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“These lawyers are the ‘best of the best’ in their field.  They are simply outstanding.  Platitudes are thrown around casually these days, but truly, these men and women are the best at what they do.  All of the attorneys we worked with are outstanding technicians who are highly respected, but speak in plain English when solving complex and sophisticated issues.”  Client Commentary, Chambers USA

If you are a U.S. person with income or operations abroad, or a foreign person with income or operations in the U.S., you are confronted with an array of international tax issues. Caplin & Drysdale's international tax attorneys provide the full spectrum of tax services for our business and individual international tax clients. View our brochure.

Practice Area(s)

  • Structuring International Transactions, Operations, and Investments
  • Maximizing/Substantiating Foreign Tax Credits
  • Resolving Transfer Pricing Issues
  • Negotiating Advance Pricing Agreements
  • Interpreting U.S. Tax Treaties
  • Handling Competent Authority Cases
  • Taxation of Nonresident Athletes and Entertainers
  • Advising on Withholding Issues
  • Structuring/Evaluating Financial Products

Structuring International Transactions, Operations, and Investments

If you are planning a cross-border transaction, operation, or investment, you must deal with a daunting array of U.S. tax rules. The structure you choose will have both immediate and long-term tax consequences, some of which are direct and obvious and others of which are indirect and hidden. Your choice of entities can be critical to your success and the "check-the-box" rules offer considerable planning opportunities in an international context. The international context also magnifies the importance of careful planning for corporate reorganizations because you not only must comply with the complex corporate reorganization rules, but you also must address outbound transfer, disposition, and other special rules.

At Caplin & Drysdale, structuring international transactions, operations, and investments is an active segment of our practice. We advise taxpayers on tax-efficient structuring of cross-border investments, including optimum use of tax treaties, foreign tax credits, tax deferral, and entity classifications. We also advise companies with established international operations on the tax aspects of cross-border reorganizations, as well as the year-by-year management of international tax exposures.

Representative Engagements

  1. A U.S. company with several foreign subsidiaries, some of which were losing money in foreign jurisdictions, found that it could not offset such losses against taxable profits it was earning in other jurisdictions.

    Result: Caplin & Drysdale developed a restructuring plan that made use of a European holding company, hybrid operating entities, and modified intercompany pricing policies to reduce the client's total foreign taxes while optimizing the utilization of foreign tax credits on its U.S. return.

  2. A U.S. multinational proposed a billion-dollar acquisition of a company with a complementary product line and an existing international structure. 

    Result: Caplin & Drysdale developed a tax efficient structure for the acquisition and a strategy for meshing the combined operations without adverse tax consequences, and we obtained tax rulings in several countries to ensure that the strategy would be respected by the relevant tax authorities.

  3. A large multinational wished to undertake a series of transactions involving loan repayments, capital contributions, and purchases of common and preferred stock involving more than a dozen corporate entities and culminating in a $200 million purchase of stock in a U.S. corporation. 

    Result: Caplin & Drysdale helped the company choose a structure that would achieve its business objectives while optimizing its worldwide tax position, including advice on how to structure the transaction so that it would not be characterized as acquisition of United States property under section 956.

Our Services

If you are planning an international transaction, operation, or investment, Caplin & Drysdale can:

  • Advise on choice of entity issues;
  • Help choose the most tax-efficient foreign situs consistent with your business needs;
  • Prepare corporate/trust/partnership documents and form entity;
  • Review foreign tax credit status and design credit-optimization strategies;
  • Obtain advance rulings to ensure approval by relevant tax authorities;
  • Aid with restructuring as business considerations or foreign tax rules change; and
  • Work to ensure that acquisitions, dispositions, and expansions are achieved in the most tax-efficient manner.

Maximizing/Substantiating Foreign Tax Credits

U.S. taxpayers concerned about avoiding double taxation and seeking to minimize their worldwide tax liability must be able to navigate the labyrinthian foreign tax credit rules of the Internal Revenue Code. The old challenges remain: determining which foreign levies qualify for the U.S. tax credit, which person is entitled to the credit, and the mechanics of calculating and applying the credit. Nowadays, however, taxpayers must also contend with IRS demands for substantiation and payment above and beyond what has been required historically. This makes it even more important to have tax counsel who knows both the written rules and IRS enforcement practice.

At Caplin & Drysdale, our attorneys have a wealth of experience dealing with foreign tax credit qualification and substantiation issues. We have helped many taxpayers, and can help you, to structure operations to make the most of the foreign tax credit rules on a prospective basis, or to defend your entitlement to foreign tax credits previously claimed.

Representative Engagements

  1. A large U.S. manufacturing company finds itself in a position where it has not claimed foreign tax credits for more than $20 million in foreign taxes paid years earlier, which may now be difficult to access for various legal and factual reasons.

    Result: Caplin & Drysdale devises an inventive strategy for accessing the credits and drafts an IRS ruling request to confirm that the strategy will work.

  2. The IRS ruled publicly that a foreign tax imposed on a segment of the natural resources industry was not eligible for credit under section 901.

    Result: Caplin & Drysdale, in association with foreign economists hired and supervised by us, performed an empirical study and prepared a report demonstrating convincingly that the foreign tax was creditable under section 903, an approach that neither the IRS nor taxpayers seemingly had taken before.

  3. The IRS sought to deny tens of millions of dollars of foreign tax credits on substantiation grounds, arguing that the taxpayer's proof of withholding was insufficient to prove payment.

    Result: Caplin & Drysdale enlisted the help of the U.S. Competent Authority and foreign tax officials and assembled appropriate documentation to persuade the IRS to allow the credits.

Our Services

To make sure you get the most out of the foreign tax credit rules, Caplin & Drysdale can:

  • Evaluate which taxpayer, and which foreign levies, will qualify for the U.S. tax credit;
  • Guide you through the "basket" characterization and calculation rules;
  • Devise appropriate strategies to maximize your credits and to access excess credits;
  • Advise you of the type of substantiation issues likely to arise;
  • Defend your entitlement to claimed foreign tax credits at all stages of proceedings; and
  • Invoke Competent Authority assistance to support the creditability of a foreign tax and your entitlement to the credit.

Resolving Transfer Pricing Issues

If your company has cross-border dealings with a related party, you probably know that transfer pricing enforcement is a high-profile and big-dollar audit priority for U.S. and foreign taxing authorities. Section 482 of the Internal Revenue Code gives the IRS broad discretion to reallocate income by second-guessing your transfer prices and can make it challenging for taxpayers to overcome such adjustments.

At Caplin & Drysdale, we can minimize the expense and burden of your transfer pricing disputes with the IRS. Our attorneys have handled scores of multi-million dollar transfer pricing cases in every stage of the proceeding -- IRS examination, Competent Authority, IRS Appeals, litigation, and the APA process.

Clients for whom we have resolved transfer pricing disputes include U.S. multinationals as well as multinationals based in major North American and European countries, Japan, and tax haven jurisdictions. The industries involved include banking and financial products, pharmaceuticals, electronics, telecommunications, batteries, bearings, motorcycles, medical equipment, biotechnology, crude oil, oil field services, luxury items, industrial equipment, automotive components, fertilizer, and steel. The intercompany transfers at issue have involved, either alone or in combination, the manufacture and/or distribution of tangible goods, the development, sale and/or licensing of intangibles, the incidental and/or regular provision of related-party services, and the making of loans.

We also help clients in legislative and regulatory matters relating to section 482. We have counseled several industry trade associations on potential application of proposed regulations and legislation, including preparation of comments and testimony and meetings with government officials. We also have extensive experience with section 6662 transfer pricing penalty protection documentation, as well as with the preparation of cost-sharing agreements for international groups.

Representative Engagements

  1. A U.S.-based multinational in the natural resources industry engaged in a series of related-party transactions which, due largely to foreign legal restrictions, placed more than $100 million profit in a small foreign subsidiary. The company asked us to evaluate its U.S. transfer pricing exposure.

    Result: Caplin & Drysdale prepared a report analyzing potential IRS arguments and taxpayer counterarguments, concluded that U.S. transfer pricing law posed little threat if the transaction was properly structured and documented, but suggested ways to minimize future exposure.

  2. A foreign-based high-tech company sold equipment and services in North and South America through a U.S.-based subsidiary. The foreign parent and its U.S. subsidiary divided the income via a royalty agreement with respect to certain sales and services and a cost-plus mechanism with respect to others. This produced confusion and created unnecessary transfer pricing exposure.

    Result: Caplin & Drysdale advised the company how to restructure the relationship to simplify administration and to provide greater transfer pricing protection. We drafted the new agreements and worked with the company to implement them, all within a matter of days.

  3. A foreign luxury goods manufacturer faced a multifaceted transfer pricing adjustment concerning trademark royalties and import prices for goods sold to U.S. distribution and retail subsidiaries.

    Result: Caplin & Drysdale negotiated with the IRS a transfer pricing methodology that resolved the audit adjustment at a fraction of the amounts proposed and established benchmarks for avoiding future disputes.

  4. A multinational company advanced interest-free funds and provided administrative services at cost to subsidiaries around the world, prompting substantial IRS proposed adjustments.

    Result: Caplin & Drysdale successfully defended the company's practice of providing administrative services at cost and negotiated a settlement that eliminated over 90% of the proposed interest adjustments.

Our Services

If your company is facing an IRS transfer pricing adjustment, or if you want to minimize the likelihood of a transfer pricing adjustment in the future, Caplin & Drysdale can help in the following ways:

  • Evaluate your transfer pricing exposure and advise on minimizing future exposure;
  • Determine an appropriate transfer price or royalty rate for tangible and intangible property;
  • Determine ownership of intangibles and establish research and development cost-share arrangements;
  • Defend your transfer prices against adjustment and avoid double taxation through the Competent Authority process;
  • Defend "at cost" administrative services and interest-free advances;
  • Prepare Section 6662 transfer pricing reports;
  • Pursue legislative and regulatory solutions to transfer pricing issues; and
  • Negotiate an advance pricing agreement with the IRS and foreign tax authorities.

Negotiating Advance Pricing Agreements

The IRS's Advance Pricing Agreement ("APA") program can provide an excellent mechanism to resolve cross-border transfer pricing controversies before they occur, on a unilateral, bilateral or even multilateral basis. Since the program began in 1991, Caplin & Drysdale has been helping clients take full advantage of this tax planning option.

Our inventory of completed APAs includes the first trilateral APA, the first maquiladora APA with Mexico, the first non-financial-products APA with the United Kingdom, the first APA involving a foreign-based cooperative, the first APA permitting recognition of interbranch financial transactions, and at least four of the handful of concluded multilateral APAs involving Japan. We presently are assisting several clients with bilateral and trilateral APA applications or renewals.

If you are considering an APA application or need assistance with a pending APA, Caplin & Drysdale can help.

Representative Engagements

  1. A multinational e-commerce company operating in dozens of countries confronted the difficult and increasingly common problem of sourcing e-commerce income and expense items.

    Result: Caplin & Drysdale devised and negotiated a bilateral APA that resolved the e-commerce sourcing issues in a manner that minimized the company's worldwide tax liability, was easy for the company to administer, and provided the company with predictable tax effects for years to come.
  2. The U.S. subsidiary of a multinational manufacturing company needed to put in place a royalty arrangement to compensate its foreign parent for manufacturing intangibles.

    Result: Caplin & Drysdale worked with the company and its economists to determine the appropriate royalty rate and won IRS approval for a 5-year APA term, plus a 5-year rollback of the APA methodology to resolve audit issues for prior years.
  3. A U.S. financial institution operating through branches and subsidiaries in foreign countries needed to allocate its revenue from global dealing in derivative financial instruments among numerous taxing jurisdictions.

    Result: Caplin & Drysdale devised a new, specifically tailored transfer pricing methodology and negotiated a first-of-its-kind multilateral global dealing APA to prevent double taxation.
  4. A foreign financial institution operating in the United States through a branch was faced with distorted tax results because it was unable, under existing U.S. law, to recognize foreign currency transactions between its U.S. and foreign branches.

    Result: Caplin & Drysdale negotiated the first multilateral APA that permitted a foreign taxpayer to take interbranch transactions into account in determining its U.S. taxable income.
  5. A leading U.S. tax publisher filed a lawsuit to force disclosure of APAs and related information. The IRS, after promising taxpayers for years that such information was protected, agreed in litigation to make some of the information publicly available.

    Result: Caplin & Drysdale assembled a collection of interested parties, including U.S. corporations and trade associations, who intervened in the litigation to object to the IRS concession and to the release of the information. Our effort delayed any disclosure of the information, thereby allowing Congress time to pass legislation that ensured the continued confidentiality of the information at issue.

Our Services

If you are evaluating how, or whether, to seek an APA or to renew an existing APA, here are some of the ways Caplin & Drysdale can help:

  • Advise you of APA experiences in your industry;
  • Estimate the cost and time involved in obtaining an APA or APA renewal;
  • Determine the most appropriate and advantageous APA transfer pricing methodology for your situation;
  • Prepare the APA application, including gathering the historical and financial information necessary for the APA analysis;
  • Engage an economist, if necessary, and oversee preparation of economic analysis;
  • Negotiate the terms of the APA with the IRS, and help shape Competent Authority negotiations; and
  • Negotiate a roll-back of the APA methodology to prior open years.

Interpreting U.S. Tax Treaties

The large and growing U.S. tax treaty network makes it likely that your company is entitled to benefits under one or more of the 50-plus U.S. tax treaties. Understanding and working with these treaties requires experience, because notwithstanding efforts to conform to a model, U.S. treaties differ from each other in important, often subtle, respects. And even seemingly simple questions common to all treaties -- such as who is entitled to treaty benefits -- can give rise to contentious and potentially costly disagreements with the IRS.

Caplin & Drysdale's tax treaty practice covers both substantive legal issues and the administrative aspects of securing treaty benefits by filing appropriate forms or working with U.S. and foreign government officials. Our attorneys are thoroughly familiar with most of the U.S. tax treaties currently in effect, and in some instances helped negotiate them. We regularly provide input to the Treasury on treaty negotiations, and we work to ensure that our clients' concerns are brought to the government's attention during the treaty negotiation and re-negotiation processes.

Representative Engagements

  1. The IRS sought to collect more than $50 million in withholding taxes and penalties from our client, a U.S. subsidiary of a foreign bank that acted as custodian for several foreign mutual funds, on the ground that the funds were not entitled to benefits under the applicable U.S. treaty.

    Result: Caplin & Drysdale orchestrated a referral of the treaty qualification issue to the IRS National Office, which agreed with our attorneys that the international examiner had misinterpreted the treaty, resulting in a complete IRS concession.

  2. A foreign bank that engaged in substantial U.S. securities trading operations through its New York branch sought advice on how to structure its operations to secure treaty benefits to minimize its U.S. tax liability. 

    Result: Caplin & Drysdale advised the company how best to structure its operations to maximize the value of its treaty benefits and, in addition, pointed out a little-known quirk in the applicable U.S. treaty that allowed the foreign bank to treat its securities income as U.S. source income while subjecting only a fraction of that income to U.S. tax.

  3. A U.S. financial institution investing in certain assets through its foreign branch asked how the applicable treaty would affect U.S. taxation of income from those assets.

    Result: Caplin & Drysdale analyzed the language of the treaty, the treaty legislative history, and all available authorities and concluded that the client could treat the income in question as foreign source income under the relevant treaty provision but would be required to disclose this position on its U.S. income tax return under section 6114.

  4. A foreign corporation engaged in business in the United States was concerned about potential withholding requirements on U.S. source income it received from customers.

    Result: Caplin & Drysdale analyzed the facts and concluded that the income was not subject to withholding because the corporation did not have a U.S. permanent establishment to which the income was attributable. We told the client which form to file to prevent withholding and to establish entitlement to treaty benefits. We also advised on the desirability of filing a protective U.S. income tax return to avoid denial of deductions in case it was ultimately determined that the client had a U.S. permanent establishment.

  5. A U.S. financial institution needed to know the rate at which withholding would be required on payments of U.S. source dividend income to a foreign corporation owned jointly by the client and a tax haven entity.

    Result: Caplin & Drysdale analyzed the unique ownership structure of the foreign corporation and concluded that it was not entitled to treaty benefits under the relevant limitation on benefits provision. We then advised the client that the dividend income was subject to full 30 percent withholding.

Our Services

If you are operating in a foreign jurisdiction within the U.S. tax treaty network, Caplin & Drysdale can help:

  • Ensure your eligibility for treaty benefits;
  • Structure your operations to maximize the value of treaty benefits;
  • Advise on treaty interpretation and the applicability of treaty provisions to your transaction;
  • Ensure that you satisfy any filing or information reporting requirements necessary to take advantage of treaty benefits;
  • Invoke the Competent Authority process under a treaty; and
  • Make your concerns or the concerns of your industry known to the government officials who are negotiating or renegotiating a particular treaty.

Handling Competent Authority Cases

The Competent Authority process is designed to help taxpayers like you avoid, or at least minimize, international double taxation, and to provide other forms of assistance to U.S. and foreign taxpayers in an international context. Many taxpayers are unfamiliar with the Competent Authority mechanism and do not understand on a practical level how the process works or how taxpayers can benefit from it.

Caplin & Drysdale understands the Competent Authority process, knows the players, and uses the process on a regular basis to benefit our clients. Our attorneys have recent experience working with the Competent Authorities of Belgium, Canada, Germany, Japan, Mexico, the United Kingdom and, of course, the United States, to secure treaty benefits and to minimize double taxation for our clients.

Representative Engagements

  1. A foreign government proposed large adjustments to the income of a foreign company doing business in the United States, potentially resulting in double taxation. 

    Result: Caplin & Drysdale worked with the Competent Authorities of the foreign country and the United States and succeeded in structuring a compromise result agreeable to both countries that eliminated the potential for double taxation.

  2. The IRS proposed to disallow foreign tax credits worth tens of millions of dollars on the ground that the taxpayer failed to prove that the foreign taxes were actually owed to the foreign government under foreign law.

    Result: Caplin & Drysdale worked with the Competent Authority of the foreign country to obtain declarations from the relevant foreign tax authorities confirming that the foreign taxes at issue were required to be paid under foreign law. The IRS reversed its position and allowed the foreign tax credits at issue.

  3. A foreign government proposed to decrease the price at which a foreign subsidiary purchased raw materials from its U.S. parent, thus increasing the subsidiary's foreign tax and potentially resulting in double taxation.

    Result: Caplin & Drysdale convinced the U.S. Competent Authority that the foreign adjustment was correct, thereby permitting the U.S. parent to obtain a tax credit for the additional foreign taxes paid and preventing double taxation.

Our Services

If you are faced with the prospect of international double taxation, are concerned that the United States or a foreign country is imposing tax in a manner inconsistent with an income tax treaty, or need government assistance to obtain documents, Caplin & Drysdale can help you:

  • Advise on prior experiences with the Competent Authority of the relevant country and the best strategy for obtaining the requested relief;
  • Prepare written Competent Authority request for assistance, tailored to your situation and the formal (and informal) requirements of the relevant Authority;
  • Meet with the appropriate U.S. and/or foreign government personnel to promote timely and favorable action on the Competent Authority request; and
  • Draft proposed Competent Authority ruling or agreement.

Taxation of Nonresident Athletes and Entertainers

Fore! The U.S. Internal Revenue Service recently released a Memorandum (July 2, 2009, AM2009-005), which draws a bead on nonresident golf and tennis professionals and their income from endorsement activities. The agency now proposes to tax all the net endorsement income at graduated tax rates, because it is mainly from performing "personal services". (The top rate is currently 35%, but it is set to go to 39.6% after 2010.) This means the IRS will challenge athletes that report these fees as royalty income at lower withholding tax rates. The notional withholding rate is 30%, but tax treaties typically eliminate or reduce it to between 0% and 15%. 

These conclusions are based upon the agency's interpretation of tax laws about on-course and on-court endorsement contracts, common in the golf and tennis business. The IRS Chief Counsel comes to these key conclusions on two types of endorsement income based on the typical endorsement contract: 

Athlete Retainer Fees. The sponsor is retaining the golfer predominately to perform personal services. The incremental value to the athlete for granting the right to use the name or likeness on a stand-alone basis apart from the services is viewed by the IRS as "de minimis". Further, Articles 16 (Entertainers and Sportsmen) and 7 (Business Profits) of the Model Income Tax Convention will apply to on-course and off-course contracts making the personal service income taxable at graduated rates rather than as royalties. 

Ranking and Replacement Bonuses. These bonuses will be characterized by the IRS as income from personal services. They are bonuses paid for personal activities and will fall under Article 16 of the Model Tax Convention as income derived by a sportsman.

Though Chief Counsel's opinion is not the final legal word on the matter, these conclusions represent published IRS policy and it is prudent to assume the tax agency will aggressively assert them in an audit and, if necessary, in court.

Prepare for an Audit. Speaking of audits, the IRS in October 2007 announced a Compliance Initiative to improve tax reporting and compliance by nonresident athletes and entertainers performing in the U.S. The initiative first focuses on high income golf, tennis and music performers. This means the IRS has –

  • Earmarked more compliance and enforcement resources to these groups;
  • Agents attending golf and tennis events to gather endorsement activity data; and
  • Already launched large-scale audits of nonresident active and retired tennis players assessing millions of dollars in back taxes, interest and penalties.

Bottom line: For those in the three targeted groups, it's best to plan and prepare for an audit.

Staying Out of the Rough. Some tax practitioners are already predicting nonresident athletes will test the IRS's conclusions and vigorously litigate them. But why not consider some new thinking to avoid confrontation and controversy? Note that the IRS legal memorandum addresses typical industry contracts, leaving room for skillful golfers to sink a backdoor putt against the Taxman.

Outlined below are a few planning ideas that might help keep you in the fairway:

  • Allocate part of the contract payments to the athlete's name and likeness;
  • Separate endorsement contracts for each country where the athlete performs;
  • Use contract language that de-emphasizes the term "personal services" and accentuates the sponsors' use and value of the athlete's name and likeness;
  • Link some of the fees and bonuses to the sales of sponsors' products; and
  • Creative use and structuring of offshore entities, including minimization of the impact of anti- "loan-out" rules in some of the tax treaties.

Customized Tax Advice. Caplin & Drysdale is well-equipped to provide sophisticated tax counsel to nonresident athletes and entertainers. The information here is general in nature and is not meant to provide definitive tax advice. Since each athlete's situation is unique, sound tax advice will always be tailored to the client's factual circumstances and the applicable tax laws (tax treaties often differ among countries).

Advising on Withholding Issues

If you are a foreign corporation or individual investing in the United States or a U.S. company making payments to foreign persons, chances are the recently-issued U.S. nonresident alien withholding regulations affect you. These new rules are voluminous and complex, and the consequences for failure to comply with their substantive or documentation requirements may be harsh. The withholding rules cannot be considered in a vacuum; you also need to understand how they interact with tax treaty provisions and with various anti-abuse rules, such as the "conduit" regulations.

Caplin & Drysdale attorneys were involved in the joint IRS banking industry task force and Treasury Department regulations project that overhauled the withholding rules. We have hands-on familiarity with all substantive and procedural aspects of the withholding rules. If you are a foreign corporation or individual investing in the United States, we can help you understand the rules, structure your investments to eliminate or minimize withholding tax, and satisfy the complicated documentation requirements. If you are a U.S. withholding agent, we can help you comply with your withholding obligations and avoid exposure to withholding liability.

Representative Engagements

  1. The IRS sought to collect more than $50 million in withholding taxes and penalties from our client, a U.S. subsidiary of a foreign bank that had acted as custodian for a group of foreign mutual funds.

    Result: Caplin & Drysdale orchestrated a referral of the issue to the IRS National Office, which agreed with our attorneys that the international examiner had misinterpreted the rules and that the funds were entitled to benefits under the applicable tax treaty, resulting in a complete IRS concession.

  2. A foreign bank engaged in a tax-advantaged cross-border leasing transaction that was susceptible to a variety of different U.S. tax characterizations. 

    Result: Caplin & Drysdale attorneys structured and documented the transaction in a manner that minimized exposure to U.S. withholding tax no matter which characterization was ultimately adopted.

  3. A foreign corporation invested in a U.S. company through a variety of foreign partnerships and hybrid entities, some of which were organized in countries with which the United States has a tax treaty.

    Result: Caplin & Drysdale analyzed the complicated withholding rules applicable to partnerships and the interaction of those rules with all pertinent treaty provisions. We advised the client on the documentation that would be necessary to establish entitlement to a reduced rate of withholding.

Our Services

  • Analyze how the withholding rules apply to your facts;
  • Structure your investments so as to eliminate or minimize withholding;
  • Analyze how treaties impact your withholding obligations;
  • Determine whether and how the conduit rules may affect your withholding obligations;
  • Ensure that you comply with relevant regulation requirements; and
  • Negotiate Qualified Intermediary agreement with the IRS on your behalf.

Structuring/Evaluating Financial Products

Companies involved in financial products - on the development side or as potential purchasers - know that such products, designed correctly, can provide competitive returns and aid in risk management while also providing creative solutions to a variety of tax concerns. This has made financial products an area of dynamic growth, particularly in the international setting where their value is frequently enhanced through the use of hybrid entities and hybrid transactions (i.e., entities and transactions that are characterized differently for U.S. and foreign tax purposes), as well as through the use of a variety of notional principal contracts, repos, and other features. With the growth in this area, however, has come intense IRS and legislative scrutiny, thereby placing a premium on ensuring that the financial product is carefully designed from the outset.

Caplin & Drysdale has assisted clients for years in designing tax-advantaged financial products and in evaluating financial products designed by others. These products have involved cross-border financing between the United States and a host of countries, such as the Cayman Islands, France, Germany, Ireland, Italy, Japan, New Zealand, Switzerland, and the United Kingdom, and we have worked in each case to achieve the U.S. tax benefits desired by the parties. We also are mindful of our duty to say "no" to ideas that do not work. We believe cautioning clients against strategies that do not work is as important as helping them devise strategies that do.

Representative Engagements

  1. A U.S. company wanted to make offshore investments in various foreign securities without incurring current U.S. taxation.

    Result: Caplin & Drysdale worked with the client and a foreign bank to design an investment strategy that met the company's investment goals while avoiding controlled foreign corporation or passive foreign investment company status. U.S. tax on the investment proceeds could thereby be deferred.
  2. A large foreign bank wanted to structure a product/transaction that would enable it to access U.S. private capital at the lowest possible rate.

    Result: Caplin & Drysdale advised on the structuring of a transaction involving hybrid entities and instruments to accomplish this goal. The transaction was designed so that costs were deductible in the foreign jurisdiction while the U.S. counterparty had access to foreign tax credits, thus minimizing the foreign bank's cost of investment.
  3. A U.S. multinational financial institution wanted to structure cross-border financing arrangements in several countries to minimize financing costs through tax efficient structures and relationships.

    Result: Caplin & Drysdale helped structure the financing arrangements to minimize the overall tax burden while maximizing foreign tax credit and actual economic returns in a way that would minimize the likelihood of an IRS challenge. Our attorneys also prepared all relevant U.S. transaction documents.
  4. A U.S. multinational company sought advice on a financial product involving international tax arbitrage transactions that its promoters claimed would materially reduce the company's U.S. tax liability without increasing its foreign tax liability.

    Result: Caplin & Drysdale analyzed the proposed transaction in light of relevant common law tax principles and statutory anti-abuse rules and advised the client that the IRS would almost certainly challenge the U.S. tax benefits from the transaction and would most likely prevail in court. After our client decided not to purchase the product, the Tax Court denied U.S. tax benefits to another company that had purchased a similar product.

Our Services

If you are structuring or evaluating cross-border financial products, here are some of the ways Caplin & Drysdale can help:

  • Evaluate existing financial product designs to determine whether they will accomplish U.S. tax objectives;
  • Advise on alternative designs to maximize US tax benefits and the likelihood of achieving them;
  • Prepare relevant transaction documents (e.g., partnership agreement, swap agreement and confirmation, etc.);
  • Prepare and file documents to organize appropriate U.S. entities (e.g., LLC formation); and
  • Advise on the applicability of tax shelter registration, disclosure, and list maintenance requirements.