U.S. Tax Seminar Updates & Developments

November 2013

Ron Mazurik, Senior Tax Manager Alon Sherer, Senior Tax Manager

Agenda

. Recent Legislation . Recent Cases . Proposed Legislation . Points for Attention . State Tax Developments

U.S. Tax Seminar November 2013 PwC 2 Recent Tax Legislation Medicare Tax • From 2013 – up to 3.8% Medicare tax • Applies only to U.S. citizens / tax residents • Applies to Net Investment Income and QDI of U.S. high income earners (>US$ 200k) • Illustration of Tax Rates Applicable to Long Term Capital Gains: 20% Federal + 3.8% Medicare tax + ~7.8% State tax (NY) ≈ 31.8%

20% Federal + 3.8% Medicare tax ≈ 23.8% Israel – 25%/30%

• Generally creditable against Israeli tax (but Israeli tax is not creditable against the 3.8% Medicare tax)

U.S. Tax Seminar November 2013 PwC 3 Treaty Qualification for Qualified Dividend Income (QDI) Purposes

• “Qualified Dividends” received by U.S. citizen / resident are eligible under certain conditions for a reduced tax rate (currently 15/20% + Medicare tax 3.8%) • In case of a foreign company, QDI treatment applies only if either: - Publicly traded; or -“Good” treaty resident • IRS recently published a ruling agreeing to apply QDI to dividends from a Cyprus company where facts indicated that the Cyprus company’s establishment was not driven by treaty benefits. • Note: LOB under other treaties(including Israel) is much less relaxed than the Cyprus treaty!

U.S. Tax Seminar November 2013 PwC 4 Subpart F Income

• Subpart F Income = Ordinary Income - Tax Court recently confirmed that so-called Subpart F Income inclusions are treated for U.S. tax purposes as Ordinary Income - Result - marginal rates apply - no QDI treatment U.S. Citizen / Resident Income inclusion under Subpart F

Interest Foreign Subsidiary Certain Sales Income

Dividends Certain Service Income

U.S. Tax Seminar November 2013 PwC 5 Recent Cases Classification of Income

Sergio Garcia – The Golfer Case • Characterization by Garcia (a Swiss resident): 15% personal services (ordinary tax rates), 85% royalties (no withholding under the U.S.- Swiss Treaty) • Court – 35% personal services, 65% royalties • Sale / License classification should be considered (exclusivity, restrictions on use, etc)!

? Services Payments Royalties

U.S. Tax Seminar November 2013 PwC 6 Recent Cases Step Transaction Doctrine & Economic Substance

• STARS Transaction (BB&T) Barnes Group Case • Repatriation of cash was held to be a dividend • Application of “Inter-dependence Test” of the Step Transaction Doctrine

Barnes (US) $

Singapore U.S.

$ Bermuda $

U.S. Tax Seminar November 2013 PwC 7 Recent Cases Creditable Windfall Profits Tax

PPL Case • Special tax imposed by the U.K. government (Windfall Profits Tax) is creditable for U.S. tax purposes, even though it is technically levied on a gross basis! • U.S. / Israel Treaty – creditability of “Profit Tax” under the VAT regime.

Deemed Creditable Sale price Windfall Profits Purchase price

U.S. Tax Seminar November 2013 PwC 8 Recent Cases Transfer Pricing - Secondary Adjustments

BMC Software Case • Secondary Adjustment due to Transfer Pricing compliance might have adverse implications

TP Israel Adjustment IP

Secondary TP Royalties Adjustment

U.S.

U.S. Tax Seminar November 2013 PwC 9 Legislation (Pending & Proposed) Transparency and Fairness Initiatives

1) Dodd Frank Act – U.S. (currently in legislation process) • Oil, gas and mining (Extractive Industries) • Listed companies (SEC) • Disclosure of payments to governments by project (e.g. royalties, dividends, etc.) 2) Stop Tax Haven Abuse Act 2013 - U.S. (proposed legislation) – Senator Levin • Applicable to SEC registrants • Public disclosure of taxes paid per legal entity 3) Other major transparency initiatives worldwide • BEPS Action Plan (by OECD)

U.S. Tax Seminar November 2013 PwC 10 Recent Tax Legislation IRC Section 304 - Anti-abuse Regulations

• Re-characterization of sales transactions between related corporations as a redemption of stock => often treated as equivalent to a dividend distribution

• Intended as an anti-abuse provision but often serves as a powerful planning tool!

• Potential abuse: Israel Distribution (dividend) Positive Subsidiary Earnings #1 and Profits (U.S.) (E&P) Subsidiary New Co sale No E&P #2 No E&P (U.S.) (U.S.)

Subsidiary #2 U.S. Tax Seminar (U.S.) November 2013 PwC 11 Points for Attention

Transfer Pricing Considerations Deferred Revenue Stock Option Compensation

Israel Alternative #1: Distribution Alternative #2: Services Stock Functions Options

U.S. Customer Cash Employees / Executives

U.S. Tax Seminar November 2013 PwC 12 Points for Attention

• FBAR – Electronic filing • FATCA update • New IDR • Increase audit to partnerships

U.S. Tax Seminar November 2013 PwC 13 www.pwc.com State Tax Developments State Tax Developments “Amazon Law” - Sales Tax

U.S. Tax Seminar November 2013 PwC 15 Trends – Click-Through Nexus

Amazon Law . Overstock.com vs. New York Department of Taxation & Finance - New York Appeals Court upheld Amazon decision . Solicitation vs. advertising? . Roughly 20 states have proposed similar type laws, so NY’s ultimate decision can have a significant impact

U.S .Tax Seminar November 2013 PwC 16 Trends – Higher Rates, Higher Burden

Sales Tax Rate Increase • The city rate increased from 1.68 percent to 1.75 percent. • The county rate rose from 1.15 percent to 1.245 percent. • The state rate went from 5.48 percent to 5.615 percent.

Marketplace Fairness Act • Sales tax collection requirement for remote (i.e. out of state) sellers • Major impact on internet sales • Passed by Senate, awaiting House review

U.S. Tax Seminar November 2013 PwC 17 Sales and Use Tax Technical Aspects: Acquisitions

• Stock Purchase – Generally, the term ‘tangible personal property’ shall not include stocks, bonds, notes, insurance or other obligations or securities. • Asset Purchase - Sales and use tax is imposed on the retail sale of tangible personal property and certain enumerated services. • 338(h)(10) election – Florida, New York, Virginia, Wisconsin are the only states to date which have explicitly exempted the transaction from tax

U.S. Tax Seminar November 2013 PwC 18 Income Tax Trends - Market-Based Sourcing

WA

ME MT ND MN OR VT NH MA ID WI SD MI NY WY C T IA PA NV NE NJ OH UT IL IN DE CA* WV CO DC KS VA Benefit Received MO KY NC Services Received TN AZ OK NM AR SC Services Delivered Other MS AL GA AK TX LA HI FL

• States are gradually moving towards market-based sourcing • Double Taxation

U.S. Tax Seminar November 2013 PwC 19 Popular State Tax Credits

New Hire Credits • California, New Jersey, New York, North Carolina

Investments in qualified property • New Jersey, New York, North Carolina

R&D Credits • Massachusetts, New Jersey, New York

Enterprise Zone Credits • California, New York, North Carolina

U.S. Tax Seminar November 2013 PwC 20 State of the States – Proposed Legislation

Business Activity Tax Simplification Act of 2013 • Expand definition of Public Law 86-272 • Protected activities would include services (currently only tangible property is covered) • Restrictions would be expanded to include business activity taxes (currently only net income taxes are included)

U.S. Tax Seminar November 2013 PwC 21 Points of Attention

. Points to consider when determining PE vs. nexus: • State adoption of U.S. income tax treaties • Worldwide Income vs. Water’s-Edge Income

Example: Co. ABC domiciled in Israel holds inventory on consignment in NY

Israel Co. Israel Co.

Federal Tax NY/NYC Tax Effectively Worldwide Connected Income Income

U.S. Tax Seminar November 2013 PwC 22 Local Taxes to Consider

Many companies overlook taxes imposed by local jurisdictions as well as other non-income based (i.e. transaction taxes): • New York City Commercial Rent Tax (tax on rented office space in Manhattan) • San Francisco Gross Receipts Tax (replacing the city payroll tax which is being phased out beginning in 2014) • City Income Taxes in Ohio (several hundred taxing jurisdictions), Kentucky, Michigan, and Oregon • Use Tax due on purchases made from companies which are not required to charge sales tax

U.S. Tax Seminar November 2013 PwC 23 Tips & Considerations

Be prepared for audits! • Sales Tax compliance (reseller/exemption certificates on file)

Minimize franchise taxes! • Par-Value Capital Method allowed for Delaware Franchise Tax (gross assets-based instead of authorized shares)

Avoid worldwide profits from being taxed in California! • Does Israel Co. generate revenues from sales to U.S.? Israeli Co. may not have nexus in the U.S. but it might be taxable in California if all of its sales are to the U.S.

U.S. Tax Seminar November 2013 PwC 24 Scope and Limitations

The information contained in this presentation is for general guidance on matters of interest only. As such, it should not be used as a substitute for consultation with professional tax advisors.

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding any U.S. federal, state or local tax penalties.

Circular 230: this document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on the taxpayer.

U.S. Tax Seminar November 2013 PwC 25 Thank you!

Ron Mazurik, Senior Tax Manager, PwC Israel 03-7954471 [email protected]

Alon Sherer, Senior Tax Manager, PwC Israel 03-7954520 [email protected]

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