The American Jobs Creation Act of 2004 - International Tax Provisions December 9, 2004 Walter Kolligs, Principal Ernst

2. Overview ETI Repeal Exploring the Implications of New §965 – The Repatriation Incentive Repatriation Planning Other International Provisions

3. ETI Repeal Generally repeals ETI for transactions after December 31, 2004 September 17, 2003 binding contract exception Transition relief 2005 – actual benefit under current law x 80% 2006 – actual benefit under current law x 60% EU has concerns regarding the ETI transition rules

5. Repatriation Incentive – General Rule 85% dividend received deduction on extraordinary cash dividends of a CFC received by a U.S. shareholder for taxable years beginning in 2004 or 2005 (but not both) Many provisions in the statute are vague Expect guidance on key terms and requirements by year-end

6. Repatriation Incentive – Dividend Definition Cash dividends are eligible for the DRD The statute indicates that §78 gross up for §902/960 credits attributable to deductible dividends is not eligible for dividends received deduction. However, the Technical Corrections bill will correct this drafting error §367 inclusions, §1248 inclusions, or §956 inclusions are not “dividends” but cash proceeds from a §367(b)/§332 liquidation are treated as dividends May cherry-pick which dividends qualify

7. Repatriation Incentive – Dividend Definition (continued) Cash dividends paid by lower tier CFCs may also qualify but only to the extent Cash dividend to CFC recipient constitutes foreign base company FPHC income in year of election, and Cash is ultimately distributed to U.S. shareholder in year of election Query: Does a CFC have sufficient cash to pay a large dividend?

8. The Repatriation Incentive - Limitations Limitations on dividends eligible for DRD Greater of: $500 million Permanently reinvested earnings under APB 23 per applicable financial statements Disclosed U.S. tax pursuant to APB 23 on permanently reinvested earnings (per applicable financial statements) divided by .35 Amount in excess of prior year base period (i.e., extraordinary dividend amount) Reduction for increased indebtedness of CFCs U.S. investment requirements

9. The Repatriation Incentive – Base Period Maximum extraordinary dividend is the dividend amount in excess of the base period All dividends, including property dividends taken into account in determining current amounts in excess of base period (“extraordinary dividends”) Base period amount is average dividends of 3 of the prior 5 taxable years ending before June 30, 2003, dropping the highest and lowest dividend years

10. The Repatriation Incentive – Base Period (continued) Base period dividends has expanded definition. Includes: Any actual dividends, including non-cash dividends PTI distributions of Subpart F income Section 956 inclusions

11. The Repatriation Incentive – Foreign Tax Credit Implications (continued) Non-deductible dividends Taxable income may not be less than the non-deductible CFC dividends for the year May be offset by any FTCs or alt. min. credits May not be offset with NOLs or other credits Expenses not deductible to the extent allocated and apportioned to DRD portion of dividends Committee reports indicate that an indirect allocation and apportionment method likely will not apply

12. The Repatriation Incentive - Limitation Financial statement limitation merely serves as a cap on amount extraordinary dividends. Other than this cap, the legislation requires no correlation between actual repatriations for which a deduction is claimed and the specific amounts of the earnings of any subsidiary for which permanent reinvestment representations have been made.

13. The Repatriation Incentive – Limitation (continued) Applicable financial statement Audited financial statement certified on or before June 30, 2003 as being prepared in accordance with GAAP; the purpose of which is to report to creditors, report to shareholders, or any other substantial non-tax purpose A financial statement that is required to be filed with the SEC is an applicable financial statement provided it is filed on or before June 30, 2003

14. The Repatriation Incentive – Reduction for CFC Indebtedness Extraordinary dividend amount reduced by total increased indebtedness of all CFCs due to U.S. related parties during measurement period Measurement period October 3, 2004 through year end in which DRD election is made All CFCs treated as a single CFC Indebtedness between CFCs disregarded Unclear how borrowings of split ownership CFCs are treated Definition of indebtedness unclear Netting of payables and receivables Treatment of accounts payable an accrued expenses arising in the ordinary course of business

15. The Repatriation Incentive – Reinvestment Requirement Extraordinary dividend must be reinvested in U.S. pursuant to a domestic reinvestment plan Funding worker hiring and training Infrastructure Research and development Capital investment Financial stabilization of the corporation for purposes of job creation or retention No time limitation placed on reinvestment requirement No incremental investments requirement (e.g., spending repatriated funds on recurring R&D or capital spending qualifies) Guidance expected before year-end!

16. The Repatriation Incentive – Reinvestment Requirement (continued) Cannot be used for payment of executive compensation The domestic reinvestment plan must be: Approved by the president, CEO or comparable officer of the U.S. shareholder before the payment of the dividend Subsequently approved by the board of directors, management committee, executive committee or similar body How to track the reinvestment Taxpayers may want to use dedicated bank accounts to fund qualified investments and/or establish annual reports to board of directors on use of repatriated extraordinary dividends for which DRD was claimed However, senior IRS officials have stated publicly that dedicated bank accounts likely would not be required

17. Repatriation Incentive – Other Considerations How will pre-enactment dividends be treated? Whether a stock repurchase program qualifies as “financial stabilization” Whether debt repayment qualifies as “financial stabilization” Different treatment for AAA and AA rated issuers as compared with issuers below investment grade Proceeds likely could be used for corporate acquisitions and joint ventures where the entity holds U.S. qualifying assets IRS considering an allocation rule for qualifying and non qualifying assets How will goodwill in an acquisition be treated?

19. Leveraging Foreign Operations Many companies may have low-taxed E&P outside the U.S., but not have cash sufficient to pay significant dividends. Consider leveraging foreign operations with debt in order to generate cash. Consider sale and leaseback transactions of business assets. U.S. parent company guarantee may be required to ensure lowest cost financing possible Parent company guarantee must be documented Risk of recharacterization by the IRS as a U.S. borrowing

20. Leveraging Foreign Operations (continued) Common methods of generating cash USP guarantee ensures best pricing and general market acceptability of offering Sale and leaseback (if respected as a lease) may generate more low-taxed E&P USP guarantee places some pressure on risk of recharcterizing the transaction as a U.S. borrowing

21. The Repatriation Incentive – Planning: E&P Bumps Used to dilute pools of taxes while generating deductions going forward, and used to create E&P in entities that have cash, but no earnings to pay a dividend Busted §351 §59(e) and other E&P elections Deferred inter-company transaction in foreign countries with consolidation regimes (UK and Australia) §737 disguised sale

22. FTC Reform 10-year FTC carryforward; one-year carryback Carryover rule applies to excess FTCs that may be carried over to any taxable year ending after the date of enactment Carryback provision applies to excess foreign taxes arising in taxable years beginning after the date of enactment Consolidation of FTC baskets Two baskets remain: passive category and general income category Generally effective for taxable years beginning after December 31, 2006 Transitional rule for pre-January 1, 2007 taxes carried over to post-January 1, 2007 years

23. FTC Reform (continued) OFL Recapture on Sale of CFC Stock Effective for dispositions after the date of enactment Also can apply to tax-free transactions if receive back a smaller percentage of stock than transferred Look-thru for dividends from non-controlled §902s Effective for taxable years beginning after December 31, 2002 Repeal 90% limit on AMT FTC Effective for taxable years beginning after December 31, 2004

24. FTC Reform (continued) Exchange Rate for Foreign Taxes Most taxpayers may elect to use the exchange rate in effect on the date the taxes were paid RICs, however, must instead use the exchange rate on the date the income accrues §902 Stock Attribution Through Partnerships Effective for taxes of foreign corporations for taxable years beginning after the date of enactment

25. FTC Reform (continued) FTC Minimum Holding Period for Property 15 days within a 30-day testing period Exclusive of periods where there is no risk of loss Effective for amounts that are paid or accrued more than 30 days after the date of enactment Domestic Loss Recapture (OFL Corollary) Effective for overall domestic loses incurred for taxable years beginning after December 31, 2006

26. FTC Reform (continued) Income Tax Base Differences Treated as “general limitation income” Effective for taxable years after December 31, 2006 For taxable years beginning before January 1, 2007, a taxpayer may elect to treat such taxes as taxes imposed on either general limitation income or financial services income

27. FTC Reform (continued) Worldwide Interest Expense Apportionment Elective for tax year beginning after 2008 Apportion interest of w/w affiliate group on w/w assets Separate group treatment for financial institutions Who Benefits? MNCs with significant CFC debt Treatment of related party loans?

28. FTC Reform (continued) JOBS Act (S. 1637) §661 “The Secretary may prescribe regulations disallowing a credit under subsection (a) for all or a portion of any foreign tax, or allocating a foreign tax among 2 or more persons, in cases where the foreign tax is imposed on any person in respect of income of another person or in other cases involving the inappropriate separation of the foreign tax from the related foreign income.” This provision not included in final bill

29. Subpart F Reform No look-through for interest, dividends, rents and royalties from related CFCs Look-through Treatment for CFC Sale of Partnership Interests Might also apply to §904 (but remember the look-through regulations)

30. Subpart F Reform - §956 Changes The Limited overturned Exception limited to deposits with specified banks or corporations held by “bank holding companies” or “financial holding companies” Exclusion of Assets from Definition of U.S. Property Securities acquired and held by a CFC that is a dealer in securities Expanded exception for obligations to those issued by an unrelated U.S. person other than a domestic corporation

31. Subpart F Reform Expansion of Active Financing Exception Allows the use of employees of a related CFC organized in the same home country as tested Repeal of Foreign Personal Holding Company and Foreign Investment Company Rules Effective 2005 Defer income to next year, if possible FPHCI now includes personal services contract income Expansion of Definition of Excluded Income from Commodities Transactions Exception covers certain transactions in the normal course of a CFC’s trade or business

32. Section 956: New Exceptions to Section 956 The American Jobs Creation Act of 2004 adds a new exception to the definition of U.S. property: The acquisition by a CFC of obligations issued by a U.S. person that is not a domestic corporation and that is not: a U.S. 10-percent shareholder of the controlled foreign corporation, or A partnership, estate or trust in which the controlled foreign corporation or any related person is a partner, beneficiary or trustee immediately after the acquisition by the controlled foreign corporation of such obligation Enables CFCs to invest in wide variety of U.S. issued asset-backed securities with greater pre-tax yields

33. Section 956: REMICS Is a Real Estate Mortgage Investment Conduit (“REMIC”) a U.S. Person for purposes of §956? The term “United States person” for purposes of §956 is defined in the regulations as having the same meaning that it has in §957(c). Section 957(c) incorporates the general definition of the term as it appears in §7701(a)(30); i.e., to include a U.S. citizen or resident alien, domestic partnership domestic corporation, domestic trust, or domestic estate, but not certain individuals who are resident in the U.S. possessions Under §860A(a), a REMIC is not subject to tax and is not treated as a corporation, partnership, or trust for purposes of subtitle A If the REMIC is a U.S. person, would it qualify for the new exception? If the REMIC is not a U.S. person, would its regular interests be excepted from the scope of §956?

34. RIC and REIT Provisions RICs may designate “interest-related” and “short-term capital gain” dividends Interest-related and short-term capital gain dividends received by a foreign shareholder are exempt from 30% U.S. tax on FDAP income Estate tax exemption REIT capital gain distributions exempt from tax under FIRPTA where REIT is publicly traded in the U.S. and shareholder holds less than 5% of stock in the REIT