By Robert Hanley, Ming Henderson, Amy S. Levin, Gordon Peery, Julia K. Sutherland, Peter Talibart, and Deirdre M. Murphy Seyfarth Shaw LLP
To the shock of corporate Britain the UK voted last week, by 52% to 48%, to leave the European Union. Within hours of the referendum result the British Prime Minister David Cameron announced that he would be standing down some time before October. The British Pound slumped, and stock markets around the world saw billions wiped off their value.
However, despite the political and market upheaval, the UK’s membership of the European Union will continue until it has been formally withdrawn, and that is likely to take several years. In the immediate future, the legal landscape will remain substantially unchanged in many respects.
This note considers the exit (or BREXIT) procedure and timing, alternatives to EU membership and the legal implications of the UK leaving the EU.
Exit procedure and timing
Despite the dramatic market reaction to the BREXIT vote, the process by which the UK will leave the European Union will take several years and, in the meantime, the legal landscape will remain largely unchanged.
The formal first step to exit is the UK notifying the EU of its intention to leave in accordance with Article 50 of the Treaty on European Union. Once served, the remaining countries of the EU are then obliged to negotiate with the UK the terms on which the UK will withdraw. The withdrawal agreement will cover not only the terms of the UK’s exit but also the nature of the UK’s future relationship with the EU.
Under Article 50 the EU treaties will cease to bind the UK after two years from the date the UK serves notice of its intention to leave the EU (although this two-year period could be extended by agreement between the European Commission and the UK Government). The UK Prime Minister David Cameron has indicated that he does not intend to serve an Article 50 notice and that doing so will be for his successor. Accordingly, the two-year timetable for exit may not commence until October this year when the new Prime Minister has taken over. This leaves a period of several months for informal talks between the UK Government and the European Commission and other EU member states.
Once the Article 50 notice has been served, the formal negotiation process is very likely to take at least two years owing to the complexity of the issues and the range of issues to be accommodated. The Government’s view (in the lead up to the BREXIT referendum) was that the negotiations could take up to 10 years whereas the successful ‘Leave‘ campaign has indicated its desire that negotiations are concluded before the next UK general election in May 2020, just under four years from now.
In any event, once negotiations are concluded the withdrawal agreement will need to be ratified by the UK and the EU and, in the latter case, this means ratification by all 27 remaining member states which is unlikely to happen quickly.
Alternatives to EU membership
The nature of the UK’s ongoing relationship with the EU will directly affect the way in which the UK’s legal framework will change when the UK does eventually exit the EU. There are several alternative models the UK could choose according to how close (or not) the UK wishes to remain to the EU. The greater the UK seeks to distance itself from the EU the greater the likelihood of change to the UK’s existing legal framework. The alternative models include the following:
- The European Economic Area (EEA) – Iceland, Lichtenstein and Norway have a relationship with the EU through membership of the EEA, which enables those countries to participate fully in the ‘Single Market’. The Single Market ensures free movement of goods, capital services and persons. It also covers related areas such as consumer protection, company law, environment and social policy, and EEA members are bound by decisions of the European Free Trade Association Court. As a result, if the UK chose to join the EEA after leaving the EU, the UK would remain subject to the vast majority of current and future EU laws.
- The European Free Trade Association (EFTA) – A step further from the current position would be for the UK to elect to become a member of the EFTA. The EFTA is a regional free trade association based on numerous free trade agreements with other (EFTA and non-EFTA) countries. Iceland, Lichtenstein and Norway are all EFTA members as is Switzerland, but Switzerland rejected membership of the EEA. Switzerland has over 100 bilateral agreements which give it access to the Single Market in specific sectors. The Swiss arrangements provide for the free movement of goods (but not services) and Swiss goods are required to comply with EU laws in certain areas. Even in areas where compliance is not required (such as consumer protection, employment law and intellectual property), Swiss domestic law is consistent with EU law. Accordingly, even if the UK was to opt for this approach, it would not result in huge change in many areas of UK law despite having to negotiate many separate bilateral agreements.
- Customs Union – Turkey has entered into a customs union with the EU that allows Turkey access to the Single Market for goods without the need to pay tariffs, but it is required to levy tariffs on imports of goods from countries outside the customs union. However, a customs union would not apply to services that would make it unattractive to the UK given the importance of the EU to the UK’s services sector.
- Free Trade Agreements – Like Canada, it would be open to the UK to negotiate a free trade agreement with the EU to facilitate tariff-free trade on specific goods and services. However, while these agreements address various issues such as tariff barriers they are unlikely to extend mutual recognition and the single passporting system for financial institutions, a critically important sector for the UK.
- The WTO Model – This is the default or base line position where there are no special agreements or relationships, and the UK simply relies on trade governed by the World Trade Organisation’s rules. Under this model the UK and the EU are each in the same position as any other country with which they have no specific agreement. This model would represent the most radical move away from the EU and result in the greatest changes from a legal perspective.
None of the above alternatives to EU membership offers a clear or obvious precedent for the extent, terms or structure of the new relationship between the UK and the EU. Successful conclusion of the negotiation process for a new UK/EU arrangement is likely to be time consuming and difficult given the background to the negotiations and the fact that a number of EU governments and institutions effectively hold a right of veto at some stage in the process.
If the UK elects to join the EEA or the EFTA, it seems likely that current EU laws and regulations would continue to apply and affect UK businesses. By contrast, if the UK opts for a customs union arrangement, free trade agreements or reliance only on the WTO rules, a much greater number of current EU laws would cease to apply and the UK could replace such laws in whatever manner it sees fit.
The legal implications of BREXIT
Until we know what form BREXIT will take and what agreements would replace Britain’s membership of the EU, it is difficult to predict the specific legal consequences that would arise following the UK’s withdrawal from the EU. The following are some general legal and regulatory issues that may arise from the UK’s decision to leave the EU:
- Contractual issues – The potential for BREXIT could act as a trigger for the exercise of termination, force majeure, ‘material adverse change’ and various change of control rights in many different types of contracts. Governing law, territory and jurisdiction clauses could also be impacted, and references to EU legislation or legal concepts may need to be amended. Accordingly, a review of agreements and clauses potentially triggered by BREXIT is recommended.
- IP rights – All pan-EU intellectual property (“IP”) rights may cease to apply in the UK (such as the European Union Trade Mark or “EUTM”). If so, this would leave only UK national rights or reciprocal rights granted by UK law pursuant to international treaty obligations, and could require businesses to re-apply for protection of their IP or carve out UK rights from existing EU rights. In practice, it is likely that the UK will legislate to preserve these rights as much as possible under any post-BREXIT relationship. Also, all pan-EU court orders issued by a UK court against IP infringers may cease to apply in the EU, and the UK courts may regard pan-EU orders issued by the courts of EU countries as no longer applying in the UK.
The European Patent System is entirely independent of the EU and will be completely unaffected by any changes to EU membership. Once the UK leaves the EU, patent rights for the UK will be obtained in exactly the same way as they are now, by a GB designation at the European Patent Office or as a separate national filing directly at the UK IPO. The only effect of leaving the EU would be that the proposed new EU Unitary Patent would not cover the UK. It is expected that provisions will be made for existing EU trade mark and design registrations to be converted to UK national registrations, with the same filing date as the original EU registrations.
- Employment issues – Many employment rights that derive from EU legislation have been enacted in domestic legislation, so will likely remain, such as discrimination and family-friendly employment rights. There is scope for reform in some areas considered unduly burdensome on business, such as collective consultation obligations (subject to union agreements which may continue to apply), and there is also opportunity to reform regimes perceived to lack certainty and create unnecessary burdens and costs for business, such as working time, holiday pay and equal treatment for agency workers. TUPE, another area of law stemming from the EU legislation that is firmly imbedded in domestic legislation as it provides stability to businesses, could either remain unchanged or be made more flexible in the future.
- Immigration – During the transition period, the immigration rights of EU nationals in the UK (and UK nationals in the EU) will remain unaffected. After the transition period, it is likely that UK nationals will no longer have the right to work in the remaining EU member states under the current conditions. Likewise, it is anticipated that EU nationals will need to obtain permission to work in the UK, and will need to meet the requirements of the immigration system in place at that time. The Government is likely to introduce a revised version of the Points Based System. The new restrictions will only come into effect after the transition period, as the Government must continue to comply with the right of free movement afforded to EU nationals under the current regulations in the interim. However, advance workforce planning is advised to limit the potential impact on business. For example, EU nationals currently in the UK may wish to document their status by applying for a registration certificate, which will confirm his or her authorization to reside and work in the UK.
- Financial services – The City of London, as a primary, global financial centre, is headquarters to leading financial services firms serving markets throughout the world, including the EU. BREXIT presents an opportunity in the long term for a new UK framework for market participants subject to financial services law. In the short term, BREXIT is likely to result in the loss of ‘passporting’ rights for UK-based, regulated financial services providers, depending on an EU-UK agreement. Legal work required by banks and financial services firms will depend on two primary factors: the extent to which an EU-UK agreement addresses financial services issues and whether the UK joins the EEA with a similar status as, for example, Iceland, Lichtenstein and Norway. It is anticipated that there will be a need to amend documentation to take account of the new regulatory framework that formalises UK status for financial services providers after BREXIT.
A significant proportion of UK financial services regulation is derived from EU legislation, some with direct effect that could fall away automatically (such as the Market Abuse Regulation) while the UK will gain the ability to repeal or modify other regulations, possibly involving grandfathering arrangements pending implementation of new domestic rules.
- Derivatives and Trading – Before BREXIT, London market infrastructure was in compliance with European standards, and OTC derivatives trading was subject to the European Market Infrastructure Regulation (EMIR). OTC derivatives trading continues to be subject to EMIR as implemented by the European Securities and Markets Authority (ESMA), in the absence of guidance to the contrary from ESMA. After BREXIT, EU approval of London-headquartered clearinghouses is generally thought to be necessary. In the absence of an EU-UK agreement on derivatives and other trading, the UK would need to draft and implement new law on trading because existing legislation and technical standards implementing EMIR (as well as regulations such as the Market Abuse Regulation and Capital Requirement Regulation generally have not been expressly incorporated or transposed into UK law. This may take considerable time to accomplish.
Of immediate concern from the perspective of the EU and elsewhere internationally is how UK banks would be governed in the case of market crises with accompanying liquidity concerns. Before BREXIT, substantial work was undertaken to establish an EU framework for crisis management within the banking sector. It is likely that directives such as the EU bank recovery and resolution and EU regulations on insolvency may still apply, but this is not completely clear in the absence of a UK-EU agreement directly addressing this. In any event, BREXIT presents new opportunities for the UK to formalise, streamline and therefore appeal to derivatives and other financial services market participants over the long term, but considerable work at the Government level is necessary in both the short and long term. In the event that subsequent UK trading law diverges from EU regulation, such as EMIR, this would create additional burdens for market participants in, for example, the OTC derivatives market because so much of that $500 trillion dollar market is international in nature.
- Competition law – Certain transactions will no longer benefit from “one stop shop” merger control review under the EU Merger Regulation and will therefore potentially face additional scrutiny from the UK Competition and Markets Authority. BREXIT will potentially allow absolute territorial protection (currently prohibited under EU law) to be granted to distributors in the UK – although depending on the context, such agreements could still be subject to challenge under post-BREXIT UK competition law. Following the BREXIT the UK could potentially choose to diverge from EU competition law, although it seems to us unlikely that this will be a priority area for reform.
- Divergence of regulatory standards – Finally, the BREXIT will most likely result in an increasing separation and divergence of laws and standards between Britain and remaining EU member states governing key areas such as data protection, energy, financial services and competition law and health and safety.
Regardless of which BREXIT route is selected by the UK and ultimately agreed with the EU, it is important to remember that major changes to the UK legal landscape will not occur immediately and, instead, may take several years. Such changes will unfold gradually at different times in relation to different areas according to the priorities of the Government and with a new Prime Minister to take office before October it is premature to guess what the Government’s priorities might be. If the UK elects to maintain close economic ties with the EU there may be minimal changes to the laws affecting UK businesses and even if the UK selects the WTO model or to pursue free trade agreements with the EU, many UK products will nevertheless need to continue to comply with EU regulations.
Lockdown 2.0 – Here’s how to be the best-looking person in the virtual room
suggests “the product you’re creating is not the camera, the lens or a webcam’s clever industrial design. It’s the subject, you, which is just on e part of the entire image they see. You want that image to convey quality, not convenience.”
Technology experts at Reincubate saw an opportunity in the rise of remote-working video calls and developed the app, Camo, to improve the video quality of our webcam calls. As part of this, they consulted the digital photography expert and author, Jeff Carlson, to reveal how we can look our best online.
It’s clear by now that COVID-19 has normalised remote working, but as part of this the importance of video calls has risen exponentially. While we’re all used to seeing the more casual sides of our colleagues (t-shirt and shorts, anyone?), poor webcam quality is slightly less forgivable.
But how can we improve how we look on video? We consulted Jeff Carlson for some top tips– here is what he had to say.
- Improve the picture quality of your call
The better your camera, the higher quality your webcam calls will be. Most webcams (as well as currently being hard to get hold of and expensive), are subpar. A DSLR setup will give you the best picture, but will cost $1,500+. You can also use your iPhone’s amazing camera as a webcam, using the new app from Reincubate, Camo.
Jeff’s comments “The iPhone’s camera system features dedicated coprocessors for evaluating and adjusting the image in real time. Apple has put a tremendous amount of work into its imaging software as a way to compensate for the necessarily small camera sensors. Although it all works in service of creating stills and video, you get the same benefits when using the iPhone as a webcam.”
Aidan Fitzpatrick, CEO of Reincubate explains why the team created Camo, “Earlier this year our team moved to working remotely, and in video calls everyone looked pretty bad, irrespective of whether they were on built-in Mac webcams or third-party ones. Thus began my journey to build Camo: an iPhone has one of the world’s best cameras in it, so could we make it work as a webcam? Category-leading webcams are noticeably worse than an iPhone 7. This makes sense: six weeks of Apple’s R&D spend tops Logitech’s annual gross revenue.”
- Place your camera at eye level
A video call will never quite be the same as a face-to-face conversation, but bringing your camera up to eye level is a good place to start. That can involve putting your laptop on a stand or pile of books, mounting a webcam to the top of your display screen, or even using a tripod to get the perfect position.
Jeff points out, “If the camera is looking down on you, you’ll appear minimized in the frame; if it’s looking up, you’re inviting people to focus on your chin, neck, or nostrils. Most important, positioning the camera off your eye level is a distraction. Look them in the eye, even if they’re miles or continents away.”
Low camera placement from a MacBook
- Make the most of natural lighting
Be aware of the lighting in the room and move yourself to face natural lighting if you can. Positioning the camera so any natural light is behind you takes the light away from your face, which can make it harder to see and read expressions on a call.
Jeff Carlson’s top tip: “If the light from outside is too harsh, diffuse it and create softer shadows by tacking up a white sheet or a stand-alone diffuser over the window.”
Backlit against a window Facing natural light
- Use supplementary lighting like ring lights
The downside to natural lighting is that you’re at the mercy of the elements: if it’s too bright you’ll have the sun in your eyes, if it’s too dark you won’t be well lit.
Jeff recommends adding supplementary lighting if you’re looking to really enhance your video calls. After all, it looks like remote working will be carrying on for quite some time.
“The light can be just as easy as a household or inexpensive work light. Angle the light so it’s bouncing off a wall or the ceiling, depending on your work area, which, again, diffuses the light and makes it more flattering.
Or, for a little money, use a softbox or a shoot-through umbrella with daylight bulbs (5500K temperature), or if space is tight, LED panels. Larger lights are better for distributing illumination– don’t be afraid to get them in close to you. Placement depends on the look you’re going after; start by positioning one at a 45-degree angle in front and to the side of you, which lights most of your face while retaining nice shadow detail.”
In some cases, a ring light may work best. LEDs are arranged in a circle, with space in the middle to put the camera’s lens and get direct illumination from the direction of the camera.
- Centre yourself in the frame
Make sure you’re getting the right angle and that you’re using the frame effectively.
“You should aim for people to see your head and part of your torso, not all the space between your hair and the ceiling. Leave a little space above your head so it’s not cut off, but not enough that someone’s eyes are going to drift there.”
- Be mindful of your backdrop
It’s not always easy to get the quiet space needed for video calls when working from home, but try as best you can to remove anything too distracting from your background.
“Get rid of clutter or anything that’s distracting or unprofessional, because you can bet that will be the second thing the viewers notice after they see you. (The Twitter account @RateMySkypeRoom is an amusing ongoing commentary on the environments people on television are connecting from.)”
A busy background as seen by a webcam
- Make the most of virtual backgrounds
If you’re really struggling with finding a background that looks professional, try using a virtual background.
Jeff suggests: “Some apps can identify your presence in the scene and create a live mask that enables you to use an entirely different image to cover the background. While it’s a fun feature, the quality of the masking is still rudimentary, even with a green screen background that makes this sort of keying more accurate.”
- Be aware of your audio settings
Our laptop webcams, cameras, and mobile phones all include microphones, but if it’s at all possible, use a separate microphone instead.
“That can be an inexpensive lavalier mic, a USB microphone, or a set of iPhone earbuds. You can also get wireless lavalier models if you’re moving around during a call, such as presenting at a whiteboard in the camera’s field of view.
The idea is to get the microphone closer to your mouth so it’s recording what you say, not other sounds or echoes in the room. If you type during meetings, mount the mic on an arm instead of resting it on the same surface as your keyboard.”
- Be wary of video app add-ons
Video apps like Zoom include a ‘Touch up your appearance’ option in the Video settings. This applies a skin-smoothing filter to your face, but more often than not, the end result looks artificially blurry instead of smooth.
“Zoom also includes settings for suppressing persistent and intermittent background noise, and echo cancellation. They’re all set to Auto by default, but you can choose how aggressive or not the feature is.”
- Be the best looking person in the virtual room
What’s important to remember about video calls at this point in time is that most people are new to what is, really, personal broadcasting. That means you can easily get an edge, just by adopting a few suggestions in this article. When your video and audio quality improves, people will take notice.
Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation
By Keith Phillips, CEO of TISATech
If just six or seven months ago someone had told you that in a matter of weeks people around the world would be locked down in their homes, trying to navigate modern work systems from a prehistoric laptop, bickering with family over who’s hogging the Wi-Fi, migrating online to manage all financial services digitally, all while washing their hands every five minutes in fear of a global pandemic… You’d think they had lost their mind. But this very quickly became the reality for huge swathes of the world and we’re about to go through that all over again as the UK government has asked that those who can work from home should.
Unsurprisingly, statistics show that lockdown restrictions introduced by the UK government in March, led to a sharp increase in people adopting digital services. Banks encouraged its customers to log onto online banking, as they limited (and eventually halted) services at branches. This forced many customers online as their primary means of managing personal finances for the first time.
If anyone had doubts before, the Covid-19 pandemic proved to us the importance of well-functioning, effective digital financial services platforms, for both financial institutions and the people using them.
But with this sudden mass online migration, it’s become clear that traditional banks have struggled to keep up with servicing clients virtually. Legacy banking systems have always stilted the digitisation of financial services, but the pandemic thrust this issue into the limelight. Fintech firms, which focus intently on digital and mobile services, knew it was only a matter of time before financial institutions’ reliance was to increase at an unprecedented rate.
For years, fintechs have been called upon by traditional players to find solutions to problems borne from those clunky legacy systems, like manual completion of account changes and money transfers. Now it is the demand for these services to be online coupled with the need for financial services firms to cut costs, since Covid-19 hit the economy.
Covid-19 has catalysed the urgent need to bring digital transformation to a wider pool of financial services businesses. Customers now have even higher expectations of larger institutions, demanding that they keep up with what the younger and more nimble challengers have to offer. Industry leaders realise that they must transform their businesses as soon as possible, by streamlining and digitising operations to compete and, ultimately, improve services for their customers.
The race for digital acceleration began far before the recent pandemic – in fact, following the 2008 financial crisis is likely more accurate. Since the credit crunch, there has been a wave of new fintech firms, full of young, bright techies looking to be the next big thing. Fintechs have marketed themselves hard at big conferences and expos or by hosting ‘hackathons’, trying to prove themselves as the fastest, most innovative or the most vital to the future of the industry.
However, even during this period where accelerating innovation in online financial services and legacy systems is crucial, the conditions brought about by the pandemic have not been conducive to this much-needed transformation.
The second issue, which again was clear far before the pandemic, is that fact that no matter how nimble or clever the fintechs’ solutions are, it is still hard to implement the solutions seamlessly, as the sector is highly fragmented with banks using extremely outdated systems populated with vast amounts of data.
With the significance of the pandemic becoming more and more clear, and the need for better digital products and services becoming more crucial to financial services firms and consumers by the day, the industry has finally come together to provide a solution.
The TISAtech project was launched last month by The Investing and Saving Alliance (TISA), a membership organisation in the UK with more than 200 leading financial institutions as members. TISA asked The Disruption House, a specialist benchmarking and data analytics business, to create a clearing house platform for the industry to help it more effectively integrate new financial technology. The project aims to enhance products and services while reducing friction and ultimately lowering costs which are passed on to the customers.
With nearly 4,000 fintechs from around the world participating, it will be the world’s largest marketplace dedicated to Open Finance, Savings, and Investment.
Not only will it provide a ‘matchmaking’ service between financial institutions an fintechs, it will also host a sandbox environment. Financial institutions can pose real problems with real data and the fintechs are given the space to race to the bottom – to find the most constructive, cost-effective solution.
Yes, there are other marketplaces, but they all seem to struggle to achieve a return on investment. There is a genuine need for the ‘Trivago’ of financial technology – a one stop shop, run by an independent body, which can do more than just matchmaking. It needs to go above and beyond to encompass the sandboxing, assessments, profiling of fintechs to separate the wheat from the chaff, and provide a space for true collaboration.
The pandemic has taught us that we are more effective if we work together. We need mass support and collaboration to find solutions to problems. Businesses and industries are no different. If fintechs and financial institutions can work together, there is a real chance that we can start to lessen the economic hit for many businesses and consumers by lowering costs and streamlining better services and products. And even if it is just making it that little bit easier to manage personal finances from home when fighting with your children for the Wi-Fi, we are making a difference.
What to Know Before You Expand Across Borders
By Sean King, Director of International Tax at McGuire Sponsel
The American retail giant, Target Corporation, has a market cap of $64 billion and access to seemingly limitless resources and advisors. So, when the company engaged in its first global expansion, how could anything possibly go wrong?
Less than two years after opening its first Canadian store in 2013, Target shut down all133 Canadian locations and terminated more than 17,000 Canadian employees.
Expansion of an operation to another country can create unique challenges that may impact the financial viability of the entire enterprise. If Target Corporation can colossally fail in its expansion to Canada, how might Mom ‘N’ Pop LLC fare when expanding into Switzerland, Singapore, or Australia?
Successful global expansion requires an understanding of multilayered taxes, regulatory hurdles, employment laws, and cultural nuances. Fortunately, with the right guidance, global expansion can be both possible and profitable for businesses of any size.
Any company with global ambitions must first consider whether the company’s expansion outside of the U.S. will give rise to a taxable presence in the local country. In the cross-border context, a “permanent establishment” can be created in a local country when the enterprise reaches a certain level of activity, which is problematic because it exposes the U.S. multinational to taxation in the foreign country.
Foreign entity incorporation
To avoid permanent establishment risk, many U.S. multinationals choose to operate overseas through a formal corporate subsidiary, which reduces the company’s foreign income tax exposure, though it may result in an additional level of foreign income tax on the subsidiary’s earnings. In most jurisdictions, multinationals can operate their business in the foreign country as a branch, a pass through (e.g., partnership,) or a corporation.
As a branch, the U.S. multinational does not create a subsidiary in the foreign country. It holds assets, employees, and bank accounts under its own name. With a pass through, the U.S. multinational creates a separate entity in the foreign country that is treated as a partnership under the tax law of the foreign country but not necessarily as a partnership under U.S. tax law.
U.S. multinationals can also create corporate subsidiaries in the foreign country treated as corporations under the tax law of both the foreign country and the U.S., with possibly two levels of income taxation in the foreign country plus U.S. income taxation of earnings repatriated to the U.S. as dividends.
Under U.S. entity classification rules, certain types of entities can “check the box” to elect their classification to be taxed as a corporation with two levels of tax, a partnership with pass-through taxation, or even be disregarded for U.S. federal income tax purposes. The check the box election allows U.S. multinationals to engage in more effective global tax planning.
Toll charges, transfer pricing and treaties
When establishing a foreign corporate subsidiary, the U.S. multinational will likely need to transfer certain assets to the new entity to make it fully operational. However, in many cases, the U.S. multinational cannot perform the transfer without recognizing taxable income. In the international context, the IRS imposes certain outbound “toll charges” on the transfer of appreciated property to a foreign entity, which are usually provided for in IRC Section 367 and subject to various exceptions and nuances.
Instead, the U.S. multinational may prefer to license intellectual property to the foreign subsidiary for a fee rather than transfer the property outright. However, licensing requires the company and foreign subsidiary to adhere to transfer pricing rules, as dictated by IRC Section 482. The U.S. multinational and the foreign subsidiary must interact in an arms-length manner regarding pricing and economic terms. Furthermore, any such arrangement may attract withholding taxes when royalties are paid across a border.
Are you GILTI?
Certain U.S. multinationals opt to focus on deferring the income recognition at the U.S. level. In doing so, they simply leave overseas profits overseas and delay repatriating any of the earnings to the U.S.
Despite the general merits of this form of planning, U.S. multinationals will be subject to certain IRS anti-deferral mechanisms, commonly known as “Subpart F” and GILTI. Essentially, U.S. shareholders of certain foreign corporations are forced to recognize their pro rata share of certain types of income generated by these foreign entities at the time the income is earned instead of waiting until the foreign entity formally repatriates the income to the U.S.
The end goal
Essentially, all effective international tax planning boils down to treasury management. Effective and early tax planning can properly allow a company to better achieve its initial goal: profitability.
If global expansion is on the horizon for your company, consult a licensed professional for advice concerning your specific situation.
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