Obama's International Tax Proposals

June 2, 2009

President Obama’s International Tax Proposals Richard T. Pines ARNSTEIN & LEHR LLP 120 S. RIVVERSIDE PLAZA | 1200 CHICAGO, IL 60606 P 312.876.6925 | F 312.876.6276 [email protected]

Richard T. Pines is of counsel in Arnstein & Lehr’s Chicago office. He concentrates his practice on business and business transactions. He specializes in international business, transfer pricing, securitization and supply chain structuring. Previously, he worked with Sears Holding Company for 37 years as a tax advisor. He was recognized by the National Retail Federation for his accomplishments at Sears, and is the past co-chairman of the National Retail Federation Tax Committee and American Corporate Counsel Association.

On May 11, 2009, the Treasury Department released the General Explanations of the Administration's FY 2010 Revenue Proposals (referred to below as the “Greenbook”), providing additional details with respect to, among other things, the international tax proposals announced (including seven new international proposals) by the president on May 4, 2009. Together, they raise $209.8 billion over 10 years. These proposals would: (1) reform the foreign income deferral rules to curb investing overseas; (2) close certain identified foreign tax credit loopholes to more align the credit to accomplish its original legislative intent; (3) strengthening the rules dealing with tax havens, including the current avoidance of subpart F rules; and (4) reforming the qualified intermediary regime to combat the underreporting of U.S. tax through off shore accounts. If enacted, these proposals represent a fundamental reform of longstanding international tax rules. But at this time they are just proposals. However, because of shortfalls in the White House budget and the perception that the international arena is an area in need of restructuring, most advisors believe changes will be made here or in a broader restructuring of the entire federal income regime. As to timing, as will later be discussed, it does not appear that any of these proposed changes will be made this year with health care (and other federal tax pay for proposals) and the environment receiving top priorities from the administration. Nonetheless, companies need be currently apprised of what changes could happen in the next few months and how they will strategically plan for those changes. According to the White House May 4 press releasei, the administration's plan is to reform U.S. international tax laws and improve their enforcement by ensuring that the tax code does not stack the deck against job creation by reducing the amount of taxes lost to tax havens. The press release cites as evidence the for “the most recent year for which data is available, U.S. multinational corporations paid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings – an effective U.S. tax rate of about 2.3%.” As to the quote above, not everyone agrees with this assessment. In the cited article, it is stated; “ Douglas S. Stransky, a partner with Sullivan & Worcester, the firm that sponsored the second annual World Wide Update, recently indicated that the White House Press release accompanying the proposals that U.S. multinationals have an effective US tax rate is misleading because it doesn’t explain how much multinationals pay on a worldwide basis. He also feels that the use of the word “loop holes” by both the administration and various lawmakers is perplexing, because many of the provisions in the current tax laws have been in existence for decades. He also claims that the

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administration’s assertions that the proposals will create U.S. jobs perpetuate the myth that investing abroad destroys American jobs. He referenced one study by Harvard economists Fritz Folay and Mihir Desai and by James Hines of the University of Michigan that estimates that for every 10% increase in U.S. multinationals’ overseas payrolls their American payrolls increase almost 4%.ii From a tax policy perspective, many of the proposals contained in the Greenbook represent an expansion of the extraterritorial reach of U.S. federal income tax rules. From a substantive point of view, these measures reflect and reaffirm the view that the United States has a continuing interest in taxing the foreign earnings of U.S. multinationals and in limiting opportunities to defer tax on such earnings. In fact, many have argued that these changes will make U.S.-owned companies less competitive and more vulnerable to takeovers. In fact, furthering the contrary arguments, many countries seem to be heading in the opposite direction, proposing changes to make their domestic multinationals more competitive. For example, the Canadian Minister of Finance’s Advisory Panel on Canada’s System of International Taxation has recommended that Canada expand its exemption regime for income earned by foreign subsidiaries, with no new limitation on related deductions to Canadian shareholders.iii On the other hand, University of Michigan Law Professor Reuven S. Avi-Yonah states an opposite opinion indicating:iv “The Obama plan for reforming U.S. international tax rules is incomplete, and it will no doubt be much amended in Congress. But it represents a crucial first step that is based on the realization that in our interdependent world, it is not possible to achieve either source- or residence-based taxation without the other form being effectively implemented and that without taxing cross-border income, all income taxation becomes impossible, because income taxation requires taxing capital and capital is mobile across borders. If we want to preserve the income tax and retain some progressivity in our tax system, the Obama plan should be enacted as soon as possible.v In March, a somewhat comparable international tax reform bill was introduced by Sen. Carl Levin, DMich., and by Lloyd Doggert, D-Texas. Tax analysts indicated in a May 21 article that some 60 companies filed lobbying reports as a bill of interest.vi Included in this list are such well known names as: Baxter Healthcare, Blackstone Group, Bristol-Meyers, Citigroup, Dow Chemical, Exxon Mobil and Pepsi. The article concludes that many of these same companies will probably be following President Obama’s recent international tax reform proposals aimed at raising nearly $200 billion in revenue.vii This could portend the effort and impact that the business community will want to have on this legislation as it moves through Congress. While much discussion now centers on international tax proposals, one should not lose sight of the many other significant federal income tax changes proposed in the Greenbook – including the repeal of LIFO and the codification of the “Economic Substance Doctrine.”viii While there was some initial discussion that some of the international tax proposed changes could pay for health care legislation, the Finance Committee’s initial write up did not include any such taxes. But in a recent Deloitte Web cast one speaker mentioned that a value added tax was being considered.ix Retailers would not be pleased with such a proposal, since the added tax burden could hamper sales. While the legislative outcome of these proposals is admittedly uncertain some companies are not waiting. A May 27 Wall Street Journal article reports on Accenture in part stating: “On Tuesday, the consulting and outsourcing firm said its board of directors had unanimously approved switching the company's place of incorporation from Bermuda to Ireland. The move comes amid a crackdown on tax havens by the Obama administration and congressional Democrats, who are targeting companies with substantial U.S. operations that are incorporated in tax havens like Bermuda to lower their overall tax burden.” The article goes on to state: “In a trend that has gained momentum over the past six months, numerous U.S. companies are reincorporating from tax-friendly locations like Bermuda and the Cayman

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Islands to Switzerland and Ireland, in an effort to cope with what are expected to be significant changes in how the U.S. taxes multinational corporations. …Many of these companies have said taxes were a reason behind the move, but have also emphasized other strategic reasons for the changes. Such moves could help companies preserve the tax benefits they had in Bermuda and the Cayman Islands, while using Switzerland or Ireland's tax treaties with the U.S. to protect them from possible adverse legislation, according to tax experts who have advised companies on the moves. Bermuda imposes no corporate income tax. Switzerland has a corporate income tax, but doesn't levy it on profits earned by subsidiaries overseas. Ireland also has a corporate income tax but doesn't impose it on various intracompany transactions, thus making the tax relatively easy to avoid, say tax professionals.”x Other companies mentioned in the article apparently taking some action include: Tyco International Ltd., Foster Wheeler Ltd., Weatherford International Ltd., Transocean Inc., Covidien Ltd., and Ingersoll- Rand Co. Finally, in a May 15 web cast by senior tax group from PwCxi, Jon Nagy explained to its audience that these initiatives must be taken seriously because of the depth and breath of the proposals and their consequent possible significant effects on financial statements. He indicated that their international tax group felt that something would be enacted and that there is an 18 month window to act before the effective date (June 2009) to December 2010). So the advice offered here was to do some planning now – for to do nothing now would be a “big mistake.” Nagy recommended that US companies need to have their certain tax attributes identified,xii quantified and then modeled so a determination can be made as to whether action need be taken before enactment date. Ken Kuykendall, from the same PwC web cast group, underlined the fact that a company’s treasury department needs to be involved in the decision making, since there could be significant FAS 109/APB 23 deferred tax liability issues to be dealt with for any planned action.xiii Kuykendall also noted that some of these tax consequences may occur prior to effective date (on date of enactment) and that some companies are considering whether to make an MD&A disclosure should any of these provisions be enacted. There will be a discussion of some of the major proposed corporate changes affecting most U.S. companies with international operations, then some comments about secondary proposed changes (but important to certain industry groups), a brief comment about the proposals to reform the qualified intermediary regime to combat the underreporting of U.S. through the use of offshore accounts, a recap of transition issues that companies will face if any of the legislation is passed; and finally, a brief discussion on timing. B. Major Proposals – Affecting All Taxpayers with International Operations Tax Havens: Here the president wants to revive Notice 98-11, 1998-1 C.B. 433. The aim of the notice was to prevent multinational corporations from "abusing" the so-called "check-the-box option" by using hybrid entities located in tax haven jurisdictions. This structuring option allows flows of passive income between controlled foreign corporations (CFCs) to disappear for purposes of the Subpart F rules. This structuring option allows flows of passive income between controlled foreign corporations (CFCs) to disappear for purposes of the Subpart F rules. Thus, it is proposed to treat certain foreign hybrid entities as corporations for U.S. tax purposes so that the subpart F rules would apply again and tax income that heretofore avoided U.S. tax. From a carve out standpoint, the ability of a foreign entity to elect to be treated as a disregarded entity for U.S. tax purposes would be restricted to cases in which either (a) the foreign entity is wholly owned by an entity organized under the laws of the same foreign country, or (b) except in cases of U.S. tax avoidance, the foreign entity is wholly owned directly by a U.S. person. The proposal is estimated to raise $86.5 billion through 2019. The White House May 4 press releasexiv provides the following (partial) explanation and example:

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Background: Traditionally, if a U.S. company sets up a foreign subsidiary in a tax haven and one in another country, income shifted between the two subsidiaries (for example, through interest on loans) would be considered "passive income" for the U.S. company and subject to U.S. tax. Over the last decade, so-called "check-the box" rules have allowed U.S. firms to make these subsidiaries disappear for U.S. tax purposes. It is clear that this loophole, while legal, has become a reason to shift billions of dollars in investments from the U.S. to other counties.

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Example under Current Law: o Suppose that a U.S. company invests $10 million to build a new factory in Germany. At the same time, it sets up three new corporations. The first is a wholly owned Cayman Islands holding company. The second is a corporation in Germany, which is owned by the holding company and owns the factory. The third is a Cayman Islands subsidiary, also owned by the Cayman Islands holding company. o The Cayman subsidiary makes a loan to the German subsidiary. The interest on the loan is income to the Cayman subsidiary and a deductible expense for the German subsidiary. In this way, income is shifted from higher-tax Germany to the no-tax Cayman Islands. o Under traditional U.S. tax law this income shift would count as passive income for the U.S. parent – which would have to pay taxes on it. But "check the box" rules allow the firm to make the two subsidiaries disappear - - and the income shift with them. As a result, the firm is able to avoid both U.S. taxes and German taxes on its profits. (Explanation: It is possible to avoid subpart F inclusion of the interest paid from Germany to the Caymans by making both second tier subs appear to be branches of the Cayman’s holding company. Because one cannot lead money to oneself, the result is no loan and no interest income, but the interest deduction is still effective to transfer profits from Germany to the Caymans.)xv

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The Administration's Proposal o Require U.S. businesses that establish certain foreign corporations to treat them as corporations for U.S. tax purposes. This would level the playing field between firms that invest overseas and those that invest at home.

Comment: Enactment of this proposal would convert existing disregarded entities that do not meet the criteria into corporations for taxable years beginning after December 12, 2010. With regard to the carve out provision “except in cases of U.S. tax avoidance, the foreign entity is wholly owned directly by a U.S. person,” the consensus is that it will need a great deal of clarification. This forced conversion could undoubtedly create unexpected tax effectsxvi and would require the assessment of whether transactions or arrangements that were in place with this entity are on “arms – length” basis terms. In this regard, companies will be required to evaluate cross border sales, financing, licensing, and leasing transaction with and through controlled foreign subsidiaries. These proposals will trigger a fierce debate. Robert Willens recaps most commentators’ opinions on the proposal stating: “The past attempts by the IRS to rein in the application of the check-the-box rules met with fierce and ultimately decisive opposition. ….Accordingly, if the president is successful in implementing his proposals, these types of arrangements would presumably cease to be entered into because they accomplish few, if any non-tax business objectives.”xvii Finally, providing some initial insights, the Osler Canadian law firm advises that US parents with Canadian subsidiaries need to consider the possible impact on these structures.xviii Deferral of Foreign Earnings: These proposals seek to curtail the benefit of deferral of foreign earnings. The proposal accomplishes this by limiting the current deduction of expenses — other than research and development expenses — that are "associated with" earnings that are eligible for deferral until the income has been repatriated and becomes subject to U.S. tax. This proposal would provide that deductions

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allocable to foreign-source income be taken into account currently only to the extent that such deductions are allocable to currently-taxed foreign income. The deductions subject to deferral would be broadly defined to include, among other items, interest expense attributed to non-U.S. operations, but would explicitly exclude deductions for research and experimentation. A portion of previously deferred deductions would be taken into account, as foreign income is repatriated based on the proportion that repatriated foreign income bears to previously deferred foreign income. Obama’s proposed changes to the deferral rule in most respects follow the deferral proposal made by House Ways and Means Committee Chair Charles B. Rangel in the Tax Reduction Act of 2007, H.R. 3970. The proposal is estimated to raise $60.1 billion through 2019. The White House May 4 press releasexix provides the following explanation: •

Explanation: Currently, a company that invests in America has to pay immediate U.S. taxes on its profits from that investment. But if the company instead invests and creates jobs overseas through a foreign subsidiary, it does not have to pay U.S. taxes on its overseas profits until those profits are brought back to the United States, if they ever are. Yet even though companies do not have to pay U.S. taxes on their overseas profits today, they still get to take deductions today on their U.S. tax returns for all of the expenses that support their overseas investment. As a result, this preferential treatment uses U.S. taxpayer dollars to provide companies with an incentive to invest overseas, giving them a tax advantage over competitors who make the same investments to create jobs in the United States.

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Example under Current Law: o Suppose that a U.S. company invests $10 million to build a new factory in Germany. At the same time, it sets up three new corporations. The first is a wholly owned Cayman Islands holding company. The second is a corporation in Germany, which is owned by the holding company and owns the factory. The third is a Cayman Islands subsidiary, also owned by the Cayman Islands holding company. o The Cayman subsidiary makes a loan to the German subsidiary. The interest on the loan is income to the Cayman subsidiary and a deductible expense for the German subsidiary. In this way, income is shifted from higher-tax Germany to the no-tax Cayman Islands. o Under traditional U.S. tax law this income shift would count as passive income for the U.S. parent – which would have to pay taxes on it. But "check the box" rules allow the firm to make the two subsidiaries disappear - - and the income shift with them. As a result, the firm is able to avoid both U.S. taxes and German taxes on its profits. (Explanation: It is possible to avoid subpart F inclusion of the interest paid from Germany to the Caymans by making both second tier subs appear to be branches of the Cayman’s holding company. Because one cannot lead money to oneself, the result is no loan and no interest income, but the interest deduction is still effective to transfer profits from Germany to the Caymans.)xx

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The Administration's Proposal: The administration's commonsense proposal, similar to an earlier measure proposed by House Ways and Means Chairman Rangel, would level the playing field by requiring a company to defer any deductions – such as for interest expenses associated with untaxed overseas investment – until the company repatriates its earnings back home. In other words, companies would only be able to take a deduction on their U.S. taxes for foreign expenses when they also pay taxes on their foreign profits in the United States. This proposal makes an exception for deductions for research and experimentation because of the positive spillover impacts of those investments on the U.S. economy.

Samuel C. Thompson provides a better example then in the White House Press release of the deferral issue and then explains why the current proposal will not deal with the issue.xxi •

Example: “The best way to grasp the deferral issues is through an example.2

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o o o

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Assume that State Oil Corp. is engaged in the oil exploration business and is headquartered in State College, Pa. It is faced with the following investment decision: invest $50 million in oil exploration and refining in State College, which is expected to produce $10 million in annual taxable income; or Set up a subsidiary in China -- China Oil Sub -- and have it invest $50 million in oil exploration and refining in China, which is also expected to produce $10 million in annual taxable income. The pretax return of both investments is $10 million. However, State Oil Corp. has a 35 percent effective corporate tax rate in the United States, and China Oil Sub would have a 15 percent effective corporate tax rate in China.3 Other things being equal, under our deferral system, which investment decision would State Oil Corp. make?”

“The answer is clear: It would invest in China, because the after-tax return on the China investment is $8.5 million ($10 million minus the $1.5 million China tax), while the after-tax return for the State College investment is only $6.5 million ($10 million minus the $3.5 million U.S. tax). This is the case even though State Oil Corp. would be subject to U.S. tax when China Oil Sub repatriates its after-tax income to State Oil Corp. in the form of dividends. Thus, the U.S. tax on the income of China Oil Corp. is "deferred" until the income is repatriated. However, under the U.S. deferral system, there is no requirement that China Oil Sub repatriates its income at any particular time, and with clever tax planning China Oil Sub may be able to defer the repatriation indefinitely. This potential for substantial deferral of the taxation of foreign income has the economic effect of making many foreign investments more attractive from a tax perspective than U.S. investments.” Mr. Samuels’s comments in part regarding the proposal: “The Obama administration is not proposing to eliminate deferral by taxing the income earned by foreign subs like China Oil Sub at the time it is earned. Rather, under the proposal, some deductions that U.S. parent corporations, like State Oil Corp., could otherwise take would be deferred until the deferred foreign income is repatriated. While the Administration's expense deferral proposal is sensible in the context of our deferral system for foreign income, it is too timid because it does not adequately deal with the fundamental issue the president addressed in his explanation of the proposals: a "tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York."

Comment: Broadly speaking, the proposal here is more conservative than was expected and presumably was made so because of concerns to much taxpayer opposition. As University of Michigan law professor Reuven S. Avi-Yonah states: “The Obama proposal on deferral is much more conservative than some commentators envisaged when the idea was broached in the president's budget. For example, the Treasury subpart F report from 2000 (written when Larry Summers was secretary and therefore of continued relevance today) suggested a total repeal of deferral with a lower tax rate for foreign-source income, or making deferral conditional on the effective foreign tax rate (a so-called low-tax inclusion, the mirror image of the current high-tax exclusion from subpart F). The Obama Administration presumably concluded that these types of proposals would run into too much opposition from the MNEs in the name of competitiveness.” xxii As to the details, the amount of deferred expenses for each tax year would be carried forward to subsequent years and combined with foreign sourced expenses of the U.S. tax payer for that year before determining the impact of the proposal in that year. Also, while the proposal should incorporate it, it is interesting to note that the Greenbook does not contemplate the repeal of worldwide interest expense rules (section 864 (f)) to take effect in 2011. Because R&E expense would be excluded from this deferral proposal, the main deductions affected are interest and various forms of headquarters expenses now allocated to foreign sourced income. Because interest expense could make up a large portion of the deductions that are deferred, it could have a significant impact on capital intensive industries or highly leveraged industries such as construction, heavy

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manufacturing or financial services. This provision will force companies to reevaluate the location of debt expense and the amount of U.S. based stewardship expenses. Having section 864 (f) as part of the interest allocation calculation could have a positive impact on lessening the amount of interest denied current deductibility under this proposal. In PwC’s May 15 web cast presentation, David Schenck also discussed and illustrated by example how moving debt offshore or to a nonaffiliated member could also have a positive impact on lessening the amount of interest denied current deductibility under this proposal. However, he also detailed the practical and possibly overwhelming financial difficulties in accomplishing such an objective in today’s credit market.xxiii Consistent with the earlier discussed PwC opinion, Ernst & Young’s Roger Brown states that “tax deferred expenses would be permanently disallowed for financial accounting purposes if the income with which they are associated was considered permanently reinvested under Accounting Principles Board Opinion No. 23 and the same treatment would apply to foreign tax credits stranded by the proposed foreign tax credit blending rule if the taxes had been paid on permanently reinvested assets.”xxiv The mechanics of making this calculation were recently outlined in a May 12; E&Y Web Cast entitled “Obama’s Proposals for International Tax Reform” with accompanying PowerPoint presentation. It clearly illustrates that most taxpayers will have a lower foreign tax credit and a higher U.S. tax.xxv Again, providing some initial insights, the Osler firm briefly advices on how U.S. firms with Canadian subsidiaries could be affected.xxvi Foreign Tax Credit: Here taxpayer’s foreign tax credit would be determined based on the amount of total foreign tax the taxpayer actually pays on its total foreign earnings; second, a foreign tax credit would no longer be allowed for foreign taxes paid on income not subject to U.S. tax. The credit is designed to avoid double taxation on the company and is therefore only applicable to offshore income that is taxable in the United States. The issues here are three fold: •

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First, because foreign tax credits are applied to income in the baskets, U.S. companies have the ability to "cross-credit" their foreign tax credit, thereby shielding offshore income subject to low tax rates with credits generated by taxes paid on other income at a rate exceeding what would be applicable in the U.S. The change in the section 904(d) basketing rules from multiple baskets to two has facilitated this cross-crediting. The consolidated blending approach is the administration’s proposal to deal with this perceived abuse. Second, under section 901, foreign tax credits allow U.S. companies to credit any taxes paid to a foreign jurisdiction on overseas income against the company's U.S. tax liabilities. However, according to the Greenbook, some U.S. companies using certain tax strategies are sometimes able to claim foreign tax credits on income not taxable in the U.S. This allows the companies to unfairly reduce their U.S. total tax liability by applying the foreign tax credits. Finally, according to the Greenbook, under code section 902, U.S. companies can claim a deemed paid foreign tax credit, which treats foreign taxes paid by some subsidiaries as paid by the parent when it receives a dividend from the subsidiary. Here the earnings of the subsidiaries are not taxed, but their taxes are used to reduce US taxes on other income.

The proposal is estimated to raise $43 billion through 2019. releasexxvii provides the following explanation:

The White House May 4 press

Explanation: Companies can take advantage of foreign tax credit loopholes: When a U.S. taxpayer has overseas income; taxes paid to the foreign jurisdiction can generally be credited against U.S. tax liabilities. In general, this "foreign tax credit" is available only for taxes paid on income that is taxable in the U.S. The intended result is that U.S. taxpayers with overseas income should pay no more tax on their U.S. taxable income than they would if it was all from U.S. sources. However, current rules and tax planning strategies make it possible to claim foreign tax credits for taxes paid on foreign income that is not subject to current U.S. tax. As a result, companies are able to use such credits to pay less tax on their U.S. taxable income than they would if it was all from U.S. sources – providing them with a competitive advantage over companies that invest in the United States.

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The Administration's Proposal: Reform the foreign tax credit to remove unfair tax advantages for overseas investment: The administration's proposal would take two steps to rein in foreign tax credit schemes. First, a taxpayer's foreign tax credit would be determined based on the amount of total foreign tax the taxpayer actually pays on its total foreign earnings. Thus, the first proposal would revise the §902 and §960 deemed-paid tax rules so that a U.S. corporation would determine its deemed paid taxes on a consolidated basis by determining the aggregate foreign taxes and E&P of all of the “foreign subsidiaries” with respect to which the U.S. taxpayer can claim an indirect credit, and the amount of the consolidated E&P of the foreign subsidiaries repatriated to the U.S. taxpayer. Second, a foreign tax credit would no longer be allowed for foreign taxes paid on income not subject to U.S. tax. The Greenbook states that it proposes to adopt “a matching rule to prevent the separation of creditable foreign taxes from the associated foreign income.” No further clarification is provided. Comment: Under the administration's main foreign tax credit proposal, "a U.S. taxpayer would determine its deemed paid foreign tax credit on a consolidated basis by determining the aggregate foreign taxes and earnings and profits of all of the foreign subsidiaries with respect to which the U.S. taxpayer can claim a deemed paid foreign tax credit," according to the Greenbook. The deemed paid foreign tax credit would be determined by the pooled earnings and profits repatriated in that tax year. This proposed provision effectively treats all of the taxpayer’s CFCs as a single CFC for section 902 purposes. In other words, the section 902 credits would be determined by what foreign E&P is recognized: creditable section 902 taxes = CFCs’ pool of section 902 credits x ( recognized CFCs’ E&Ps/Total CFCs’ E&Ps). But there are open questions about this formula. Should the numerator be current or cumulative E&P? What about pre 87 and post 86 E&P and foreign tax pools? These are significant transition rules that need addressing. Finally, this proposal would have the effect of blocking U.S. companies from choosing high-tax jurisdictions from which to repatriate income, thereby generating large foreign tax credits. A second foreign tax credit proposal involves "adopting a matching rule to prevent the separation of creditable foreign taxes from the associated foreign income," the Greenbook says. Regarding using foreign tax credits, but not taxing related foreign income, Law Professor Avi-Yonah states in the same article cited above: “Second, the Obama proposal reins in various forms of foreign tax credit abuse such as FTC generators (like the ones used by insurance giant AIG) and transactions that purport to generate current FTCs while the underlying income is subject to deferral. While the details are still unclear, the first proposal would focus on granting FTCs only for taxes that the taxpayer "actually pays," which presumably refers to various techniques that use the technical taxpayer rule to obtain credits for taxes economically borne by another party to the transaction. The second proposal relates to schemes built on the Guardian case (see Doc 2007-4863 [PDF] or 2007 TNT 38-14 ), in which the taxpayer used a Luxembourg form of consolidation to obtain direct credits for taxes paid by a Luxembourg holding company (which was treated as a branch for U.S. tax purposes) while maintaining deferral for the underlying earnings in the operating Luxembourg subsidiary.” xxviii If any or all of these proposals are enacted, US companies with international operations overall effective tax rate will certainly increase. Again, providing some initial insights, the Osler firm briefly advices on how U.S. firms with Canadian subsidiaries could be affected.xxix C. Other Highly Technical International Proposals in Obama’s Tax Plan include: •

Modify the definition of “intangible property” for purpose of §§367(d) and 482 proposals – Transfer pricing as a rule is not present in the Obama proposals. The single exception is in the proposal to “clarify” the definition of intangible property. Here the proposal would add “workforce in place,” “goodwill” and “going concern value” to the items included in the definitions of “intangible property” for purposes of §§367(d) and 482.1. Because of a concern that once

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intangibles were transferred off shore and their subsequent income never taxed in the U.S., most such transfers are subject to a rule that the U.S. transferor must receive a “commensurate with the income” payment. The new regime would add these three new items to the “commensurate with the income” standard. This may block attempts to transfer U.S. marketing intangibles outside the U.S. Two other important provisions here are that the IRS may value properties on an aggregate basis “where that achieves a more reliable result.” Further the proposal would require that intangible property must be valued at highest and best use (as determined by willing buyers and sellers, “both having reasonable knowledge of the relevant facts”). Taxpayers might expect reallocations under the second proposal where separate arrangements now exist. The proposal is estimated to raise $2.9 billion through 2019. Deloitte’s comment on this proposal: While this proposal may be consistent with some positions taken by the IRS in connection with §367(d) and cost sharing, it would be inaccurate to describe the proposal as a clarification with respect to foreign goodwill and going concern value, which have long been expressly excluded from the operation of §367(d).xxx •

Limit earnings stripping by expatriated entities proposal – Here, the proposal would make the limitation on interest deductions under §163(j) more restrictive in the case of expatriated entities. Under current law, opportunities are available to reduce inappropriately the U.S. tax on income earned from U.S. operations through the use of foreign related-party debt. In its recent study of earnings stripping, the Treasury Department found strong evidence of the use of such techniques by expatriated entities. Consequently, amending the rules of section 163(j) for expatriated entities is necessary to prevent these inappropriate income-reduction opportunities The following changes to section 163(j) limitation on interest deductions would be applied to expatriated entities: no debt-equity safe harbor, “adjusted taxable income” threshold reduced from 50% to 25% (except for guaranteed debt) and carry forward of disallowed deductions limited to 10 years with the excess limitation carry forward eliminated. The proposal is estimated to raise $1.2 billion through 2019. Deloitte’s comment on this proposal: The proposal is identical to the §163(j) proposal in the Bush Administration’s FY 2009 Budget 3. The proposal raises compliance issues as applied to entities that expatriated (as described in §7874) in taxable years beginning after July 10, 1989, but prior to the effective date of §7874. Such entities would have to determine, for the first time in 2011, whether they expatriated up to 21 years ago, under a standard that was first set forth in the Internal Revenue Code in 2004. Companies potentially affected may have undergone significant restructurings since the transaction to be tested was completed, making application of the standard even more difficult.xxxi

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Boot in acquisitive reorganizations by foreign corporations proposal -“Boot” (property other than certain stock or securities) received by an exchanging shareholder in certain corporate reorganizations is generally not taxable to the recipient to the extent that it exceeds the gain realized by the shareholder in the exchange. According to the Greenbook, under section 356(a) (1), if as part of a reorganization transaction an exchanging shareholder receives in exchange for its stock of the target corporation both stock and property that cannot be received without the recognition of gain (so-called “boot”), the exchanging shareholder is required to recognize gain equal to the lesser of the gain realized in the exchange or the amount of boot received (commonly referred to as the “boot within gain” limitation). In cross-border reorganizations, the boot-within-gain limitation - a well trafficked arena for mergers and acquisitions planning - of current law can permit U.S. shareholders to repatriate previously-untaxed earnings and profits of foreign subsidiaries with minimal U.S. tax consequences. The proposal would repeal the bootwithin-gain limitation of current law in the case of any reorganization in which the acquiring corporation is foreign and the shareholder’s exchange has the effect of the distribution of a dividend, as determined under section 356(a)(2). The proposal would be effective for taxable years beginning after December 31, 2010. The proposal would treat the excess as a deemed

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dividend within the meaning of §356(a) (2). The proposal is consistent with the IRS crackdown on repatriation transactions. The proposal is estimated to raise $300 million through 2019. Deloitte’s comment on the proposal: The proposal is the latest in the government’s effort to crack down on repatriation transactions. It would change the treatment of, for example, “all-cash D” reorganizations where the exchanging shareholder has no built-in gain in the stock of the acquired corporation.xxxii •

Repeal “80/20 company” rules proposal - This proposal would entirely repeal the special rules for interest and dividends paid by a so-called “80/20 company.” The Greenbook’s straight forward and only comment on this proposal is that these provisions can be manipulated and should be repealed. Under current law, dividends and interest from U.S. corporations has a U.S. source and, absent tax treaty exemption, is subject to withholding tax when paid to foreign recipients. Now interest and dividends received from an 80/20 company (80% of its income is foreign sourced, as measured over a three year test period) is foreign source income, and at most 20 percent (and as little as none) of a dividend or interest is subject to 30-percent U.S. gross-basis tax. The proposal is estimated to raise $1.2 billion through 2019. Deloitte’s comment on the proposal: The proposal is a more draconian version of the Clinton Administration proposal in the FY 2001 Budget, and may affect both foreign tax credit utilization by U.S. taxpayers and U.S. taxation of foreign persons. While the 80/20 rules were significantly narrowed in 1986, they have been part of federal tax law since the 1920s.xxxiii

•

Certain expiring provisions extended through 2010 proposal - Section 954(c) (6) (“the lookthrough exception”) and the active financing exception would be extended through December 31, 2010.

D.

Cracking Down on the Abuse of Tax Havens by Individuals: On May 11, the Treasury Department released details on the proposal to reform the qualified intermediary regime to combat the underreporting of U.S. tax through offshore accounts. On May 4, the administration announced proposals that include a modification of the qualified intermediary regime, increased withholding by financial institutions on U.S. payments to individuals using non qualified intermediaries, additional reporting and penalties related to off shore investments, and the extension of the statute of limitations for international tax enforcement. The White House May 4 press release explains that: “The core of the Obama administration's proposals is a tough new stance on investors who use financial institutions that do not agree to be Qualifying Intermediaries. Under this proposal, the assumption will be that these institutions are facilitating tax evasion, and the burden of proof will be shifted to the institutions and their account-holders to prove they are not sheltering income from U.S. taxation.”xxxiv In addition, the White House May 4 press release provides the following explanation of the issues and proposals to cure those problems:xxxv Explanation: The IRS is already engaged in significant efforts to track down and collect taxes from individuals illegally hiding income overseas. But to fully follow through on this effort, it will need new legal authorities. Current law makes it difficult for the IRS to collect the information it needs to determine that the holder of a foreign bank account is a U.S. citizen evading taxation. The Obama administration proposes changes that will enhance information reporting, increase tax withholding, strengthen penalties, and shift the burden of proof to make it harder for foreign account-holders to evade U.S. taxes, while also providing the enforcement tools necessary to crack down on tax haven abuse. A centerpiece of the current U.S. regime to combat international tax evasion is the Qualified Intermediary (QI) program, under which financial institutions sign an agreement to share information about their U.S. customers with the IRS. Unfortunately, this regime, while effective, has become subject to abuse:

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At Non-Qualifying Institutions, Withholding Requirements Are Easy to Escape: Currently, an investor can escape withholding requirements by simply attesting to being a non-U.S. person. That leaves it to the IRS to show that the investor is actually a U.S. citizen evading the law. Loopholes Allow Qualifying Institutions to Still Serve as Conduits for Evasion: Moreover, financial institutions can qualify as QIs even if they are affiliated with non-QIs. As a result, a financial institution need not give up its business as a conduit for tax evasion in order to enjoy the benefits of being a QI. In addition, QIs are not currently required to report the foreign income of their U.S. customers, so U.S. customers may hide behind foreign entities to evade taxes through QIs. Legal Presumptions Favor Tax Evaders Who Conceal Transactions: U.S. investors overseas are required to file the Foreign Bank and Financial Account Report, or FBAR, disclosing ownership of financial accounts in a foreign country containing over $10,000. The FBAR is particularly important in the case of investors who employ nonQIs, because their transactions are less likely to be disclosed otherwise. Unfortunately, current rules make it difficult to catch those who are supposed to file the FBAR but do not. Administration Proposal includes: Impose Significant Tax Withholding on Transactions Involving Non- Qualifying Intermediaries: The administration's plan would require U.S. financial institutions to withhold 20 percent to 30 percent of U.S. payments to individuals who use non-QIs. To get a refund for the amount withheld, investors must disclose their identities and demonstrate that they're obeying the law. Create A Legal Presumption Against Users Of Non-Qualifying Intermediaries: The administration's plan would create rebuttable evidentiary presumptions that any foreign bank, brokerage, or other financial account held by a U.S. citizen at a non-QI contains enough funds to require that an FBAR be filed, and that any failure to file an FBAR is willful if an account at a non-QI has a balance of greater than $200,000 at any point during the calendar year. These presumptions will make it easier for the IRS to demand information and pursue cases against international tax evaders. This shifting of legal presumptions is a key component of the anti-tax haven legislation long championed by Senator Carl Levin. Limit QI Affiliations with Non-QIs: The administration's plan would give the Treasury Department authority to issue regulations requiring that a financial institution may be a QI only if all commonly-controlled financial institutions are also QIs. As a result, financial firms couldn't benefit from siphoning business from their legitimate QI operations to illegitimate non-QI affiliates. Provide the IRS with the Legal Tools Necessary to Prosecute International Tax Evasion: The Obama administration proposes to improve the ability of the IRS to successfully prosecute international tax evasion through the following steps: Increase Penalties for Failing to Report Overseas Investments: The administration's plan would double certain penalties when a taxpayer fails to make a required disclosure of foreign financial accounts. Extend the Statute of Limitations for International Tax Enforcement: The administration's plan would set the statute of limitations on international tax enforcement at six years after the taxpayer submits required information.

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Tighten Lax Reporting Requirements: The administration's plan would increase the reporting requirement on international investors and financial institutions, especially QIs. QIs would be required to report information on their U.S. customers to the same extent that U.S. financial intermediaries must. And U.S. customers at QIs would no longer be allowed to hide behind foreign entities. U.S. investors would be required to report transfers of money or property made to or from non-QI foreign financial institutions on their income tax returns. Example Under Current Law Through a U.S. broker, a U.S. account-holder at a non-qualified intermediary sells $50 million worth of securities. If the seller self-certifies that he is not a U.S. citizen and the non-qualified intermediary simply passes that information along to the U.S. broker, the broker may rely on that statement and does not need to withhold money from the transaction. As a result, a U.S. taxpayer who provides a false self-certification can easily avoid paying taxes, since the non-QI has not signed an agreement with the IRS, and the IRS may have limited tools to detect any wrongdoing Comment: These measures are expected to raise $8.7 billion over 10 years

E.

Transition Issues and Possible Counteractions:xxxvi Companies need to consider how these proposed changes could effect them and what counteractions they might take before the legislation is enacted: • FAS 109/APB 23 issues are sure to arise if any of these proposals are passed. • Counteraction: meet with the company’s treasury department early on in the assessment and planning stages. • Expense allocation rules could increase a company’s effective tax rate. • Counteraction: consider moving debt offshore, deconsolidating U.S. borrower, charge out most or all supportive services, minimize foreign stewardship expense. • Many disregard financing structures will not be effective. • Note: dividends, interest and royalty payments will now be regarded and probably not have same country or high tax exception protection from a subpart F inclusion. • Counteraction: develop strategy for maintaining desired foreign and U.S. tax objectives, quantify the exposure upon disregarded entities being regarded. • Certain section 954 planning will not be effective. • Note: related party services and royalty payments will not be regarded and probably not have the same country or high tax exception protection from a subpart F inclusion. • Counteraction: develop strategy for maintaining desired foreign and U.S. tax objectives, quantify the exposure upon disregarded entities being regarded. • Deemed incorporation DE’s could trigger unwanted U.S. tax effects. • Counteraction: develop strategy for maintaining desired foreign and U.S. tax objectives, quantify the exposure upon disregarded entities being regarded. • Post enactment, E&P pools blended. • Counteraction: consider repatriating high tax pools from CFCs before 2011.

F.

Timing: On May 12, 2009 Tax Analysis reported on John Buckley, chief tax counsel for the House Ways and Means Committee and Josh Odintz, tax counsel for the Senate Finance Committee, speaking May 9 at the Foreign Lawyers Forum session of the American Bar Association Section on Taxation. They both agreed that health care and climate change were almost certain to jump ahead of Obama’s tax plans as far as Congress’s legislative agenda. “Buckley further commented that these proposals were likely to make his next two years on the

Page 12

committee an exciting one.” Tax Analysts authors Goulder and Sheppard concluded that: “His “two-year” remark is a signal that nothing is going to happen overnight.” And, “That might be a good thing given the emotional rhetoric being tossed about last week. Obama’s tax plan is not going away, but the passage of time might foster a more patient deliberation of tough policy choices.”xxxvii

i

The White House, Office of Press Secretary, :White House Outline of a Plan to Curb Tax havens, Remove Tax Incentive for Shifting Jobs Overseas” (May 4,2009), available at http://news.bna.com/DTLNWB/split-display.adp? fedfid=12360970&vname=dtrnot&fn=12360970&jd=a0b8q6v7h3&split=0[hereinafter White House outline.]. ii

Kristen A. Parillo, “ Rhetoric Surrounding Obama’s International Tax Proposals Detracts from Real Debate,” May 19, 2009, Doc 2009-11269 2009 WTD 94-1

iii

Osler, Hoskin @ Harcourt {[email protected]], “Olser Update: Obama Administration Proposes Major reforms to U.S. International Tax Rules.” iv

Reuven S. Avi-Yonah, “Obama’s International Tax Plan a Major Step Forward,” Tax Notes, May 6, 2009 Doc 200910121 [PDF] 2009 WTD 85-12.

v

Reuven S. Avi-Yonah, “Obama’s International Tax Plan a Major Step Forward,” Tax Notes, May 6, 2009 Doc 200910121 [PDF] 2009 WTD 85-12.

vi

Meg Shrive, “U.S. Legislation to Curtail Offshore Tax Evasion Sparks Upswing in Lobbying,” May 21, 2009 Doc 2009-11439 2009 WTD -11439 A Roster of Lobbyists on the Stop Tax Haven Abuse Act (Company/Association/Firm and Congress in Which Registered) ACE INA Holdings, 110, 111 Alcon, 111 Altria Client Services, 110 American Bankers Association, 111 American Bar Association, 110 American Chemical Society, 111 American Institute of CPA’s, 110, 111 Ameriprise Financial, 111 Avenue Solutions, 110 Baxter Healthcare, 111 Blackstone Group, 111 Boston Scientific, 111 Bristol-Myers Squibb, 111 Case New Holland, 111 Cayman Islands, Financial Services Association, 111 Center for Freedom and Prosperity, 110 Chamber of Commerce, 111 Citigroup, 110 Covidien, 111 Credit Suisse Securities, 111 CT Corp., 110, 111 Deloitte, 110

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Dow Chemical, 110 DuPont, 110, 111 Edwards Lifesciences, 111 Equifax , 111 Ernst & Young , 110 Exxon Mobil, 110 FMR Inc. (Fidelity Investments), 111 Government of Turks and Caicos, 110 Hong Kong Trade Development Council, 111 Intellectual Property Association, 110 Intelsat, 111 International Paper, 111 Investment Company Institute, 111 James Hardie, 111 KPMG, 110 Latvian-American Financial Forum, 110, 111 LGT Group Foundation, 110 Managed Fund Association, 110, 111 Maples and Calder, 111 Merrill Lynch, 110 Mutual of Omaha, 110 Occidental Petroleum, 111 Organization for Intl. Investment, 111 PepsiCo, 111 PricewaterhouseCoopers, 110 Qualcomm, 111 Royal Caribbean Cruises, 111 Sony Corp. of America, 111 Swiss Bankers Association, 110 Taylor Lohmeyer PC, 110 TIAA-CREF, 110 Travelport, 111 Tyco Electronics Corp., 111 Tyco International Ltd., 111 UBS Americas, 110 VISA USA, 111 Zimmer, 111 Zurich, 110, 111 vii

Id.

viii

Other significant revenue raisers include: LIFO repeal, codify “Economic Substance” doctrine, reinstating superfund excise taxes, reinstating Superfund environmental income tax, tax carried profits as ordinary income, denying the deductions for punitive damages, requiring ordinary treatment for certain dealers of equity options and commodities, expansion of the net operating loss carryback, elimination of capital gains taxation on investments in small business stock, requiring information reporting on payments to corporations, and reinstating the 39.6 percent rate for upper income earners. ix

The Senate Finance Committee, at the direction of Max Baucus, has released details of the health care reform financing piece. The tax changes designated to be “pay fors” include: Modify or repeal the itemized deduction for medical expenses; repeal or modify the special deduction and special unearned premium rule for Blue Cross and Blue Shield or other qualifying organizations; modify health savings accounts; modify or repeal the exclusion for employer-provided reimbursement of medical expenses under flexible spending arrangements and health reimbursement arrangements; limit the qualified medical expense definition; modify FICA tax exemption; extend Medicare payroll tax to all state and local government employees; modify the requirements for tax-exempt hospitals. During a May 15 Deloitte web cast entitled “The 2010 Obama Budget: Potential Impact of the New Tax Proposals”, one commentator mentioned that an add on value added tax was even being considered by the Administration. x

Drucker, Jesse “Accenture is Seeking to Change Tax Locales” The Wall Street Journal May 27, 2009.

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xi

Tim Anson, Alan Fischl, Chip Harter, Ken Kuykendall, Drew Lyon, Jon Nagy, David Schenck and Mike Urse, “Integrated Global Structuring Obama International Tax Proposals” and accompanying PowerPoint May 15, 2009.

xii

Id. PowerPoint, page 48. Listed foreign tax attributes included: E&P, Foreign Tax Credit Pools, Net Operating Losses, Overall Foreign Losses, Dual Consolidation Losses, Branch Loss Recapture (Section 367(a)), Cash Needs/Expected Future Dividend Payments, Borrowing Capacity, Section 987 Gain/Loss, Asset/Stock Basis and FMV, Expense Allocation. xiii

Id. PowerPoint, pages 25-27.

xiv

White House outline, supra note i.

xv

White House outline, supra note i.

xvi

The deemed incorporation of a disregarded entity could trigger any of the following: gains on asset transfers, section 367(a) and 904(f) recaptures, section 304 gains, section 987 gains. Might need to check if gains recognition amounts are triggered under existing filings or even whether a new gain recognition filing needs to be made. xvii For a technical explanation of this fact pattern, see Willens, Robert. “Unchecking the Box Could Lead to Fierce Debate.” CFO.com May 11, 2009.

xviii

Osler, Hoskin @ Harcourt, supra note 4. “U.S. corporations with indirect Canadian subsidiaries, or Canadian subsidiaries owning lower-tier disregarded entities, should consider the extent to which the proposal implicates existing structures, including inter-company debt arrangements, as well as the consequences of any deemed incorporation transactions resulting from the conversion of existing disregarded entities to corporations. Canadian corporations with U.S. subsidiaries would likely only be affected by the proposal to the extent that those U.S. subsidiaries, in turn, have non-U.S. subsidiaries. The proposal will likely not apply to most inbound investments into Canada from the U.S. using a Canadian unlimited liability corporation (ULC). However, any use of Canadian ULCs or other hybrid entities should be carefully reviewed. In addition, taxpayers with cross-border structures utilizing U.S. or Canadian hybrid entities should carefully consider the interplay of this proposal with the anti-hybrid rules in the Canada-US Treaty that come into force on January 1, 2010.” xix xx

White House outline, supra note i. Id.

xxi

Samuel C. Thompson Jr., “Obama’s Tax Proposal is Too Timid” Tax Notes, May 12, 2009. DOC 2009-10230 [PDF] 2009 TNT 89-34. xxii

Reuven S. Avi-Yonah, “ supra note iv.

xxiii

Tim Anson, Alan Fischl, Chip Harter, Ken Kuykendall, Drew Lyon, Jon Nagy, David Schenck and Mike Urse, supra note x. The PowerPoint listed some potential treasury department concerns. As to moving debt offshore: higher coupon, credit support (potential section 956 issue), commercial restrictions (security interest, financial ratio maintenance, foreign exchange profile change (borrowing in local currency, FAS 52 effect of unwinding intercompany debt). As to deconsolidating US borrower: higher coupon, preferred share not deductible, higher pretax, credit support, third party voting rights and maintaining a greater that 20 percent minority interest.

xxiv

Presenters included: Barbara Angus (E&Y LLP), Jeffrey Michalak (E&Y LLP), Marjorie Rollinson (E&Y (LLP).

xxv

Ibid. Power Point Pages 12 – 16: Deferral of Expense (If H.R. 3970 approach is followed: •

Foreign – Related Deductions (FRDs) o FRDs would be taken into account only to the extent allocable to Currently Taxed Foreign Income (CTFI) (defined as foreign-source gross income)* o The remaining deductions would be classified as “Previously Deferred Deductions” (PDD) o FRDs would consist of all deductions and expenses which would be allocated and apportioned to gross income from sources without the United States if both CTFI and “Deferred Foreign Income” (DFI) were currently taxable

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o *H.R. 3970 did not carve out any expenses for this calculation. The Obama Administration’s proposal, however, explicitly excludes R&D expenses from this expense deferral calculation. •

o Foreign income not currently taxed would be considered one of the following: o Deferred Foreign Income (DFI) o Previously Deferred Foreign Income (PDFI) o Previously Deferred Deductions (PDD)

•

Amount of FRDs that may be claimed on the US tax return for a taxable year is calculated as follows: o FRD x CTFI / CTFI + DFI o Remaining FRDs classified as PDD

•

Deductions related to repatriated DFI calculated as follows: o PDD x Repatriated DFI / PDFI

•

Sec. 976 – Foreign income taxes Example:

Accumulated E&P Accumulated taxes 2008 E&P 2008 taxes

o •

CFC 1 1,000 1,000 100 100

U.S. CFC2 2,000 -0200 -0-

CFC 3 2,500 1,250 200 125

In this example, CFC 1 pays a 100 dividend to US out of 2008 E&P, resulting in a deemed paid FTC of 100 (under current law)

o Sec. 976 – Foreign income taxes o Under proposed law: ƒ CTFI = 100 ƒ DFI = 400 • Note that IRC §78 does not apply when determining CTFI and DFI, although Sec. 901 taxes reduce CTFI ƒ Total foreign income taxes (100 + 125 = 225) x CTFI (100) / (CTFI (100) + DFI (400)) = 45 ƒ Amount considered “foreign income tax” for taxable year is 45, compared with 100 under current law

xxvi

Osler, Hoskin @ Harcourt , supra note 4. “This proposal is similar to a Canadian proposal in the 2007 Federal Budget that was significantly criticized for restricting the competitiveness of Canadian corporations. The Canadian proposal was amended to target certain double-dip financing transactions and was subsequently abandoned altogether. U.S. corporations with Canadian subsidiaries or branches should consider the extent to which deductions would be deferred under this proposal (including in respect of interest and head office expenses). Deductions allocable to Canadian branches of U.S. corporations may be deferred under this provision notwithstanding the fact that the income from the branches is subject to current U.S. tax. Canadian corporations with U.S. subsidiaries would likely only be affected by this proposal to the extent the U.S. subsidiaries have non-U.S. subsidiaries or branches (i.e., the provision does not appear to look to “upstream” deductions and income).” xxvii

White House outline, supra note i.

xxviii

Reuven S. Avi-Yonah, supra note iv.

xxix

Osler, Hoskin @ Harcourt , supra note 4. “U.S. corporations with Canadian subsidiaries or branches should consider the extent to which foreign tax credits would be deferred under this proposal. In particular, U.S. corporations that may repatriate income from high-tax Canadian subsidiaries, but not subsidiaries in low-tax jurisdictions, may be

Page 16

subject to substantial deferral of foreign tax credits for Canadian taxes. As with the proposal regarding deduction deferral, it is possible that foreign tax credits allocable to Canadian branches may be deferred under this provision notwithstanding the fact that the income from the branches is subject to current U.S. tax. Canadian corporations with U.S. subsidiaries would likely only be affected by the provision to the extent the U.S. subsidiaries have non-U.S. subsidiaries or branches (i.e., like the deduction deferral proposal, the provision does not appear to look to “upstream” taxes and income).” xxx xxxi

Deloitte, “U.S. International Tax Alert : Treasury Department releases Greenbook” May 12, 2009. Id.

xxxii

Id.

xxxiii

Id.

xxxiv

White House outline, Supra Note i

xxxv

White House outline, Supra Note i

xxxvi

Tim Anson, Alan Fischl, Chip Harter, Ken Kuykendall, Drew Lyon, Jon Nagy, David Schenck and Mike Urse, Supra Note x. Recap developed from PwC PowerPoint. Pages 24-48 does a detailed analysis of the transition issues with examples to illustrate the issues. The PowerPoint also has detailed action plans if a particular company falls into one of two tax profiles if the administration’s international tax proposals are enacted: (1) Deferral Group or (2) Repatriation Group.

xxxvii

Robert Goulder and Lee A. Shepard, “News Analysis: ABA Tax Section Tackles Deferral, “May 12, 2009 Doc 2009 – 10650 [PDF} 2009 TNT 89-8.

Page 17