1. U.S. Cross-Border Tax Arbitrage Examples

2. Dual Resident Corporations Without Arbitrage Structure: U.K. group earns $100 and faces U.K. tax of $30 (30%); U.S. group earns $100 and faces U.S. tax of $35 (35%). Without Arbitrage Structure: U.K. group earns $100 and faces U.K. tax of $30 (30%); U.S. group earns $100 and faces U.S. tax of $35 (35%). U.S. Group: Earns $100 U.K. Group: Earns $100

3. Dual Resident Corporations U.K. group creates DRC to acquire the U.S. group. DRC has losses (perhaps from financing costs of acquisition). U.K. group creates DRC to acquire the U.S. group. DRC has losses (perhaps from financing costs of acquisition). As a member of both the U.S. group and the U.K. group, DRC seeks to use its loss against the income of both groups. As a member of both the U.S. group and the U.K. group, DRC seeks to use its loss against the income of both groups. U.K. Group: $100 income DRC: $100 losses U.S. Group: $100 income Part of U.K. Group

4. Dual Resident Corporations Desired Taxpayer Result: U.K. group (which includes DRC) reports $0 income. U.S. group (which includes DRC) reports $0 income. In reality, $100 of income has been earned across both groups although none is reported for tax purposes. Desired Taxpayer Result: U.K. group (which includes DRC) reports $0 income. U.S. group (which includes DRC) reports $0 income. In reality, $100 of income has been earned across both groups although none is reported for tax purposes. U.K. Group (with DRC) reports: U.K. Group (with DRC) reports: Income of $100 Loss of $100 Taxable income of $0 U.S. Group (with DRC) reports: U.S. Group (with DRC) reports: Income of $100 Loss of $100 Taxable income of $0

5. Dual Resident Corporations Current Result: Under I.R.C. Section 1503, U.S. may deny use of $100 DRC loss against income of the U.S. group. Under U.K. law, U.K. may deny use of $100 DRC loss against income of the U.K. group. Current Result: Under I.R.C. Section 1503, U.S. may deny use of $100 DRC loss against income of the U.S. group. Under U.K. law, U.K. may deny use of $100 DRC loss against income of the U.K. group. Thus, a total of $200 of income is reported for both groups even though $100 is earned. Thus, a total of $200 of income is reported for both groups even though $100 is earned.

6. Reverse Hybrid Entity Treaty Arbitrage Without Arbitrage Structure: Foreign corporation owns U.S. operating subsidiary. Subsidiary pays dividend to foreign parent. Dividend is not deductible in the U.S.; it is likely subject to withholding tax under the applicable treaty. In foreign jurisdiction, dividend either benefits from a foreign tax credit or exemption system. Without Arbitrage Structure: Foreign corporation owns U.S. operating subsidiary. Subsidiary pays dividend to foreign parent. Dividend is not deductible in the U.S.; it is likely subject to withholding tax under the applicable treaty. In foreign jurisdiction, dividend either benefits from a foreign tax credit or exemption system. Foreign Parent U.S. Sub Dividend

7. Reverse Hybrid Entity Treaty Arbitrage With Arbitrage Structure: Foreign parent creates U.S. hybrid entity, that owns the U.S. operating sub. Foreign parent creates U.S. hybrid entity, that owns the U.S. operating sub. The U.S. operating sub pays a dividend to the U.S. hybrid. The U.S. hybrid pays interest to the foreign parent. The U.S. operating sub pays a dividend to the U.S. hybrid. The U.S. hybrid pays interest to the foreign parent. Foreign Parent U.S. Hybrid U.S. Sub Dividend Interest

8. Reverse Hybrid Entity Treaty Arbitrage Desired Tax Effect: -U.S. Sub has no deduction for dividend paid -U.S. Hybrid (viewed as a corporation by the U.S.) has no income on dividend, but deducts interest paid to Foreign Parent -Foreign Parent obtains reduced U.S. withholding rate on the interest payment under the treaty -Foreign Parent obtains beneficial dividend treatment of the payment in the foreign country Foreign Parent U.S. Hybrid U.S. Sub Dividend- U.S. Sub not deduct, U.S. Hybrid not include Interest/Dividend- U.S. Hybrid deducts interest, Foreign Parent has Reduced U.S. withholding on interest and good domestic treatment on dividend

9. Reverse Hybrid Entity Treaty Arbitrage Under IRC section 894 and its regulations, payment to Foreign Parent treated as a dividend. Under IRC section 894 and its regulations, payment to Foreign Parent treated as a dividend. Foreign Parent U.S. Hybrid U.S. Sub Dividend Interest Dividend