Reconciling U.S.-Foreign Intercompany Accounts to Avoid Taxable Deemed Dividends Under Section 956 WEDNESDAY , DECEMBER 9, 2015, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down • only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire program. • WHO TO CONTACT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Reconciling U.S.-Foreign Intercompany Accounts Dec. 9, 2015 Lewis J. Greenwald William R. Skinner Mayer Brown Fenwick & West lgreenwald@mayerbrown.com wrskinner@fenwick.com Paul K. Marineau Lucas Giardelli Global Tax Consulting Mayer Brown marineap@cooley.edu lgiardelli@mayerbrown.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Section 956 — Investments in U.S. Property Reconciling U.S.-Foreign Intercompany Accounts to Avoid Taxable Deemed Dividend Under Section 956 December 9, 2015 Strafford Webinar William R. Skinner F ENWICK & W EST LLP wrskinner@fenwick.com (650) 335-7669
William R. Skinner, Esq. is a tax partner with Fenwick & West LLP, in Mountain View, CA. He graduated from Stanford Law School and was recognized as a Rising Star in Tax by California Super Lawyers. He focuses his practice on U.S. international corporate tax, William R. Skinner including the full range of international tax Partner, Tax Group issues such as subpart F and deferral structures, foreign tax credit planning, Phone: 650.335.7669 transfer pricing, IP migration and structuring Fax: 650.938.5200 IP ownership within a corporate group, E-mail: wrskinner@fenwick.com internal restructurings and cross-border Emphasis: M&A, and tax treaties and inbound tax International Tax planning. More information about his Tax Planning practice is available at www.fenwick.com. Tax Controversy 6
Paradigm Example Intercompany Intercompany Transactions Transactions Loans Loans Cash Poor Cash Rich 7
Section 956 Amount The amount determined under Section 956 is equal to the lesser of — 1. The shareholder’s pro rata share of the quarterly average of the investments by the CFC in United States property, in excess of such shareholder’s amounts previously taxed under Section 956; and 2. The shareholder’s pro rata share of the CFC’s “Applicable Earnings.” The amount of investment in U.S. property is generally equal to the CFC’s adjusted tax basis in the property. The applicable earnings of a CFC means the sum of accumulated earnings (if positive) and current earnings, less any previously taxed income in Section 959(c)(1) and any distributions during the year. See § 956(b)(1). 8
Section 956 Amount - Example 100% US Real $500 Current & Estate $1,000 Purchase Accumulated E&P CFC’s Investment Quarter End $0 1Q2015 $1,000 2Q2015 $1,000 3Q2015 $1,200 4Q2015 Quarterly Average = $800 9
Section 956 Amount – Example Amount determined under Section 956 equals the lesser of: The shareholder’s pro rata share of the quarterly average of the 1. investments by the CFC in United States property ($800), in excess of such shareholder’s amounts previously taxed under Section 956 ($0) = $800 ; and The shareholder’s pro rata share of the CFC’s “Applicable Earnings” = $500. 2. Here, the Section 956 amount is $500 . What result would occur if the CFC distributed $500 in the year and then generated another $200 of earnings in the following year? 10
Section 956 – Overview Section 956 applies to four categories of U.S. property: Our focus in this Obligations of U.S. persons webinar Stock in U.S. persons Real or tangible property physically located in the U.S. Certain intangible property acquired or developed for use in the U.S. The general intent of Section 956 was to deem a dividend to occur where earnings of a CFC are invested in US property of a lasting nature that would be expected to produce income over an indefinite period of time, and to exclude ordinary commercial transactions involving the CFC. 11
Section 956 – Investments Other Than Obligations of a U.S. Person Stock in a US person is included in a 956 investment if the CFC or other affiliates own 25% or more of the stock of the US corporation. Real or tangible property is generally included in the Section 956 amount, subject to an “export property exception” for inventory acquired for sale or use outside of the United States. The amount of the investment is generally measured based on adjusted tax basis of the CFC, so zero basis assets (e.g., self-created IP) do not result in a Section 956 investment. 12
Section 956 – Obligations of U.S. Persons Obligations of U.S. persons constitute a section 956 investment to the extent of the CFC’s adjusted basis in the obligation. “[T]he term ‘obligation’ includes any bond, note, debenture, certificate, bill receivable, account receivable, note receivable, open account, or other indebtedness.…” Reg. 1.956 -2T(d)(1). Exceptions to Section 956 treatment are provided for the following obligations: Obligations issued by a person that is not a related person with respect to the CFC. “Ordinary and necessary obligations” arising out of performance of services or the sale / processing of property. Certain short-term obligations. Deposits with certain federally regulated banking institutions. Certain specialized exceptions for taxpayers in the financial services industry. 13
Obligations of Related U.S. Persons Loan of $200 $200 E&P (non-PTI) $50 Taxes The loan to a related U.S. person is a § 956 investment of $200. If loan is outstanding for all 4 quarters, CFC will be deemed to make a dividend of $200, with $50 of foreign tax credits. 14
Obligations of U.S. Persons “Ordinary and Necessary” Obligations Receivables arising from the sale or processing of property, or provision of services, in the ordinary course of business, may also be excluded from Section 956 if the loans, at no time during the year, exceed an amount that would be ordinary and necessary between unrelated persons. 60-day safe harbor for service receivables. In inventory cases, facts and circumstances test applies. 15
Loans to Related U.S. Persons — Ordinary and Necessary Exception Contract Accounts Manufacturing Receivable Services An account receivable arising from purchase or manufacturing of property or provision of services is excluded from § 956, so long as the outstanding balance, at no time during the year, exceeds what is ordinary and necessary between unrelated parties. 16
“Ordinary and Necessary” Loans— LTR 200519005 Initial Manufacturing Required to Ships maintain M goods for months of further inventory to CFC US processing avoid supply disruptions. Sale with payment due in M months Foreign “Complex and delicate” manufacturing process “Long lead times” Held to qualify for the ordinary and necessary exception. 17
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