Transfer Pricing: International Joint Ventures (Portfolio 6906)

Tax Management Portfolio No. 6906, Transfer Pricing: International Joint Ventures, discusses tax issues pertinent to international joint ventures, including §482 issues, such as: control, hidden or “creeping” control, acting in concert, and burden of proof. Other tax issues discussed include those in the joint venture context, such as: choice of entity, formation of, and outbound transfers to, joint venture corporate and partnership vehicles (including the issuance of regulations under §367(a) and §367(d) for foreign corporations and §721(c) for partnerships), check-the-box rules, blocker corporations, piercing the corporate veil, sham treatment, taxation of operating income, reporting requirements, repatriation of income, foreign tax credit planning, and joint venture termination. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Tax Management Portfolio No. 6906, Transfer Pricing: International Joint Ventures, discusses tax issues pertinent to international joint ventures, including §482 issues, such as: control, hidden or “creeping” control, acting in concert, and burden of proof. Other tax issues discussed include those in the joint venture context, such as: choice of entity, formation of, and outbound transfers to, joint venture corporate and partnership vehicles (including the issuance of regulations under §367(a) and §367(d) for foreign corporations and §721(c) for partnerships), check-the-box rules, blocker corporations, piercing the corporate veil, sham treatment, taxation of operating income, reporting requirements, repatriation of income, foreign tax credit planning, and joint venture termination.

This Portfolio represents an update and amplification of the excellent work by Kenneth J. Krupsky, Esq., and Karl L. Kellar, Esq., Chapter 10: Transfer Pricing — International Joint Ventures of 890 T.M., Transfer Pricing: Alternative Practical Strategies.

This Portfolio may be cited as Handler, 6906 T.M., Transfer Pricing: International Joint Ventures.

Authors

R. Arnold Handler, Esq.

R. Arnold Handler, University of Rochester/London School of Economics (B.A. 1961); Harvard Law School (J.D. 1964); Harvard Student Legislative Research Bureau — helped organize seminal Harvard Journal on Legislation; New York University School of Law, LL.M in Tax and Corporation Law (1966); Captain, Judge Advocate General's Corps. (1966–1970, specializing in taxation and military affairs; twice awarded U.S. Army Commendation Medal); Senior Tax Associate, Carter Ledyard & Milburn (1970–1976) (M&A, partnerships, financial institutions and investors, debt restructure, real estate); Group Tax Counsel, Mobil Corp. (1976–1990) (all aspects of international taxation, including sourcing, acceleration and deferral of income and deductions, foreign tax credits, joint ventures, real estate, transfer pricing); Director — International Tax Research and Planning, Citigroup (1990–2013) (international joint ventures, M&A, restructuring, timing and sourcing of income and losses, foreign tax credits, Subpart F income, financial products, transfer pricing); Adjunct Professor, Fordham University (1999–2003, Taxation of Financial Products); Tax Attorney and Consultant (2013 to present).

Table of Contents

Detailed Analysis
I. Introduction: “Control”
Introductory Material
A. Background
B. Hypothetical Joint Venture
II. Legal Framework
A. General Standard for Common Control
B. Application of “Control” Standard to 50/50 Joint Ventures
1. Acting in Concert and Common Purpose: Case Law
2. Adversity of Interest Among Co-Venturers
3. Adversity of Interest/Control: More than Measurement of Ownership Interests
4. Regulatory Standard for Common Control
5. Applying “Acting in Concert/Common Purpose” Under Case Law and Regulation — Resolving Problems of Fact and Concept
6. Common Control: Effect of Third Party's Presence in Negotiations
C. IRS Use of §482 as a Backstop to Other Code Provisions
D. Burden of Proof — Demonstrating Arbitrary Shifting of Income to Establish Presumption of Control in Reg. §1.482-1(i)(4)
1. General Rules on Burden of Proof Under §482
2. Burden of Demonstrating Arbitrary Shifting of Income or Deductions
E. Control and Cost Companies
III. Establishing Absence of Common Control and Arm's-Length Transactions
Introductory Material
A. Establishing Adversity of Economic Interest
B. Establishing Independence of Motivations
C. Contractual Arrangements
D. Business Plans, Memos, Financial Analyses
E. Documentation of Arm's-Length Negotiation
F. Economic Experts’ Reports
G. Opinions of Tax Counsel
IV. Hidden or “Creeping” Control
Introductory Material
A. Disproportionate Loans
B. Personnel Transfers
C. Agreements Among Co-Venturers
D. Stock Options
E. Directors
F. Cross-Ownership Interest
G. Comparative Economic Power
H. Conclusions
V. Joint Venture Pricing as an Arm's-Length Comparable
Introductory Material
A. Comparability of Transactions and Products
B. Comparability in Time
VI. Additional Tax Planning Issues
A. Tax and Financial Accounting Cooperation Agreement
B. Choice of Entity
C. Check-the-Box Rules on Entity Classification
D. Distinguishing “Foreign” from “Domestic” Entities
E. Use of a Blocker Corporation: Piercing the Corporate Veil and “Sham” Treatment
F. Taxation of Formation Transactions
1. Contributions to Partnerships and Corporations: Impact of Taxpayer Relief Act of 1997 and T.D. 9814
a. Corporations
b. Partnerships and T.D. 9814
(1) T.D. 9814: General Rule
(2) Gain Deferral Method for Contributed Section 721(c) Property
(3) De Minimis Rule and Anti-Abuse Rule
(4) Controlled Transactions Involving Partnerships: §482; Reg. §1.6662-6(d)
(5) Effective Dates of Regulations
2. U.S. Joint Ventures
a. Joint Venture Vehicle as U.S. Corporation
b. Joint Venture Vehicle as U.S. Partnership Not Subject to Rules Announced in T.D. 9814
c. Joint Venture Vehicle as U.S. Partnership Subject to Rules Announced in T.D. 9814
d. Joint Venture Vehicle as U.S. Corporation or U.S. Partnership
3. Foreign Joint Ventures — Foreign Corporation or Foreign Partnership
a. Joint Venture Vehicle as Foreign Corporation
(1) Foreign Goodwill and Going Concern Value
(2) Coordination with §482
b. Joint Venture Vehicle as Foreign Partnership
G. Taxation of Operating Income
1. Corporate Joint Venture
2. Joint Venture Partnership
H. Repatriation and Foreign Tax Credit Planning
I. Termination of the Joint Venture
VII. Summary of Key Reporting Obligations
VIII. Conclusions

Working Papers

Table of Worksheets
Worksheet 1 Sample Currency Fluctuation Agreement
Worksheet 2 Sample Clauses for Agreement Among FP, DP, and JV