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High-profile struggles of giants such as General Motors, Chrysler and Ford have brought to the forefront the increasingly volatile market conditions facing today’s automotive industry. Uncertainty surrounding macroeconomic challenges and the liquidity of original equipment manufacturers (OEMs), as well as the supply base, makes the near-term seem bleak and uncertain. As a result, automakers and their suppliers, whether distressed, underperforming or healthy, are filled with a greater sense of urgency to stop crises in their tracks, rapidly improve performance and create sustainable growth.
The consumer packaged goods industry is at a crossroads. Given current economic realities, these organizations continue to be challenged as they balance gaining share of the consumer’s wallet while providing value to the consumer. Faced with pressures from retailers, the diminishing impact of advertising, as well as competition from high-quality private label offerings, many consumer packaged goods organizations are losing critical brand relevance and positioning in the retail battleground.
The energy industry is undergoing a transformation as the rapid growth of North American crude oil and natural gas production changes global energy supplies and impacts the allocation of capital and corporate strategies. This transformation is creating both opportunities and challenges for companies in all sectors of the industry.
The credit crisis has produced a global shockwave for the financial services industry. Lingering pools of troubled assets, increased regulatory implications, government assistance, as well as the fall of major players continue to present unique challenges along with complex, mounting pressures and aggressive legislative developments.
Healthcare organizations and their stakeholders face unprecedented challenges in managing the business of healthcare. These mounting pressures can undermine – if not outright threaten – the sustainable delivery of quality services.
Technology companies face myriad challenges to not only meet financial goals, but to remain competitive in a constantly changing and innovative landscape. Consumers are increasingly savvy in technology capabilities and, consequently, are more sophisticated in their demands. In an economic downturn, technology businesses face budget cuts, declining sales and a decrease in consumer demand. To weather the storm, cost savings are crucial to firms that are struggling amid distressed market conditions.
Organizations and regulators across the insurance industry face complex challenges to improve performance, meet financial and operational targets, and navigate compliance issues. The Insurance Advisory services practice of Alvarez & Marsal (A&M) draws upon the firm's distinctive operational heritage to deliver results.
Manufacturing, which accounts for 18 percent of world GDP, is now facing its largest decline since World War II. Global competition, complex company structures, and emerging markets are challenging current business capabilities, while providing opportunities for prepared companies to gain market share. Input costs are challenging and IT and human capital investments are crucial considerations for all manufacturing businesses.
As communications, media, and entertainment companies continue to combat the complex challenges presented by the digital movement, plummeting ad revenues and consolidation, many recognize the significant opportunity the current landscape presents for improving the performance of their operations.
A&M helps public sector leaders to thoroughly analyze operations, seize opportunities and effect functional change to dramatically impact service delivery and budget management – in any economic climate.
How can A&M Real Estate Advisory Services ("A&M REAS") help your company – anywhere in the world? Today’s real estate landscape is more complex than ever – sovereign debt burdens, defaults and deleveraging, regulatory compliance, long-range sustainability and creative re-use, alignment between asset management strategy and property management implementation, and billions of dollars of dry powder looking for the optimal risk-adjusted return opportunities. A&M Real Estate Advisory Services professionals are experienced at addressing all of these issues and more.
As retailers continue to face a weak economic environment, the landscape is changing dramatically – with no signs that the pace of change is slowing.
Cutthroat competition and the increasingly unforgiving credit markets are creating a variety of challenges for transportation and infrastructure companies. In an industry that requires significant capital expenditure and investment, and with long-term high fuel prices putting pressure on businesses, leverage is often necessary to maintain liquidity.
September 30, 2008
Now that summer is over and the kids are back at school, you turn your attention to the 2009 forecast and realize that one of the rules your company has been relying on for the past few years to maintain deferral of U.S. taxation on foreign earnings is about to sunset. It is uncertain whether the Subpart F look-through rule will be extended. What should you do while you wait to learn the fate of this deferral rule? One option is to restructure your company’s deferral strategy through several available tax planning mechanisms. However, if your company, like many other companies, might have trouble taking these measures by the end of the year, this article provides some practical examples of what you could do during the last quarter of 2008 to brace yourself for the temporary or permanent lapse in the Subpart F look-through rule.
As we noted in Issue 23 of the Tax Advisor Weekly, when the Subpart F look-through rule under Internal Revenue Code Section 954(c)(6) was first enacted, it created new and improved opportunities for U.S. multinationals to effectively manage their foreign earnings and to keep their effective tax rate (ETR) stable and their corporate structures simple. Before its enactment in 2006, companies frequently relied on entity classification (check-the-box) planning to achieve deferral, the downside being a more difficult repatriation due to averaging of high-taxed and low-taxed earnings. With the enactment of the look-through rule, deferral was still achievable while repatriation became significantly more manageable and less costly.
In general, the look-through rule provides that income in the form of dividends, interest, rents and royalties received or accrued by one controlled foreign corporation (CFC) from a related CFC is not immediately taxed in the U.S. by its direct or indirect U.S. shareholder as a deemed dividend (that is, as Subpart F income), to the extent attributable or properly allocable to income of the distributing CFC that is neither Subpart F income nor income treated as effectively connected with the conduct of a U.S. trade or business. Thus, if the CFC payor generates active foreign income, the passive income it pays to the related CFC (that would otherwise be taxed in the U.S.) is exempt from immediate taxation under the look-through rule.
The following is an example of how the look-through rule operates:
U.S. Parent is the parent company of a multinational group that has operations in high-tax jurisdictions (where income is taxed at a minimum of 31.5 percent) through HoldCo1 in country A and low-tax jurisdictions (where income is taxed at a rate lower than 31.5 percent) through HoldCo2 in country B. HoldCo1 has two foreign operating companies: OpCo 1 in country C and OpCo2 in country D. HoldCo2 has three foreign operating companies: OpCo3 in country E, OpCo4 in country B and OpCo5 in country G held as a subsidiary of OpCo4.
The five OpCo’s do not receive any passive income and, instead, only receive revenue from active business operations outside the United States. Additionally, HoldCo2 has a dedicated finance subsidiary (FinCo) set up in country F, where it enjoys a favorable regulatory system and a reduced tax rate and loans funds to all five operating companies.
In this example, the group is structured in a tax-efficient way by taking local interest deductions in higher-tax jurisdictions and having inclusions in lower-tax jurisdictions without triggering current U.S. taxation on these earnings. In the high-tax jurisdictions, OpCo1 and OpCo2 distribute dividends to HoldCo1. In the low-tax jurisdictions, OpCo3 and OpCo4 distribute dividends to HoldCo2, while OpCo5 distributes dividends to OpCo4. FinCo receives interest income from all five operating companies.
The dividends received by HoldCo1, HoldCo2 and OpCo4 and the interest income received by FinCo are excluded from Subpart F income and not taxable in the U.S. by U.S. Parent under the look-through rule because the underlying earnings are derived from payors’ active foreign business operations.
Enacted in 2006 with the goal of enhancing the global competitiveness of U.S. multinationals by allowing them to redeploy active foreign earnings with no additional tax burden, the provisions contained in the look-through rule have significantly helped the vast majority to indefinitely defer U.S. taxation on their foreign earnings and profits. Its applicability, however, is limited to fiscal years of foreign corporations beginning no later than December 31, 2008.
There is in Congress a bill extending the applicability of this rule for one more year to fiscal years beginning on or before December 31, 2009. This bill has already been voted on by the Senate, but with the House and Senate debating amendments to the bill, with the presidential elections looming and with all the discussions about potential tax increases in sight, there is considerable uncertainty as to whether this look-through rule will be extended. Even if the provisions are extended for one additional year, there could be a temporary lapse if they are not extended by December 31, 2008.
Upon the expiration of the look-through rule that is being relied upon to achieve deferral, the tax consequences in the above example will be as follows:
Clearly, the expiration of the look-through rule might increase your Subpart F income and cause immediate taxation of more foreign earnings in the United States. The ideal response would be for you to alter your deferral structure before the end of 2008. However, as previously mentioned, the look-through rule could be extended another year(s). So, if you prefer to take the “wait and see” approach, there are some things you should do now to prepare for the potential loss of the look-through rule.
The following are not new concepts but rather a review of some of the considerations that you might have put aside if you had the benefit of avoiding Subpart F income in the past few years:
Do not wait until it has been decided whether the look-through rule has been extended. Instead, start evaluating the situation now. If you can alter your deferral strategy by the end of the year, go for it. In conjunction with that approach, or alternatively, we suggest you look at the tax profile of your U.S. companies and your CFCs to evaluate the impact on your U.S. financial statements and U.S. income tax returns of the look-through rule not being extended. The additional taxable income in the U.S. might require you to adjust estimated income tax payments in 2009, recalculate the company’s effective tax rate, evaluate your APB 23 position and appraise whether valuation allowances are needed on foreign tax credits that flow up to the U.S. shareholder with the deemed dividends.
Once your tax profile is established, you can take some relatively simple actions to minimize the impact of the additional earnings in the U.S., such as altering cash flows to utilize the previously taxed earnings to bring cash back to the U.S.
Finally, there may seem to be quite a bit of time to accomplish the above between now and the end of 2008. But the kids will be home for winter break before you know it.
As provided in Treasury Department Circular 230, this e-newsletter is not intended or written by Alvarez & Marsal Taxand, LLC, to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Alvarez & Marsal Taxand, LLC distributes a complimentary electronic newsletter to subscribers on a weekly basis. A&M Tax Advisor Weekly provides comprehensive and timely insight on a wide range of taxation issues including international tax, state and local tax, incentives and current issues. Readers are reminded that they should not consider these documents to be a recommendation to undertake any tax position, nor consider the information contained therein to be complete. Before any item or treatment is reported, or excluded from reporting on tax returns, financial statements, or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in these releases may not continue to apply to a reader's situation due to changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
Senior Director, Washington D.C.
Fabio Gadelha, Senior Associate, contributed to this article.
|04/15/08||Treasury Refreshes the Application of Subpart F to Contract Manufacturing|
|12/06/07||Stay the Course — Check-the-Box Regulations Still Valid|
|06/08/06||The TIPRA Sub F Look-Thru Rule: Satisfy Your Repatriation Hunger|
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