INTERNATIONAL TAX UPDATE BKR INTERNATIONAL ANNUAL WORLDWIDE MEETING

1. INTERNATIONAL TAX UPDATEBKR INTERNATIONALANNUAL WORLDWIDE MEETING OCTOBER 22, 2012

2. Consequences of Improper or Missed Filings • Extended statute of limitations • IRC Section 6501(c)(8) extends statute of limitations in the case of a number of commonly required forms if improperly filed or unfiled. This includes Forms 5471, 8621, 5472, 926, 8938, 8865, and 3520. • Applies to entire return unless failure not willful. Increased reporting of indirectly held PFICS by partnerships places extraordinary burden on tax preparers. Is section 1298(b)(5) self-executing? • Period of limitations does not expire until 3 years after the date on which the IRS is provided with the proper information • Numerous monetary penalties with increasing maximums, reductions of foreign tax credits, and criminal penalties • Denial of non-recognition treatment for improper disclosures required with respect to cross-border mergers, acquisitions, reorganizations and other non-recognition transactions • Withholding agent liabilities and penalties • 100% penalty for tax evaded, not collected or not accounted for and paid over • Accuracy related penalty – 20% of underpayment of withheld tax if negligent, 75% if civil fraud • Addition to tax of 5% to 25% for negligent failure to file return or to pay tax (15% to 75% if fraudulent) • Failure to deposit tax – 2% to 10% • Per Form Penalties – Failure to file and furnish – 115% to 150% • Failure to file return 5% per month • Negligence and criminal penalties

3. FATCA • Administration Processes Under Proposed Regulations • Responsible Officer (“RO”) must certify to the IRS that a participating foreign financial institution (“PFFI”) has completed all mandatory due diligence at the conclusion of years 1 and 2 of the FFI agreement: • Confirming that the PFFI has not engaged in assisting clients in the avoidance of FATCA, • Certifying the PFFI’s compliance with the FFI agreement on a periodic basis, and • Disclosing material failures of compliance. • RO must register electronically and the RO’s identity must be verified. An RO that does not have a social security number or an ITIN must apply for an identification number by filing Form 8956, Application for Foreign Account Tax Compliance Act Individual Identification Number and providing appropriate documentation. Once assigned, that number will be used to sign the FFI agreement. • While FFIs with US affiliates may have ROs with identification numbers, the majority will not. Event hose ROs that have identification will want to seriously consider whether they are willing to comingle their personal and business affairs tot his extent. RO can designate Authorized Third Parties, including US licensed tax professionals and in–house personnel to complete registration process and sign the FFI agreement. • Intergovernmental agreements allow FFIs in foreign countries to report to partner country local authorities, which would then transmit the information to the US automatically. Will vary by country but may narrow scope of withholding required and may expand categories of deemed-complaint FFIs.

4. FATCA – Impact on Structures • Due diligence by investment partnerships – need to establish and document foreign status. Offshore private equity funds now generally include FATCA-related language in their documents that typically contain the following elements: • Investors are obligated to provide any information reasonably requested to support the fund’s efforts to comply with FATCA reporting requirements • GPs have the authority to withhold at a 30% rate on distributions to a non-compliant investor. New Form W-8 BEN is used to certify participating status. Participating foreign investors will likely be required to file annual reports with the IRS, but as long as there are no US persons in the ownership chain, it appears unlikely that they would be required to divulge any information about direct and indirect owners. New Form W-8 BEN requires a foreign identification number. • Each investor indemnifies the fund and all other investors against any loss caused by such investor’s failure to comply with information/certification requests • Start Dates for FATCA Withholding: • January 1, 2014 for most US source income (e.g. interest and dividends paid by US issuers • January 1, 2015 for amounts realized on disposition of most US securities • January 1, 2017 for “foreign pass-through payments” • Grandfather Rule: FATCA withholding will not apply to obligations outstanding on January 1, 2013. • Proposed regulations expand on categories of deemed complaint FFIs.

5. FATCA: Section 6038D • Many practical compliance issues arise in connection with new filings that must now be made on Form 8938, Statement of Specified Foreign Financial Assets. • Significant penalty exposure for undisclosed and improperly disclosed specified foreign financial assets. • Many client sensitive internal issues implicated. • Specified entity rules to apply for 2012 filings, which will expand the number of filers, which were limited to individuals for 2011 filings. This will greatly increase the complexity of Form 8938 filings. • Requirements, rules and procedures differ significantly from FBAR. Many articles have been written on the myriad of differences which arise form the fact that FBARs derive form banking statutes rather than tax statutes.

6. CFCs and PFICs: Tax Planning Vehicles? • CFCs and Section 1291 Fund PFICS can provide potential planning vehicle for 3.8% • Subpart F inclusions are not dividends and, therefore, are seemingly not includible in net investment income subject to tax under Section 1411(d). • Because subpart F inclusions are based on earnings and profits, investment and other expenses subject to the 2% floor may be deductible in full for income and surtax purposes. • Section 1291 Fund PFICS may provide Alternative Minimum Tax planning benefits as well as state tax benefits.

7. Voluntary Disclosure Programs/FBAR Decision to participate in formal IRS Offshore Voluntary Disclosure Program versus informal programs versus inaction. Program now open indefinitely. New York Department of Taxation and Finance position on PFICs Willful failure penalties (50% of foreign account balance per year) may be more easily asserted in view of the Appeals Court decision in Williams (No. 10-2230 – 4th Cir. 2012)

8. Foreign Trusts Use of default rule versus actual computations Detailed disclosures of transactions related to foreign trusts are required on Form 3520 Distribution planning, modeling and computations as well as investment strategy can dramatically improve results

9. Gifts • NY banking law Section 675(b) – risk of completed gift of 50% of account value when joint account established unless clear evidence of lack of intent to create true joint tenancy • Taxable gift if joint tenant is a non-citizen • Accounting for gifts to be reported to ensure proper filing of Form 3520, Receipt of Foreign Gifts • Determination of location of cash gifts made by check or wire

10. Foreign Portfolio Investments Portfolio interest exemption compliance Improper withholding on investments – over/underwithholding Treaty certification – timing issues EIN application and control Documentation and compliance issues related to payments or U.S. source income to foreign persons, foreign partners in U.S. partnerships and disposition of U.S. real property interests.

11. Entity Classification Elections Ability to retrieve original election – IRS confirmation critical Follow-up of IRS confirmation and storage and accessibility of documentation Tax relevance/renewal of election

12. Year-End Conformity Issues IRC Sec. 898 requires adoption of shareholder year-end by Controlled Foreign Corporations (“CFCs”). Properties owned by trust – must use calendar year U.S. and foreign partnerships with foreign partners and no U.S. effectively connected income must use tax year of majority U.S. partner – even where partnership books are maintained based on a different accounting period