2014 IADC International Tax Seminar: Repatriation Planning · 2014 IADC International Tax Seminar: Repatriation Planning . ... Triangular B Reorganization ... Upstream Merger –

2014 IADC International Tax Seminar:

Repatriation Planning

Pat Jackman – WNT International Tax

kpmg.com

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. NDPPS 206315

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Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.


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Agenda

Leveraged Distribution

Triangular B Reorganization

Split Acquisitions/U.S. Acquisition Alternatives

– Upstream Merger

– Split Acquisition/Hook Stock Sale

– F Reorganization and Note Distribution

Prepaid Royalties

Foreign Partnership Loan

Section 964(e) Sale: Split E&P


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Repatriation Overview

Utilizing offshore cash is a primary concern of U.S. multinationals.

In particular, most companies access offshore cash through:

– Nonacquisitive repatriations

– Acquisition funding

– Internal restructurings (including post-acquisition restructurings)

Leveraged Distribution


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Non-Acquisitive Repatriations: Leveraged Distribution Example

Background Facts & Assumptions CFC HoldCo has no current and accumulated

E&P. USP has high, uniform basis, in the shares of CFC

HoldCo. Transaction Steps 1)CFC HoldCo declares a $100m distribution and

satisfies its obligation by distributing a $100m promissory note.

Anticipated U.S. Tax Consequences Distribution is treated as going out pro rata on all

CFC HoldCo in the same class (note: different basis blocks).

Assuming uniform stock basis, the entire distribution should be a tax-free return of basis under § 301(c)(2).

CFC HoldCo could also borrow from related or unrelated parties, and then distribute the proceeds to USP.

CFC HoldCo

USP

CFC2

CFC1

E&P $0

AB > $100m

1) Distribution of $100m Note

Triangular B Reorganizations


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Internal Restructuring: Triangular B Reorganization Example

Background Facts & Assumptions CFC2 has no E&P (or only PTI E&P). USS has uniform stock basis in CFC2 equal to the

value of CFC1 (i.e., no basis blocks).

CFC1

CFC2

USP

USS


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Internal Restructuring: Triangular B Reorganization Example (continued)

Transaction Steps 1) CFC2 purchases USS stock for a note, equal to or less than

the value of CFC1 (the “Note”).

2) Prior to the end of the quarter in which Step 1 occurs, CFC2 exchanges its USS stock for the stock of CFC1 in a triangular B reorganization; USP files a GRA with respect to its outbound transfer of the stock of CFC1.

Anticipated U.S. Tax Consequences If the amount of the below-described deemed dividend under

the Reg. § 1.367(b)-10 fiction that would be subject to U.S. tax or included in income under section 951(a)(1)(A) exceeds USP’s § 367(a) gain with respect to its CFC1 stock (taking into account USP’s GRA), Reg. § 1.367(b)-10 applies.

Under Reg. § 1.367(b)-10, the triangular B reorganization should be treated as:

‒ A deemed distribution by CFC2 to USS in a § 301(c) distribution equal to the principal amount of the Note.

No income inclusion is expected under Reg. § 1.367(b)-4 (immediately after, CFC1 is a “CFC” with respect to which USS is a § 1248 shareholder).

If Reg. § 1.367(b)-10 does not apply, CFC2’s acquisition of USS stock should be tax free under §§ 1032 and 1001.

CFC1

USS

CFC2

1) Note 1) USS Stock

2) USS Stock

2) CFC1 Stock

CFC1

USP

Split Acquisitions/U.S. Acquisition Alternatives

Upstream Merger


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Beginning Structure

USP

TCFC

UST CFC

Seller Background Facts & Assumptions TCFC, on a standalone basis, is equal to or

less than 60% of UST’s total net fair market value (here, assume 60% for illustrative purposes). ‒ TCFC can be worth more than 60% of

UST’s total net fair market value, but CFC’s ownership of UST should not exceed 60%.

CFC has low-taxed E&P and excess cash. The slides assume that all of UST’s foreign

operations are conducted in one CFC (TCFC) and that TCFC has a value approximately equal to CFC’s future ownership interest in UST.

UST US Assets

USS


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Steps 1 and 2: UST Acquisition

Transaction Steps 1) USP contributes 40% of the UST acquisition

consideration to USS. 2) USS and CFC jointly acquire UST in a taxable stock

purchase, such that CFC’s ownership interest in UST is, to the extent feasible, equal to TCFC’s standalone value.

Anticipated U.S. Tax Consequences The acquisition of UST is intended to constitute a

qualified stock purchase under § 338. As noted earlier, CFC should not own more than

60% of the net fair market value of UST (i.e., USS must receive at least 40% of UST’s net assets in the upstream merger, which occurs in Step 4).

USP

CFC

UST

2) UST Acquisition

TCFC UST US Assets

Seller

60% 40%

USS

1) 40% UST Acquisition Consideration


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Step 3: Potential Positioning Steps

Transaction Steps 3) Depending on what assets UST will distribute to CFC in

Step 4, additional restructuring steps may be necessary to position assets in TCFC to be distributed to CFC. Ideally, the E&P in TCFC (including lower-tier subsidiaries) that is properly attributed to UST’s ownership under section 1248 should be equal to UST’s built-in-gain in the TCFC stock.

Anticipated U.S. Tax Consequences The associated U.S. tax consequences will depend

upon the specific transactions effected.

USP

CFC

UST

TCFC UST US Assets

60% 40%

USS


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Step 4: Upstream Merger of UST

Transaction Steps 4) UST merges with and into USP, distributing all of its assets,

except for the stock of TCFC, to USP. In the transaction, CFC receives the stock of TCFC and [x%] of USS stock in exchange for its interest in UST.

Anticipated U.S. Tax Consequences

USP has no gain or loss recognition and takes the UST US Assets received with a carryover tax basis.

Because CFC receives USP shares in addition to TCFC, CFC’s consequences are governed by § 356. Under current law, because CFC is expected to have FMV tax basis in the UST shares, CFC recognizes no gain or loss.

UST recognizes all gain in the shares of TCFC distributed to CFC.

‒ Gain is recharacterized as a deemed dividend under § 1248. U.S. taxable income on the gain/dividend could be offset by net operating loss carryovers and/or foreign tax credits (or other attributes) available in the UST return.

‒ TCFC’s E&P that is included in UST’s income is characterized as PTI, allowing for future use without further U.S. tax cost.

TCFC UST US Assets

USP

CFC

UST

60% 40%

4) TCFC and USS Stock

4) Merger

USS


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Final Structure

Summary Results USS owns all of UST’s historic domestic assets/operations.

Depending on the fair market value of UST’s historic foreign operations, these operations are now held directly by CFC and can be integrated with CFC’s direct and indirect historic businesses through post-transaction integration.

TCFC has a pool of PTI for potential future use.

See PLR 201045020 (Nov. 12, 2010).

Structure Limitations Additional current E&P in TCFC may be necessary to convert all

of UST’s gain recognized on the distribution of TCFC to CFC as a deemed dividend under § 1248. If E&P is less than the gain recognized by UST, the overall benefit is reduced.

Time limitation to implement the transaction, as CFC should not own stock in UST over a quarter end (due to § 956 implications).

Basis and E&P in TCFC may impact cash tax effective tax rate.

PTI that is generated cannot be distributed to USP unless USP has sufficient basis in CFC to reduce under § 961(b), potentially “trapping” the PTI. In this case, PTI may be loaned to USP.

Current cash tax cost.

USP

CFC

TCFC UST US Assets

USS

Split Acquisition/ Hook Stock Sale


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Beginning Structure

Background Facts & Assumptions UST conducts significant foreign operations in

TCFC. TCFC represents less than 50% of the value of

UST. CFC has low-taxed E&P and excess cash. Any subsidiaries owned by TCFC can, if

necessary, be converted to disregarded entities. For purposes of these slides, the “Asset” held by TCFC may include disregarded entities owned by TCFC.

The fair market value of the Asset is equal to CFC’s future ownership interest in UST.

CFC

USP

Asset

UST

Seller

TCFC


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CFC

USP Seller 1) X% Consideration

Asset

UST

TCFC

Transaction Steps 1) USP and CFC acquire UST from Seller in a

taxable transaction. Anticipated U.S. Tax Consequences Acquisition of UST is expected to be a qualified

stock purchase under § 338.

Step 1: UST Acquisition

Y%

1) Y% Consideration

X%


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CFC

USP

Asset TCFC

Transaction Steps 2) TCFC sells Asset to CFC in exchange for its UST stock.

Anticipated U.S. Tax Consequences Transfer is expected to be subject to § 304 and, thus, is

treated as if:

‒ CFC contributed its UST stock interest to TCFC in exchange for fictional TCFC stock, and

‒ TCFC redeemed such fictional stock with the Asset in a §§ 302(d)/301(c) transaction.

Consider application of subpart F rules to:

‒ TCFC’s recognition of the built-in gain attributable to Asset, and

‒ Deemed dividend received by CFC.

The limitations under § 304(b)(5) are not intended to apply.

If TCFC’s operations are conducted through a chain of subsidiaries, consider whether the liquidation and sale of such subsidiaries (e.g., CTB election) can be recast as a reorganization of such subsidiaries with and into CFC.

TCFC’s UST stock should not exceed 50% of UST’s stock.

Step 2: TCFC Asset Sale

UST 2) UST Stock

2) Asset

Y%

X%


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Final Structure

CFC

USP

Asset

UST

TCFC

Summary Results USP has financed its acquisition with offshore earnings in a

tax-efficient manner.

TCFC’s historical operations continue to be conducted with minimal disruption.

TCFC should continue to observe corporate formalities to avoid potential de facto liquidation concerns.

USP’s ability to access UST’s earnings is restricted, as dividends paid by UST will generate subpart F E&P at TCFC.

Structure Limitations Need to evaluate the amount of hook stock TCFC can own in

UST.

UST is not consolidated with USP. Additional transactions may need to be evaluated to allow the integration of UST’s domestic operations with USP.

Requires § 954(c)(6) (or the high-taxed exception) to apply such that the deemed dividend from TCFC to CFC is not currently taxable to USP.

Time limitation to implement the transaction, as CFC should not own stock in UST over a quarter end (due to § 956 implications).

Y%

X%

F Reorganization with Distribution


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Beginning Structure

Background Facts & Assumptions UST’s assets mainly consist of IP, including

goodwill and workforce-in-place, and no material “Inside Gain” (as defined by Reg. § 1.367(a)-7(f)(5)) in § 367(a) assets.

USP has high basis in UST. No significant E&P in UST.

USP

UST

Seller

USS

CFC


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Step 1: UST Acquisition

USP

UST

Seller Transaction Steps 1) USP acquires UST from Seller in a taxable

transaction. Note, UST can be an existing subsidiary

of USP as long as USP has high (uniform) basis in UST.

Anticipated U.S. Tax Consequences Acquisition of UST is expected to be a qualified

stock purchase under § 338.

1) Consideration

USS

CFC


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Steps 2 and 3: UST Migration and Note Distribution

Transaction Steps 2) UST migrates to a foreign jurisdiction (“CFC2”).

3) Sometime after Step 2 in a separate and independent transaction, CFC2 distributes a note to USP (“Note”).

Anticipated U.S. Tax Consequences Step 2 is expected to be an outbound F reorganization.

Step 3 is expected to be a separate distribution after, and not part of (or before), the F reorganization.

‒ Since CFC2’s note distribution is intended to occur after the F reorganization, it is not intended to be assumed in connection with the F reorganization.

‒ To the extent UST’s current and accumulated E&P is inherited by CFC2, a dividend received deduction should be applicable.

To the extent UST’s IP is subject to § 367(d), USP will be required to include into income annual deemed royalties from CFC2 over the useful life of such IP (i.e., the transfer is not anticipated to be subject to the prepayment provisions of Notice 2012-39).

Consider the application of § 367(a) to any non-§ 367(d) assets owned by UST.

Determine the proper amount of the Note under debt/equity principles (e.g., can the value of CFC2 resulting from Step 4, if implemented, be taken into account?).

2) Migration

3) Note USP

CFC2 USS

CFC


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Step 4: CFC D Reorganization

Transaction Steps 4) In a separate and independent transaction,

CFC may reorganize with and into CFC2 in a tax-free reorganization under § 368(a).

Anticipated U.S. Tax Consequences Step 4 is intended to be a tax-free D

reorganization of CFC.

4) Sub-All Assets

Note USP

CFC2 USS

CFC

4) CFC 2 Stock

4) CFC2 Stock


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Final Structure

Structure Limitations Ideal for transaction where UST has no material

§ 367(a) assets. Technical issue as to the treatment of goodwill,

going concern value, and workforce-in-place under § 367.

Need high (uniform) stock basis in UST. UST’s carryover E&P may result in some U.S.

tax if distributed by CFC2. Need to understand how IP will be utilized

offshore and associated issues. Notice 2012-39 due diligence.

USP

CFC2

Note USS

Prepaid Royalties


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Transaction Steps 1) F prepays royalties with respect to the foreign IP rights.

2) The amount prepaid should be based on terms that are comparable to third party agreements (transfer pricing).

Anticipated U.S. Tax Consequences Receipt of advance royalty should constitute ordinary income and taxable to

USP.

Advance royalties reduce the total amount of the expected royalty stream over the life of the license, but accelerates taxes otherwise payable in the future.

Advanced royalty should not constitute investment in U.S. property under § 956, but overall comfort level will depend on the underlying facts and circumstances.

Consider Rev. Proc. 2004-34

Allows taxpayers to either (i) recognize the receipt of the full advance payment amount in the year of receipt or (ii) include a portion of the advance payment in gross income for the taxable year of receipt, and the remaining amount of the advance payment in gross income for the next succeeding taxable year.

Certain disclosures may be required to be included in the financial statements to report the prepayment.

The advance payment must be made without recourse, i.e., there is no right of refund on the part of the payer or of additional royalty due to the payee, after the advance payment is made, as it could result in the advance payment being re-characterized as a deposit or loan.

One would expect that arm’s-length parties would negotiate the amount of the pre-payment taking into account, inter alia, the time value of money, i.e., advance payment equals the net present value of anticipated royalties over the indicated time.

Prepaid Royalties

Annual Payment of Royalties

License Foreign IP Rights

US

F



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Transaction Steps 1)US and US2 form PS, a partnership. US

contributes CFC in exchange for a 50% partnership interest. US2 contributes assets equal to the value of CFC to PS in exchange for a 50% partnership interest.

2)CFC will loan money to PS. Anticipated U.S. Tax Consequences Loan from CFC to PS should not constitute an

investment in U.S. property under section 956. Considerations:

‒ Need to consider the possible application of the partnership disguised sale provisions; and

‒ Need to evaluate other Subchapter K considerations, e.g., the inapplicability of the partnership anti-abuse rule, etc.

US

US2

CFC

PS

2) Loan

1) Formation & Contribution

Section 964(e) Sale: Splits E&P from Cash


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Section 964(e) Sale: Splits E&P From Cash

Transaction Steps

1) FSub transfers FSub 2 (cash and E&P-rich) to Holdco for NQPS, which is approximately equal to the E&P of FSub 2, and Holdco common stock.

2) FSub 2 may loan funds to USP in a subsequent tax year.

Anticipated U.S. Tax Consequences

Because the consideration is Holdco NQPS, the transaction should be treated as a partial section 1001 sale (not a transaction under sections 351 or 304) requiring the issuance of common stock issued as well.

Under section 964(e) any gain recognized is recharacterized under section 1248 principles. Deemed dividend could be exempt from subpart F income under section 954(c)(6).

If a section 956 investment occurs in same year of a section 954(c)(6) dividend, Notice 2007-9 may apply to turn off the application of section 954(c)(6).

E&P is moved into FSub while cash remains in FSub 2.

Other Considerations

In the event of a subpart F dividend (e.g., 954(c)(6) sunsets or is inapplicable) are multiple PTI pools created?

Is this alternative preferable to 304 transaction with a note? Considerations include: 1) the amount of dividend under 1248 is limited to amount of gain recognized; 2) generally only take into account target CFC E&P; and assuming all low basis stock, probably not a big difference versus a note; and 3) section 1248 amount includes E&P of subsidiaries (i.e., section 1248 tiers down).

USP

FSub

FSub 2 Holdco

FSub 2

1) Transfer of FSub 2 in exchange for NQPS

2) Loan


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Today’s Speaker

Patrick Jackman KPMG LLP Stamford Square 3001 Summer St. Stamford, CT 06905 Ph: (203) 406-8353 [email protected]

Patrick is an International Tax Partner in KPMG’s Washington National Tax Practice, based in New York, where he advises clients on cross-border transactions, both taxable and tax-free, including public and private reorganizations/mergers, spin-offs, and partnerships. In connection therewith, he assists clients in developing structures that provide for tax-efficient repatriation, foreign tax credit planning, acquisition financing and post-acquisition integration of acquired operations. Prior to joining KPMG, Pat was a partner with Weil, Gotshal and Manges LLP in New York, where he focused principally on international transactions for multinationals, including corporate acquisitions and mergers, internal restructurings, business formations and joint ventures. Prior to Weil Gotshal, Pat was Managing Director, Head of International Tax, for Merrill Lynch. There he focused on optimizing tax-efficiency of Merrill Lynch’s foreign and cross-border operations, investments and funding, with specific focus on strategic M&A support and optimization, business unit/product support and oversight. Pat co-authors a leading International M&A tax treatise, “U.S. Taxation of International Mergers, Acquisitions, and Joint Ventures” as well as having written articles for Journal of International Tax, International Tax Journal, and Tax Notes International.

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 206315

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Documents

2014 IADC International Tax Seminar: Repatriation Planning · 2014 IADC International Tax Seminar: Repatriation Planning . ... Triangular B Reorganization ... Upstream Merger –