Oregon State Bar Association

OREGON STATE BAR ASSOCIATION INTERNATIONAL LAW SECTION FROM THE INSIDE AND OUT: FEDERAL AND FOREIGN TAX CONSIDERATIONS IN CROSS-BORDER TRANSACTIONS A CASE STUDY “CLEAN TECH GOES GLOBAL” PANELISTS Gabe B. Gartner Ellen McMillan Director of Corporate Tax Planning International Tax Manager Microsoft Corporation Tektronix, Inc. Redmond, WA Beaverton, OR John Shepherd Mark McGinley Manager of International and Federal Tax International Tax Partner Louisiana-Pacific Corporation Moss Adams LLP Portland, OR Eugene, OR Jon Brian Davis Asa Altmark Managing Director International Tax Senior Manager Chainbridge Research International Grant Thornton LLP Washington, DC Portland, OR MODERATOR Todd M. Beutler Tax Partner Lane Powell PC Portland, Oregon A CONTINUING LEGAL EDUCATION PROGRAM University of Oregon White Stag Block Building • Portland, OR • November 9, 2009 OSB – INTERNATIONAL LAW SECTION CASE STUDY: CLEAN TECH GOES GLOBAL Background A retired University of Oregon professor of molecular physics was tinkering around her garage laboratory in Eugene when she stumbled upon a photo- induced chlorophyll substrate-reduction process that generated tremendous energy and would soon set the renewable energy world ablaze. Realizing the vast environmental and commercial implications of her discovery, Mary approached a biomechanical engineer colleague at Oregon State University and together they raised sufficient funds from investors in their circle of friends and family, along with funds from a generous, local angel investor, to establish a company, Solnetik, to develop commercial applications for this new solar energy technology. After experimenting with various applications, Solnetik’s research and development team achieved a major breakthrough. Using experimental nanotechnology, they discovered that it was possible to arrange within an extremely thin polymer sheet an intricate series of nanochannels through which the energy-generating chlorophyll substrate could be kinetically-propelled for both an indefinite period of time and in such a manner as to maximize its photovoltaic output. This obviously opened up a number of possibilities for commercializing small- and large-scale, unobtrusive, high-output, flexible solar arrays, which Solnetik was keen to develop. After further research and development, Solnetik developed several prototypes and displayed its flexible polymer array prototypes at the annual renewable energies convention being held in Portland. Solnetik’s new technology and functioning prototypes took the convention by storm and Solnetik received the coveted “Golden Photon Award” for its ground-breaking contribution to the renewable power industry. Solnetik’s arrays even became the focus of the convention’s keynote speech delivered by a former Vice President of the United States. Afterwards, Solnetik’s flexible polymer arrays were subsequently featured in a cover article in the next issue of The Journal of Renewable Technologies. Over the next couple of years, Solnetik experienced breakaway growth and quickly joined the top ranks of renewable energy companies. With steady growth anticipated in the U.S. market and significant sales domestically and internationally, Solnetik has determined the time is right to look to key foreign markets for additional sales growth as well as sourcing, manufacturing and research. Page 1 OSB – INTERNATIONAL LAW SECTION PANEL ONE – DOING BUISNESS IN CHINA I. EXPLORING THE CHINESE MARKET A. Overview Solnetik’s management needed to understand China before entering the market. • Notes / Issues: B. U.S. Sales Representative in China One of Solnetik’s first major initiatives outside the U.S. was to send sales representatives to China to introduce its technology and products to the Chinese market. Solnetik saw an opportunity to position itself as the market leader in harnessing renewable energy to fuel the continued growth of the Chinese economy. Solnetik’s goal was to be well-positioned in the market for when China abandoned its dependence on coal and foreign oil and adopted more eco-friendly practices focusing on renewable energy. To start, Solnetik sent employees from Oregon over to Shanghai and other Chinese cities. • Notes / Issues: Page 2 OSB – INTERNATIONAL LAW SECTION C. Hiring Chinese Representatives Solnetik quickly discovered that local employees and contacts were a key ingredient to success in the Chinese market. Accordingly, it called home its U.S. sales representatives and instead hired a Chinese citizen to help develop those contacts and expand sales in the market. • Notes / Issues: D. Committing to Presence in China With its continued success in the Chinese market, Solnetik established a regional sales office in Shanghai to bolster its growing market share there and in neighboring countries, as well as to identify potential sourcing and manufacturing opportunities. Employees from the U.S. were sent to the Shanghai office, and additional Chinese employees were hired to staff the office. • Notes / Issues: Page 3 OSB – INTERNATIONAL LAW SECTION D. Committing to Presence in China (cont.) The Shanghai office showcased Solnetik’s technology and products for prospective customers. The office was built out as a state of the art showroom for Solnetik’s flexible polymer arrays, and upon entry guests were greeted by walls of moving images demonstrating the company’s products in various applications (e.g., on buses, railcars, office buildings, aircraft). • Notes / Issues: In addition to more standardized items, Solnetik focused its sales efforts on custom fabrication projects involving various applications of its solar technology and products. For these projects, Solnetik’s Shanghai account representatives would visit with customers as part of a standardized inspection, bid and bid- review process. After visiting a customer’s site to gather information, the Shanghai account representatives and office manager would develop a preliminary bid for the customer. If satisfied with the terms of the preliminary bid, the customer would sign the sales documents and return them to the Shanghai office. Solnetik’s documents all state that an accepted bid does not become a binding agreement until the home office approves the bid and signs the documents. In practice, however, the responsible officer in Portland could not oversee each sale in China, and bids routinely receive approval without review. • Notes / Issues: Page 4 OSB – INTERNATIONAL LAW SECTION E. Delivering Services in China Not long after entering the market, Solnetik’s local customers began to demand that it provide various services in China (e.g., general consulting, maintenance). To ensure high levels of customer satisfaction, Solnetik’s management determined that the best course of action would be to send personnel from the U.S. home office to China, and to simultaneously hire local employees or agents, to meet the demand for services. • Notes / Issues: II. STRATEGIC EXPANSION IN CHINA A. Incorporating a Branch Solnetik’s Shanghai operations allowed the company to quickly achieve good market penetration in China. As a result, Solnetik’s management decided that pursuing self-distribution within China made sense. One of the first options to consider was whether Solnetik could or should incorporate its existing branch. • Notes / Issues: Page 5 OSB – INTERNATIONAL LAW SECTION B. Acquiring a Chinese Company To jump-start its expansion into the Chinese market, Solnetik identified a local company for acquisition. The Chinese company was in the business of manufacturing custom gateways and batteries used in certain Solnetik products. Solnetik’s management believed that the acquisition of this company would facilitate Solnetik’s adoption of a more vertical source and supply chain, which would further add to its bottom line. • Notes / Issues: C. Reconsidering Go-it-Alone Distribution Solnetik’s Shanghai operations allowed the company to quickly achieve good market penetration in China. Nonetheless, Solnetik – like most companies new to the China market – found that the distribution channels within the country were difficult to access and organic logistics development was next to impossible. Accordingly, the company determined that it could more-efficiently enhance its total market penetration by partnering with a local sales/distribution company. • Notes / Issues: Page 6 OSB – INTERNATIONAL LAW SECTION D. Joint Development of Additional IP While the solar array operations firmly established in China, Solnetik’s management turned to the question of future developments. As it happened, the company’s scientists had again stumbled on some “promising findings” in the laboratory – this time in the geothermal energy space. Solnetik’s management met with its advisors, and came away with the understanding that the Chinese government was keen to develop geothermal energy technology locally. Further, the company’s advisors offered to introduce Solnetik’s management to representatives from a reputable Chinese chemical engineering firm considered to be a most-trusted development partner. After meeting with the Chinese engineering firm’s representatives, Solnetik decided to jointly develop its “promising findings” with the Chinese engineering firm. • Notes / Issues: Page 7 OSB – INTERNATIONAL LAW SECTION III. OTHER STRATEGIC CONSIDERATIONS A. Further Structuring Several of Solnetik’s advisors had suggested to management that efficiencies might be gained if the company were to hold its Chinese operations through a separate non-U.S. holding company. Management was intrigued.

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