Will Guarantee Fees Be the New Management Fees After Container Corp.?
WG&L Journal of Taxation
June 1, 2010
Taxation and International & Cross Border Transactions Partner Jeffrey Rubinger and Associate Summer Ayres LePree authored an article titled "Will Guarantee Fees Be the New Management Fees After Container Corp.?" for the June 2010 issue of the WG&L Journal of Taxation.
In the article, Mr. Rubinger and Ms. LePree discuss the implications of the Tax Court's recent opinion in Container Corp., which seems to open the door to many potential tax planning opportunities from an inbound perspective. One of the primary goals in U.S. international tax planning is to shift the tax burden from a taxpayer resident in a high-tax jurisdiction to a taxpayer resident in a low-tax jurisdiction. From an inbound tax perspective, this is typically accomplished by making a deductible payment in the U.S. without incurring U.S. withholding tax. Other than the use of interest payments, which are typically subject to the Section 163(j) interest "stripping" rules, the use of intragroup services, usually labeled "management" fees, historically has been one of the most effective means of achieving such a goal.
By treating guarantee fees as more akin to compensation for services than interest for sourcing purposes, the court's holding in Container Corp. permits taxpayers to "strip" income out of the United States without U.S. withholding tax. While the transfer pricing rules will, at least in theory, provide a limitation on the amount that can be charged for such a guarantee, the court's sourcing treatment of guarantee fees may permit some taxpayers to avoid paying any worldwide tax at all on "reasonable" guarantee fees, and should permit others to defer taxation of such amounts.
Ultimately, Mr. Rubinger and Ms. LePree conclude that the use of guarantee fees will likely become more common in international tax planning after Container Corp. The Tax Court's refusal to characterize guarantee fees as interest for U.S. federal income tax purposes not only allows U.S. taxpayers to make deductible payments to foreign related parties without incurring U.S. withholding in the absence of a comprehensive income tax treaty, but also allows such taxpayers to avoid the Section 163(j) interest stripping limitations. While it is not yet known whether the Service plans to appeal the Tax Court's holding (some commentators and practitioners have already questioned whether the holding will stand), tax practitioners should carefully consider how to take advantage of the decision in the appropriate setting. To view the full article, please visit the link below.
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