Expanding into the US Financial and Tax Issues Kevin McLoughlin Joe Bollard 25 January 2005

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Expanding into the USFinancial and Tax
IssuesKevin McLoughlinJoe Bollard25 January
2005
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Agenda

• Objectives in tax planning
• Impact of sales model
• Maximising low taxed profit
• Minimising unrelieved losses
• IP ownership
• MA and fundraising

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Objectives in Tax Planning
The Profit Pie
High tax
Low Tax
High/low tax
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Objectives in Tax Planning

• Minimise cost associated with US tax
• Consider sales model
• Apply tax analysis
• Develop tax plan in harmony with business plan
• Combine with legal analysis
• How is expansion financed?
• Plan early to avoid costly mistakes
• Maximise flexibility for future expansion
• Manage the evolving structure!

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The Sales Model Tax Issues

• US a multi-tier tax system
• Federal and State taxes
• Local business tax rules
• Creating a taxable presence
• Transfer pricing
• Restrictions on use of debt
• Head office costs

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The Sales Model

• No local presence
• Partnering
• Selling into US from Ireland
• Issues
• US taxable presence
• US sales taxes
• Practicality

Ireland
Ire Co
Sales
US Customer
US
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The Sales Model
Ireland
Ire Co

• Local presence - 3 options
• Rep office
• Branch
• Subsidiary
• Implications
• US Co
• Taxed in US
• Branch
• Taxed in Ireland and US
• Rep Office
• No US tax
• Care required

US Co
Branch
Rep Office
Sales
US
US Customer
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The Sales Model Ignored Taxes

• Sales Tax
• How many States?
• Where is nexus?
• Available exemptions
• Payroll Taxes
• Impact on salaries
• Impact for expats
• Social security
• Withholding Taxes Interest, royalties,
  dividends

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Maximising Low Taxed Profits

• Ireland a low tax country 12.5 (10/0)
• US a high tax country 35 plus
• gt Maximise Irish profits
• Needs to be defensible in the US
• Functions
• Risks
• Substance
• Documentation

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Minimising Unrelieved Losses

• Get best use for start up losses
• Build into structure e.g. branch at outset
• Flexibility to change when profitable

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IP Ownership

• Consolidate IP in Ireland low tax
• Patent exemption
• RD tax credit
• 12.5 tax rate
• If RD outside Ireland
• RD services on behalf of Ireland
• Avoid high tax on extracting IP

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IP Ownership
IP - Residual Profit
RD Services
Irish Co
Patents
US Co
Patent Co
Licences
No IP Cost

• Issues
• Achieves low tax rate on income earned
• Irish rules to qualify for patent exemption
• Pricing of RD Services
• Is separate IP Hold Co needed?

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Tax Planning Longer Term

• Consider optimal group structure
• Withholding taxes on income flows
• Treasury management
• Holding companies
• Risk management
• Dealing with acquisitions
• Fund raising

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Tax Planning Longer Term

• Advantages of US as regional hub
• Withholding taxes
• Canada
• Latin America
• Japan

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MA Tax Issues

• Preparing to acquire
• Asset v. share deals
• Due diligence
• Handling potential tax liabilities of Target
• Deal price
• Documentation e.g. warranties, indemnities

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MA Tax Issues

• Acquisition planning
• Use of debt
• Location of IP
• Use of losses in Target
• Step Up in assets acquired
• Sheltering future growth

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MA Tax Issues

• Acquisition costs
• Transfer taxes e.g. Stamp Duty
• Capital duty share deals
• Sales taxes
• Are transaction costs deductible?
• Is VAT on costs recoverable?

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MA Tax Issues

• Post acquisition
• Integration
• Structural
• Operational
• Moving IP to Ireland
• Beware non-US subs under US

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Fundraising

• Listing
• Capital duty
• Pre-listing restructuring
• Tax residence
• Impact of low tax rate on valuation
• VC - Typical demands
• US top company
• Senior execs in the US
• Tax impact

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Conclusion

• Plan early to avoid costly mistakes
• Business model should drive tax planning
• Flexibility to meet growth of business
• Manage evolving structure
• MA issues can be complex
• Impact of tax on company valuation

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Contacts
Joe Bollard Tax Partner Ernst Young, Dublin Ph
353 1 479 2102 E-mail joe.bollard_at_ie.ey.com Kev
in McLoughlin Tax Director Ernst Young,
Dublin Ph 353 1 479 2139 E-mail
kevin.mcloughlin_at_ie.ey.com David Allgaier US Tax
Desk Ernst Young, Dublin Ph 353 1 479
2157 E-mail david.allgaier_at_ie.ey.com