The document outlines the significant updates on U.S. international tax legislative reforms and the OECD's Base Erosion and Profit Shifting (BEPS) report. It highlights various policy options, corporate tax rates comparisons, and concerns regarding profit shifting, particularly related to U.S. multinational companies utilizing offshore structures to minimize tax liabilities. Additionally, it discusses recent reform proposals from President Obama and congressional members aimed at addressing these tax challenges.

1. US International Tax
Legislative Reform Update & OECD
BEPS Report
Eric D. Ryan, International Tax Partner
Paulus Merks, Tax Partner Netherlands
Ágata Uceda, EMEA Transfer Pricing Director
DLA Piper, March 7 2013

2. Agenda
 Eric, Paulus and Agata
 A (very) short history of international corporate tax
 Policy options
 Corporate tax rates comparison
 Paulus and Agata
 The OECD presented Base Erosion and Profit Shifting
 Key pressure areas
 Tax planning structures
 Eric
 Typical offshore IP structure entities
 US concerns regarding profit shifting
 The Amazon case
 US international tax reform proposals
US International Tax Legislative Reform Update March 7, 2013 2

3. A (Very) Short History of
International Corporate Tax
2009: UK and Japan go
territorial
2013: US multinationals
1918: Foreign tax credit 1990 & 2003: EU have $1-2 trillion in
1923: Relief of double
1962: Subpart F Directives on dividend offshore untaxed
taxation as goal exemption earnings
Circa 1920 1960s 1990 2009
US International Tax Legislative Reform Update March 7, 2013 3

4. Corporate Tax Rates Comparison
US International Tax Legislative Reform Update March 7, 2013 4

5. Policy Options
Hybrid
Option Incremental
(e.g. Policy
worldwide Territoriality Change to
Worldwide Formulary
consolidation (dividend Existing
Consolidation Appointment
contingent exemption) System
on low (transfer
foreign tax pricing)
rate)
US International Tax Legislative Reform Update March 7, 2013 5

6. Base Erosion and Profit Shifting
 The OECD presented the Base Erosion and Profit Shifting
("BEPS") report on February 15, 2013 to G-20
 Acknowledgement and support from G-20. UK leading the
initiative.
 What is BEPS?
Base erosion and profit shifting 7 March, 2013 6

7. Key pressure areas of BEPS
 International mismatches
 Hybrid mismatch arrangements and arbitrage
 Application of treaty concepts
 To profits derived from delivery of digital goods and services
 Conduit companies (beneficial ownership)
 Derivatives (withholding taxes)
 The effectiveness of anti-avoidance measures
 GAARs, CFC regimes, thin-capitalisation rules, avoidance of tax treaty abuse
 Harmful preferential tax regimes, special attention to transparency
and substance
Base erosion and profit shifting 7 March, 2013 7

8. Key pressure areas of BEPS
 Transfer pricing
 Shifting of risks and intangibles
 Artificial (legal) splitting of ownership of assets between entities
 Intercompany financing, captive insurances and guarantees
 Transactions that would rarely take place between third parties
 Action plan to be presented June 2013
Base erosion and profit shifting 7 March, 2013 8

9. Investments in holding countries
 NETHERLANDS
 Inward stock investment: USD 3.207 billion
 Outward stock investment: USD 4.002 billion
 LUXEMBOURG
 Inward: USD 2.129 billion
 Outward: USD 2.140 billion
 HUNGARY
 Inward: USD 233 billion
 Outward: USD 176 billion
 AUSTRIA
 Inward: UDS 271 billion
 Outward: USD 300 billion
Base erosion and profit shifting 7 March, 2013 9

10. Dutch CV / BV
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11. The Dutch Sandwich of Google and
Facebook
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12. Leverage acquisition
Base erosion and profit shifting 7 March, 2013 12

13. Group A's Tax Planning Structure
Base erosion and profit shifting 7 March, 2013 13

14. Group A's tax planning structure
Base erosion and profit shifting 7 March, 2013 14

15. Typical Offshore IP Structure Entities
• Performs R&D function
US US Company • Management
Customers • US Distributor
Sale
• Low-tax jurisdiction
• Has non-US rights to exploit IP
Non-US Foreign IP/Operating Co • Direct sales to non-US customers
Customers (Swiss, Ireland, etc.) • Bears commercial risks (e.g. inventory,
bad debt, f/x)
Sale
• Entitled to IP profits
• Conducts/contracts manufacturing
• Performs sales and marketing
Sales and Mktg function in local jurisdictions
Marketing Information Subsidiaries • “Check-the-box” tax election to
be viewed as branch
• No valuable intangible assets
• Limited risks
US International Tax Legislative Reform Update March 7, 2013 15

16. Tax Planning Results and
US Concerns regarding Profit Shifting
 As a result of these structures, profits accumulate in specifically
chosen low-tax foreign subsidiaries
 “The data speak for themselves. Unequivocally, low-tax countries
have a disproportionate share of profit.” U.S. Commerce
Department’s Bureau of Economic Analysis, 2009
 U.S. Senate hearings, September 2012, criticize HP and Microsoft of
avoiding US taxes, while acknowledging the techniques are legal
 Congressional Research Service, “An Analysis of Where American
Companies Report Profits; Indications of Profit Shifting,” January 18,
2013, concludes:
 “. . . The analysis presented here appear to show that significant shares of profits
are being reported in tax preferred countries and that these shares of profits are
disproportionate to the location of the firm’s business activity as indicated by where
they hire workers and make investments
 “For example, American companies reported earnings 43% of overseas profits in
Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland in 2008, while
hiring 4% of their foreign workforce and making 7% of their foreign investments in
those economies”
US International Tax Legislative Reform Update March 7, 2013 16

17. IRS Reaction to Taxpayer IP Valuation
Methods – The Amazon Case
 Amazon.com is the world’s largest online
retailer
 In 2005, Amazon US entered into a
“qualified cost sharing arrangement” with
Amazon US AEHT, agreeing to share with AEHT the
R&D costs of developing Amazon’s future
IP
Cost  AEHT also made a “buy-in” for the rights
Buy-In to exploit Amazon US’ preexisting IP in
Sharing
Payments Europe. Amazon originally valued this buy-
Payments
in at $216.7 million using standard
methods available at the time
AEHT  During audit, however, the IRS’
(Luxembourg) economists valued Amazon’s IP to be
worth $3.6 billion using a discounted
cash flow method. Use of this method
under the previous regulations was
rejected by the Tax Court in the 2009
Veritas case
 The IRS economists also used a perpetual
life for the IP and aggregated the items IP to
Amazon Amazon capture synergies: two concepts that were
Amazon UK
Germany France also rejected by the Veritas court
 Amazon is currently challenging the IRS’
valuation in Tax Court
US International Tax Legislative Reform Update March 7, 2013 17

18. US International Tax Reform Proposals
 Two recent proposals from President Obama:
 Treasury’s 2013 Green Book
 “The President’s Framework for Business Tax Reform”
 Two Republican proposals to move the US to a territorial system:
 Chairman Camp’s Discussion Draft
 Senator Enzi’s Territorial Bill
 Simpson-Bowles Plan
 Senator Levin’s CUT Loopholes Act
US International Tax Legislative Reform Update March 7, 2013 18

19. 2013 Green Book – Prior Proposals Retained
 On February 13, 2012, Treasury released its latest annual budget
proposal, “General Explanations of the Administration’s Fiscal Year
2013 Revenue Proposals” (Green Book), retaining in large part the
same proposals from the 2012 budget, but also adding a few more
 Significant retained proposals include:
1. Excess returns tax on transfer of intangibles offshore
 If a US parent transfers covered intangibles to a related CFC, then the “excess
intangible income” would be Subpart F income if subject to a low foreign ETR
(less than 15%)
 Discussed in more detail later in the Camp proposal (slides 14-16)
1. Expand §936(h)(3)(B) definition of “intangible property”
 Thus, for purposes of §367(d) and §482, IP would include goodwill, going
concern value, and workforce in place
1. Determine FTCs on pooled basis
Proposed Changes to US International Tax Rules March 7, 2013 19

20. 2013 Green Book – New Proposals
1. Tax gain from sales of partnership interest on a look-through basis
 Under RR 91-32, gain from the sale of a partnership interest not taxable to non-
resident aliens and foreign corps to the extent not ECI
 But RR 91-32 founded upon shaky legal reasoning / ignores lack of statutory authority
 Under the proposal, gain/loss from sale/exchange of a partnership interest would
be ECI to extent attributable to ECI property (i.e., a codification of RR 91-32)
 In addition, transferee of partnership interest would be required to withhold 10% of amount
realized on sale/exchange of partnership interest
1. Prevent use of leveraged distributions from related foreign corps
 Under current law, one foreign corp can avoid dividend treatment on the
repatriation of E&P by funding a second foreign corp with no E&P, where the
shareholder has enough basis to characterize distribution as return of basis
 Current remedy is to simply rely on anti-abuse rules (e.g., §1.956-1T(b)(4))
 Under the proposal, to the extent foreign “funding corporation” funds (e.g., capital
contributions, loans, or distributions) a related foreign “distributing corporation,” the
US shareholder’s basis in stock of distributing corp is not taken into account for the
purpose of determining distribution treatment under §301
 I.e., the distribution receives capital gain treatment
 Note that “a principal purpose” must be to avoid dividend treatment
 Effectively shuts down a proven repatriation strategy
US International Tax Legislative Reform Update March 7, 2013 20

21. 2013 Green Book – New Proposals
(Continued)
3.Extend §338(h)(16) to certain asset acquisitions
 Under current law, where a proper §338 election is made, §338(h)
(16) prevents the seller from increasing allowable FTCs
 Under the proposal, §338(h)(16) would be extended to also deny
an increase in FTCs for all “covered asset acquisitions” under
§901(m)
3.Remove foreign taxes from §902 corp’s foreign tax pool
when earnings are eliminated
 Under current law, certain transactions (e.g., redemptions, spin-
offs) can eliminate E&P other than by reason of a dividend
 The result is that the taxpayer can claim indirect FTCs for foreign taxes
paid on earnings that will no longer fund dividend distributions
 Proposal would reduce the amount of foreign taxes paid in the
event a transaction results in the elimination of E&P other than by
reason of a dividend
US International Tax Legislative Reform Update March 7, 2013 21

22. Obama Proposed Business Tax
Reform – Key Provisions
 On February 22, 2012, President Obama released a 23-page plan to
reform the taxation of US companies, entitled “The President’s
Framework for Business Tax Reform”
 Intended to be revenue neutral
 Reduce the corporate tax rate to 28%
 Repeal most corporate tax expenditures (i.e., deductions, credits,
incentives)
 Accelerated depreciation repeal is the biggest change; 5x as valuable as
proposed international tax changes
 Retain the Research and Experimentation Tax Credit
 Tighten the definition of Domestic Manufacturing for the §199 Tax
Credit, but increase the credit rate
 Tax “carried interest” as ordinary income
 Tax large partnerships as corporations
US International Tax Legislative Reform Update March 7, 2013 22

23. Obama Proposed Business Tax
Reform – Key Provisions (Continued)
 Require CFCs to pay a “minimum tax” on overseas profits, offset by
FTCs
 No indication yet what the minimum rate would be. But the idea is to target tax
havens, where no FTCs are available. Thus, this may not be a problem for income
earned in higher tax jurisdictions (e.g., Ireland, Switzerland)
 Defer interest deductions related to deferred income of CFCs until that
income is taxable in the US
 Interest deductions allocable to CFCs cannot exceed the pro rata share of income
derived from the subsidiary which is subject to current US tax
 Determine FTCs on a pooled basis
 Total FTCs allowed = Total foreign taxes paid × (Relevant distribution ÷ Total foreign
income earned)
 Tax CFCs on excess income from covered intangibles if the foreign tax rate
is below 15% (discussed in the context of the Camp proposal)
 Broaden the definition of “intangible property” (for §367(d) and §482) to
include goodwill, going concern value, and workforce in place
US International Tax Legislative Reform Update March 7, 2013 23

24. House Ways and Means Territorial
Income Proposal (Camp Proposal)
 Proposed move to territorial system by Representative Camp (R-MI),
Chairman of the House Ways and Means Committee
 Revenue neutral
 Reduce the corporate tax rate to 25%
 95% deduction for dividends received by a domestic parent from
foreign subsidiaries (i.e., a 1.25% tax rate)
 Only applicable to portion of dividends attributable to foreign-source
income derived from the active conduct of business
 One year holding period requirement (similar to §246(c)(1))
 FTCs cannot offset US tax due on these dividends
 All foreign branches treated as CFCs
 Thin capitalization rules – where (i) taxpayer has more foreign debt
than US debt and (ii) overall debt is high
 Maintain Subpart F, with changes
US International Tax Legislative Reform Update March 7, 2013 24

25. Camp Proposal (Continued)
 Mandatory inclusion of pre-enactment undistributed foreign earnings in
domestic parent’s income in the year of enactment, 85% is deductible
(i.e., a 5.25% tax rate)
 Taxpayers can pay cash tax over 8 years with interest (book tax treatment?)
 If the inclusion is tied to E&P, then there will be disparate treatment based
on §338 elections of targets (and other factors)
 If the inclusion is tied to APB 23, many companies in fact indefinitely
reinvest earnings in factories / targets, so often free cash is a fraction of
APB 23 amount -> very high effective tax rate
 If the inclusion is tied to cash, disparate treatment for cash-intensive
companies
 Interest deduction capped for US shareholders of affiliated groups with
“excess domestic indebtedness”
 Judged under either a) “relative leverage” test (total debt of group allocated
to each member according to the debt-to-equity ratio of the entire group), or
b) “percentage of adjusted taxable income” test (interest deductions allowed
up to a designated percentage of adjusted taxable income)
US International Tax Legislative Reform Update March 7, 2013 25

26. Camp Proposal:
Three Alternative Base Erosion Options
1) Obama’s excess returns proposal (no need for separate FTC
baskets)
2) Subpart F treatment of CFC income taxed at an ETR of less
than 10% (determined country-by-country); same-country
exception for active business income
3) “Carrot and stick” option
US International Tax Legislative Reform Update March 7, 2013 26

27. Enzi Territorial Bill
 On February 9, 2012, Senate Finance Committee member Michael
Enzi (R-WY) introduced his own territorial taxation bill, called the
United States Job Creation and International Tax Reform Act of 2012
(S. 2091)
 Similarities with Camp proposal
 New §245A would provide 95% deduction for dividends received by 10%
US shareholders of CFCs (or entities that elect to be treated as CFCs)
 One year holding period
 Differences from Camp proposal
 Corporate tax rate remains unchanged at 35%
 §1248 gain is also eligible for a 95% deduction
 Elective inclusion of pre-enactment undistributed foreign earnings, 70% is
deductible (i.e., 10.5% tax rate)
 FTCs cannot offset US tax on this income
US International Tax Legislative Reform Update March 7, 2013 27

28. Enzi Territorial Bill (Continued)
 Differences from Camp Proposal (Continued)
 Foreign branches are not treated as CFCs
 Treasury to issue guidance to prevent inappropriate losses/FTC planning
 Foreign income derived from intangibles created, developed, or produced
in the US would receive a 50% deduction (i.e., 12.5% tax rate)
 Does not override amended Subpart F rules (i.e., income that would be subject
to current inclusion under Subpart F would still be so treated)
 All income derived by a CFC in a country with an ETR of half (or less) the
maximum US corporate tax rate considered Subpart F income
 Exemption for income arising from substantial local activity
 Several tests to define “substantial activity”
 Ex: If a company operating in a low-tax jurisdiction (e.g., Ireland) has no
income related to intangibles and passes the substantial activity test,
exemption; if the same company derives 50% of its income from intangibles,
no exemption
US International Tax Legislative Reform Update March 7, 2013 28

29. Enzi Territorial Bill (Continued)
 Differences from Camp Proposal (Continued)
 Active financing exception to Subpart F
 Eliminate FBC sales and services income from definition of Subpart F
income
 Create FTC basket for foreign intangible income
 Accelerate effective date of worldwide interest allocation election to
December 31, 2012
 Affiliated group can elected to have all entities treated as a single corporation for
the purposes of allocating interest expenses between US and foreign source
income
 Status: Bill referred to the Senate Committee on Finance
US International Tax Legislative Reform Update March 7, 2013 29

30. Simpson-Bowles Plan
 On December 1, 2010, the National Committee on Fiscal
Responsibility and Reform published its final report entitled “The
Moment of Truth”
 Recommendations
 Reduce the corporate tax rate to 28%
 Repeal AMT
 Eliminate the Domestic Production Deduction, along with 30 other tax
credits and 75 other deductions
 Eliminate LIFO method of accounting (for tax purposes)
 Exempt active foreign-source income from US taxation
 Maintain Subpart F for passive foreign-source income
 Status: On December 3, 2010, the plan received a majority but not
supermajority vote, and thus did not make it to Congress
US International Tax Legislative Reform Update March 7, 2013 30

31. CUT Loopholes Act
 One February 11, 2013, Senator Levin introduced the Cut Unjustified Tax
(CUT) Loopholes Act (S. 2075). Title I of the Act, entitled “Ending
Offshore Tax Abuses,” proposes major changes to the US’ international
tax provisions:
 Foreign corporations “managed and controlled” in the US would be barred
from claiming foreign status
 Swap payments would become subject to US withholding tax
 Limit “foreign-related deductions” to only “currently-taxed income”
 Require FTCs to be calculated on pooled basis
 Tax currently excess income to foreign affiliates receiving US IP
 Broaden definition of “intangible asset” in §936(h)(3)(B) to include goodwill,
going concern value, and workforce in place
 Amend §163(j) so that “expatriated entities” cannot deduct “excess interest
expense” for 10 years regardless of debt/equity ratio
 Limit some foreign entities’ ability to make a check-the-box election
 Terminate the recently extended §954(c)(6) look-thru rule
 Currently tax loans from CFCs to US shareholders
US International Tax Legislative Reform Update March 7, 2013 31

32. Side-by-Side Comparison
2013 Business CUT
Camp Simpson-
Green Tax Enzi Bill Loopholes
Proposal Bowles
Book Reform Act
System of World- World- Territ- Territ-
Territorial Worldwide
Taxation wide wide orial orial
Corporate
35% 28% 25% 35% 29% 35%
Tax Rate
Excess
Returns Yes Yes Yes No No Yes
Tax
Minimum
Tax Rate No Yes Possibly Yes No No
F.S.I.
US International Tax Legislative Reform Update March 7, 2013 32

33. Side-by-Side Comparison (Continued)
2013 Business CUT
Camp Simpson-
Green Tax Enzi Bill Loopholes
Proposal Bowles
Book Reform Act
Inclusion of Pre-
Mandatory Elective
Enactment
No No (85% (75% N/A No
Undistributed
deduction) deduction)
Income
FTCs Pooled Yes Yes No No No Yes
Limit Interest
No Yes Yes Yes Yes Yes
Deduction
Ability to
Foreign Branches make CTB
No No Yes No No
Treated as CFCs elections
limited
US International Tax Legislative Reform Update March 7, 2013 33

34. Contact
Eric D. Ryan
International Tax Partner
T: +1 650 833 211
E: eric.ryan@dlapiper.com
Paulus Merks
Tax Partner the Netherlands
T: +31 20 5419 813
E: paulus.merks@dlapiper.com
Ágata Uceda
EMEA Transfer Pricing Director
T: +31 20 5419 268
E: agata.uceda@dlapiper.com
US International Tax Legislative Reform Update March 7, 2013 34