is not

Debtor-creditor or corporation-shareholder relationship?• Is there an unconditional promise on the part of the debtor to pay a sum certain

• Is there convertibility into the stock of the corporation

• Are the rights of the creditor subordinate to those of general creditors

• Does the agreement give the creditor the right to participate in the management

of the debtor

• Is the debtor thinly capitalized

• Is there identity between the creditor and shareholders of the debtor;

• Were the funds repaid on the due date

• Is there presence of a maturity date

• What is the label placed upon the instrument by the parties

• Does the debtor have the ability to obtain loans from outside

lenders

Our Perspective• Most transactions have the characteristics of equity

– Ensuring treatment of debt

– Compliance with above

– Tax due on payment of interest

– Portfolio interest exception

• Treatment upon exit

– Equity – Return of capital and capital gain.

– Loan – Payment of interest and withholding; return of principal.

– Conversion Feature – Tax due on period of loan treatment, including if payment is

in shares

• Distribution of portfolio company’s earnings

How likely is it that this scenario will occur?

Delaware Franchise Taxes

• Certificate of Good Standing

• Default – Authorized Shares Method

• $75 for each 10,000 shares

• 40,000,000 x 75 = $300,000

10,000

Alternate Method

$ 14,000.00 TAX DUE

365 $ 14,000.00 40,000,000

Prorated for Number of DaysGross Tax

APVC For Tax Basis

40,000,000 1.000000 40,000,000

Assumed Par Value CapitalAssumed ParShares Authorized

1 20,000,000 $ 20,000,000 12/31/2008

Assumed ParTotal Shares IssuedGross Assets

The P. Stein Way

$ 7,000.00 TAX DUE

365 $ 7,000.00 20,000,000

Prorated for Number of DaysGross Tax

APVC For Tax Basis

20,000,000 0.500000 40,000,000

Assumed Par Value CapitalAssumed ParShares Authorized

0.5 40,000,000 $ 20,000,000 12/31/2008

Assumed ParTotal Shares IssuedGross Assets

Establishing US Operations

State Tax Implications

• 50 states

• Physical Presence

• Economic Presence

• Migration to Gross Receipts Taxes

• On the Upside – Grants & Incentives

Sales Tax Issues and Audits

• Is sale subject to sales tax?

- Transaction subject to tax

- End user – resale certificate

• Is there nexus in that state?

• Use tax

• 8,800 jurisdictions

• Audits – testing periods plus interest

Forms W-8

• IRS Tier I Issue – Closing the $100 billion tax gap

• Default Presumption Rules

• Substitute Form W-8

• Spreadsheet Equivalents