Disclosures and Elections in the International Tax Arena Including M & A Tim Smith, Senior Tax Manager Doug Watson, Director © Grant LLP. All rights reserved. GrantThornton Thornton LLP. All rights reserved. Disclosure and Elections for International Transactions • • • • • • Check the Box Elections Corporate Organizations Taxable Corporate Acquisitions Corporate Liquidations Corporate Stock Redemptions Tax-free Reorganizations 2 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Formation/Organization of Foreign Entity that Elects to be Treated as a Flow-Through Entity USP CFC CFC (or US Parent) Forms/Organizes a Foreign Entity that Elects to be Treated as a Disregard Entity Foreign Eligible Entity 3 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Formation/Organization of Foreign Entity that Elects to be Treated as a Flow-Through Entity Disclosures and Elections • Form 8832 • Form SS–4 • Form 8858 4 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Conversion of Less Than 100% Owned Foreign Corporation to a Foreign Partnership Foreign Corporation Elects to be Treated as a Foreign Partnership. The transaction is treated as a distribution by FC of all its assets and liabilities to USP in liquidation followed by a contribution of those assets and liabilities to Foreign PRS under Treas. Reg. § 301.7701 – 3(g)(1)(ii) USP USP FC Foreign PRS 5 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Conversion of Less Than 100% Owned Foreign Corporation to a Foreign Partnership Disclosures and Elections • Form 8832 • Form 5471, Schedule O if FC is a CFC • Form 8865, including Schedule O • Section 367(b) Notice – Attach to USP's return • Section 331 Statement – Attach to USP's return – Treas. Reg. § 1.331-1(d) – Applies if USP owns less than 80% of CFC – This notice is only required if USP owns 80% or more of CFC and thus the liquidation qualifies under Section 332 • Section 332 Statement – Attach to USP's return – Treas. Reg. § 1.332 - 6(a) – Applies if USP owns 80% or more of FC • Form SS-4 6 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Deemed Liquidation of CFC by Electing to be Treated as a Disregarded Entity CFC Elects to be Treated as a Disregarded Entity. The transaction is treated as a deemed liquidation of the CFC under Treas. Reg. § 301.7701 – 3(g)(1)(iii). USP CFC 7 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Deemed Liquidation of CFC by Electing to be Treated as a Disregarded Entity Disclosures and Elections • Form 8832 • Section 332 Statement – Attach to USP's return – Treas. Reg. § 1.332 - 6(a) – Applies if USP owns 80% or more of CFC • • Section 331 Statement – Attach to USP's return – Treas. Reg. § 1.331-1(d) – Applies if USP owns less than 80% of CFC Section 367(b) Notice – Attach to USP's return – This notice is only required if USP owns 80% or more of CFC and thus the liquidation qualifies under Section 332 • Form 5471, Schedule O • Form 8858 • Form SS-4 8 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Foreign Disregarded Entity Elects to be Treated as a Corporation Foreign Disregarded Entity Elects to be Treated as a Corporation. The transaction is treated as a contribution by USP of all the assets and liabilities of Foreign DRE to CFC in exchange for stock of CFC under Treas. Reg. § 302.7701 – 3(g)(1)(iv) USP USP Foreign DRE CFC 9 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Foreign Disregarded Entity Elects to be Treated as a Corporation Disclosures and Elections • Form 8832 • Form SS-4 • Form 926 and Section 6038B Statement • Section 964, First Year Accounting Methods Election – Election may be made upon organization of CFC; attach to CFC's Form 5471 – Attach to USP's return – – Treas. Reg. § 1.6038B – 1(b)(l)(i) and § 1.6038 – 1T(c) Election required when E & P of CFC is "significant" for federal tax purposes – Treas. Reg. § 1.964 – 1(c)(3)(ii) and § 1.964 – 1(c)(6) • Form 5471, Schedule O • Section 351 Statement – Attach to USP's return – Statement under Treas. Reg. § 1.351 - 3(b) not required 10 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Foreign Partnership Elects to be Treated as a Foreign Corporation Foreign Partnership Elects to be Treated as a Foreign Corporation. The transaction is treated as a contribution by the foreign partnership of all its assets and liabilities to FC followed by the liquidation of the foreign partnership (i.e., USP) and then a distribution of FC's stock to its partners under Treas. Reg. § 301.7701 – 3(g)(1)(i) USP Foreign PRS USP FC 11 © Grant Thornton LLP. All rights reserved. Check-the-Box-Elections Foreign Partnership Elects to be Treated as a Foreign Corporation Disclosures and Elections • Form 8832 • Form 5471, Schedule O • Form 8865, Schedule P • Form 926 and Section 6038B Statement • – Election may be made upon organization of CFC – Attach to USP's return – Election required when E & P of CFC is "significant" for federal tax purposes – Treas. Reg. § 1.6038B – 1(b)(1)(i) and § 1.6038 – 1T(c) • – Treas. Reg. § 1.964 – 1(c)(3)(ii) and § 1.964 – 1(c)(6) Section 351 Statement – Attach to USP's return – Statement under Treas. Reg. § 1.351 - 3(b) not required Section 964, First Year Accounting Methods Election – attach to CFC's Form 5471 • Form SS-4 12 © Grant Thornton LLP. All rights reserved. Corporate Organizations US Parent Forms CFC and Contributes Property to CFC USP US parent contributes property to CFC for use in an active trade or business outside the US CFC 13 © Grant Thornton LLP. All rights reserved. Corporate Organizations US Parent Forms CFC and Contributes Property to CFC Disclosures and Elections • Form 926 filed by USP • Statement under Treas. Reg. § 1.6038B – 1(b)(l)(i) and Temp. Treas. Reg. § 1.6038B-1T(c) filed by USP • Form 5471, Schedule O (Required only if contribution is part of the organization of the CFC) • Section 351 Statement – Filed by USP on behalf of CFC – Treas. Reg. § 1.351-3(a) – Treas. Reg. § 1.351-3(b) requires CFC to file a § 351 statement, but this is not required if USP makes complete disclosure under Treas. Reg. § 1.351-3(a) • Section 964, first year accounting methods selection – Election may be made upon organization of CFC; attach to CFC's Form 5471 – Election required when E & P of CFC is "significant" for federal tax purposes – Treas. Reg. § 1.964 – 1(c)(3)(ii) and § 1.964 – 1(c)(6) 14 © Grant Thornton LLP. All rights reserved. Corporate Organizations CFC1 Forms CFC2 and Contributes Property to CFC2 USP CFC1 contributes property to CFC2 for use in an active trade or business outside the US CFC1 CFC2 15 Corporate Organizations CFC1 Forms CFC2 and Contributes Property to CFC2 Disclosures & Elections • Form 5471, Schedule O (Required only if contribution is part of the organization of the CFC2) • Section 351 Statement – Filed by USP on behalf of CFC – Treas. Reg. § 1.351-3(a) – Treas. Reg. § 1.351-3(b) requires CFC to file a § 351 statement, but this is not required if USP makes complete disclosure under Treas. Reg. § 1.351-3(a) • Section 367(b) Notice – Filed by USP and CFC1 – Treas. Reg. § 1.367(b) – 1(c) • Section 964, first year accounting methods selection ; attach to CFC2's Form 5471 – Election may be made upon organization of CFC – Election required when E & P of CFC is "significant" for federal tax purposes – Treas. Reg. § 1.964 – 1(c)(3)(ii) and § 1.964 – 1(c)(6) 16 Corporate Organizations US Parent Contributes Stock of CFC1 to CFC2 USP CFC1 USP owns 100% of CFC1 and CFC2 and transfers 80% or more of the stock of CFC1 to CFC2 CFC2 CFC1 17 © Grant Thornton LLP. All rights reserved. Corporate Organizations US Parent Contributes Stock of CFC1 to CFC2 Disclosures and Elections • Form 5471, Schedule O • Form 8838, Consents to Extend the Time to Assess Tax under Section 367 – Gain Recognition Agreement – filed by USP • Gain Recognition Agreement (GRA) – Treas. Reg. § 1.367(a) – 8(c)(2) & (3) – filed by USP – New Regulation, Nov, 19, 2014: Use of "available upon request" or similar descriptions instead of provided information for a GRA constitutes a willful failure to comply with the regulations • Annual Gain Recognition Agreement Certification – Treas. Reg. § 1.367(a) – 8(g) – filed by USP • Section 367(b) Notice - Treas. Reg. § 1.367(b) – 1(c) – filed by USP • Section 351 Statement • – Filed by USP – Treas. Reg. § 1.351-3(a) – Treas. Reg. § 1.351-3(b) requires CFC to file a § 351 statement, but this is not required if USP makes complete disclosure under Treas. Reg. § 1.351-3(a) Section 926 and Statement under Treas. Reg. § 1.6038 B – 1(b)(l)(i) and (2) – New Regulation, Nov. 19, 2014: If GRA is filed, Form 926 and the § 6038B statement are required 18 © Grant Thornton LLP. All rights reserved. Corporate Organizations Partnership (US or Foreign) Forms CFC or Contributes Property to CFC USP Domestic or foreign partnership contributes property to CFC for use in an active trade or business outside the US PRS CFC 19 © Grant Thornton LLP. All rights reserved. Corporate Organizations Partnership (US or Foreign) Forms CFC or Contributes Property to CFC Disclosures and Elections • Form 926 filed by USP • Statement under Treas. Reg. § 1.6038 B – 1(b)(l)(i) and Temp. Treas. Reg. § 1.6038B – 1T(c) • Form 5471, Schedule O (Required only if contribution is part of the organization of the CFC) • • – If PRS is domestic, attach Form 5471 to Form 1065 – If PRS is foreign, USP files Form 5471 Section 351 Statement – Attach to Form 1065 or 8865 – Treas. Reg. § 1.351-3(a) – Treas. Reg. § 1.351-3(b) requires CFC to file a § 351 statement, but this is not required if PRS makes complete disclosure under Treas. Reg. § 1.351-3(a) Section 964, first year accounting methods selection; attach to CFC's Form 5471 – Election may be made upon organization of CFC – Election required when E & P of CFC is "significant" for federal tax purposes – Treas. Reg. § 1.964 – 1(c)(3)(ii) and § 1.964 – 1(c)(6) 20 © Grant Thornton LLP. All rights reserved. Taxable Corporate Acquisitions CFC Acquires Assets of Target for Property CFC acquires assets of target for property (e.g. cash or debt) USP CFC Assets Target Property 21 © Grant Thornton LLP. All rights reserved. Taxable Corporate Acquisitions CFC Acquires Assets of Target for Property Disclosures and Elections • Form 8594 – Asset Acquisition Statement – Attach to CFC's Form 5471 – Only required if trade or business assets are bought or sold – Treas. Reg. § 1.1060 – 1(e) 22 © Grant Thornton LLP. All rights reserved. Taxable Corporate Acquisitions US Parent Acquires Foreign Target for Property and Makes a Section 338(g) Election US Parent acquires the stock of target for property and makes a Section 338(g) election Property USP Seller Target Stock Foreign Target (CFC) Foreign Target 23 © Grant Thornton LLP. All rights reserved. Taxable Corporate Acquisitions US Parent Acquires Foreign Target for Property and Makes a Section 338(g) Election Disclosures and Elections • • • Form 5471, Schedule O for Foreign Target – Applies to USP's Form 5471 – Applies to Sellers Form 5471 if Seller is a US Person Form 8023, Election under Section 338 for Corporations Making Qualified Stock Purchases – Filed by USP – Due the 15th day of the 9th month beginning after the month the acquisition occurs – Treas. Reg. § 1.338 - 2(c)(14) and 2(d) Form 8883, Asset Allocation Statement under Section 338 – Filed by USP – Attach to Foreign Target's Form 5471 – If Seller is US person, it must also file a Form 8883 • Section 338 Election Notice – This Notice is only required if Foreign Target was a CFC, PFIC or FPHC during its tax year that ends on the acquisition date – Election is due the later of 120 days after the acquisition or the date Form 8023 is filed USP (purchaser) must deliver written notice of the election and a copy of the Form 8023 to: – – 1. Each US person that held stock in the Foreign Target on the acquisition date 2. Each US person that sold stock in the Foreign Target during the 12 month acquisition period if the Foreign Target was a CFC, PFIC or FPHC Treas. Reg. § 1.338 - 2(e)(4) 24 © Grant Thornton LLP. All rights reserved. Taxable Corporate Acquisitions US Parent Acquires Foreign Target for Property and Makes a Section 338(g) Election (Continued) • Section 1248 Schedule – Applies only if Seller is a US corporation – Attached to Seller's return – Treas. Reg. § 1.381(b) – 1 • Section 964, first year accounting methods selection – Election may be made upon organization of CFC – Attach to CFC's Form 5471 • Election to step-up basis in nonrecently purchased stock – Only applies if purchasers (USP) held shares in Foreign Target prior to the Section 338 transaction – Attach to Form 8023 – Treas. Reg. § 1.388 – 5(d) – Election required when E & P of CFC is "significant" for federal tax purposes – Treas. Reg. § 1.964 – 1(c)(3)(ii) and § 1.964 – 1(c)(6) 25 © Grant Thornton LLP. All rights reserved. Taxable Corporate Acquisitions US Parent Sells CFC to Unrelated (US or Foreign) Acquiror for Property Property USP Acquiror Foreign Target Stock Foreign Target (CFC) Foreign Target US Parent Sells CFC to Unrelated (US or Foreign) Acquiror for Property 26 © Grant Thornton LLP. All rights reserved. Taxable Corporate Acquisitions US Parent Sells CFC to Unrelated (US or Foreign) Acquiror for Property Disclosures and Elections • Form 5471, Schedule O • Section 1248 Schedule – USP attaches to its return – Treas. Reg. § 1.1248(b) – 7 27 © Grant Thornton LLP. All rights reserved. Corporate Liquidations CFC Liquidates into US Parent USP CFC (at least 80% owned) liquidates into US Parent CFC 28 © Grant Thornton LLP. All rights reserved. Corporate Liquidations CFC Liquidates into US Parent Disclosures and Elections • Section 332 Statement – Filed with USP's return – Treas. Reg. § 1.332 - 6(a) • Form 966 – Corporate Dissolution or Liquidation – Due within 30 days after the plan to dissolve or liquidate the corporation – Form 966 is only required if CFC is required to file a US tax return (e.g. Form 1120-F) • Form 5471, Schedule O • Election to carryover corporate attributes in a reorganization or 332 liquidation – Attach to USP's return as US shareholder – Attach to Form 5471 for CFC – Treas. Reg. § 1.381(b) - 1 – Treas. Reg. § 1.6043 – 1(a) and (b) • Section 367(b) Notice – Attach to USP's return and CFC's Form 5471 29 © Grant Thornton LLP. All rights reserved. Corporate Liquidations CFC2 Liquidates into CFC1 USP CFC1 USP owns 100% of CFC1, which owns at least 80% of CFC2 and CFC2 liquidates into CFC1 CFC2 30 © Grant Thornton LLP. All rights reserved. Corporate Liquidations CFC2 Liquidates into CFC1 Disclosures and Elections • Section 332 Statement – Filed with USP's return – Treas. Reg. § 1.332 - 6(a) • Form 966 – Corporate Dissolution or Liquidation • • Form 5471, Schedule O for both CFC1 and CFC2 Election to carryover corporate attributes in a reorganization or 332 liquidation – Due within 30 days after the plan to dissolve or liquidate the corporation – Attach to USP's return as US shareholder – Form 966 is only required if CFC2 is required to file a US tax return (e.g. Form 1120-F) – Attach to each Form 5471 for CFC1 and CFC2 – Treas. Reg. § 1.381(b) - 1 – Treas. Reg. § 1.6043 – 1(a) and (b) • Section 367(b) Notice – Attach to USP's return and CFC1's Form 5471 31 © Grant Thornton LLP. All rights reserved. Corporate Stock Redemptions CFC Redeems Stock Held by US Parent CFC Redeems Stock Held by US Parent and redemption is treated as a Section 301 distribution USP Stock of CFC Property CFC 32 © Grant Thornton LLP. All rights reserved. Corporate Stock Redemptions CFC Redeems Stock Held by US Parent Disclosures and Elections • Section 302 Statement – USP attaches to its return – Treas. Reg. § 1.302 - 2(b)(2) 33 © Grant Thornton LLP. All rights reserved. Corporate Stock Redemptions CFC2 Acquires the Stock of CFC1 from US Parent CFC2 acquires the stock of CFC1 from US Parent. USP is treated as contributing CFC1 stock to CFC2 for CFC2 stock in a Section 351 transaction. CFC2 is treated as redeeming the stock issued to USP. USP CFC1 CFC2 CFC1 34 © Grant Thornton LLP. All rights reserved. Corporate Stock Redemptions CFC Redeems Stock Held by US Parent Disclosures and Elections • Section 351 Statement – Attach to USP's return – Statement under Treas. Reg. § 1.351 - 3(b) • – not required • Form 926 and Section 6038B Statement • Section 302 Statement – Attach to USP's return – Treas. Reg. § 1.302 – 2(b)(2) Gain Recognition Agreement - Treas. Reg. § 1.368(a) – 8(c)(2) and (3) filed by USP New Regulation, Nov. 19, 2014: use of "available upon request" or similar descriptions instead of actual information in connection with a GRA constitutes a willful failure to comply • Annual Gain Recognition Agreement Certification Treas. Reg. § 1.367(a) – 8(g) filed by USP • Section 367(b) Notice – Attach to USP's return – Treas. Reg. § 1.367(b) – 1(c) 35 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Contributes the Stock of CFC1 to CFC2 in Exchange for Solely CFC2 Voting Stock – "B" Reorganization/Section 351 USP US Parent Contributes 80% or more of the Stock of CFC1 to CFC2 in Exchange for Solely CFC2 Voting Stock CFC1 CFC2 CFC1 36 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Contributes the Stock of CFC1 to CFC2 in Exchange for Solely CFC2 Voting Stock – "B" Reorganization/Section 351 Disclosures and Elections • Form 5471, Schedule O for CFC2 • Form 8838 filed by USP • Gain Recognition Agreement - Treas. Reg. § 1.368(a) – 8(c)(2) and (3) filed by USP – • • • • – Attach to USP's return - Treas. Reg. § 1.351 - 3(a) New Regulation, Nov. 19, 2014: use of "available upon request" or similar descriptions instead of actual information in connection with a GRA constitutes a willful failure to comply Annual Gain Recognition Agreement Certification - Treas. Reg. § 1.367(a) – 8(g) filed by USP Section 367(b) Notice – Attach to USP's return – Treas. Reg. § 1.367(b) – 1(c) Section 368 Statements – Attach to USP's return – Treas. Reg. § 1.3683(a) and (b) Section 351 Statement – Statement under Treas. Reg. § 1.351 - 3(b) not required • Form 926 and § 6038B Statement – Statement under Treas. Reg. § 1.6038B – 1(b)(l)(i) and (2) – New Regulation, Nov. 19, 2014 Form 926 and § 6038B statement is required if USP files a GRA 37 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Contributes the Stock of CFC1 to CFC2 and CFC1 Liquidates – "D" Reorganization USP CFC1 US Parent Contributes the Stock of CFC1 to CFC2 and CFC1 either Liquidates or Elects to be Treated as Disregarded CFC2 CFC1 38 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Contributes the Stock of CFC1 to CFC2 and CFC1 Liquidates – "D" Reorganization Disclosures and Elections • Form 5471, Schedule O for CFC1 and CFC2 • Section 367(b) Notice – – • • • Attach to USP's return and CFC2's Form 5471 Treas. Reg. § 1.367(b) – 1(c) Section 368 Statements – Attach to USP's return – Treas. Reg. § 1.368 - 3(a) and (b) Form 966 – Corporate Dissolution or Liquidation – Due within 30 days after the plan to dissolve or liquidate the corporation – Form 966 is only required if CFC1 is required to file a US tax return (e.g. Form 1120-F) – Treas. Reg. § 1.6043 – 1(a) and (b) • Form 8832 – Filer is CFC1, not USP – Attach to CFC1's Form 8858 – May need to apply for EIN by filing Form SS-4 Election to carryover corporate attributes in a reorganization or 332 liquidation – Attach to USP's return as US shareholder – Attach to Form 5471 for CFC2 – Treas. Reg. § 1.381(b) - 1 39 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Recapitalizes CFC – "E" Reorganization USP US Parent Converts Debt/Receivable from CFC to Equity in CFC CFC 40 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Recapitalizes CFC – "E" Reorganization Disclosures and Elections • Form 5471, Schedule O, but only if USP's interest in CFC increases by 10% or more • Section 367(b) Notice – Attach to USP's return and CFC's Form 5471 – Treas. Reg. § 1.367(b) – 1(c) • Section 368 Statements – Attach to USP's return – Treas. Reg. § 1.368 - 3(a) and (b) 41 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Contributes the Stock of CFC1 to New CFC2 and CFC1 Liquidates "F" Reorganization USP CFC1 US Parent Contributes the Stock of CFC1 to New CFC2 and CFC1 either Liquidates or Elects to be Treated as Disregarded New CFC2 CFC1 42 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Contributes the Stock of CFC1 to New CFC2 and CFC1 Liquidates "F" Reorganization Disclosures and Elections • Form 5471, Schedule O • – CFC2 is treated as a continuation of CFC1 – Due within 30 days after the plan to dissolve or liquidate the corporation – Form 5471 covers full year – Name on Form 5471 is CFC2 (FKA CFC1) – Treas. Reg. § 1.6038 – 2 and § 1.367(b) – 2(b) • – Form 966 is only required if CFC1 is required to file a US tax return (e.g. Form 1120-F) Section 367(b) Notice – Treas. Reg. § 1.6043 – 1(a) and (b) – Attach to USP's return and CFC2's Form 5471 • Section 368 Statements – Attach to USP's return – Treas. Reg. § 1.368 - 3(a) and (b) Form 966 – Corporate Dissolution or Liquidation • Form 8832 – Filer is CFC1, not USP or CFC2 – Attach to CFC1's Form 8858 – May need to apply for EIN by filing Form SS-4 43 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Contributes the Stock of CFC1 and CFC3 to CFC2 and CFC1 Liquidates "D" Reorganization USP US Parent contributes the Stock of CFC1 to new CFC2 and CFC1 either liquidates or elects to be treated as disregarded CFC1 CFC2 CFC3 CFC1 CFC3 44 © Grant Thornton LLP. All rights reserved. Tax-Free Corporate Reorganizations US Parent Contributes the Stock of CFC1 and CFC3 to CFC2 and CFC1 Liquidates "D" Reorganization Disclosures and Elections • Form 5471, Schedule O for CFC 1 and CFC 2 • Section 367(b) Notice • – Filer is CFC1, not USP or CFC2 – Attach to USP's return and CFC1's Form 5471 • – Treas. Reg. § 1.368 - 3(a) and (b) • – Attach to CFC1's Form 8858 – May need to apply for EIN by filing Form SS-4 Section 368 Statements – Attach to USP's return Form 966 – Corporate Dissolution or Liquidation – Due within 30 days after the plan to dissolve or liquidate the corporation – Form 966 is only required if CFC1 is required to file a US tax return (e.g. Form 1120-F) Form 8832 • Election to carryover corporate attributes in a reorganization or 332 liquidation – Attach to USP's return as US shareholder – Attach to Form 5471 for CFC2 – Treas. Reg. § 1.381(b) - 1 – Treas. Reg. § 1.6043 – 1(a) and (b) 45 © Grant Thornton LLP. All rights reserved. Questions? 46 © Grant Thornton LLP. All rights reserved. Are You Prepared To Successfully Defend Your Transfer Pricing Upon Audit? Nick Scott, Transfer Pricing Director © Grant LLP. All rights reserved. GrantThornton Thornton LLP. All rights reserved. Agenda • Why TP Defense is Timely? • • • • Best Practices • • • • Overview OECD Developments State Transfer Pricing Landscape Preparation Manage and Defend Learn and Improve Next Steps © Grant Thornton LLP. All rights reserved. Why TP Defense is Timely Overview Your approach and level of investment will depend on the number of transactions, materiality, and complexity/type of your intercompany transactions combined with your appetite for risk -- One Size Does Not Fit All • Whatever the size of your company, consider the various best practices and tailor them to best fit your situation • Regardless of the approach, be proactive and consider the best practices at each stage of the transfer pricing life cycle: • • • • Development and implementation of your transfer pricing (including policies) Audit preparation Manage and defend your transfer pricing upon audit Once audit is resolved, learn and improve from experience © Grant Thornton LLP. All rights reserved. Why TP Defense is Timely Overview • • • • • For most corporations the largest tax exposure and risk is usually its transfer pricing It's not a question of if, but when taxpayers will be audited Factors increasing the chance of audit: • Domestic • States are hungry for revenue • States are adding transfer pricing expertise • International • Issuance of OECD Transfer Pricing roadmap and BEPS initiatives • Government need for more tax revenue • Recent trend within MNCs, issuing tax transparency reports Constantly changing TP environment • States and countries recognize TP differently • No domestic "competent authority" process Taxpayers need to consider foreign and federal TP adjustments in state/international tax audits © Grant Thornton LLP. All rights reserved. Why TP Defense is Timely Will the OECD/UN increase transfer pricing controversy? Tax authorities, OECD and UN, are issuing an increasing amount of guidance in areas that could affect transfer pricing: • Discussion Draft on Intangibles • Broad definition of intangibles • White paper on country by country reporting • OECD Transfer Pricing Risk Assessment Handbook • OECD Action Items: • 8,9,10: Assure transfer pricing outcomes are in line with value creation • 11: Establish methodologies to collect and analyze data on BEPS • 13: Re-examine transfer pricing documentation State tax authorities have the same concern! © Grant Thornton LLP. All rights reserved. Why TP Defense is Timely State Transfer Pricing Landscape • • • • • • • Some states clearly adopt 482 and its regulations • Approximately 15 states have separate 482 authority. • Some states incorporate 482 as the standard for 482 mandatory combined filing, others have the authority to separately compute federal taxable income. Historically, the separate entity states were not focused on transfer pricing. These states had little or no expertise with transfer pricing. Larger states (New York, California) have focused efforts on transfer pricing. Today, both combined reporting and separate entity states are increasing their focus and expertise on transfer pricing. In some cases states are hiring transfer pricing experts to assist in their audits. The Multistate Tax Commission (MTC) is seeking a contract with transfer pricing firms to assist the MTC with state income tax audits. In the current audit environment, the best practice is to have transfer prices documented through regular transfer pricing studies every year. During the course of a state transfer pricing audit, a transfer pricing expert can help in resolving the state tax audit before appeals. © Grant Thornton LLP. All rights reserved. Why TP Defense is Timely The "All-in" Cost of a Transfer Pricing Audit • In addition to taxpayers paying more in taxes, audits: • Increase tax reserves (multiple tax years involved) • Lead to costly administrative appeals or court action • Cause significant internal time and expense • Result in material transfer pricing adjustments • Earnings surprise • Impact tax and transfer pricing business strategies and structures • Result in unforeseen sales tax liabilities from state TP adjustments Successful defense of your transfer pricing is not an accident, it is in your control. Prepare in advance to successfully defend your transfer pricing upon audit! © Grant Thornton LLP. All rights reserved. Best Practices: Preparation for, Managing and Defending, and Learning/Improving from a TP Audit Manage & Defend Prepare © Grant Thornton LLP. All rights reserved. Learn & Improve • • • Success! No surprises No TP adjustment Release reserves Best Practices: Preparing for, Managing and Defending, and Learning/Improving from a TP Audit Checklist Preparing for an Audit 1. Possess the right mindset 2. Draw on past experiences 3. Have a strategy to manage the audit 4. Identify all intercompany transactions 5. Consider the effect of intercompany transactions and business strategies 6. Acknowledging the role of Special Purpose Entities 7. Importance of intercompany agreements 8. Explaining changes to transfer pricing policies 9. Intercompany Invoices 10. Operationalize transfer pricing 11. Prepare Contemporaneous Documentation 12. Consider M&A Activity 13. Evaluate Legal Entity Optimization Managing and Defending the Audit 1. Responding to the audit 2. Appointing a single point of contact for responding to the audit 3. Balancing in-house expertise with outside transfer pricing specialists Learning from the audit 1. Post-audit Debrief © Grant Thornton LLP. All rights reserved. Best Practices: Preparing for a TP Audit Having a Strategy to manage the audit Best Practice 3: In advance, develop a strategy and process to respond to an information request; seek to manage the transfer pricing audit versus letting the audit manage you Items to consider in a successful end-to-end transfer pricing audit process • Have you identified all of your intercompany transactions? • Are you using best practices for intercompany agreements? • Does your G/L in your ERP system align with your intercompany agreements? Can you generate the reports you need for the audit? • Do you have contemporaneous documentation if state so requires? Are they well thought out, updated, and consistent/adaptable across the enterprise? • Will it impact your tax and transfer pricing business strategies and structures? • What will your strategy be to manage the audit? © Grant Thornton LLP. All rights reserved. Best Practices: Preparing for a TP Audit Intercompany Agreements Matter--Tax Authorities Read What You Write! Best Practice 7: Characteristics of a best-in-class intercompany agreement from a tax and transfer pricing perspective: • Easy to read for all stakeholders involved • Risks should be allocated and reflect the operations • Market, Inventory, A/R, Forex, R&D, warranty, etc. • Tax clause detailing treatment of sales and use tax • Obtain input from SMEs (legal, IP counsel, treasury, etc.) • Ability to balance competing objectives to achieve an agreement beneficial to your organization Things to consider: • Do you bundle versus unbundle the various transactions? • Does the agreement reflect the actual transaction? • Do you periodically update the agreement for changes in your business? • Who reviews your agreement and approves changes? • Have your legal entities signed the agreement? • Do you store the signed agreement on a share point site so it is readily available on audit? Getting the best intercompany agreement is a team effort! © Grant Thornton LLP. All rights reserved. Best Practices: Preparing for a TP Audit Contemporaneous Documentation Best Practice 11: Prepare Contemporaneous Documentation • Tells a good story, easy to follow • Seamlessly ties together the business, industry and transfer pricing approach • Reflective of intercompany agreements and invoices • Are agreements being lived and invoices followed • Consistent approach across major transactional groupings: states, countries, regions, and business units/segments • Collect facts, benchmark, and monitor results real time and before the books close • Documentation constructed in an efficient, organized fashion • Use industry and business related factors to support your TP results • Functional analysis should clearly delineate • Who performs the routine (tactical) versus non-routine (strategic) functions • Who carries the relevant risks • Ownership of assets (such as IP) • Differentiate between high value services and routine services • It is extremely important that all methods have been evaluated and documented why or why not they have been selected. © Grant Thornton LLP. All rights reserved. Next Steps: Consider the Following • Strategic Review of Your Approach to Successfully Defend Your Transfer Pricing Upon Audit • Intercompany Agreement Review • Strategic Risk Assessment of Your Transfer Pricing • Transfer pricing study and contemporaneous documentation • Assistance with Audit defense of ongoing tax audits • Combining Integrated International & State planning with TP to implement business objectives • Combining International/State tax controversy and TP expertise during the audit © Grant Thornton LLP. All rights reserved. Disclaimer This document was written to support the promotion or marketing of professional services by Grant Thornton LLP, and is not written tax advice directed at the particular facts and circumstances of any person. 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