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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 Tax Compliance • • Forms W-8 Series Sales Tax Issues and Audits 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 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 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? 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 Alternate Method Gross Assets 12/31/2008 $ 20,000,000 Shares Authorized 40,000,000 APVC For Tax Basis 40,000,000 TAX DUE Total Shares Issued Assumed Par 20,000,000 Assumed Par 1 Assumed Par Value Capital 1.000000 40,000,000 Gross Tax Prorated for Number of Days $ 14,000.00 365 $ 14,000.00 The P. Stein Way Gross Assets 12/31/2008 Total Shares Issued $ 20,000,000 Shares Authorized 40,000,000 Assumed Par 40,000,000 APVC For Tax Basis 20,000,000 TAX DUE Assumed Par 0.5 Assumed Par Value Capital 0.500000 Gross Tax $ 20,000,000 Prorated for Number of Days 7,000.00 365 $ 7,000.00 Establishing US Operations State Tax Implications • 50 states • Physical Presence • Economic Presence • Migration to Gross Receipts Taxes • On the Upside – Grants & Incentives 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 Forms W-8 • IRS Tier I Issue – Closing the $100 billion tax gap • Default Presumption Rules • Substitute Form W-8 • Spreadsheet Equivalents