Tax Executives Institute
Kalamazoo Chapter
Repatriation Planning
Peter M. Daub, Baker & McKenzie, LLP
Thursday, March 17, 2011
Your Trusted Tax Counsel
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used
in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly,
reference to an “office” means an office of any such law firm.
Presenter
Peter M. Daub (Washington, D.C.)
peter.daub@bakermckenzie.com
(202) 452-7081
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AGENDA
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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
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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
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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
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Restructuring to Avoid Anti-Hopscotch Example -Section 304 Transaction
Advantages
– Section 304 deemed dividend from
CFC-2 earnings direct to US parent
U.S.
Parent
– No GRA needed. Treas. Reg. §1.367(a)9T
However…
CFC-1
(Low-tax)
– Dividend constrained by value of CFC-3
CFC-3
$
– CFC-2 may not be desirable holdco
Variations
CFC-2
(High-tax)
CFC-3
shares
– 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
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Restructuring to Avoid Anti-Hopscotch Internal
Foreign-to-Foreign Inversion
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
Before
After
US
US
common and
preferred stock
LT
CFC
Hook stock
Key Points
– Foreign-to-foreign section 351
exchange or “B” reorganization
– Need GRA
HT CFC
Hold Co
HT CFC
Hold Co
LT
CFC
HT
CFCs
– Need business purpose
– Valuation considerations
– Can be long term solution
HT
CFCs
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Restructuring to Avoid Anti-Hopscotch Spin-off
of High Tax Group
Steps
US
– LT CFC distributes stock of HT CFC
Holdco to US
HT CFC Holdco stock
Key Points
– Can qualify as tax free section 355
spin-off
LTC
CFC
– Need business purpose
– No GRA or e&p pick-up
– Most elegant long term solution
HT CFC
Hold Co
HT
CFCs
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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
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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. §
1.451-5 or Rev. Proc. 2004-34?
• 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?
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Return of Capital Distribution
US Parent

return of capital
distribution
12/30/Y1

cash loan 12/28/Y1
Third Party
Lender
Foreign Holdco


repay loan with cash on 1/2/Y2
cash dividend 1/2/Y2
Foreign Sub

Buyer
sale of assets 1/1/Y2
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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?
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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)
OPCO’s attributes are key to ensuring
this structure works
low-tax earnings
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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
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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)
merger
US Sub
(US)
• Assume US Parent has a full FMV basis in the shares of Target
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Section 368(a)(2)(D) Reorganization Issues
• Outside the scope of Notice 2008-10 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
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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
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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
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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
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Outbound “F” Reorg. Example – Steps 2 and 3
US Parent

shares of Target
Foreign Newco
Target LLC

Conversion to LLC
(deemed
liquidation)
Target CFCs
US Tax Consequences
• Treated as an outbound “F” reorganization
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Outbound “F” Reorg. Example – Step 4
US Parent
Foreign Newco

IP and CFC shares
Target LLC
Target CFCs
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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
US Parent
(US)
• to avoid section 956
Foreign Newco
US Newco
Target CFCs
Target LLC
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Purchase of Parent Stock Used in Foreign Acquisition

Key Points
– CFC purchase of new Parent
stock non-taxable under section
1032
Parent
Shareholders

– 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
Stock
$
Target
Stock
CFC
Parent
Stock
Foreign
Target
Foreign
Target
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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 200430026 concludes the reimbursement is not a
dividend to extent of section 83 spread
• Questions  Is an advance agreement to reimburse required?
 GAAP implications?
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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. 99-32 repatriation of agreed section 482 adjustments
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Dueling Loan Strategy
USCO
2A
1B
2B
1A
CFC OPCO 1
(Low-Tax)
12/31 Year end
11/30 Year end
CFC OPCO 2
(Low-Tax)
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Dueling Loan Strategy
• 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
–
–
–
–
–
–
–
–
12/01/03-01/14/04
01/15/04-02/28/04
03/01/04-04/14/04
04/15/04-05/31/04
06/01/04-07/14/04
07/15/04-08/30/04
09/01/04-10/14/04
10/15/04-11/31/04
OPCO Two
X
X
X
X
X
X
X
X
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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. 89-73, 1989-1 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 § 1.956 – IT(b)(4)
 Section 269
 Conduit
 Section 7701 (o)
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Rate-Hyping

Example 1. USCO has $100 of U.S. Source Income and
$100 of Foreign Source Income subject to $0 of foreign
tax

Example 2. Same as 1, but USCO triggers a $100 foreign
source dividend subject to $70 of foreign tax credits
Income
$200
Income
$300
Tentative U.S. Tax
$ 70
Tentative U.S. Tax
$105
Tentative FTC
Section 904 Limitation
FTC
$ 0
$35 *
Tentative FTC
Section 904 Limitation
FTC
$70
$70 *
Total U.S. Tax
($ 0)
$ 70
* Assumes all foreign source income is in the general
basket
Total U.S. Tax
($70)
$ 35
* Assumes all foreign source income is in the general
basket
OBJECTIVE: MOVE FROM EXAMPLE 1 to EXAMPLE 2 WITHOUT PAYING MORE FOREIGN TAX
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Rate-Hyping
USCO
CFC 1 Stock Contributed
CFC 1
<$70 Deficit>
CFC 2
$70 E&P $30 Taxes
CFC 1
<$70 Deficit>
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Hovering – Rate Hyping
EXAMPLE: CFC2 acquires all of the assets of a CFC 1 in a tax-free transaction on
December 31, 2001. Each has the following attributes as of December 31, 2006:
Acquirer
Target
Pool
E&P
Taxes
Pool
E&P
General Basket
$ 70
$ 30
General Basket
($70)
Taxes
$ 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
$ 30
($ 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.
Pool
General Basket
E&P
$ 70
Taxes
$ 60
(Hovering) (Hovering)
(Deficit) (Taxes)
($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.
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