International Tax
Advisory
MARCH 15, 2003
Insights Into Recent Regulatory, Judicial and Legislative Developments
Atlanta
Can Foreign Companies Hide from Sarbanes-Oxley?
Charlotte
Overview
New York
The Sarbanes-Oxley Act of 2002 (the “Act”) is one of the most significant developments in corporate law in
recent years. Many of its provisions apply to foreign affiliates of publicly traded U.S. corporations as well
as to foreign corporations whose securities (including ADRs) are listed on U.S. exchanges.
Research Triangle
Washington, D.C.
Impact
The Act’s auditor independence rules significantly restrict the relationship a company has with its outside
auditor. Rules recently issued by the SEC prohibit the auditor of a publicly traded corporation from
providing certain non-audit services to the client. In the case of other non-audit services, prior audit
committee approval is required.
Prohibited services include, among other things, certain (i) bookkeeping or other services related to
accounting records; (ii) financial information systems design; (iii) appraisals and valuations; (iv) actuarial
services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii)
broker, investment advisor or banking services; (viii) legal services not related to the audit; and (ix) any
other service designated in regulations. While certain tax services are prohibited, others are permissible.
The general principles underlying these proscribed activities are that an auditor cannot function as part
of the management of the company, audit or review its own work and serve as an advocate for its client.
The rules regarding prohibited and permissible services generally apply to any foreign accounting firm
with audit clients whose securities are publicly traded in the U.S.
The Act moves the relationship that a company has with its auditor from management to the audit
committee. There are strict rules regarding the composition of the audit committee. These rules will
generally apply to foreign companies whose shares are publicly traded in the U.S., although certain
exemptions apply to foreign companies.
Regulation of Public Accounting Firms and Law Firms
Jack Cummings
Editor
601 Pennsylvania Avenue, N.W.
North Building, 10th Floor
Washington, D.C. 20004-2601
202-756-3300
Fax: 202-756-3333
www.alston.com
One of Fortune® magazine’s
“100 Best Companies to Work For”™
All accounting firms, including foreign ones, must register with the new Public Company Accounting
Oversight Board (or “PCAOB”) if they either furnish or prepare audit reports to an audit client whose
securities are publicly traded in the U.S. or play a substantial role in the preparation of the audit report.
Individual accountants must “rotate off” the team for an audit client every 5 years and remain off for 5 years
(or every 7 years and remain off for 2 years in the case of audit partners other than the lead or concurring
partner). The “cooling off” provisions prevent audit firm partners from accepting employment with the
client for a period of 1 year; however employment with foreign subsidiaries and affiliates of the issuer is
permissible. Under the proposed attorney conduct rules of the Act, foreign attorneys who advise on U.S.
securities law (including participation in SEC proceedings and filings) must report “up the ladder” to the
CEO, audit committee and board of directors any alleged violations by the company of U.S. securities
laws. However, these rules should not apply if they conflict with or are prohibited by local law.
Planning Considerations
The Act will have far-reaching implications. Companies, their advisors, and accountants must develop
internal procedures to meet the requirements of the Act.
For additional information, contact Pinney Allen at (404) 881-7845, Saba Ashraf at (404) 881-7648
or Chuck Wheeler at (202) 756-3308.
IRS Highlights the Importance of Foreign Currency
Translation Rules in Cross-Border Acquisitions
IRS Legal Mem. (ILM) 200303021 (Released January 17, 2003)
Summary
This IRS Legal Memorandum (“ILM”) opines that the U.S. dollar basis of an asset acquired from a foreign
person with no U.S. connection in a carryover basis transaction is determined using the U.S. dollar
exchange rate in effect on the date the property was originally acquired by the foreign person even if the
foreign person has no contact with the U.S. either at the time of the acquisition or during his or her holding
period for the asset.
In the ILM, the Taxpayer acquired stock of a foreign corporation (“FC”) from foreign investors in a tax-free
stock for stock B reorganization. Because the Taxpayer took a carryover basis in the FC stock, it needed to
know that basis expressed in U.S. dollars. At issue was whether the Taxpayer’s basis should be translated
into U.S. dollars at the exchange rate in effect on the date the foreign investors originally acquired the stock
or at the exchange rate in effect on the date the Taxpayer acquired the stock. Surprisingly, the answer was
the earlier date.
International
Tax Group
Sam K. Kaywood, Jr.
Co-Chair
404-881-7481
Edward Tanenbaum
Co-Chair
212-210-9425
Pinney L. Allen
404-881-7485
Gideon T. J. Alpert
212-210-9403
Pamela S. Ammermann
202-756-3341
Saba Ashraf
404-881-7648
Henry J. Birnkrant
202-756-3319
Robert T. Cole
202-756-3306
Example
Japanese person (“J”) acquired non-amortizable property in 1990 for 1,000 yen. The yen-to-U.S. dollar
exchange rate in effect at that time was 10 to 1 (e.g., 1000 yen was worth 100 U.S. dollars). In 2003, when
the yen-to-U.S. dollar exchange rate is 5 to 1, J transfers the property to a U.S. corporation (“U.S. Co.”) in
exchange for its stock in a tax-free transaction. U.S. Co. takes a carryover basis in the property of 1000
yen (i.e., J’s historic cost for the property). Does U.S. Co. translate J’s 1000 yen basis into U.S. dollars at
the exchange rate in effect when J originally acquired the property (for a basis of 100 U.S. dollars) or at the
exchange rate in effect when U.S. Co. acquires the property (for a basis of 200 U.S. dollars)?
Philip C. Cook
404-881-7491
James E. Croker, Jr.
202-756-3309
Jasper L. Cummings, Jr.
202-756-3386
Donald M. Etheridge, Jr.
404-881-7734
Tim L. Fallaw
404-881-4479
Analysis
The foreign currency translation rules contained in IRC §§ 985-989 do not provide a clear answer as to
which exchange rate should be used in this situation. The ILM generally opines that the foreign investors’
U.S. dollar basis in their FC shares is determined by applying U.S. tax law, even though the foreign investors
had no connection to the U.S. when they acquired the shares or at any time prior to the B reorganization.
Thus, the Taxpayer’s carryover basis in the FC shares was equal to the U.S. dollar value of the foreign
currency on the date the foreign investors originally acquired their FC stock.
Terence J. Greene
404-881-7493
Michelle M. Henkel
404-881-7633
L. Andrew Immerman
404-881-7532
Akemi Kawano
202-756-5588
Planning Considerations
Any U.S. person acquiring assets from a foreign person using a foreign currency in an inbound carryover
basis transaction must address the issue of the appropriate exchange rate for translating the foreign
currency denominated basis of the acquired property into U.S. dollars. Moreover, this analysis should be
performed early in the planning stages because exchange rate changes might dictate restructuring the
acquisition as a purchase.
For additional information, contact Pamela Ammermann at (202) 756-3341
or Kevin Rowe at (212) 210-9505.
Andrea M. Knight
404-881-4522
Andrea Lane
202-756-3354
Brian E. Lebowitz
202-756-3394
Timothy J. Peaden
404-881-7475
Kevin M. Rowe
212-210-9505
Matthew C. Sperry
404-881-7553
Joe T. Taylor
404-881-7691
Gerald Von Thomas II
404-881-4716
Charles W. Wheeler
202-756-3308
www.alston.com