US Tax Reform and Inversions: An Analysis of Current Policy and Future Outlook

US Policy for Inward and Outbound
Investment
Q&A
Presented By
Robert J. Kiggins
www.istructuring.com

Question: When will the US Adopt
International Tax Reform?

Answer: I See No US Tax Reform Until
After 2016 Elections
– Dems And Republicans Gridlock In US
Congress
– Neither Party Can Afford To Alienate Well
Heeled Campaign Donors
• (US$5BBN Cost estimated for US Presidential
Election alone)
• Super PAC’s essentially allow for Unlimited
Special Interest Campaign Donations

So the Fight is On
2015 to 2016

But 2017??
You never know.

Question: What does Donald Trump have
to say about US tax reform?

Donald Trump Speaks
All of America will say “I win” when I am elected!

Answer: Trump Would:
1. Cut the US Corporate Rate to 15%
2. Allow US Companies to Repatriate on a One Time Only Basis
At 10%
3. After that no More Deferrals on US company income earned
overseas –
4. But Trump would Keep the Foreign Tax Credit
One Small Problem
He’s Not Electable

Question: Are There Any Areas Of Tax
Reform That Could Go Forward in The US
Before 2016?

Answer: “Perhaps”. 2 Areas that Don’t
Immediately Need US Congress
1. US Model Income Tax Treaty
2. Country By Country Reporting – Not until
2017 though
TO AMPLIFY:

US MODEL INCOME TAX TREATY PROPOSALS
Five basic areas are covered by the Proposals: Feller -
1. Limiting benefits from “special tax regimes” offering certain taxpayers preferential rates
of taxation (e.g. below 15%) with regard to mobile income such as interest and royalties.
2. Reduction of benefits from a corporate inversion by imposing full U.S. withholding
(currently at a rate of 30%) on earnings stripping type payments such as dividends,
interest, and royalties made by certain companies that have engaged in inversions.
3. Prevention of use of permanent establishment concepts to achieve non-taxation or
artificially low taxation.
4. Adoption of a broad “derivative benefits” test to permit companies to qualify for treaty
benefits that previously could not – essentially no longer restricted to NAFTA (North
America Free Trade Agreement) or EU members
5. A provision for subsequent changes in law of a treaty partner which would deny treaty
benefits if the highest marginal rate of tax of the treaty partner falls below 15%.
Conclusion: It can be expected that the model provisions in some form would become part of
the basis for negotiating future tax treaties.
This is an admin action – not Congress
BUT , actual DTT Treaties will require 2/3 US Senate Approval.

COUNTRY BY COUNTRY REPORTING
(BEPS ACTION 13)
– US Treasury plans to implement this part of BEPS in 2017 in
lock step with the BEPS timetable.
– The IRS takes the position that it currently has the legislative
authority to implement the CbC reporting requirements under
Sections 6001 and 6038(a) of the Internal Revenue Code
– The IRS intends to share the country-by-country reports with
other countries’ tax administrations under U.S. bilateral tax
treaties and tax information exchange agreements.
– But there is some thinking that the IRS— aware of the
compliance difficulties created by implementation of FATCA—
may take a cautious approach when issuing the new rules.

Question: Can You Tell Us About
Inversions?

You Turn Something Upside Down That’s American
35% tax
rate

Like a US Company
35% tax
rate

Question: What is the Viability of
Inversions as a strategy for US
companies?

Answer: Inversions are Still Going Strong
• Driven by high US corporate tax rate (35%) on all worldwide income
• Pfizer as of early this month in talks to combine with Allergan, the
Ireland-based pharmaceutical company.
• Pfizer CEO Ian Read (Scottish born) said:
– “The employees of Pfizer want to have a robust successful company in the
future. Their jobs and their careers depend upon it ... To be successful in the
future, we need to have a competitive tax rate. So that is why it's an important
issue for us.”
• Ireland provides one of the most attractive havens for tax-inverted
deals, given the country's low corporate tax rate of 12.5%. (Going
down to 6.25% under the new “knowledge development box”?)
– This could double the amount of money saved on taxes, given Pfizer's current
effective tax rate is 25%.
• This would allow Pfizer a better option for cash already held overseas
instead of repatriation.

The Reason: Gridlock in the US Congress
• Neither Democrats nor Republicans like inversions, but they disagree
on what to do about them
– Republicans call them the inevitable consequence of a flawed tax system, and
say the only solution is a full revamp of the tax code, including lowering the
corporate rate and limiting taxes on foreign profits.
– Although some Democrats agree on the broad outlines of a corporate-tax
revision — Obama’s 2016 budget calls for lowering domestic and foreign rates
— the parties disagree on so many other things that there’s little chance that a
big tax bill will pass Congress any time soon.
• In the meantime, tightened rules have made the deals less attractive,
but the Obama administration has warned that only legislation could
stop them completely.
• One proposal from Congressional Democrats would prevent $19.5
billion from escaping the U.S. tax system over the next decade.
Proposals like this are unlikely to clear a divided Congress.

Question: What Amount of USA
company profits are being held offshore?

Answer:
– USD 2.1 Trillion!!
– Repatriation would cost them USD 620
Billion in US Tax
– Apple alone holds USD 181.1 Billion
Offshore
– Repatriation Would Cost Apple USD 59.2
Billion in US Taxes

Question: Can You Tell Us About The
Double Irish with A Dutch Sandwich?

1
2
345
6
7
SURE. IT’S EASY

1
2
345
6
7
Well Maybe Not that Easy

Question: What are the latest
developments with the Double Irish with
a Dutch?

• Ireland has killed the tax haven leg
• But is lowering rates to 6.25% on
its knowledge development box
• BEPS Action 3 “modified hybrid
mismatch” (See Figure 2.1 in
Action 3) would also kill this if
adopted by the US

Question: You’ve talked lot about
Outbound. What about Inbound?
E.G. Can I just file my W-8BEN or W-
8BENE to claim US Treaty Benefits with
Whatever I need to Say to Qualify?

NO. BIG BROTHER IS WATCHING!!

W-8BEN is the Form used for Individuals
claiming benefits of a Tax Treaty with the USA
W-8BENE is the Form used for Entities claiming
benefits of a Tax Treaty with the USA
Each is also now used (in many cases) to show
that the person making the filing who holds
money in an offshore account is not a US person

• WHY WOULD YOU WANT TO DO THIS (Claim to be a Resident of Country X)
– Treaties between the X’s of the world and the US can reduce w/h down from 30% to 15%-10%-5%-even 0%
– BUT LOB Provisions in US Tax Treaties to Prevent Treaty Shopping – A sufficient % of UBOs must have a real nexus
(e.g. tax residence or business activity) with the treaty country or a real nexus with a jurisdiction in essence having
local tax rates no higher than the treaty country
– Or under FATCA the US will seek back taxes that you did not pay from foreign accounts
– Or if you are a FFI or the like – you will be withheld on at 30%
– Nominees and shells don’t work
• YOUR W-8BEN WILL BE SCRUTINIZED
• Data will be cross checked – OFAC, AML, passports, reports, credit reports, marketing reports
• Red Flags
– The permanent residence address is not in the treaty country
– Payer (withholding agent), notified of a new permanent residence address that is not in the treaty
country.
– The mailing address is not in the treaty country .
– The account holder has standing instructions for the withholding agent to pay amounts from its account
to an address outside, or an account maintained outside, the treaty country
– Critical parts of the treaty claim are missing in the treaty sections of Forms W-8BEN (Individual) or
W8BEN-E (entity), such as a missing TIN (U.S. or foreign)where one is required for the type of treaty
claim.
90 days to cure but full w/h (30%) will be required if payment is made in the meantime

• Advice – Don’t do the W-8BEN or even
more so the W-8BEN-E on your own.
• These are very complex especially the
W-8BEN-E.
• Very EZ to make technical mistakes
• Cultural factor – The W-8’s are written
in American. Check the box in
American is “tick” the box in English

Robert J. Kiggins
Culhane Meadows, PLLC
90 Park Avenue
New York, NY 10017
rkiggins@culhanemeadows.com
www.culhanemeadows.com

US Tax Reform and Inversions: An Analysis of Current Policy and Future Outlook

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