Basics of Foreign Tax Reporting: Identifying...

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Basics of Foreign Tax Reporting: Identifying Individuals’

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October 29, 2019

Basics of Foreign Tax Reporting: Identifying Individuals' Filing Requirements

Alison N. Dougherty, J.D., LL.M., Director

Aronson

[email protected]

Patrick J. McCormick, J.D., LL.M., Partner

Culhane Meadows

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

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RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

Basics of Foreign Tax Reporting: Identifying Individuals’ Filing Requirements

Patrick J. McCormick, JD, LLM

Patrick J. McCormick

• Patrick J. McCormick is a partner with Culhane Meadows. He earned his J.D. from Vanderbilt University Law School in 2008, and his LL.M. from New York University School of Law in 2009.

• Mr. McCormick specializes in and regularly handles matters covering all areas of international taxation, frequently publishing articles and giving presentations on assorted areas of international tax law.

Introduction: United States International Taxation

• An increasingly borderless world – and the resultant

prevalence of cross-border activities – makes familiarity with

how the United States taxes international activities a necessity

–Conflicts between jurisdictions regarding who has the right/first

right to tax income leads to potential for double taxation (and

punitive effective global tax rates)

• Familiarity with the “why’s” of the U.S. international tax system

is hugely valuable in assessing uncertain tax implications

–U.S. international tax – like many tax subcategories – is filled with

special rules and unique tax regimes

•Rules/regimes put into place to accomplish specific U.S. goals

7

7

Overview – Inbound Transactions

• Under default rules, nonresident aliens and foreign

corporations are generally subject to United States tax on:

– (1) income effectively connected with a United States trade or

business, and

– (2) fixed or determinable annual or periodic income

• Nonresident aliens are subject to transfer taxes on

gifts/bequests of certain property sitused to the United States

• Inbound transactions – non-U.S. taxpayers with United States

activities/income/assets

–Non-U.S. taxpayers – individuals who are not U.S.

citizens/residents, and entities not domiciled in the United States

8

8

Foreign Taxpayers With United States Activities

• U.S. income tax primarily imposed on foreign taxpayers as to

their income sourced to the United States

–Sourcing rules become important as a result

• Interest – sourced to payor’s residence

•Dividends – sourced to payor’s place of incorporation

•Rents/royalties – sourced based upon place of use of asset

•Personal services – sourced based on where services are

performed

• Non-U.S. sourced income earned by non-U.S. taxpayers only

subject to tax if connected to a U.S. trade or

business/permanent establishment of the non-U.S. taxpayer

9

9

Nonresident Taxpayers – Effectively Connected Income

• Income effectively connected to a United States trade or business is subject to tax

–“Trade or business” undefined in the Code/regulations – but profit-oriented activities carried on in the United States which are regular, substantial, and continuous are properly classified as a trade or business for these purposes

•Macro-level – relatively light requirements to be considered engaged in a U.S. trade or business

–Effectively connected income taxed by the United States at graduated rates, with deductions/credits available

–Treaty modification to standard: “effectively connected with a U.S. trade or business” becomes “income attributable to a U.S. permanent establishment”

•Similar – but heightened - standard

10

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Foreign Corporations –Effectively Connected Income

Foreign corporations engaged in a United States trade or business are

generally subject to regular United States tax at normal graduated rates

•Withholding unrequired for effectively connected income

–Recipient should provide Form W-8ECI to substantiate the

income is ECI

•Foreign corporations engaged in a United States trade or business

are allowed deductions; however, must timely file a “true and

accurate return” to obtain them

–18-month grace period is applicable for these purposes, generally

requiring the return to be filed within 18 months of the due date

•Filing a protective return can be beneficial where questions

exist as to whether there is a United States trade or business

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Nonresidents – FIRPTA

• Under the Foreign Investment in Real Property Tax Act of 1980, gain from disposition of United States real property interest by a foreign taxpayer is subject to tax– Gains are automatically classified as ECI!

– United States real property interest: any interest in United States real property or an interest in a domestic corporation unless such corporation was not a United States real property holding corporation for the prior five years

•United States real property holding corporation: corporation where more than 50% of the corporation’s assets are United States real property interests

– Transferee must withhold on disposition at a rate of 15% of the amount realized

• Vitally, nonresident aliens generally not subject to capital gains tax on non-ECI U.S.-sourced gains

12

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Nonresidents – FDAP Income

• Fixed or determinable annual or periodic income (“FDAP income”) also subject to tax by the United States (for income items sourced to the U.S.)– FDAP income functions as a catch-all for U.S.-sourced income items

(aside from capital gains) not otherwise subject to U.S. tax

• Includes interest (subject to expansive exceptions), dividends, rent, salaries, wages, premiums, annuities, compensation, remuneration, etc.

– Interplay exists between ECI and FDAP income

•US-sourced income is classified as effectively connected to a U.S. trade or business rather than FDAP if it satisfies an asset use test or a business activities test

• FDAP income generally subject to a flat 30% rate of tax (with tax collected through withholding by payors)– Deductions not permitted for FDAP income

13

13

Tax Treaties

• Tax treaties function to reduce a country’s taxing authority in

situations covered by treaty terms

–Under treaties, residents of a treaty country (whether individuals or

entities) can be taxed at a reduced rate (or even exempted from

tax) on specified income items from the other country

• i.e. withholding taxes on United States-sourced income

•Goal with treaties is to ensure international transactions are not

disincentivized by higher tax rates

–Savings clause prevents a United States citizen or resident from

using a tax treaty to alter tax on US-source income

–Treaty-based positions generally must be disclosed

•Subject to exemptions under the Regulations

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14

Tax Treaties

• Residency takes on importance in this realm – generally foreign

persons are entitled to treaty benefits only when they are residents of

a country which is party to the treaty

– Treaty definitions of residence normally include persons liable for tax

to a country based on domicile, residence, citizenship, place of

management, or place of incorporation

•Corporations are residents of countries for these purposes if liable

for tax based on the country being its place of management

–Can have conflicts as to residence where place of management

and place of incorporation differ

•Tiebreaker typically is the treaty between those two countries

– Rules exist to prevent “treaty shopping” – entity creation solely for

purposes of treaty benefits

15

15

Tax Treaties

Benefits depend on specific treaty terms; however, some terms are commonly utilized in treaties

•Treaties usually provide that business profits of a resident of one country may be taxed by the other country only where a permanent establishment exists in that country and the profits are attributable to such a permanent establishment

•Can be compared/contrasted to ECI requirements – higher threshold of activity/connection required

•Where no permanent establishment exists, corporation only subject to U.S. tax on U.S. source income

•Permanent establishment – focus is normally on whether there is either (1) a fixed place of business in the United States or (2) an agent of the company whose U.S. activities are attributed to the nonresident principal

16

16

Tax Treaties

FDAP income is impacted by treaty terms

•Treaties often reduce/eliminate tax on FDAP income

–FDAP income attributable to a permanent establishment is

governed by the business profits/permanent establishment

treaty provision

–Dividends – can still be taxed, but rates usually reduced

–Tax of interest/royalties can be removed from source country

under treaties

Income from personal services also impacted – need

more substantial connections

17

17

Information Reporting – Inbound Transactions

• Information reporting requirements for non-U.S. taxpayers

limited (based on more limited scope of U.S. tax)

–Form 5472 – can be required for foreign corporations engaged in a

U.S. trade or business or holding disregarded entities

–Form 8833 requirements exist for taxpayers availing themselves of

treaty benefits

• Importantly, failure to file Form 8833 does not eliminate treaty

benefits!

•Tiebreaker provisions: individuals reclassified for income tax

liability purposes

–For information reporting purposes, still (mostly) treated as

U.S. taxpayers!

19

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Overview – Outbound Transactions

• Unlike foreign taxpayers, United States taxpayers are taxable

on worldwide income, irrespective of the income’s source

–Critically, United States taxpayers also must meet assorted

information reporting requirements, with significant penalties

imposed for failures

• United States taxpayers can separately incorporate foreign

activities to obtain some level of deferral on U.S. income tax

(through creation of a separate non-U.S. taxpayer)

–Historical anti-deferral efforts significantly buttressed by GILTI

provisions in 2017 TCJA

20

20

United States Taxpayer Classification

• United States citizens are taxable on their worldwide income and

transfers of worldwide assets

• Citizenship – persons born in the United States, naturalized in

the United States, or (under specified circumstances) where

parents were United States citizens at the time of their birth

• Can be a citizen without ever having entered the United States

– often termed “accidental citizens”

• Taxable on worldwide income/worldwide asset transfers –

includes earnings in a foreign country

• Options exist to mitigate double taxation

• Expatriation option also exists – though can end up subject to

exit tax

21


• Income Tax: United States residents also taxable on their worldwide income

• Classified as a “resident” for United States purposes if meeting any of the following requirements:

•Lawfully admitted for permanent residence (green card holder);

•Make an election to be treated as a resident; or

•Meet substantial presence requirements

• Substantial presence: must be present in the United States for 31 days during the relevant tax year and the sum of days for the last three years (after use of applicable multipliers) exceeds 183

• Applicable multipliers – multiply the numbers of days in the current year by 1, the first preceding year by 1/3, and the second preceding year by 1/6

22


• Exception to substantial presence – closer connection to a foreign country

• Where a closer connection to another country exists, the individual is treated as a nonresident alien

• For exception to apply – must be in the United States for less than 183 days in the current year, maintain a tax home in another country, and have a closer connection to that country (facts and circumstances determination – look to more significant connections)

• Treaty tiebreaker provisions can also provide exceptions

• Can reclassify residents (including green card holders!) as nonresident aliens

•Critically, however, these reclassified residents still subject to FBAR requirements!

• Importantly, days spent in the U.S. under certain visas types can also be exempt!

• i.e. F visas for students

23


• Estate and Gift Tax: applies to individuals who are United States domiciliaries

• Rules are different from income tax rules!

• Treated as a resident when a United States domiciliary –a United States resident with no present intention of leaving

•Facts and circumstances determination – look to length of stay, ties to U.S. versus other countries, etc.

• Imposes an elevated standard compared to income tax requirements

•Can have individuals who are taxable on worldwide income but not worldwide gifts/bequests

• While United States residents are taxable on worldwide gifts and bequests, rules for transfers to United States residents can differ

• Example – transfers to United States citizen spouses are excluded from tax, but transfers to United States resident noncitizen spouses are not

24

Foreign Tax Credit

• Foreign tax credit generally available to United States persons for taxes paid to foreign jurisdictions

• Mechanism provided to alleviate burdens of double taxation for United States-resident taxpayers earning income from foreign jurisdictions

• Goal is to not disincentivize foreign transactions

• Credit available for taxes directly paid and some indirect payments

• In most instances, foreign tax credits not permitted for nonresident aliens or foreign corporations

• Foreign tax credit allows the source country to impose an initial tax on income, then have the United States collect the difference

• i.e., if foreign income is taxed at a 15% rate in the foreign country and a 21% rate in the United States, functionally the foreign country imposes its full tax and the United States gets the 6% remainder

25

General Reporting Requirements

Form 8938

• Used to report interests in specified foreign financial assets

• Largely duplicates FBAR – look to accounts, financial assets, etc.

•ONLY NEED TO FILE WHERE A FINANCIAL INTEREST EXISTS

•Unrequired for mere signature authority, unlike the FBAR

•Accounts, securities held outside accounts, interests in foreign

entities, etc.

• Filing thresholds:

•Residents of United States – aggregated value of $50,000 at end of

year or $75,000 at any time during year; $100,000/$150,000 if

married filing jointly

•Residing overseas - $200,000/$300,000 if single;

$400,000/$600,000 if married filing jointly

26


Form 8938

• $10,000 penalty assessable for failure to file (with additional penalties

up to $50,000)

• Treasury notifies of failure to file; after 90 days, if still not filed, $10,000

penalties are assessed up to $50,000

• Failure to file when required can cause statute of limitations for entire

tax return to stay open until three (3) years after the form is filed

• Reasonable cause exception exists

• Form first required in 2011

27


Form 8621

• Filed by taxpayers with interests in passive foreign investment

companies (“PFICs”)

• Importantly, non-U.S. mutual funds are almost always classified as

PFICs

•For foreign pensions, Form 8621 requirements can depend on the

structure of the pension

• Applicable only to interests in foreign corporations – need to assess

whether an entity is a corporation for U.S. tax purposes

28


• Form 8621

• Investments in PFICs generally subject to very high tax rates and onerous reporting requirements

• Alternatives for default tax rules exist: QEF election and mark-to-market election

•HOWEVER, ELECTION SHOULD BE MADE IN YEAR OF ACQUISITION TO AVOID RECOGNITION OF ACCUMULATED GAIN UNDER DEFAULT RULES

• Information reporting required if threshold values met

•$25,000 or $50,000 if married filing jointly

• No specific financial penalties for failure to file; however, failure to file when required can cause statute of limitations for entire tax return to stay open until three (3) years after the form is filed

• Reasonable cause exception exists

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29


Form 3520

• Primarily relevant for taxpayers with interests in foreign trusts or who

receive gifts/bequests from nonresident aliens

• Responsible party for reporting a reportable event that occurred during

tax year or transferred property to a foreign trust in exchange for an

obligation

• U.S. person who is treated as the owner of any part of the assets of a

foreign trust

• U.S. person receiving distributions from a foreign trust

• U.S. person receiving distributions from foreign persons or entities

•Foreign bequests/gifts – filing requirement exists when receiving

more than $100,000 from a nonresident alien individual which are

treated as gifts or bequests

30


Form 3520

• Various penalties assessable for failure to file, and statute of

limitations can remain open for items reportable on the Form

•Reasonable cause exception exists for penalties

Form 3520-A – filed by foreign trusts which have a United States owner

• Each U.S. person treated as an owner is responsible for ensuring the

foreign trust completes the form

31

General reporting requirements

Form 5471

• Filed by taxpayers with relevant interests in foreign corporations

• Various levels of filing requirements exist, depending on the type

of interest held by the taxpayer

• Requirement exists, for example, where acquiring 10% or more

of ownership in a given year, or maintaining control over a

foreign corporation

• Penalties vary, and can depend on the category of filing required

Form 5472

• Used by a reporting corporation if it had a reportable transaction

with a foreign or domestic related party

32

General reporting requirements

Form 8865

• Filed by taxpayers with relevant interests in foreign partnerships

• Various levels of filing requirements exist, depending on the type of interest held by the taxpayer

• Largely mirrors Form 5471

• Penalties vary, and can depend on the category of filing required

Form 8858 – similar filing requirement for foreign disregarded entities

• Filed by tax owners of foreign disregarded entities, and specified persons who control foreign corporations/partnerships which are tax owners of foreign disregarded entities

33

Foreign Corporations –Subpart F Income

Subpart F imposes a direct tax on a U.S. shareholder of a controlled foreign corporation (“CFC”) as to the CFC’s Subpart F income

– Tax imposed directly on shareholders, regardless of whether distributions of income are made

•For future distributions which previously were taxed under Subpart F, Sec. 959 prevents double taxation of the same income

• Indirect foreign tax credits available under Sec. 960 – however, only available for domestic corporations!

– Look to (1) whether a U.S. shareholder exists, (2) whether there is a CFC, and (3) whether the CFC has Subpart F income

•U.S. shareholder – United States person owning at least 10% of the foreign corporation’s voting stock or value

•Controlled foreign corporation if on any day during a given year U.S. shareholders own more than 50% of the stock

34

34

Foreign Corporations –Subpart F Income

Subpart F income is primarily comprised of “movable income” –

income that can be shifted to foreign jurisdictions more easily

•Foreign base company income is the largest component

–Includes foreign personal holding company income, foreign

base company sales income, foreign base company services

income, etc.

•Foreign personal holding company income: dividends,

interests, rents, royalties, and annuities

•Also includes certain net gains from sale of property

which generates passive income

•Exceptions exist, i.e. for active trade or business rents

35

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Foreign Corporations –Passive Foreign Investment Companies

• Passive foreign investment company (“PFIC”) is a foreign corporation where either:

–75% or more of the gross income of such corporation for the taxable year is passive income, or

–The average percentage of assets held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50%

Passive income for these purposes is any income which is of a kind which would be foreign personal holding company income

–Unlike with Subpart F, no minimum ownership requirements exist for rules to apply

•Where an entity meets both PFIC and CFC definitions, the CFC rules apply and the PFIC ones do not

36

36

Foreign Corporations –Passive Foreign Investment Companies

• Separate regimes can apply to PFICs for United States tax purposes; default rules exist in lieu of alternate elections

–Default rules: punitive tax repercussions exist on excess distributions or dispositions

•Holders of PFICs are subject to tax on any excess distribution or disposition at the top marginal tax rates for individual taxpayers, plus interest amounts calculated based on their holding period

–Elections outside default rules available to modify tax ramifications

•Qualified electing fund (“QEF”) election: include ordinary earnings as ordinary income and net capital gain as long-term capital gain

•Mark-to-market (“MTM”) election: recognition of gain or loss on shares’ fair market value on an annual basis

37

37

Foreign Corporations - GILTI

• Under Sec. 951A, U.S shareholders of a controlled foreign

corporation must include their share of global intangible low-

taxed income in US tax

–GILTI: Excess of the shareholder’s net CFC tested income over

the shareholder’s net deemed tangible income return

–U.S. shareholder and controlled foreign corporation concepts

mirror Subpart F

•GILTI inclusion treated similarly to Subpart F in many ways, but

not technically a component of Subpart F

–50% deduction available for GILTI, but ONLY for C-Corporations!

•Makes the effective tax rate for corporate shareholders 10.5%

•For non-corporate U.S. shareholders, rate can be 37%

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Foreign Corporations - GILTI

• GILTI Application

–Functionally, GILTI essentially is tax imposed on U.S.

shareholders of a CFC on the excess of an assumed 10% rate of

return on tangible business assets of the CFC

•GILTI imposes a minimum tax on foreign earnings that exceed a

standard rate of return amount

–No direct reference to intangibles is made in Sec. 951A

•Aim may have been intangible income, but application will be

significantly more far-reaching, and not limited to one type of

income (i.e. movable income)

39

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Patrick J. McCormick, J.D., LL.M.

[email protected]

215.630.0861

40

40


Basics of Foreign Tax Reporting: Identifying Individuals’

Filing Requirements—Inbound vs. Outbound Reporting Duties,

Intersection between Information Reporting and Income Calculation

Alison N. Dougherty October 29, 2019

https://aronsonllc.com/person/alison-dougherty/

https://aronsonllc.com/u-s-expatriate-citizens-by-birth-and-their-u-s-tax-reporting-obligations/

https://aronsonllc.com/government-contractors-and-cross-border-payroll-tax-issues/

http://blogs.aronsonllc.com/tax/u-s-tax-foreign-persons-gain-sale-u-s-partnership-interest/

http://blogs.aronsonllc.com/tax/new-us-international-tax-rules/

http://blogs.aronsonllc.com/tax/new-form-5472-filing-requirement-u-s-disregarded-entities-owned-foreign-person/

http://blogs.aronsonllc.com/tax/reporting-foreign-accounts-offshore-assets/

http://blogs.aronsonllc.com/fedpoint/2012/06/28/international-tax-series-know-the-basics-of-entity-classification-and-check-the-box-when-forming-or-

acquiring-a-foreign-company/

http://blogs.aronsonllc.com/tax/new-u-s-international-tax-reporting-disclosures-required-on-2016-u-s-federal-form-1065-partnership-tax-return/

http://blogs.aronsonllc.com/tax/us-companys-should-process-with-caution-when-filing-tax-returns-with-international-interest/

http://blogs.aronsonllc.com/tax/what-should-i-do-if-i-did-not-report

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Tax Reform Impact on Cross-Border Activities

▪ Income (Including Gains and Losses)

➢ I.R.C. § 951A Global Intangible Low-Taxed Income (GILTI)

❑ IR-2018-186, IR-2019-27, IR-2019-114

❑ IRS Notice 2019-01

❑ REG-104390-18, REG-101828-19

❑ TD 9865, TD 9866

➢ I.R.C. § 956 CFC Earnings Invested in U.S. Property

❑ IR-2018-210

❑ REG-114540-18

❑ TD 9859

➢ Limitations on Carried Interest

❑ IR-2018-37


http://www.aronsonllc.com/

http://www.aronsonllc.com/blogs



▪ Deductions and Depreciation

➢ I.R.C. § 163(j) Business Interest Expense

❑ IR-2018-82


❑ REG-106089-18

➢ I.R.C. § 245A 100% Dividends Received Deduction

❑ REG-106282-18

❑ TD 9865

➢ I.R.C. § 250 Deduction for FDII and GILTI

❑ IR-2019-27

❑ REG-104464-18

➢ I.R.C. § 267A Hybrid Arrangements

❑ REG-104352-18





▪ Taxes

➢ I.R.C. § 11

❑ 21% U.S. federal corporate income tax rate

➢ I.R.C. § 59A Base Erosion and Anti-Abuse Tax (BEAT)

❑ IR-2018-250

❑ REG-104259-18

➢ I.R.C. § 965 Transition Tax on Foreign Corporation Earnings

❑ Various IRS news releases and notices

❑ REG-104226-18

❑ T.D. 9846

❑ IRS FAQs

❑ IRS Publication 5292

➢ I.R.C. §§ 864(c)(8) and 1446(f) U.S. Withholding Tax on a Foreign Partner’s Sale of a Partnership

Interest

❑ IR-2018-81

❑ IRS Notice 2018-08, Notice 2018-29

❑ REG-113604-18, REG-105476-18





▪ Foreign Tax Credits

➢ I.R.C. §§ 861, 904, etc.

❑ IR-2018-235

❑ REG-105600-18

❑ TD 9866

▪ CFC Ownership and Downward Attribution

➢ Repeal of I.R.C. § 958(b)(4)

❑ REG-104223-18

❑ REG-125135-15

❑ REG 101828-19




U.S. International Tax Reporting Structure—Outbound

▪ Outbound U.S. international tax reporting requirements

➢ Form 5471 ownership of a foreign corporation

➢ Form 926 transfers of cash or property to a foreign corporation

➢ Form 8865 ownership of a foreign partnership

➢ Form 8858 ownership of a foreign disregarded entity

➢ Form 8832 check the box entity classification election

➢ Form 8975 country by country reporting

➢ Form 8991 base erosion and anti-abuse tax (BEAT)

➢ Form 8992 global intangible low-taxed income (GILTI)

➢ Form 8993 I.R.C. § 250 deduction for foreign derived intangible income (FDII) and GILTI

➢ Form 8938 specified foreign financial assets

➢ FinCEN Form 114 foreign bank account report (FBAR)

➢ Form 8621 ownership of a PFIC

➢ Form 5713 international boycott report

➢ Forms 1116 and 1118 foreign tax credits

➢ Form 3520 transactions with foreign trusts and foreign gifts

➢ Form 3520-A return of a foreign trust with a U.S. owner

➢ Form 2555 foreign earned income exclusion




U.S. International Tax Reporting Structure—Inbound

▪ Inbound U.S. international tax reporting requirements

➢ Form 5472 reportable transactions with related parties

➢ Forms 1042, 1042-T, and 1042-S U.S. nonresident withholding tax

➢ Forms 8804, 8804-C, 8805, and 8813 foreign partner withholding

➢ Form 1120-F foreign corporation engaged in a U.S. trade or business

➢ Form 1040NR nonresident individual income tax return

➢ Form 8854 expatriation statement

➢ Form 8840 Closer connection exception statement

➢ Form 8843 statement for exempt individuals and medical condition

➢ Form 8833 treaty based tax return position disclosure

➢ Forms 8288, 8288-A, and 8288-B FIRPTA withholding

➢ Forms W-8BEN, W-8BEN-E, W-8ECI, W-8IMY




U.S. International Information Return Penalties

▪ The following penalties could apply for the failure to file, the late filing, or a substantially incomplete filing of a U.S. international information return.

➢ Forms 5471, 8865, and 8858 –

❑ $10,000 penalty for the failure to file on time

❑ Additional $10,000 penalty up to $50,000 maximum for each month that delinquency continues after IRS sends notice

❑ Statute of limitations stays open on entire U.S. Federal tax return until complete and accurate form is filed.

❑ Possible reduction in foreign tax credits from a foreign company

❑ Possible criminal penalties for willful failure to file, fraudulent and false returns or statements

➢ Form 5472

❑ $25,000 penalty for the failure to file on time

❑ No limit on continuation penalty

➢ Form 926 – Penalty is 10% of FMV of property transferred to foreign corporation and some types of transfers may result in a taxable sale or exchange.

➢ FBAR –

❑ $10,000 (adjusted for inflation) civil penalty for nonwillful failure to file on time

❑ greater of $100,000 (adjusted for inflation) or 50% of the account balance for willful or intentional failure to file

❑ Criminal prosecution with possible imprisonment for willful or intentional failure to file

➢ Form 5713 – Penalty is $25,000 or up to one year imprisonment for the willful failure to file.

➢ Forms 1042 and 1042-S – Penalties can be up to 50% of the tax liability plus interest for the failure to file and pay the U.S. nonresident tax on time.




IRS International Practice Unit Guidance

Substantial Compliance Rules

▪ Examples of when a U.S. international information return

is not substantially complete

➢ All required schedules are not attached or completed

➢ Overstatements or understatements of amounts that are required to be

reported

➢ Incorrect or inaccurate information stated on the form

➢ All required information is not reported




SCHEDULES REQUIRED TO BE ATTACHED

TO FORM 5471 BASED ON APPLICABLE U.S. FILER CATEGORY




SCHEDULES REQUIRED TO BE ATTACHED

TO FORM 8865 BASED ON APPLICABLE U.S. FILER CATEGORY




Form 5471 Examples from the IRS International Practice Unit Guidance

▪ Example 1: FSA 33381431 – The taxpayer did not substantially comply with the Form 5471

reporting requirements. ➢ Significant understatements of purchases from and sales to some CFCs and related third parties reported on

Schedule M

➢ Significant inconsistencies in the earnings and profits of some CFCS

➢ Other information reported on Form 5471 was accurate

▪ Example 2: CCA 200645023 – The taxpayer did not substantially comply with the Form

5471 reporting requirements. ➢ Schedule C income statement and Schedule F balance sheet not reported in accordance with U.S. GAAP

➢ Schedule O was not attached

➢ Forms 5471 not filed for certain inactive or dormant foreign corporations




Form 5472 Example from the IRS International Practice Unit Guidance

▪ Example 3: CCA 200429007 – The taxpayer did not substantially comply with the Form

5472 reporting requirement. ➢ Some transactions were reported erroneously

➢ Magnitude of each erroneously reported transaction was substantial in relation to all other reportable

transactions, substantial in relation to the volume of business and overall financial situation

▪ Specific Errors: ➢ Taxpayer over-reported amounts in Part IV purchases of stock in trade as $1,000X when the actual amount was

$500x

➢ Taxpayer incorrectly reported intercompany A/R not required and later corrected Form 5472 to remove them

➢ Ending balance of related party loans did not match the beginning balance on the next year’s Form 5472 and

the opening loan balance was incorrectly reported

➢ Taxpayer over-reported one amount and under-reported another amount. There was a relatively small

aggregate difference between the correct total and what was reported.




Form 5472 Example from the IRS International Practice Unit Guidance

▪ Seven factors to consider in determining whether taxpayer has substantially complied. 1. The magnitude of the underreporting, or of the over-reporting, of the erroneous reported transactions in

relation to the actual total amount of that reported type of transaction.

2. Whether the reporting corporation has reportable transactions other than the erroneous reported transactions

with the same related party and correctly reported such other transactions

3. The magnitude of the erroneous reported transactions in relation to all of the other reportable transactions as

correctly reported

4. The magnitude of the erroneous reported transactions in relation to the reporting corporation’s volume of

business and overall financial situation

5. The significance of the erroneous reported transactions to the reporting corporation’s business in a broad

functional sense

6. Whether the erroneous reported transactions occur in the context of a significant ongoing transactional

relationship with the related party

7. Whether the erroneous reported transactions are reflected in the determination and computation of the

reporting corporation’s taxable income




ALISON N. DOUGHERTY

DIRECTOR, TAX SERVICES

ARONSON LLC

Direct (301) 222-8262

Main (301) 231-6200

Email: [email protected]

805 King Farm Blvd, Third Floor

Rockville, MD 20850

Washington, DC Metro Area

Alison N. Dougherty provides tax services as a Director at Aronson LLC.

Alison specializes in international tax reporting, compliance, consulting,

planning, and structuring as a subject matter leader of Aronson’s

international tax practice. She has extensive experience assisting clients

with U.S. tax reporting and compliance for offshore assets and foreign

accounts. She provides outbound U.S. international tax guidance to U.S.

individuals and businesses with activities in other countries. She also

provides inbound U.S. international tax guidance to nonresident individuals

and businesses with activities in the United States. She has worked

extensively in the area of U.S. international tax reporting and compliance

with the preparation of the U.S. Federal Forms 5471, 926, 8865, 8858,

5472, 1042, 1042-S, 8621, 8804, 8805, 8813, 8288, 8288-A, 8288-B, 1116,

1118, 1120-F, 1040-NR, 3520, 3520-A, 2555, 5713, 8832, 8833, 8840,

8843, 8854, 8938, and FBAR. She has counseled U.S. taxpayers regarding

the outbound formation, capitalization, acquisition, operation,

reorganization, and liquidation of foreign companies. She has significant

experience with U.S. Federal nonresident tax withholding, foreign partner

tax withholding, and FIRPTA withholding. She works closely with

nonresident individuals and businesses regarding inbound U.S. real

property investment. She often assists U.S. taxpayers with IRS amnesty

program disclosures of offshore assets and foreign accounts.

Alison completed the LL.M. (Master of Laws) in Securities and Financial

Regulation in 2004 with academic distinction at Georgetown University Law

Center. She completed the LL.M. (Master of Laws) in Taxation in 2000 and

the Juris Doctor in 1999 at the University of Denver College of Law. She

completed a Bachelor of Arts degree in Foreign Language in 1995 at

Virginia Commonwealth University.




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