International Tax

Caplin & Drysdale’s International Tax practice derives its strength from the technical depth and wide-ranging experience of our attorneys. Our practice is informed by our attorneys’ experiences in the IRS, the Department of the Treasury, federal clerkships, the private sector, and their collective decades of client work for multi-national corporations, investment funds, foreign governments, private individuals, and others. We continually build on these experiences through collaboration and intellectual engagement within the firm and the broader international tax community by writing on cutting-edge tax topics, speaking at leading industry events, and cultivating relationships with other international tax professionals throughout the world.

Areas of Focus

Cross-Border Business Operations

Businesses with cross-border operations face U.S. tax issues that purely domestic operations do not. The legal form and capital structure of a business play an outsized role in the cross-border context. Caplin & Drysdale attorneys advise a wide variety of businesses on the application of the subpart F, GILTI, FDII, PFIC, BEAT, FIRPTA, and foreign tax credit provisions of U.S. tax law and tax treaties to day-to-day operations. Our International Tax team also advises on U.S. income tax filing obligations, as well as withholding and reporting obligations for cross-border payments or activities.

Investments and Operations Abroad

U.S. operating businesses and private equity funds must structure their acquisitions and divestitures of foreign entities, or of U.S. entities with foreign operations, with an eye to the complex rules governing U.S. taxpayers’ income from foreign investments and activities. Overseas investment and operations can present opportunities for tax savings through deferral or permanent exemption, but also pitfalls due to the risk of double taxation or the forced recognition of phantom income.

Foreign operating businesses and private equity funds must structure their acquisitions and divestitures of U.S. entities with an understanding of applicable U.S. tax provisions such as debt/equity characterization, limitations on the deductibility of related-party payments, the branch profits tax, FIRPTA, and the withholding rules.

When advising clients on these issues, Caplin & Drysdale brings to bear its considerable experience with U.S. tax treaties and the U.S. taxation of foreign income, as well as its extensive network of relationships with tax advisors throughout the world.

International Investments

Individuals investing abroad must be cognizant not only of the complex and often punitive U.S. tax regimes that may apply to such investments, such as the subpart F, GILTI, and PFIC regimes, but also of the U.S. reporting requirements associated with such investments. Investing through common estate planning structures, such as trusts, can add an additional layer of complexity. Caplin & Drysdale attorneys have extensive experience advising clients on such investments, and our International Tax group works closely with the attorneys in the Private Client group to mitigate tax exposure and avoid compliance mistakes that can result in costly penalties.

Cross-Border Real Estate Investment Structures

Foreign investors in U.S. real estate face potential exposure to U.S. tax, including federal and state income tax and estate tax exposure. Corporate and trust structures can effectively mitigate estate tax exposure, but investors must weigh such benefits against the income tax consequences of these structures, both U.S. and foreign. Caplin & Drysdale has considerable experience advising clients with respect to such structures and working with our Private Client group and foreign tax advisors to optimize global tax exposure from investments in U.S. real estate.

Taxation of Bona Fide Residents of Puerto Rico, U.S. Virgin Islands, and Other Possessions

U.S. persons who are bona fide residents of U.S. possessions, including Puerto Rico and the U.S. Virgin Islands, are subject to different tax regimes than other U.S. persons with respect to certain types of income. For example, bona fide residents of Puerto Rico are exempt from U.S. income taxation on certain income sourced to Puerto Rico, and bona fide residents of the U.S. Virgin Islands and other possessions also enjoy certain tax benefits. Special rules under the U.S. tax law define who is a bona fide resident of a possession and provide income sourcing rules applicable to such bona fide residents. Caplin & Drysdale attorneys has substantial experience advising clients on a wide range of issues under both regimes:  

• Whether they are bona fide residents of a possession under Treasury Regulations;
• Transfer pricing between possession companies and related U.S. businesses;
• The optimal structure for ownership of and transactions with Puerto Rico Act 60 companies;
• The sourcing of gains from sales of closely held U.S. businesses, including interests in U.S. partnerships, S corporations, and C corporations by bona fide residents of a possession;
• The sourcing of investment gains earned by bona fide residents of a possession, whether directly or through investment entities; 
• The sourcing of stock-based compensation, such as qualified and non-qualified options, warrants, and other interests; and
• Trust and estate planning issues unique to residents of Puerto Rico and other U.S. possessions.

Withholding Tax Issues

From FIRPTA to FATCA, U.S. tax regulations require U.S. and foreign persons to comply with withholding and related documentation requirements in a wide variety of situations. These withholding rules are voluminous and complex, and the consequences for failure to comply with their substantive or procedural requirements may be harsh. Moreover, they cannot be considered in a vacuum; tax treaties and various anti-abuse rules, such as the "conduit" regulations, are also relevant.

For foreign corporations and individuals investing in the United States, as well as U.S. persons making payments to foreign persons, understanding these withholding rules—whether and how they apply, whether and under what circumstances reduced withholding may be available, and what compliance obligations flow from them—is essential. Caplin & Drysdale attorneys are steeped in these rules and in some cases were involved in writing them. We have hands-on familiarity with all substantive and procedural aspects and regularly assist with:

• Structuring or restructuring U.S. investments to eliminate or minimize withholding tax, and satisfying the associated documentation requirements, such as Forms W-8BEN, W-8BEN-E, W-8IMY, and W-8EXP, non-foreign person certificates, and other certifications; and
• Compliance with U.S. withholding obligations, including those of U.S. partnerships with foreign partners, and limiting exposure to withholding liability.

Foreign Tax Credits 

The intricate rules governing foreign tax credits are of fundamental importance for U.S. taxpayers with cross-border operations and income. Caplin & Drysdale attorneys have extensive experience and expertise in navigating these ever-changing rules, including not only basic questions of creditability under U.S. tax law and tax treaties, but also the equally important provisions relating to the foreign tax credit limitation, the deemed paid credit, the requirements for substantiation, and the special currency, accounting, and carryover rules pertaining to the credit.

Expert Witness

Caplin & Drysdale attorneys have served as expert witnesses in more than 40 contentious matters involving international tax issues. These matters have included not only disputes between taxpayers and government entities, but also a variety of private disputes in which aspects of international taxation have been a focus. Although many of these disputes have arisen in state and federal court cases and domestic arbitrations, a substantial number have been in foreign jurisdictions such as Australia, Norway, Canada, and the Netherlands and some have come in international arbitrations under bilateral investment treaties.

U.S. Tax Treaty Matters

Caplin & Drysdale attorneys are called upon daily to interpret and apply tax treaties due to our years of experience structuring cross-border investments, transactions, and operations for clients, participating in the Mutual Agreement Procedure, handling litigation, and representing foreign governments. We are thoroughly familiar with the provisions of most U.S. treaties and have deep knowledge of the histories of most of the treaties in the U.S. network. We also benefit from contacts with a wide network of tax treaty experts throughout the world, with whom we regularly consult.

Competent Authority Cases

Caplin & Drysdale has decades of experience with the Mutual Agreement Procedure (“MAP”) of U.S. tax treaties, in which the competent authorities— that is, representatives of the countries party to the treaty—seek to resolve specific treaty issues. These cases frequently involve disagreements regarding the residence of a taxpayer for treaty purposes, whether a taxpayer resident in one country has a permanent establishment in the other country, and transfer pricing disputes. With the growth in U.S. Advance Pricing Agreements (“APAs”), under which rulings on transfer pricing matters are considered ex ante rather than retrospectively on audit, the role of the competent authority has assumed a greater prominence than it used to have. We have shepherded many APAs through the MAP and are familiar with the process. We have also represented taxpayers in non-APA competent authority cases involving Canada, the United Kingdom, France, Germany, Norway, Japan, Korea, India, Switzerland, Luxembourg, and the Netherlands, to name a few. 

Advance Pricing Agreements

Advance Pricing Agreements (“APAs”) can provide an excellent mechanism to resolve cross-border transfer pricing controversies before they occur, on a unilateral, bilateral, or multilateral basis. APAs are often used as a dispute resolution mechanism for contentious big-dollar transfer pricing issues. Caplin & Drysdale has substantial experience helping clients successfully navigate the APA process. Here are some of the ways our attorneys can help:

• Advise on APA experiences in your industry and with your general fact pattern;
• Determine the most appropriate and advantageous transfer pricing methodology;
• Prepare the APA application by identifying, gathering, and synthesizing appropriate historical and financial information;
• Engage an economist, if necessary (under “Kovel”, to best preserve attorney-client privilege), and oversee preparation of the economic analysis;
• Negotiate the terms of the APA with the IRS, in some cases with non-U.S. tax authorities, and help shape Competent Authority negotiations;
• Ensure the documented APA or APAs (if bilateral or multilateral) are consistent with the intended agreement; and
• Support implementation of the APA by providing pre-submission review of APA Annual Reports.

Transfer Pricing Issues

Transfer pricing enforcement is a high-profile, big-dollar audit priority for U.S. and foreign taxing authorities. U.S. tax law gives the IRS broad discretion to reallocate income by challenging transfer prices, and the IRS regularly does so. The IRS also has shown a consistent willingness to litigate big-dollar transfer pricing issues, with material successes in recent years. Caplin & Drysdale’s International Tax team can help by:

• Working with the company and its economic advisors to develop the best defensible method for pricing related-party transactions, including high-value services transactions, services transactions priced under the services cost method, licenses and royalty rates, cost-sharing arrangements, contract manufacturing, at-risk manufacturing, distribution, inventory and other trading, interest rates on loans, and other controlled transactions;
• Preparing or advising on the preparation of transfer pricing planning studies and transfer pricing penalty protection documentation;
• Preparing inter-company agreements that delineate and price related-party transactions, including cost-sharing agreements that meet the requirements of Treasury Regulations;
• Defending the company’s transfer pricing at IRS Examination and Appeals;
• Litigating transfer pricing assessments in various venues, including the United States Tax Court, United States Court of Federal Claims, Federal district courts, and Federal appeals courts;
• Helping clients to avoid double tax by accessing the Competent Authority process, including by seeking mutual agreements and Advance Pricing Agreements; and
• Addressing client concerns in legislative and regulatory processes that relate to transfer pricing.

Taxation of Foreign Sovereigns and Pension Funds

Foreign government investors, including sovereign wealth funds, and foreign public and private pension funds, are among the many investors who seek yield in the U.S. private equity and real estate markets and thereby potentially become subject to U.S. taxation. Certain special exemptions in the U.S. tax law and tax treaties—some longstanding (section 892) and others of more recent vintage (the qualified foreign pension fund (“QFPF”) exemption from FIRPTA)—offer relief.

Structuring into and maintaining qualification for the tax exemptions for foreign sovereigns and pension funds require careful planning and ongoing vigilance. Caplin & Drysdale attorneys have extensive experience working with these rules, having advised clients globally in a wide range of contexts. We regularly:  

• Advise foreign sovereign and pension fund clients on their eligibility for exemption under the U.S. tax law and income tax treaties;
• Structure (or restructure) U.S. real estate, infrastructure, private equity and other investments by foreign governments and their controlled entities, to eliminate or minimize withholding tax, and to satisfy the associated documentation requirements;
• Assist clients with real estate and M&A transactions; and
• Support clients in monitoring and managing existing structures to ensure ongoing compliance with the requirements for the foreign sovereign and QFPF exemptions.

Taxation of Nonresident Athletes and Entertainers

Caplin & Drysdale helps professional athletes and entertainers navigate the complex rules that govern their U.S. tax liabilities through planning and dispute resolution, applying the principles of both the U.S. tax laws and applicable tax treaties. We are thoroughly familiar with the growing body of case law and rulings that apply to such persons, who often earn large amounts of income in a relatively short time and who may be compensated not only for their professional services, but also for licensing their names and likenesses. Our team assists these clients in complying with rules requiring that they allocate all their compensation appropriately to the various components—services versus name and likeness, U.S. vs foreign, etc.—and by structuring business arrangements with these issues in mind to minimize the risk of a dispute with the IRS. Our Private Client group provides complementary estate planning services.