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Staying One Step Ahead

Staying One Step Ahead. Proper Tax Planning and Compliance for Tax Audits. Miriam C. Konstam Corporate Tax Services Manager July 22, 2009. Agenda. Tax Planning. Debt vs. equity Delaware franchise taxes Establishing US operations State tax implications Incentives or grants available.

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Staying One Step Ahead

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  1. Staying One Step Ahead Proper Tax Planning and Compliance for Tax Audits Miriam C. Konstam Corporate Tax Services Manager July 22, 2009

  2. Agenda Tax Planning • Debt vs. equity • Delaware franchise taxes • Establishing US operations • State tax implications • Incentives or grants available Tax Compliance • Forms W-8 Series • Sales Tax Issues and Audits

  3. Debt vs. Equity • IRC § 385 governs this issue • Debt appears to have flexibility • Debt must accrue interest and comply with withholding requirements • Taxpayer is bound by his decision, IRS is not

  4. Debtor-creditor or corporation-shareholder relationship? • Is there an unconditional promise on the part of the debtor to pay a sum certain • Is there convertibility into the stock of the corporation • Are the rights of the creditor subordinate to those of general creditors • Does the agreement give the creditor the right to participate in the management of the debtor • Is the debtor thinly capitalized • Is there identity between the creditor and shareholders of the debtor; • Were the funds repaid on the due date • Is there presence of a maturity date • What is the label placed upon the instrument by the parties • Does the debtor have the ability to obtain loans from outside lenders

  5. Our Perspective • Most transactions have the characteristics of equity • Ensuring treatment of debt • Compliance with above • Tax due on payment of interest • Portfolio interest exception • Treatment upon exit • Equity – Return of capital and capital gain. • Loan – Payment of interest and withholding; return of principal. • Conversion Feature – Tax due on period of loan treatment, including if payment is in shares • Distribution of portfolio company’s earnings How likely is it that this scenario will occur?

  6. Delaware Franchise Taxes • Certificate of Good Standing • Default – Authorized Shares Method • $75 for each 10,000 shares • 40,000,000 x 75 = $300,000 10,000

  7. Alternate Method

  8. The P. Stein Way

  9. Establishing US OperationsState Tax Implications • 50 states • Physical Presence • Economic Presence • Migration to Gross Receipts Taxes • On the Upside – Grants & Incentives

  10. Sales Tax Issues and Audits • Is sale subject to sales tax? • Transaction subject to tax • End user – resale certificate • Is there nexus in that state? • Use tax • 8,800 jurisdictions • Audits – testing periods plus interest

  11. Forms W-8 • IRS Tier I Issue – Closing the $100 billion tax gap • Default Presumption Rules • Substitute Form W-8 • Spreadsheet Equivalents

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