Complex Corp Actions Increase Tax Issues

Corporate Actions

MINNEAPOLIS-A growing volume of complex corporate actions notifications has led to an increase in tax-related issues, and a full understanding of events is necessary to handle certain announcements, say tax analysts.

"Complex transactions are increasing due to the rising number of cross-border events and complicated mergers, causing firms to test the limits of the tax code," says Illinois-based John Kareken, writer/analyst at corporate actions tax analysis provider CCH Capital Changes, part of Minneapolis-based data vendor Wolters Kluwer Financial Services.

Corporate actions are seldom straightforward from a tax perspective, but there are 10 particularly challenging corporate events, such as spin-offs, mergers and distributions, expected to impact the upcoming tax season, according to CCH Capital Changes.

The 10 transactions include the Transocean and GlobalSantaFe reclassification of shares and cash distribution. This event raised questions due to the application of the internal revenue code section 302, determining whether cash paid to a company through its shareholders in a redemption transaction is treated as capital dividend or capital gain.

"If cash in redemption of stock of a US company, paid to non US residents, is characterized as a dividend, the payment is subject to US withholding tax. If it is treated as capital gain it won't be," says Illinois-based Richard Ryndak, senior tax analyst at CCH Capital Changes.

"The whole question of section 302 and whether or not payments by a company should be treated as dividend or as capital gain is getting increased attention both in the US and overseas," he adds.

In fact, the Internal Revenue Service issued proposed regulations to deal with payments subject to 302 last October, and a hearing is scheduled for February 6 this year. However, a withholding agent has the option to rely on these proposed regulations for redemptions that occur before then, says Ryndak.

"Under the proposed regulations, non-US residents would have a 60-day period to respond and specify whether or not US redemption proceeds they receive will be treated as capital gain or as dividend income, and that will in turn determine whether any withholding tax is imposed," he says.

While some of the selected corporate actions occur often, such as a spin-off or distribution of stock of another company, others are fairly unique. In the Anglo American transaction, American investors who held American depository receipts (ADRs) of British company Anglo American received cash proceeds from the sale of shares distributed in a complicated series of transactions.

"Anglo American distributed shares of Mondi plc, then Mondi plc distributed shares of Mondi Ltd… This was accompanied by a share consolidation, making it difficult to track all the changes through to the end of the transaction and determine what the final shareholder entitlement was," says Ryndak.

Holders of ADRs only became aware of this transaction when they received the cash proceeds upon the distributed shares. "The problem in the US then became working backwards to find out how to treat the cash and how it was derived … among other things, ADR holders would be required to reduce their basis in Anglo American ADRs held," he adds.

The full list of transactions that could impact this tax season is available from CCH Capital Changes.

Carla Mangado

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