Michael ferguson-sic-2011

The way we developour people

Seattle Interactive ConferenceNovember 2, 2011

© 2011 EYGM Limited. Slide 2

Your presenters

► Michael Ferguson► International Tax Services, Seattle

► Troy Foss► International Tax Services, Seattle

► Paul Fleming► International Tax Services, Dublin & New York


Agenda

► Global Taxing Jurisdiction► US Tax System ► Foreign tax credit (FTC) mechanism► U.S. Tax Deferral► Transfer Pricing► Investing in Ireland


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?


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


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?


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


Deferral example: Income earned in a foreign base company

Transfer price (A)

Profit = B – A

Transfer price (B)

Foreigncustomers

Foreign

marketing

subsidiary

Foreign

principal

company

$

$$

US parentcorporation


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 withrelated parties


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 transferpricing provisions

► OECD guidelines


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 saleof widget Resale

of widget

Transfer price = ?

Foreign

customer

Resale price= $100

Manufacturingcost = $60

Marketingexpense

= $15

$

Foreign marketing subsidiary

US parent corporation


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”


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.


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

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


Summary of the Irish Corporate Tax Regime

► 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


Irish 12.5% Tax Regime

► 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

Michael ferguson-sic-2011

Technology

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