Multistate Tax Symposium - Deloitte United States · 2020. 9. 1. · Mergers, acquisitions, &...

The 2020 National Multistate Tax SymposiumMastering the Art (and Articulation) of State Tax—Distilling the Complex

January 29-31, 2020

Mergers, acquisitions, & restructurings in a post – tax reform worldWilliam M. Backstrom, Jr., Jones Walker, LLPAlexis Morrison-Howe, Deloitte Tax LLPKevin O’Brien, 21st Century Fox (retired)January 31, 2020

3The National Multistate Tax Symposium: January 29-31, 2020Copyright © 2020 Deloitte Development LLC. All rights reserved.

• C-Suite Communications in the Context of Restructuring Transactions

• Doing Your Due Diligence

−Federal Tax Reform (TCJA) Items to Watch For

−Impact of Wayfair on Nexus Analysis and Potential Exposures

−Practical Considerations and Traps for the Unwary

• Closing the Deal

−State/Federal Conformity Issues in Corporate Transactions

◦ Special considerations for foreign operations

−Specific Debt Issues in Structuring Transactions

Agenda


The Deal Table

BOARD ROOMCEO

Fed.

Tax

Prof.

CFO

Intl.

Tax

Prof.

V.P.

Tax

Tax

Coun.

Corp.

Treas.

Corp.

Treas.

COO CIO G.C.V.P.

Biz

Unit

V.P.

Biz

Unit

V.P.

Biz

Unit

V.P.

Biz

Unit

Ex.

V.P.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX


• Key Strategies for SALT Professional

−Get to the table early and stay at the table until the deal is done

−Be a deal-maker and not a deal-breaker

• C-Suite Communication Strategies

−“It’s not what you know, it’s how you communicate what you know.”

−Understand what is and is not important to senior executives

−What do the senior executives need to know vs. what you want them to know

−Understand the goals and metrics of the proposed transaction and prepare accordingly

−Get to the point; you only have a limited amount of time

−Be clear and precise

−You know it is coming, so be prepared for the senior executive’s “challenge”

C-Suite Communications in the Context of Restructuring Transactions


In Summary…

Communicate Your SALT Plan Clearly

7

Due Diligence Process


Due Diligence Process

Identify/Estimate Tax

Exposure

Determine ability todefend tax positionson audit

Analyze quality of seller’s

tax personnel

Identifytax reporting

processesand practicesof the seller


•What Should SALT Professionals Throw Out?

−Nothing

−Tried-and-true due diligence strategies may still be effective

−We just have to refine them in light of TCJA and Wayfair

Due Diligence After TCJA and Wayfair


•Federal and State Income Tax Accounting

−Examine Target’s current and deferred tax accounts (federal and state)

−Has Target properly accounted for all TCJA implications?

−Has Target undergone any restructuring transactions to address implications of TCJA?

• Intercompany Flows

−Review organizational structure, intercompany transactions, intercompany loans and account balances, transfer pricing, Subpart F exposure

−Especially important in light of TCJA

Due Diligence: Tax Reform Items to Watch For


•Section 965/GILTI/FDII

− Proper application of state guidance

− Apportionment/Factor Relief

− Impact on any dividends paid by CFCs

−Section 245A conformity

−Has Target properly addressed any potential exposure for Subpart F income and GILTI?

−Allocation of GILTI between Seller and Buyer



•Section 163(j) (Business Interest Expense Limitation)

−Proper application of state guidance

−Value of Carryovers

◦ Impact of Section 382

◦States that allowed full deduction in year incurred and future modifications

◦Future state guidance regarding sharing in combined group

−Has Target implemented any structural changes to address the implications of Section 163(j)?



•Section 965 (Repatriation)

−Has Target properly addressed the SALT implications of the federal transition tax?

−Identify and quantify impact of any actions taken by Target to limit the implications of the transition tax?

−Do any of Target’s actions trigger the IRC §965 anti-abuse provisions?

−Which entity bears the burden for the transition tax and any installment payments?



•Section 267A (Hybrid Entities/Hybrid Transactions)

−Buyer must conduct due diligence to understand complete tax status of cross-border, intercompany flows

−Buyer must understand U.S. and non-U.S. tax implications of all a U.S. Target’s offshore affiliates to which the target pays royalties or interest, including timing of income inclusions and deductions

−Does new IRC §267A permanently disallow royalty or interest deductions? If so, is the amount at issue material and can the issue be addressed in post-acquisition structural changes?



•Closing Thoughts on Due Diligence Post-TCJA

−Tried-and-true due diligence still works; but may need to be refined

−More important now to work closely with accounting professionals to review Target’s federal and state income tax returns, tax reserve provisions and intercompany flows

−Look more closely, and as early as possible, at Target’s structure and operations, especially changes intended to address TCJA changes

−Carefully consider necessary changes to transaction documents

−Focus on integration after Target is acquired



•South Dakota v. Wayfair, Inc. (2018)

−Bright line threshold above de minimis

−Non-retroactive

•Applicability to income tax

•When did an obligation begin?

−States with existing economic nexus rules

−States that pass similar “Wayfair” statutes applying to income tax

•Continued application of Public Law 86-272

•Special issues for foreign (non-U.S.) remote sellers

Due Diligence: Impact of Wayfair on Nexus Analysis and Potential Exposures


•Potential for voluntary disclosure agreement or negotiated settlements

•Ability of systems to quickly pivot to address issues identified in diligence

Due Diligence: Impact of Wayfair on Nexus Analysis and Potential Exposures (cont’d)


•Other “Taxes”

−Property taxes

−Gross receipts, occupational license and similar taxes

−Margin tax, CAT and similar “unusual taxes”

−Transfer taxes

−Regulator licenses and fees

−Employment taxes

−Unclaimed property

−PRACTICE POINTER – DON’T FORGET LOCAL FEES AND TAXES

Due Diligence: Practical Considerations and “Traps for the Unwary”


•Remember:

−Business and tax incentives and credits – don’t leave money on the table

•Transaction Documents

−Tried-and-true strategies for working with deal team on transaction documents may still be effective

−Goals for SALT Professional with Transactions Documents

◦Get involved early and stay involved until the deal closes

◦Request and review all versions of all transaction documents with SALT implications

◦Assist deal team to address SALT issues and implications

◦Assist deal team regarding necessary SALT-related closing documents

Due Diligence: Practical Considerations and “Traps for the Unwary” (cont’d)

20

Closing the Deal


Closing the Deal: State/Federal Conformity Issues in Corporate Transactions

•Types of analysis generally required

−Separate company states

−States that conform to the federal consolidated return rules (“CRR”)

−States that do not conform to the CRR

−Non-income tax impacts (e.g., net worth tax)

•Differences between federal and state filing groups

•Apportionment treatment



Example – Parent to Subsidiary Contribution

Qualifiedproperty

Parent

Sub 2

Sub 150%

50%

100%

• Parent owns 50% of Sub 2 directly and the other 50% through Sub 1 and contributes qualified property

•Section 351 requires 80% control of entity after contribution*

• Treas. Reg. 1.1502-34 may allow attribution of ownership between members of a consolidated report

−Contribution may not qualify as a Section 351 contribution in states that do not follow the CRR

* Analysis highly simplified for purposes of illustration only

Similar issues can occur in context of Section 332 liquidation or Section 368 reorganization



Example – Parent to Subsidiary Contribution – Multiple Contributions

Qualifiedproperty

Parent

Sub 2

Sub 150%

50%

100%

• Parent and Sub 1 both contribute property to Sub 2 as part of a plan of contribution

• Treas. Reg. 1.351-1 requires test of control be done at the close of a series of contributions that are part of a plan. Section 351 allows for multiple contributors to be in “control” post contribution*

•Contribution may still qualify as a Section 351 contribution even in states that do not follow the CRR (assuming other requirements are met)


Qualified

property



Example – Special considerations for foreign operations

Foreign Co

2US

CFC

•US sells stock of CFC to Foreign Co 2

•Section 1248 generally recharacterizes gains recognized on the sale of foreign stock as a distribution of all of the accrued E&P of the transferred entity. Some or all of the E&P at issue may be previously taxed E&P.*

•States may not conform to Section 1248 recharacterization and treat the transaction as capital gain.

•States may not allow a full dividends received deduction

•Worldwide states may be subject to elimination


Foreign Co

1

Sale of CFC stock

Similar issues can occur in context the liquidation of a foreign entity


Closing the Deal: Specific Debt Issues in Structuring Transactions

•Entities within the structure taking on debt

−State footprint

−Separate company section 163(j) limitations

•Co-obligor treatment within debt documents

−Debt allocation agreements

•Assumption of debt

•Structuring of acquisition vehicles with debt

•Practical considerations


Contact information

Kevin O’Brien

21st Century Fox (Retired)

[email protected]

William M. Backstrom, Jr.

Jones Walker, LLP

[email protected]

Alexis Morrison-Howe

Deloitte Tax LLP

[email protected]

mailto:[email protected]




This presentation and related panel discussions contain general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.

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Copyright © 2020 Deloitte Development LLC. All rights reserved.

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Multistate Tax Symposium - Deloitte United States · 2020. 9. 1. · Mergers, acquisitions, &...

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