Microsoft PowerPoint - Drafter for a day to print.PPTX

Microsoft PowerPoint - Drafter for a day to print.PPTX

HYBRIDS International Tax Institute May 15, 2018 Michael Steinsaltz - Partner, Deloitte Tax LLP Brian Krause - Partner, Skadden, Arps, Slate, Meagher & Flom LLP John Merrick - Senior Level Counsel to Associate Chief Counsel/IRS Office of Associate Chief Counsel (International) Agenda Background on Hybrid Mismatch Rules Hybrid Dividends 245A(e) Hybrid Transactions and Hybrid Entities Copyright 2018 Deloitte Development LLC. All rights reserved. 2 Background on Hybrid Mismatch Rules Copyright 2018 Deloitte Development LLC. All rights reserved. Presentation title [To edit, click View > Slide Master > Slide master1] 3

BEPS and UK/EU Rules The 2015 Final Report on Action 2, Neutralising the Effects of Hybrid Mismatch Arrangements (Action 2), addresses concerns that hybrid mismatch arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term deferral. Action 2 provides recommendations which are designed to neutralize hybrid mismatch arrangements. Action 2 defines a hybrid mismatch arrangement as a payment made by or to a hybrid entity that gives rise to one of the following types of mismatches in tax treatment between countries: deduction/no inclusion (D/NI) outcomes, where the payment is deductible under the rules of the payer jurisdiction but not included in the ordinary income of the payee; double deduction (DD) outcomes, where the payment triggers two deductions in respect of the same payment; or indirect deduction/no inclusion (indirect D/NI) outcomes, where the income from a deductible payment is set off by the payee against a deduction under a hybrid mismatch arrangement Copyright 2018 Deloitte Development LLC. All rights reserved. 4 BEPS and UK/EU Rules Subsequent to the issuance of Action 2: the UK issued anti-hybrid legislation effective January 1, 2017 the EU issued its anti-tax avoidance directive (ATAD) mandating intra-EU anti-hybrid legislation as of January 1, 2019 and ATAD II mandating inter-EU anti-hybrid legislation (and expanding the scope of ATAD to include indirect mismatch rules) effective January 1, 2020

Copyright 2018 Deloitte Development LLC. All rights reserved. 5 Section 245A(e) Consistent with the European Commissions Anti-Tax Avoidance Directives and consistent with a recommendation of the BEPS Projects Action 2, Section 245A does not allow the DRD for a dividend with respect to which the payer receives a deduction (or other tax benefit) from taxes imposed by a foreign country (a hybrid dividend). No FTC or deduction is allowed for any taxes paid or accrued (or treated as paid or accrued) with respect to any hybrid dividend received by a U.S. shareholder or included in the U.S. shareholders income. A hybrid dividend received by a US shareholders CFC from another CFC of the same shareholder is treated as subpart F income of the CFC. The Secretary is authorized to issue regulations or other guidance that is necessary or appropriate to carry out these provisions. Copyright 2018 Deloitte Development LLC. All rights reserved. 6 Section 267A IRC Section 267A The provision denies a deduction for any disqualified related party amount paid or accrued pursuant to a hybrid transaction or by, or to, a hybrid entity. A disqualified related party amount is any interest or royalty paid or accrued to a related party to the extent that:

(1) there is no corresponding inclusion to the related party under the tax law of the country of which such related party is a resident for tax purposes or is subject to tax, or (2) such related party is allowed a deduction with respect to such amount under the tax law of such country. A disqualified related party amount does not include any payment to the extent such payment is included in the gross income of a U.S. shareholder under section 951(a). Copyright 2018 Deloitte Development LLC. All rights reserved. 7 Section 267A IRC Section 267A HYBRID TRANSACTION.For purposes of this section, the term hybrid transaction means any transaction, series of transactions, agreement, or instrument one or more payments with respect to which are treated as interest or royalties for purposes of this chapter and which are not so treated for purposes the tax law of the foreign country of which the recipient of such payment is resident for tax purposes or is subject to tax. HYBRID ENTITY.For purposes of this section, the term hybrid entity means any entity which is either (1) treated as fiscally transparent for purposes of this chapter but not so treated for purposes of the tax law of the foreign country of which the entity is resident for tax purposes or is subject to tax, or (2) treated as fiscally transparent for purposes of such tax law but not so treated for purposes of this chapter. Copyright 2018 Deloitte Development LLC. All rights reserved. 8 Policy Considerations

How should we look at sections 245A(e) and 267A in comparison to BEPS Action 2, the UK anti-hybrid rules, and ATAD II? Why was 267A drafted so differently considering the roadmap that already existed? How should taxpayers think about guidance as being prospective or retroactive? What considerations go into this decision? How would the rules interact w/other countries hybrid mismatch rules (consider ATAD implementation) and the lack of a secondary US rule? CFC regimes? Consider the subpart income F exception, regulatory authority, and guidance under BEPS Action 2. Copyright 2018 Deloitte Development LLC. All rights reserved. 9 Hybrid Dividends Copyright 2018 Deloitte Development LLC. All rights reserved. Presentation title [To edit, click View > Slide Master > Slide Master] 10 Section 245A Timing Differences Between Interest and Dividends; Effect of PTI What if in year 1 interest is accrued (but not paid) for Country X purposes and no dividends

are paid for U.S. purposes? + US Co What if X CFC has PTI? Year 1: Country X: Interest Accrual US: Nothing Hybrid Inst. _ X CFC What if the deduction in Country X does not completely eliminate Country X tax? Should the US care about the hybrid nature of the dividend given the CFCs income is subject to the GILTI tax? Does the denial of credits for withholding tax on 245A(e) sense as a matter of policy? Copyright

2017 2018Deloitte Deloitte Development LLC. All rights reserved. Copyright Development LLC. All rights reserved. DRAFT For discussion purposes only 11 Section 245A Scope of Hybrid Dividend Definition US Co What is the scope of (or other tax benefit) in section 245A(e)(4)(B)? What if Country X allows notional interest deductions on equity?

X CFC Copyright 2017 2018Deloitte Deloitte Development LLC. All rights reserved. Copyright Development LLC. All rights reserved. DRAFT For discussion purposes only 12 Section 245A Tiered Hybrid Dividends Involving CFCs How 245A(e)(4)(A) is applied in the tiered (or foreign-to-foreign) hybrid dividend context. That is, can a CFC claim a 245A DRD? See FN 1486 in conference report. US Co

US Co 100% 100% + Hybrid Inst. + X CFC Hybrid Inst. 100% _ Y CFC 10% _

Copyright 2018 Deloitte Development LLC. All rights reserved. Copyright 2017 Deloitte Development LLC. All rights reserved. X CFC DRAFT For discussion purposes only Y F Co 13 Hybrid Transactions and Hybrid Entities Copyright 2018 Deloitte Development LLC. All rights reserved. Presentation title [To edit, click View > Slide Master > Slide Master] 14 267A(d)(2) Definition of Hybrid Entity Section 267A(d)(2) defines a hybrid entity as an entity treated as fiscally transparent for purposes of the tax law of the foreign country of which the entity is resident for tax purposes

or is subject to tax, but not so treated for U.S. tax purposes A Co B Co Interest or Royalty C Co Copyright 2017 2018Deloitte Deloitte Development LLC. All rights reserved. Copyright Development LLC. All rights

reserved. DRAFT For discussion purposes only Does this definition work? Should the definition look to country of organization rather than residence since reverse hybrids are typically not tax resident in any country? Does US perspective makes sense in all cases or should investor country perspective be determinative? 15 267A Connection Between Hybridity and No Inclusion + Nonhybrid license Y Co US Co

_ Preferential Rate for Royalties Royalty Conference report discusses disallowing deductions where hybrid nature is what causes application of preferential regime What if, instead, US Co paid the royalty directly (not through Z Co DE)? Z Co Copyright 2017 2018Deloitte Deloitte Development LLC. All rights reserved. Copyright Development

LLC. All rights reserved. What if all countries view as a license/royalty? DRAFT For discussion purposes only 16 Section 267A Application to Foreign Payors USP CFC1 Interest or Royalty CFC2 Interest or Royalty CFC1

Copyright 2018 Deloitte Development LLC. All rights reserved. Copyright 2017 Deloitte Development LLC. All rights reserved. USP FP DRAFT For discussion purposes only USP CFC1 Interest or Royalty CFC2 DRE 17 What if Payee Country Does Not Impose Any Tax? Does the lack of any tax imposed on the hybrid payment result in no inclusion by the

related party under the tax laws of the jurisdiction in which it is resident? A Co US FDE Interest or Royalty Copyright 2017 2018Deloitte Deloitte Development LLC. All rights reserved. Copyright Development LLC. All rights reserved. C Co

(0% Tax) DRAFT For discussion purposes only 18 Can the U.S. be the No Inclusion Jurisdiction? USP CFC 1 CFC 2 _ If royalty is eligible for FDII deduction, does the 250A deduction turn the payment Royalty into a disqualified related party

amount in whole or in part? Copyright 2017 2018Deloitte Deloitte Development LLC. All rights reserved. Copyright Development LLC. All rights reserved. DRAFT For discussion purposes only USP USS Z Co Does USSs

+ deduction make USPs income no inclusion income? Definition of related person Royalty Consider consolidated return regulation _ matching rule 19 267A Conduit Arrangements + Y Co Hybrid Inst. $10

0 US Co _ $10 0 Debt Inst. (NonHybrid) Copyright 2017 2018Deloitte Deloitte Development LLC. All rights reserved. Copyright Development LLC. All rights reserved. What if Country Y and Country X have not adopted hybrid mismatch rules?

_ X Co Regulatory grant of authority to address conduit arrangements under section 267A(e) (1) + DRAFT For discussion purposes only 20 Effect on E&P? + FP What is the effect of interest expense that is disallowed under section 267A on earnings and profits? Hybrid Inst.

_ Copyright 2017 2018Deloitte Deloitte Development LLC. All rights reserved. Copyright Development LLC. All rights reserved. USS DRAFT For discussion purposes only 21 Regulatory Authority Copyright 2018 Deloitte Development LLC. All rights reserved. Presentation title

[To edit, click View > Slide Master > Slide Master] 22 267A Anti-Hybrid Provisions Regulatory Authority 267A provides for authority to issue regulations: denying deductions for conduit arrangements that involve a hybrid transaction or a hybrid entity, the application of this provision to branches and domestic entities applying this provision to certain structured transactions denying all or a portion of a deduction claimed for an interest or a royalty payment that, as a result of the hybrid transaction or entity, is included in the recipients income under a preferential tax regime of the country of residence of the recipient and has the effect of reducing the countrys generally applicable statutory tax rate by at least 25 percent denying all of a deduction claimed for an interest or a royalty payment if such amount is subject to a participation exemption system or other system which provides for the exclusion or deduction of a substantial portion of such amount, rules for determining the tax residence of a foreign entity if the foreign entity is otherwise considered a resident of more than one country or of no country exceptions to the general rule set forth in the provision, and requirements for record keeping, and information in addition to any requirements imposed by section 6038A. Copyright 2018 Deloitte Development LLC. All rights reserved. Copyright 2017 Deloitte Development LLC. All rights reserved. DRAFT For discussion purposes only

23 As used in this document, Deloitte means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2018 Deloitte Development LLC. All rights reserved. This presentation and related panel discussion contain general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.

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