1. Tax Executives Institute
Kalamazoo Chapter
Repatriation Planning
Peter M. Daub, Baker & McKenzie, LLP
Thursday, March 17, 2011
Your Trusted Tax Counsel

2. Presenter Peter M. Daub (Washington, D.C.)
(202)

3. AGENDA Defining the Repatriation Problem
Restructuring to Avoid Anti-Hopscotch
Prepayment Strategies
Return of Capital Distributions
All Cash “D” Reorganizations
Section 368(a)(2)(D) Reorganization of Domestic Target
Outbound “F” Reorganization of Domestic Target
Purchase of Parent Stock Used in Foreign Acquistion
Stock Compensation Strategies
Transfer Pricing Approaches
Dueling Loans
Rate Hyping

4. Defining the Repatriation Problem
For those companies that are not in an overall foreign loss (OFL) position, the issue is typically how to get access to low-tax cash without:
Incurring a significant residual U.S. tax liability; and
Violating the company’s APB 23 assumption
For those companies in an OFL, the objective may be to get access to low-tax or high tax cash without significant residual tax or violating APB 23 assumption

5. Restructuring to Avoid Anti-Hopscotch -- Section 304 Transactions and Other Internal Restructurings
When
Anytime (under current law)
How
Section 304 Transaction to hopscotch low-tax E&P pools over high tax pools, or vice versa
Spin-offs and other internal restructurings
Why
Need longer-term solution that warrants restructuring

6. Restructuring to Avoid Anti-Hopscotch Example -- Section 304 Transaction
Advantages
Section 304 deemed dividend from CFC-2 earnings direct to US parent
No GRA needed. Treas. Reg. §1.367(a)-9T
However…
Dividend constrained by value of CFC-3
CFC-2 may not be desirable holdco
Variations
Sell CFC-1 stock to CFC-2
CFC-3 sells other CFC shares to CFC-1
Recap shares of transferred CFC into preferred to minimize valuation issues
U.S. Parent
CFC-1
(Low-tax) $
CFC-3
CFC-3
shares
CFC-2
(High-tax)

7. Restructuring to Avoid Anti-Hopscotch Internal Foreign-to-Foreign Inversion
Before
After
Steps
US contributes LT CFC stock to HT CFC Hold Co in exchange for HT CFC Hold Co common and preferred stock
Dividends on preferred stock can be paid directly to US without distribution to LT CFC
Key Points
Foreign-to-foreign section 351 exchange or “B” reorganization
Need GRA
Need business purpose
Valuation considerations
Can be long term solution US US
common and
preferred stock LT
CFC
HT CFC Hold Co
Hook stock
HT CFC
Hold Co LT
CFC HT
CFCs HT
CFCs

8. Restructuring to Avoid Anti-Hopscotch Spin-off of High Tax GroupUS
Steps
LT CFC distributes stock of HT CFC Holdco to US
Key Points
Can qualify as tax free section 355 spin-off
Need business purpose
No GRA or e&p pick-up
Most elegant long term solution
HT CFC Holdco stock
LTC
CFC
HT CFC
Hold Co HT
CFCs

9. Prepayment Strategy Inventory Prepayment Transaction USCO
Cash equal to two years’ worth of inventory, discounted to reflect the fact that the money is advanced earlier than normal
Must be nonrefundable
Swiss Subsidiary

10. Prepayment Strategy Broader Prepayment Issues
Can be used for inventory, services, royalties and cost sharing payments
Can USCO defer the income pursuant to Treas. Reg. § or Rev. Proc ?
If deferral is possible, how long? Could immediate income be a benefit?
Is the discount that foreign subsidiary receives subpart F income or is it a reduction in expense?
Can you repeat?

11. return of capital distribution 12/30/Y1
US Parent 
return of capital distribution 12/30/Y1 
cash loan 12/28/Y1
Foreign Holdco
Third Party Lender  
repay loan with cash on 1/2/Y2
cash dividend 1/2/Y2
Foreign Sub
Buyer 
sale of assets 1/1/Y2

12. Return of Capital Distribution
Can IRS assert subsequent distribution really boot in the section 351 transaction in which new Foreign Holdco formed?
Could the return of capital distribution trigger any GRAs entered into on the set up?
Will the bank demand a parent guarantee or pledge of subsidiary assets to support the loan?

13. All-Cash “D” Reorganization
Value $100
Basis $ 80
E&P / Section 1248 Amt. $ 20
USCO
OPCO
(Country X)
Holding Company
(Dutch)
effective rate in pool of 35%
OPCO
(Ireland)
low-tax earnings
OPCO’s attributes are key to ensuring this structure works

14. All-Cash “D” Reorganization
Value $100
Basis $ 80
E&P / Section 1248 Amt. $ 20 
USCO
OPCO c/s for $100 note 
OPCO
(Country X)
Holding Company
(Dutch)
dividends to Holdco
to pay off note
effective rate in pool of 35%
Consequences
$80 recovery of basis
$20 OPCO (X) e&p pick-up
OPCO
(Country X)
OPCO
(Ireland) 
CTB election

15. Section 368(a)(2)(D) Reorganization of Domestic Target
US Parent
(US)
merger consideration 40% FA stock and 60% cash
merger consideration of FA stock and cash
Target
(US) FA
(Non-US)
US Sub
(US)
merger
Assume US Parent has a full FMV basis in the shares of Target

16. Section 368(a)(2)(D) Reorganization Issues
Outside the scope of Notice because it is a section 361 transfer from one US corporation to another US corporation
Cash boot can be received tax-free by US Parent because there is no gain in the shares of Target

17. Outbound “F” Reorganization of Domestic Target
Convert recently acquired/purchased U.S. target into a foreign company
Allows repatriation of pre-acquisition E&P via DRD
DRD available because the earnings have already been subject to US tax
Allows repatriation through return of capital/basis
High/FMV basis in recently purchased entity
Target must repatriate cash before new low taxed earnings accrue in the foreign target
Must manage the E&P pools
Must fund the distribution

18. Outbound “F” Reorganization of Domestic Target (Cont.)
Key Costs
Basis step down for the built-in gain in the tangible assets (but not the IP)
DRD at 80% or 100%?
Potential waiting period under section 1059
Issues arising from the US tangible assets
Dividend them up and recognize section 311(b) gain and related issues, OR
Live with two separate U.S. tax returns

19. Outbound “F” Reorg. Example – Step 1
US Parent 
Target
Shareholders
cash
Third Party Bank Debt?
Merger Sub
(US)
Target
(US)
merge
Target CFCs
Assume that most appreciation is in Target intangibles or CFCs, not US operating assets
US Tax Consequences
Treated as a taxable stock purchase
US Parent takes a full FMV basis in the target stock

20. Outbound “F” Reorg. Example – Steps 2 and 3
shares of Target
US Parent
Foreign Newco
Target LLC
Target CFCs
Conversion to LLC (deemed liquidation)  
US Tax Consequences
Treated as an outbound “F” reorganization

21. Outbound “F” Reorg. Example – Step 4
US Parent
Foreign Newco
Target LLC
Target CFCs
IP and CFC shares 

22. Outbound “F” Reorg. Example – Step 5
Foreign Newco contributes Target LLC to US Newco
US Newco assumes Target LLC liabilities such that Foreign Newco takes a $0 stock basis in US
to avoid section 956
US Parent
(US)
US Newco
Target LLC
Target CFCs
Foreign Newco

23. Purchase of Parent Stock Used in Foreign Acquisition
Parent
Stock
Key Points
CFC purchase of new Parent stock non-taxable under section 1032
CFC use of Parent stock in acquisition triggers no gain due to FMV basis
Anti-"killer B" Notices not applicable if no tax-free reorganization
Parent
Shareholders 
Target
Stock $
CFC
Foreign
Target
Parent
Stock
Foreign
Target

24. Stock Compensation Strategies
Foreign Sub grants stock options to its employees
US Parent provides stock to Foreign Sub’s employees
Foreign Sub reimburses US Parent for difference between FMV of stock and employee payment
PLR concludes the reimbursement is not a dividend to extent of section 83 spread
Questions -
Is an advance agreement to reimburse required?
GAAP implications?

25. Transfer Pricing Approaches
Consider expanding scope of expense charge-outs
If can get foreign deduction
E.g., stewardship expense, guarantee fees
IP ownership
Consider prepayments of royalties, service fees, cost sharing payments, inventory purchases
Does not impact basic transfer pricing approach, but …
Need to reflect risk factor and time value of money
Discount rate versus bond rate versus AFR
Is discount above or below the line?
Rev. Proc repatriation of agreed section 482 adjustments

26. Dueling Loan Strategy USCO 2A 1B 2B 1A CFC OPCO 1 (Low-Tax)
12/31 Year end
11/30 Year end

27. Dueling Loan Strategy OPCO One OPCO Two
OPCO 2 will have an 11/30 year end, as permitted under section 898 of the Code. The low-tax partners will lend all of their cash back to the United States parent at the following intervals:
OPCO One OPCO Two
12/01/03-01/14/ X
01/15/04-02/28/04 X
03/01/04-04/14/ X
04/15/04-05/31/04 X
06/01/04-07/14/ X
07/15/04-08/30/04 X
09/01/04-10/14/ X
10/15/04-11/31/04 X

28. Dueling Loan Strategy Potential risks:
Debt v. Equity – unlikely to be successful, provided loans are repaid on time and advances have the formal indicia of debt.
Step-Transaction – at what point will a reviewing court step the advances together and treat them as one loan?
Rev. Rul , C.B. 258 (2 months not ok, but 6 months ok)
Jacob’s Engineering v. Commissioner, 97-1 USTC ¶50,340 (C.D. Cal. 1997), aff’d 99-1 USTC ¶50,335 (9th Cir. 1999).
Reg § – IT(b)(4)
Section 269
Conduit
Section 7701 (o)

29. Rate-Hyping
Example 1. USCO has $100 of U.S. Source Income and $100 of Foreign Source Income subject to $0 of foreign tax
Income $200
Tentative U.S. Tax $ 70
Tentative FTC $ 0
Section 904 Limitation $35 *
FTC ($ 0)
Total U.S. Tax $ 70
* Assumes all foreign source income is in the general basket
Example 2. Same as 1, but USCO triggers a $100 foreign source dividend subject to $70 of foreign tax credits
Income $300
Tentative U.S. Tax $105
Tentative FTC $70
Section 904 Limitation $70 *
FTC ($70)
Total U.S. Tax $ 35
* Assumes all foreign source income is in the general basket
OBJECTIVE: MOVE FROM EXAMPLE 1 to EXAMPLE 2 WITHOUT PAYING MORE FOREIGN TAX

30. Rate-Hyping USCO CFC 1 Stock Contributed CFC 1 <$70 Deficit>
CFC 2 $70 E&P $30 Taxes
CFC 1 <$70 Deficit>

31. Hovering – Rate Hyping
EXAMPLE: CFC2 acquires all of the assets of a CFC 1 in a tax-free transaction on
December 31, Each has the following attributes as of December 31, 2006:
Acquirer Target
Pool E&P Taxes Pool E&P Taxes
General Basket $ $ General Basket ($70) $ 0
Assume the Surviving Corporation is a CFC, the attributes carry over as follows:
(Hovering) (Hovering)
Pool E&P Taxes (Deficit) (Taxes)
General Basket $ 70 $ ($ 70) ($0)
If Surviving Corporation earns another $100 in 2007, subject to $30 of taxes, the $100 will be eaten up by $100 of hovering deficit.
General Basket $ 70 $ ($0) ($0)
If, in 2008, Surviving Corporation does not earn any net income, and a $100 dividend is declared, it will bring with it $60 of taxes, a 46% effective rate.