International Hot Topics, Recent Guidance, Spin-Offs and Split-Offs
In the latest episode of the Weil Tax Insight Series, Tax Co-Chair Joe Pari and International Tax Head Devon Bodoh highlight international hot topics and recently released guidance, as well the tax status of spin-offs and split-offs.
International Tax Developments: PTEP Regulations and OECD Pillar 2
Two major topics in international tax are highlighted in the podcast: the PTEP (previously taxed earnings and profits) regulations and the implementation of the OECD’s Pillar 2.
The US Treasury released new PTEP rules, addressing offshore earnings allocation by US multinationals under the transition from a worldwide tax system to a territorial one. These regulations introduce complex compliance burdens, impacting costs due to intricate accounting rules and the reconciliation of local tax outcomes with US requirements. Devon Bodoh notes the regulations’ intricate nature, with summaries spanning hundreds of pages, emphasising the need for specialised tax guidance. See the Weil Tax blog for more information.
“The regulations are hundreds of pages. The complexity of the regulatory set will be a burden on US multinationals in terms of compliance and increased costs.”
Pillar 2 aims to establish a global minimum tax of 15%, thus reducing tax competition and a “race to the bottom”. However, implementation challenges arise due to varying participation by countries. For instance, the United States relies on its corporate minimum tax instead of adopting Pillar 2. Practical issues include complications in joint ventures, where tax burdens can fall disproportionately on minority partners, and complexities in “earn-out” provisions for mergers and acquisitions, particularly regarding cross-border stock sales.
Spin-Offs and the “Expansion Doctrine”
Joseph Pari delves into the tax considerations for corporate spin-offs and split-offs under US tax law; specifically, those governed by Sections 355 and 368 of the Internal Revenue Code. These transactions can achieve tax-free status if specific criteria are met, including the active trade or business (ATB) requirement, which mandates a five-year operational history.
Businesses that are acquired taxably, or that have been started within five years, might still meet the ATB test if considered an “expansion” of an existing business. For example, acquiring a similar business in another state or transitioning from physical operations to online activities (“bricks to clicks”) might qualify as expansions.
“When tax council examines whether we’ve got a new business or a business expansion, we look for a similar product, we look for similar operational activities and we look for similar experience and know-how.”
Determining whether a business qualifies involves evaluating operational similarities, product lines and expertise. Even seemingly non-compliant transactions could meet the requirements through careful factual and legal analysis.
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