International Perspectives - Tax & Other Considerations for Bioscience Companies


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International Perspectives Tax & Other Business Considerations for Bioscience Companies

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International Perspectives - Tax & Other Considerations for Bioscience Companies

  1. 1. International Perspectives Tax & Other Business Considerations for Bioscience Companies Presented by: Stuart Anolik (240) 396-2786
  2. 2. Worldwide Taxation vs. Territorial vs. Deferral  Worldwide – U.S. persons (individuals, partnerships, LLCs, and corporations) and residents are subject to U.S. tax on their worldwide income. See §§ 1 and 11 of the Internal Revenue Code of 1986, as amended (the “Code”). – §§ 871, 881 and 882 of the Code subject non-resident aliens and foreign corporations to U.S. tax on U.S. source income. See §§ 861 through 885 of the Code for rules to determine US and foreign source income.  Territorial Tax -Foreign income of residents are not taxed (some jurisdictions exempt some but not all foreign income of residents by taxing a resident’s foreign income once it is repatriated)  Deferral -The postponement of current taxation on the net income or gain economically accrued by a taxpayer – Ability to use pre-US tax dollars for international expansion – Increases cash flow – Increases earnings per share and thus shareholder value
  3. 3. PE Defined  Where a tax treaty applies, the relevant concept is a PE, rather than a Trade or Business. The term PE is narrower and better defined than Trade or Business.  A PE is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on.  A PE does not include: • Facilities used solely to store, display, or deliver goods belonging to enterprise. • Maintenance of a stock of goods solely for purpose of storage, display or delivery, or processing by another enterprise. • Maintenance of a fixed place of business solely to purchase goods, collect information, or any other activity of a "preparatory or auxiliary" nature.  Subsidiary • Simply owning control of a subsidiary corporation does not create a PE for parent corporation in the subsidiary country. • The activities of a subsidiary could create a PE for parent if the subsidiary is considered a dependent agent and habitually exercises an authority to conclude contracts in the parent’s name.
  4. 4. PE Defined  Independent Agents – Doing business through an independent agent does not create a PE, provided the agent is acting in the ordinary course of its business as an independent agent  Dependent Agents – Dependent agent can create a PE if the agent habitually exercises an authority to conclude contracts that are binding on taxpayer
  5. 5. Government Incentives Singapore Incentive Benefit • Pioneer Status Tax exemption for qualifying income for up to 15 years • Development and expansion incremental Incentive (DEI) Reduced rate (5 – 15%) for up to 20 years on • Regional and international headquarters program Reduced rate of between 0 – 15% for up to 5 years on qualifying income negotiable • Approved foreign loan incentive Reduced withholding tax on interest payments on loans • Approved royalties incentive Reduced withholding tax on royalty payments to access advanced technology and know-how income from qualifying activities
  6. 6. Government Incentives Singapore Incentive • Writing-down allowance for Benefit Automatic 5-year write-down of IP acquired acquired IP • Writing-down allowance for R&D payments under an approved cost-sharing agreement • Productivity and Innovation Credit (PIC) scheme • Investment allowances Enhanced deduction of 100% of R&D cost-sharing payments Enhanced deduction of 400% of qualifying expenditure (e.g. acquisition / registration of IP rights, R&D and in-licensing of IP) subject to expenditure caps Enhanced deduction of 100% on qualifying fixed capital expenditure on top of normal allowance
  7. 7. Government Incentives Singapore Incentive Benefit • Initiatives in New Technology (INTECH) Co-funding to support the manpower development in the application of new technologies, industrial R&D and professional know-how • Research Incentive Scheme for Companies (RISC) Co-funding to support the set-up of R&D centers and/or the development of in-house R&D capabilities in strategic areas of technology
  8. 8. Government Incentives The Netherlands Employers engaged in certain R&D activities (“WBSO”) are entitled to a payroll tax reduction of 38 percent (in certain cases 50 percent) of the relevant payroll costs, up to a maximum base amount of €200,000, and 14 percent for any excess base (maximum reduction of €14 million). In addition, the R&D deduction (RDA) of 54 percent of the eligible cost and expenditure is available for investments in new business assets .
  9. 9. Government Incentives Ireland Ireland also provides a tax credit of 25 percent of capital and revenue expenditure on qualifying R&D expenditure. It is possible to claim excess R&D credits as a cash refund. Certain start-up companies are exempt from tax in each of their first 3 years.
  10. 10. Government Incentives Germany Investment subsidies of 2.5 percent for investments started in 2013 in the former Eastern German areas, or regional subsidies as well as subsidies on European, Federal and State levels.
  11. 11. Government Incentives Switzerland Accruals for future R&D projects executed by third parties are permitted in an amount of up to 10 percent of the taxable profit, maximum 1 million Swiss francs. Full or partial tax holidays of up to 10 years on cantonal and – in certain regions – federal tax level can be granted to substantial investment projects. In addition, funding in case of a collaboration between the company and a university may be available.
  12. 12. Government Incentives UK Tax incentives for R&D expenditure are available, with an enhanced deduction of 130 percent for large companies and of 225 percent for small and midsized enterprises. From April 2013, an optional above-the-line R&D tax credit of 10 percent of qualifying expenditure is available for large companies. Twenty-four new enterprise zones have been set up in economically declining areas of the UK. Possible measures include a five-year holiday up to £275,000.
  13. 13. Government Incentives Malaysia 1. BioNexus Tax Incentives A company undertaking biotechnology activity and has been approved with BioNexus Status may apply for the following incentives: i. An exemption from tax on 100% statutory income: • For a period of ten (10) consecutive years of assessment from the first year the company derived statutory income from the new business; or • For a period of five (5) consecutive years of assessment from the first year the company derived statutory income from the existing business and expansion project; or
  14. 14. Government Incentives Malaysia 1. BioNexus Tax Incentives (continued) A company undertaking biotechnology activity and has been approved with BioNexus Status may apply for the following incentives: ii. An exemption of 100% statutory income derived from a new business or an expansion project that is equivalent to an allowance of 100% of qualifying capital expenditure incurred for a period of five (5) years. iii. A BioNexus Status company is entitled to a concessionary tax rate of 20% on statutory income from qualifying activities for ten (10) years upon the expiry of the tax exemption period.
  15. 15. Government Incentives Malaysia 1. BioNexus Tax Incentives (continued) A company undertaking biotechnology activity and has been approved with BioNexus Status may apply for the following incentives: iv. Tax exemption on dividends distributed by a BioNexus Status company. v. Exemption of import duty and sales tax on imported raw materials/ components and machinery and equipment. vi. Double deduction on expenditure incurred for R&D.
  16. 16. Government Incentives Malaysia 1. BioNexus Tax Incentives (continued) A company undertaking biotechnology activity and has been approved with BioNexus Status may apply for the following incentives: vii. Double deduction on expenditure incurred for the promotion of exports. viii. With effect from 2 September 2006, qualifying buildings used solely for the purpose of biotechnology activities will be eligible for Industrial Building Allowance to be claimed over a period of 10 years. ix. A company or an individual with business source investing in a BioNexus Status company is eligible for a tax deduction equivalent to the total investment made at initiating of commercialization stage.
  17. 17. Government Incentives Malaysia 2. Funding Assistance – Biotechnology Commercialization Fund (BCF) Biotechcorp provides funding to BioNexus Status companies under its Biotechnology Commercialization Fund (BCF) Facility Program. The objectives of the BCF Facility are to facilitate on-going commercialization of biotechnology products and services as well as provide assistance in expanding the applicant’s existing biotechnology business.
  18. 18. Government Incentives Malaysia A maximum of 90% funding assistance of up to RM3 million per company is provided under the funding initiative to cover the following expenditures: i.Expansion project; ii.Expansion of existing biotechnology products or services; iii.Expansion of new biotechnology products or services; and iv.Activities for expansion into new markets (geographical or segmental)
  19. 19. Government Incentives Malaysia Eligibility criteria for the BCF facility includes the following: i.Applicant must be a BioNexus Status company; ii.Majority Malaysian owned i.e. at least 51% of the equity is owned by Malaysians; and iii.Minimum paid-up capital of RM250,000
  20. 20. Government Incentives Malaysia Guideline on BioNexus Status eligibility criteria: General eligibility criteria for a company to apply BioNexus Status are as follows: a)There must be a separate legal entity for the BioNexus-qualifying business and activities b)The applicant is a provider of a product or services based on life sciences, or substantially utilize biotechnology processes; c)The applicant must undertake continuous development research work with access or capability to carry said activity.
  21. 21. Government Incentives Malaysia Guideline on BioNexus Status eligibility criteria: (continued) General eligibility criteria for a company to apply BioNexus Status are as follows: d)The applicant employs a significant percentage of knowledge workers as part of its total workforce e)The applicant complies with applicable and related laws, regulations, and guidelines f)Minimum paid-up capital requirement of RM250,000. (This requirement must be complied at the Application Processing Stage)
  22. 22. Transfer Pricing – Basic Concepts & Fundamentals  The arm’s-length principle.  Methods of evaluation vs. methods of implementation.  Functional or transactional comparability. – – – – – – Characteristics of the operation Functions, risk and assets employed Contractual terms Economic circumstances Business strategies Intangible property  The “Best Method” rule.
  23. 23. Overview: Functional Analysis & Profitability Factors
  24. 24. Overview: Functional Analysis & Profitability Factors
  25. 25. Overview: Functional Analysis & Profitability Factors
  26. 26. Overview: Functional Analysis & Profitability Factors
  27. 27. Application of Methods: Implementing a Limited Risk Distributor Model “LRDM”  Conduct a functional analysis to identify baseline facts.  Shift risks and functions from sales companies to one centralized location – Inventory, accounts receivable, and foreign exchange risks – Key point: LRD can be implemented on a product-line basis or on a company-wide basis  Address implementation issues – Potential PE risk – New decision-making and approval processes • Reimburse significant marketing expenses to avoid ownership of marketing IP  Goal: LRDs have limited risks and intangible assets  transfer pricing implementation yields consistent low profitability over the long-term
  28. 28. Application of Methods: LRDM Typical Activities of the Entrepreneur
  29. 29. Application of Methods: LRDM Typical Activities of the LRD
  30. 30. Application of Methods: LRDM – Limited Risk Distributor Objectives  The LRDM centralizes the IP, risks, certain functions, P & L account results of and the key decision-makers for the LRD in a single entrepreneur entity. The LRDs will be selling product in their own names but in a manner and with a reward that reflects their limited risks and functions  Furthermore, the LRDM model aligns with the developing market driven centralization and globalization trend in operations of many multinationals by: – Providing a fiscal/ legal framework to pursue direct sales/global or pan-regional and other regional contracts/deliveries of services. – Providing a framework for local companies to pass certain risks to the Entrepreneur. – Increasing the transparency and accountability for revenue growth and operating performance. – Providing a legal/framework for significantly reducing inter-company transactions and cross charges.
  31. 31. Application of Methods: LRDM – Typical Contractual Arrangements between Entrepreneur & LRD  The Entrepreneur enters into a LRD Agreement with each of the LRDs. This contract typically allows the following: – The Entrepreneur provides LRD with management services (E.g., headquarters, stewardships, strategy, direction and control, etc.) – The Entrepreneur bears certain risks relating to LRD’s business (e.g., credit management risk, bad debt risk, delivery risk, foreign exchange risk, etc.) – The Entrepreneur grants LRD the right to use the IP without which LRD cannot perform contracts it enters into with customers in its respective jurisdictions – Product pricing is set so that the arm’s-length reward for LRD is targeted, and all excess profit is retained by the Entrepreneur  These contracts are usually accompanied by contract R & D agreements, tolling/supply agreements, and management services agreements
  32. 32. Tax Treaties  The U.S. has 55 double tax treaties in force, including with most major European and Asian economies, as well as Israel.  Benefits vary significantly from one treaty to another.  Recent Trend of concluding protocols with major trading partners which allow for 0% withholding tax on dividends.  Access to most treaties may be difficult for MNCs due to elaborate LOB provisions.  MNCs may potentially access U.S. treaties with LOB provisions pursuant to: – – Active Trade or Business Test Ownership / Base Erosion Test  There are still a number of treaties left which do not include LOB provisions (Hungary, Poland, Iceland) – but the U.S. is pressing to renegotiate these treaties.  Even if treaty applies, a number of U.S. rules need to be taken into account, including: – Anti-conduit regulations & 894(c) regulations
  33. 33. Transfer Pricing – Overview: Basic Principles  Explosion of countries with: – – – Specific transfer pricing rules. Documentation requirements. Disclosure requirements.  Increasing number of countries with penalty provisions.  Pricing and regulatory constraints.  Increase levels of cooperation between tax administrations.  Transfer pricing planning trends.
  34. 34. Part II – Investing in the U.S.  Initial Set-Up of U.S. Presence – – – – Issues to Consider Prior to Investment Objectives of Structuring Forms of Doing Business Transfer Pricing  Acquisitions of U.S. Companies – – – – – – – Recent Trends in Inbound M&A Tax Due Diligence – Main Issues Stock Acquisition vs. Asset Acquisition – Comparative Analysis Utilization of Tax Attributes (Goodwill, NOLs) Transfer Pricing Global Structure Alignment (CFC Extraction) Planning Ideas
  35. 35. Overall Objectives  Global Tax Optimization (subject to business goals).  Where do we want to put our profit?  Profit Drivers: – – – – Capital Function Know-How (intangibles) Risk  Which drivers attract the most profit?
  36. 36. IRS Examination of Potential PEs The dilemma – to file or not to file? That is the question!  If no “protective” return is filed: – Unless a “protective” return is filed, an IRS determination that a PE exists might result in: • Denial of deductions and credits. • Various penalties.  If a return is filed: – The IRS recently conducted specialty training for international agents to examine “Protective” Income tax returns filed by foreign corporations. – 160 returns have been selected for examination, out of over 1000 reviewed. If substantial issues are identified, the IRS will most likely expand the protective return examination program. – IRS decided to take another look at this area due to increased activity by foreign governments raising PE issues on U.S. companies.
  37. 37. IRS Enforcement & Audit Strategies Current Climate  Associate Chief Counsel (International), Steven Musher, said "International tax compliance is now really a major emphasis for the Service. We're putting a great deal more emphasis in this area.”  Frank Ng, IRS LMSB Deputy Commissioner (International) in November 2006: "International tax matters are a growing significant area within the IRS and it is important that we work with taxpayers and the practitioner community to improve voluntary compliance with the international tax laws.“  In general, cross-border arbitrage using hybrids will be closely scrutinized by the IRS as consistent with the priorities of IRS Commissioner Mark Everson. "We see these as smoke, and sometimes there's fire, and sometimes there isn‘t." Bettie Ricca, IRS deputy associate chief counsel (international).
  38. 38. IRS Enforcement & Audit Strategies Inter-Governmental Sharing of Information  OECD's Forum on Tax Administration (FTA)  Joint International Tax Shelter Information Center (JITSIC) – JITSIC is a permanent international secretariat whose members include Australia, Canada, U.S. and the United Kingdom.  “Leeds Castle Group” – Includes tax commissioners from the Australia, Canada, China, France, Germany, India, Japan, South Korea, United Kingdom and United States – China and India are important participants because of significant foreign direct investment in these countries  IRS and UK are sharing information to combat abusive tax arbitrage  IRS Sharing Information With Other Treaty Partners
  39. 39. IRS Enforcement & Audit Strategies Tax Arbitrage and Hybrid Entities  New multilateral efforts are focused on cross-border enforcement, particularly as it applies to underreported income, as well as on "tax arbitrage" transactions.  Audit experience with hybrid transactions.
  40. 40. IRS Enforcement & Audit Strategies Recently-Identified Areas of IRS Compliance Interest  Protective Form 1120-F filings are being scrutinized to identify other entities that should be paying federal income tax.  IRS is examining a pool of Form 1120-F filings to determine if taxpayers are engaged in U.S. trade or business or have a U.S. permanent establishment under the applicable U.S. tax treaty.  IRS is researching taxpayers on internet to determine extent of taxable U.S. presence. Information will be shared with agents in LMSB and SB/SE groups throughout U.S. who will conduct examinations.  Foreign controlled corporations with significant intercompany transactions reported on Form 5472, and limited operating profit, are being targeted.
  41. 41. IRS Enforcement & Audit Strategies Recently-Identified Areas of IRS Compliance Interest  IRS is looking at inbound entities that have U.S. tax losses, as well as transfer pricing, and withholding tax compliance.  Extensive compliance initiative project to address noncompliance by taxpayers responsible for withholding income tax under Sections 1441-1443. The IRS goal is to examine compliance of 300 taxpayers in each of the five Large and Mid-Size Business (LMSB) divisions.  IRS computer audit specialists and international examiners have been analyzing information reported on Form 5471 and Form 5472 to determine whether reportable amounts reflected on those information returns have been reported properly on Form 1042.
  42. 42. IRS Enforcement & Audit Strategies Delinquent International Returns & Potential Penalties  The IRS is enforcing the Form 5471 filing requirement and assessing $10,000 penalty per Form 5471 for incomplete information or for failure to file the form.  Chief Counsel Notice (CC-2004-036): penalties assist IRS by increasing economic cost of non-compliance. IRS staff should support imposition of penalties when issue is properly developed.  Hazards of litigating a penalty are to be considered separately from hazards of litigating a tax liability.  IRS Chief of Appeals issued memo to staff establishing new policy under which "penalty issues" will no longer be "traded" as part of settlement process. Settlement of a penalty must be on the merits.
  43. 43. Contact Information Stuart H. Anolik –International Tax Practice Leader (240) 396-2786 • • With experience and degrees in both law and accounting, Stu has been a valued business consultant for more than 30 years. He has extensive experience in international investment and finance, intellectual property migration, transfer pricing, infrastructure project finance, mergers and acquisitions and international taxation. Stu has represented clients ranging from start-ups to Fortune 500 companies on various international securities and transactional matters, including multi-jurisdictional acquisitions and dispositions of business, cross-border joint ventures, and securities transactions and financings for U.S., European, Asian, and Latin American companies. Stu is a popular speaker for industry and bar association conferences, addressing matters as varied as "EBusiness: Taxation in a Virtual Marketplace” (e-conference in Israel), "Tax Issues Associated with Trade and Investment in the Republic of China" (George Washington University Symposium on International Issues), “International Tax Considerations for a Maryland Company” (Maryland Association of CPAs), and “IP Taxation and International Tax” (Maryland State Bar Association, Montgomery County Tax Study Group). Complementing his extensive experience in international and multijurisdictional tax and business advisory, Stu also consults with companies regarding the advantages of implementing captive insurance scenarios to minimize risk mitigation costs. He is actively involved in captive insurance councils.
  44. 44. Contact Information Stuart Anolik, CPA CBIZ MHM, LLC P: 240.396.2786