Inbound Tax Policy DC Bar 25 May 2016 Bob Dilworth Viva Hammer Andy Needham Oren Penn

Outline History Disparities in income tax rates between countries and pressure to move income from high (US) to low tax rate countries Passive investments

History Post WW1 framework Varying mobility of economic resources that generate income (land/labor/capital/IP) Passive active division Location/creation/use of income producing property Capital importing/exporting nations Relative size of economies Volume and character of cross border flows Tax sovereignty

Earnings stripping and 385 Growing disparities in national tax rates – U.S. lagging Debt vs. other types of capital Flexibility in arranging a capital structure in a controlled group Easier to describe debt and interest; easier to administer interest stripping than other kinds of deductible payments whose character is harder to explain in political sound bites to voters with limited attention time

Earnings stripping and 385 BEPS Action 4 vs Section 385 “independent action” vs UK investigations Diverted Profits Tax vs EU State Aid U.S.-led coordination developed since League of Nations 1923 and post-WWI Treaties basically out the window Intellectual Capital: Silicon Valley vs. Rest of the World Not Blue collar labor intensive 974,000 foreign students in US 2015; limited availability of work visas Easier to describe debt and interest; easier to administer interest stripping than other kinds of deductible payments whose character is harder to explain in political sound bites Google IP royalties should not be stateless Apple IP royalties should not be stateless Chinese not likely to develop IP on their own Conventional US economic wisdom Flexibility in arranging a capital structure in a controlled group Third party debt not affected by proposed 385 regulations Unlike IP that the Chinese are not clever enough to replicate, banks are available to provide replacement for related party debt; What Me Worry?

Interest and principal payments to by US Sub to UK sister subject UK Parent Date 2: $100x dividend Date 1: $150x Loan UK Sub Interest and principal payments to by US Sub to UK sister subject to U.S. withholding tax as “deemed dividends” of at least 5%. Interest otherwise subject to zero withholding tax. Article 11 Principal repayment otherwise subject to zero withholding tax IRC 1442 Real” dividends otherwise paid to UK Parent subject to zero withholding tax Article 10(3) Apparent violations of Treaty Articles 9 (Associated Enterprises) and Article 25 (Non Discrimination) US Treasury states that new foreign investment is welcome in the United States; UK MNCs may be confused

Passive investing into US Passive vs. active disparities Portfolio interest Withholding on dividends Capital gains exemption Cf, framework for taxation of active business Will the corporate tax go the way of portfolio interest?