Innovations

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• Innovations Strategies for Troubled Times
• Economic Stimulus Plans Internationally
• April 29, 2009
• Washington, D.C.

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Economic Stimulus Plans Internationally

• Introducing Our Panel
• Moderator Lewis Horowitz, Lane Powell PC
• Thomas Barry, British Embassy, United Kingdom
• Philippe Drouillot, Soulier Avocats, France
• Albert Garrofé, Cuatrecasas Gonçalves, Pereira,
  Spain
• Zhang Yi, King Wood, China
• Leigh Brown, Minter Ellison, Australia
• Ken Levinson, Faegre Benson, U.S.A.

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Economic Stimulus Plans Internationally

• What Well Cover
• Brief summaries of Economic Stimulus Plans in the
  U.K., France, Spain, China, Australia, and the
  U.S.
• Tax and investment and other incentives offered
  by each
• Accounting measures in each (where applicable)
• Contrast and compare approaches Panel
• What may coming next Panel
• Your questions

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Session Title

• Economic Stimulus United Kingdom
• Thomas Barry, British Embassy, Washington, D.C.

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3,000 Car Scrap Scheme
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1.1 billion Strategic Investment Fund
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Economic Stimulus Plan 2009 France

• Economic Stimulus France
• Philippe Drouillot, Soulier Avocats
• p.drouillot_at_soulier-avocats.com
• Tel [phone]

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Economic Stimulus Plan 2009 France

• General Framework
• Two successive Stimulus Plans January and March
  2009
• Total approx. EUR 32 billion, i.e. approx. 1.6
  of the GNP
• In the low range of the Stimulus Plans in other
  countries
• Philosophy
• Package focusing on investments rather than on
  consumption
• To provide companies with new sources of
  financing in 2009

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Economic Stimulus Plan 2009 France

• Main investment incentives
• Acceleration of public investments (EUR 14
  billion) new infrastructures, universities,
  defense, building restoration, etc. (national
  local)
• Automotive sector (EUR 7 billion)
• Soft loans granted (EUR 6.5 billion), but subject
  to the absence of relocation in foreign
  countries, redundancy plans and bonus for
  managers
• Premium to customers who purchase ecological
  vehicles, in replacement of vehicles more than 10
  years old
• Sovereign wealth fund, to invest in strategic
  French companies (EUR 20 billion)

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Economic Stimulus Plan 2009 France

• Main corporate tax incentives (1/3)
• In 2009, tax receivables can be immediately
  refunded to companies (approx. EUR 10 billion)
• Example tax losses can be carried forward (i.e.
  used against future profits), but they can be
  also carried back (i.e. used against past
  profits)
• In case of carry-back election, in principle
  tax credit is used against future corporate tax
  due and refunded in cash after 5 years only
• In 2009, companies can have an immediate cash
  refund of the tax credit
• In addition, the carry-back option can be
  exercised in relation to previous losses, and not
  only the loss made during the last financial
  year in other words, a company having elected to
  carry-forward its losses may therefore change its
  mind and decide to carry-back such losses without
  any statute of limitations being applicable

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Economic Stimulus Plan 2009 France

• Main corporate tax incentives (2/3)
• Tax credit for RD expenses in France now set at
  30 of the eligible RD expenses
• For companies applying for RD Tax Credit for the
  first time, and for companies that have not
  received RD Tax Credits in the last five years,
  the rate of the tax credit is increased to 50
  for the first year and 40 for the second year
  (subject to conditions)
• In principle, tax credit is used against future
  corporate tax due and refunded in cash after 3
  years only
• In 2009, companies can have an immediate cash
  refund of the tax credit

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Economic Stimulus Plan 2009 France

• Main corporate tax incentives (3/3)
• The local business tax (taxe professionnelle)
  should be reduced by 80 in 2010 (not included in
  the stimulus plans at this stage)
• Crucial issue, given that the global revenue from
  the local business tax is approx. EUR 18 billion,
  whereas the revenue from the corporate income tax
  is EUR 54 billion
• Then the effective tax rate in France could be
  reduced by approx. 25
• But the question of the possible replacement of
  such revenue by another tax is still pending

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Economic Stimulus Plan 2009 France

• You must know
• The tax treaty between the USA and France has
  been updated in January 2009 (but amendment not
  yet in force)
• 0 withholding tax on dividend payments (5
  previously) subject to conditions
• 0 withholding tax on royalty payments (5
  previously) subject to conditions
• New provisions on treaty shopping
• New provisions on partnerships

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Economic Stimulus Spain

• Economic Stimulus Spain
• Albert Garrofè, Cuatrecasas Gonçalves Pereira
• albert.garrofe_at_cuatrecasas.comTel 1 212 784 88
  01

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Economic Stimulus Spain

• General Framework
• No single general Stimulus Plan in Spain
• Up to 80 measures introduced in different areas
  to ease the financial situation of companies
  based in Spain
• It is expected that these plans will increase GNP
  for 2009 by approximately 1, according to the
  OECD (third highest in the world)
• Main focus of the measures adopted
• Specific industries
• Tax incentives
• Corporate and accounting measures
• Employment incentives

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Economic Stimulus Spain

• Specific industries
• Some measures focus on economic sectors strongly
  affected by the crisis. Others aim to generally
  stimulate the Spanish economy or facilitate
  liquidity in the financial sector
• Euro 50 billion assigned to purchase reliable
  (non-toxic) assets from banks through different
  auctions
• City councils will invest E8 billion in local
  construction, e.g. new infrastructure, building
  restoration, general improvements
• State-backed guarantee for real estate developers
  to construct government-subsidized housing.

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Economic Stimulus Spain

• Specific industries contd
• Auto sector
• Public subsidies for RD, optimizing production,
  and producing more ecological cars, etc.
• Cost-free financing up to a total of E10,000 for
  purchasing ecological vehicles or replacing
  vehicles 10 years old.

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Economic Stimulus Spain

• Tax incentives
• Unrestricted depreciation for new assets, subject
  to preserving employment
• New regime implies a deferral in corporate
  income tax and encourages i) investments in
  new fixed assets related to companys business
  (real estate, machinery, etc.) and ii)
  preservation of employment during two years
  following the investment.
• Companies may depreciate these new assets, with
  no restrictions, provided
• The new fixed assets become operational during
  the 2009 or 2010 tax years.
• The company preserves, during the next 24 months,
  the same staff average it had during previous 12
  months.

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Economic Stimulus Spain

• Tax incentives contd
• Maintenance of tax credit for RD activities
• Companies involved in RD can benefit from a tax
  credit at a general rate from 25 up to 42 based
  on expenses incurred during the tax year. (The
  Spanish government had planned to abolish this
  tax credit as of 2012 but recently announced it
  would be maintained.)
• Monthly VAT refund
• All companies may claim this if they have a VAT
  credit against the public funds. To date, this
  was only applicable to qualifying exporters
  non-qualifying companies had to wait to end of
  year.

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Economic Stimulus Spain

• Tax incentives contd
• VAT on bad debts can be recovered one year after
  their due date
• Elimination of capital duty for restructuring
  operations
• Capital duty of 1 no longer levied on certain
  qualifying corporate reorganizations (mergers,
  divisions, etc.)

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Economic Stimulus Spain

• Corporate and accounting measures
• Temporary modification of the criteria for
  compulsory winding up
• According to Spanish Public and Private Limited
  Liabilities Companies Acts, the reduction of
  companies equity to less than 50 of the share
  capital by reason of accumulated losses is a
  cause for compulsory winding up. As an exception,
  during fiscal years 2009 and 2010, losses
  resulting from depreciation of fixed assets, real
  estate investments and trading stocks will not be
  considered for these purposes.

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Economic Stimulus Spain

• Corporate and accounting measures contd
• Amendment to the Insolvency Act in relation to
  refinancing agreements
• Refinancing agreements are excluded from the two
  years hardening period if
• i) they are entered by creditors whose credits
  represent at least 3/5 of debtors liability at
  the time of signing the refinancing
• ii) there is independent export report on the
  sufficiency of the information provided by the
  debtor, the reasonability of the viability plan,
  and the proportionality of the guarantees
  undertaken and
• iii) it is documented through notarial form.

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Economic Stimulus Spain

• Employment incentives
• These incentives are oriented to preserving
  employment and reducing Social Security Costs for
  companies. Most significant include
• 50 reduction in Social Security contributions in
  procedures for temporary lay-off (or reduction in
  working time).
• Complementary unemployment income for employees
  involved in temporary layoff (or reduction of
  working time) if their contracts are terminated
  afterwards.
• Reduced Social Security contributions for hiring
  employees qualifying for unemployment income.
• Measures focused on promoting part-time
  contracts.

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Economic Stimulus-China

• Economic Stimulus China
• Zhang Yi, King Wood, China
• zhangyi_at_kingandwood.com
• Tel [phone]

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Economic Stimulus-China

• Overview
• Previous CNY4 trillion investment package (in
  seven fields) approved on November 27,2008
• Updated CNY 4 trillion investment package (in
  seven fields) approved on March 13, 2009, as
  adopted by 2nd Session Meeting of the 11th
  National Peoples Congress
• Composed of approx. CNY1.18 trillion by Central
  Government approx. CNY 3 trillion by Local
  Government and Public Investment
• Expected to boost 18 trillion further investment
  by all other entities
• State Council will allow local government to
  issue CNY 200 billion government bonds first
  time in China. Local governments are selecting
  their own financing platforms.

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Overview contd

• Housing Improvement Program
• Rural Livelihood and Infrastructure Improvement
  Program
• Medical Care, Health, Culture and Education
• Environment-related Investment
• Independent Innovation and Structural Adjustment
• Sichuan Earthquake Aftermath Reconstruction
• Infrastructure (airports, railways, highways,
  grid and etc) Construction

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Economic Stimulus-China
Industry-specific Stimulus Plans

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Economic Stimulus-China
Industry-specific Stimulus Plans (Contd)

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Economic Stimulus-China
Tax Cut Plan

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Economic Stimulus in Australia

• Economic Stimulus Australia
• Leigh Brown, Minter Ellison
• Leigh.brown_at_minterellison.com
• Tel [phone]

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Economic Stimulus in Australia

• Overview
• A10.4 billion Economic Security Strategy
  announced on 14 October 2008.
• A4.7 billion Nation Building Package announced
  on 12 December 2008.
• A42 billion Nation Building and Jobs plan
  announced on 3 February 2009

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Economic Stimulus in Australia

• Nation Building and Jobs Plan
• Expected to increase economic growth by 0.5 of
  GDP in 2008-09 and 0.75-1.00 in 2009-10
• The Plan involves
• targeted spending on education infrastructure,
  social and defense housing and energy efficiency
• investment in the commercial property sector
  through the Australian Business Investment
  Partnership
• a direct cash payment to those earning 100,000
  or less and
• a tax break for businesses.

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Economic Stimulus in Australia

• Business Tax Break
• Tax deduction of 30 of the value of
• new investment of more than 1000 for small
  businesses and more than 10,000 for other
  businesses
• in new tangible, depreciating assets or new
  investment in existing assets
• purchased or contracted for by 30 June 2009 and
• installed prior to 30 June 2010.

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Economic Stimulus in Australia

• Business Tax Break
• Tax deduction of 10 of the value of
• new investment of more than 1000 for small
  businesses and more than 10,000 for other
  businesses
• in new tangible, depreciating assets or new
  investment in existing assets
• purchased or contracted for by 31 December 2009
  and
• installed prior to 31 December 2010.

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Economic Stimulus in Australia

• Frequently Asked Questions
• Once the threshold is reached for an individual
  asset (subject to aggregation discussed below)
  any further investment in other assets qualifies
  for the tax break.
• The value of identical or substantially identical
  assets or assets forming a set may be aggregated
  to meet the threshold.
• The tax break will not be reduced for any
  non-taxable use of the asset.
• The asset does not necessarily have to be located
  in Australia when you start to use it, but it
  must be intended to use the asset in Australia at
  some time in the future.

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Economic Stimulus in Australia

• Business Tax Break - Example
• A business is looking at installing new plant
  worth 60,000 before 30 June 2010.
• As long as the business purchases or contracts
  for the plant before 30 June 2009 it will be
  entitled to the tax break.
• 30 of the value of the new plant (18,000) can
  be claimed as a deduction in the businesss 2009
  tax return.
• If the business is not currently generating
  profits the deduction will carry forward as a
  loss.

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Economic Stimulus in Australia

• State Incentives
• International investors may also be interested in
  State government initiatives including
• NSW Major Investment Attraction Fund to attract
  jobs and investment in NSW manufacturing
• Increased spending on infrastructure in
  conjunction with Infrastructure Australia the
  Build Australia Fund specific projects will be
  announced from May 2009 onwards
• Commitments by State governments to cut red tape
  in approving new investments in capital works.

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Economic Stimulus in the U.S.

• Economic Stimulus in the U.S.
• Kenneth S. Levinson, Faegre Benson
• klevinson_at_faegre.com
• Tel [phone]

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Economic Stimulus in the U.S.

• Policy Intentions
• Increase liquidity in the banking/financial
  sector
• Promote consumer confidence in key sectors
• Avoid systemic collapse exposure by reinforcing
  key companies (and industries)
• Open up credit markets
• Increase consumer and government spending
• Provide greater accountability and transparency
  regarding bailout expenditures

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Economic Stimulus in the U.S.

• Policy Intentions
• Increase liquidity in the banking/financial
  sector
• Promote consumer confidence in key sectors
• Avoid systemic collapse exposure by reinforcing
  key companies (and industries)
• Open up credit markets
• Increase consumer and government spending
• Provide greater accountability and transparency
  regarding bailout expenditures

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Economic Stimulus in the U.S.

• Legislation
• Economic Recovery and Reinvestment Act of 2009
• Signed into law Feb. 17, 2009 (the Stimulus
  Bill)
• Nearly 800 B authorized
• Stimulus provisions, further pay limits for
  companies accepting TARP funds, increased
  accountability for TARP funds, set up website
  (www.recovery.gov)
• Emergency Economic Stabilization Act of 2008
• Signed into law Oct. 3, 2008 (the Bailout Bill)
• 700 B (two tranches of 350 B each, plus up to
  an additional 100 B upon presidential
  certification)
• TARP (Troubled Asset Relief Program)
• Capital Purchase Program
• Public-Private Investment Fund
• Small Business Community Lending Initiative

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Economic Stimulus in the U.S.

• Conventional budget constraints, deficit
  expansion concerns not a factor
• Traditional Congressional pay-for rules do not
  apply in the stimulus arena
• Obama Administration has made it clear that for
  longer-term policy initiatives (e.g., health
  care, energy independence, etc.), those rules and
  normal budget considerations will apply
• Initial proposals for 2010 Budget (Oct. 1, 2009 -
  Sept. 30, 2010) by the Administration have
  brought back on budget spending for the Iraq
  war, borrowings from Social Security, etc.
• Purpose to ensure entire U.S. Government budget
  is understood by and transparent to taxpayers
• 3.5 T budget recently passed by House of
  Representatives

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Economic Stimulus in the U.S.

• Contributors to Stimulus
• Legislation enacted by Congress
• Department of the Treasury
• Federal Reserve
• Federal Deposit Insurance Corporation
• Other Federal governmental regulators (IRS, SEC,
  etc.)
• State and local governments
• Financial Accounting Standards Board

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Economic Stimulus in the U.S.

• Forms of Stimulus (cont.)
• Federal Reserve
• Lowered fed funds (inter-bank) borrowing rate
  (currently 0 -.25)
• Acquire assets, provide loans, finance purchases
  of commercial paper from companies, and Fannie
  Mae/Freddie Mac (current exposure estimate 2
  T)
• Loan facility, warrants for 79.9 of AIG (122.8
  B)
• Acquire 300 B Treasury Notes, and 750 B in
  mortgages
• Participation in financing Legacy Securities
  purchases (31 leverage cap?)
• FDIC
• Temporary liquidity guarantee
• Participation in financing Legacy Asset
  purchases (up to 61 leverage)
• Increased insurance limits on qualified deposits
  (now 250,000)

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Economic Stimulus in the U.S.

• Forms of Stimulus (cont.)
• Treasury Department
• Under TARP, can purchase troubled assets from
  financial institutions
• Acquired preferred stock warrants under Capital
  Purchase Program (JPMorgan, Citigroup, Wells
  Fargo, BOA, etc.) (197 B)
• Systemically Significant Failing Institution
  acquisition of AIG preferred (40 B)
• Targeted Investment Program additional Citigroup,
  BOA investments (40 B) and loss sharing with
  Citigroup, BOA on mortgage assets (face 424 B)
• Loans to auto industry (GM, Chrysler plus GMAC)
  (24.7B)
• Temporary guarantee program for money market
  funds
• Participation with private equity to acquire
  legacy assets
• Financial Stability Plan (part of 2nd tranche of
  TARP) ( 300 B)

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Economic Stimulus in the U.S.

• Forms of Stimulus (cont.)
• Direct US government cash infusion into specified
  companies (debt, preferred stock, etc.)
• Voting, management or approval rights
• Other strings attached to TARP funds (e.g.,
  restrict executive salaries, deny bonus or
  contingent compensation except in the form of
  stock redeemable only after US repaid targeted
  funding for specified activities)
• Restrictions on new H-1B visas (companies
  accepting TARP funds required for 2 years to
  justify that visa applicants not displacing US
  workers for the position)
• Treasury Departments intentions to unseat
  current management in certain industries (e.g.,
  banks) if they accept exceptional government
  assistance in future
• Denial of supplemental bailout funds to auto
  companies (even with required change in GMs CEO)
  pending acceptable strategic plan

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Economic Stimulus in the U.S.

• Forms of Stimulus (cont.)
• Congressional appropriations of funds to be paid
  to states and/or municipalities for specified
  purposes
• Shovel-ready construction projects (bridges,
  roads, mass transit, construction, etc.)
• Education programs (K-12, merit pay)
• Extended unemployment benefits (payment
  eligibility extended gt 26 weeks, extended COBRA
  availability subsidized COBRA costs)
• BUT, little of stimulus payments to states
  permitted to relieve general state/local budget
  shortfalls, so pressure remains on state/local
  governments to balance their budgets by other
  means
• States also enacting mortgage foreclosure
  moratoria, other consumer protection laws

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Economic Stimulus in the U.S.

• Forms of Stimulus (cont.)
• Public-Private Investment Program treatment of
  legacy assets
• Examples illiquid sub-prime mortgages (legacy
  loans) or credit swap derivatives (legacy
  securities) with no current market, hence no
  fair market value (thus limiting accounting
  write-downs or sale)
• Capital/asset ratio laws prevent/restrict lending
  when FMV of assets fall
• Plan funds created to buy legacy assets with
  50/50 equity financing from private capital and
  Treasury, with FDIC guarantee of debt financing
• Sellers identify legacy assets for sale auction
  process determines buyers
• Private management of liquidation process for
  acquired legacy assets
• Some recipients may reject/return certain federal
  funds due to strings
• States (required extension/expansion of
  unemployment benefits)
• Companies (appearance of need vs. competitors,
  compensation or dividend payment restrictions,
  increased reporting)

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Economic Stimulus in the U.S.

• Some Tax Incentives with Positive Impact
• Real-estate related provisions
• First time home-buyer credit
• Extension of 50 bonus depreciation to qualified
  property in service lt 1/2010
• Small businesses (lt 15 M gross) can elect 3 5
  year NOL carry-back for 2008
• Election to recognize discharge of indebtedness
  income over 5 years
• Business debt transactions in 2009/2010 (cash,
  exchange, debt for equity, etc.)
• Exchange for 85 in cash of certain low-income
  housing credits ( 42) for project
  developers/states

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Economic Stimulus in the U.S.

• Positive Tax Incentives (cont.)
• Renewable energy incentives
• Advanced energy tax credits (solar, wind, fuel
  cell/micro-turbine development, hybrid vehicle
  batteries, smart grids, etc.), Plug-In Electric
  Drive vehicle credits
• Production tax credits (extended to alternate
  energy forms)
• Grants from Treasury in lieu of investment tax
  credits (converts ITC to refundable credit)
• Renewable Clean Energy, Qualified Energy
  Conservation Bonds (construction of renewable
  generation facilities and for green programs,
  rural development)
• Opportunities to challenge state/local property
  tax assessments lagging behind market value
  decreases
• Employer tax credits to cover COBRA premium
  subsidy obligation

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Economic Stimulus in the U.S.

• Some Tax Incentives with Negative Impact
• International tax reform, increased reporting
  concepts
• Threats to further erode/reduce deferral for
  income of CFCs, require more PFIC-related
  transaction reporting
• Increased U.S. enforcement, reporting and
  penalties likely regarding foreign assets/bank
  accounts/income (despite secrecy laws)
• Proposed legislation regarding Offshore Secrecy
  Jurisdictions that imposes greater penalties,
  requires more and broader reporting and creates
  presumptions when tax havens used
• Impose know your customer and anti-laundering
  requirements on hedge funds
• Prohibit tax patents on inventions to
  minimize/avoid/defer any taxes (federal, state or
  foreign)

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Economic Stimulus in the U.S.

• Negative Tax Incentives (cont.)
• Tax carried interests of hedge fund managers as
  ordinary income
• Reduction in certain oil and gas company tax
  deductions/benefits
• Codify economic substance doctrine
• Disallow deductions or losses from transactions
  with tax avoidance purpose (courts apply on
  case-by-case basis today) taxpayers to show
  substantial non-tax purpose and significant
  economic consequences aside from tax benefits
• Possible surcharge tax on bonuses for employees
  making gt 250,000 from companies receiving gt 5 B
  in U.S. Government bailout funds

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Economic Stimulus in the U.S.

• Complementary Accounting Changes
• FASB Mark-to-Market Changes (to Fair Value
  Accounting per FAS 157)
• Fair value determinations when no active market
• Reflect sale price for orderly, not distressed,
  transaction even if formerly active market
  becomes inactive
• Fair value for financial instruments
• Disclose value quarterly (not annually as at
  present) with qualitative and quantitative
  information regarding estimates (e.g., loans held
  by banks)
• Fair value for other than temporary impairment
• Management may avoid impairment charge if they
  represent they will hold security until fair
  value recovers and if no present intention to
  sell must also believe all cash flows will be
  collected

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Economic Stimulus Plans Internationally

• Panel Discussion Questions

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Economic Stimulus Plans Internationally

• Final Questions?
• Thank You for Joining Us!