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

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

3. 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

4. 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

5. 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?

6. 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

7. 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?