November 10, 2015

Tax Issues for Non-Tax Lawyers

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• Goal: Provide a high level overview of current federal, state and local tax issues that may impact your non-tax practice

• Topics:– Corporate Transactions: IRS Ruling vs. Tax Opinion

– Tax Controversy Considerations for Transactions

– Avoiding the creation of a deemed tax partnership

– Sales and use tax issues including issues related to in-store sales and delivered goods

– Is an Instrument Debt or Equity

– Impact of clean energy tax incentives on retail and other non-energy companies

– When IRS reporting is required for customer/employee contests, litigation and other transactions, and the costs of failing to properly report

– Unclaimed property: How does it arise and what are the implications?

– Overseas Accounts

– Why are companies moving overseas?

Overview

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Corporate Transactions: IRS Ruling vs. Tax Opinion

– Should you request an IRS ruling or obtain a tax opinion?

• Recent Example: Yahoo announces plans to distribute Alibaba shares to its shareholders in a tax-free spinoff.– Yahoo distributes Aabaco shares to its shareholders in a purported tax-free spin-

off (the “Spin-Off”).– The completion of the Spin-Off was conditioned upon Yahoo obtaining a favorable

IRS Ruling that the Spin-Off qualifies as tax-free distribution/spinoff of Aabaco under section 355.

– Active trade or business requirement issue

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Tax Controversy Considerations For Transactions

• Non-tax practitioners should be aware of the real world implications of tax risk

• Tax practitioners often express tax risk using “will”, “should”, “more likely than not”, or “reasonable basis.”

• IRS Exam, IRS Appeals, Litigation – where your tax risk likely will be resolved may need to be considered in your assessment of the economics of a deal.

• State tax controversy considerations.

• Relevant current tax controversy trends.

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• Contractual relationships, such as a “collaboration” or “alliance” agreement may result in a deemed partnership for tax purposes

• Contractual provision that no partnership is created by agreement does not control

• If a deemed partnership is created for tax purposes, Tax Code rules regarding partnerships apply

– Consequences:

• Need to apply Tax Code rules to determine tax treatment of relationship

• Results may significantly alter economics of transactions and relationship

Avoiding the Creation of a DeemedTax Partnership

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• Sales Tax– Transactional tax imposed on retail sale of tangible personal property and certain

services

– Not a tax on vendors, but vendors are required to collect sales tax on each transaction (absent exemption) and remit the sales tax to the jurisdiction

– In addition to the state-level taxes, there are more than 7,000 local tax jurisdictions

Sales & Use Tax

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• Use Tax– Complementary to the sales tax

– Tax imposed upon the storage, use or other consumption of tangible personal property or taxable services in a taxing jurisdiction

– Most use tax remitted by businesses

– Promotional items

Sales & Use Tax

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• Sourcing – Which state laws apply?– Sales/use tax generally paid to the state where property sold, used or consumed

– Most states follow a “destination” concept for interstate sales

• Digital goods and services – billing address proxy

– Some states apply “origin” concept to intrastate sales

• May be based on “shipped from,” “order receipt,” or “order approval” location

– Creates issues where systems are POS-oriented

• Delivery

• Returns

Sales & Use Tax

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• How much tax to collect? – Taxable sales price may include:

• Property/service sold

• Freight/handling charges

• Value of trade-ins/barter

• Value of manufacturer’s coupons or instant rebates

• Other taxes included in price

• Prepaid 911?

Sales & Use Tax

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• Who remits the tax?– Vendor not required to collect use tax if no physical presence (“nexus”) in taxing

jurisdiction

• Physical presence means a location, employee, agent, warehouse, leased equipment, inventory, etc., in taxing jurisdiction

– No collection by many online retailers

– Attributional nexus – allows state to attribute nexus of in-state person making a market

• Related companies

• Click-through referrals

• Marketplace

Sales & Use Tax

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Is an Instrument Debt or Equity?

• Labels do not control.

• Affects availability of often substantial interest deductions

• Focus of federal and state audits.

• Federal and state tax authorities may differ

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Impact of Clean Energy Incentives on Retail & Other Non-Energy Companies

• Why? – Stakeholder desire to “go green”– Lock-in energy prices– Tax incentives

• Federal renewable energy incentives

– Production Tax Credit (PTC): 2.3¢ or 1.2¢ per kWh generated for 10 years

– Investment Tax Credit (ITC): 30% of capital costs

• Bonus and accelerated depreciation

• State tax and other incentives

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• Investments in renewable energy span across industries including retail, financial service, tech and energy companies. Primary driver: tax benefits

ExampleInitial Cost $500,000ITC ($150,000)Depreciation ($148,750)Net Cost $201,250 40% of costTax Benefit 60%

• Additional potential economic benefits include:– Renewable energy credits (RECs)– Reduced energy costs– State tax and other incentives

Impact of Clean Energy Incentives on Retail &Other Non-Energy Companies

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When IRS Reporting is Required and the Costs of Failing to Properly Report

• Taxable wages/ payroll concepts

• What is a 1099?

• Reporting requirements for customer contests and employee contests

• Employment litigation reporting – W-2 vs. 1099

• Why do you need a W-9 or W-8?

• Imputing and reporting income

• How are litigation settlements taxed/reported?

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• UP is NOT a tax

• All states have UP laws

• The holder can have UP responsibilities regardless of whether it has nexus with the reporting jurisdiction

• Often UP statutes contain no statute of limitations or repose

• Often UP statutes contain no administrative appeals process

• Regulatory agency administering UP varies by jurisdiction

Unclaimed Property

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• The Great Treasure Hunt– State budget shortfalls

• Delaware’s 3rd largest revenue source (~$500MM in 2014)

• California’s 5th largest revenue source

– Contingency fee auditors

• Aggressive view of includible property

• Aggressive audit tactics

• Receive 10%–15% of amounts recovered

Unclaimed Property

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• Typical property types subject to escheat– Uncashed checks

– Traveler’s checks and money orders

– Financial accounts

– Contents of safe deposit boxes

– Utility deposits

– Proceeds of insurance policies

Unclaimed Property

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• Digital property potentially implicated by UP laws– Electronic stored value cards/codes

– Virtual property

– Loyalty program benefits

– Vouchers for discounts

– Online credits

– Bitcoins and other electronic payment media

– Unused electronic subscriptions

– Unused software-as-a-service (SAAS)

Unclaimed Property

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– FATCA: Requires foreign financial institutions to disclose information about their U.S. clients and U.S. individuals to disclose foreign financial assets

• Companies must consider FATCA withholding and tax gross up provisions in their agreement

• Foreign financial institutions required to disclose information about their U.S. clients

– FBAR: Requires U.S. persons to disclose information about their foreign accounts

• FBAR filing (FinCEN 114) is now due by April 15 of each year (formerly, June 30) with respect to the immediately preceding year

• Filing deadline can be extended along with federal income tax returns

• Corporate officers may be required to file if they have signatory authority over accounts of the company

Overseas Accounts

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Why are Companies Moving Overseas?

• U.S. corporate marginal tax rates are some of the highest in the world

• Deferral

If a U.S. multinational company has foreign subsidiaries, the earnings of those Subs are not subject to U.S. tax when earned by a Sub

Taxed when the Sub pays it as a dividend to U.S. parent

• Anti-deferral

Some types of income earned by a Sub are taxed by the U.S. in the year it is earned. Dividends, interest, rent, royalties, and similar types of income

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Why are Companies Moving Overseas?

High-tax country example

Foreign income: $100 Foreign tax rate: 25% Foreign tax paid: $25

U.S. corporate tax rate: 35% U.S. tax on $100 would be: $35

Dividend of $75 to U.S. Parent

Foreign tax credit: $25 U.S. taxes due ($35-$25) $10 Cash U.S. Parent keeps $65

Low-tax country example

Foreign income: $100 Foreign tax rate: 3% Foreign tax paid: $3

U.S. corporate tax rate: 35% U.S. tax on $100 would be: $35

Dividend of $97 to U.S. Parent

Foreign tax credit: $3 U.S. taxes due: ($35-$3) $32 Cash U.S. Parent keeps $65

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Why are Companies Moving Overseas?

U.S. Parent

Foreign Subs

Foreign Subs

USP shareholders

U.S. tax base

Foreign tax base

Irish Parent

Irish Bebe

Irishshareholders

• Pre-Inversion Structure

Foreign Subs

Foreign Subs

USP shareholders

Irish Parent

Irish Bebe

Irishshareholders

New U.K.Parent

Foreign Acquired

• Post-Inversion Structure

U.S. Parent

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Why are Companies Moving Overseas?

• Section 7874 80% Test

– If former shareholders of the U.S. company own 80% or more of the newly formed corporation after the acquisition, and

– The global group has less than 25% of its assets, employees, payroll, or income in the new country of incorporation, then

– The newly formed corporation will be treated as a domestic corporation for purposes of the Tax Code

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Questions?

Sutherland Asbill & Brennan LLP

Jon Maddison 202.383.0916 Jon.Maddison@Sutherland.com

Daniel R.B. Nicholas 202.383.0876 Daniel.Nicholas@Sutherland.com