Mapping out a Tax Plan

Will it pass the tax test? Thats the question for international companies, which must determine how operating and financing decisions will be affected by the complex and perhaps conflicting rules in numerous jurisdictions. Wesley Riemer, the director of international tax planning at pharmaceuticals giant Rhone-Poulenc Rorer, wrestles every day with a wide range of taxation issues that could make or break plans that are laid halfway around the world. For practitioners who want to know more about this burgeoning area, his insights offer a deeper understanding.

MULTINATIONAL INTERESTS

The $5.4 billion company is the product of a merger in 1990 between the pharmaceutical business of French Rhone-Poulenc and the American Rorer. It is 68%-owned by the French company and also has its own foreign subsidiaries, which immediately makes it unusual, since few companies have both these aspects, according to Riemer. The company, whose products include Taxotere, a new cancer drug, and Lovenox, a new medication that prevents blood clots in certain surgeries, has a four-person international tax planning group in Collegeville, Pennsylvania, and seven more staff devoted to international tax who are located in other countries. Each of the U.S staff is assigned geographic and topical responsibilities to distribute the workload. Riemer, who reports to the conglomerates director of taxation, has duties that include the 10-country Asia/Pacific region—a particular marketing focus for the company—and South America. In addition, Riemer, who has been with the company for 6 years after 11 years in Price Waterhouses international tax practice, works with the companys treasury group on issues such as transfer pricing, dividend repatriation and structured financing.

KEY CONCERNS

Transfer pricing is one of the most important issues for the company. After the combination of the French and U.S. companies, Rhone-Poulenc Rorer in 1995 acquired a British pharmaceuticals concern. With a strong presence in these three geographic areas, and offices in roughly 100 other countries, the distribution of profit becomes a major concern, according to Riemer. “To be a strong pharmaceuticals company, we would like to have our products marketed on a global basis,” he explains. “That means taking products developed in France, the United Kingdom and the United States and making sure they get to all our different locations around the world. We have a number of manufacturing facilities. Its rare to have a product made in one location and then sold there, so we have a tremendous number of cross-border transactions. To manufacture a product in the United States to sell in Asia, for example, we must make sure we assign a price that is reasonable to both subsidiaries and that there is a reasonable amount of profit in both locations.” Transfer pricing—which helps to determine what profit is to be assigned to each location along the production pipeline—becomes an integral part of the process.

For many products, the job can entail assigning profits to the subsidiary that developed the product, to the one that manufactured it, to the one that packaged it and to the one that actually distributed and sold it. “Depending on how the chain works, three or more countries may be involved and you have to find a way to give a reasonable profit to each one.” That profit, in turn, is taxed by the appropriate countries, which makes transfer pricing a hot topic.

To understand how it works, Riemer offers an example. Assume a product developed in the United States is manufactured in Singapore for sale in Japan. The respective tax rates in these countries are 35%, 0 and 50%. The U.S. arm of the company incurred research and development costs to discover the product, Singapore incurred expenses to manufacture it and Japan racks up costs to sell it. If Singapore makes all of the profit, the companys tax burden would be the lowest, since tax rates there are 0. Tax authorities in the United States and Japan, however, would challenge that result and the company could end up paying more taxes than if it had provided a reasonable return to each affiliate from the beginning.

“The United States has made a push to establish proper transfer pricing for products made here, because collecting tax on those products is a way to raise revenues,” Riemer reports. “Once the United States started the ball rolling by putting a lot of emphasis on transfer pricing, other countries didnt want to fall behind. Many countries now are trying to update and strengthen their transfer pricing rules, as well as their documentation requirements.”

Another pressure point in the international tax arena is structured financing. While companies are increasingly seeking ways to hedge their investments or to reduce their financing costs, the creation of complicated debt and investment structures “puts tension on the tax rules to determine how you would actually treat the vehicle,” Riemer says. Although a particular structuring may meet its intended purpose—to lower interest costs, say—Riemer must determine all of the tax implications. For example, a particular structuring could be classified as equity in one location and debt in another, so Riemer must research tax regulations to understand how to take advantage of the varying tax treatments for debt or equity in the different countries. In another scenario, an investment banker may create a financing in which a company borrows funds to make a foreign investment, receives an interest deduction for the borrowing and accumulates tax-free income from the investment because of the rules in the foreign country. “But when you overlay the U.S. tax rules, you see theres a problem because the U.S. tax rules require the income to be taxed immediately in the United States as a deemed distribution even though there has been no cash dividend. The purpose of the deal may not be achieved if the foreign tax benefit is offset by paying U.S. tax on the income.” Its not even safe to rely on the implications for seemingly identical products. “One vehicle may look very similar to another one, but there may be vast differences in taxation here and abroad,” he says. As a result, deals that may seem on the surface to be good business decisions may lose their luster once the tax toll is considered.

TEAM WORK

Transfer pricing and structured financing are clearly areas of opportunity for CPAs in business and industry and for those in public practice who would like to extend services to multinationals. To keep abreast of developments, Riemer reads publications devoted to U.S. international tax, such as Daily Tax Report and Tax Notes International, and relies on controllers at the companys many subsidiaries as well as local tax consultants to report back with information.

For practitioners seeking to become more involved in the field, “the best advice is to know your limits,” Riemer advises. “To do this job requires team work with my colleagues at Rhone-Poulenc and RPR but also with our outside advisers, since we cant have an expert on staff for every country in which we do business. This is not an area in which one person can know everything.”