november 10, 2015 tax issues for non-tax lawyers 1
TRANSCRIPT
November 10, 2015
Tax Issues for Non-Tax Lawyers
1
2
• Goal: Provide a high level overview of current federal, state and local tax issues that may impact your non-tax practice
• Topics:– Corporate Transactions: IRS Ruling vs. Tax Opinion
– Tax Controversy Considerations for Transactions
– Avoiding the creation of a deemed tax partnership
– Sales and use tax issues including issues related to in-store sales and delivered goods
– Is an Instrument Debt or Equity
– Impact of clean energy tax incentives on retail and other non-energy companies
– When IRS reporting is required for customer/employee contests, litigation and other transactions, and the costs of failing to properly report
– Unclaimed property: How does it arise and what are the implications?
– Overseas Accounts
– Why are companies moving overseas?
Overview
3
Corporate Transactions: IRS Ruling vs. Tax Opinion
– Should you request an IRS ruling or obtain a tax opinion?
• Recent Example: Yahoo announces plans to distribute Alibaba shares to its shareholders in a tax-free spinoff.– Yahoo distributes Aabaco shares to its shareholders in a purported tax-free spin-
off (the “Spin-Off”).– The completion of the Spin-Off was conditioned upon Yahoo obtaining a favorable
IRS Ruling that the Spin-Off qualifies as tax-free distribution/spinoff of Aabaco under section 355.
– Active trade or business requirement issue
4
Tax Controversy Considerations For Transactions
• Non-tax practitioners should be aware of the real world implications of tax risk
• Tax practitioners often express tax risk using “will”, “should”, “more likely than not”, or “reasonable basis.”
• IRS Exam, IRS Appeals, Litigation – where your tax risk likely will be resolved may need to be considered in your assessment of the economics of a deal.
• State tax controversy considerations.
• Relevant current tax controversy trends.
5
• Contractual relationships, such as a “collaboration” or “alliance” agreement may result in a deemed partnership for tax purposes
• Contractual provision that no partnership is created by agreement does not control
• If a deemed partnership is created for tax purposes, Tax Code rules regarding partnerships apply
– Consequences:
• Need to apply Tax Code rules to determine tax treatment of relationship
• Results may significantly alter economics of transactions and relationship
Avoiding the Creation of a DeemedTax Partnership
6
• Sales Tax– Transactional tax imposed on retail sale of tangible personal property and certain
services
– Not a tax on vendors, but vendors are required to collect sales tax on each transaction (absent exemption) and remit the sales tax to the jurisdiction
– In addition to the state-level taxes, there are more than 7,000 local tax jurisdictions
Sales & Use Tax
7
• Use Tax– Complementary to the sales tax
– Tax imposed upon the storage, use or other consumption of tangible personal property or taxable services in a taxing jurisdiction
– Most use tax remitted by businesses
– Promotional items
Sales & Use Tax
8
• Sourcing – Which state laws apply?– Sales/use tax generally paid to the state where property sold, used or consumed
– Most states follow a “destination” concept for interstate sales
• Digital goods and services – billing address proxy
– Some states apply “origin” concept to intrastate sales
• May be based on “shipped from,” “order receipt,” or “order approval” location
– Creates issues where systems are POS-oriented
• Delivery
• Returns
Sales & Use Tax
9
• How much tax to collect? – Taxable sales price may include:
• Property/service sold
• Freight/handling charges
• Value of trade-ins/barter
• Value of manufacturer’s coupons or instant rebates
• Other taxes included in price
• Prepaid 911?
Sales & Use Tax
10
• Who remits the tax?– Vendor not required to collect use tax if no physical presence (“nexus”) in taxing
jurisdiction
• Physical presence means a location, employee, agent, warehouse, leased equipment, inventory, etc., in taxing jurisdiction
– No collection by many online retailers
– Attributional nexus – allows state to attribute nexus of in-state person making a market
• Related companies
• Click-through referrals
• Marketplace
Sales & Use Tax
11
Is an Instrument Debt or Equity?
• Labels do not control.
• Affects availability of often substantial interest deductions
• Focus of federal and state audits.
• Federal and state tax authorities may differ
12
Impact of Clean Energy Incentives on Retail & Other Non-Energy Companies
• Why? – Stakeholder desire to “go green”– Lock-in energy prices– Tax incentives
• Federal renewable energy incentives
– Production Tax Credit (PTC): 2.3¢ or 1.2¢ per kWh generated for 10 years
– Investment Tax Credit (ITC): 30% of capital costs
• Bonus and accelerated depreciation
• State tax and other incentives
13
• Investments in renewable energy span across industries including retail, financial service, tech and energy companies. Primary driver: tax benefits
ExampleInitial Cost $500,000ITC ($150,000)Depreciation ($148,750)Net Cost $201,250 40% of costTax Benefit 60%
• Additional potential economic benefits include:– Renewable energy credits (RECs)– Reduced energy costs– State tax and other incentives
Impact of Clean Energy Incentives on Retail &Other Non-Energy Companies
14
When IRS Reporting is Required and the Costs of Failing to Properly Report
• Taxable wages/ payroll concepts
• What is a 1099?
• Reporting requirements for customer contests and employee contests
• Employment litigation reporting – W-2 vs. 1099
• Why do you need a W-9 or W-8?
• Imputing and reporting income
• How are litigation settlements taxed/reported?
15
• UP is NOT a tax
• All states have UP laws
• The holder can have UP responsibilities regardless of whether it has nexus with the reporting jurisdiction
• Often UP statutes contain no statute of limitations or repose
• Often UP statutes contain no administrative appeals process
• Regulatory agency administering UP varies by jurisdiction
Unclaimed Property
16
• The Great Treasure Hunt– State budget shortfalls
• Delaware’s 3rd largest revenue source (~$500MM in 2014)
• California’s 5th largest revenue source
– Contingency fee auditors
• Aggressive view of includible property
• Aggressive audit tactics
• Receive 10%–15% of amounts recovered
Unclaimed Property
17
• Typical property types subject to escheat– Uncashed checks
– Traveler’s checks and money orders
– Financial accounts
– Contents of safe deposit boxes
– Utility deposits
– Proceeds of insurance policies
Unclaimed Property
18
• Digital property potentially implicated by UP laws– Electronic stored value cards/codes
– Virtual property
– Loyalty program benefits
– Vouchers for discounts
– Online credits
– Bitcoins and other electronic payment media
– Unused electronic subscriptions
– Unused software-as-a-service (SAAS)
Unclaimed Property
19
– FATCA: Requires foreign financial institutions to disclose information about their U.S. clients and U.S. individuals to disclose foreign financial assets
• Companies must consider FATCA withholding and tax gross up provisions in their agreement
• Foreign financial institutions required to disclose information about their U.S. clients
– FBAR: Requires U.S. persons to disclose information about their foreign accounts
• FBAR filing (FinCEN 114) is now due by April 15 of each year (formerly, June 30) with respect to the immediately preceding year
• Filing deadline can be extended along with federal income tax returns
• Corporate officers may be required to file if they have signatory authority over accounts of the company
Overseas Accounts
20
Why are Companies Moving Overseas?
• U.S. corporate marginal tax rates are some of the highest in the world
• Deferral
If a U.S. multinational company has foreign subsidiaries, the earnings of those Subs are not subject to U.S. tax when earned by a Sub
Taxed when the Sub pays it as a dividend to U.S. parent
• Anti-deferral
Some types of income earned by a Sub are taxed by the U.S. in the year it is earned. Dividends, interest, rent, royalties, and similar types of income
21
Why are Companies Moving Overseas?
High-tax country example
Foreign income: $100 Foreign tax rate: 25% Foreign tax paid: $25
U.S. corporate tax rate: 35% U.S. tax on $100 would be: $35
Dividend of $75 to U.S. Parent
Foreign tax credit: $25 U.S. taxes due ($35-$25) $10 Cash U.S. Parent keeps $65
Low-tax country example
Foreign income: $100 Foreign tax rate: 3% Foreign tax paid: $3
U.S. corporate tax rate: 35% U.S. tax on $100 would be: $35
Dividend of $97 to U.S. Parent
Foreign tax credit: $3 U.S. taxes due: ($35-$3) $32 Cash U.S. Parent keeps $65
22
Why are Companies Moving Overseas?
U.S. Parent
Foreign Subs
Foreign Subs
USP shareholders
U.S. tax base
Foreign tax base
Irish Parent
Irish Bebe
Irishshareholders
• Pre-Inversion Structure
Foreign Subs
Foreign Subs
USP shareholders
Irish Parent
Irish Bebe
Irishshareholders
New U.K.Parent
Foreign Acquired
• Post-Inversion Structure
U.S. Parent
23
Why are Companies Moving Overseas?
• Section 7874 80% Test
– If former shareholders of the U.S. company own 80% or more of the newly formed corporation after the acquisition, and
– The global group has less than 25% of its assets, employees, payroll, or income in the new country of incorporation, then
– The newly formed corporation will be treated as a domestic corporation for purposes of the Tax Code
24
Questions?
Sutherland Asbill & Brennan LLP
Jon Maddison 202.383.0916 [email protected]
Daniel R.B. Nicholas 202.383.0876 [email protected]