1. THE FUNDAMENTALS OF INTERNATIONAL PRACTICE: TAX ISSUES ARISING IN DRAFTING INTERNATIONAL CONTRACTS Prepared by: Jeffrey M. Trinklein jtrinklein@gibsondunn.com April 1, 2014

2. 2 Overview of International Tax Principles US citizens, residents and corporations are taxed in the US on their worldwide income Foreign taxes are credited against the US taxes Non-US individuals and companies are subject to US tax depending on their level of activity – Passive investors are subject to US withholding taxes on US source income – An active US business will require non-US individuals and companies to file tax returns and assume a full set of US tax responsibilities Comparable rules apply in other countries The normal rules are often changed by tax treaties – Withholding rates are reduced – Often permit foreign individuals and companies to do more activities before being taxed on business profits

3. 3 Unique characteristics of international contracts Money crosses borders Different jurisdictions have different rules on what is taxed Procedural rules for challenging assessments and claiming refunds will differ Need to work closely with local counsel Rules are always changing; for example— – FATCA is dramatically changing the expectations regarding confidentiality of international banking information. All “foreign financial institutions” should be in the process of complying with the new rules, and lawyers should understand the changes needed to their contracts – Jurisdictions around the world are rethinking sourcing rules, what constitutes a permanent establishment, and whether an indirect transfer can be taxed as a direct transfer

4. 4 M&A Contracts Structure of the deal needs to be clearly understood – Taxable or non-taxable – Different rules for different jurisdictions? Representations and warranties must be tailored to the relevant jurisdictions Tax indemnities need to mirror requirements under local laws Tax claims of remote jurisdictions need to be anticipated – India: Vodafone – China: Circular 698 – Germany/NY: real estate transfer tax Consider tax rulings

5. 5 Financing Documents Payments need to be correctly characterized for tax purposes Parties need to determine which party bears the risk of withholding tax now, and which party bears the risk later if the applicable law changes Lenders need to understand tax-related limits on the security available to the lenders FATCA needs to be considered See sample tax clause

6. 6 Licensing Agreements How are payments characterized Need to think about the tax consequences Example: for computer programs, what is being licensed? – copyrighted right – copyrighted article (i.e., a copy) – programming services – programming know-how

7. 7 Joint Venture Agreements How is the joint venture entity classified for tax purposes? – corporation – fiscally transparent If partnership, is there a need for tax distributions Anticipate need for appropriate technical tax language in a shareholders agreement Unwinding the joint venture

8. 8 U.S. Tax System—Entity Classification: Check-the-Box Rules 8 In 1997, the U.S. changed the rules and permitted all eligible entities to elect to be transparent or taxable by “checking the box”—i.e., by filing Form 8832.

9. 9 Circular 230 Disclosure To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this presentation was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein