May 5, 2014
Interviewed by: David Snow
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The Tax Man Eyes Your Overseas HQ

Politicians on each side of the aisle are struggling to create tax policy around overseas earnings of international companies. Experts from New Mountain Capital and RSM analyze the argument and sort tax fact from political perception.


The Taxman Eyes Your Overseas HQ
Taxes and Private Equity

David Snow, Privcap: Today, we’re joined by Adam Weinstein of New Mountain Capital and Rick Bailine of RSM. Gentlemen, welcome to Privcap. Thanks for beinghere.

All: Thank you, David.

Snow: We’re talking about tax and private equity. Both of you are experts who spend a lot of time both helping private equity firms plan their tax strategies and also planning your own tax strategy for New Mountain Capital, Adam. I’m fascinated to hear what you have to say.

  Obviously, there are shifting sands or expected shifting sands in private equity and in tax, in general, for financial services. Let’s talk about an important set of strategies that private equity firms use: offshoring or using offshore strategies. There are a lot of different approaches but, Adam, can you start with a format or strategy that a firm like yours might use to offshore? How does that need arise? Walk us through it.   

Adam Weinstein, New Mountain Capital: We are, predominantly, a U.S.headquartered business. Our overseas operations and most of our businesses have global operations, but they are all under a U.S. corporation, which means everything flows through to the U.S. corporate taxpaying entity and it pays its 35%, with certain deductions and other things.   

  With certain businesses that started out internationally, it is often advantageous to look at the U.S. business and the foreign business separately. The reason is that, if you have a U.S. business where 90% of the income is coming from the U.S. and it has a holding company above it in some foreign-­‐tax beneficial jurisdiction, you are paying all the U.S. corporate tax you’re supposed to on the 90% piece, but at the top level, you avoid paying a level of U.S. tax on that 10% foreign.

Now, to the extent that your investors, shareholders and GP members are U.S. citizens, in the U.S. or in U.S. taxpaying entities, they’re obviously paying the flowthrough effect of any of that income, even if it’s foreign income. But, in these instances, in certain jurisdictions, you don’t have to be doublepaying taxes. The administration has had a particular focus on U.S. businesses that try to pull themselves into offshore vehicles, which has been a very controversial topic. We have never tried to employ a strategy like that.

Snow: Even with that perfectly sound tax strategy, is there talk that there should be changes to that format that would affect the way private equity firms set them up?

Rick Bailine, RSM: Yes. In my mind, the simplest and maybe the most efficient way to look at the question is, if you start with a company that’s all domestic—all of its operations are in the U.S.—what does one do if the business, let’s say, is headquartered in New York but suddenly starts to expand to Connecticut and maybe Pennsylvania, and sooner or later, you’re in California and Texas and the whole nine yards? That’s where the question first came up. You are now moving your business so that it is no longer just taxed by Uncle Sam, but taxed by the state. Different states have different tax policies, as I’m sure Adam will tell you, and different countries have different tax policies.

If you’re now talking about shifting your business not from New York to Connecticut, but from New York to, say, Germany, you have to look at a number of things.

One: what is the business environment in Germany? We need to make a  business decision. Number two: what  is the regulatory environment in Germany? We need to be sure we’re complying with regulations. Number three: any prudent business person would also want to make sure we plan this in a taxefficient manner as well, because taxes affect your bottom line. It’s a cost of doing business.

For years, there has been a policy in place that, typically, as Adam points out, money earned overseas by an overseas entity is not taxed in the U.S. directly unless the money is returned to the U.S. In the last five or six years, we have seen this referred to as a “great incentive” to cause American corporations, particularly American multinational corporations, to invest overseas rather than invest

here in the U.S. and, hopefully, to grow jobs more effectively in our country.

Snow: How do you differentiate between a corporation investing overseas purely for taxefficiency reasons versus one doing so because markets overseas are attractive and warrant heavy investment?

Bailine: I’d go so far as to say nobody invests simply for tax reasons.

Weinstein: That’s exactly right. You’re not going to put out a dollar to avoid anything. The political tide has certainly gone the other way.

The strategy a lot of people have tried is if you’re going to have a meaningful piece of your income in the future come from foreign earnings, you may be best advised to create a foreignholding company above the U.S. corporate business. Once that’s already happening under the U.S. corporate business, it’s near impossible now to shift it overseas.

Bailine: If you are a U.S. corporation doing business in the U.S., it is very difficult to move the business offshore. There are tax-code provisions that address not only the movement of the business, but also the ongoing taxation of the business. We’re referring to the notion that you have a U.S.-­‐based business and they want to access the markets in a foreign country, be it China, India, Germany or wherever. You set up a corporation in that jurisdiction, which, in fact, does business in that jurisdiction. It is not a business that’s being conducted in the U.S.; it’s being conducted in the foreign country.

The key question they’re trying to address (and Adam’s right— there has not been a lot of substance) is “What are you doing?” or “How can we appropriately address American businesses that want to access markets overseas? How do we tax that in an appropriate way, which discourages job growth outside the U.S. and potentially maximizes job growth in the U.S.?” That is not an easy puzzle to solve. If it were, it would have been solved a long time ago. Both sides of the aisle are struggling with it. Both sides of the aisle in Congress have some sympathies for trying to do this in an appropriate way. Right now, there’s no consensus on what the word “appropriate” might mean.

Snow: Right. Having a thriving business in China does not necessarily mean your home office is going to shrink.

Bailine: That’s correct.

Snow: It means the whole enterprise could possibly grow.

Weinstein: We’ve seen a ton of examples—not just companies we own— where the only reason a U.S. business was able to expand so significantly is because of offshore operations, which helped it grow to scale.

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