umling primosch subpart f
TRANSCRIPT
1
Subpart F
Presented by:
Seth Primosch
Edward Umling
April 19-20, 2010
Discussed in this Module
Policy Overview of “Subpart F” ( 951-964)
How Subpart F Accelerates U.S. tax on a CFC’s
earnings
Branch Rules
Foreign Personal Holding Company Income
Look-through Rules
Non-Dividend Repatriation
Planning for Distributions of PTI
2
Policy Overview
General Rule – Deferral
A U.S. taxpayer is not subject to taxation on the earnings of
a foreign subsidiary until the earnings are repatriated.
Exceptions ─ “tainted income”
(but only to the extent of E&P)
Foreign Base Company Sales Income “FBCSI”
Foreign Base Company Sales Service Income “FBCSvI”
Foreign Personal Holding Company Income “FPHCI”
Certain Investments in US property 956
3
Note: list is not all inclusive
4
5
“Tainted” Income
U.S. tax arises only if a CFC earns “tainted” income but
only to the extent of earnings & profit
Personal holding company income (inherently passive
items) dividends, interest, rents, royalties etc.
Exceptions: Look Through and same country exception
through January 1, 2010
Foreign Base Company Income
Section 956 income (earnings invested in U.S. property)
6
“Tainted” Income
Such subpart F income is taxable as a dividend and a
foreign tax credit is available.
Upon a subsequent distribution the dividend is not taxed
but it is treated as previously taxed income.
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8
Foreign Base Company
Sales Income
I.R.C 954(d)(1)
9
FPHCI
FBCSvI FBCSI
FBCI
FBC oil related
income
Base Company Income has four categories
Additional 951 inclusion under Subpart F not
discussed in the Module
Foreign base company oil related income
Insurance income
Bribe income
Boycott income
Income from blacklisted countries
Withdrawals from investments in less developed
countries
Section 956 – (will be discussed later)
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A simple explanation
FBCSI represents income from certain related party
transactions where the products acquired or sold do
not have a economic and legal connection to the CFC’s
country of incorporation because they were not
manufactured or consumed in the CFC’s country of
incorporation.
11
Base Company Sales Income
Defined in 954(d)(1)
The purchase from a related person and sale to
any person,
The purchase from any person and sale to, a
related person, and
the purchase from any person or sale to any
person on behalf of a related person.
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In case of property sold on behalf of a related person,
the property which is sold) is manufactured,
produced, grown, or extracted outside the country
under the laws of which the controlled foreign
corporation is created or organized and;
the property is sold for use, consumption, or
disposition outside such foreign country, or, in the
case of property purchased on behalf of a related
person, is purchased for use, consumption, or
disposition outside such foreign country.
13
Base Company Sales Income
The “foreign base company sales income” referred to
means income from the purchase and sale of property,
without any appreciable value being added to the
product by the selling corporation.
14
Policy Overview
U.S.
Mfg.
Lower Tax
No Mfg
Country Y
Buyer
Country X
100%
15
Example- Separation of selling in
manufacturing from to achieve a
lower tax liability
Example without Sales Subsidiary
US
Sales Price 800
COGS 100
Profit 700
Tax Rate 35%
U.S. Tax245
U.S.
Foreign
Buyers
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Tax Incurred
Now, interpose a “Sales Subsidiary”
US FBC Buyers
Sales 200 700 800
GOGS 100 125 700
Profit 100 575 100
Tax
Rate
35% 8% 28%
Final
Tax
35 46 28
U.S.FBC sales
sub in low
Tax
Country Y
Foreign
Buyers
Country X
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Results
US FBC Buyers Total
Tax
Otherwise
US Tax
Difference
Sales 200 700 800 800
GOGS 100 125 700 100
Profit 100 575 100 700
Tax Rate 35% 8% 28% 35%
Final Tax 35 46 28 109245
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18
How Subpart F Operates
U.S.
Luxembourg
(Mfg.)
UK
Buyer
Sells
Product
100%
Luxembourg
Sales Office
Sales Outside
Luxembourg
constitute FBS Income
19
How Subpart F Operates
U.S.
Luxembourg
(Mfg.)
UK
Buyer
Sells
Product
100%
Luxembourg
Sales Office
“Base Company Sales Income”
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Exceptions to the FBCSI
If product is purchased and sold to unrelated party
Product is manufactured in the home country of
incorporation of the CFC
Product that is manufactured by the CFC (954(d)(1)
(Substantial Transformation Test)
Product sold for use and consumption in the CFC
country of incorporation (same country exception)
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Product that is manufactured by the CFC
(Proposed Reg. 1.954-3(a)(4)(iv)(b))
(Substantial Contribution Test)
Issued December 24, 2008
Product that is manufactured by the CFC
(Substantial Contribution Test)
The CFC satisfies the test if all the facts and
circumstances clearly demonstrate that the CFC made
a substantial contribution
through the activities of its employees to the
manufacture of the Property.
See Proposed Reg. 1.954-3(a)(4)(iv)(a)
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through the activities of its employees
Old Regulations - Test 1
“Substantial Transformation”
If purchased personal property is substantially
transformed prior to sale, the property sold will be
treated as having been manufactured, produced, or
constructed by the selling corporation.
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Old Regulations - Test 2
Provides when a CFC is considered Manufacturing
If the activities of the CFC are “substantial in nature”
and are considered to constitute manufacturing”
“substantial in nature” – safe harbor test provided
where conversion costs account for 20% of the cost of
goods sold.
24
Old Regulations
Substantial Transformation Of Property
Examples in Treasury Regulation 1.954-3(a)(4)(ii)
The transformation of wood pulp to paper
The transformation of steel rods to screws and bolts
The transformation of fish into canned fish
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New Regulations
Product that is manufactured by the CFC
(Substantial Contribution Test)
The CFC satisfies the test if… a substantial
contribution through the activities of its employee
Such as….
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•Oversight and direction of manufacturing
•Material selection, vendor selection and
control of raw materials, work-in-process,
and finished goods
•Management of manufacturing costs (i.e.
risk of loss, or cost reduction)
•Control of logistics
New Regulations
Application of the
(Substantial Contribution Test)
“The weight accorded to the performance of
any quantum of any activity (whether or not
specified…) will vary with the facts and
circumstances of the particular business...”
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Stated another way…
The Substantial Contribution test is a fact and
circumstance test where no single activity is more
important than another.
Under the New Regulations
How is the Substantial Contribution Test is Applied ?
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US
P
CFC 2
Country X
CFC 1
Country X
Unrelated
CM
Country Y
Property is purchased from
a related party
Property is
delivered to a
contract
manufacturer
under terms of
agreement
How is the Substantial Contribution Test is Applied ?
Continued…
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CFC 1
Country X
Unrelated
CM
Country Y
CM performs substantial
transformation, assembly and
conversion outside of Country X
CFC 1 retains the right to
control raw materials, work
in process, finished goods
and right to oversee and
direct activities or
processes but does not
exercise through its
employees, its powers to
control the raw materials,
WIP, FG and does not
exercise powers of
oversight and direction.
CFC 1does not through its
employees direct the use
or development of the
intellectual property
CFC1 owns intellectual
property used in
manufacturing process
How is the Substantial Contribution Test is Applied ?
30
CFC 1
Country X
Finally CFC 1 sells the
finished product outside
Country XBuyers
Country T
no substantial contribution to manufacturing
RESULTS
CFC 1 does not satisfy the substantial contribution
test because it does not make a substantial
contribution through the activities of its employees to
the manufacture of the product.
Mere contractual rights to control materials and to
direct the manufacturing activities or process
pursuant to which the property is manufactured,
along with ownership of intellectual property are not
sufficient to satisfy the test.
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Explanation of Results
Change the Facts - Example
Assume the same facts except for the following:
CFC 1 through its employees, engages in designing the
product, participating in quality control and maintain
control over manufacturing and related logistics.
Moreover, employees of CFC 1 exercise the right to
oversee and direct the activities of CM in the
manufacture of product.
32
Result
Under the facts and circumstances of the business,
CFC 1 would satisfy the test because it makes a
substantial contribution through the activities of its
employees to the manufacture of product.
33
Another Example
Contract Manufacture
34
CFC 1
Country X
CM
Country Y
CM provides its own materials
and physically performs the
substantial transformation,
outside CFC 1 home country of
incorporation
Buyers
Country T
Additional Information
Employees of CFC 1 select the materials that will be
used to manufacture
CFC 1 does not own the materials or work-in-process
during the manufacturing process. However, CFC 1
through its employees, exercises oversight and
direction of the manufacturing process and provides
quality control.
CFC 1 manages the manufacturing costs and
capacities with respect to the product by managing the
risk of loss and engaging in planning and production
scheduling.
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Question
36
CFC 1
Country X
CM
Country Y
Buyers
Country T
Is there a
subpart F
pickup here?
Result
If the manufacturing activities undertaken with
respect to product occur through the activities of its
employees prior to sale then CFC 1 would qualify for
the manufacturing exception because it makes a
substantial contribution through the activities of its
employees to the manufacture of product.
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39
Foreign Base Company Service
Income
(“FBCSvI”)
I.R.C. 954(e)(1)
FBCSvI
Policy Overview
Performing services “For, or on behalf of”
Substantial Assistance Test
40
Policy Overview
U.S.
Low Tax
Country Y
Buyer
Country X
Sells Items that Require
Service Contracts
Services the Product as a
condition of the sale
41
Policy Purpose for BCSvI
Deny tax deferral where the service subsidiary is
separated from the manufacturing activity or related
corporation and organized in a country to obtain a
lower tax rate from service income
Exception
Same Country Exception
Unrelated Person
42
FBCSvI 954(e)(1)
Income (whether in the form of compensation,
commissions, fees, or otherwise) derived in connection
with the performance of technical, managerial,
engineering, architectural, scientific, skilled, industrial,
commercial or like services which
CFC performs for or on behalf of a related person
(954(e)(1)(A) )
Outside the country of incorporation (954(e)(1)(B) )
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“For, or on behalf of”
Services must be performed “for, or on behalf of,” a
related person to constitute foreign base company
services income.
The regulations identify four situations where a CFC
is to perform services for, or on behalf of, a related
person when the services are not directly provided to a
related person, but the related person is involved with
the services transaction
44
“For, or on behalf of”
Treas. Reg. 1.954-4(b)(1)(i) thru (iv)
The receives a financial benefit from, a related person
for performing services
CFC performs services which a related person was
obligated to perform
CFC performs services for the property sold by a
related person and that performance constitutes a
condition of the sale
The CFC receives substantial assistance from a related
person by performing the CFC's services
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Substantial Assistance Test
Treas. Reg. 1.954-4(b)(2)(ii)
If substantial assistance furnished by a related person
then, the CFC is deemed to have provided services (i.e.
supervision, know-how, financial assistance and
equipment, material, or supplies).
Test of substantial - If assistance is a principal element
in producing the income
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Measuring
“if assistance is the “Principal Element”
The cost to the controlled foreign corporation of the
assistance furnished equals or exceeds 50% or more of
the total cost to of the services performed by such
corporation.
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Example – Substantial Assistance 1.954-4(b)(3)
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CFC
A
US
CFC
B
CFC
C
B Manufactures and
sells machines to CB Pays A to do
installation and
maintenance
Exceptions to FBCSvI
An exception to the definition of foreign base
company services income is provided for income
derived by a CFC in connection with certain
services related to sales of property which is
produced, manufactured, grown or extracted by
the CFC.
See I.R.C. 954(e)(2); Treas. Reg. 1.954-4(d).
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Branch Rules
I.R.C. §952(d)(2 )
Congressional Concerns
Companies may circumvent anti-deferral by using a
branch company
Separation of the sales and manufacturing functions
inappropriately
Causes profits to end up in a lower tax jurisdiction
52
General Rule - 954(d)(2)
Branch rule is implicated where a CFC carries on
purchasing or selling activities by or through a branch
outside the CFC’s country of incorporation and using
that branch has substantially the same tax effect as if
the branch were a wholly owned subsidiary.
Branch is then treated as a separate corporation in
determining FBCSI.
53
General Rule - 954(d)(2)
The December Regulations treat the branch rules as
mutually exclusive: If the manufacturing branch
rules apply the sales branch rules does not apply (i.e.
no overlap)
Note- There are different rules for
sales and manufacturing branches
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Two Scenarios – Two Tests
MFG Sales
Sales MFG
US US
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Sales Test
MFG Sales
Sales MFG
Mfg. Test
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Sales Test
MFG
Country Y
Sales
Country
X
Branch rule applies to
sales/purchase branch when the
tax rate imposed by the country
where the branch is located is
less than 90% of and at least 5
percentage points below the
ETR if it had the income
otherwise been earned in the
country where the CFC is
located
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Sales Test
MFG
Country Y
Sales
Country
X
1. Compare the actual tax rate
on income in country X to a
hypothetical tax that would
apply if those sales were
earned in country Y
2. Apply the rate disparity test
Test
looks
up
Tax determinations shall be made by
taking into account only the income, war
profits, excess profits, or similar tax laws
(or the absence of such laws) of the
countries involved. Treas. Reg. 1.954-
3(b)(2)(i)(e) 58
Sales
Country
Y
MFG
Country
X
Mfg. Test
Branch Rule applies if the tax
rate in the country in which the
CFC is organized is less than
90% of and at least five
percentage points below, what it
would be if the income was
earned where the
manufacturing branch is
located.
The test is REVERSED
for the Mfg branch
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Test
looks
down
Sales
Country
Y
MFG
Country
X
Mfg. Test•Compare the actual tax rate on
sales income to a hypothetical
tax that would apply if the sales
income were earned in the
Manufacturing branch home
country
•Hypothetical tax is determined
under foreign law
Test
looks
down
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Manufacturing branches are tested separately
Manufacturing branches are tested separately if the
CFC manufactures “different” products in separate
branches or hybrid entities.
“Different” = “Distinct”
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Branch
A
Branch
B Example
Results
Branches A&B are tested separately if they are
making distinct products.
NOTE: One branch cannot taint another
.
Testing Separately
Country A sells to
related and unrelated
parties and does not
make substantial
contributions to the
manufacturing through
its employees. Country
A does not tax Country
B and C branches
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Country A
10%
Country
B
12.5%
UK
28%
.
Manufactures flat
screens (LCD’s) for
TV’s
Manufactures
Television Chassis
Sells Televisions
Results
The Analysis starts with the
Country B. The tax rate is not
5 percentage points below the
tax rate in Country B that
would apply if the LCD’s
were sold in the Country B
63
Country
A
10%
Country
B
12.5%
Country
C
28%
.
Manufactures flat
screens (LCD’s) for
TV’s
Manufactures
Television Chassis
Sells Televisions
Test
looks
down
Results - Continued
Next, analyze the Country
C. The Country A rate is
low taxed when compared
with Country C if the
Chassis were sold through
the Country C branch.
Therefore, the branch
rules apply to the chassis
but not to the LCD’s.
64
Country A
10%
Country
B
12.5%
Country
C
28%
.
Manufactures Flat
screens for TV’s
Manufactures
Television Chassis
Sells Televisions
Test
looks
down
Discussion
The branch rules do not automatically mean that
the income is FBCSI but that the parent
company and the branches are treated as
separate CFC’s.
The income from Country B is not tainted and
therefore excluded however, the income from
Country C is included and currently taxable
assuming no exception applies.
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Two tests…but six procedural steps
1. Identify the sales and purchasing locations
2. Determine the ETR in the locations
3. Identify what locations the sales or purchasing
should be compared with to determine whether low-
tax jurisdiction exists
4. Determine how the sales and purchasing would have
been taxed in the manufacturing or the country of
incorporation (if relevant)
5. Apply the tax rate disparity test (mechanical test)
6. Determine the otherwise FBCSI
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Discussion - The Substantial Contribution Test
Under the December Regulations, if the substantial
contribution test is met then, it is the same as physical
manufacturing. So if only one location satisfies the
substantial contribution test then that location
represents the manufacturing location for purposes of
applying the branch rules.
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B
Mfg
A
Sales
C
Mfg
.
Did not meet the
substantial
contribution test
so tax rate
disparity test is
applied against B
Test 1
looks
Test 2
looks
down
Trying to locate the tested manufacturing branch
when more than one location satisfies the
manufacturing test
68
Country
10%
Country
18%
Country
21%
.
Manufactures
Television Chassis
Sells Televisions
Manufactures
Television Chassis
If more than one
location independently
satisfies the
manufacturing test on
the same item of
property then, the
location with the lowest
ETR is the
manufacturing location
69
Country A
10%
Country
B
12.5%
Country
C
28%
.
Ships Product to
unrelated CM
Sells Product
Substantial
Contribution made
through its employees
to Product of CM
Contract
Manufacturer
Country D
70
Country A
10%
Country
B
12.5%
Country
C
28%
.
Contract
Manufacturer
Country D
Result The branch rule does NOT apply...
Substantial transformation test is
met by country C branch AND, the
new substantial contribution test is
met by Country B branch.
Therefore, the branch rule uses only
the 12.5% rate for the tax rate
disparity test.
What happens if no single location satisfies
the manufacturing test when substantial
contribution is present?
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CFC 1
Sales
CM
Components
CM
Final
Product
identify the sales location
that should be tested
Identify purchasing
locations.
Assume substantial
contribution made to
mfg through its
employees by CFC 1
Group various locations together (i.e. all
locations that are not treated as “high-tax” are
grouped together and all locations that are
treated as “low-tax” are grouped together)
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CFC 1
Sales
CM
Components
CM
Final
Product
Determine which grouping that provides the
“demonstrably greater” contribution to
manufacturing and test that grouping first.
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CFC 1
Sales
CM
Components
CM
Final
Product
This example assumes the low tax jurisdictions
provides the “demonstrably greater” contribution
to the manufacture than the “high-tax”
jurisdictions.
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CFC 1
Sales
CM
Components
CM
Final
Product
Perform tax rate disparity test on low tax
jurisdictions
75
CFC 1
Sales
CM
Components
CM
Final
Product
After you do the tax rate disparity test how much
income is FBCSI?
What if you have included in some of the low tax
groupings locations that do not purchase or sell. Is
this included as FBCSI?
The branch rule is intended to tax sales and
purchasing income that has been separated from the
manufacturing process. However, the December
Regulations are not quite clear on this issue.
76
Question?
Debrief
Step 1 – identify the tested sales and purchasing locations.
Step 2 – group various locations together (i.e. all locations
that are not treated as “high-tax” are grouped together and
all locations that are treated as “low-tax” are grouped
together)
Step 3 – determine which grouping provides the
demonstrated greater contribution to manufacturing
Step 4 – perform tax rate disparity test on that grouping
first
Step 5 – Include FBCSI as subpart F77
International Tax Planning Issues to Consider
Suppose a CFC purchases manufactured product
from an unrelated party and sells to an unrelated
party? Assume also that the CFC makes a substantial
contribution through its employees to the manufacture
of the final product.
Is there FBCSI? Do the branch rules apply?
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Foreign Personal Holding
Company Income
(“FPHCI”)
I.R.C. 954(c)
FPHCI Includes…
FPHC income is that portion of income that includes:
dividends, interest, royalties, rents, and annuities
the excess of gains over losses from the sale or exchange
of property on certain property where a deemed
dividend occurs
other items: f(x) currency gains, interest equivalents,
commodity transactions (list is not all inclusive)
81
Exceptions to FPHCI
Temporary provision granting look-through rules
beginning after December 31, 2005 and before
January 1, 2010.
Applies to dividends, interest, rents and royalties to the
extent not allocable to subpart F income
Exception provided for rents and royalties from a related
corporation received for the privilege of using property
within the country where the CFC is organized (same
country exception)
Active Trade or Business Exception for rents and
royalties (Treas. Reg. 1.954-2(b), (c) and (d))
Export Financing (banks only)82
How to Apply the Same Country Exception
Dividends and interest ─ if CFC is incorporated where
the business of the payor is located
Rents and royalties ─ if CFC is incorporated where the
property is used
•Payor ─ is related to CFC
•Payor ─ is organized under laws of same country as
CFC
•Payor ─ uses substantial part of assets in trade or
business in country of incorporation (50% test)
83
How to Apply the Same Country Exception
Rents and royalties ─ if CFC is incorporated where the
property is used, payor is related and the royalty is for
the privilege of using the property within the country
of the laws of the CFC
Exception – rents allocated to insurance income or FBCI
84
How to Apply the Same Country Exception
Portfolio interest is not excluded
Interest allocable to payor’s foreign base company
income is not excludable
Dividends must be paid out of E&P earned when the
amounts were owed to the owner of the stock
85
Example ─ same-country exception rule
GmbH 1
GmbH 2
GmbH 1 acquires GmbH 2 and GmbH 2 dividends up
RESULT
Same country exception
will not apply to pre-
acquisition earnings &
profit
86
Alternate Scenario of Same-Country Exception
GmbH P
GmbH Holding
GmbH S
GmbH forms a Holding company to acquire
GmbH Sub
RESULT
Same country exception
should apply to pre-
acquisition earnings &
profit because GmbH held
stock when GmbH
Holding earned its E&P
87
Process for Inclusion of “Subpart F income”
( 954) ─ Determine income included as Subpart F
( 954(b)(5)) ─ Allocate and Apportion Expenses
( 954(b)(3);(4)) ─ Either full inclusion; de minimis
exception or high tax exception
( 952)(c)) ─ Is there an E&P limitation?
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Full Inclusion Rule 954(b)(3)(B)
If the sum of the foreign base company income and the
gross insurance income for the taxable year exceeds
70% gross income, the entire gross income for the
taxable year shall be treated as foreign base company
income or insurance income (whichever is
appropriate).
89
Exception For Certain Income Subject To High Foreign
Taxes (“High Tax Exception”)
income that was subjected to an effective rate of by a
foreign country greater than 90 percent of the
maximum U.S. rate of tax will not be considered FBC
income. This exception does not apply to Oil related
income.
Shareholders must elect to exclude income under the
high-tax exception (Treas. Reg. 1.954-1(d)(1)(i)).
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91
Non-Dividend Repatriation
I.R.C. 956
91
Introduction
Generally when a loan is made by a subsidiary CFC
corporation to its parent or to another affiliate it is not
considered a taxable event. However, Code Section
956, provides an exception, by treating an amount
loaned by a controlled foreign corporation (CFC) to a
related U.S. person as a deemed dividend to the CFC's
U.S. shareholders.
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Example
93
US
Parent
GmbH
S.A.
956 is implicated to
the extent of
Earnings and Profit
(unless an exception
applies)
Non-Dividend Repatriation 956
Applies to U.S. shareholders of CFC
Attempts to tax dividend equivalents
Hypothetical deemed distribution
Even if U.S. taxpayer had no “tainted” income,
if the CFC makes a loan to the U.S. parent or
invests in certain types of U.S. property, the U.S.
taxpayer is taxed on the amount of that
investment
94
Tax Court in Ludwig v. Comr.
In Ludwig, the court rejected the Service's
argument that a U.S. shareholder's pledge of
CFC stock as collateral for a loan caused the
CFC to be a “guarantor” of the loan and therefore
subject to §956.
The government argued that “[t]he purpose of
section 956 of the Code is to terminate the tax
deferment privilege with respect to the earnings
of controlled foreign corporations when such
earnings are directly or indirectly repatriated.”
95
The Treasury provides two exceptions to 956
Notice 88-108 provides “30/60” day exception
These are obligations the CFC collects within 30
days as long as the CFC does not have loans
outstanding during the year for 60 or more days
Notice 2008-91 provides “60/180” day exception
expanded the exception to obligations collected
within 60 days as along as the CFC does not have
loans outstanding to a related person during the
year for 180 days or more
96
There is a General legal Advice Memorandum
(“GLAM”) on Notice 2008-91
GLAM 2009-13 provides guidance with regard to
multiple obligations of one or more CFC’s
Provides insight in the governments' views on the
application of 956
If taxpayer relies on “60/180” there is no requirement
for a formal election
Done on a CFC by CFC basis
Applies for 2009, 2009 and 2010
97
GLAM Notes
The GLAM points out that the CFC is deemed to
have acquired property as of the date it acquires
an adjusted basis in US property. This would
include obligations on the date the loan was
made or guaranteed.
Counting days for obligations – date of issuance
is excluded and the date of repayment is included.
Counting days for purposes of §951-964 the
holding period of the asset is determined by
excluding the day the asset was acquired and
including the day the asset was disposed.
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What about a loan made on December 31st ?
GLAM indicates (unless an exception applies)
that §956 would apply to the loan for 2008 even
though the date of issuance is not counted as a
day in the holding period.
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What about a series of loans?
GLAM states that a series of loans must be
executed independently or else periods of
disinvestments will be ignored. GLAM holds
that if it is determined a series of obligations
constitutes successive rollovers of a single
obligation then the disinvestment period will be
ignored for the 60 and 180 day requirements.
100
Debrief
General Rule for Subpart F is: “Deferral”
A U.S. taxpayer is not subject to taxation on the earnings of
a foreign subsidiary until the earnings are repatriated.
Exceptions ─ “tainted income”
(but only to the extent of E&P)
US shareholder can claim a FTC
Subsequent distributions qualify as PTI
Lesser of $1M or 5% of CFC gross income (de minimis)
70% of CFC income is “Subpart F” then 100% rule
High tax kick-out (90% of U.S. tax)
Same country exception
101
Debrief
Generally, in order for income to be considered
foreign base company sales income, the property
purchased must be manufactured or produced
outside the country in which the CFC is organized
and must also be sold for use outside that country.
Sec. 954(d)(1)(A) and (B).
102
103
Planning for Distributions of
Previously Taxed Income
PTI distributions excluded from income
I.R.C. 959 excludes from income distributions of
E&P which were previously included into income
(includes actual and deemed distributions)
Section 959(d) generally provides that a distribution
from PTI is NOT a dividend.
Result upon distribution is that the CFC’s E&P and
tax pools are immediately reduced to preclude the
USSH from inappropriately gaining a 902 credit
104
Exception to non-dividend treatment
A distribution of PTI through a chain of ownership.
Section 960(a)(3) provides that, for purposes of
calculating a U.S. corporate Shareholder's 902 credit
for taxes paid on PTI as it is distributed through a
chain of ownership to a U.S. Shareholder a
distribution of PTI is counted as a dividend when
ultimately received by the corporate U.S. Shareholder
(where no credit was previously given under 960)
105
Planning for Distributions
under the
“Ordering Rules”
A distributions is first deemed to made from earnings
that were previously taxed and included into income
as investments in U.S. property (I.R.C. 956)
A distribution is next deemed to be made out of
earnings that were currently or previously
required to be included into income under
951(a)(1)(A).
106
Planning for Distributions
under the
“Ordering Rules”
Finally, distributions that occur in excess of the CFC’s
PTI are attributable to the remaining untaxed and
undistributed E&P…first out of current then,
accumulated E&P …
107
Planning for Distributions using a chain of corporations
GmbH 2 invested 150
in U.S. property. The
U.S. P must include
150 into income
(I.R.C. 951(a)(1)(B))
U.S. P
GmbH 1
GmbH 2
US property
108
Planning for Distributions using a chain of corporations
Additional Facts
During the tax year
GmbH dividends 150
to GmbH 1. The U.S. P
does not have to
include this into
income under 951(a)
due to the 959(b)
exclusionary rule
U.S. P
GmbH 1
GmbH 2
US property
109
Planning for Distributions using a chain of corporations
Additional Facts
Suppose GmbH
subsequently invests in US
property in the next year
without the occurrence of a
distribution, U.S. P would
have to include into
income because US p
received the exclusion in
the prior year
U.S. P
GmbH 1
GmbH 2
US property
The exclusionary rule
contemplates an actual
distribution that must occur
110
Debrief
Distributions of PTI are not considered a dividend
( 959(d))
Distributions of PTI reduce E&P
Exception is provided ( 960 (a)(3))
111
112
Disclaimers
113
The informal comments and the information presented in
these slides should not be construed as constituting tax
advice applicable to any specific taxpayer because each
taxpayer’s facts are different.
To ensure compliance with requirements imposed by the
IRS, we inform you that any U.S. tax advice mentioned in
the presentation or contained in these slides is not
intended or written to be used, and cannot be used, for the
purpose of (i) avoiding penalties under the Internal
Revenue Code or (ii) promoting, marketing or
recommending to another party any transactions or matters
addressed herein.
Contact Information
114
Edward Umling CPA, LLM
Senior Manager
Urish Popeck LLC
3 Gateway Center, Suite 2400
Pittsburgh, PA 15222
Tel: 1 412 391-1994
Seth Primosch
Senior Accountant
ParenteBeard, LLC
1650 Market Street, Suite 4500
Philadelphia PA 19103