21st Annual Health Sciences Tax Conference€¦ · · 2015-07-2921st Annual Health Sciences Tax Conference The global hospital: avoiding risk with international operations ... provision

21st Annual Health Sciences Tax Conference The global hospital: avoiding risk with international operations 5 December 2011

The global hospital: avoiding risk with international operations Page 2

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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Disclaimer

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► Views expressed in this presentation are not necessarily those of Ernst & Young LLP.

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Presenters

► Robert F. Waitkus Senior Director – Taxation and Compliance The Cleveland Clinic Foundation Cleveland, Ohio

► Gary Horowitz Ernst & Young LLP 99 Wood Avenue South Iselin, New Jersey 08830 +1 732 516 4328 [email protected]

► Terence M. Kennedy Ernst & Young LLP 925 Euclid Avenue, Suite 1300

Cleveland, Ohio 44115 +1 216 583 1504 [email protected]


Basics of international taxation


► There are differences between worldwide taxation and territorial taxation.

► The United States taxes all income of US corporations.

► Most countries tax income earned within their borders.

► International transactions create complexity. ► There are multiple levels of tax.

► Each country may treat the transaction differently.

► Tax treaties that override local law may apply.

Basics of international taxation For-profit issues


► Double taxation of outbound transactions can occur. ► The United States cedes the right to tax to the foreign country. ► The IRC permits a general deferral of tax until repatriation. ► A tax credit is allowed against US income tax imposed on foreign

earnings.

► Foreign tax credit rules are complex. ► Total relief from double taxation is not guaranteed.

► Other considerations ► Exceptions to deferral rules – Subpart F, foreign personal holding

company (FPHC), passive foreign investment company (PFIC), IRC Sec. 926, etc.

Basics of international taxation For-profit issues (cont.)


► Exempt organization rules add additional complexity and planning challenges.

► Classification of revenue streams as exempt function, non-exempt function or “excludable” as royalty, interest, dividend, etc.

► Placement of activities may be critical.

► Non-exempt services are taxable, whether performed by tax-exempt organization or for-profit subsidiary.

► Exempt status may result in applicability of different treaty rules.

► Public disclosure matters

Basics of international taxation Exempt organization issues


Programs, operations and facilities outside the United States


► Increasing frequency of US hospitals going abroad ► Developing overseas facilities ► Conducting research abroad ► Entering into joint ventures ► Developing intellectual property (IP) ► Grant making ► Providing health care services ► Entering into management agreements ► Entering into consulting agreements



Programs, operations and facilities outside the United States (cont.)

► The form of conducting the activities matters. ► Tax implications

► Fiscally transparent entity vs. taxable entity

► Availability of tax-exempt status in foreign country

► Availability of treaty benefits

► Other issues ► Foreign reporting and registration requirements

► Foreign labor and employment laws

► Local country reputational risk



► Tax implications of foreign business activities ► Branch operations (i.e., unincorporated or no joint

venture) ► Revenue Ruling 71-460: The activities of an exempt

organization that are conducted in a foreign country are deemed exempt activities to the same extent they would constitute exempt activities if conducted in the United States.

► Would be viewed as having an agent in the country

► Is it permissible under their law?



► Joint venture and contractual arrangements ► Likely to be treated as pass-through entity under local

law, but US treatment depends on default classification under Treas. Reg. 301.7701-3 ► Many entities default to “association” status (i.e., corporate) ► Timely “check the box” election (Form 8832) ► Limited relief for late election (Rev. Proc. 2009-41)

► Not clear if treaty benefits would apply – Section 894(c)

► May still require local country registration and management



► Incorporation or formation of tax-exempt subsidiary ► Provides greatest amount of certainty under local tax

and other laws

► Clear delineation of responsibilities for ► Payroll ► Employment and labor law issues ► Tax ► Management ► Legal liability

► More certainty under potential income tax treaties



► US tax implications ► Royalties

► Section 512(b)(2): “There shall be excluded [from unrelated business income, or UBI] all royalties (including overriding royalties) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with such income.”

► Reg. Sec. 1.512(b)-1(c)(2)(i): Certain royalties from either debt-financed property or controlled organizations are included in the computation of UBI.



► Facilities or personnel used to carry on exempt activities and unrelated trade or business activities ► Treasury Regulation Section 1.512(a)-1(c):

► Facilities: Expenses, depreciation and items such as overhead shall be allocated between the two uses on a reasonable basis.

► Personnel: Expenses attributable to such personnel shall be allocated between the two uses on a reasonable basis.



► Management/consulting fee – generally considered unrelated business taxable income (UBTI) ► Revenue Ruling 72-369 – Managerial and consulting services

provided to unrelated nonprofit tax-exempt organizations did not qualify for exemption because such services are ordinarily carried on by for-profit organizations.

► Private Letter Ruling 9822004 – Management and ancillary services provided to an unrelated hospital did not qualify for tax-exempt status where such activities are similar to those of an ordinary commercial enterprise.

► B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978) –Consulting services provided for a fee to nonprofit limited resources organizations did not qualify for exemption.



► Management fee can be held to be exempt. ► Private Letter Ruling 9839039 – Where a domestic exempt

organization established a foreign hospital with two foreign government hospitals, and established a foreign service organization to provide administrative and managerial services to the foreign hospital, the domestic exempt organization was not taxable on its administrative and managerial revenue.


Private Letter Ruling (PLR) 201128028

► An organization that provides consulting and educational services for a fee to foreign hospitals and governments operating health care facilities does not qualify for exemption.

► Activities not inherently charitable


PLR 201128028 (cont.)

► Consulting services offered ► Organization and leadership

► Patient care and quality measures

► Nursing staff

► Support services

► Finance and accounting

► Medical staff

► Information technology


PLR 201128028 (cont.)

► Education and training

► Observerships

► Training programs

► Rotations

► Continuing medical education (CME)


PLR 201128028 (cont.)

► IRS – Not every activity that promotes health furthers exclusively charitable purposes.

► While activities may incidentally result in benefitting the community, providing consulting services to paying clients is not a charitable activity.

► Primary beneficiaries are the foreign organizations, not the general public.

► Education and training are a minor part of activities.


The use of tax treaties by exempt organizations


The use of tax treaties by exempt organizations

► Treaty analysis – the three major issues ► Residency ► Permanent establishment ► Limitation on benefits

► Other issues ► Ownership requirements for rates on dividends, interest, rents,

royalties ► Timing requirements for other provisions ► Related-party transactions ► Treatment of disregarded entities


The use of tax treaties by exempt organizations (cont.)

► Model treaties ► Organisation for Economic Co-Development (OECD) Model Tax

Treaty on Income and Capital ► US Model Income Tax Treaty of 2006

► Exemplifies US treaty policy (in general terms) ► Starting point for treaty negotiations ► Recent US treaties generally conform to 2006 model

► Other types of treaties ► Information exchange agreements ► Social security totalization agreements ► Estate and gift tax agreements ► Shipping and air transportation agreements



► Residency (US Model Treaty Article 4) ► Any person liable to tax by reason of his or her domicile,

residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature

► Does not include any person who is liable to tax only on income from sources in such country or only on profits attributable to a permanent establishment

► Tiebreaker rules ► Permanent home ► Center of vital interests ► Habitual abode ► Nationality (i.e., citizenship) ► Mutual agreement



► Permanent establishment (PE) (US Model Treaty Article 5) ► Place of management ► Branch ► Office ► Factory ► Workshop ► Mine, oil or gas well, or place of extraction of natural resources

► Agency ► PE exists if a person other than an independent agent habitually exercises

authority to conclude contracts on behalf of the entity. ► No PE solely because of relationship with broker, general commission agent

or any other independent agent ► Mere fact of controlling enterprise in other country does not automatically

create PE



► A new trend? ► US-Canada Protocol contains a new “services” deemed PE

provision effective as of 1 January 2010.

► A single employee providing services to third parties in the other country for more than 183 days, to residents of that country or solely for the benefit of the home country entity, is deemed to be a PE.

► Business activities income attributable to that employee may be taxed by the country of the PE.

► See paragraph 9 of Article 5.



► Each PE is treated as a separate business activity.

► Income from business activities attributed separately to each PE (US Model Treaty Article 7) ► “Only so much [of the profits] as are attributable to that permanent

establishment”

► Facts and circumstances test – what activities are being conducted?

► Contrast with the “force of attraction” under US law.



► Limitation on benefits (US Model Treaty Article 22) ► Individuals (generally no special restrictions)

► Publicly traded companies, if certain objective tests (ownership and income) are met or if certain subjective tests (derivative benefits, competent authority) are met

► Certain governmental and tax-exempt entities (if organized under laws of treaty country)



► Summary ► Always review the “Big 3” issues

► Don’t forget the details ► Forms W-8BEN, W-8EXP ► Individual Taxpayer Identification Number (ITIN) ► Other documentation – opinion of counsel

► Treaties do not relieve you of your local country filing requirements and other legal requirements.

► Treaties are principally meant to eliminate double taxation.

► Each treaty is unique.



► Case study 1 – foreign joint venture ► A US research organization establishes a research

facility in Brazil to study environmental issues in the Amazonian rainforest.

► Step 1: Assess the needs related to: ► Current resources

► Time horizon for the facility

► Tax and exit strategy from the facility



► Case study 1 (cont.) ► Step 2: Identify advisors in Brazil to provide advice

relating to: ► Licensing and registration issues

► Scientific research

► Medical services

► Drug discovery or IP development

► Local labor and employment laws

► Laws relating to provision of tax-exempt or educational services



► Case study 1 (cont.) ► Step 3: Brazil is not a treaty country – must assess tax

exposure under US tax law

► Are the activities taxable? ► R&D expenses ► Facility and employee expenses ► Royalty income ► Management and consulting income

► What are the foreign partner’s demands?

► How much insulation does the hospital need from potential liability?



► Case study 1 – potential structure

Hospital

Tax-exempt subsidiary

Taxable subsidiary

Research joint

venture

100% 100%

75% 25%

Scientific/research services Management/consulting services


► Case study 2 – seeking treaty benefits

► A small hospital starts a program in Germany to increase its foreign service offerings and to emphasize the hospital’s international profile.




► Possible courses of action

► Lease space and send existing US employees for short-term assignments to Germany (i.e., “go it alone”).

► Hire foreign physicians and send US residents to Germany ad hoc.

► Join consortium of US hospitals that operate programs in Germany.

► Create a German entity for this purpose.



► Germany has a treaty with the US

► Article 27 (Exempt Organizations) – a United States company or organization operated exclusively for religious, charitable, scientific, educational or public purposes shall be exempt from tax by Germany to the extent that

► Such organization is exempt from tax in the United States, and

► Such organization would be exempt from tax in Germany if it were a German organization and carried on all its activities in Germany


► “Go it alone”

► Would need to prove:

► Entity is tax-exempt in the US

► Income would be tax-exempt if earned in Germany

► Registration and licensing requirements

► Is a foreign entity eligible to conduct these activities?



► Hire foreign physicians

► Less complex compliance burden in the US

► Withholding

► Form 990

► Low risk of creating PE (i.e., dependent agency with limited authority or independent agency)

► Greater ability to manage risk

► Contractual arrangements with physicians



► Join a consortium

► Evaluate business structure

► Foreign joint venture

► Less control/management

► Potential loss of name recognition

► Greater risk management and less liability exposure

► Foreign registration and compliance




► Form a tax-exempt subsidiary

► Greater complexity initially and more start-up costs

► Identifying local counsel and managers

► Complying with local tax and labor

► Obtaining financing

► Less complexity and fewer costs in the operational phase

► Local country management of all tax and legal obligations


Non-corporate tax issues


Expatriate and other tax considerations

► Expatriate issues ► Income tax considerations

► Non-income tax considerations

► Visa

► Passport

► Work status

► Value-added tax (VAT) issues ► Consumption taxes

► Customs and duties

► Local country employment taxes


Business traveller vs. accidental expat

► Business traveller ► Travels abroad for their home employer ► Home employer continues to bear all risks and benefits ► Duration is usually for “a few days” in each case/country ► Should not “work” from host, but only participate, e.g., attend meetings

(however, be careful with consultancy-related work)

► Accidental expat ► A business traveller who “accidentally” turns into a de facto “expatriate” by

changing aspects of above description for business traveller (a few days become a few weeks, which then become a few months)

► Often under the radar of established HR processes ► Usually no formal arrangements in place to define status ► Questions of work permit and tax arrangements should be (but are often

not) considered


Spotting PE risks

► Employees working in a “host” country can inadvertently create a permanent establishment of the “home” country firm in the host country. This must be avoided where possible.

► Costs to resolve PE issues are normally insignificant; the risk of non-compliance is much greater – e.g., all income tax returns in the host country; extension of legal liability between countries.

► Issues to consider:

► The country in which activities are to be carried out

► The anticipated duration of the visit/project

► Estimated revenue/profit

► The nature of the work to be carried out

► Will any of the staff have a signing authority?


Withholding tax and VAT

► Withholding tax ► When invoices are to be settled from overseas, it is necessary to

consider withholding tax.

► It is important to discuss withholding taxes at the earliest opportunity.

► The withholding tax does not necessarily mean a cost – there may be ways of avoiding, reducing or reclaiming it, subject to certain conditions.

► VAT and goods and services tax (GST) ► Need to consider implications of cross-border billing


Foreign investment compliance


Foreign investment compliance

► FBAR: Foreign Bank and Financial Accounts Report

► Form 926: Return by a U.S. Transferor of Property to a Foreign Corporation

► Form 5471: Information Return of U.S. Persons With Respect To Certain Foreign Corporations

► Form 8865: Return of U.S. Persons With Respect To Certain Foreign Partnerships

► Form 8621: Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund


Form 926

► To report certain transfers of property to foreign: ► Corporations:

1. In complete liquidation of a subsidiary (Sec. 332) 2. Controlled by the transferor (Sec. 351) 3. Pursuant to a reorganization (Secs. 354, 356 and 361) 4. Distribution of stock of a controlled corporation (Secs.

355 and 356) ► Partnerships:

As a contribution in return for a partnership interest when a US person holds at least 10% interest or the value of property transferred exceeds $100,000


Form 926 (cont.)

► Transfers subject to reporting ► $100,000+ cash is transferred during the 12-month period to

an entity

► Cash transfer results in at least 10% ownership

► All other transfers of property except: ► Exchange of stock pursuant to a recapitalization or asset

reorganization

► Distribution of stock or securities under Section 355

► Certain transfers of stock or securities under Section 367(a)


Form 926 (cont.)

► Who must file: ► US citizens ► US residents ► Domestic corporations, trusts and estates ► Domestic partners of a partnership

► When to file: with transferor’s tax return for year that includes the date of the transfer

► Statute of limitations: 3 years from date information is required to be provided


Form 5471

► To report certain ownership interests in foreign corporations ► Who must file: US person who

► Is an officer or director of a foreign corporation in which a US person owns 10% or more of foreign corporation

► Meets the 10% stock ownership requirement

► Had control (more than 50%) of a foreign corporation for an uninterrupted period of at least 30 days

► Owns 10% or more of the voting power of a controlled foreign corporation (CFC) or any stock of a captive insurance company that is a CFC for an uninterrupted period of at least 30 days


Form 8865

► To report interests in foreign partnerships ► Who must file: US person

► Who controlled (more than 50%) a foreign partnership at any time during the partnership’s tax year (Category 1)

► With a 10% or greater interest in a foreign partnership controlled by US persons (Category 2)

► Who contributed property during the tax year to a foreign partnership (Category 3)

► Whose interest in a foreign partnership increased to 10%, decreased below 10% or changed by 10% (Category 4)


Form 8621

► PFIC is a foreign corporation that meets one of the following tests:

► Income test – 75% or more of gross income is passive

► Asset test – at least 50% of the average percentage of assets held are assets that produce passive income


Form 8621 (cont.)

► Taxation of PFIC ► US mutual funds are taxed like partnerships – shareholders

are taxed on their pro rata share of income and gains, which are reported on Form 1099.

► Foreign mutual funds are not subject to US tax or reporting and disclosure.

► Shareholders* must determine their share of taxable income ► Excess distributions

► Mark-to-market

► Qualified electing fund

*Tax-exempt organizations taxable only on Subpart F insurance income


► Tax-exempt organizations file only for Subpart F insurance income

► Tax-exempt organizations are not subject to elections made by partnerships that are PFIC shareholders

► File with Form 990 or 990-T

► Due same time as Form 990 or 990-T, with extensions

► File a separate Form 8621 for each PFIC

Form 8621 (cont.)


If all the nations in the world are in debt, where did all the money go?

– Steven Wright

Documents

21st Annual Health Sciences Tax Conference€¦ · · 2015-07-2921st Annual Health Sciences Tax Conference The global hospital: avoiding risk with international operations ... provision