Michael ferguson-sic-2011
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The document summarizes a presentation on international tax given at a Seattle conference. It discusses key aspects of the US and Irish tax systems, including: - The US worldwide tax system and how it differs from territorial systems - How the US foreign tax credit works to prevent double taxation - How US companies can defer domestic taxes on foreign subsidiary earnings until repatriation - Transfer pricing policies and challenges in allocating profits between jurisdictions - Ireland's attractive tax features for multinational corporations like its 12.5% corporate tax rate and participation exemption regime.
Michael ferguson-sic-2011
- 1. Seattle Interactive Conference November 2, 2011
- 2. Your presenters Michael Ferguson International Tax Services, Seattle Troy Foss International Tax Services, Seattle Paul Fleming International Tax Services, Dublin & New York
- 3. Agenda Global Taxing Jurisdiction US Tax System Foreign tax credit (FTC) mechanism U.S. Tax Deferral Transfer Pricing Investing in Ireland
- 4. Global Taxing Jurisdiction Global vs. Territorial Tax Systems Territorial Tax System: Many countries impose tax on a territorial basis (that is, on income earned within that jurisdiction). Worldwide Tax System: The United States taxes global profits. The extraterritorial approach of the United States tax system creates the risk of double taxation. E.g., What happens if the U.S. assesses tax on corporate profits already taxed in another country?
- 5. United States system United States taxes U.S. persons on a worldwide basis: US citizens Resident aliens Domestic corporations U.S. taxes Foreign persons on a source basis: Non-resident aliens Foreign corporations Relief from double taxation – the foreign tax credit
- 6. Foreign Tax Credit What is the FTC’s purpose? What can be claimed as a credit? Whose taxes? Which taxes? How does the FTC mechanism work? What drives the FTC mechanism?
- 7. U.S. Taxation on Subsidiary Earnings Why do most large U.S. multinational technology companies have foreign principal sales companies? U.S. companies are generally able to defer U.S. tax on foreign earnings until repatriation. This tax mechanism is often referred to as the U.S. tax deferral system. Example: U.S. parent company earns $200 global profit. $100 is earned in the U.S. and $100 is earned in Ireland. Assume U.S. corporate rate is 35% and Irish rate is 12.5%. What current tax is due? What tax is deferred? Anti-deferral rules. Financial Reporting Considerations – APB23
- 8. Deferral example: Income earned in a foreign base company Transfer price (A) Profit = B – A Transfer price (B) Foreign customers Foreign marketing subsidiary Foreign principal company US parent corporation $ $ $
- 9. Transfer Pricing - Policy background US rules are designed to prevent the improper shifting of income, deductions, credits and allowances among related persons Concern exists that multinationals have a strong incentive to shift income to low-tax jurisdictions or shift deductions to high-tax jurisdictions through transactions with related parties
- 10. What is transfer pricing? Establishing prices for transactions between related companies in different tax jurisdictions Section 482 grants broad powers to the IRS to reallocate income and deductions to prevent tax evasion or to clearly reflect income Applicable standard is that of an uncontrolled taxpayer dealing at arm’s length with another uncontrolled taxpayer Foreign countries often have their own transfer pricing provisions OECD guidelines
- 11. What is transfer pricing? Group profit = $25 ($100 - $60 - $15) Impact of alternative transfer prices: Transfer price of $60 would allocate entire $25 profit to foreign subsidiary Transfer price of $85 would allocate entire $25 profit to US parent Transfer price between $60 and $85 splits profit between USP and FSUB Export sale of widget Resale of widget Transfer price = ? Foreign customer Resale price = $100 Manufacturing cost = $60 Marketing expense = $15 Foreign marketing subsidiary US parent corporation $
- 12. Ireland – Key Tax Features Irish Government commitment to 12.5% Tax Rate Transfer pricing regulations introduced in 2010 for trading transactions Generous domestic exemptions for withholding taxes on Royalties Interest Dividends Extensive Treaty Network - Treaties signed with 64 countries (56 in effect) Attractive Research & Development credit regime 25% tax credit in addition to deduction at 12.5% for qualifying R&D expenditure (including buildings and plant and machinery) Cash refund scheme (refunds available for excess credits) No requirement for Irish entity to own the developed IP. Competitive Intellectual Property (IP) amortization regime Broad definition of Qualifying IP. Ability to migrate IP offshore and avoid Irish “exit charge”
- 13. Why Ireland? Passport to EU markets (and beyond) Stable political & regulatory environment Business friendly operating environment English is the spoken language Maximum time-zone overlap with Asia and North America Access to skilled workforce Low taxes Ireland is home to some of the world’s leading companies: 8 of top 10 pharmaceutical companies 8 of top 10 technology companies 15 of top 25 in medical devices 50%+ of leading financial services companies Strong clusters of expertise Competitive location and high-skilled workforce: 1st for availability of skilled labour 1st for finance skills 1st for real corporate taxes 3rd for flexibility and adaptability of people 3rd for being open to new ideas 4th for labour productivity * Source IBEC Ireland (www.ibec.ie/ireland) Over 960 MNCs have established operations in Ireland employing 138,000 people. These companies operate across the full spectrum of industry sectors . Page
- 14. Operating in Ireland Legal Structure Republic with a written Constitution Common law system, similar to England EU has harmonized many areas of the law Large amount of legal precedent available Considerable legal certainty Modern legislation Legal Framework Employment law – flexible relative to Continental Europe Strong protection for IP Data protection follows EU rules Commercial court internationally respected Page Incorporation of an Irish Company Possible to operate via Irish or foreign incorporated entity Irish company available within 5 business days Minimum of 2 directors (natural persons) One director to be EEA resident, or … … bond (€25,395) – 2 weeks to process Duties: skill, care and due diligence
- 15. Summary of the Irish Corporate Tax Regime Page Low corporate tax rates 12.5% on trading income 25% other income and gains Business friendly regime rulings possible but not required low compliance costs stable corporate tax environment Full Member of EU and OECD Extensive tax treaty network 64 signed 9 in negotiation Strong holding company regime exemption from capital gain on sale of many participations various reliefs to facilitate nil Irish tax cost on foreign dividends tax incentives for certain expatriates coming to Ireland Repatriation 0% dividend withholding tax available under extensive domestic relief, EU parent/subsidiary directive or tax treaties structures exist to allow repatriation to intermediate holding company in 0% or low-tax location Financing no thin-capitalisation rules Irish company can be entirely debt-funded tax-efficient financing of Irish operations to reduce overall funding cost relief for interest on borrowings to fund overseas subsidiaries, JVs unlike many other holding company locations Other Issues no controlled foreign companies or anti-haven provisions no capital duty
- 16. Irish 12.5% Tax Regime Page 12.5% tax rate for trading income 25% tax rate for passive income and gains No ruling required - advance opinions may be available No formulaic rule for trading requires people on the ground in Ireland responsibility appropriate to Irish company's activities and profits very broad in its application
Editor's Notes
- #3: Take a few minutes to introduce yourself to the group. Consider sharing the following information about yourself with them: Experience Family Hobbies/interests Personal objective for the session
- #4: Briefly describe how the objectives will be met by explaining the outline of the session. Before moving on to the next topic, ask the participants if they have any questions at this time.