2. My Background
• 1962 Graduated from Niigata High School
• 1963 Went to the USA for college education
• 1967 Graduated from Oklahoma State University with BS in
Accounting
• 1967 -1970 Worked in the audit department New York & Tokyo
offices of Price Waterhouse & Co. (now PriceWaterhouse
Cooper)
• 1972 -1978 Joined New York International Tax Division of Peat Marwick
Mitchell (now KPMG)
• 1978 - 1988 Worked in Tokyo Office of Peat Marwick Mitchell
• 1988 -2001 Worked in New York Office of KPMG. Became the
Japanese Tax Practice Leader of KPMG in the US
• 2001 Retired from KPMG
• 2001 -2004 Full-time professor at IUJ
• 2004 – 2008 Outside Statutory Auditor of Takeda Pharmaceutical
Company
• 2004 – Now Visiting Professor at IUJ
2
3. 3
What is International Taxation?
• There are no international tax laws
• It is an inter-action of more than one
country’s tax laws and rules
• Tax laws and rules of more than one country
which are applied to a cross-boarder
transaction.
• Global business has no border but tax laws &
rules will continue to have a clear border.
• Risk (double taxation) and Opportunity
(reduction of total tax liability)
5. Features of International Taxation
• What’s tax?
Government expenditures = tax (or non-tax) revenue + government
debts (e.g. Japanese government bonds, US Treasury Bills, etc.)
• Financial accounting vs. Tax accounting
• Tax systems are different in every country.
– Tax rate
– Tax basis = determination of taxable income
– Different taxes
– Allowable deductions (depreciation, entertainment expense, etc.)
– Definition of terms
– Culture & practice
• Tax practice (tax culture and tax enforcement practice) is different in every
country
• In cross-border transactions, income to a party in a country is
cost/expense to other of another country in almost all cases
5
6. History of International Taxation-I
In 1950’s, US companies’ expansion overseas
began
1n 1960’s, US introduces various tax laws & rules
governing cross-border transactions. For example:
Subpart F rules (tax haven taxation)
Thin capitalization rule
Transfer pricing regulations
Taxation of inbound investment (i.e. foreign
corporation)
6
7. History of International Taxation - II
In 1970’s, US tighten foreign tax credit rules
1. Clarifying source rules
2. New rule concerning allocation of expenses
3. Clarification of what are qualifying foreign taxes
Developing countries have began to adopt similar tax
laws & rules of USA
Japan’s example
Tax haven taxation – 1978 (1963)
Transfer pricing law – 1986 (Regulations in 1968)
Thin capitalization - 1992 (1950’s)
Consolidated tax return- 2002 (1950’s)
Limited Liability Company – 2008 (1970’s)
Foreign dividend exclusion – 2010 (2008)
7
8. Growth of KPMG International Tax Practice -1
8
InternationalTax TransferPricing InternationalExecutive
Practice Practice TaxPractice
1965 None None None
1970 Groupof3partners,5managers&10staff None None
inNewYork. SmallgroupinLosAngles,
SanFrancisco,Chicago,andHouston.
OutsidetheUSA,therewereasmallgroupin
London,Paris,Frankfurt,SingaporeandSydney
1980 Numberofprofessionalsspecializedin None IET(InternationalExecutiveTax)groupstarted
InternationalTaxationdoubled. USofficesof inNewYorkwith2partners,4managerand
Miami,Washington,D.C.,Atlanta,Dallas,Boston 8staff. Paris&LondonofficeshadUStax
Denver,andDallasandoutsideUSofficesof partnerstoserviceUSexpatriateclientsof
Amsterdam,Munich,Zurich,Milan,Madrid, USmultinationalcompanies
Dublin,HongKong,TokyoandMexicoCity
9. Growth of KPMG International Tax Practice - 2
9
1990 Almostallofficesinmajor citiesintheUSand WashingtonD.C. officestartedEconomic IETPracticeexpandedtolargeofficeslike
aroundtheworldhaveInternationalTaxGroup ConsultingGroupwith2partnersand5 Chicago, LosAngles, Brussels, Tokyo,
managerstoprovidetransfer pricinganalysis Singapore&HongKong
services. 2partnershadPhDinEconomics
2000 Over 2000taxprofessionalsinmajor andmedium15USofficesandseveralofficesoutsidethe Nearly 1000professionalsinmajor cities
sizeofficesaroundtheworldspecializein UShaveagroupspecializinginTransfer aroundtheworldspecializesinIETpractice
inInternationalTax PricingGroup(e.g. London, Tokyo&Sydney),
2010 Nearly 2500taxprofessionalsinmajor and Transfer PricingGroup isformedinoffices Remainsatthesamelevelof 1000
mediumcitiesspecializeinInternationalTax inthecountriesof theemergingmarket. For professionals
includingcitiesinemergingmarketlikeChina, example, KPMGhastransfer pricingspecialists
IndiaandBrazil inBeijing, Shanghai, SanPaulo, NewDelhi
andJakarta
10. 10
Cross-border Transactions
Country A Country B
Country A Country B
① Capital
② Loan
③ Intangible (know-how)
④ Service
① Dividend
② Interest
③ Royalty
④ Fee
11. Tiger Woods Case
Total
California Florida Michigan New York Japan UK Dubai Germany
Golf tournament prize money 1,000,000 2,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 9,000,000
Appearance money 1,000,000 1,000,000 1,000,000 3,000,000
Endorsement income
Niki 10,000,000 10,000,000
American Express 10,000,000 10,000,000
GM - Buick 10,000,000 10,000,000
Others 18,000,000 1,000,000 1,000,000 20,000,000
Total income 62,000,000
Withholding tax rate on a 9% 0% 6% 15% 20% 15% 0% 25%
nonresident
Tax 90,000 60,000 150,000 600,000 150,000 0 750,000 1,800,000
Marginal tax rate as a resident 9% 0% 6% 15% 50% 31% 0% 53%
California Florida
Tax 25,496,000 21,927,500 3,568,500
In the USA Outside USA
11
12. Anneka Sorenstein Case
Total
California Arizona Florida Michigan New York Japan UK Dubai Germany Sweden
Golf tournament prize money 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 9,000,000
Appearance money 1,000,000 1,000,000 1,000,000 3,000,000
Endorsement income
Niki 10,000,000 10,000,000
American Express 10,000,000 10,000,000
GM - Buick 10,000,000 10,000,000
Others 18,000,000 1,000,000 1,000,000 20,000,000
Total income 62,000,000
Withholding tax rate on a 9% 5% 0% 6% 15% 20% 15% 0% 25% 25%
nonresident
90,000 50,000 60,000 150,000 600,000 150,000 0 750,000 1,850,000
Marginal tax rate as a resident 9% 5% 0% 6% 15% 50% 31% 0% 53% 50%
Sweswn California Florida Resident of Monaco
Tax 31,000,000 Tax in Monaco 0
Foreign tax credit -1,850,000 Taxes in other 1,850,000
Net tax sweden 29,150,000 21,048,000 17,345,000
Taxes in other jurisdictions 1,850,000
Tax saving 9,952,000 13,655,000 29,150,000
31,000,000 31,000,000 31,000,000 31,000,000
In the USA Outside USA
12Tiger
13. Risks in Tiger Woods and Anneka Sorenstam Cases
• Determination of resident*
1. Bank account,
2. Ownership of real estate
3. Driver’s license,
4. Physical residence (i.e. number of days)
5. Voter registration.
• Source or origin of income*
1. Place of services rendered
2. Recipient’s residence
3. Payer’s residence
4. Place of contract signing
5. Place of filming and appearance
6. Place of benefit (advertising effect)
13
Tiger
14. Basic Principle of International Taxation - 1
• Capital Export Neutrality
A tax system meets the standard of capital-export
neutrality if a taxpayer’s choice between investing capital
at home or abroad is not affected by taxation. Domestic
income and foreign income are taxed at the same rate.
• Capital Import Neutrality
– A tax system meets the standard of capital-import
neutrality if all taxpayers doing business in a country are
taxed at the same rate whether domestic taxpayer or
foreign taxpayer earns it.
14
15. Basic Principle of International Taxation - 2
• Nationality Rule
– Nationality rule is the taxation system based on the legal connection
(i.e. place of incorporation) to a country. Under this rule, the
worldwide income of a domestic corporation is taxed in that country.
– USA, UK, Germany, Japan, Indonesia
• Territoriality Rule
– Territoriality rule is the tax system based on the factual connection to
a country. A taxpayer is expected to share the costs of running a
country which makes possible the production of income, its
maintenance and investment and its use through consumption.
– France, Hong Kong, Switzerland
15
16. Jurisdiction To Tax
Residence Jurisdiction (Nationality Rule)
A country may impose a tax on income
because a nexus between the country and the
person earning the income
Source Jurisdiction (Territoriality Rule)
A country may impose a tax on income
because of a nexus between that country and
the activities that generated the income
17. 17
Taxation of Inbound Investment
Form of Operations
– Business trip
– Representative office
********************************
– Branch – a part of corporation
– Pass-through entity, e.g. partnership, LLC (not taxable entity.
Income or loss belong to each investor/partner)
– Subsidiary – legally separate entity
– Joint venture – could be in corporate form or pass-through
entity form
– M & A of existing company
**********************************
Transfer pricing
Thin capitalization
18. 18
Taxation of Inbound Investment
Taxation of Branch
• Permanent establishment
– Factual determination
– Treaty Definition
• Effectively connected income
• Income attributable to a permanent establishment
• Application of arm’s length standard
• Allocation of head office expenses
• If a subsidiary is established in a given country, such
subsidiary is generally treated same as the
corporation is such country for tax purposes.
• Some countries offer tax incentives to subsidiary
companies of foreign investors to encourage
investment in such countries e.g. Ireland & Brazil,
19. 19
Taxation of Inbound Investment
Government Policy
• Government tax policy toward inbound foreign
investment.
– Encourage = tax incentive:
– Discourage = high withholding tax
• Foreign investment incentive
– Tax holiday – zero or low corporate income tax rate
– Zero withholding tax on dividend, interest and royalty
– Tax sparing credit
20.
21.
22. 22
Taxation of Outbound Investment
• Foreign income exclusion vs. worldwide income
taxation with foreign tax credit system
• Deferral of foreign subsidiary’s income
• Tax haven taxation (Slide 26)
• Foreign dividend exclusion
– Countries adapted the territoriality rule
– Special measure – USA’s one time exclusion and
Japan introduced the foreign dividend exclusion
provision in 2009
23. 23
Use of Tax Haven Country
USA UK
USA UKBahamas
1,000
1,000700
Sales 1,000
Cost -600
Profit 400
Tax@50% -200
Profit after tax 200
1,000
-700
300
-0
300
Before
After
US company set up a subsidiary company in Bahamas which imposes no income tax
and sells product to an unrelated UK distributes.
Sales 700
Cost -600
Profit 100
Tax@50% 50
Profit after tax 50
Bahamas
24. Foreign Tax Credit System - I
• General Rules
Foreign tax credit system generally exists in a country which taxes
its corporation or individual based on nationality. With respect a
country which adapt territorial rule, a foreign tax credit is not
allowed since foreign income is not taxed in that country
• Type of foreign tax credit
• Direct foreign tax credit - foreign tax on branch/partnership income, foreign
withholding tax
• Indirect foreign tax credit - foreign tax on subsidiary income ( USA – 6th tier
subsidiary, Japan – 2nd tier subsidiary (since 1992))
• Tax sparing credit – foreign tax credit for a foreign tax not actually paid
• Creditable foreign tax – generally foreign tax assessed on income
25. Foreign Tax Credit System- II
• Foreign tax credit limitation –
– Per country limitation,
– Overall limitation,
– Type of income limitation (etc. dividend, interest, business
income
–
• Use of unused foreign tax credit and limitation –
• Planning opportunity and managing foreign tax credit
• Implication to use of a holding company structure
26. 26
Anti-Avoidance Measures
• Tax Avoidance vs. Tax Evasion
– Tax avoidance is the deferral, avoidance or reduction
of tax by lawful means, sometimes taking the
advantage of loopholes in tax laws or rules.
– Tax evasion is the reduction of tax by illegal means,
usually involving fraud and willful neglect,
• Tax avoidance measures adapted by various
countries
– Taxation of tax haven subsidiary
– Controlled foreign corporation (CFC) rules
– Anti-treaty shopping rule
– Thin capitalization rule
– Taxation of unrealized gains on transfers of property
27. Tax Treaty - I
• Facilitate and encourage economic, cultural, athletic exchange of two
countries
• Every county has a network of tax treaties
– Indonesia– 57
– Japan – 47
– Netherland – 84
– Mongolia - 31
• OECD Model or UN Double Taxation Convention
• Tax treaty provision override internal tax law
• Definition of various terms
29. Recent Development in Tax Treaty
• Treaties have been and are being negotiated to adapt
to the changing time. (New Japan-US Tax Treaty
signed in 2003. Old treaty was signed in 1972)
• Reduction of withholding tax rates
• Exchange of information
• Competent authorities procedures – mitigation of
double taxation in transfer pricing cases
• Limitation on Benefits article
To prevent third country residents from
receiving treaty benefits (i.e. treaty shopping)
• Elimination of tax sparing credit article
29
31. Individual Taxation
• USA is one of rare countries taxes its citizens and permanent
residents wherever they actually reside
• Almost all countries tax individuals based on their residency.
• Taxation of fringe benefits (e.g. housing, home leave,
education, stock option, etc.) varies
• Definition of “resident” varies
– Generally 183 days rule but some countries use one year
rule
– USA has a unique “substantial presence” rule
– Some countries have “permanent resident” and “non-
permanent resident “ classification.
• “Permanent Traveler”
31
32. US Substantial Presence Rule
Nonresident in 2009
Days in
Year Year Total
2007 120 x 1/6 20
2008 120 x 1/3 40
2009 120 x 1/1 120
180
Resident in 2009
2007 126 x 1/6 21
2008 129 x 1/3 43
2009 120 x 1/1 120
184
32
33. Takefuji Case
3333
Takefuji Corp.
-Japan-
YST Investment
-Netherland-
Yasuo Takei
(Father)
-Japan-
Toshiki Takei
(Son)
-Hong Kong?-
Gift – 720 shares of YST Investment
15.7 millions shares
②
①
④
⑥
③
⑤
800 shares 720 shares
Takefuji
34.
35. 35
Takefuji Case - 1
1. Takefuji Corp. was established by Yasuo Takei and engaged
in consumer financing business
2. In December 1997, YST Investment was established by
Yasuo Takei in Netherland with 800 shares
3. In 1997, Yasuo Takei’s son, Toshiki Takei, “moved” to Hong
Kong to establish his residency there and spent about 65%
of the year in Hong Kong.
4. In March 1998, Yasuo Takei made a tax-free transfer of 15.7
millions shares of Takefuji Corp to YST Investment, which
represented about 10% of the outstanding shares of
Takefuji .
5. In December 1998 Takefuji Corp went public on the Tokyo
Stock Exchange.
35
Takefuji
36. 36
Takefuji Case - 2
6. In December 1999, Yasuo Takei gifted to Toshiki Takei 720 shares
of YST Investment, which assets were mostly the shares of
Takefuji Corp. Takefuji’s stock was traded at 11,850 Yen at that
time. 720 shares were valued at 160 billion Yen.
7. Prior to 2000, a gift of non-Japanese assets to a non-resident
individual was not subject to Japanese gift tax. Thus, Toshiki
Takei did not pay any gift tax. Hong Kong has no gift tax.
8. Japanese tax authorities determined that Toshiki Takei
effectively lived in Japan and his “move” to Hong Kong was only
to create a situation to avoid paying Japanese gift tax. He was
assessed 130 billion Yen including penalties and interest
9. Toshiki Takei is contesting the assessment claiming that he was
a nonresident of Japan at the time of gift.
10. In December 2011, the Japanese Supreme Court handed down
a decision in favor of Toshiki Takei resulting in a refund of 130
billion yen plus interest of 40 billion yen.
36
Takefuji
37. Takefuji Case - 3
Japanese tax laws amended in two areas:
• Tax free incorporation
• Gift tax – Japanese inheritance and gift tax rules never
contemplated this type of situation (Japanese citizen residing
and owning assets outside Japan). There were loopholes. In
2000, the tax laws were amended and if the donor or donee
was a resident of Japan within 5 years before the time of gift
or death, the donee is subject to Japanese gift tax on all gifts
from the donor.
37
Takefuji
38. Thin Capitalization – Leveraging US Operations
Capitalization Case A Case B
Capital 1,000,000 9,000,000
Debt (inter-company loan @10% interest rate) 9,000,000 1,000,000
Total 10,000,000 10,000,000
Taxable Inocme
Net Income before interest expense 1,000,000 1,000,000
Interest expense 900,000 100,000
100,000 900,000
Tax Burden
US subsidiary of Indonesian company
Tax @40% 40,000 360,000
Withholding tax @10% 90,000 10,000
Total tax cost 130,000 370,000
US subsidiary of French company
Tax @40% 40,000 360,000
Withholding tax @0% 0 0
Total tax cost 40,000 360,000
US subsidiary of Hong Kong company
Tax @40% 40,000 360,000
Withholding tax @30% 270,000 30,000
Total tax cost 310,000 390,000
38
Thin Cap
39. Thin Capitalization
Thin Capitalization
Tax Implication in Home Country - 1lication
in Home Country - 1
39
Case A Case B Case A CaseB
Senario I - High home country tax rate Senario I - High home country tax rate
No external funding in home country External funding in home country
Interest Income 900,000 100,000 Interest Income 900,000 100,000
Interest expense -900,000 -900,000
Tax @ 50% 450,000 50,000 Ne income 0 -800,000
Tax in USA 130,000 370,000 Tax @ 50% 0 -400,000
Total tax 580,000 420,000 Tax in USA 130,000 370,000
Total tax 130,000 -30,000
Interest expense 900,000 900,000
Cash out 1,030,000 870,000
Thin Cap
40. Thin Capitalization
Tax Implication in Home Country - 2
40
Senario 2 - Low home country tax rate Senario 2 - Low home country tax rate
No external funding in home country External funding in home country
Case A Case B Case A Case B
Interest Income 900,000 100,000 Interest Income 900,000 100,000
Interest expense -900,000 -900,000
Tax @ 20% 180,000 20,000 Net income 0 -800,000
Tax in USA 130,000 370,000 Tax @ 20% 0 -160,000
Total tax 310,000 390,000 Tax in USA 130,000 370,000
Total tax 130,000 210,000
Interest expense 900,000 900,000
Cash out 1,030,000 1,110,000
Thin Cap
41. 41
Transfer Pricing - Update
• 80% of global trade is between controlled group
of companies
• Tax transfer price vs. custom duty price
• APA – many countries are adapting APA
procedure but the success of APA still uncertain.
• Competent authorities to settle transfer pricing
cases to avoid double taxation
• Attacking home country corporations
Takeda Case
• The largest transfer pricing assessment ever.*
GlaxcoSmithKline Case – Team Project
42. 42
Takeda’s Transfer Pricing Case
Takeda
Pharmaceutical
Company
(Japan)
Abbott
Laboratories
(USA)
TAP
(USA)
50%
Sales of
Prevacide 50%
Takeda
43. 43
Takeda Case
• TAP is a 50/50 joint-venture established 30 years ago
between Takeda Pharmaceutical Company of Japan and
Abbott Laboratories of USA. Both are publically held
companies and totally unrelated.
• TAP mainly imported and sold Takeda’s products in the
USA
• In 2006, Osaka Tax Bureau adjusted the sales price of
Prevacid for Yen 122 billion (about $1.2 billion) involving
6 years and assessed an additional tax of Yen 57 billion
(about $570 million) claiming Takeda’s transfer price was
too low.
• This is the largest transfer pricing assessment in Japan
so far.
• Interesting fact was that Abbott sued Takeda claiming
Takeda overcharged the price of Prevacid.
Takeda
44. 44
Takeda Case - continued
• The case has been referred to the competent authorities
of Japan and USA and it is uncertain how and when the
case will resolved.
• The case is unusual since Takeda had no motivation or
received any benefit by reducing the transfer pricing to
TAP since 50% of the profit belongs to Abbott.
• Technically speaking the Japanese transfer pricing rules
apply to an overseas company owned 50% by a
Japanese company.
• Tokyo Tax Bureau also made a transfer pricing
assessment of Yen 11.7 billion (about $117 million) to
Honda with respect to its transactions with Honda’s
50/50 joint venture in China.
Takeda
45. 45
Management of Effective Tax Rate - I
• Statutory Tax Rate vs. Effective Tax Rate**
• Impact on financial statement analysis ratios:
ROA (return on assets) ,
ROE (return on equity),
EPS (earnings per share)
• Cash flow management
• Permanent differences vs. timing differences -
importance of discounted cash flow
• Future tax payment (i.e. tax assessments upon
audit) is considered as a “loan” from government
• Different tax culture – GE & Panasonic comparison*
46. Management of Effective Tax Rate - II
• 1999 Tax Efficiency Scoreboard (see copy of CFO article)
• 3-year average ETR %
• 3-year average Cash Rate (% of PBT)
• 3-year average of non-US revenue %
• How to manage effective tax rate
• Advance planning is essential and tax consequences must be reviewed before
a transaction is put in place
• Strengthening of internal tax department (Citicorp – 300 vs Mizuho – 5)
• Constant monitoring is necessary
• Use of outside tax professionals is essential – knowledge of country’s tax laws
& rules,
tax authorities’ administration & enforcement practice, and tax culture &
development
• No one major tax saving techniques but accumulation of many tax
minimization techniques.
47. 47
International Tax Arbitrage - 1
For international tax purpose, avoiding double taxation should be
the minimum objective of a company. Interaction of different
countries’ tax systems can lead to double taxation and also at the
same time can provide opportunities to minimize and sometime
eliminate tax liability. When two countries classify the same
transaction differently, the opportunity for Tax Arbitrage arises
1) Characterization of Income
A, worked, in Country X, for many years, and retired. He receives
distribution from Country X. It’s treated as pension in Country X
while the US considers such distribution as a payment similar to US
social security. If neither country could claims it right to tax this
distribution pursuant to tax treaty provision, A will not be taxed in
either country.
48. 48
International Tax Arbitrage - 2
2) Dual Non-Resident Corporation
F Corp is incorporated in country X but effectively managed in
Country Y. F has business income in Country X but no P/E in
country X. Country X uses “place of management” test to
determine residence while Country Y uses “place of incorporation”
test. F Corp could be treated as a non-resident corporation in
both countries and could escape taxation from both countries.
3) Hybrid Entity
An entity can be classified as a corporation in Country X but a
pass-through entity (e.g. a partnership) in Country Y.
4) Hybrid Instrument
An instrument can be regarded as equity in Country X whereas it
is treated as debt in Country Y. An interest expense on “debt” is
deductible in Country Y.
49. 49
International Tax Arbitrage - 3
5) Double Dip Lease
Guidelines (definition for economic ownership) of treating a lease
transaction as an operating (true) lease vs. capital (finance) lease
could be different in County X and Country Y. Therefore, a certain
lease arrangement can be treated as an operating lease in Country
X whereas it is treated as a capital lease in Country Y. This could
result in double depreciation (dip) of one leased property.
6) Dual Consolidation Loss
Opposite of ２）above. By regarded as a resident corporation in
two countries, a loss of the company will be claimed in two
countries at the same time.
Note: Certain countries either by their internal tax law or by tax
treaty provisions have restricted the use of some of the above tax
arbitrage techniques. However, there are still many countries which
have not yet “caught up” with restricting the use of these
techniques. Therefore, it may be legal and valid to utilize these
types of tax arbitrage techniques.
50. Residence of Legal Entity (Corporation)
Place of Incorporation Test
The place (e.g. country or other jurisdiction) of legal
incorporation determine the residency of a legal entity
Place of Management Test
A place of management activities (e.g. location of
headquarters, the place of the board of driectors
meeting) determine the residency of a legal entity.
51. 51
Double Dip – R&D Credits
U.S.
• Policy – To encourage R&D
activities in the U.S. so that
the U.S. R&D environment
will be fostered and enriched.
• Do not care who ultimately
bear the R&D costs
Japan
• Policy – To encourage
Japanese companies pay
for the R&D activities and
acquire intangibles so that
they will be competitive
technologically.
• Do not care where the
R&D activities are
performed.
51
52. 52
Double Dip – R&D Credits
52
Japanese
Parent
US HoldCo
US R&DSub
Japan
US
US R&D
Vendor(CRO)
$100Fees
$100Reimbursement
Consolidated
Max $100 R&D Credit
Japanese
Government
Max $100 R&D Credit US
Government
53. 53
Hybrid Entity – Check-the-Box Rule
U.S. Check-the-Box Rule allows taxpayers to freely choose
whether a business entity should be treated as a corporation
or a non-taxable pass-through entity for U.S. tax purposes
except for certain specified corporate entities (e.g., US C-
Corporations, Japanese KKs).
53
LLC LLC
Corp
Partnership
or
Corporation
Branch
or
Corporation
Corp Corp
54. Hybrid Entity
Corporate Characteristics
1. Continuity of Life
2. Central Management
3. Limited Liability
4. Free Transferability of Ownership
Existence of 3 or more will generally teat
an entity to be taxed as a corporation
55. Check-the Box Rules
Treated as a corporation for US tax purposes:
Canada – Corporation and Company
China – Gufen Youxian Gungsi
Greece – Anonymos Etairia
Indonesia – Perseoan Terbuka
Japan – Kabushiki Kaisha
Thailand – Borisat Chamkad (Mahachon)
56. Double Dip Lease
• Each country has different rules for classifying long-term leases,
sometime a country (e.g. USA, Japan, etc.) has different rules for
accounting and tax purposes.
• In some countries, tax treatment simply follow the legal form.
• Under US GAAP, if a lease meets one of the 4 conditions, the lease
must be treated as a capital lease.
1) Ownership of the leased property transfers to the lessee at the end of the lease term
2) “Bargain puchase” option exists and transfer of ownership is likely
3) The lease term extends at lease 75% of the assets life
4) The present value of the minimum contractual lease payments equal or exceeds 90 % of the
fair market value of the assets at the time of the lessee signs the lease.
• Major international accounting firms have lease experts in all
major cities around the world.
• Triple dip lease ?
57. Double Dip Lease
Operating (True) Lease – Country A
Legal & economic owner Renter &user of lease property
Take depreciation Take lease expense
Legal
Form
Capital (Finance) Lease – Country B
Seller /Financer Purschaser & economic owner
Recognize gain on sales & interest income Take depreciation & interest
expense
LesseeLessor
58. 58
Hybrid Entity
58
JapaneseParent
US General
Partnership
US Operating
Sub
Japan
US
Bank
$100
Interest
Consolidated
$100 Interest Deduction
• Japanese Parent’s Branch for
Japanese Tax Purposes
• Corporation for US Tax
Purposes
Head office / Branch
$100 Interest Deduction
NominalPartner
59. 59
Hybrid Instrument – US Repo
Step 1
US Sub Issues
preferred stock to
US HoldCo.
Step 2
US HoldCo sells preferred
stock to the Japanese
Parent with forward
purchase agreement
Step 3
US Subsidiary pays
dividends to the
Japanese Parent
Japan
US
Japanese Parent
US HoldCo
US Sub
Japanese Parent
US HoldCo
US Sub
US Sub
Preferred
Stock
US Sub
Preferred
Stock
Cash
Japanese Parent
US HoldCo
US Sub
Preferred
Dividends
Step 4
US HoldCo buys back
preferred stock from the
Japanese Parent
Japanese Parent
US HoldCo
US Sub
US Sub
Preferred
Stock
Cash
59
60. 60
Hybrid Instrument – US Repo
Capital Contribution
Japan
Dividends Income 600
Exclusion@95% (570)
Taxable Income 30
Corp. Tax @40% 12
Total Japan Tax 12
US
Business Income 1,000
Income Tax @40% 400
After Tax Income 600
Total US Tax 400
Total Tax 412
- 300
Repo
US
Business Income 1,000
Interest Expense （1,000）
Taxable Income 0
Withholding Tax 100
Total US Tax 100
Japan
Dividends Income 1,000
Exclusion @95% (950)
Taxable Income 50
Corp. Tax @40% 20
Total Japan Tax 20
+8
Total Tax 120- 292
Inter-Company Loan
US
Business Income 1,000
Interest Expense (1,000)
Taxable Income 0
Withholding Tax 100
Total US Tax 100
Japan
Interest Income 1,000
Exclusion Ｎ/A
Taxable Income 1,000
Corp. Tax @40% 400
ForeignTax Credit (100)
Total Japan Tax 300
Total Tax 400
+/- 0
- 280
- 280
60
62. 62
Tax Sparing Scheme
Scenario 2
Loan from Foreign Financier to Country X Company, but loan is channeled
through a New Zealand company
Loan
$200 Million
Loan
$200 Million
FOREIGN
FINANCIER
Interest
$15 million
COUNTRY X
COMPANY
NEW ZEALAND
COMPANY
Interest
$15 million
Sparing
63. 63
Tax Sparing Scheme
Loan
$200 Million
Scenario 3
Similar to scenario two, except two New Zealand companies are used – one to soak up
the tax sparing credits and the other to accumulate tax losses
Interest
$4.545 million
FOREIGN
FINANCIER
Interest
$10.455 million
Interest
$15 million
COUNTRY X
COMPANY
NEW ZEALAND
COMPANY No.1
NEW ZEALAND
COMPANY No.2
Loan
$139.4 million Equity capital
$60.6 Million
Loan
$60.6 Million
Sparing
64. 64 64
Tax Sparing Scheme
Country X Company pays $15 million interest to NZ Co
2. NZ Co 2 is taxed in New Zealand as follows:
Interest income
Interest expenses
New profit
Tax on net profit(33%)
Tax sparing credits(10% x $15 million)
Tax to pay
15,000,000
(10,454,545)
4,545,455
1,500,000
(1,500,000)
Nil_____
Sparing
65. Double Irish with a Dutch Sandwich
• Many US hi-tech companies (Apple, Starbucks,
Google, Microsoft, HP, and others) are known to
have used this techniques to shift profits to a low
or no tax jurisdictions.
• It involve sending profits first via first Irish
company, then to a Dutch company and finally to
a second Irish company headquartered in a tax
haven
• Search “Double Irish with a Dutch Sandwich” via
Google and other search sites. Many articles and
videos
66. 66
E-commerce Taxation
OECD Definition
E-commerce is a commercial transaction, involving both organizations
and individuals, that are based upon the processing and transmission of
digitized data, including text, sound and visuals images and that are
carried out over open networks (like, the Internet) or closed networks
(like, AOL or Yahoo) that have gateway onto an open network
OECD Guideline:
1. Neutrality
- Same as conventional trading
2. Efficiency
- Minimum and reasonable cost
3. Certainty and Simplicity
- Clear and understandable rules
4. Effectiveness and Fairness
- Right amount of tax
5. Flexibility
- Technological, commercial development of e-commerce
67. 67
Recent Trend & Development - I
• Reduction of corporate tax rate & increase of VAT tax
rate
• Introduction of transfer pricing rules and documentation
requirements*
• Scrutiny of tax haven countries*
– OECD Report on Harmful Tax Competition: An Emerging Global
Issue in 1999
– Tax Information Exchange Agreement (TIEA) –a transparency &
exchange of information for tax matters
– “Gray List” of tax havens – 12 TIEA to be off the list.
• Increase of international tax examiners in most countries
• Joint audit – US & UK, US & Canada
68. 68
Recent Trend & Development - 2
• Joint International Tax Shelter Information
Center (JITSIC) in Washington D.C. and
London formed by Australia, Canada, USA,
UK, and Japan
• Tax shelter regulations in the USA
• Impact of FIN 48- uncertain tax positions
• E-commerce taxation
69. 69
Tax Shelter Legislation in the USA - 1
• In post-Enron, US introduced in 2004
regulations to strengthen penalties for
corporate tax shelter activity.
• General definition –any method that
recovers more than $1 in tax for every $1
spent within 4 years
70. 70
Tax Shelter Legislation in the USA - 2
• The following transactions are required to be
disclosed on a taxpayer’s tax return
– Listed transactions by IRS
– Confidential transactions
– Transactions with contractual protections
– Transactions generating tax losses exceeding certain
stated amounts ($10 million in a single year and $20
million in multi years).
– Transactions resulting in a “significant” ($10 million)
book-tax difference
– Transaction generating a tax credit in excess of
$250,000 if the underlying assets is held less than 45
days.
71. 71
Tax Shelter Legislation in the USA - 3
• Every “organizer and seller” (e.g. accounting
firm, law firm, investment banker*, etc.) of
potentially abusive tax shelter is required to
maintain a list of any transactions that are
reportable transactions.
• Reliance on common law doctrines to
recharacterize transactions that may escape
statutory or regulatory provisions
– Sham transaction
– Economic substance
– Business purpose
– Step transaction
– Form over substance
72. 72
FIN 48 Uncertain Tax Positions - 1
• In 2006, Financial Accounting Standards Board
(FASB) introduced Financial Interpretation
Number 48 (FIN 48), a new interpretation of
FASB Statement 109 – Accounting for Taxes
• FIN 48 requires a review of a company’s tax
positions taken on all its tax returns. If a
position is uncertain, a related liability must be
recorded for the potential tax plus interest and
penalty.
– Public companies – 2007
– Private companies – 2008
73. 73
FIN 48 Uncertain Tax Positions - 3
• FIN 48 must be applied to all entities that are
included in consolidated financial statements of
a company, domestic and foreign.
• For the tax positions that do not meet the MLTN
threshold, companies must record the tax
liabilities
• IRS Commissioner announced a proposal to
require large businesses taxpayers to disclose
their uncertain tax positions and related
amounts on their tax returns – Road Map for IRS
audit
74. 74
FIN 48 Uncertain Tax Positions - 2
• FIN 48 requires companies to evaluate
their tax positions under two-step process:
– First, it is necessary to determine whether the
tax position is “more likely than not” (MLTN)
to be sustained by a taxing authority or court
based on technical merits
– If the MLTN threshold (generally referred as
50% test) is met, the second step requires to
measure the benefit
75. 75
Future Considerations
• For some of the tax authorities’ (e.g. Japan) prospective, the
key issue is how to prevent the erosion of taxation basis
• Laws and rules that meet the objective of fairness and
efficiency are sought by multinational companies.
• Expansion of tax treaty provisions to meet the changing time
– global business and internet
• Clarification and uniformity of source rules
• International cooperation? Governments have been reluctant
in this regard as they do not want to lose sovereignty over
their tax policy. If there is no merit to a country, how can we
expect to be cooperative.
• Tax authorities must know the behavior and motivation of
taxpayers so that they can collect tax revenue in cost effective
ways.
76. US Common Law Doctrines
– Sham transaction
– Economic substance
– Business purpose
– Step transaction
– Form over substance
Show economic factors, aside from tax factors, that
made the transaction worthwhile.
Potential to make money from the transaction
77. What You Should Have Learned From
This Course
• You just touched the surface of International
Taxation
• Understand risks and opportunities in
International Taxation
• Every country is different in tax laws, tax
enforcement, tax administration and tax culture
• Tax laws change constantly
• Learn to use outside tax professionals effectively
• Plan ahead as it is too late to do anything a
transaction is consummated
