U.S. TAX DEVELOPMENTS Inbound Investment into the U.S. Technical Updates & Planning Strategies

1. U.S. TAX DEVELOPMENTSInbound Investment into the U.S.Technical Updates & Planning Strategies PRESENTED BY James Barry Mayer, Brown, Rowe & Maw (Chicago)Bernard Moens PricewaterhouseCoopers LLP (Washington, D.C.)

2. Agenda • Introduction • Technical Updates • Treaties • Final DCL Regulations • IRS Enforcement and Audit Strategies • Inbound Strategies

3. Administrative Matters • The views expressed in this presentation should not be relied on as accounting, auditing, or tax advice. The outcome of any independent situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of FAS 109, FIN 48, and other relevant literature in effect at the time. • This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

4. Technical Updates

5. Treaty Developments • Treaty Activity • Trends and Highlights • Memorandums of Understanding & Competent Authority Agreements

6. Treaty DevelopmentsTreaty Activity • Aug. 7, 2006 – U.S.-Bangladesh treaty entered into force • Aug. 31, 2006 – U.S.-Sweden protocol entered into force • Nov. 27, 2006 – New U.S.-Belgium treaty signed • Dec. 21, 2006 – The U.S.-French protocols to the income and estate treaties between the U.S. and France entered into force. • March 20, 2007 - The U.S. and Brazil signed Tax Information Exchange Agreement • March 22, 2007 – The Netherlands Antilles-U.S. Tax Information Exchange Agreement entered into force

7. Treaty DevelopmentsTreaty Activity • Late in 2006, the Administration sent to the Senate for ratification proposed protocols to treaties with Germany, Denmark and Finland. • The Administration is near completion of a U.S. income tax protocol with Norway. • Administration also signed a new income tax treaty and protocol with Belgium and completed negotiations on a new income tax treaty with Iceland. It is expected that these treaties will be sent to the Senate for ratification in coming months.

8. Treaty DevelopmentsTreaty Activity Renegotiation of Older Treaties • Iceland: US Treasury has reportedly initialed a new agreement. Start and length of ratification process unclear • Hungary – US Treasury has reported a new agreement with Hungary is "substantially complete“ • Poland – US Treasury has said that renegotiation with Poland is a high priority but first round of negotiations has not yet occurred

9. Treaty DevelopmentsTreaty Activity • Nov. 14, 2006 – New U.S. Model Income Tax Treaty and Technical Explanation released • Incorporates new U.S. tax treaty policy that has been reflected in recent treaties, protocols, and competent authority agreements • Reflects opening position of the U.S. in treaty negotiations regarding tax rate reductions, including: • Dividends: 15%, reduced to 5% in certain cases • Interest: 0%, except in certain cases • Royalties: 0%

10. Treaty DevelopmentsTreaty Activity • Inclusions in Model Treaty • Closely follow content of recent agreements, such as U.S. treaties with Germany, Sweden, Denmark, and Finland • Absent from Model Treaty • An arbitration article • Derivative benefits or equivalent beneficiaries provision • Elimination of withholding tax on dividends

11. Treaty DevelopmentsTreaty Activity • New Guidance Provided by the Model Technical Explanation • Treatment of Fiscally Transparent Entities • Attribution of Profits to a Permanent Establishment • Resolving Inconsistent Beneficial Ownership Concepts in the Application of Reduced Rates of Tax for Dividends

12. Treaty DevelopmentsTrends & Highlights • Trend toward zero withholding tax on certain types of dividends (80%-owned subsidiaries) • Feature in recent treaties with Australia, Mexico, Japan, UK, the Netherlands, and Sweden • Other countries pending include Germany, Finland, Denmark, Norway, Belgium and France • Not featured in newly-released U.S. Model Income Tax Treaty • Limitation on Benefits Clauses and Impact on Privately-Held Companies / Active Trade of Business Qualification

13. Treaty DevelopmentsMemorandums of Understanding & Competent Authority Agreements • Recent experiences with competent authority proceedings • Derivative benefits • Dutch finance companies

14. Treaty DevelopmentsMemorandums of Understanding & Competent Authority Agreements • US & UK Agree to Change Dual Consolidated Loss Regimes • The IRS published a competent authority agreement between the United States and the United Kingdom with respect to dual consolidated losses (DCLs) under Section 1503(d). • Certain taxpayers may elect to use, or relieve, losses in either the United States or the United Kingdom to the extent permitted by the rules of the contracting state, as modified by the agreement. • Included are the rules and conditions that must be satisfied for a taxpayer to use dual consolidated losses in the U.S. or UK, with respect to which relief is available under the terms of the agreement.

15. Dual Consolidated Loss Rules –Key Issues with Recent Regulatory Changes

16. Background • Section 1503(d) provides that a “dual consolidated loss” (“DCL”) for any taxable year of a corporation shall not be used to reduce the taxable income of any other member of the affiliated group for the taxable year or another taxable year. • A DCL generally is defined as a net operating loss (“NOL”) of a U.S. corporation that is subject to income tax of a foreign country on worldwide or residence basis. IRC Sec. 1503(d)(2)(A).

17. Separate Unit Combination Rule • Historically, separate branches of a single domestic corporation would be combined when applying the DCL rules. • The new regulations extend the rules to situations in which entities are owned by more than one member of a consolidated group. Thus, if two members of a consolidated group own an interest in a foreign entity, the DCL rules can apply to losses of that entity.

18. Separate Unit Combination Rule Example. Treas. Reg. § 1.1503(d)-7, Ex. 1. Unrelated Party Combine (U.S.) P 50% 50% 100% (For Y) PRS (U.S.) DRC (For X) DE3 100% (For X) FB (For X) DE1 (For X) FB 100%

19. Domestic Reverse Hybrid Entities Foreign Corporation Preamble specifically notes that the DCL rules do not apply to these structures. Bank US Domestic Reverse Hybrid Loan U.S. Corporation U.S. Corporation U.S. Corporation

20. Transparent Entities • Regulations provide that foreign entities that are transparent under local law such as partnerships and grantor trusts generally will not be treated as separate units of a domestic corporation.

21. Foreign Use Rules • The DCL rules only apply if there are losses are “used” in a foreign country. • The new regulations provide that a foreign use is deemed to occur only if two conditions are satisfied. • The first condition is satisfied if any portion of a deduction or loss taken into account in computing the DCL is made available under the income tax laws of a foreign country to offset or reduce, directly or indirectly, any item that is recognized as income or gain under such laws (including items of income or gain generated by the dual resident corporation or separate unit itself), regardless of whether income or gain is actually offset, and regardless of whether these items are recognized under U.S. tax principles.

22. Foreign Use Rules • The second condition is satisfied if items that are (or could be) offset pursuant to the first condition are considered, under U.S. tax principles, to be items of: (1) a foreign corporation; or (2) a direct or indirect (for example, through a partnership) owner of an interest in a hybrid entity, provided such interest is not a separate unit.

23. Indirect Foreign Use Rules • Regulations provide that the DCL rules will apply to certain transactions which move losses from a separate unit to another entity that would not be literally subject to the DCL rules because that second entity is not a separate unit subject to the DCL rules.

24. Indirect Foreign Use Rules –Treas. Reg. § 1.1503(d)-7, Ex. 6. Bank (U.S.) P Loan (U.S.) S (For) DE1 99% 1% Interest on loan treated as DCL because is available to DE1 in both foreign country and U.S. (For) FRH

25. Indirect Foreign Use Rules –Treas. Reg. § 1.1503(d)-7, Ex. 6. Bank (U.S.) P Interest on loan from DE3 to DE1 will be disregarded When applying DCL rules. 100% Loan 100% (For) DE3 Loan (U.S.) S 100% (For) DE1 1% (For) FRH 99%

26. Indirect Foreign Use Rules –Treas. Reg. § 1.1503(d)-7, Ex. 7. (U.S.) P Bank (For) DE1 Hybrid Instrument U.S – Equity Foreign - Debt (X) FS

27. Legislative and Regulatory Update • New Temporary Regulations Addressing Corporate Inversions (June 2006) • Revisions to Regulations Regarding Taxation of Restructurings Involving the Transfer of U.S. Real Property Interests (June 2006) • Changes to Regulations Relating to Forms 5471 and 5472 Filing Requirements (June 2006) • Temporary and Proposed Transfer Pricing Services and Intangibles Regulations (Aug. 2006) and Additional Guidance (Dec. 2006) • Guidance Regarding Withholding Tax Treatment on Net Consideration for Certain Cross-Licensing Agreements (March 2007) • Proposed Legislation on Treatment of Dividends, Corporate Residency (April 2007) • Final Regulations Relating to Interest on Portfolio Indebtedness Obligations (April 2007)

28. IRS Enforcement & Audit Strategies • Current climate • Inter-Governmental Sharing of Information • Tax Arbitrage and Hybrid Entities • Recently-Identified Areas of IRS Compliance Interest • Delinquent International Returns & Potential Penalties • Forms in Development

29. IRS Enforcement & Audit StrategiesCurrent Climate • Associate Chief Counsel (International), Steven Musher, said "International tax compliance is now really a major emphasis for the Service. We're putting a great deal more emphasis in this area.” • Frank Ng, IRS LMSB Deputy Commissioner (International) in November 2006: "International tax matters are a growing significant area within the IRS and it is important that we work with taxpayers and the practitioner community to improve voluntary compliance with the international tax laws.“ • In general, cross-border arbitrage using hybrids will be closely scrutinized by the IRS as consistent with the priorities of IRS Commissioner Mark Everson. "We see these as smoke, and sometimes there's fire, and sometimes there isn‘t." Bettie Ricca, IRS deputy associate chief counsel (international).

30. IRS Enforcement & Audit Strategies Inter-Governmental Sharing of Information • OECD's Forum on Tax Administration (FTA) • Joint International Tax Shelter Information Center (JITSIC) • JITSIC is a permanent international secretariat whose members include Australia, Canada, U.S. and the United Kingdom. • “Leeds Castle Group” • Includes tax commissioners from the Australia, Canada, China, France, Germany, India, Japan, South Korea, United Kingdom and United States • China and India are important participants because of significant foreign direct investment in these countries • IRS and UK are sharing information to combat abusive tax arbitrage • IRS Sharing Information With Other Treaty Partners

31. IRS Enforcement & Audit StrategiesTax Arbitrage and Hybrid Entities • New multilateral efforts are focused on cross-border enforcement, particularly as it applies to underreported income, as well as on "tax arbitrage" transactions. • Audit experience with hybrid transactions.

32. IRS Enforcement & Audit StrategiesRecently-Identified Areas of IRS Compliance Interest • Protective Form 1120-F filings are being scrutinized to identify other entities that should be paying federal income tax. • IRS is examining a pool of Form 1120-F filings to determine if taxpayers are engaged in U.S. trade or business or have a U.S. permanent establishment under the applicable U.S. tax treaty. • IRS is researching taxpayers on internet to determine extent of taxable U.S. presence. Information will be shared with agents in LMSB and SB/SE groups throughout U.S. who will conduct examinations. • Foreign controlled corporations with significant intercompany transactions reported on Form 5472, and limited operating profit, are being targeted.

33. IRS Enforcement & Audit StrategiesRecently-Identified Areas of IRS Compliance Interest • IRS is looking at inbound entities that have U.S. tax losses, as well as transfer pricing, and withholding tax compliance. • Extensive compliance initiative project to address noncompliance by taxpayers responsible for withholding income tax under Sections 1441-1443. The IRS goal is to examine compliance of 300 taxpayers in each of the five Large and Mid-Size Business (LMSB) divisions. • IRS computer audit specialists and international examiners have been analyzing information reported on Form 5471 and Form 5472 to determine whether reportable amounts reflected on those information returns have been reported properly on Form 1042.

34. IRS Enforcement & Audit Strategies Delinquent International Returns & Potential Penalties • The IRS is enforcing the Form 5471 filing requirement and assessing $10,000 penalty per Form 5471 for incomplete information or for failure to file the form. • Chief Counsel Notice (CC-2004-036): penalties assist IRS by increasing economic cost of non-compliance. IRS staff should support imposition of penalties when issue is properly developed. • Hazards of litigating a penalty are to be considered separately from hazards of litigating a tax liability. • IRS Chief of Appeals issued memo to staff establishing new policy under which "penalty issues" will no longer be "traded" as part of settlement process. Settlement of a penalty must be on the merits.

35. IRS Enforcement & Audit StrategiesForms in Development • IRS has announced that it intends to revise Form 1120F for the 2007 tax year. • A new Schedule M-3, similar to the one required for domestic corporations, is being developed and will require foreign corporations with more than $10 million of U.S. assets include the Schedule M-3 as part of their Form 1120 F.

36. Relevant Inbound Strategies

37. Defining Characteristic(s) • Notional Deductions • Belgian NID regime • Notional Interest Deduction • Indirect group relief • Hybrid Treatment • Repo transaction • Delaware General Partnership • Other • Tax reduction

38. Notional Deductions

39. EU Co (EU - Not Switzerland) Non-Redeemable Equity Interest U.S. Co (U.S.) Swiss Finance Co (Switzerland) Loan Swiss Financing Using Notional Deductions POTENTIAL BENEFITS • Deduction in the U.S. • Low effective tax rate in Switzerland. CONSIDERATIONS • Swiss Finance Co must obtain ruling. • US-Swiss income tax treaty requirements. • Section 163(j) earnings stripping.

40. Belgian NID Structure Parent Co TRANSACTION STEPS • ParentCo forms and contributes equity to NidCo. • NidCo loans cash to US Opco. TAX BENEFITS/CONSIDERATIONS • U.S. withholding tax (current treaty vs. proposed protocol) • Notional Interest Deduction in Belgium results in a lowering of the effective Belgian corporation tax rate. • Interest expense deduction in US Op Co. • ParentCo’s tax implications should be considered. STEP 1 Formation and capitalization of NidCo US Op Co (U.S.) NidCo (Belgium) STEP 3 Loan

41. Indirect Group Relief

42. Indirect Group Relief SUMMARY • UK 1 makes a loan to UK2, which is disregarded for US tax purposes. • UK 2 makes a loan to UK 3, which is also disregarded for US tax purposes. INTENDED RESULT (UK) • Interest income in UK 1 can be group relieved using interest expense in UK 3 • Interest income in UK 2 is offset by interest expense on loan from UK 1 • Unless can argue Condition C does not apply (may be possible in certain circumstances) the AA rules may deny deduction in UK INTENDED RESULT (U.S.) • Loan from UK 1 to UK2 is regarded and interest expense is available for use in the US • Loan from UK2 to UK 3 is disregarded. • Consider impact of final DCL regulations (indirect foreign use?). UK1 US UK 2 UK 3 US

43. Hybrid Treatment

44. Foreign Parent (Country X) Foreign SubCo (Country X) Unrelated Lender 99% 1% Interest Loan DGP elects to be treated as a corporation DGP (U.S.) Company Y U.S. Group (U.S.) U.S. CONSOLIDATED GROUP Delaware General Partnership POTENTIAL BENEFITS • Deduction in U.S. and Country X. • Dividend from Co. Y may be exempt in Country X. • Dividend from Co. Y not taxed in the U.S. • May be no or reduced withholding tax on interest. CONSIDERATIONS • Dual consolidated loss rules. • Business purpose. • Domestic reverse hybrid rules.

45. Repo Structure Parent OBJECTIVE • Tax effective financing of US subsidiary aimed at e.g. refinancing of existing debt or funding of investment (e.g. acquisition). TRANSACTION STEPS • To be determined based on facts of client • Note that it is necessary for the planning to contain a mechanism for the repurchaser/ U.S. borrower to have funds available to repay the principal. INTENDED TAX CONSEQUENCES US • Treatment of integrated steps as a loan; deductibility of the dividend payments on the Preference Shares as interest expense (subject to applicable limitations). • Reduced interest withholding rate under applicable treaty. FOREIGN JURISDICTION • Exemption of part or all of the dividend from local country taxation. Sub REPO US HoldCo COMMON SHARES US OpCo PREFERENCE SHARES

46. Other

47. The NetherlandsProposed Tax Reform 2007 – Interest Box • Effective rate is 5% • Conditions: • Taxpayer has to opt for application of the regime together with all affiliated companies subject to CIT in the Netherlands • In principle, regime applies for a minimum period of 3 years • Group interest income that can benefit from this favorable regime is restricted to the Official Interest rate (currently 4.25%) over the company’s tax equity • FX results are not included in the interest box but subject to regular taxation • Group interest box will have retro-active effect from January 1, 2007 after approval of EU in 2007

48. Dutch or EU Co Holding B.V. (Netherlands) Holding Overseas B.V. (Netherlands) Loan note U.S. CO(U.S.) U.S. Group (U.S.) The NetherlandsGroup Interest Box Structure OBJECTIVE • Loan note should result in a full tax deduction for financing costs in U.S. (subject to earnings stripping regulations) with a corresponding taxable receipt at an effective tax rate of 5% in the Netherlands when providing funds directly from the Netherlands to the U.S. TRANSACTION STEPS • Holdings Overseas B.V. incorporates U.S. Co. • Holding Overseas B.V, contributes the shares in U.S. Group to U.S. Co. • U.S. Co distributes loan note to Holding Overseas B.V. CONSIDERATIONS • The distribution of the loan note would be subject to U.S. withholding tax to the extent of the earnings and profits of U.S. Group. • Provided that the minimum requirements for the participation exemption are met, dividend receipts from U.S. Co should be tax exempt in the Netherlands • Interest withholding tax on interest payments from U.S. Co under the US-NL tax treaty • Group interest box should approved by EU • Threshold of group interest box should be met • Structure can also be considered for qualifying EU group to do US inbound financing