International Tax Servicesteidetroitchapter.camp7.org/Resources/Documents/TEI... · 29/04/2015 · April 29, 2015: MSU Management Education Center (Troy) ... 7 Prevent the artificial

International Tax Services

Tax Executives InstituteInternational Tax Seminar

29 April 2015

Strictly private and confidential

Time Topic Speaker8:30 - 8:45 am Welcome & Introductions Scott Hesse, ITS Partner (Detroit)

8:45 - 9:45 am Current Trends in Tax Efficient Supply Chains John Ranke, US VCT Leader (Chicago)

Bill Hahn, TP Partner (Detroit)

Elizabeth Masek, ITS Director (Detroit)

9:45 - 10:50 am Mike Danilack, Principal (WNTS)

Bill Hahn, TP Principal (Detroit)

10:50 - 11:00 am Break

11:00am - 12:00 pm European Tax Update Jeff Brown, ITS Partner (Detroit)

Matt Ryan, Partner (UK Tax Desk, NY)

Gerard Cops, Partner (PwC-Luxembourg)

11:00am - 12:00 pm BEPS Update: Transfer Pricing Bill Hahn, TP Principal (Detroit)(CbCR Update & Other TP Action Plan Reports) Kevin Daly, TP Director (Detroit)

12:00 - 1:00pm Lunch

1:00 - 1:50pm US Legislative Update: International Tax Reform Rohit Kumar - PwC-WNTS (Legislative Group)

1:50 - 2:40 pm International Compliance & Reporting Topics David Chen, ITS-QS Partner (Detroit)

Jarrod Wood, ITS Director (WNTS)1:50 - 2:40 pm Scott Hesse, ITS Partner (Detroit)

Gerard Cops, Partner (PwC-Luxembourg)

Russ Loose, ITS Director (Detroit)

2:40pm - 2:50pm Break

2:50pm - 3:40pm Chip Harter, ITS Principal (WNTS)

David Chen, ITS-QS Partner (Detroit)

Jarrod Wood, ITS Director (WNTS)3:40pm - 4:30pm Hot Topics in International Tax Jeff Brown, ITS Partner (Detroit)

Chip Harter, ITS Principal (WNTS)

Brian Chrzanowski, ITS Manager (Detroit)

Offshore Treasury Centers & Other Foreign Currency Issues

April 29, 2015: MSU Management Education Center (Troy)Agenda

International Tax Controversies & Transfer Pricing Developments

BEPS Update: International Tax & State Aid Developments

1 Welcome & Introductions 4

2 Current Trends in Tax Efficient Supply Chains and Value Chain Transformation 5

3 International Tax Controversies & Transfer Pricing 42

4 European Tax Update 55

5 BEPS Update – Transfer Pricing 88

6 US Legislative Update: International Tax Reform 100

7 International Compliance & Reporting Topics 122

8 BEPS Update – International Tax & State Aid 161

9 Offshore Treasury Centers & Foreign Currency Issues 200

10 Hot Topics in International Tax 225

PageSection Overview

Table of Contents

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Welcome & Introductions

4Tax Executives Institute

1 Welcome & Introductions

Scott Hesse, ITS Partner (Detroit)

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Current Trends in Tax Efficient Supply Chains and Value Chain Transformation


2 Current Trends in Tax Efficient Supply Chains and Value Chain Transformation

John Ranke, US VCT Leader (Chicago)Bill Hahn, TP Partner (Detroit)Elizabeth Masek, ITS Director (Detroit)

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1997 - “Big Three” Sedans

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Has the time for value chain planning passed?

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Value Chain Planning



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Optimizing the Global Footprint

China

Brazil

India

Russia

U.S.

Colombia

Australia

U.KGermany

Spain

Egypt

Canada

Mexico

South Africa

Argentina

Chile

Venezuela

Indonesia

Thailand

Korea

Assembly PlantsEngine Plants

Product DevelopmentAftermarketQuality & WarrantyProcurementShared Services

N.A.Region

S.A.Region

EuropeanRegion

AsiaRegion

Aus.Region

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Purchasing / TollManufacturer

Principal

Commissionaire /Sales Agents

Royalty PaymentIP Co

Warehousing

Cost Plus

U.S. ParentCo(U.S.)

Return on SalesCost Plus /Return On Assets

Suppliers Customers

Fees Fees Fees

Raw Materials Products

Typical Value Chain Transformation Model – Componentizing the Value Drivers

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Value Chain Planning under Attack?



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BEPS Action Plan Impacts on VCT Planning

No Action OECD deadline(s)1 Address the tax challenges of the digital economy Deliverable - Sept 2014

2 Neutralise the effects of hybrid mismatch arrangements Deliverable - Sept 2014

3 Strengthen CFC rules September 2015

4 Limit base erosion via interest deductions and other financial payments Deliverable - Dec 2014

5 Counter harmful tax practices more effectively, taking into account transparency and substance

Deliverable - Sept 2014

6 Prevent treaty abuse Deliverables - Sept 2014

7 Prevent the artificial avoidance of PE status Deliverable - Dec 2014

8 Assure that transfer pricing outcomes are in line with value creation: intangibles Deliverable - Sept 2014

9 Assure that transfer pricing outcomes are in line with value creation: risks and capital Deliverable - Dec 2014

10 Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions

Deliverable - Dec 2014

11 Establish methodologies to collect and analyse data on BEPS and the actions to address it September 2015

12 Require taxpayers to disclose their aggressive tax planning arrangements September 2015

13 Re-examine transfer pricing documentation Deliverable - Sept 2014

14 Make dispute resolution mechanisms more effective Deliverable - Dec 2014

15 Develop a multilateral instrument Deliverable - Sept 2014

VCT

VCT

VCT

VCT

VCT

VCT

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Permanent Establishment Attacks



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14

















15 Develop a multilateral instrument Deliverable - Sept 2014

VCT

VCT

VCT

VCT

VCT

VCT

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BEPS Action 7

• OECD released discussion draft on BEPS Action 7 (Preventing the Artificial Avoidance of PE Status) on October 31, 2014.

• Action 7: Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues.

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Principal



Warehousing

Cost Plus

U.S. ParentCo(U.S.)


Suppliers Customers

Fees Fees Fees


Typical Value Chain Transformation Model – Permanent Establishment Attacks

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Typical Value Chain Transformation Model Significance of PE Analysis

• Commissionaire arrangements in tandem with toll manufacturing arrangements often represent the most effective structure to retain deferral for US tax purposes – the arrangements permit the principal to sell to an unrelated party for purposes of the foreign base company sales income rules of Subpart F. The arrangements are therefore important structural elements.

• A commissionaire arrangement under which a person (the commissionaire) sells products in a given state in its own name as an undisclosed agent on behalf of a foreign enterprise (the principal) has typically not created a permanent establishment for that enterprise in the country of sale because the commissionaire is not a dependent agent with the authority to conclude contracts “in the name of the enterprise.”

Commissionaire and Toll Manufacturing Arrangements

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Typical Value Chain Transformation Model Significance of PE Analysis

• A toll manufacturing arrangement under which a manufacturer produces products using raw materials and production parts owned by a foreign enterprise (the principal) has typically not created a permanent establishment for the enterprise in the country of manufacture because the maintenance of a stock of goods or merchandise solely for the purpose of processing by another enterprise generally does not give rise to a permanent establishment.

Commissionaire and Toll Manufacturing Arrangements

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Typical Value Chain Transformation ModelSignificance of PE Analysis

Warehousing Services and Purchasing Services

• Optimization of the value chain footprint generally does not require centralization of activities, such as warehousing activities and purchasing activities, that could be outsourced without compromising the business model. The principal typically engages foreign service providers to engage in these activities.

• Warehousing services under which a person stores products owned by a foreign enterprise (the principal) have typically not created a permanent establishment for the enterprise in the country where the products are stored. Generally, the use of facilities just for the purposes of storage, display or delivery of goods or merchandise, and the maintenance of a stock of goods or merchandise solely for the purpose of storage, display or delivery, do not give rise to a permanent establishment.

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Typical Value Chain Transformation ModelSignificance of PE Analysis

Warehousing Services and Purchasing Services

• Purchasing services under which a person purchases raw material and production parts for a foreign enterprise (the principal) by executing purchase orders at the direction of the enterprise under purchase agreements executed by the enterprise have typically not created a permanent establishment for the enterprise in the country where the purchasing activity takes place because the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise generally does not give rise to a permanent establishment.

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BEPS Action 7 – Impacts

Commissionaire Arrangements

• BEPS Action 7 proposes the alternative approaches that could result in the activities ofa person acting pursuant to a commissionaire arrangement or similar strategycreating a permanent establishment for an enterprise if that person:

1. “habitually engages with specific persons in a way that results in the conclusion ofcontracts” for the transfer of property owned by the enterprise;

2. “habitually concludes contracts, or negotiates the material elements of contracts”;3. “habitually engages with specific persons in a way that results in the conclusion of

contracts which, by virtue of the legal relationship between that person and theenterprise, are on the account and risk of the enterprise.”

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BEPS Action 7 – Impacts

Toll Manufacturing, Warehousing Services and Purchasing Services

• BEPS Action 7 addresses several activities performed in a foreign country for anenterprise that are currently specifically excluded from constituting a PE, includingmanufacturing, storing, or purchasing products, with three alternative approaches:1. Make the above activities subject to the requirement of being preparatory or

auxiliary.2. Remove the exemption for the use of facilities for the delivery of goods or

merchandise belonging to the enterprise.3. Delete the provision exempting the maintenance of a fixed place of business solely

for purchasing goods or merchandise or collecting information for the enterprise(alternatively, retain the exemption for information collection).

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Permanent Establishment Attacks – Observations

1. Typical Value Chain Transformation models are more likely to create a PE.

2. A Limited Risk Distributor may be as likely to create a PE as a Commissionaire.

3. No change has been proposed in the rules for attributing income to a PE.

4. So, if TP is correct, there may be no additional income subject to tax.

5. Companies should consider affirmatively filing as a PE.

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Base Erosion Attacks



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15 Develop a multilateral Instrument Deliverable - Sept 2014

VCT

VCT

VCT

VCT

VCT

VCT

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BEPS Action 2

• OECD released a discussion draft on BEPS Action 2 (Neutralise the effects of hybrid mismatch arrangements) on September 16, 2014.

• Action 2: Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities.

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EU State Aid

Existence of an economic

advantage

Affects competition and trade

between MS

Presence of a selective measure

Involvement of state resources

+ +

+ +

Article 107(1) TFEU (ex Art. 87(1) TEC):“Save as otherwise provided in the Treaties, any aid granted by a Member State (MS) or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between MSs, be incompatible with the internal market.”

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Principal



Warehousing

Cost Plus

U.S. ParentCo(U.S.)


Suppliers Customers

Fees Fees Fees


Typical Value Chain Transformation Model – Base Erosion Attacks

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Typical Value Chain Transformation Model Significance of Hybrid Arrangement and EU State Aid Analysis

• Value Chain Transformation structures often rely on hybrid entities and / or hybrid instruments to support base erosion strategies for the principal.

• In tandem, these structures may rely on rulings from tax authorities that apply transfer pricing principles that reduce the tax burden on the Principal in a manner that provides a benefit disproportionate to the economic footprint of the enterprise (eg., super- or fluctuating-royalties).

• BEPS Action 2 may limit the effectiveness of these base erosion strategies for the Principal by limiting the deductibility of the payment or mandating an income inclusion related to the payment.

• Additionally, the EU State Aid provisions may result in an assessment of illegal state aid resulting in a recovery including interest over the last 10 years.

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Application to Common Value Chain Transformation Model BEPS Action 2 / State Aid

Royalty

USP

CV

Principal

Service Provider

Structure: Dutch CV structures with royalty payments from the principal to the CV, or with interest payments from the principal to a CV

Response - Reverse Hybrid Rule: Principal country denies the deduction for payments to IP Holding, or the US taxes the payment under its CFC rules, or IP Holding jurisdiction should treat the entity as a tax resident and tax the payment as ordinary income.

Response – EU State Aid: Even if BEPS Action 2 were not adopted, a State Aid assessment may still be owed if the royalty is not supportable under transfer pricing principles.

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Application to Common Value Chain Transformation Model BEPS Action 2

Structure: Luxembourg SCS structures with deductible payments under a Master Facility Agreement

Response - Imported Mismatch Rule: Lux denies the deduction for payments under the Master Facilities Agreement, or Sales Co tax authorities disallow tax deductions for any payments (including payment for goods) made by Sales Co to Lux Principal.

Payments under Master Facility Agreement

USP

Lux

Lux Principal

Sales Co

Lux

Fiscal Unity

Payments for Goods

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Base Erosion Attacks – Observations

1. The effectiveness of principal base erosion techniques that rely on hybridinstruments or hybrid entities is potentially limited.

2. Locating the principal and the IP in a low tax jurisdiction, such as Ireland orSwitzerland, may be more sustainable than structures relying on base erosionfor rate reduction.

3. EU State Aid potentially impacts typical Value Chain Transformation modelssimilarly to the impact of BEPS Action 2 on hybrid mismatches.

4. EU State Aid challenges, however, are generally based on Transfer Pricingprinciples rather than the structural arrangement.

5. EU State Aid exposures may exist in current structures resulting in potentialretroactive assessments. In contrast, prospective legislation under BEPSAction 2 has not yet been enacted.

6. Therefore, EU State Aid may be a current FIN 48 issue.

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Transfer Pricing and Substance Attacks

ITS K&I February Call33

Tax Executives Institute


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No Action OECD deadline(s)

1 Address the tax challenges of the digital economy Deliverable - Sept 2014
















15 Develop a multilateral Instrument Deliverable - Sept 2014

VCT

VCT

VCT

VCT

VCT

VCT




VCT

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Action 8: IntangiblesDeliverable Highlights

• Proposed revisions to the OECD Guidelines to provide guidance on:

o The definition of intangibles;

o Identifying transactions involving intangibles;

o Determining arm's length conditions for transactions involving intangibles; and

o Transfer pricing treatment of local market features and corporate synergies.

• Given that some of the transfer pricing issues related to intangibles are closelyrelated to the work that will be performed as part of Action 9 (Risks and Capital) andAction 10 (Other High-risk Transactions), key elements of the work on intangibleshave not been finalized yet and need to be viewed as interim guidance.

• While the arm's length principle is retained, the report indicates that the OECD maybe willing to go beyond that for hard-to-value intangibles.



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Action 8-10: Risk, Recharacterization and Special MeasuresDecember 2014 Discussion Draft Highlights

• The draft on risk and situations calling for recharacterization or “special measures” is divided into two parts:

o Part I would revise the OECD Transfer Pricing Guidelines to emphasize the parties’ substantive commercial and financial relationships;

o Part II has options for special measures on intangible assets, risk, and over-capitalization, some going beyond the arm’s length principle.

• The draft discusses the idea that contractual allocations of risk are only a starting point, as they are still subject to a substantive analysis of the parties’ economic behavior in the context of the multinational’s entire value chain.

• The OECD would permit tax authorities to override a written contract among related entities, recasting terms to reflect risk allocation measures tax authorities believe unrelated parties would take in a similar commercial or financial relationship.

• The draft introduces the concept of “moral hazard” between unrelated parties, meaning a situation where one party would assume risk without control over the consequences related to that risk.

o In the OECD’s view, parties acting at arm’s length would act to mitigate any moral hazard created by a lack of incentive to guard against risk.



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Action 8-10: Risk, Recharacterization and Special MeasuresDecember 2014 Discussion Draft Highlights

• The draft proposes to replace the “commercial rationality” test in the existing Transfer Pricing Guidelines with the “fundamental economic attributes” concept.

o The OECD explains that transactions should not be recognized (i.e., should be disregarded) for transfer pricing purposes, and should instead be recharacterized, if they do not have the “fundamental economic attributes of arrangements between unrelated parties.”

o The new test would require that actual arrangements give both parties an opportunity “to enhance or protect their commercial or financial positions,” in light of alternatives the parties could have pursued.

• The OECD’s exploration of special measures for certain circumstances goes beyond the traditional arm’s length principle, raising significant questions about the consistency of this draft with many existing income tax treaties.



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Action 10: Profit Splits in the Context of Global Value ChainsDecember 2014 Discussion Draft Highlights

• In the discussion draft on profit splits, the OECD’s position is that transactional profit splits may be appropriate in situations in which a multinational’s business is ‘highly integrated.’

o In such situations, strategic risks may be jointly managed and controlled by more than one related entity.

o The discussion draft treats transactional profit splits as a means of aligning profit with value creation, but it acknowledges the subjectivity of profit splits.

• The draft discusses different issues and questions that cover controversial areas of profit splits in the context of global value chains:

1. Integration and sharing of risks

2. Fragmentation

3. Lack of comparables

4. Hard-to value intangibles

5. Dealing with ex ante / ex post results

6. Dealing with losses

• The views and options included in the draft do not represent a consensus of all parties involved, but they do provide a useful overview of the current thinking and areas that will ultimately be addressed following further consultations.



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Value Chain Transformation – A Survivor?



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Today’s Megatrends Forces shaping our lives and our world



By 2050, the number of people over 65 is forecast to grow by over 200% in China, India, Indonesia, Bangladesh, Pakistan, Brazil, Mexico and Colombia.Population in Africa is expected to more than double in the next 40 years.

As incomes in Asia and Africa increase, the global middle class (daily expenditure of US$10-100 in purchasing power parity terms) will more than double to reach some five billion people by 2040.

The number of connected devices per person worldwide will rise from 3.47 in 2015 to 6.58 in 2020.

The world’s urban population is expected to increase 72% by 2020.

With a population of 83 billion by 2030, the world will need 50% more energy, 40% more water and 35% more food.

Source: PwC's Global Annual Review 2013 and PwC's Project Blue

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What is Base Erosion and Profit Shifting (‘BEPS’)?

• “Base erosion and profit shifting (BEPS) is a global problem which requires global solutions. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs).”



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International Tax Controversies & Transfer Pricing


3 International Tax Controversies & Transfer Pricing

Mike Danilack, Principal (WNTS)Bill Hahn, TP Principal (Detroit)

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Global Tax Controversy Environment



• Even pre-BEPS, foreign tax audits and resulting controversy were on the rise.

• U.S.-based multinational companies were increasingly subject to foreign assessments, particularly with respect to transfer pricing.

• The increase in audits of and assessments onU.S.-based multinational companies is likely driven by worldwide fiscal crises and resulting pressure on tax enforcement agencies to increase revenues.

• Extreme positions are out of line with global principles regularly asserted by tax examiners.

• Strong-arm tactics are often used to force concession by the taxpayer.

• Unsatisfactory appellate and judicial processes have been necessary to reach more-principled results.

• U.S. companies are forced to rely either on a U.S. competent authority to eliminate double taxation or on the foreign tax credit (if available).

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Mutual Agreement Procedures



• The central purpose of tax treaties is to eliminate double taxation.

• Treaty-based “mutual agreement procedures” (MAP) are designed to eliminate, through negotiation by the relevant “competent authorities,” any double taxation arising from one country’s tax assessment.

• Even pre-BEPS, MAP programs around the world seemed overly stressed.

• The number of new MAP cases is rising, cases are taking longer to resolve, and there are an increasing number of cases in which a resolution is not reached.

• OECD produced a Manual on Effective Mutual Agreement Procedures (MEMAP) in 2004 and revised in 2007 prescribing “best practices” to ensure effective MAP resolution.

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MAP Inventory of OECD Countries



2,3522671

2897

3426 3328

38384073

4566

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Pending cases - end of reporting period: 94% increase from 2006 through 2013

2006 2007 2008 2009 2010 2011 2012 2013

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U.S. 2014 MAP Statistics



• IRS productivity in APAs decreased 30 percent in 2014.

o APMA executed 101 APAs during 2014, down from 145 in 2013 and 140 in 2012.

o 2014 still represents the third highest year of completed APAs in the past 20 years.

o The average time to complete APAs increased from 32.7 months in 2013 to 35.3 months in 2014.

o For the second consecutive year, bilateral APAs with Japan accounted for almost 50 percent of the bilateral APAs.

o Canada, the UK, and Korea contributed for 15%, 10%, and 8%, respectively.

o Including roll-back years, the average term length for APAs executed in 2014 was six years.

• No indication as to when the 2013 proposed revenue procedures governing APA and MAP applications will be finalized.

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MAP Diagnosis



• To date, the main problem with MAP has NOT been a failure of competent authorities to reach agreement on the meaning of global principles.

• Rather, MAP programs have been impeded by:

o A lack of “empowerment” of competent authorities to reach principle-based compromise (see next slide);

o Inadequate competent authority resources dedicated to MAP;

o Adversarial postures and lack of trust around the MAP table;

o Frequent turnover and lack of expertise among MAP negotiation teams.

• In 2013, a new “MAP Forum” was initiated to begin to address these problems through multilateral discussions and projects undertaken by the competent authorities themselves.

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Description of “Empowerment” Problem



• Many competent authorities come to the MAP table not to seek a principle-based, mutually satisfactory result, but to defend the assessment at all cost.

• Many competent authorities are beholden to, or unduly influenced by:

o Revenue collection goals of the tax administration of which they are a part;

o Developing policy views of their ministries;

o A general view that companies with deep pockets should pay more and the United States should not care if the assessments are not large (from the U.S. perspective).

• Many competent authorities do not have the authority to withdraw or refine unprincipled adjustments prior to bringing the cases to the MAP table.

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Prevailing “BEPS” Impact Prediction



• It is widely believed that many of the BEPS proposals will lead to a marked increase in tax assessments on U.S.-based multinational companies and that it will be more difficult for competent authorities to agree on principles to eliminate double taxation.

• The draft BEPS reports so far appear to provide tax authorities:

o More tools to challenge reported transfer pricing positions;

o More tools to assert broader taxing rights;

o More tools to challenge treaty benefits.

• In evaluating transactions, tax authorities may well have a basis, post-BEPS, to:

o Disregard legal entities;

o Disregard/recharacterize contractual arrangements;

o Ignore the allocation of risks / legal ownership of assets.

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But the Future May Be Now



• We are already seeing tax authorities adopt BEPS-like approaches in tax audits and we are seeing tax authorities cite to BEPS to justify their inquiries/assessments

• Arguably, regardless of where the final reports come out, the damage is already done

• BEPS launch statements roundly criticized current principles and called into question the future of the arm’s length standard

• The pro-BEPS rhetoric in public discourse and in political settings may have been all that is needed for tax enforcement personnel to feel more free to take unprincipled approaches

• Many tax authorities are already acting as if the BEPS recommendations have been implemented

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BEPS Action 14 on Dispute Resolution



• The December 18th report on Action 14 was roundly criticized as a weak attempt to address MAP problems.

• The report signaled a surrender in the attempt to gain consensus that all treaty articles on mutual agreement should provide for mandatory binding arbitration as a fail-safe.

o This arbitration is seen by many as a “silver bullet” solution.

o However, some question whether binding arbitration would solve all problems if there is a tsunami of unprincipled adjustments which are seemingly justifiable by oblique BEPS report language.

• The report, however, does recognize the importance of addressing some of the major problems with MAP programs, such as resource and empowerment limitations and inappropriate negotiation postures.

o The report points to the MAP Forum as the place where these issues must be addressed.

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Exchange of Information Trends



• Pre-BEPS, countries were working together and sharing information, but the focus was on individual compliance with a more limited focus on corporate taxpayers, mainly in JITSIC.

• The BEPS focus has heightened interest in collaboration and information sharing on multinational businesses:

o ATO’s 6-country project

o Broadened JITSIC membership

• Action 13 (master file and country-by-country reporting) has whetted appetites to share information about multinational corporations’ global information.

• Arguably, “risk assessment” demands will stretch the current “may be relevant” standard for treaty exchange.

• Again, tax authorities are behaving as if they are already entitled to this global information.

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IRS Posture on BEPS



• Overall, the IRS is more worried about the challenges BEPS will bring than they are hopeful that it will enhance enforcement of U.S. international tax laws.

• It is believed that both the IRS and Treasury see the United States as a potential net loser in a new BEPS world, perhaps substantially so.

• The IRS will face significant challenges in implementing the exchange of country-by-country reports and is concerned about the demands of post-exchange follow-up requests for information. Challenges include:

o Severe budget and personnel limitations;

o Many important and competing priorities.

• That being said, we have already seen IRS agents point to BEPS in pursuing issues on audit.

• We are also already seeing APMA adopt a more “conservative” approach.

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Looking ahead

• Multinational companies will likely be in a period of tax uncertainty for quite a while to come.

• Tax planning cannot stop, of course, but rather must take into account new types of risks and companies should expect even greater controversy.

• There will likely be more pronounced variation in tax enforcement among governments.

• Companies must be prepared to defend their tax positions vis-à-vis a wider array of stakeholders.



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European Tax Update


4 European Tax Update

Jeff Brown, ITS Partner (Detroit)Matt Ryan, Partner (UK Tax Desk, NY)Gerard Cops, Partner (PwC-Luxembourg)

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Agenda



Topics

EU Parent-Subsidiary-Directive and GAAR

UK – Diverted Profits Tax

Hybrid Proposals / Rules – UK, Germany, Spain

Developments in European Ruling Practice

Changes to Patent Box Regimes – The Modified Nexus Approach

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EU Parent-Subsidiary-Directive and GAAR



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EU Parent Subsidiary Directive and GAAR

• In 2014, EU PSD was amended to limit the application of the EU PSD benefits for hybrid loan mismatches. No consensus could be reached with respect to a General Anti-Abuse Rule (“GAAR”).

• 2015 developments: The EU Council amended the EU PSD adding a GAAR.

• The implementations into domestic law are due by December 31, 2015.

• Currently applicable to dividend flows - may be extended to interest and royalty flows in the future.

Review Holding Company Structures with a stricter focus on substance

The EU PSD exempts dividends and other profit distributions made by subsidiaries to parent companies from withholding taxes and eliminates double taxation of such income at the level of the parent company.



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EU Parent Subsidiary Directive and GAAR

• "refrain from taxing such profits to the extent that such profits are not deductible by the subsidiary, and tax such profits to the extent that such profits are deductible by the subsidiary“ (Correspondence rule).

• “not grant the benefits of the EU PSD to an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. […] an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality” (General Anti Abuse Rule).

De minimis anti abuse rule allowing countries to apply stricter national rule!

Member States shall …



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UK – Diverted Profits Tax



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Summary of Legislation

A new 25% tax on a company’s taxable diverted profits in two scenarios:

Entities or transactions lacking economic substance: Where groups create a tax benefit by using transactions or entities that lack economic substance (including UK-UK transactions).

• A comparison of the value of the tax reduction and the financial benefit of the transactions; and

• Focus on situations where absent the tax benefit the UK expenditure would not have been incurred or the income would have been in the charge to UK tax.

Avoidance of a UK taxable presence: Where foreign companies have exploited the permanent establishment rules.

2

1Scenario

Scenario



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Scenario 1: Entities or Transactions Lacking Economic Substance

The focus is on UK companies which are involved in arrangements where:• deductible payments are ultimately subject to low tax somewhere in the group,• or where income should otherwise be taxable in the UK,• and there is a lack of economic substance in the arrangements.



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Scenario 1: Entities or Transactions Lacking Economic Substance

Applies when:• Provision has been made between the UK company (or a UK PE of a non-resident)

and another person (UK or non-UK) by means of a transaction or series of transactions;

• The parties are connected;• The provision results in a tax mismatch outcome; and• The insufficient economic substance condition is met.

See further detail on next slides

UK Company Non-UK Company

Payment / income diversion

Connected/Related Parties



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Entities or Transactions Lacking Economic SubstanceLegislative Tests

Effective tax mismatch outcomeThere will be an effective tax mismatch outcome where:• The material provision between the parties results in expenses or a reduction in

income for one party such that the reduction in that party’s tax liability is greater than any resulting increase in the other party’s total liability to corporation tax, income tax or any non-UK tax; and

• The amount of tax paid by the second party is less than 80% of the corresponding reduction in the first party’s tax liability.



PwC29 April 2015

Entities or Transactions Lacking Economic SubstanceLegislative Tests

Insufficient economic substanceApplies when either:1. (a) the effective tax mismatch outcome is referable to a single transaction, or one or

more transactions in a series of transactions; and (b) it is reasonable to assume that the transaction(s) was designed to secure the tax reduction; unless at the time of making the material provision it was reasonable to assume, taking into account all accounting periods for which the transaction(s) was to have effect, that the non-tax benefits would exceed the financial benefit of the tax reduction; or

2. (a) a person is party to the transaction, or any one or more transactions in a series of transactions; and (b) it is reasonable to assume that the persons involvement was designed to secure the tax reduction; unless either:• At the time of imposing the material provision it was reasonable to assume that

the non-tax benefits referable to the contribution of the person’s staff, taking into account all accounting periods, exceeds the financial benefit of the tax reduction; or

• In the accounting period, the income attributable to the functions or activities that the staff perform (excluding holding, maintaining or protecting an asset) is greater than other income attributable to the transaction.



PwC29 April 2015

DPT commentary (continued):• The correct characterization

of group companies is essential with regard to functional and risk profiles.

• In considering whether there is economic substance, a taxpayer should demonstrate that the economic value of F Principal Co’s activities exceeds the value of the tax benefit.

• If calculating DPT, determine what transactions would have taken place in the absence of tax considerations.

DPT commentary• As the UK sales are from a UK

company, the focus moves from looking at the “avoided PE” to whether there is a lack of economic substance.

• There are (typically) a number of arrangements which UK LRD Co is party to which have the effect of reducing the level of profits in the UK.

Sale of goods

Sales to UK customers

Operating Model features:• F Principal Co sells goods to

UK LRD Co which are distributed to customers located in the UK.

• UK LRD Co is remunerated using a resale minus transfer pricing policy.

• The group is US parented.

Example Under s.80 – Limited Risk Distributor

F Principal Co (Low tax)

UKcustomers

UK LRD Co

US parent Co



PwC29 April 2015

Scenario 2:– Avoidance of UK Taxable Presence

The focus is on non-UK companies making direct sales to customers through UK activities. Scenario 1 applies where:• There is a foreign company and:

- A person (‘the avoided PE’) is carrying on activities in the UK in connection with the supply of goods or services or property made by a foreign company to customers.

- It is reasonable to assume that the activity of the avoided PE or the foreign company (or both) is designed to ensure the company is not carrying on a trade through a UK PE; and

- either or both the conditions below are met:

The mismatch condition

There are arrangements between the foreign company and another connected person that results in an effective tax mismatch outcome and the insufficient economic substance condition is met. (Same tests as Scenario 1.)

The tax avoidance condition

There are arrangements in place where the main purpose or one of the main purposes to avoid a charge to UK Corporation Tax.



PwC29 April 2015

Avoidance of a UK Taxable Presence – Example Under s.86

Operating model features• UK Co identifies UK customers and undertakes

all selling activities up to the point of concluding the contract with the customer.

• F Co concludes contracts with the customer.

• F Co pays royalty to IP Co (non-US).

• Except for acquiring products and concluding sales contracts, no activity is performed by F Co in the UK.

• Separating conclusion of contract from the selling activity is contrived.

F Co

UK Co UKcustomers

Sale of goods/services to UK customers

Cost plus service provider

DPT commentary

• It is reasonable to assume that the activities of both companies are designed to ensure no UK PE of F Co.• Need to consider if there is a main purpose to avoid a charge to UK corporation tax or if the tax benefit

of the arrangement is greater than the economic value of the activities added by F Co and the employees of IP Co.

• In calculating DPT, deem a UK PE of F Co and determine how the transactions would have been carried out in the absence of tax considerations.

IP CoRoyalty payment



PwC29 April 2015

Non-UK groups selling into UK who do not have a PE

Groups Most Likely to be Impacted

Groups who have sold IP from the UK to another group company.

Groups with tax efficient structures for paying royalties for the use of IP.

Groups who have a large management presence in the UK but whereby group profits are materially taxed outside of the UK (especially those with material UK trading businesses).

Groups who have multiple companies in the UK fulfilling different functions.

Groups who have entities located in low taxing jurisdictions (especially with limited substance).



PwC29 April 2015

Practical Next Steps

04

01

02

03Review operating models to assess restructuring options

Assess DPT position and notification requirements

Review accounting and reporting considerations

Engage with CRM and HMRC



PwC29 April 2015

Hybrid Mismatch – UK, Germany, Spain



PwC29 April 2015

UK– 2014 Consultation DocumentProposed Adoption BEPS Action Item 2

• The payment is made under a hybrid mismatch arrangement and is not included in the ordinary income of the recipient (direct or indirect), or if it gives rise to a double deduction

• A hybrid mismatch arrangement is one that involves a payment on a hybrid instrument or a payment by or through a hybrid entity (an entity that is recognised as a person under the tax code of any territory and its income or expenses are also treated under the same or a different tax code as the income or expenses of one or more other persons)

• Ordinary income means income that is subject to the taxpayer’s full marginal rate and it should not benefit from any exemption, exclusion, credit or other tax relief applicable to particular categories of payments

If the entity receiving the interest income has its tax reduced because it can benefit from the use of tax losses or it is offset by a deemed deduction, the rule is notexpected to apply.

For payments made to a related party on or after 1 January 2017, no deduction will be allowed if …



PwC29 April 2015

Expenses are not deductible as business expenses for German tax purposes to the extent the corresponding income i. is not considered in the tax base of the direct or indirect beneficiary orii. is subject to a tax exemption, because the underlying legal instrument is not

treated as debt financing at the level of the creditor and the debtor. Business expenses are only deductible for German tax purposes to the extent those expenses do not reduce the tax basis in any other country. (…)

Germany – Proposed Changes in 2014Three (New) Components Covered

New BEPS-related tax provision as proposed 2014

General Correspondence

Rule

Anti Hybrid Instrument Rule Anti Double Dip Rule

Model for potential changes in 2015?



PwC29 April 2015

UK & Germany – Proposed ChangesAffected Structures

German / UK HoldCo

German / UK OpCo

US Parent Co

Payment

German/UK OpCo

US Parent Co

Payment

Foreign LP

Foreign HoldCo

Payment



PwC29 April 2015

Spain– 2014 ChangesNew Anti-Hybrid Rules

• At the recipient level it is either not treated as income or it’s exempt or taxed at a nominal rate of less than 10%.

• Interest accrued on profit participating loans will no longer be deductible by the Spanish payer.

If the entity receiving the interest income does not actually pay taxes because it can benefit from the use of tax losses or offset of expenses, the rules are not expected to apply.

For financing granted by a related party after June 2014, no deduction will be allowed if …



PwC29 April 2015

Developments in European Ruling Practice



PwC29 April 2015

EU Tax Transparency Package

EU Directive:

EU Commission Proposal of 18 March 2015 for a Council Directive amending Directive on Administrative Cooperation providing for the mandatory exchange of information regarding advance cross-border rulings and advance pricing arrangements.

Mandatory Exchange of Rulings Between all EU Member States

Wide definition of ruling !

“Any communication or instrument or action with similar effect, given by or on behalf of a Member State, regarding the interpretation or application of its tax law.”

“Cross border” rulings only !?

• Focus would be rulings relating to “cross border” transactions only.• Purely domestic tax rulings would be exempt



PwC29 April 2015

EU Tax Transparency Package

Information to be shared:

• Name of taxpayer and group,• A description of the issues addressed in the tax ruling,• A description of the criteria used to determine an advance

pricing arrangement,• Identification of the Member State(s) most likely affected,• Identification of any other taxpayer likely to be affected

(not: natural persons).Process:• Automatic exchange on quarterly basis• Not possible to refuse or reduce information on grounds of

commercial secrecy or public policy

Status:

• Tax Transparency package will be sent to European Council

• To be processed in line with general EU procedures

Scope

New rulings& all rulings

issued since 2005

Objective

“Every MS would know what cross-border tax rulings

apply across the EU, and would be able to

assess for itself whether a tax ruling of another Member State has an impact

on itself”



PwC29 April 2015

By the Grand Ducal Decree of 23 December 2014, Luxembourg introduced a revised and unified system for advance tax confirmations, effective 1 January 2015.

Objectives:

Luxembourg Tax Rulings UpdateNew Ruling Practice

010203

Provide tax payers with legal certainty on their transactions

Offer uniform and egalitarian treatment between taxpayers

Increase transparency of Luxembourg tax system.



PwC29 April 2015

The new process includes in particular:

• The introduction of a tax ruling commission who will review and give recommendations on each request;

• A charge of between EUR 3,000 and EUR 10,000 will be applied for each ATA to cover the administrative and operational expenses of the tax administration;

• A summary of decisions will be published on a no-names basis in the annual report of the direct tax administration.

Current status & experience:

Luxembourg Tax Rulings UpdateNew Ruling Practice

Existing rulingsPending ruling

applications

New applications



PwC29 April 2015

Changes to Patent Box Regimes: the Modified Nexus Approach



PwC29 April 2015

IP & Patent Box Regimes in the EU

But, there has been uncertainty over the future of these IP regimes:

• European Commission (EC) concluded that the UK Patent Box regime amounted to harmful tax competition (Oct 2013);

• EU Council invited the EU's Code of Conduct Group on business taxation to review all patent boxes in the EU to assess principle of equal treatment and against background of international developments such as OECD BEPS;

• EC launched inquiries against several EU member states (March 2014).

Primary concern: Are patent box regimes granting a selective advantage to a particular group of companies in breach of EU state aid rules?

Latest developments: • IP regimes received broad support from EU Member States• EC announced to not pursue investigations but to set new IP regime criteria based

on consensus reached by Germany and UK (Nov 2014 – “Modified Nexus Approach”).

Many countries in the EU have special IP tax regimes, e.g.: Belgium, Cyprus, France, Hungary, Ireland, Italy, Luxembourg, NL, Spain, and the UK.



PwC29 April 2015

New Criteria for IP Regimes in EUModified Nexus Approach

‘Modified Nexus approach’ developed by OECD under BEPS action 5:

• IP income should only qualify for preferential treatment if it is generated by R&D activity carried on by the taxpayer itself (substantial activity).

• Aim is to exclude from qualifying expenses those incurred by related parties, such as outsourcing expenses and IP acquisition costs (but allow qualifying expenses to be increased by outsourcing & acquisition costs up to a max. 30% of qualifying expenses).

ModifiedNexus

Approach

Patents Only

Only patents could benefit from preferential regime:

• But formal push from The Netherlands and other Member States for extended scope to include IP similar to patents

• Most current IP regimes provide for a broader scope (e.g. (no trademarks, software copyrights, etc.)



PwC29 April 2015

Entry into Force of New European RulesPhasing out / Phasing in

Phasing out of existing regimes

• No new entrants under existing regimes after 30 June 2016

• Complete phasing out of existing regimes by 30 June 2021

Phasingout

Phasingin

Phasing in of new regimes

• Countries can introduce new regimes under “Nexus” approach and criteria

• Legislative amendments to be passed by 30 June 2016



PwC29 April 2015

For more information, please contact

Robert DeGaudenzi, International Tax Desk leader,[email protected] (646) 471-0645

Joni Geuther, International Tax Desk Operations [email protected] (646) 471-4526

EUROPEAN TAX GROUP

BelgiumKristof Vandepoorte

(646) 471-3990 [email protected]

Central Eastern Europe (CEE) RussiaMihaela Craciun (646) 471-0428 [email protected] Liaskovskaia (646) 471-5515 [email protected] Kozhushko (646) 335-4262 [email protected]

CyprusJovanna Tannousis (646) 471-2879 [email protected]

FranceGuillaume Glon (646) 471-8240 [email protected] Barbier (646) 471-5278 [email protected] Perrot (646) 313-7297 [email protected]

GermanyTorsten Schmidt (646) 471-2384 [email protected] Nuernberger (646) 471-2536 [email protected] Bildstein (646) 335-4911 [email protected] Herbst (646) 471-6083 [email protected] Lange-Hueckstaedt


Sweden, Denmark, NorwayStefan Anderssen (646) 471-1781 [email protected]

SwitzerlandMartina Walt (646) 471-6138 [email protected] Portier (646) 471-7080 [email protected]

United KingdomMatt Ryan (646) 471-5385 [email protected] Fryatt (646) 471-6592 [email protected] Beatty (646) 335-4263 [email protected] David Evans (646) 313-3656 [email protected]

LuxembourgBegga Sigurdardottir (646) 471-5724 [email protected]

Netherlands Maarten Maaskant (646) 471-0570 [email protected] Moison (646) 471-3091 [email protected] Melger (646) 471-1925 [email protected] von Welie (646) 471-8519 [email protected]

Spain/PortugalDaniel Landaluce (646) 471-7762 [email protected] Yago (646) 471-3262 [email protected]



IrelandSusan Roche (646) 313-0813 [email protected]

IsraelLioran Pinchevski (646) 471-2926 [email protected]

PwC29 April 2015




AFRICAN TAX GROUP

Pan Regional Contacts – North Africa - Francophone Africa

Gilles de Vignemont (646) 471-1301 [email protected]

(US Leader)Emuesiri Agbeyi (646) 471-8211 [email protected]

Ronald Kalungi (646) 471-2006 [email protected]

Robert Smallwood (646) 471-2577 [email protected]

Mickel Dada Amos (646) 471-2365 [email protected]

Msindiseni Masetle (646) 313-3912 [email protected]

Kenya, Nigeria, TanzaniaEmuesiri Agbeyi (646) 471-8211 [email protected]

UgandaEmuesiri Agbeyi (646) 471-8211 [email protected]

Ronald Kalungi (646) 471-2006 [email protected]

Angola, Ghana, Liberia, Mozambique, Sierra LeoneRobert Smallwood (646) 471-2577 [email protected]

Botswana , Ethiopia, Namibia, South Africa, Zambia, Zimbabwe, BeninMsindiseni Masetle (646) 313-3912 [email protected]

LATIN AMERICAN TAX GROUP

Pan Regional Contacts - South America, Central America, the Caribbean and Mexico John Salerno (US Leader)


Jose Leiman (305) 381-7616 [email protected] Vianello (646) 471-9809 [email protected] Cuellar (646) 471-6344 [email protected] Landaluce (646) 471-7762 [email protected] Bel (646) 471-1268 [email protected] Echenique (646) 471-6294 [email protected] Silva Jimenez (646) 471-8794 [email protected]

Sebastian Diaz (305) 381-7676 [email protected] Yago (646) 471-3262 [email protected] Feliciano (646) 313-0931 [email protected] Vaca Valverde (646) 471-8357 [email protected]

Estevan Paredes Leal (646) 471-4838 [email protected]

BrazilRafael Vianello (646) 471-9809 [email protected] Paredes Leal (646) 335-4838 [email protected]

ChileMauricio Valenzuela (646) 471-7323 [email protected]

Puerto RicoJosue Rivera (646) 471-7915 [email protected]

UruguayLucia Echenique (646) 471-6294 [email protected]

PwC29 April 2015




ASIA PACIFIC TAX GROUPAustraliaRoss Follone (646) 313-3172 [email protected]

China, Hong Kong, Malaysia, TaiwanTsz Ping Kwan (Danny)


Deborah Lee (213) 356-6119 [email protected] (Julie) Xu (646) 471--2178 [email protected] CY Hau (646) 313-7509 [email protected]

India, Indonesia, BangladeshChengappa Ponnappa (646) 313-0080 [email protected] Raval (646) 335-4859 [email protected]

Japan, Cambodia, ThailandTakaaki Tokuhiro (646) 471-3164 [email protected] Nonaka (646) 471-5147 [email protected] Supornpaibul (646) 471-5187 [email protected]

Korea, Vietnam, LaosYeong-Min Jo (Brandon)

(646 ) 471-0710 [email protected]

New ZealandBrian Russell (646) 471-7671 [email protected] Williams (646) 471-8808 [email protected]

Singapore, Philippines and Myanmar (Burma)

Irene Tai (646) 313-3323 [email protected] Szuan Leng (213) 217-3421 [email protected]

PwC29 April 2015

BEPS Update – Transfer Pricing


5 BEPS Update – Transfer Pricing

Bill Hahn, TP Principal (Detroit)Kevin Daly, TP Director (Detroit)

PwC29 April 2015

The Future of Transfer Pricing Documentation: A Three-Tiered Approach

Local file Country by country report

Master file



PwC29 April 2015

BEPS Transfer Pricing Implementation Guidance

The OECD announced on February 6, 2015, as part of its ongoing BEPS initiative, additional transfer pricing documentation guidance. In particular, the OECD further described the implementation of CbC reporting. The key points from the OECD's latest recommendations on CbC reporting are as follows:• CbC reports would be required for multinationals for fiscal years starting on or after

January 1, 2016.• The first CbC reports would be filed no later than December 31, 2017 (i.e. one year

from the close of the related fiscal year). Companies with fiscal years ending on a date other than December 31st would be required to file 12 months after the close of the relevant fiscal year.

• Multinationals with less than Euro 750 million (approx. $1B USD) consolidated revenues in the preceding year would be exempt from filing a CbC report.

• The OECD intends to develop a comprehensive CbC reporting implementation package by April 2015.

The following slides present a overview of the work plans, estimated fees, and tools to assist Steelcase in understanding its BEPS transfer pricing readiness in relation to CbC reporting, the master file and local file requirements.



PwC29 April 2015

Master file: The Overview of the MNE’s Business Vis-a-Vis its Global Economic, Legal, Financial and Tax Context

• Purpose: transfer pricing risk assessment tool

• Requires disclosure of 5 categories of information:

1. Organizational structure

2. Description of business(es)

3. Intangibles

4. Financial activities

5. Financial and tax positions of the MNE

• Can be prepared on business line basis or for MNE as a whole. In either case, it should be available “to each country in order to assure that an appropriate overview of the MNE group’s global business is provided”.

• To be shared with each country (each relevant country) in which the MNE has an affiliate subject to tax; but how, is an item that is TBD.



PwC29 April 2015

Master File Requirements



Org. Structure Description of MNE’s Business MNE’s Intangibles MNE’s Financial

ActivitiesMNE’s Financial & Tax

Positions

Chart showing legal & ownershipstructure & geo.location of operating entities

Important drivers of business profit

Overall strategy: development, over-sight, & exploitation, including location of R&D facilities & management.

Description of how the MNE is financed, includ-ing arrangements with third-party lenders

Annual consolidated financial statement for FY

Description of supply chain for material products & services

List of IP & entities that own IP

Financial transferpricing policies

List & description of unilateral APAs & other tax rulings relating to allocation of income

List & description of service arrangementsamong MNE members other than R&D, including policies

Agreements related to IP, including CSAs

ID central financialfunction, country of org. & management of entity providing function

Main geographic markets for productsand services

IP and R&D transfer pricing policies

Functional analysis describing contributions to value creations by individual entity

Material transfers of IP among MNE members during FY, including details

Business restructurings, acq-uisitions, divestitures in FY

PwC29 April 2015

Master File - Challenges

Master File

• New documentation format will require increased input from across the business to create and maintain the master file documentation in addition to the varying local country documentation requirements

• Data requirements within the documentation are extensive and will require companies to ensure that their systems can provide the data to the level of detail and accuracy required

• While sensitive information (e.g., top 25 most highly paid individuals) has been removed, requirements still include business sensitive information (e.g,. information regarding unilateral APAs and tax rulings)

• Expects contemporaneous documentation with annual updates of facts, financial data and benchmarking

• Consideration in regards to more ambiguous areas (e.g., source of financial data, materiality) and how best to utilize the ‘flexibility’ from a group perspective



PwC29 April 2015

CbC Template



Tax jurisdiction Revenues Profit

(loss) before income

tax

Incometax paid (on cash

basis)

Income taxes

accrued –current

year

Stated capital

Accumulatedearnings

Number of full time

employees

Tangible Assets

(other than cash and

cash equivalents)

Unrelated party

Related party

Total

Footnotes:

1. Revenues: Should exclude payments received from other constituent entities that are treated as dividends in the payer's country.

2. Income tax paid (on cash basis): Should also include withholding taxes paid by other entities (related and unrelated) with respect to payments made to the constituent entity(ies).

3. Income tax accrued - current year: Tax accrual should only reflect operations in the current year and should not include deferred taxes or provisions for UTPs.

4. Full time employees: This is seeking 'full time equivalents' and should include independent contractors. This may be reported on any basis, as long as it is consistent across countries.

PwC29 April 2015

CbC Template



Tax jurisdiction

Constituent entities

resident in the tax

jurisdiction

Tax jurisdiction of organization

or incorporation,

if different from tax

jurisdiction of residence

Main business activity(ies)

Res

earc

h an

d D

evel

opm

ent

Hol

ding

or

Man

agin

g in

telle

ctua

l pro

pert

y

Purc

hasi

ng o

r Pr

ocur

emen

t

Man

ufac

turi

ng o

r Pr

oduc

tion

Sale

s, M

arke

ting

or

Dis

trib

utio

n

Adm

inis

trat

ive,

Man

agem

ent o

r Su

ppor

t Ser

vice

sPr

ovis

ion

of S

ervi

ces

to

unre

late

d pa

rtie

s

Inte

rnal

Gro

up F

inan

ce

Reg

ulat

ed F

inan

cial

Ser

vice

s

Insu

ranc

e

Hol

ding

sha

res

or o

ther

equ

ity

inst

rum

ents

Dor

man

t

Oth

er

PwC29 April 2015

CbC Assessment - Challenges

Country-by-Country Reporting

• Gathering the information required efficiently and accurately may be challenging for IT systems – huge amounts of data are required and the time spent collecting this will be burdensome

• Access to global information means tax authorities can target you when they perceive there is a lack of substance or loss of tax revenue

• Disclosure of wider variety of information gives tax authorities the ability to test other matters (e.g., VAT) resulting in more queries for your business

• There will be greater visibility of transfer pricing within each business, particularly with some of the sensitive data that the client will be supplying – the client will need to spend more time managing a wider group of stakeholders to keep them appraised of developments



PwC29 April 2015

Local File: Provides More Detailed Information Relating to Specific Intercompany Transactions

Requires inclusion of the following information:

1. Description of mgmt. structure of the local entity, a local org chart, a description of the individuals to whom local mgmt. reports and the county(ies) in which such individuals maintain their principal offices

2. Detailed description of business(es) and business strategy, including involvement in business restructurings or IP transfers in current or immediately past year

3. Key competitors

4. For each category of controlled transactions:

o Description of material controlled transactions, including context

o Amount of payments and receipts for each category of controlled transactions involvingthe local entity

o Copies of all material intercompany agreements concluded by local entity

5. Copy of existing unilateral and bilateral/multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to the local file controlled transactions

6. Information and allocation schedules applying the TPM



PwC29 April 2015

Master File

• Review existing documentation

• Prepare gap analysis

• Discuss findings

• Prepare Master File Template

CbC Assessment

• Data extraction

• Data processing

• CbC risk assessment

• Discuss Action Plan

Remediation (e.g., restructuring)

• To be determined

How To Get Started - Process and Dependencies



PwC29 April 2015

TODAY

Start of project

Deadline to complete

Restructuring / Planning

File FY16 Master Filealong with income

tax return

Remediation –take action to reduce risk as needed (e.g., restructuring, draft Master File, etc.)- TBD

Potential opportunity: data extraction/ processing automation

Set goals, identify gaps, determine how to fill gaps, strategic assessment, prepare to tell your story, assess preparedness

2015 2016 2017

Prepare FY16 Master File

First tax year subject to Master File requirements

File FY16 CbC

Why do something now? The need for a plan - there’s a lot to do…



PwC29 April 2015

US Legislative Update: International Tax Reform


6 US Legislative Update: International Tax Reform

Rohit Kumar, Tax Policy Services Co-Leader (WNTS)

PwC29 April 2015

Political & Economic Drivers of Tax Policy



PwC29 April 2015

Bipartisan Cooperation or Continued Gridlock?

* Includes two Independents: Senators Bernie Sanders (I-VT) and Senator Angus King (I-ME) who caucus with Democrats** Rep. Michael Grimm (R-NY) resigned January 5, 2015, and Rep. Alan Nunnelee (R-MS) passed away on February 6, 2015

Senate House

Republicans 54 246**

Democrats 46* 188

Net Change from 113th Congress +9 Republicans +13 Republicans

Senate Control Could Change Over the Next Two Election Cycles

In 2016, Democrats will be defending 10 seats – all in states won twice by President Obama. Republicans will be defending in 7 states (FL, IL, IA, NH, OH, PA, WI) won twice by President Obama and in 2 states (IN, NC) won by President Obama in 2008.

In 2018, Republicans will defending 8 seats – all in states won by Mitt Romney in 2012. Democrats will be defending 5 seats in states (WV, MO, SD, MT, IN) Mitt Romney won by 9 percentage points or more.

FL, IL, IA,

NH, OH,

PA & WI

WV, MO,

SD, MT,

IN, + (FL

& VA)CO & NV

NV

NV

21

10

25

15

24

8

2014 2016 2018

Democratic seats Republican seats

WV, MO,

SD, MT,

IN, + (FL

& VA)

FL, IL, IA,

NH, OH,

PA & WINVCO & NV



PwC29 April 2015

Spending and Revenue as a Percentage of GDP

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

1965 1975 1985 1995 2005 2015 2025

Per

cen

tage

of

GD

P

50-yr historical average revenues

17.4%

50-yr historical average outlays

20.1%

Projected revenuesSolid: current lawDashed: alt. proj.

Projected outlays, Solid: current lawDashed: alt. proj.

2014 revenues 17.5%

2014 outlays 20.3%



PwC29 April 2015

-6%

-5%

-4%

-3%

-2%

-1%

0%

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Fede

ral B

udge

t Def

icit

/ G

DP

50-yr historical average = -2.7%

2013actual: -4.1%

Alternative Projection:- Permanent extension of expiring tax provisions- No BCA sequestration - Medicare “Doc Fix” permanently extended

2016-25 Deficit: $7.6 trillion

2016-25 Deficit: $10.1 trillion

CBO January 2015 baseline2014

actual: -2.8%

Source: Congressional Budget Office, Budget and Economic Outlook: 2015 to 2025 (January 2015); PwC calculations.

Federal Budget Outlook, FY 2015-2025



PwC29 April 2015

Fiscal deadlines & Other Dates Affecting Tax Policy

December 31, 2014 Business and individual tax provisions expired

February 2, 2015 President’s FY 2016 budget submitted to Congress

February 27, 2015 Department of Homeland Security funding expired

March 15, 2015 Federal statutory debt limit suspension period expired

March 31, 2015 Medicare “doc fix” expires; physician payments reduced 21%

April 15, 2015 House & Senate budget resolution target date

May 31, 2015 Highway funding expires

June 1, 2015 FISA & PATRIOT Act national security provisions expire

June/July 2015 US Supreme Court decision expected in King v. Burwell case

June 30, 2015 Export-Import Bank authorization expires

August 2015 GOP presidential primary debates begin; Iowa straw poll held

October 1, 2015 FY 2016 begins; budget “sequestration” reinstated, Internet tax moratorium expires

October /November 2015 Treasury debt limit “extraordinary measures” expire



PwC29 April 2015

International Developments



PwC29 April 2015

Business Tax Reform Has Been a Global Trend

Lower tax rate Base broadening proposals

Exemption system (“territorial”)

Consumption taxes used to fund tax reform

Primaryfeatures of reform



PwC29 April 2015

International Competitiveness

39.1

24.8

20

25

30

35

40

45

50

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Top Statutory (Federal and State) Corporate Tax Rates, OECD 1981-2014

United States

OECD Average Excluding US

Since 1988, the average OECD statutory corporate tax rate (excl. US) has fallen by over 19 percentage points, while the US rate

Source: OECD Tax Database and PwC Calculations



PwC29 April 2015

9 8 9 1012 13 14 15 16

2123 24

27 28

0

5

10

15

20

25

30

1986 1988 1989 1991 1992 1998 2000 2001 2003 2004 2005 2006 2009 2011

Source: PwC report, Evolution of Territorial Tax Systems in the OECD, prepared for the Technology CEO Council, April 2, 2013.

Number of OECD countries with dividend exemption systems has grown since last US tax reform –only six of 34 OECD countries have worldwide tax systems

Worldwide Outlook



PwC29 April 2015

Research Credits & Patent Box Regimes

-10%

0%

10%

20%

30%

40%

50%

Indi

aPo

rtug

alSp

ain

Fran

ceD

enm

ark

Mal

aysi

aB

razi

lH

unga

ryN

orw

aySo

uth

Afr

ica

Turk

eyC

zech

Rep

ublic

Can

ada

Taiw

anB

elgi

umC

hina

Net

herl

ands

Irel

and

Japa

nA

ustr

iaIt

aly

Aus

tral

iaU

nite

d K

ingd

omR

ussi

aSo

uth

Kor

eaSi

ngap

ore

Uni

ted

Stat

es*

Slov

enia

Chi

leFi

nlan

dIc

elan

dIn

done

sia

Isra

elLu

xem

bour

gM

exic

oPo

land

Slov

ak R

epub

licSw

eden

Swit

zerl

and

Ger

man

yN

ew Z

eala

nd

US is 27th out of 41 countries

Countries with solid bars have patent box regimes. (Ireland's Knowledge Development Box is under development). R&D tax subsidy rate does not reflect patent box. US rate is a weighted average of alternative simplified and regular research tax credits.

Source: Information Technology and Innovation Institute, "The United States Lags Far Behind in R&D Tax Incentive Generosity," July 2012



PwC29 April 2015

Lack of Competitive US Tax System Reflected in Cross-Border M&A /Redomiciliations



PwC29 April 2015

US Tax Policy Outlook



PwC29 April 2015

President Obama’s Framework for Business Tax Reform

• Reduce corporate rate from 35% to 28%

• Provide 25% rate for certain domestic manufacturing income

• Minimum tax on foreign earnings of US-based company CFCs

• Has proposed using $150 billion in ‘one-time’ tax reform revenue to fund infrastructure spending

• Budget also included a “financial crisis responsibility fee”



PwC29 April 2015

Obama Administration FY 2016 BudgetSelect International Revenue-Raisers Reserved for Tax Reform

Proposal 10-year amount ($ billions)

Impose a 19-percent minimum tax on foreign income* $206.0

Restrict deductions for excess interest for members of financial reporting groups $64.1

Prevent avoidance of foreign base income though manufacturing service arrangements $18.4

Limit the ability of domestic entities to expatriate $12.8

Modify tax rules for dual capacity taxpayers $10.3

Create new Subpart F category for digital goods and services $8.7

All other provisions** $21.5

Note: 14-percent mandatory tax on previously untaxed foreign E&P reserved for infrastructure / deficit reduction $268.1

Source: Treasury Department FY 2016 estimates (February, 2015). *Provisions in Italics represent new proposals.**Other provisions includes new smaller FY 16 provisions for closing Subpart F loopholes.



PwC29 April 2015

• The Administration proposes using Subpart F to impose a per-country minimum tax on the foreign earnings of US corporations and their CFCs.

• The minimum tax would apply to US corporations that (i) are US shareholders of CFCs with foreign earnings or(ii) have foreign earnings from branches or from performing services abroad.

• The proposal would subject those foreign earnings to o current US federal income tax at a rate (not below zero) of 19%, o less 85% of the per-country foreign effective tax rate (ETR), termed the

‘residual minimum tax rate.’ • Minimum tax would be imposed on current foreign earnings whether or not

they are repatriated.o Thus, all foreign earnings could be repatriated without further US tax.

Obama FY16 Budget – International Tax ProposalsMinimum Tax – Overview



PwC29 April 2015

House Ways & Means Chairman Paul Ryan (R-WI)

Tax reform is a ‘critical centerpiece of the Republican agenda to promote economic growth’

• Reform is a question of ‘when’ and ‘not if’; could be 1 to 3 year process• Current international system is a ‘jalopy’ from the 20th century;

replacement is a matter of economic survival• Consensus with Administration that corporate system is antiquated and

the rate is too high; many differences on details• Supports top rate of 25 percent for individuals and corporations• Open to a ‘phase 1’ approach focusing on business tax reform• Ways and Means will pursue an ‘aggressive’ timeline for reform



PwC29 April 2015

Senate Finance Committee Tax Reform Working Groups

Bipartisan working group co-chairs:Individual Income Tax:Senator Chuck Grassley (R-IA) & Senator Mike Enzi (R-WY), Senator Debbie Stabenow (D-MI)Business Income Tax:Senator John Thune (R-SD) & Senator Ben Cardin (D-MD)Savings & Investment:Senator Mike Crapo (R-ID) & Senator Sherrod Brown (D-OH)International Tax:Senator Rob Portman (R-OH) & Senator Chuck Schumer (D-NY)Community Development & Infrastructure:Senator Dean Heller (R-NV) & Senator Michael Bennet (D-CO)

Working groups timeline• February / early April: Education sessions• April / May: Roundtable presentations• May 25: Report to Chairman Hatch & Ranking Member Wyden



PwC29 April 2015

What is the definition of revenue-neutral?

Revenue Baseline

Current-law baseline assumes expiration of temporary business and individual tax provisions (“tax extenders”) and resulting increase in revenue

Current-policy baselineassumes renewal of tax extenders and therefore no revenue from expiration and no cost for extension.

Estimation Period

Congress uses 10-year budget windowto measure revenue effects of tax legislation.

The Obama Administration wants long-run sustainability, meaning revenue neutrality beyond the 10-year budget window, and opposes using one-time revenue (e.g., mandatory repatriation) and timing differences (e.g., realization of LIFO reserves) to pay for permanent rate reductions.

Scoring Methodology

Conventional revenue estimation, by the staff of the Joint Committee on Taxation includes behavioral responses.

The House has adopted dynamic scoring, which includes the macroeconomic growth (and revenue) effects of tax reform.



PwC29 April 2015

Expired Business & Individual Tax Provisions

Senate Finance Committee• 2-years (2014 /

2015)

House Ways and Means Committee• Permanent

H.R. 5771, Tax Increase Prevention Act• 1-year (2014)

Research credit -$16.0 billion -$155.5 billion* -$7.6 billion

CFC look-through -$2.5 billion -$20.3 billion -$1.2 billion

Active financing -$10.4 billion -$58.8 billion -$5.1 billion

Bonus depreciation -$3.5 billion -$287.4 billion* -$1.5 billion

All other business and individual provisions

-$51.6 billion(50 other provisions)

-$302.9 billion(six other bills)

-$26.2 billion(49 other provisions including technical

corrections)

Total -$84 billion -$824.9 billion -$41.6 billion

* Denotes bill passed House of Representatives



PwC29 April 2015

Treaty overview

The Senate Foreign Relations Committee has reported out favorably the following treaties and protocols but the prospects for Senate ratification remain unclear due to procedural objections by Senator Rand Paul (R-KY)

• Hungary

• Luxembourg

• Switzerland

• Chile

• Spain

• Poland

Treaties submitted to Senate• Japan

Treaties initialed and awaiting signature• Norway

Treaties in negotiation• United Kingdom

• Vietnam

Note: A protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters was also considered and reported out favorably on April 1, 2014.



PwC29 April 2015

Questions?



PwC29 April 2015

International Compliance & Reporting Topics


7 International Compliance & Reporting Topics

David Chen, ITS-QS Partner (Detroit)Chip Harter, ITS Principal (WNTS)Jarrod Wood, ITS Director (WNTS)

PwC29 April 2015

Agenda

• E&P and Accounting Methods

• Section 901(m)

• Section 909



PwC29 April 2015

E&P and Accounting Methods



PwC29 April 2015

Earnings & Profits - Overview

• What is Earnings and Profits (“E&P”) and why it is important?o Generally reflects economic earnings of a corporationo Foundation tax attribute for international reportingo Key data point for determining taxability of corporate distributions

• US shareholders of controlled and non-controlled foreign corporations must calculate E&P

• E&P of a foreign corporation is calculated in accordance with US tax ruleso Step 1 – obtain financial statements in functional currencyo Step 2 – adjust financial statements for material US GAAP adjustmentso Step 3 – adjust financial statements for US tax principles



PwC29 April 2015

Earnings & Profits – Overview

Computation• Step 1 – Local currency financial statement

o May be calculated under local accounting principleso Must clearly reflect income

• Step 2 – US GAAP adjustmentso Adjustments to reflect income under US GAAPo Common adjustments

– Historical costs– Valuation of assets / liabilities– Inflation adjustments– Deferred taxes– Foreign exchange– Purchase accounting



PwC29 April 2015

Earnings & Profits – Overview

Computation• Step 3 – US tax adjustments

o Generally timing itemso Deferred tax expenseo Bad debt expenseo Inventory reserveo Other reserve accounts – contingency, severance, restructuringo Goodwill amortizationo Unrealized F/Xo Prior period adjustments



PwC29 April 2015

Earnings & Profits – Pooling

• Pre 1987 E&P – Layering • Post 1986 – Pooling

o E&P maintained in functional currencyo Taxes maintained in USDo Maintained in basketso Dividends paid from CY E&P first, then accumulated E&P



PwC29 April 2015

Earnings & Profits – Translation

• Post 1986 E&P maintained in functional currencyo Distributions translated at appropriate exchange rate

– Spot rate for actual dividends– Weighted average for deemed dividends under Subpart F– Last day of foreign corporation tax year for deemed dividends for investment in

US property• Taxes maintained in USD

o Spot rate between 12/31/1986 and 1/1/1998o Annual average rate post 1/1/1998



PwC29 April 2015

Earnings & Profits – Adoption of Accounting Methods

• New accounting methods are adopted for a foreign corporation for the first taxable year in which E&P is “significant” for US tax purposes.o Significance defined by example to include actual or deemed dividends, Subpart F

inclusions, use of tax basis to allocate interesto E&P must be “trued up” to the new method as of the beginning of the adoption year

as if the foreign corporation always used the new method (impacts accumulated E&P, not current E&P).



PwC29 April 2015

Earnings & Profits – Common Elections

• Generally, elections may be made for a foreign corporation in calculating its E&Po Accrual method of accountingo Straight line depreciation under Alternative Depreciation System o Specific write-off for bad debto Recurring item exceptiono Section 404A for qualified foreign planso Capitalize and amortize start-up expenditures

• Elections made pursuant to Treas. Reg. §1.964-1(c)(3)



PwC29 April 2015

Earnings & Profits – Changes in Accounting Methods

• To adopt or change a method of accounting, controlling domestic shareholders of the foreign corporation must:o Follow all applicable procedural rules under section 446, including the filing of

forms (e.g., Form 3115) and securing permission of the IRSo File statement with its tax return for its taxable year with or within which ends the

foreign corporation’s year of changeo Provide written notice to all non-controlling shareholders

• Favorable terms & conditions that may apply to taxpayer-initiated method changes include:o Section 481(a) adjustment (to current E&P) increasing E&P spread over 4 tax years;

section 481(a) decreasing E&P spread over 1 tax yearo Prospective year of change (eliminates year-by-year analysis)o Audit protection for prior years protects historic E&P



PwC29 April 2015

Accounting Methods – Changes in Year End

• Generally, a foreign corporation is required to have the same tax year of its majority US shareholder

• Foreign corporation may elect tax year beginning one month earlier than its majority US shareholdero Election of one month deferral should be an automatic changeo Foreign corporation may elect off one month deferral

• Election of one month deferral may extend certain provisions for US shareholders of foreign corporationso Look-thru o Active financing



PwC29 April 2015

Section 901(m)



PwC29 April 2015

Pre-Section 901(m)Targeted Transactions

• US tax rules allowed step up in inside basis of assets of a foreign target

o Section 338(g) election

o Acquire disregarded entity for US tax purposes

• USP acquires FT for $300.

• Acquisition price exceeds value of assets at FT by $200.

• USP makes section 338(g) election to step up basis of assets in FT to FMV, thereby creating $200 of amortizable goodwill.

• Amortizable goodwill allows FT to reduce E&P for US tax purpose without impacting taxable income at FT.

• Amortization may convert low taxed E&P to higher taxed E&P.

USP(US)

FT(Foreign)

FT(Foreign)

§338(g) election

FMV: 300Tax Basis: 100

FT Owners

Cash

FT Stock



FMV: 300PP&E: 100Goodwill: 200

PwC29 April 2015

Operative Rules under Section 901(m)

Section 901(m) disallows a credit for the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to the relevant foreign assets.

• “Disqualified portion” – the percentage obtained by dividing (i) the aggregate amount of basis differences allocated to a tax year by (ii) the income for such tax year as measured for foreign tax purposes

• “Basis difference” – the increase in the tax basis of an asset for U.S. tax purposes as a result of a CAA

• Basis difference generally is allocated to each tax year in the same manner as depreciation/amortization



PwC29 April 2015

Section 901(m)Denial of FTCs in Case of Covered Asset Acquisitions

• FSub purchases FT after December 31, 2010 and makes a section 338(g) election.• Total stepped-up basis is $1,500,000 (all assets have a 15-year life).• Basis immediately prior to acquisition was 0, so “basis difference” is $1,500,000.• FT’s foreign income for year 1 is $1 million and foreign tax is $500,000.

USP(US)

FSub(Foreign)

FT(Foreign)

FT(Foreign)

FT Owners

Cash

FT Stock

x $500,000 [foreign taxes] = $50,000 disallowed tax

Disqualified portion of year 1 tax:

$100,000 [$1,500,000 ÷ 15]$1,000,000 [foreign income]



PwC29 April 2015

Operative Rules under Section 901(m)

“Disposition” of relevant foreign asset (“RFA”) triggers basis difference

• Section 901(m) provides upon the “disposition” of a RFA, any remaining basis difference is allocated to the tax year of disposition

• Prior to Notice 2014-44, the term “disposition” was not specifically defined by the statute

• Lack of definition resulted in uncertainty and opportunity for taxpayers to take positions minimizing basis differences from acquisitions



PwC29 April 2015

Notice 2014-44IRS Concern with Statutory Disposition Rule

• The acquisition of FT stock is a section 338 covered asset acquisition (“CAA”), and the assets of FT are RFAs.

• For U.S. tax purposes, FT is deemed to distribute all of its assets and liabilities to FSub in a tax-free liquidation pursuant to sections 332 and 337.

• Taxpayers take the position that the deemed liquidation constitutes a disposition of the RFAs for purposes of section 901(m).

o All of the basis difference is allocated to FT’s final taxable year.

o Thus, no basis difference is allocated to any later taxable year.

• Notice: This raises significant policy concerns because:

o The basis difference continues to exist after the deemed liquidation; and

o No foreign income tax is disqualified because no gain was recognized for foreign income tax purposes.

USP(US)

FSub(Foreign)

FT(Foreign)

FT(Foreign)

1Qualified stock purchase -§338(g) election

2

§338 CAA

CTB election

FT Owners

Cash

FT Stock



PwC29 April 2015

New Rules in Notice 2014-44

• Section 901(m) definition of disposition:

o The Notice definition of disposition includes only transactions that are taxable for U.S. income tax purposes, foreign income taxes purposes, or both.

o Transactions that are disregarded for U.S. and foreign income tax purposes are not dispositions for purposes of section 901(m) under the rules announced in the Notice.

• The Unallocated Basis Difference:

o Under the Notice, section 901(m) continues to apply to an RFA until the Unallocated Basis Difference is eliminated. A positive Unallocated Basis Difference may be reduced in one of two ways:

› U.S. depreciation/amortization deductions under the applicable cost recovery method, and

› In the case of a disposition, the lesser of (a) the foreign taxable gain (Foreign Disposition Gain or U.S. loss (U.S. Disposition Loss), or (b) the remaining Unallocated Basis Difference (the rules operate in reverse if the unallocated basis difference is negative w/r/t a RFA, e.g., U.S. gain reduces a negative Unallocated Basis Difference).

o In the case of a disposition that is taxable for both U.S. and foreign purposes, the entire Unallocated Basis Difference is taken into account in the year of the disposition.

• Special rules for Section 743(b) CAAs

o In the case of a Sec. 743(b) CAA, the disposition amount takes into account the foreign disposition gain or loss or U.S. disposition gain or loss that is allocable to the partnership interest transferred in the Sec. 743(b) CAA taking into account the basis adjustment under Sec. 743(b) allocated to the RFA under Sec. 755.



PwC29 April 2015

Notice 2014-44Section 4.04 Example 1 – CTB Liquidation Not a Disposition

• CFC’s acquisition of FT stock is a section 338 CAA, and Asset is an RFA.

• For U.S. tax purposes, as a result of the CTB election, FT is deemed to distribute Asset to CFC in a tax-free liquidation.

• Under the Notice, the CTB election is not a disposition of Asset for purposes of section 901(m) because no gain or loss was recognized for purposes of U.S. or Country A income tax.

o No Unallocated Basis Difference will be taken into account by FT as a result of the deemed liquidation.

o Section 901(m) will continue to apply until the entire $200 Unallocated Basis Difference has been taken into account under section 901(m)(3)(B).

USP(US)

CFC(Country A)

FT(Country A)

FT(Country A)


2

§338 CAA

CTB election

FT Owners

$300

FT Stock

Asset(land)

Asset(land)

U.S. Basis: $100For. Basis: $100




PwC29 April 2015

Notice 2014-44Section 4.04 Example 2 – Partial Disposition

• CFC’s acquisition of FT stock is a section 338 CAA, and Asset is an RFA.

• FT’s transfer results in $50 gain for foreign tax purposes, but no gain for U.S. tax purposes.

• There is a disposition of Asset for purposes of section 901(m) because the transfer results in gain being recognized by FT for foreign tax purposes.

o FT takes into account the portion of the Unallocated Basis Difference equal to the Disposition Amount of $50 (i.e., the lesser of the foreign disposition gain of $50 or the unallocated basis difference of $200).

o Section 901(m) will continue to apply to Asset, as held by FC, until the remaining $150 Unallocated Basis Difference has been taken into account under section 901(m)(3)(B).

FT(Country A)

USP(US)

CFC(Country A)

FT(Country A)


2

§338 CAA

Transfer

FT Owners

$300

FT Stock

AssetAsset



FC(Country A)

FC Stock & Cash

Asset

Asset




PwC29 April 2015

Section 909Final Regulations



PwC29 April 2015

Pre-Section 909 Targeted Transactions



LP

USP

FHC

CFC

USP

FHC

DE 1 CFC

USP

FHC

Partner B

FP

Partner A

Inter-Branch PaymentDebt for Local Tax

Equity for US TaxLoss SurrenderE&P

Taxes

Reverse Hybrid Transactions

Loss Sharing Transactions

Hybrid Instrument Transactions

Partnership Allocation

DE 2

DE 1 DE 1 DE 2

PwC29 April 2015

FTC Splitting Events - Background

Section 909 Generally

• A “foreign tax credit splitting event” occurs if “related income is (or will be) taken into account by a covered person.” Section 909(d)(1).

• “If there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by the taxpayer, such tax shall not be taken into account for purposes of this title before the taxable year in which the related income is taken into account . . . by the taxpayer.” Section 909(a).

• If there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a section 902 corporation, such tax shall not be taken into account:

1) for purposes of section 902 or 960, or 2) for purposes of determining earnings and profits under section 964(a)

• until the related income is taken into account under chapter 1 by the section 902 corporation, its section 902 shareholder, or a member of the section 902 shareholder’s affiliated group. Section 909(a), (b).



PwC29 April 2015

FTC Splitting Events – Explanation of ProvisionsSection 909 – Final RegulationsSplitter Arrangements Generally and Exclusive List of Splitter Arrangements

• Similar to Notice 2010-92 and the Temporary Regulations, the Final Regulations provide an exclusive list of arrangements that give rise to splitters:o Reverse hybrid splitter arrangementso Loss-sharing splitter arrangementso Hybrid instrument splitter arrangementso Partnership inter-branch payment splitter arrangementso No “new” splitters were introduced in the Final Regulations.



PwC29 April 2015

FTC Splitting Events – Notable Changes

Final Regulations Issued in TD 9710 (February 9, 2015)• The Final Regulations are substantially similar to the Temporary Regulations but contain several

modifications, which include, for example, the following:

o Two new examples that clarify the related income of a reverse hybrid splitting arrangement.

o Clarification that a “usable shared loss” is a shared loss that could be used under foreign tax law to offset income of the U.S. combined income group in a current or previous foreign taxable year.

o Clarification that references to U.S. combined group’s “income” in Treas. Reg. § 1.909-2(b)(2)(v) are intended to refer to income for purposes of foreign tax law. That Treas. Reg. section defines related income for loss sharing splitters.

o Clarification that a U.S. equity hybrid instrument splitter arrangement exists whenever an accrual causes the instrument’s owner to have a foreign income tax liability without giving rise to income under U.S. tax law. Thus, an actual payment of the accrued amount does not prevent the hybrid instrument from being a splitter. However, the regulations acknowledge that payments may be treated as a distribution of related income providing a new example to illustrate the rule.

o Clarification that split taxes are released only when the appropriate amount of related income is taken into account, which can occur as a result of either (i) a distribution or inclusion out of the covered person’s E&P, or (ii) the payor combining with the covered person in a section 381 transaction and having a positive E&P adjustment.



PwC29 April 2015

FTC Splitting Events – Explanation of ProvisionsSection 909 – Final RegulationsReverse Hybrid Splitter Arrangements – Treas. Reg. § 1.909-2(b)(1)

• A reverse hybrid is a splitter arrangement when a payor pays or accrues foreign income taxes with respect to income of a reverse hybrid.

• The “split taxes” are the foreign taxes paid or accrued with respect to the income of the reverse hybrid.

• The “related income” is the U.S.-measured E&P of the reverse hybrid with respect to which the split foreign taxes were paid or accrued.

• Final Regs. clarify: related income must be adjusted annually. A reverse hybrid can have fluctuating amounts of related income if it subsequently incurs gains and losses (i.e., its E&P goes up and down over multiple tax years).



LP

Local: Flow-through

US: Corporation

USP

FHC

DE 1

PwC29 April 2015


• Split taxes are “unsuspended” from this reverse hybrid splitter arrangement when the related income of LP is taken into account for U.S. tax purposes by FHC (e.g., by way of a distribution to DE 1).

• LP earned 100 of income (the “related income”) on which DE 1 paid 20 of foreign tax (and, as a result, FHC has 20 of split taxes).

• LP subsequently distributes 40 as a dividend to DE 1. Split taxes are unsuspended in proportion to related income taken into account by FHC for U.S. tax purposes. When 40 of related income (40% of total related income) is distributed to DE 1, the proportionate amount of split taxes are unsuspended: 8 (i.e., 40% of 20).



LPLocal: Flow-through

US: Corporation

USP

FHC

DE 1

40 Dividend

LP related income: 100

20 Split Taxes

PwC29 April 2015


• Example: Assume USP, a domestic corporation, wholly owns FHC, a foreign corporation, which in turn wholly owns LP, a foreign entity that is a corporation for U.S. tax purposes and a flow-through entity for foreign tax purposes. Finally, assume LP wholly owns DE1, a disregarded entity for U.S. tax purposes.

o Assume also that LP earns no income in the current year other than 100u through the operations of DE1. DE1 is taxed 30u on its income by the relevant foreign country.

o No “related income” in this fact pattern because FHC is not subject to foreign tax on any of LP’s income. See Treas. Reg. § 1.909-2(b)(1)(iii).



DE 1

USP


US: Corporation

FHC

DE 1

PwC29 April 2015


• Assume LP has $100 of E&P, $70 of the E&P is generated by LP, and $30 of the E&P is from DE1

• $70 of LP’s E&P is taxed to FHC under foreign law, and $30 of E&P attributable to DE 1 is not taxed to FHC.

• Distributions are deemed made pro rata from related and unrelated income. Accordingly, a $10 dividend paid by LP is deemed to include $7 of related income and $3 of unrelated income.

• Split taxes are unsuspended proportionately as related income is recognized by the required person. Accordingly, when $7 of the $70 related income is distributed, 10% ($7/$70) of split taxes are unsuspended.



DE 1

USP


US: Corporation

FHC

$10 dividend

(of which

$7 is related &

$3 is unrelated)

LP Income:

$70 related

$30 unrelated

PwC29 April 2015

FTC Splitting Events – Explanation of ProvisionsSection 909 – Final RegulationsReverse Hybrid Splitter Arrangements – Treas. Reg. § 1.909-2(b)(1)(v) Ex. 1 (Added by Final Regulations)

• Facts: Country A imposes an income tax at the rate of 30% on DE with respect to the items of income earned by RH. Prior to year 1, RH had no income for country A purposes and had no post-1986 earnings and profits for U.S. Federal income tax purposes. In year 1, RH earns 200u of income on which DE pays 60u of country A tax. Pursuant to Treas. Reg. § 1.901-2(f)(4)(ii), USP is treated as legally liable for the 60u of country A taxes paid by DE. DE has no other income. In year 2, RH earns no income and incurs no losses or expenses. At the end of year 2, RH distributes 100u to DE.

• 100u of the 200u of related income of RH, or 50%, is taken into account by USP by reason of the 100u dividend. Accordingly, a ratable portion of the split taxes, or 30u of taxes (50% of 60u), is no longer treated as split taxes and is taken into account by USP for U.S. Federal income tax purposes.



RH(A)

USP(US)

DE(A)

RH Year 2 E&P: 200uCountry A tax: 60u

100u

PwC29 April 2015

FTC Splitting Events – Explanation of ProvisionsSection 909 – Final RegulationsReverse Hybrid Splitter Arrangements – Treas. Reg. § 1.909-2(b)(1)(v) Ex. 2 (Added by Final Regulations)

• Facts: The facts are the same as in the previous example, except that there are no year 1 distributions and in year 2, RH has a 100u loss for U.S. Federal income tax purposes as well as for country A tax purposes. For country A tax purposes, DE takes the 100u loss into account in year 2 and may not carry back the 100u loss to offset its country A taxable income for year 1. At the end of year 2, RH distributes 100u to DE.

• Related income of RH is reduced to 100u (200u -100u) in year 2 because RH incurred a 100u loss in year 2 attributable to the activities that are included in DE’s country A tax base.

• 100u of the 100u of related income of RH, or 100%, is taken into account by USP by reason of the 100u dividend. Accordingly, 60u of taxes (100% of 60u), is no longer treated as split taxes and is taken into account by USP for U.S. Federal income tax purposes.



RH(A)

USP(US)

DE(A)

RH Year 1 E&P 200uRH Year 2 E&P: 100u

100u

PwC29 April 2015

FTC Splitting Events – Explanation of ProvisionsSection 909 – Final RegulationsLoss-Sharing Splitter Arrangements – Treas. Reg. § 1.909-2(b)(2)

A “loss-sharing splitter arrangement” is an arrangement arising under a foreign group relief or other loss-sharing regime, to the extent a shared loss of a “U.S. combined income group” could have been used to offset income of that group in the current or in a prior foreign taxable year (a “usable shared loss”) but is used instead to offset income of another U.S. combined income group.

• Final Regulations clarify that a usable shared loss includes a shared loss that could be applied under foreign tax law to offset income in a prior foreign taxable year, but is not caused by the potential to use a loss in the future.

“Split taxes” are the foreign taxes on income from the current foreign taxable year, or , in the case of a foregone carryback loss, from the prior foreign taxable year, equal to the “usable shared loss” that is offset.

“Related income” is the amount of income under foreign tax law of a U.S. combined income group that is offset by the usable shared loss of another U.S. combined income group.



USP

UK DE1

UK Holdco

UK CFC

UK DE2

PwC29 April 2015

FTC Splitting Events – Explanation of ProvisionsSection 909 – Final RegulationsLoss-Sharing Splitter Arrangements – “US Combined Income Group”

A “U.S. combined income group” includes:

• A single individual or corporation (U.S. or foreign),

• All entities beneath the individual or corporation that combine items of income, deduction, gain, or loss for U.S tax purposes with such individual or corporation, and

• A U.S. consolidated group is deemed to be a single corporation; individuals filing a joint return are treated as a single individual.

U.S. combined group income consists of aggregate taxable income of members with positive taxable income, as computed under foreign tax law.



U.S. combined groupUS Sub

UK CFC1

UK Holdco

UK CFC2

UK DE

USP

U.S. combined group

U.S. combined group

*Assume USP and US Sub are consolidated

UK Hybrid

U.S. combined group

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FTC Splitting Events – Explanation of ProvisionsSection 909 – Final RegulationsLoss-Sharing Splitter Arrangements – Same or Prior Year Rule

If a U.S. combined group that surrenders a loss could not use the loss itself in the relevant year of the loss-sharing or in a prior foreign taxable year, no splitter arrangement arises.

In 2015, UK DE2 surrenders an operating loss to UK CFC in 2015.

Alt 1: if USP, DE1, or DE2 could use DE2’s loss for the current or a prior year, there’s a loss-sharing splitter.

Alt 2: If neither UK DE2 nor UK DE1 (nor USP) could use DE2’s loss in the current foreign taxable year, or in a prior foreign taxable year, there’s no loss-sharing splitter, and no split tax arises from the 2015 loss surrendered, regardless of whether the USP U.S. combined group incurs U.K. tax in a later year.



USP

UK DE2UK DE1 UK CFC

UK DE2 surrenders operating loss to UK CFC in 2015

UK DE1 incurs no U.K. tax in 2015

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FTC Splitting Events – Explanation of ProvisionsSection 909 – Final RegulationsU.S. Equity Hybrid Instrument Splitter Arrangements – Treas. Reg. § 1.909-2(b)(3)(i)

• A splitter arrangement includes a U.S. equity instrument with respect to which the issuer is entitled to a foreign tax deduction for amounts paid or accrued with respect to the instrument, regardless of whether it is debt for foreign tax purposes (e.g., notional interest deduction).

• “Split taxes” are the additional foreign taxes paid or accrued by the owner of the hybrid instrument because it is subject to foreign tax on income from the instrument.

• “Related income” is income of the issuer in an amount equal to the amounts giving rise to the split taxes that are deductible by the issuer for foreign tax purposes, determined without regard to the actual amount of the issuer’s income or E&P for U.S. federal income tax purposes.



Deduction for foreign tax purposes

Interest income for foreign purposes

USP

Holdco (holder)

Opco(issuer)

US: EquityForeign: Deductible

Operating income remains in Opco for U.S. tax purposes

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FTC Splitting Events – Explanation of ProvisionsSection 909 – Final Regulations U.S. Equity Hybrid Instrument Splitter Arrangements – Treas. Reg. § 1.909-2(b)(3)(i)

• A U.S. equity hybrid instrument is a splitter arrangement if under the laws of a foreign jurisdiction in which the instrument owner is subject to tax, the instrument gives rise to income includible in the instrument owner’s income and such inclusion results in foreign income taxes paid or accrued by the owner, and,

• Under the laws of a foreign jurisdiction in which the issuer is subject to tax, the instrument gives rise to deductions that are incurred or otherwise taken into account by the issuer.

• Split taxes are the taxes paid or accrued by the owner of the hybrid instrument.

• Related income is the income at the issuer that equals the amount giving rise to taxable income at the owner.



Deduction for foreign tax purposes

Interest income for foreign purposes

USP

Holdco (holder)

Opco(issuer)

US: EquityForeign: Debt

Operating income remains in Opco for U.S. tax purposes

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FTC Splitting Events – Explanation of Provisions

Partner B

FP

Sections 909 – Final RegulationsPartnership Inter-Branch Payment Splitter Arrangements – Treas. Reg. § 1.909-2(b)(4)



Partner A

DE1 DE2

• An inter-branch payment is a splitter arrangement if the inter-branch payment is not allocated to the partners in the same proportion as the distributive shares of income of the branch making the payment.

o Split taxes are the taxes allocated to a partner under the partnership agreement that exceeds the taxes the partner would have been allocated if the taxes were allocated in accordance with the income from the branch making the payment, or,

o Related income is the income allocated to a partner that exceeds the income the partner would have been allocated if the income was allocated in accordance with the branch making the payment.

$75 income$75 deduction

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FTC Splitting Events – Explanation of Provisions

Partner B

FP

Sales income Allocation: 75 %(A)/25% (B)Local TI $25Tax $10

Services income, Allocation: 50%(A)/50%(B)Local TI $125Tax $25

Sections 909 – Final Regulations Partnership Inter-Branch Payment Splitter Arrangements – Treas. Reg. § 1.909-2(b)(4)



Partner A

DE1 DE2

• DE2 paid $25 of taxes, $10 on its business income ($50 x 20%) and $15 on payment from DE1 ($75 x 20%).

• If $25 of tax from DE2 is allocated 50/50 to Partner A & B, then the allocation should constitute a splitter event on the inter-branch payment.

• If $10 of taxes from DE2 is allocated 50/ 50, and remaining $15 of taxes from DE2 (associated with $75 payment from DE1) is allocated 75 / 25, then there may be no splitter event.

• Allocation of the earnings may cause a splitter event.

$75 income$75 deduction

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BEPS Update – International Tax & State Aid


8 BEPS Update – International Tax & State Aid

Scott Hesse, ITS Partner (Detroit)Gerard Cops, Partner (PwC-Luxembourg)Russell Loose, ITS Director (Detroit)

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BEPS Action Plan: What is it?

Response to:• Climate of austerity and renewed focus on the contribution from business

• Fiscal deficits, politicians and the media

• Tax structuring concerns

• Globalization, technology, etc.

Comprehensive action plan published on 19 July 2013:• Identifies 15 actions that are required to address BEPS;

• Sets deadlines for actions (the majority within 24 months); and

• Identifies resources and methodology required to implement solutions.

What is the essence of the Action Plan?• Focus on double non-taxation (or less than single taxation) through “cracks” in the interaction

of domestic tax systems

• Primary aim is to address situations where profits are perceived as geographically divorced from activities



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BEPS Action Points & TimelinesNo Action Area of Focus OECD Deadline(s)

1 Address the tax challenges of the digital economy Digital economy Deliverable - Sept 2014(VAT - February 2015)

2 Neutralize the effects of hybrid mismatch arrangements Coherence (Hybrids) Deliverable - Sept 2014

3 Strengthen CFC rules Coherence (CFCs) April/May 2015

4 Limit base erosion via interest deductions and other financial payments Coherence (Debt) December 2014

(February 2015)

5 Counter harmful tax practices more effectively, taking into account transparency and substance Coherence (‘Deals’) Deliverable - Sept 2014

6 Prevent treaty abuse Substance (Treaty) Deliverables - Sept 2014(Early 2015)

7 Prevent the artificial avoidance of PE status Substance (PE) Deliverable – Nov. 2014(January 2015)

8 Assure that transfer pricing outcomes are in line with value creation: intangibles Substance (TP) Varies by topic

(Dec. 2014 to July 2015)

9 Assure that transfer pricing outcomes are in line with value creation: risks and capital Substance (TP) Varies by topic

(Dec. 2014 to July 2015)

10 Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions Substance (TP) Varies by sub-topic

(Dec. 2014 to July 2015)

11 Establish methodologies to collect and analyse data on BEPS and the actions to address it Transparency (Data collection) January/February 2015

12 Require taxpayers to disclose their aggressive tax planning arrangements Transparency (Schemes) March /April 2015

13 Re-examine transfer pricing documentation Transparency (Documentation) Deliverable - Sept 2014

14 Make dispute resolution mechanisms more effective Transparency (Disputes) December 2014(January 2015)

15 Develop a multilateral Instrument Multilateral instrument Deliverable - Sept 2014



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Some Countries Are Already Acting on BEPS Issues

• European Union: Amendments to EU PSD, including addition of a GAAR

• United Kingdom: First of 44 countries to formally commit to implementing the new country-by-country reporting template; Announced consultation process on the implementation of the hybrids proposals; proposal for diverted profits tax

• Italy: New transfer pricing rules for on-line advertising

• Spain: New general audit guidelines indicate intention to focus on digital economy, use of hybrid mechanisms, deductibility of interest expense; introduction of rule denying deduction for payments if recipient does not treat as income or is subject to less than 10% rate of tax.

• France: New rules denying deductions for interest payments to related parties subject to low tax

• Austria: New provision imposing subject-to-tax test with respect to deduction for interest and royalties paid to related parties

• Canada: Consultation on domestic law approach to denying treaty benefits

• Norway: New limits on deductibility of interest expense

• Russia: Ministry of Finance letter to tax authorities calling for denial of treaty benefits

• Mexico: New requirements for eligibility for treaty benefits

• Ireland: Change in residency rules requiring all companies registered in Ireland to also be tax resident



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BEPS Initiative & U.S. International Tax Reform

• A number of anti-BEPS proposals have been advanced in the U.S. international tax reform context.• Expanding Subpart F regime

o Baucus Option Z to end deferral and give 40% participation exemptiono Baucus Option Y to make “low tax” income subpart F incomeo Baucus Proposal to repeal “check the box” subpart F planning and eliminate

954(c)(6) except for “non-hybrid” dividendso Camp 2 “Intangible Income” subpart F proposalo Minimum tax on foreign earnings of CFC’s in FY2016 Obama budget.

• Hybrid Arrangements - The FY2015 and FY2016 Obama budgets propose rules to restrict the use of hybrid arrangements that create stateless income

• Limiting Interest Deductions - The FY2015 and FY2016 Obama budgets propose restrictions for excessive interest deductions of members of financial reporting groups



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US Response to BEPS Initiative US Goals

• Develop clear and administrable rules• Improve dispute resolution• Maintain U.S. tax base• Avoid creating double taxation• Commitment to arm’s length transfer pricing• Further restrictions to CFC regime part of tax reform proposals• Resistance to major changes to PE concepts• Resistance to re-balancing of residence versus source taxation



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BEPS Update – Hybrid Mismatch Arrangements



• Identifying Hybrid Mismatch Arrangements:

o Deduction / No Inclusion

o Double Deduction

o Indirect Deduction / No Inclusion

• Domestic and Treaty Law Recommendations

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Overview of the 2014 Hybrids Deliverable

• On September 16, 2014, the OECD issued a Deliverable on hybrid mismatch arrangements (BEPS Action 2).

• The Deliverable is presented as a comprehensive set of proposed rules, outlined within twelve Recommendations.

• While announced as ‘final,’ the Deliverable states that additional work is to be performed with respect to several areas, including particularly regulatory capital and certain financial instruments.

• The Deliverable also states it will take into account the deliverables of other Actions, leaving the door open for potentially numerous and significant changes in 2015.



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• Key elements of a hybrid mismatch arrangement:

o Results in a mismatch in the tax treatment of a payment.

o Contains a hybrid element.

o The hybrid element is the cause of the mismatch.

o The mismatch in tax outcomes lowers the aggregated tax paid by the parties to the arrangement.



Overview of the 2014 Hybrids Deliverable

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OECD Action 2 sets out general recommendations for improvements to domestic law and tax treaties to address hybrid mismatches.

• Three Categories of Hybrid Mismatch Arrangements:1. Deduction / No Inclusion (D/NI): where a deductible payment made under a

financial instrument is not taxed as ordinary income by the payee’s jurisdiction.2. Double Deduction (“DD”): where a payment or item of expenditure incurred by

an entity is deductible in more than one jurisdiction.3. Indirect Deduction / No Inclusion (“Indirect D/NI”): where the effect of a

hybrid mismatch is shifted into another jurisdiction through another financial instrument.

BEPS Action 2: Hybrid Mismatches Deliverable



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Overview of the OECD recommendations




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Hybrid Mismatch ArrangementsD / NI Illustration – Hybrid Financial Instruments

Notes• Instrument classification or ownership

mismatch: e.g., collateralized loan arrangements, deferred subscription arrangements, convertible notes and derivative transactions

• Deductible under the laws of County B but not taxed in Country A

• Results in D/NI Outcomes and improper attribute (FTC) generators

A Co.

B Co.

Hybrid Financing

InstrumentPayment

Main Recommendations (“Linking Rules”)• Primary Rule: Deny payee deduction to the extent payment not taxed as OI. • Defensive Rule: Payee Income Recognition to the extent of payer deduction/benefit. • Additional Rule: Participation Exemption denied for related party deductible payments.

Supplemental Recommendations • Tax Credit Limitation: credit proportional to income inclusion.• Timing: targets only permanent differences (timing differences ignored).



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Hybrid Mismatch ArrangementsD / NI Illustration – Hybrid Entity Payments

Country B

Country A

Interest

A Co

B Co

B Sub

Loan

Notes

• Difference in tax classification of an entity produces D/NI outcomes from payments made by that entity.

• Country A sees B Co. as transparent. A Co. disregards B Co.’s existence and the Loan to B Co.

• Due to group surrender or other consolidation arrangements, B Co can use the loan deduction to offset tax on B Sub’s profits.

Main Recommendations• Primary Rule: Deny payee deduction to the extent payment not taxed as OI. • Defensive Rule: Payee Income Recognition to the extent of payer deduction/benefit. • The rule does not apply to the extent the deduction is set against dual inclusion income,

defined as income subject to tax as ordinary income in both jurisdictions.



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Hybrid Mismatch ArrangementsD / NI Illustration – Payments to Reverse Hybrids

Notes

• Difference in tax classification of an entity produces D/NI outcomes from payments made to that entity.

• B Co is treated as transparent under Country B’s laws and non-transparent under Country A’s laws.

• Income earned by B Co not subject to tax in Country A or Country B while C Co interest expense is deductible in Country C.

A Co.

B Co. C Co.

Loan

Interest

Main Recommendations• Primary Rule: Deny payee deduction to the extent payment not taxed as OI. • Defensive Rule: Not necessary given other recommendations, including:

o Improvements to CFC regimes

o Limiting tax transparency for non-resident investors / expanding PE and tax residency regimes

o Expansion of annual tax filing and information reporting requirements



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Hybrid Mismatch ArrangementsIndirect D/NI Illustration – Imported Mismatch

Notes

• Effect of a hybrid mismatch is shifted to another jurisdiction through the use of a simple loan.

• The result is an Indirect D/NI outcome between A Co and C Co, while B Co’staxable income is unaffected.

Main Recommendations• Primary Rule: Deny the deduction within the payor’s resident jurisdiction to

the extent that the deduction is set off against the payment in the payee jurisdiction. • Defensive Rule: No recommendation for a Defensive Rule provided.

Country B

Country A

A Co

B Co

C Co

Payment

Hybrid financing instrument

InterestLoan

Country C



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Hybrid Mismatch Arrangements Additional Recommendations

Implementation and Coordination

• While a “final” Deliverable was released in September, the Deliverable states that:

o Additional work is to be performed with respect to several areas.

o Will need to take into account the deliverables of other Actions, leaving the door open for potentially numerous and significant changes in 2015.

• Recommendations within the report are subject to ongoing review

• OECD and G20 are to provide additional guidance by September 2015 on how rules should be implemented

o Cooperation and coordination between taxing jurisdictions.

o Consideration of rules to be effective at a common date across jurisdictions.

• OECD recognizes that jurisdictions will need to understand the laws of other jurisdictions and how financial instruments and entities are taxed across borders.



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Hybrid Mismatch Arrangements Additional Recommendations

Recommendations on Treaty Issues

• Part II of the Deliverable recommends that the OECD Model Treaty should be amended to include provisions aimed at preventing the effects of hybrid mismatches.

• The Deliverable specifically addresses provisions for:

o Dual resident entities

o Transparent entities

o Hybrid mismatches

• Part II acknowledges the need for coordination of the OECD Model Treaty with the domestic law Recommendations in Part I but does not address all possible interactions.



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• Foreign tax authorities may be quick to act on OECD recommendations• Legislation has already been enacted or was proposed in many jurisdictions before

the latest BEPS report was issued• Enacted Proposed / Under Discussion

Austria AustraliaFrance JapanGermany Poland SingaporeS. AfricaMexicoSpainUnited Kingdom

• Impact of BEPS hybrid mismatch rules on existing arrangements may need to be evaluated to determine the potential impact on the future ETR




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BEPS Update – Permanent Establishment



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Permanent Establishment

What is Permanent Establishment• Permanent establishment, or PE, is a “fixed place of business through which business

is carried out” by which a business can create a taxable presence within a jurisdiction. Generally, a PE is created by having property or employees/workers located within a jurisdiction. The determination of a PE within a jurisdiction requires a detailed analysis based on what the employee’s (or agent’s) actions are in that particular jurisdiction.

• If a treaty exists between the U.S. and the foreign jurisdiction, the treaty generally specifies what creates a PE. Often when no treaty exists between the U.S. and a foreign jurisdiction, the jurisdiction’s rules on creating a taxable presence may be more broadly defined, thereby making it more difficult to avoid creating a taxable presence.

• Avoiding the creation of a taxable presence may be a means to reduce global tax liabilities.



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Permanent Establishment November 2014 Discussion Draft Highlights

• Three main areas of concern:

(1) Businesses have significant involvement in another jurisdiction's economic life without creating a PE (e.g., commissionaire).

• Four options for amending of dependent agent rule and simple proposal to amend the independent agent rule–aimed at commissionaire arrangements, but likely to impact a broad range of taxpayer structure/arrangements.

• No requirement for contract/terms to be "in the name of" or for agent to be restricted to "concluding contracts"–activity leading to contracts is sufficient.

(2) Separated/unwarranted use of specific activity exemptions to avoid PE.

• Preference to subject all specific activity exemptions to an overriding preparatory or auxiliary test; or

• Removal of specific exemptions for warehousing, purchasing, and data collection.(3) Fragmentation of activities/splitting of contracts within groups to avoid PE status.

• Looks at all activities or "associated enterprises" where there are "complementary functions" which are part of a "cohesive business operation.“

• Prevent avoidance of passing 12 month threshold by splitting contracts.• Does not address profit attribution.



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BEPS Update – Interest Deductions



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Action 4: Interest DeductionsDecember 2014 Discussion Draft Highlights

• The OECD seeks best practice rules on base erosion and profit shifting via interest expense and similar payments, particularly among related parties.

• The discussion draft makes it clear that a conclusion has not been reached in relation to the best practice recommendations.o The discussion draft sets out various options for addressing this issue, concluding

current rules do not address the underlying BEPS concerns. o Other considerations include interactions with EU law and other BEPS workstreams, as

well as how the rules would apply to certain industries/sectors.• The OECD has rejected the arm's length standard and withholding tax regimes as efficient

tools to prevent BEPS.• There is a similar proposal in the Obama Administration’s annual budget.

o The proposal also resembles existing UK rules, although the current UK limit is the entire worldwide interest expense, not an allocation.

o Similar rules operate in Australia, Finland, France, Germany, and New Zealand as a carve-out from a ‘fixed ratio’ test (see next slide).



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Action 4: Interest DeductionsDecember 2014 Discussion Draft Highlights

Potential Best Practice Rules1. Group-wide rules

• Limit net interest deductions to a proportion of the group’s actual net third party interest expense, based on a measure of economic activity such as earnings

• Limit interest deductions based on applying a group-wide ratio (such as net interest as a proportion of earnings)

2. Fixed financial ratio rules• Restrict interest expense to a specified proportion of earnings, assets or equity of a

company• Benchmark ratio must be low enough to address BEPS concerns without giving rise to

significant double taxation risk3. Combination group-wide and fixed ratio rules

• Fixed ratio would be set “deliberately low” so that it would only permit full interest deductions for entities which pose little risk of BEPS

• Group-wide rules would be used as an alternative where the initial (fixed ratio) test led to non-deductible interest



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BEPS Update – Treaty Abuse



• U.S.-Style Limitation on Benefits Provision (Possibly Without Derivative Benefits Test)

• General Anti-Abuse Rule

• Corporate Tie-Breaker Rule

• Specific Anti-Abuse Measures

• Recommended Domestic Law Changes

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Treaty Abuse Limitation on Benefits Proposal

• One of a number of alternative tests satisfied to qualify for treaty benefits:o Publicly Traded Testo Subsidiary Testo Ownership/Base Erosion testo Derivative Benefits Testo Active Trade/Business Testo Competent Authority Consultation

• The tests are intended to be relatively objective, based upon quantitative criteria.



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Treaty Abuse General Anti-Abuse Rule

• GAAR would be in addition to LOB Provision: Applies on subjective determination of the tax authority.

• Instead of providing a one-size-fits all solution, the Deliverable provides that a combination of an LOB article and/or PPT should be sufficient.

Proposed GAAR Comment“Notwithstanding the other provisions of this Convention, abenefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit,

Room for subjectiveconclusion by tax authorities

unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”

Room for refutation by taxpayer



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Treaty Abuse Corporate Tie-Breaker Rule

• Residency of a dual-resident company to be determined by “place of effective management.”

• Recommends mutual agreement procedure to determine residency.o Already included in some tax treaties (e.g., UK-US (2002), Dutch-UK (2008), and

US-Canada (2003)).

• Unlikely to be an improvement – long term uncertainty.



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Treaty Abuse Specific Anti-Abuse Measures (Examples)

• Dividend transfer transactions: holding period and anti-abuseo Minimum holding period to qualify for withholding tax relief.o Specific anti-abuse rules for intermediary entities.

• Indirect Immovable Property Sales. Source State taxation on capital gains on sale of companies, partnerships and trust with more than 50% immovable property.

• 3rd Country Permanent Establishments. Use of third country PEs for purpose of obtaining treaty benefits (triangular cases): o Transfer of assets to PEs in jurisdictions with preferential income treatment,

while resident state exempts income from PE.o Proposed new rule reduced treaty benefits if the combined aggregate tax rate is

less than 60% of the effective rate of the resident state.



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Treaty Abuse Treaties to Circumvent Domestic Law

• Inclusion of a US-style “saving clause” provision in Model Treaty, clarifying that domestic law rules applicable to residents shall not be affected by the treaty.o Various exceptions, such as elimination of double taxation, income of certain

persons (students, government service), non-discrimination, etc.

• Domestic anti-treaty abuse provisions applicable when: (a) “a principal purpose” of transaction was to secure a more favorable tax position, and(b) obtaining the desired treaty benefit was contrary to the “relevant provisions.”

• May open door for treaty overrides – no clear distinction offered.



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State Aid



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A major European tax initiative

• The European Commission (EC) is the executive body of the European Union (EU).

• The EC has two mechanisms for challenging member States’ tax arrangements that it regards as creating an improper competitive advantage.

• One of those mechanisms addresses ‘harmful’ tax competition that violates the EU’s business taxation Code of Conduct. A Code of Conduct violation simply requires the member State to end the ‘harmful’ tax practice.

• The other mechanism for tax challenges involves alleged ‘fiscal State aid,’specifically addressing the indirect subsidy of a reduced tax burden.

o A State aid violation can go beyond simply requiring the member State to end the offending tax regime or arrangement.

o The EC can also force that country’s tax authorities to claw back as much as 10 years’ worth of tax savings (plus compound interest) from companies that have benefited from the regime or arrangement.

State Aid – What is it?



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Economic pressures and public perceptions

• Like the OECD BEPS project, recent EU State aid actions reflect revenue needs and public concern about whether certain companies pay their ‘fair share’ of taxes or use legal loopholes (e.g., the ‘Double Irish’ structure) to reduce tax liabilities excessively.

o The BEPS project has helped create the environment for recent State aid actions.

o Some specific issues addressed in the BEPS project are also the target of EC tax challenges.

• Like the OECD, the EC is not tied to a single country’s interests and views itself as having a broad mandate to achieve a level economic playing field.

o There have been tensions within the EU over international tax laws, as certain countries are viewed as having tax policies that confer preferential treatment, to the economic disadvantage of other EU countries.

State Aid – What is driving it?



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State Aid – Definition



Existence of an economic advantage

Affects competition and trade between MS

Presence of a selective measure

Involvement of state resources

Article 107(1) TFEU (ex Art. 87(1) TEC):“Save as otherwise provided in the Treaties, any aid granted by a Member State (MS) or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between MSs, be incompatible with the internal market.”

For example: exemption, reduction of tax base, reduction of amount of tax due, deferral/cancellation of tax debts

From State resources?Example: loss of tax revenue

Causing a distortion of competition & affecting intra-EU trade? Mere fact that aid strengthens firm’s position sufficient.

Having a selective character?Certain undertakings or the production of certain goods/services

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• A State aid case begins with the EC announcing an investigation into a specific tax matter.

o The investigation can aim at a particular company’s tax arrangements with a particular country.

o The investigation can aim at a particular country’s tax system, either in general or with respect to a specific regime.

o EC State aid investigations generally take one to two years to complete.

• When the investigation is complete, the EC announces the result.o If it finds illegal State aid, it can require the member State to remove non-

compliant laws or enact compliant laws.o The EC may also order the member State to ‘recover aid granted’ (i.e., claw back

the tax benefits) for the previous 10 years – which could potentially cost a company many millions, even billions, of dollars.

o State aid rulings are subject to EU judicial review.

State Aid – What does it involve?



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EU State Aid

What has been happening recently?

Investigations into Ruling Practices:

• In 2014, the EC made high-profile challenges to several large multinationals and theirtax arrangements with European countries that many companies use in their tax planning.These actions may reflect the EC being emboldened by the OECD BEPS project. Thesecases are the first in which the EC has used State aid powers to challenge individualtransfer pricing rulings as not in accordance with the arm's-length principle.

Investigations into Tax Regimes:• In 2013, the EC began investigating Gibraltar's corporate tax system, which dates

from 2010, and in 2014 the EC added Gibraltar's tax rulings to the investigation. Theinvestigation is ongoing.

• In November 2014, the General Court of the European Union annulled two EC State Aiddecisions against Spain based on what the Court deemed to be tenuous application of the‘selectivity’ criteria.

• In February 2015, the EC announced its investigation of the Belgian excess profits rulingsystem.



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EU State Aid - Practical impact: A bird’s eye view

• Awareness of fiscal State Aid as a risk increasing after some high profile cases• Media coverage of fiscal State Aid is increasingly generating questions; CFOs want

information• Increasing awareness of (potential) accounting impact of fiscal State Aid risks;

accountants may ask more questions on this when considering a business’ tax position• Tax directors, tax advisors and the tax authorities still find this subject complicated• Although some businesses do already have internal risk management for other types

of State Aid, a control framework for fiscal State Aid is often lacking• Many tax departments seem to be unaware of fiscal State Aid risks; if things ever were

to go wrong, this could put the tax department in a tricky situation and jobs at risk; ownership of the issue is a problem



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BEPS Update –Next Steps



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BEPS & State Aid

What Should Companies Do?• Review the level of substance in entrepreneur companies and in financing

structures; future tax policy could be more geared towards headcount and asset management; determine if your transfer pricing for key entities is consistent with the substance in place and review your documentation;

• Determine which, if any, components of your global tax strategy are vulnerable to BEPS and/or State Aid attack and consider possible unwinds and/or alternative structures;

• Quantify the potential range of lost benefits and the cost of compliance with Country by Country Reporting/Master file;

• Monitor U.S. legislative developments;• Develop a high level message to management/stakeholders about the potential

impact of BEPS/State Aid on your company;• Continue global tax planning, ensuring structuring has sufficient substance and

evaluating vulnerability to unilateral or multilateral attack (or U.S. legislative or regulatory changes).



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Offshore Treasury Centers & Foreign Currency Issues


9 Offshore Treasury Centers & Foreign Currency Issues

Chip Harter, ITS Principal (WNTS)David Chen, ITS-QS Partner (Detroit)Jarrod Wood, ITS Director (WNTS)

PwC29 April 2015

Agenda

PricewaterhouseCoopers

• Introductions• Brief overview of key concepts

o Foreign currency gains and losseso Subpart F rules applicable to FX gains and losses

• Treasury Center issueso Timing issueso Subpart F netting issueso Section 267(a)(3)(B) issues

• Section 987



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Brief Overview of Key Concepts



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Key Concepts for Foreign Currency Gains and Losses

1. Section 988 currency gains or losses are:• Ordinary in character

• Sourced at residence of QBU

2. Section 988 transactions include:• Accruing foreign currency denominated income or expense

• Foreign currency denominated debt

• Foreign currency forward contract, futures contract, option or similar financial instrument

• The disposition of foreign currency

3. Equity investments not included



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Subpart F Treatment of Foreign Currency Gains and Losses

1. Net foreign currency gains are foreign personal holding company income (“FPHCI”)

2. Net losses do not offset other categories of FPHCI unless election is made under Treas. Reg. § 1.954-2(g)(4).

3. Foreign currency gains and losses on interest-bearing liabilities are allocated and apportioned between subpart F and non-subpart F income based on the manner in which interest expense is allocated (absent special elections)

4. Certain foreign currency gains and losses are excluded from FPHCI under the “business needs exception”



PwC29 April 2015

Subpart F Exception: Business Needs & Bona Fide Hedging Transactions

FX gain or loss is excluded from current subpart F income if either:

• FX gain/loss arises from qualifying transaction (the business needs exception)o FX gain/loss arises in normal course of trade or businesso Item does not give rise to Subpart F income (other than FX income)o Item is not itself a currency derivative, or

• FX gain/loss arises from bona fide hedge of qualifying transactiono Standard generally based on the section 1221 standard for “hedging”, but

expanded upon for subpart F purposeso Proper identification required!



PwC29 April 2015

Treasury Center Issues



PwC29 April 2015

Before Treasury Center

• Each entity interacts directly with Bank

o Alternatively, US hedges for affiliates

o Will that qualify for tax hedging? Subpart F?

• Cash poor CFCs borrow from Bank

o Alternatively, cash rich CFCs loan to cash poor CFCs

o Can CFC lender hedge that risk?

• Consider potential application of the section 1092 straddle rules.

PLI – Current Treasury and Currency Issues8 January 2015

CFC +600

US

CFC (-400)

FX 1 FX 2

Bank

FX 3 FX 4

FX 5

FX 6loan

FX 5 hedge FX 6

hedge

DRE/ Branch



PwC29 April 2015

Basic Treasury Center Fact Pattern

Possible Benefits:

• Creating better oversight and visibility

o Centralized investment

• Cash pool leader

o Reduce interest expense

o Extension of look through rules?

o Avoiding pitfalls of US participation

• Hedging

o ISDAs & Dodd Frank

o Back to back hedges

o Timing whipsaws

o Netting exposures

PLI – Current Treasury and Currency Issues8 January 2015

CFCs

US

CFCTreasuryCenter $

CFCs

Bank

Loans in multiple

currencies

Hedges where necessary to manage net risk

Loans in multiple

currencies

Hedges of business risks

Hedges of business risks



PwC29 April 2015

CFCs

US

CFCTreasuryCenter $

CFCs

Bank

Crucial to have offsetting FX gains and losses recognized in same tax year.

• Net section 988 gain for a year is generally subpart F income under section 954(c)(1)(D).

• Net section 988 loss for a year is generally allocated against deferrable income. Treas. Reg. §1.954-1(c)(ii).

• Even if the Treasury Center has a balanced book of positions, it can have net FX gain in one year with net FX loss in another year if offsetting gains and losses are not recognized in the same year.

Issues with Realization Based FX Recognition

Multiple loans in multiple currencies

Hedges where necessary to manage risk on gaps




PwC29 April 2015

CFCs

US

CFCTreasuryCenter $

CFCs

Bank

Strategies for avoiding timing mismatches:

• Have realization events for all positions shortly before year end.

• Section 1092 straddle rules will defer realized losses to match with subsequent gains, but not vice versa.

• Treas. Reg. §1.446-4 hedge timing rules match hedge gains or losses with underlying gains or losses, but loans receivable or payable are not hedges.

Mark to market accounting

• Mixed Straddle Account under Treas. Reg. §1.1092(b)-4?

• Securities dealer MTM accounting under section 475.

Issues with Realization Based FX Recognition






PwC29 April 2015

CFC 1

US

CFCTreasuryCenter $

CFC 2

Dealer

Can a TC be a section 475 securities dealer?

• TC regularly purchases securities in the normal course of its trade or business from “customers” as it lends to affiliates.

o How much activity needed?

• Related parties can be customers under Treas. Reg. §1.475(c)-1(a)(3).

• Treas. Reg. §1.475(c)-1(a)(3)(iv), Ex. 1 illustrates that an internal hedging center can be a dealer.

• Elect out of negligible resale exception under Treas. Reg. §1.475(c)-1(c)(ii).

Treasury Centers – MTM Accounting Under Section §475






PwC29 April 2015

CFC 1

US

CFCTreasuryCenter $

CFC 2

Dealer

“Securities” which must be marked under section 475 include:

• A “note, bond, debenture or other evidence of indebtedness”;

• An interest rate, currency, or equity NPC;

• Any “evidence of an interest in, or a derivative financial instrument in . . . any currency, including a short position, and any similar financial instrument in such a . . . currency”;

• And a ‘hedge’ of a security, including any “position which manages the dealer’s risk of . . . currency fluctuations . . . .”

• Note that under section 1092(d)(7) a FX debt liability is a short position in the currency for purpose of the straddle rules.

Treasury Centers – MTM Accounting Under Section 475






PwC29 April 2015

CFC 1

US

CFCTreasuryCenter $

CFC 2

Dealer

Can a section 475 dealer mark its FX debt liabilities to market under section 475?

• Treas. Reg. § 1.475(c)-2(a)(2) (debt issued by taxpayer not a security)

vs.

• Section 475(c)(2)(E) (short position in FX is a security)

• See, NYSBA Report on Subpart F Currency Issues

Treasury Centers – MTM Accounting Under Section §475






PwC29 April 2015

CFC 1

US

CFCTreasuryCenter $

CFC 2

Dealer

Treasury Centers – Subpart F Netting

Loans in multiple currencies

Loans in multiple currencies


Subpart F characterization of FX gains1. Internal treasury center can’t qualify for subpart F

dealer exception.

• Subpart F dealer exception requires unrelated customers.

2. FX gain or loss on loans receivable is subpart F gain or loss netted within section 954(c)(1)(D) unless it qualifies for the “business needs” exception of Treas. Reg. §1.954-2(g)(2)(ii).

• Business Needs Exception applies to FX gain or loss arising from a transaction entered into in the normal course of business which could not be reasonably expected to give rise to subpar F income other than FX gain.

• Exception might apply to FX gain on a loan receivable if all interest on loan receivable is expected to qualify under section954(c)(6) and receivable will be held to maturity.

o Can be difficult to qualify, given the passive income look thru rules for related party interest and the periodic expiration of section 954(c)(6).

• Entire FX gain or loss on a receivable is either subpart FX or not.



PwC29 April 2015

CFC 1

US

CFCTreasuryCenter $

CFC 2

Treasury Portfolio


£1000 Deposit ($100 gain)

£1000 Loan ($100 loss)

Subpart F characterization, cont’d3. FX gain or loss on an interest bearing loan payable is

characterized between subpart F and non-subpart F income in the same manner as interest on the loan would be allocated under Treas. Reg. §§1.861-9T & -12T. See Treas. Reg. §1.954-2(g)(2)(iii).

• Can business needs exception apply instead?

4. Given the asymmetric characterization of FX gains and losses on loans receivable vs. loans payable, serious subpart F mismatches can result from a balanced book of positions.

• In the example on the left, the entire FX loss on the loan receivable might qualify for the business needs exception, and therefore not reduce subpart F income, while a portion of the FX gain on the liability would be characterized as subpart F income because a portion of the interest expense on the deposit liability would be allocable to the passive treasury portfolio.

• Even though the combination of the loans receivable and the deposit liabilities produces a net FX gain of zero as an economic matter, the asymmetric characterization of the gains and losses produces net subpart F income.

• Although the subpart F inclusion can not exceed the net earnings of the TC for the year, the effect can be to erode the deferral benefit of section 954(c)(6) for related party interest earned by the TC.



PwC29 April 2015

CFC 1

US

CFCTreasuryCenter $

CFC 2

Treasury Portfolio


£1000 Deposit ($100 gain)

£1000 Loan ($100 loss)

Subpart F characterization, cont’d• Election under Treas. Reg. § 1.954-2(g)(4) can

provide more symmetric subpart F characterization.

• Under a (g)(4) election, CFC agrees to treat all section 988 gains and losses as subpart F GX gains and losses, allowing them all to be netted for purposes of section 954(c)(1)(D).

o Any net section 988 gain is FPHCI.

o Any net section 988 loss is deductible against FPHCI.

o Revocable only with Commissioner’s consent.

• Election works well for Treasury SPV’s which can maintain balanced book of FX positions.

• Election does not work well for operating entities that would want to take advantage of the business needs exception.

o Therefore, want to have TC in a separate CFC that has no operations checked into it.



PwC29 April 2015

CFC 1

US

CFCTreasuryCenter $

CFC 2

Swap Dealer


Floating Rate £ deposits

Fixed rate £ term loans

£ floating to fixed interest rate swap

Subpart F characterization, cont’dAsymmetric subpart F treatment of section 988 gains vs. interest rate related gains on securities.

• In example at left, assume that TC has a MTM gain of $20 on the fixed rate loans receivable, of which $10 is attributable to FX appreciation.

• Further assume that it has a $10 MTM loss on the floating rate deposits, all of which is attributable to FX fluctuations and a $10 loss on the interest rate swap.

• On the loans receivable, $10 of the gain is section 988 gain falling in section 954(c)(1)(D) and $10 is gain on securities falling in section 954(c)(1)(B).

• Both the $10 loss on the deposits and the $10 loss on the £ interest rate swap are section 988 losses falling in section 954(c)(1)(D).

• TC therefore has net section 954(c)(1)(B) FPHCI of $10 which is not offset by the $10 of net section 988 loss under section 954(c)(1)(D).

• (g)(4) election does not solve this problem.

• Consider integrated hedge under Treas. Reg. §1.1275-6.



PwC29 April 2015

CFC 1

US

CFCTreasuryCenter $

CFC 2

Treasury Centers – Timing of Interest Deductions

Deposits from multiple affiliates

Loans to multiple affiliates

Interest

Timing of Deductions for Interest

1. Section 267(a)(3)(B) provides that a borrower from a related CFC gets a deduction for interest expense only when interest is “paid” unless subpart F income to the lender.

2. In CCA 201334037, the IRS defined “payment” very narrowly, disregarding circular cash flows and interest payments financed by lender.

3. Application of section 267(a)(3)(B) in Treasury Center context produces duplication of E&P.

Interest



PwC29 April 2015

CCA 201334037

• Taxpayer borrowed funds from FP and deposited those funds into its General Account

• Taxpayer then paid interest on other intercompany loans owed to FP (as well as operational expenses to third parties) from its General Account

• The Service concluded under Battelstein/Davison that “the borrowed funds were, in substance, the same funds used to satisfy the interest obligation” resulting in “an effective postponement of payments due” and therefore interest deductions should be deferred under section 267(a)(3)

• The Service found “compelling” evidence that the interest payments should be traced to the FP debt:

• Taxpayer-FP loans either (1) netted borrowed principal against interest owed on other debts, (2) “earmarked” borrowed principal for outstanding interest obligations, or (3) were advanced close in time to interest payments

• Taxpayer’s FP borrowings increased year after year, unrelated to “temporary and unforeseeable adverse business conditions”, “unaccompanied by any infusion of capital”, and without consideration of “Taxpayer’s ability to make payments of interest thereon”

FPA

TaxpayerU.S.

Intercompany Loans

Interest



PwC29 April 2015

Section 987



PwC29 April 2015

Final Regulations Coming in the Near Future?

a. Tax Notes Today (January 15, 2014) – Danielle Rolfes (Treasury International Tax Counsel) stated that she hoped the final section 987 regulations would be issued by mid-summer. Rolfes stated that the final regulations would largely retain the framework of the proposed regulations, because Treasury believes that the framework makes economic sense.

b. Tax Notes Today (April 25, 2014) – Marjorie Rollinson (Deputy Associate Chief Counsel (International)) stated that the IRS and Treasury hoped to release final section 987 regulations before the end of June.

c. BNA Daily Tax Report (July 24, 2014) – Brian Jenn (Attorney-Adviser, Treasury Office of International Tax Counsel) said that the government is actively working on the final section 987 regulations since the July 1 launch of FATCA has passed.

d. BNA Daily Tax Report (September 22, 2014) – John Merrick (Special Counsel to the IRS Associate Chief Counsel (International)) said that the IRS is placing a high priority on the guidance under section 987.

e. BNA Daily Tax Report (October 17, 2014) – Steven Musher (Associate Chief Counsel (International)) said the guidance project under section 987 could possibly be done by the end of the calendar year and certainly by the end of the business plan year [June 30th].



PwC29 April 2015

What to Expect in Final Regulations

• Comments on the 2006 regulations are a guide to what to expect in the final regulations. The comments largely fell into two camps--(1) Requests that the government return to the 1991 regparadigm and (2) simplification of the 2006 reg paradigm.

1. Return to the 1991 equity pool paradigm—unlikely (see past statements by Danielle Rolfes).

2. Simplify the calculations required under the 2006 regulations--likely. Possible items to take note of include:

a. Simplification of rates used to establish the amounts on the balance sheet.

b. Simplification of rules relating to inventory.

c. Simplification of rules relating to section 988 transactions entered into by a QBU.

d. Better coordination between sections 987 and 988.

e. Simplification of the transition rules.

f. Possible changes to the partnership rules.



PwC29 April 2015

Practical Consequences Related to Section 987

• Subpart F considerationso 2006 Regulations require section 987 gain/loss to be treated as Subpart F income in

certain circumstances• E&P Determinations

o Even if the section 987 gain or loss is not subpart F income currently, E&P cannot be determined with accuracy if proper section 987 calculations are not performed.

• Scope of “remittance” and “contribution”o Are you picking up all disregarded royalties, loans and inventory sales transactions?o How does this fit in with your overall hedging approach?

• Definition of a QBU



PwC29 April 2015

What should taxpayers think about before the section 987 regulations are finalized?

• Confirm that a reasonable method has been adoptedo Is “doing nothing” a method?o Are refinements to the method necessary?o If so, is this a change in method of accounting?

• Assess potential impact of the finalization of the 2006 regulationso Determine approach to transition reliefo Assess whether any planning needs to be undertaken before the end of the

transition period• Document the current method• Take a critical look on current functional currency choices and qualified business unit

approacho Submit requests for changes in functional currency as appropriate



PwC29 April 2015

Hot Topics in International Tax


10 Hot Topics in International Tax

Jeff Brown, ITS Partner (Detroit)Chip Harter, ITS Principal (WNTS)Brian Chrzanowski, ITS Manager (Detroit)

PwC29 April 2015

Megatrends Five forces shaping our lives and our world

By 2050, the number of people over 65 is forecast to grow by over 200% in China, India, Indonesia, Bangladesh, Pakistan, Brazil, Mexico and Colombia.Population in Africa is expected to more than double in the next 40 years.

As incomes in Asia and Africa increase, the global middle class (daily expenditure of US$10-100 in purchasing power parity terms) will more than double to reach some five billion people by 2040.

The number of connected devices per person worldwide will rise from 3.47 in 2015 to 6.58 in 2020.

The world’s urban population is expected to increase 72% by 2020.

With a population of 8.3 billion by 2030 the world will need 50% more energy, 40% more water and 35% more food.



PwC29 April 2015

Megatrends Impact on Tax Landscape

• The global tax policy landscape is shifting dramatically• Pace of competition and globalization continues at breakneck speed, governments

around the world, constrained by the need to reduce deficits and maintain the confidence of financial markets are under pressure as never before to protect and grow tax revenues

• The result is a fast-changing compliance landscape where tax authorities everywhere are becoming more sophisticated (and collaborative) in their scrutiny, particularly of cross-boarder financing structures and other avoidance tools

• Despite this shift, global companies are under pressure to increase shareholder value by minimizing their global tax burden



PwC29 April 2015

Heightened Scrutiny

• Policymakers have been pushing for measures (i.e. legislation) to challenge “aggressive tax planning” where they feel that cross-border planning is more focused on double non-taxation rather than trying to avoid double taxation

o OECD BEPSo Local Country Taxing Authorities (i.e., Germany, UK, etc.)o European Uniono Judicial Decisions (i.e. European Court of Justice)

• These proposed measures often beg the question: Does a taxpayer that seeks to avail itself of the benefits afforded by a specific country (or countries) have sufficient substance within that country to warrant the tax benefits?

o There is a clear tendency for tax authorities to challenge tax effective structures with insufficient substance. They increasingly demand economic rationale behind international tax planning initiatives

o If a multinational company’s (“MNC”) tax strategy is aligned with its business strategy, then it should be feasible to meet this demand



PwC29 April 2015

Applicable Rules

• Depending on the countries in which the MNC operates, each respective country may be subject to more than one body of laws/rules governing substance.

• Consideration should be given to following the respective body of rules, where applicable:

o Domestic law – The laws of the country of organization or where the entity is a tax resident should be considered first.

o OECD – A review of the OECD rules should be considered, where applicable, to determine whether the OECD rules supersede domestic law.

o EU – A review of the applicable EU law, both primary EU legislation and secondary EU legislation may be considered. Under both primary and secondary EU law, Member States are permitted to enact anti-abuse rules. Failure to abide by these anti-abuse provisions means that the taxpayer will not be able to rely on EU law.

o Double Tax Treaties – it is important to review the applicability provisions (including any Limitation on Benefits) to determine whether treaty access is available when analyzing substance.



PwC29 April 2015

Substance

• The degree of ‘substance’ or the lack thereof is determined largely based on the unique facts and circumstances of a MNC.

• Judicial opinions have provided more guidance on what factors should be considered when measuring the level of substance that a MNC has achieved in a particular country

• Cadbury Schweppes (2006 European Court of Justice): With respect to the conditions that should be considered when determining the level of substance, the Court provided the following guidance:

o Subjective Intent: Was the intent of the MNC in choosing a particular jurisdiction to obtain a tax advantage?

o Objective Circumstances: It must be shown (through the eyes of a third-party) the MNC physically exists in terms of (i.) premises; (ii.) staff; and (iii.) equipment

– If assessing these factors leads to the finding that the MNC is a fictitious establishment not carrying out any genuine economic activity in the respective country, the creation of the respective entity must be regarded as having the characteristics of a “wholly artificial arrangement.”



PwC29 April 2015

• Ongoing debate as to the meaning and scope of the term “beneficial owner” in double tax treaties (e.g., relating to dividends, interest, and royalties)

• Recent international case law decisions have lead to continued ambiguity

o l’Economie v. Société Bank of Scotland (France, 2006), and Indofood International Finance v. JP Morgan (The United Kingdom, 2006), in decisions against the taxpayer

o Her Majesty the Queen v. Prévost (Canada, 2009), Vodafone International Holdings B.V. v. Union of India & Anr. (India, 2012) and Velcro Canada Inc. v. The Queen (Canada, 2012), with decisions expanding the meaning of beneficial ownership in favor of the taxpayer



Beneficial Ownership

PwC29 April 2015

Example: Italian Royalty Withholding Assessment

US Group

Dutch CV(Netherlands)

Perpetual license to non-US Intellectual

Property and ongoing cost sharing arrangement

Dutch BV(Netherlands)

Italian Subsidiary

(Italy)

License Agreement for use of non-US

Intellectual Property

Sub-License Agreement for foreign country use of Intellectual Property

• Speculation regarding Dutch substance prompted Italian audit assessment disallowing use of beneficial Italian/Dutch treaty rate

• Raises considerations related to both Dutch substance and application of “beneficial owner” concept

• Potential for broader implications stemming from other subsidiaries participating in royalty structure

• Reinforces importance of establishing and maintaining appropriate functions, risks, and associated supporting documentation



PwC29 April 2015

Select Foreign Tax Law Updates


ChinaIndiaEurope


PwC29 April 2015

Chinese GAAR (General Anti-Avoidance Rule)

• Applies to cross border arrangements• Applies to tax-avoidance schemes that are intended to obtain a tax benefit and do not

have a reasonable commercial purpose• Counteracts harmful tax practices, anti-abuse and treaty shopping.• Interplay with offshore indirect equity transfers • State Tax Administration typically adopts the following tests during investigation:

• Main purposes test • Substance test

• Burden of proof is on the taxpayer



PwC29 April 2015

Chinese Indirect TransfersPublic Notice 7

• Addresses Capital Gains Tax and Circular 698• When a foreign transferor indirectly transfers China taxable properties in a

transaction without a reasonable commercial purpose that results in the avoidance of CIT liability, the indirect transfer will be recharacterized as a direct transfer of those properties and subject to CIT

• New requirements and responsibilitieso First time clearly stated that a transferee, foreign or domestic, could be held liable

• The following transactions are deemed offshore indirect transfers of China taxable properties:

o Offshore indirect equity transfer transactionso Offshore transactions involving transfers of assets held under the establishment

and place (“E&P”) in China of a foreign company through the offshore transfer of a foreign intermediate holding company

o Offshore transactions involving transfers of immovable property in China



PwC29 April 2015

Indirect Transfers

Transferor 1

HoldingCompany 1

Chinese Company

100%

Transferor 2

Holding Company 2

Transferor 3

100%

Transfer of Equity

Transfer of E&P

Chinese Branch

Overseas

Public Notice 7 defines a transfer of the ‘equity’ interest in a foreign intermediate holding company broadly to cover any changes in the shareholders of the foreign company being transferred, including in the course of a group’s overseas restructurings. ‘Equity’ includes ‘other similar rights.’

Holding Company 3

100%

Chinese Immovable

Property

China

Transfer of Immovable Properties

Transferee

Example 1 Example 2 Example 3



PwC29 April 2015

Chinese Indirect Transfers‘Green Zone’: Transactions with Good Commercial Purpose

1. Transfer through public stock exchanges: • The foreign transferor buys and sells the shares of the listed company overseas

through public stock exchanges2. Unchanged tax treaty status:

• When the foreign transferor would otherwise directly hold and transfer China taxable property, the income from that direct transfer would be exempt from Chinese Income Tax under the applicable tax treaty or tax arrangements

• Example for a less than 25% Chinese investment



PwC29 April 2015

Chinese Indirect TransfersExamples

Company A (Hong Kong)

Company C

Company B

Direct Transfer: Enjoy the Treaty Benefit

Company A (Hong Kong)

Intermediate Holding Co.

Company C

Company B

Overseas

China

Indirect Transfer: Apply the Safe Harbor Rule

24% 100%

24%

Overseas

China



PwC29 April 2015

Chinese Indirect Transfers‘Green Zone’: Transactions with Good Commercial Purpose

3. Internal Group Restructurings: • Three criteria for deemed reasonable commercial purpose:

i. Deal consideration is completely settled with equity of the transferee or its subsidiaries (except equity of a listed enterprise)

ii. The shareholding relationship of the foreign transferor and transferee is 80% or more of the ‘equity’

iii. The internal group restructuring would not result in a reduction of the Chinese Income Tax burden on the gain arising from the potential subsequent indirect transfer

• Policy: Counteract those indirect equity transfers that have the purpose of obtaining a tax benefit through utilizing the safe harbor rule



PwC29 April 2015

Chinese Indirect TransfersExamples

Case 1 - Qualified Case 2 - Disqualified

Cases 1 and 2 involved a less than 25% China shareholding (in which both Hong Kong and Singapore treaties exempt CIT on dispositions)

Group HQ

Transferor (Hong Kong)

Holding Company

Chinese Company

Overseas

China

100%

Transferee (Singapore)

100%

100%

24%

Group HQ

Transferor (Cayman)

Holding Company

Chinese Company

Overseas

China

100%

Transferee (Singapore)

100%

100%

24%



PwC29 April 2015

Chinese Indirect TransfersExample

Case 3 is a 100% China shareholding (in which CIT would apply on a disposition by the US and Luxembourg)

Case 3 – Qualified

Group HQ

Transferor A (US)

Holding Company C

Chinese Company

Overseas

China

100%

Transferee B (Luxembourg)

100%

100%

100%



PwC29 April 2015

Chinese Indirect Transfers‘Red Zone’: Transactions with no reasonable commercial purpose

• If an offshore indirect equity transfer meets all of the following conditions, it will be considered a transaction lacking reasonable commercial purpose and thus subject to CIT:i. Value of Holdco: 75% or more of the value of the overseas company being

transferred is derived directly or indirectly from China taxable propertiesii. Derive Assets / Income: At any time within one year before the indirect

transfer of China taxable properties, 90% or more of the foreign company’s total assets (not including cash) is directly or indirectly derived from China taxable properties, or 90% or more of its income is directly or indirectly derived from China

iii. Foreign Tax Burden: The foreign income tax payable for the indirect transfer of the China taxable properties is less than the possible tax burden in China on the direct transfer of those properties

iv. Substance: The foreign company and its subsidiaries that directly or indirectly hold the China taxable properties perform limited functions and undertake limited risks that are not commensurate to their economic substance



PwC29 April 2015

Chinese Indirect TransfersGeneral criteria for assessing reasonable commercial purpose

• Whether the China proportion in the equity value is the main value of the transferred foreign company shares

• Whether Chinese investments comprise the majority of the assets or income of the transferred foreign company

• Whether the functions performed and risks undertaken by the transferred foreign company (and its subsidiaries) can substantiate the economic substance of the structure

• How long the shareholders, business model of the foreign company, and related organizational structures have existed

• Foreign income tax payment with respect to the offshore indirect equity transfer• Whether the indirect investment and indirect transfer can be replaced by direct

investment and direct transfer• The applicability of any treaty protection• Other related factors



PwC29 April 2015

Chinese Indirect TransfersReporting Requirements & Consequences

• The foreign transferor should assess whether there are reasonable commercial purposes for an offshore indirect transfer. If the foreign transferor cannot come to any position after its self assessment, it may present its case to the Chinese tax authority for a determination within 30 days of signing the equity transfer contract

• Should a transaction lack commercial purpose, failure to report and settle CIT liability for a taxable transaction by the transferor and failure to perform reporting or withholding obligations by the transferee will result in an interest levy on the foreign transferor and a penalty on the transferee

• The transferee also has reporting and tax withholding responsibilities – whether or not it is a foreign or domestic entity



PwC29 April 2015

India’s 2015 Budget Proposal

• Reduction in corporate tax rate from 30% to 25% over four years

• Current year surcharge (effective from April 1, 2015) increased by 2%

• Goods and Services Tax (GST) from April 1, 2016

• Direct Taxes Code dropped

• Deferral of GAAR

• Additional guidance with respect to overseas transfers

o “Substantial” – India assets > USD 1.7mn and at least 50% of value

o Value of assets at FMV (without liabilities) – rules to be prescribed

o Value based on latest balance sheet or transfer date, depending on facts

o Income reasonably attributable to assets in India taxable

o Relief to minority shareholders

o Transfer of shares in foreign company under a merger or demerger is exempt (subject to conditions)



PwC29 April 2015

Europe

Amendments to the European Union Parent Subsidiary Directive (PSD)• Hybrid loan provision intended to counter the distorting effects of mismatches

resulting from differences in the tax treatment of hybrid transactions within the scope of application of the PSD between EU Member States

• Introduction of a GAAR with a purpose to prevent the abuse of the PDS• Member States have until December 31, 2015, to implement these amendments in

their national legislation

Enactment of UK Diverted Profits Tax• A new 25% tax on a company’s diverted profits, effective April 1, 2015• To counteract contrived arrangements used by large groups (typically multinational

enterprises) that result in the erosion of the UK tax base • Applicable in two scenarios:

1. Avoidance of UK taxable presence2. Entities or transactions lacking economic substance



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These materials have been prepared only for a general discussion of matters of interest and do notconstitute professional advice. You should not act upon information contained in these materialswithout obtaining specific professional advice. No representation or warranty (express or implied) isgiven as to the accuracy or completeness of the information contained herein.