Cross-Border Business Combinations

Cross-Border Business Combinations - SeptemberOctober 2010...

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5 September–October 2010 I NTERNATIONAL T AX J OURNAL Patrick Jackman is a Partner with Weil, Gotshal & Manges. Cross-Border Business Combinations By Patrick Jackman and Philip Tretiak Cross-Border Acquisitions Get More Expensive: New Legislation Would Limit FTCs in “Covered Asset Acquisitions” * Philip Tretiak is a Managing Director with the Mergers & Acquisitions group of Bank of America Merrill Lynch’s investment banking division. T he Education Jobs and Medicaid Assistance Act of 2010 (“H.R. 1586”) enacted Code Sec. 901(m) (Act Sec. 212), which disallows a foreign tax credit for the disqualified portion of any foreign income tax paid or accrued in connection with a “cov- ered asset acquisition.” 1 The prior proposed versions of this legislation generated significant criticism from commentators, 2 most of whom particularly objected to the lack of prior debate before this provision was first included as part of H.R. 4213. 3 This lack of prior debate and discussion 4 makes uncertain the intended scope of new Code Sec. 901(m). 5 From a broader policy perspective, Code Sec. 901(m) likely reduces the ability of potential U.S. acquirors to compete with non-U.S. acquirors for foreign target companies. Overview The term “covered asset acquisition” expressly in- cludes the following transactions: (1) a qualifying purchase of a corporation’s stock that is treated as a purchase of the corporation’s assets pursuant to a Code Sec. 338 election; (2) the purchase of a part- nership interest that results in a proportionate part of the partnership’s assets receiving a fair market value basis pursuant to a Code Sec. 754 election, and (3) any transaction that is treated as the purchase of an entity’s assets for U.S. tax purposes but as a stock ac- quisition for foreign tax purposes. Also, the Treasury would have the authority to identify “any other similar transaction” to these specified deemed asset purchase
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6 © 2010 CCH. All Rights Reserved Cross-Border Business Combinations transactions. 6 In summary, the focus is on transactions that result in an increase to the basis of assets for U.S. tax purposes without a corresponding increase (or cost) for foreign tax purposes. 7 Before discussing this legislative change in more detail, it may be useful to briefl y review the history of deemed asset purchase transactions, especially Code Sec. 338 transactions, and the foreign tax credit mechanism. Background Brief History of Code Sec. 338 The Kimbell-Diamond doctrine 8 provided that a stock purchase, followed by a liquidation of the purchased corporation, would be treated as an asset purchase. As such, the buyer obtained a cost basis in the assets of the purchased corporation, rather than a carryover basis, which generally would have occurred if the two-step transaction had not been collapsed into an asset purchase. In an effort to provide a statutory regime, Congress enacted Code Sec. 334(b)(2), which had allowed a corporate purchaser of target stock to liquidate the target tax-free within two years of the
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