Practical Approaches for “Beating” the BEAT...Dec 31, 2017 · — Outbound cost -sharing...

2018 U.S. Cross-Border Tax Conference

May 15 – 17, 2018

kpmg.com

Practical Approaches for “Beating” the BEAT

2© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.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.

Notices

AgendaBEAT Overview

BEAT Mitigation Alternatives

Data Collection & Reporting

Open Issues

01

02

03

04


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Today’s presenters Name Title Firm | Company

Name Email | Telephone

Brian Forschino Head of Tax – Region Americas UBS [email protected]

Gretchen Horwitz Vice President, International Tax

Cognizant Technology Solutions U.S. [email protected]

Jesse EggertPrincipal, Washington National Tax -International Tax

KPMG LLP [email protected]

Danielle RolfesPartner, Washington National Tax -International Tax

KPMG LLP [email protected]

BEAT overview


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Potential addition to regular tax liability

Targets taxpayers making deductible payments to related parties that are foreign persons

Two Tier Trigger – BEAT Applies:

Application effectively reverses a portion of deductions attributable to payments to foreign related parties and certain tax credits

Applies to base erosion payments (discussed below) made in TYBA 12/31/17

BEAT overview

If there is an Applicable Taxpayer and

To the extent the BEAT tax liability

exceeds the regular tax liability


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A taxpayer that:— Is a corporation other than a RIC, REIT, or S Corp— Has average annual gross receipts for the 3-year period ending with the preceding taxable

year of at least $500MM — Has a base erosion percentage (“BEPct”) of at least 3% (2% for certain financials)

- Annual calculation

Aggregation rules apply for purposes of gross receipts test and BEPct calculation— Generally, all members of a section 1563 controlled group (generally based on > 50% control)

are treated a single person for this purpose — Includes foreign corporations to the extent of ECI

— BETBs = deductions attributable to Base Erosion Payments (next slide)

Applicable taxpayer: Definition

Base erosion tax benefits (“BETBs”)

generally all allowable deductions for the year other than under §§172 (NOL), 245A (participation exemption), or 250 (FDII/GILTI)

Base erosion percentage (“BEPct”)


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Includes: Amounts paid or accrued to a related foreign person that— Are deductible— Are for the acquisition of property that gives rise to a depreciation or amortization allowance— Are premium or other consideration for any reinsurance payments taken into account under

section s 803(a)(1)(B) or 832(b)(4)(A)— Result in a reduction of gross receipts (including COGS) if payments made to a member

of a post-11/9/17 inverted group

Exceptions:— COGS and other payments that result in a reduction of gross receipts (subject to exception

for inverted groups)— Amounts paid for services that are eligible for the services cost method under section 482, determined

without regard to the business judgment rule (“SCM Exception”)— Qualified derivative payments

Base erosion payments


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Calculating the BEAT: Base erosion minimum tax amount

BEAT liability

Modified Taxable Income

R&E Credits10%

[80%] x certain § 38

Credits

[21% x TI -All Credits]

MTI rate is 5% in 2018, 10% from 2019 through 2025, and then 12.5% for TYBA 12/31/25

All rates for banks and securities dealers are 1% higher

In computing BEAT, taxpayers retain the benefit of the R&E credit and a portion (capped at 80%) of “applicable” § 38 credits (LIHTC, renewable energy production credit, energy credit)

Must run two calculations to determine addback for applicable § 38 credits

Benefit of R&E credits and applicable section 38 credits eliminated for TYBA 12/31/25

Taxable Income BETBsMTI BEPct § 172 NOL deduction for year+ +( )


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The BEAT is not just for inbounds — U.S. multinationals in a wide range of industries are getting hit with the BEAT — Common outbound fact patterns raising BEAT issues include:

— Significant payments to foreign entities for subcontracted services — Outbound cost-sharing payments and payments to foreign R&D centers— Reimbursement of significant third party costs incurred by foreign subsidiaries— Use of a U.S. corporation as a rebiller/cost collection center — Payments to foreign data centers, shared service centers, etc. — Back-to-back hedging through a U.S. entity

Unexpected BEAT triggers — Low taxable income due to NOLs— High amounts of credits against regular tax liability (e.g., FTCs)

Surprise…you’re subject to the BEAT

BEAT mitigation alternatives

Scenario 1:Centralized procurement of shared services


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Scenario 1: Centralized procurement of shared services― FSub is a foreign corporation that acts as procurement company for the

worldwide group ― FSub contracts with 3P, a third-party service provider for services provided to

various members of the worldwide group, including USP ― FSub makes a lump sum payment to 3P and bills USP for its share of the services― Note: Similar issues arise in the inbound context, where FP may contract out for

mixed related party and third party services, but bill a single amount to the U.S. sub.

Overview

Potential Approaches― Modify the third-party contract to have USP directly contract with 3P for services

provided to USP ― If not possible, restructure arrangement between USP and FSub so that FSub is

acting as an agent for USP― Consider need for formal agency agreement and disclosure of agency

relationship to 3P

USP

Payment for services

Potential base-erosion tax on payment even though reflects, in part, third party costs

$$ for services provided to WW group

3P Service Provider

FSub

Services

Services

Collateral Consequences of Agency Relationship― Transfer pricing for agency fee; any agency fee to FSub would be BEATable ― Potential PE issues for USP ― VAT implications of changing 3P contract

Scenario 2: Global customer contracts and network services


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Scenario 2: Global customers/ network services

― U.S. Principal contracts with customers to provide global services ― U.S. Principal subcontracts the non-U.S. services to FSubs and

pays FSubs services fees ― Payments to FSubs are base erosion payments

Overview

Potential Approach – Move Customer Contracts― Foreign Principal enters into new customer contracts and

subcontracts with U.S. Principal (for U.S. services) and with FSubs ― Requires functional change to negotiate contracts outside the U.S.― May be impractical to have Foreign Principal negotiate the contracts ― If U.S. Principal continues to negotiate contracts on behalf of

Foreign Principal ― U.S. PE/ECI risk for Foreign Principal ― If Foreign Principal has a U.S. PE, Foreign Principal’s payments

to FSubs may be attributed to the U.S. PE, with the result that they remain BEATable; consider check-the-box strategies to mitigate risk

― Transfer pricing, including need to compensate old U.S. Principal for existing marketing intangibles

― VAT issues

Subcontracts for services

U.S. Principal

Third Party

Customers

FSub

Direct servicescontracts

FSubFSubs

FSubFSubFDREs

Parent

Subcontracts for services

Foreign Principal

Third Party

Customers

U.S. SubSubcontracts for services

Parent

Alt #1: Adopt a foreign principal structure


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― U.S. Principal and FSub form contractual partnership (JV Co), pursuant to which all items of income and expense relating to customer contracts are shared

― Under U.S. tax principles, an agreement between two or more parties may be treated as resulting in a contractual partnership if the parties are considered to jointly carry on a business for profit

― Relevant factors include (but are not limited to):― Intent of the parties― Sharing of profits and losses― The contributions, if any, that each party has made to the venture― The existence of separate books of account for the business

― Potentially no changes required to Third Party Customer contracts; U.S. Principal continues to contract directly with customers but does so on behalf of JV Co (undisclosed)

― Reduces BEAT risk for expenses between U.S. Principal and FSub ― Collateral consequences and other issues:

― PE/ECI risk― Transfer pricing ― Compliance costs

Potential Approach – Contractual PartnershipUSP

U.S. Principal

Third Party

Customers

FSub

Direct contracts

JV Co

Binding contractual agreement to operate

joint venture

Performance of Services

Alt #2: Partnership structure


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― Payments to Fsub treated as made to USP, so not a base erosion tax payment

―Collateral consequences:―DCL issues ― Section 367(b) ―Need sufficient foreign branch income to

support FTCs in foreign branch basket

Potential Approach – CTB on Fsub (outbound)

Potential Approach – CTB on U.S. Sub (inbound)

―Disregarded payment from U.S. branch of FP to FP not subject to BEAT

―Collateral consequences ― Section 367(e)(2) ―US PE/ECI/BPT issues for FP

USP

Subcontract for services

U.S. Principal

Third Party

CustomersFSub

Direct service

contracts

FP

U.S. SubThird Party

Customers

Direct servicecontracts

Subcontract for services

Alt #3: Check-the-box structure

Scenario 3: Inbound financing


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Scenario 3: Inbound financing structure

― Foreign-parent borrows from an external bank / lender― FP on-lends loan proceeds to its wholly-owned U.S.

subsidiary― Assume that FP is exempt from U.S. WHT on interest

paid from U.S. subsidiary under a double tax treaty with the U.S.

Overview

FP ExternalLenders

I/CLoan

U.S. Group

3rd PartyLoan

Non-U.S. Group

Entire I/C interest payment potentially treated as a BETB

FPExternalLenders

3rd PartyLoan

U.S. Group

Guarantee of US Debt

Non-U.S. Group

Guarantee fee treated as a BETB, but underlying interest payment not subject to BEAT ―Restructure to have U.S. subsidiary borrow directly

from unrelated lenders, with FP as guarantor―Guarantee fees paid to FP are subject to BEAT, but

interest paid to 3P lender is not―Risk of application of anti-abuse rule?

Potential alternative structure – Direct borrowing

Data collection & reporting


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Modeling, modeling, modeling— Data collection challenges

- Identifying related party payments - Gathering data on gross amounts that are netted down - System and institutional constraints:

— Gathering information that is not necessary for any purpose other than BEAT— Gathering information across entire controlled group

— Accuracy of taxable income forecasting — NOL utilization— Interaction with GILTI, FTCs, other provisions

How do I know if I have a BEAT problem?


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New BEAT Reporting Requirement— New section 6038A(b)(2) permits Treasury to implement expanded U.S. tax reporting requirements for “applicable

taxpayers” that are either > 25% foreign-owned or are foreign corporations engaged in a U.S. trade or business — New “BEAT” reporting potentially quite broad – authority to capture information necessary to determine BEMTA,

BEPs, BETBs, and any other information that is deemed necessary— Section 59A(h)(2)(B) conditions “qualified derivative payment” treatment on reporting information necessary

to identify relevant payments in addition to other required reporting- Note: Statute mistakenly cross-references section 6038B(b)(2), which does not contain a reporting

requirement, instead of new section 6038A(b)(2).

Increased Penalties— Penalties for failure to report required disclosures under this section are increased from $10,000 to $25,000

for each tax year to which the failure occurs.

Reporting requirements under BEAT

Open issues


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— Treatment of consolidated groups— Treatment of partnerships— Applicable BEPct of NOL deduction— Treatment of pre-2018 NOLs— Ability to net payments— Treatment of profit splits— Scope of SCM Exception — Scope of qualified derivative exception — Extent of ability to gross-up denominator of BEPct— Scope of COGS — Aggregation rule for determining applicable taxpayer status — Payments subject to a reduced rate of w/h under a treaty — Reporting

Uncertainties everywhere

Thank you

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 613174

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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Practical Approaches for “Beating” the BEAT...Dec 31, 2017 · — Outbound cost -sharing...

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