mastering form 5471 for interests in foreign entities...

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Mastering Form 5471 for Interests in Foreign Entities:

Determining Ownership Share and Correct Filing Status

WEDNESDAY, FEBRUARY 22, 2017, 1:00-2:50 pm Eastern

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Feb. 22, 2017

Mastering Form 5471 for Interests in Foreign Entities

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

Aronson, Rockville, Md.

[email protected]

John Samtoy, Tax Principal

Holthouse Carlin & Van Trigt, Costa Mesa, Calif.

[email protected]



Notice

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

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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.

FOCUS • CLARITY • COMMITMENT

MASTERING FORM 5471 FOR INTERESTS IN FOREIGN ENTITIES: DETERMINING OWNERSHIP SHARE AND CORRECT FILING STATUS

John Samtoy, HCVT LLP [email protected]

T A X | A U D I T | B U S I N E S S M A N A G E M E N T | M E R G E R S & A C Q U I S I T I O N S

FORM 5471 - BACKGROUND

•Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, is filed by US persons to report interests in and transactions related to foreign corporations. The requirements to file are established in IRC §§ 6038 and 6046.

•Form 5471 is an important IRS tool for assessing the scope of a taxpayer's foreign holdings and operations and can be used in determining taxpayers that need to be audited and establishing an audit work plan.

•The Form is also useful for keeping track of the earnings and profits of foreign corporations, determining whether a foreign entity is generating subpart F income or has undergone a taxable restructuring or changes of ownership, and tracking possible IRC § 956 inclusions.

•The latest form estimates indicate that preparation takes on average 24 hours (the new revision removes the time estimates).

6


FORM 5471 – ENFORCEMENT ENVIRONMENT

•“So from the outset, the IRS adopted a clear message: International tax evasion was, and would continue to be, a top priority for the agency, and people hiding assets offshore would find themselves increasingly at risk of enforcement actions.” – IRS Commissioner John Koskinen June 3rd 2014

•“The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore …” John Koskinen Jan 28th 2015

•Offshore Voluntary Compliance has collected more than $10 billion as of October 2016 and brought 100,000 taxpayers back into compliance.

•New (2017) LB&I Audit Campaign – 13 point plan includes: OVDP Declines and Withdrawals to target individuals who received pre-clearance

•FATCA, CRS and global transparency.

7


FORM 5471 - WHO MUST FILE - FILING CATEGORIES

•A Category 2 Filer is a U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person has acquired the requisite shares (10% vote or value) in one or more transactions.

A Category 3 Filer is a U.S. person who acquires or disposes of shares in a foreign corporation and exceeds or falls below a 10% ownership threshold, a U.S. person who acquires stock that would on its own meet the 10% threshold, or a person who becomes a U.S. person while meeting the requisite ownership requirements.

A Category 4 Filer is a U.S. person (and certain nonresident aliens) who had “control” of a foreign corporation for an uninterrupted period of at least 30 days during the accounting period of the foreign corporation.

8


FORM 5471 - WHO MUST FILE - FILING CATEGORIES

•A Category 5 Filer is a “U.S. shareholder” that owns stock in a foreign corporation that is a CFC for 30 days or more during the tax year of the foreign corporation and that owned that stock on the last day of the year.

• A “U.S. Shareholder” is defined as a U.S. Person that owns 10% of a foreign corporation directly or indirectly or constructively.

• A CFC is a foreign corporation with U.S. Shareholders that own more than 50% of the vote or value of the corporation.

9


DETERMINING CFC STATUS – IS FOREIGN CORPORATION A CFC?

Example 1

Foreign Corporation

6 different

US Corps

5 US

Indv

There are 11 US owners, each own 9.09% interest, no foreign

owners. All owners are unrelated.

No Yes Foreign

Corporation

6 different

US Corps

Example 2

US

100%

5 US

Indv

10


DETERMINING CFC STATUS – IS FOREIGN CORPORATION A CFC?

No Yes

US 1

Example 3

Foreign Corporation

FC US 2 US 3

45% 9% 9% 37%

US 1

Example 4

Foreign Corporation

FC US 2 US 3

45% 15% 9% 31%

11


ATTRIBUTION – DETERMINING TOTAL OWNERSHIP

•Determining ownership of a foreign company is not as straightforward as looking at a US person’s direct ownership percentage. Attribution rules can combine direct, indirect, and constructive ownership to determine total ownership of a foreign corporation.

•There are attribution rules for a variety of purposes and the rules are not always the same. Attribution is used to determine:

• Acquisitions and dispositions reporting total ownership determination - § 1.6046-1(i) – includes siblings – Category 3

• Determination of control for information reporting requirements - § 1.6038-2(c) based on §318 with modifications – Category 4

• Determining US Shareholder and CFC status - IRC § 958(b) – based on §318 with modifications – Category 5

12


ATTRIBUTION –US SHAREHOLDER AND CFC STATUS

•Indirect – IRC § 958(a) stock owned through foreign entities is treated as being actually proportionately owned.

•Constructive Ownership – IRC § 318(a) as modified by IRC § 958(b)

a) Family – Induvial owns stock owned directly or indirectly by spouse, children, grandchildren, and parents.

b) From partnerships – stock is owned proportionately by partners.

c) From corporations – If 10% or more of the value is owned, then considered to own the stock owned by the corporation proportionately .

d) To Partnership – partnership is considered to own stock owned by the partner.

e) To Corporations – If 50% or more of a corporation is owned, then corporation will own stock of owner.

f) Do not attribute from NRA or nonresident entity for purposes of (a), (d), or (e)

g) For (b) and (c) if a partnership or corporation owns more than 50% of the voting stock it shall be considered to own all of the voting stock.

h) Do not re-attribute stock owned by reason of:

• (a) for re-applying (a) to another person.

• (d) or (e) for applying (b) or (c) to another person

13


FORM 5471 - ATTRIBUTION – EXAMPLE 1

50% 50%

25%

US 1

Foreign

Corporation

UK 1

P1 (UK)

40%

UK 2

US 2

8%

27%

US 1 and US 2 are siblings. Who is a US Shareholder? Is an annual Form 5471 required? US 1 is the only US Shareholder. Foreign corporation is not a CFC so reporting not required on an annual basis (only when transaction occurs to trigger).

50% 50%

25%

US 1

Foreign

Corporation

UK 1

P1

(UK)

40%

UK 2

US 2

8%

27%

US 1 is US 2’s parent. Who is a US Shareholder? Is an annual Form 5471 required?

US 1 and US 2 are US Shareholders. Foreign corporation is a CFC. US 1 and US 2 are deemed to own more than 50%. Reporting required annually. Cat 4 and Cat 5

14


FORM 5471 – CONTROL (CATEGORY 4)

• A person in control of a corporation which, in turn, owns more than 50 % of the combined voting power, or of the value, of all classes of stock of another corporation is also treated as being in control of such other corporation. • A U.S. partnership controls a foreign corporation through

ownership control of it by a U.S. C Corporation. • A U.S. C corporation is a 51 % owner of the U.S. corporate joint

venture and the joint venture entity controls a foreign corporation. As a result, the C corporation controls the foreign corporation

• A U.S. company owns 80% of the voting stock of an unconsolidated U.S. C corporation which, in turn, controls a foreign corporation. As a result, the U.S. company also controls the foreign corporation.

15


FORM 5471 - CONTROL (CATEGORY 4)

US Corp 1

FC 1

FC 2

US Person

51%

51%

51%

Foreign 3rd Party

49%

Foreign 3rd Party

49%

• What is US Person’s ownership of FC 1 and FC 2? • Using Category 4 constructive

ownership rules we get to: • FC 1 – 26% • FC 2 - 13%

• US Person controls both FC 1 and FC 2 for

Category 4 filing purposes.

• Is FC 2 a CFC ? • YES – if more than 50% of voting

stock is owned then 958 attribution rules state that all voting stock shall be considered owned. See examples in 1.958-2(g)

16


FORM 5471 - FILING EXCEPTIONS – MULTIPLE FILERS

• One person may file Form 5471 and the applicable schedules for other persons who have the same filing requirements

• For example, a category 4 filer may file on behalf of a category 5 filer

• However, for category 3 filers, the required information may only by filed by another person having an equal or greater interest (measured in terms of value or voting power of the stock of the foreign corporation)

• The person filing Form 5471 must complete item E on page 1 of the form.

• All persons identified in E must attach a statement to their income tax return.

17


FORM 5471 - FILING EXCEPTIONS – MULTIPLE FILERS

18


FORM 5471 - FILING EXCEPTIONS – CONSTRUCTIVE OWNERS

•A U.S. person described in Category 3, 4 or 5 does not have to file Form 5471 if all of the following conditions are met:

• The U.S. person does not own a direct interest in the foreign corporation,

• The U.S. person is required to furnish the information requested solely because of constructive ownership from another U.S. person, and

• The U.S. person through which the U.S. person constructively owns an interest in the foreign corporation files Form 5471 to report all of the required information.

•The instructions clarify that there is no statement that needs to be attached for persons claiming the constructive owners exception. The regulations have been updated to reflect this as well (previously some ambiguity).

19



US Corp 2

FC 1

FC 2

51%

51%

51%

US Corp 1

•Caution – US Corp 1 is not just a constructive owner. US Corp 1 has control over FC 1 and FC 2.

Examples from the regulations: X, a domestic corporation owns 100 percent of the stock of Y, a domestic corporation, Y Corporation owns 100 percent of the stock of Z, a foreign corporation. X Corporation is not excused by this paragraph (j)(2) from filing information with respect to Z Corporation because X Corporation is deemed to control Z Corporation under the provisions of paragraph (b) of this section without recourse to the attribution rules in paragraph (c) of this section

20



M (US) N (FC)

100%

A

Examples from the regulations: A, a U.S. person owns 100 percent of the stock of M, a domestic corporation. A also owns 100 percent of the stock of N, a of foreign country Y. A, in filing the information return foreign corporation organized under the laws required by this section with respect to N Corporation, in fact furnishes all of the information required of M Corporation with respect to N Corporation. M Corporation need not file the information

100%

21



• Category 2 filer is not required to file if either of the below apply: • Immediately after the acquisition, 3 or fewer US persons own 95%

or more of the CFC and the US acquirer is filing a category 3 Form 5471; or

• US person for which the Category 2 filer is required to file does not directly own an interest in FC but is required to file under constructive ownership rules and the US person from whom the stock ownership is attributed properly files Form 5471.

• Category 4 or 5 filers – constructive from nonresident alien • US person does not own a direct or indirect interest and is

required to file solely due to constructive ownership from a non-resident alien.

22


FORM 5471 - FILING EXCEPTIONS – ENTITIES TREATED AS DOMESTIC CORPORATIONS

• Forms 5471 are not required for certain entitles that are treated as domestic corporations. • Form 5471 not required for insurance companies that have elected

under section 953(d) to be treated as domestic and have filed their US income tax returns.

• Category 4 filers are not required to file a Form 5471 for a corporation defined in section 1504(d) that files a consolidated return for the tax year.

23


FORM 5471 - APPLICABLE FOREIGN CORPORATIONS

•What is an association taxable as a corporation (“corporation”)? Consider the check-the-box regulations.

• By default a foreign entity with limited liability for all members will be treated as a foreign corporation. An entity with unlimited liability for at least one member will be treated as a pass-through. • A member of a foreign eligible entity has limited liability if the member has no personal

liability for the debts of or claims against the entity by reason of being a member

• We are permitted to elect whether or not a foreign entity is treated as a corporation or pass-through by filing Form 8832 “check-the-box” election.

• If we are dealing with a per se corporation, it is a corporation for U.S. tax purposes.

• The foreign legal form of the entity can be useful in classifying it e.g., SA or SrL

•Remember that a separate 5471 is required for each foreign entity even if it is included in a foreign consolidated group, e.g., a German “Organschaft.”

25


FORM 5471 - PENALTIES

•IRC §§ 6038(a) and 6046 - Penalties for failure to file Form 5471, Schedule M, and Schedule O

• $10,000 failure to file penalty is automatically imposed for each late or incomplete Form 5471

• If not filed within 90 days after IRS notice of failure to the US person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof up to $50,000 per Form per year.

•IRC §6038(c) – 10% reduction of foreign taxes available for credit under 901, 902 and 960.

• If the failure continues 90 days or more after the IRS mails a notice of failure, an additional 5% reduction for each 3-month period (or fraction thereof) during which the failure continues after the 90-day period has expired. • Limitation on the 6038(c) penalties - the greater of $10,000 or the income of the

foreign business entity for its annual accounting period with respect to which the failure occurs.

26


FORM 5471 - PENALTIES

•IRC §6662(j) – 40% accuracy related penalty for underpayments of tax as a result of transactions involving an undisclosed specified foreign financial asset.

•IRC §6501(c)(8) – Will keep the statute of limitations open indefinitely when information is required to be reported under Sections 6038, 6038A, 6038B, 6046, 6046A or 6048 and is not reported.

27


FORM 5471 – PENALTY REMEDIATION

•Abatement, reduction, or modification of penalties is possible. • Taxpayers now have several options for submitting late returns due to IRS efforts

to encourage taxpayers to come forward. • Quiet Disclosure • Delinquent International Information Return Submission Procedures • OVDP • Streamlined Filing Compliance Procedures

• Reasonable cause – Where taxpayer can demonstrate that failures to file are due to reasonable cause and not due to willful neglect. • The regulations indicate what the IRS deems reasonable cause as exercising

“ordinary business care and prudence”. • The Internal Revenue Manual says that “ordinary business care and prudence

standard requires that taxpayers make reasonable efforts to determine their tax obligations.... Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances”

28


FORM 5471 – PENALTY REMEDIATION

• Complexity is a factor that should be considered – IRM, Court cases – Congdon v. US , Dillin v. Commissioner

• Reliance on a professional advisor constitutes reasonable cause where special training is required – US v. Boyle

• Neonatology Assocs., P.A. – confirms that taxpayers may rely on a professional advisor and establishes three factors for reliance: • The advisor was a competent professional with sufficient expertise to

justify reliance. • The taxpayer provided necessary and accurate information to the adviser. • The taxpayer actually relied in good faith on the adviser’s judgement.

• Reliance on a professional advisor continues to be upheld – See James v. US

29


FORM 5471 – PENALTY REMEDIATION – OVDP

•2014 OVDP effective 7/1/2014

•Benefits (FAQ #4):

• Become compliant

• Avoid substantial civil penalties (e.g. FBAR – up to 50% of maximum account balance per year)

• Eliminate risk of criminal prosecution

• Costs/Terms include (FAQ #7):

• 27.5% offshore penalty (highest value of foreign financial assets in any year) if institution is not being investigated

• Failure to file, failure to pay penalties, accuracy related penalties

• Significant professional fees

• OVDP disclosure period = 8 years (FAQ #9)

30


FORM 5471 – PENALTY REMEDIATION – STREAMLINED FILING

• Purpose: become compliant with US reporting. Filers must certify failure to file was not due to willful conduct

• Eligibility for individuals including estates. Two separate programs: • Streamlined Foreign Offshore Procedures - resident outside the US • Streamlined Domestic Offshore Procedures – US residents

• Foreign Offshore Procedures requirements for eligibility: • US citizens or green card holders

• In at least 1 of last 3 years did not have a US abode and outside the US for at least 330 days during the year

• Non-US citizens and non-green card holders • In at least 1 of the last 3 years the individual did not meet the substantial presence test

• Filing Requirements: three most recent years’ US tax returns (including information returns) and six most recent years’ FBARs

• Payment Requirements:

• Full amount of tax and interest

• 5% of highest aggregate balance for any year (Domestic only)

31


FORM 5471 – ISSUE SPOTTING, PREPARATION AND REVIEW POINTERS

•Sometimes we find non-U.S. persons that own foreign businesses, becoming U.S. taxable residents (e.g., securing a “Green Card.”) As a result, they are now required to file Form 5471, as well as consider the U.S. taxable consequences associated with their foreign operations, e.g., subpart F.

•Schedule of filing requirements for categories of filers found in Form 5471 instructions is a good reference for review or preparation of the form.

• Review the “Additional Filing Requirements” in the form instructions. • Category 3 filer statement, Section 338 Election, Reportable

Transaction Disclosures.

32



33



•When reviewing the foreign corporations that must complete Form 5471, it is always a good practice to have a log of those entities that filed returns in the prior year for better control over the current year’s filings. Generally speaking if a return was not needed for a previous year or there is a new entity in the group Schedule O is frequently required.

•Filing on behalf of others may be possible. Filing on behalf of a U.S. consolidated group is permissible.

•A separate Form 5471 must be filed for each foreign corporation for each tax year of the foreign corporation ending during the shareholder’s tax year.

34


FORM 5471 - ISSUE SPOTTING, PREPARATION AND REVIEW POINTERS

•Attachments – Required schedules should be completed on the form itself. Penalties can apply for non-compliance. Certain attachments are mandated by the instructions.

•Dormant foreign corporations. • The IRS permits an abbreviated Form 5471 filing with respect to

certain dormant foreign corporations. See Rev. Proc. 92-70. • Filers, however, must verify each year that a foreign corporation

meets the requirements for dormant company status.

35


FORM 5471 - ISSUE SPOTTING, PREPARATION AND REVIEW POINTERS

•Is information presented consistently year-to-year?

•Are creditable foreign taxes and earnings and profits being calculated?

•Is currently taxable income, such as subpart F income and Sec. 956 investments in U.S. property, being included in U.S. shareholder’s income and are amounts being computed accurately?

• In particular look for dividends, interest, royalties, rents, gains in excess of 5% of gross income or $1mil. Also look for shareholder loans.

• Individual taxpayers – Net Investment Income Tax does not apply to Sec. 951 income by default. Subsequent PTI distributions then may be subject to NIIT. Consider Treas. Reg. § 1.1411-10(g) election.

•Does it appear that other income currently taxable to the foreign corporation’s shareholders is being overlooked?

•Do transactions between related parties raise transfer pricing issues?

•Have stock sales or reorganizations been accounted for properly?

•Does the tax return include all forms required to report on foreign operations? Consider the questions included in Schedule G (Other Information) & the related “reminders” included in the Instructions to the Form.

36

3 7 T A X | A U D I T | B U S I N E S S M A N A G E M E N T | M E R G E R S & A C Q U I S I T I O N S

JOHN SAMTOY – INTERNATIONAL TAX PRINCIPAL HCVT LLP

[email protected]

37


MASTERING FORM 5471

FOR INTERESTS IN FOREIGN ENTITIES:

DETERMINING OWNERSHIP SHARE AND CORRECT FILING STATUS

Alison N. Dougherty February 22, 2017

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/

© 2017 | All Rights Reserved | 805 King Farm Boulevard | Suite 300 | Rockville, Maryland 20850 |

301.231.6200 P | 301.231.7630 F | www.aronsonllc.com


FORM 5471 PAGE ONE

• Top of first page – foreign corporation’s annual accounting period

– Required tax year for CFC is the majority U.S. shareholder’s tax year

– Report information on Form 5471 based on foreign corporation’s tax year that ends with or within U.S. shareholder’s tax year

– Schedule O reports acquisitions, dispositions, organizations and reorganizations that occurred during the U.S. shareholder’s tax year

• U.S. Filer’s name, address and tax year end

• Item A – U.S. filer’s U.S. taxpayer identification number (SSN or FEIN)

• Item B – U.S. filer categories 2, 3, 4 and 5

• Item C – U.S. filer’s percentage of voting stock owned directly, indirectly and constructively at end of foreign corporation’s annual accounting period

• Item D – U.S. person on whose behalf Form 5471 is filed for multiple filers of same information, members of U.S. consolidated groups and constructive owners exceptions

• Item 1 – Name, address, date of incorporation, country of incorporation, principal place of business, business activity code number, principal business activity, functional currency

• Item 1(b)(1) – U.S. FEIN of foreign corporation, if any

• Item 1(b)(2) – Reference ID number of foreign corporation is required if it does not have a U.S. FEIN

• Item 2(a) – Name, address and identifying number of U.S. branch office or agent

• Item 2(b) – U.S. taxable income and tax paid if foreign corporation files a U.S. Federal income tax return (Form 1120-F)

• Item 2(c) – Name and address of foreign corporation’s statutory or resident agent in country of incorporation

• Item 2(d) – Name and address of person with custody of foreign corporation’s books and records




SCHEDULES REQUIRED TO BE ATTACHED

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




FORM 5471 SCHEDULES A & B




FORM 5471 SCHEDULES A AND B

• Schedule A – Stock of the Foreign Corporation – Description of each class of stock

– Number of shares issued and outstanding at beginning and end of annual accounting period

• Schedule B – U.S. Shareholders of Foreign Corporation – Category 3 and 4 filers complete Schedule B for U.S. persons that owned

directly or indirectly through foreign entities 10% or more in vote or value of any class of foreign corporation’s stock during the annual accounting period

– Column (a) – Name, address and identifying number of U.S. shareholder

– Column (b) – Description of each class of stock held by U.S. shareholder

– Columns (c) and (d) – Number of shares held at beginning and end of annual accounting period

– Column (e) – Pro rata share of Subpart F income as a percentage




FORM 5471 SCHEDULE C INCOME STATEMENT




FORM 5471 SCHEDULE C INCOME STATEMENT

• Income statement should be reported in functional currency

and translated into U.S. dollars in accordance with U.S. GAAP

• Functional currency net income or loss reported on line 21

Schedule C provides the starting point to determine current

earnings and profits on Schedule H

• Note that non-income taxes are reported on line 15 of

Schedule C and income taxes deducted in accordance with

U.S. GAAP are reported on line 20

• Consider materiality when providing detail for other income

and deductions




FORM 5471 SCHEDULE E

INCOME TAXES PAID OR ACCRUED




FORM 5471 SCHEDULE E

INCOME, WAR PROFITS AND EXCESS PROFITS TAXES PAID OR ACCRUED

• Income, war profits and excess profits taxes paid or accrued to United States, any foreign country or U.S. possession for the annual accounting period

• Accrual method taxpayers report amounts in the local currency and then translate to U.S. dollars based on average exchange rate for the tax year to which the tax relates unless an exception applies

• Translate to U.S. dollars based on exchange rate at time the taxes are paid if:

– The taxes are paid more than two years after the close of the tax year to which the taxes relate

– The taxes are paid in a tax year prior to the year to which they relate

– The taxes are denominated in a hyperinflationary currency

– The taxes are denominated in any currency other than the taxpayer’s functional currency if the taxpayer makes an election under I.R.C. Section 986(a)(1)(D)

• U.S. dollar amount of foreign taxes will be included in foreign corporation’s foreign tax pool relevant for calculating the I.R.C. Section 902 deemed paid foreign tax credit




FORM 5471 SCHEDULE F BALANCE SHEET




FORM 5471 SCHEDULE F BALANCE SHEET

• Balance sheet is reported and translated into U.S. dollars in accordance with U.S. GAAP

• Line 5 loans to (U.S.) shareholders and other (U.S.) related persons may indicate a possible I.R.C. Section 956 inclusion if the foreign corporation has positive earnings and profits

• Consider whether an appropriate interest rate is being charged on loans receivable due from and loans payable due to particularly for shareholders and other related persons

• Significant line 1 cash amounts may indicate that FinCEN Form 114 Report of Foreign Bank and Financial Accounts (FBAR) should be filed if a U.S. shareholder owns more than 50% of foreign corporation or if U.S. officers and directors have signature authority over the foreign accounts




FORM 5471 SCHEDULES G, H & I




FORM 5471 SCHEDULE G OTHER INFORMATION

• Statement required if foreign corporation owned 10% directly or indirectly of a foreign partnership

• Disclosure required to indicate ownership of interest in a trust or foreign disregarded entity

• Form 8858 must be attached by Category 4 or 5 filer of Form 5471 if foreign corporation is the tax owner of a foreign disregarded entity. Otherwise, a statement is attached by other filers.

• Disclosure for participation in cost sharing arrangement for development of intangibles




FORM 5471 SCHEDULE H

CURRENT EARNINGS AND PROFITS (CEP)

• E&P is important to determine

– Amount of dividends

– I.R.C. Section 956 inclusion for investment in U.S. property

– Subpart F income inclusion

– I.R.C. Sections 902 and 960 deemed paid foreign tax credits

– I.R.C. Section 1248 recharacterization of gain on sale of CFC stock

• Report on line 1 the functional currency U.S. GAAP net income or loss from line 21 of Schedule C income statement

• Tax adjustments to calculate E&P

– Deferred tax expense

– Bad debt reserves

– Inventory reserves

– Advance payments

– Contingencies, severance and restructuring reserves

– Goodwill amortization

– Unrealized foreign currency exchange gain or loss

– Cumulative translation account

– Prior period adjustments

– Depreciation

– Unicap




FORM 5471 SCHEDULE I

SUMMARY OF SHAREHOLDER’S INCOME FROM FOREIGN CORPORATION

• A separate Schedule I is required for each U.S. shareholder who is a Category 4 or 5 filer on whose behalf the Form 5471 is filed

• Line 1 reports the U.S. shareholder’s share of Subpart F income translated at average exchange rate for CFC’s tax year

• Line 2 reports the U.S. shareholder’s I.R.C. Section 956 inclusion from earnings invested in U.S. property translated at the spot rate on the last day of the CFC’s tax year

• Line 7 reports the U.S. shareholder’s share of dividends actually received (and not previously taxed as Subpart F income) translated at the spot rate on the date when the dividend was included in income

• Line 8 reports exchange gain or loss recognized on actual distribution of previously taxed income

• Answer questions regarding blocked and unblocked income






CFC’S SUBPART F INCOME

• Subpart F income – Foreign base company income

– Foreign personal holding income (interest, dividends, passive rents, royalties, net gains from property that produces this income and

personal service contract income)

• Excluded are rents and royalties received from unrelated person and derived from active trade or business

• Excluded are dividends and interest received from related parties incorporated in same country as CFC

• Excluded are dividends, interest, rents and royalties received from related CFC if the amounts are not attributable to Subpart

F income or U.S. ECI of the related CFC (look-through rule extended for CFC tax years beginning before year 2020)

– Foreign base company sales income

• CFC buys property from or sells to a related person

• Property is manufactured, produced, grown or extracted by a party other than the CFC outside the CFC’s country of

incorporation

• Property is sold for use, consumption or disposition outside CFC’s country of incorporation

– Foreign base company services income

• Compensation, commission, fees or other income

• Derived from CFC’s performance of technical, managerial, professional, scientific and like services

• CFC performs services for or on behalf of a related person

• The services are performed outside the CFC’s country of incorporation

– Foreign base company oil related income (foreign source income derived from refining, processing, transporting, distributing or selling

oil and gas or primary products derived from oil and gas)

• Other types of Subpart F income – insurance income, international boycott income, illegal bribes and kickbacks






I.R.C. SECTION 956 INCLUSION INCOME

• I.R.C. Section 956 inclusion is the lesser of:

– the U.S. shareholder’s pro rata share of CFC’s applicable earnings, or

– the share of the average of the CFC’s investments in U.S. property for the year as measured at the end of each quarter

• Investments in U.S. property include: – Tangible property located in the United States

– Stock of a U.S. corporation

– An obligation with a U.S. issuer (bond, note, debenture, certificate, account receivable, note receivable, open account or other debt whether or not issued at a discount and whether interest or non-interest bearing) • Exception for stock or debt of a U.S. corporation that is not a CFC shareholder and 25% or

more of voting stock is not owned by CFC’s U.S. shareholders

• Exception for account receivable for services paid within 60 days

– The right to use intangible property in the United States

– CFC loan to or guarantee of foreign partnership loan with distribution to U.S. partners related to CFC (TD 9733 and REG-155164-09 9/2/2015)






FOREIGN CURRENCY EXCHANGE GAIN OR LOSS

• Foreign currency exchange gain or loss on distributions of

previously taxed income is calculated as the difference between:

– The value of the distribution translated at the spot rate on the

date of distribution, and

– The U.S. dollar amount at which the earnings were previously

included in the U.S. shareholder’s U.S. Federal taxable

income

• Exchange gain or loss is ordinary income reportable as other

income on the U.S. shareholder’s U.S. Federal tax return




FORM 5471 SCHEDULE J ACCUMULATED EARNINGS & PROFITS (AEP)




FORM 5471 SCHEDULE J ACCUMULATED EARNINGS & PROFITS

• Report amounts on Schedule J in functional currency

• Column (a) Post-1986 undistributed E&P reports opening balance, current year additions and subtractions and closing balance

• Column (b) Pre-1987 E&P not previously taxed, distributed or deemed distributed

• Line 3 total CEP and AEP as of the close of the tax year before actual or deemed distributions during the year is the denominator of the fraction for the I.R.C. Section 902 deemed paid foreign tax credit calculation (local currency dividend/post-1986 E&P in local currency x post-1986 foreign tax pool translated into USD at average exchange rate unless taxpayer has elected to use the spot rate)

• Column (c) reports cumulative balance of previously taxed E&P resulting from I.R.C. Section 956 inclusions and Subpart F income




FORM 5471 SCHEDULE M TRANSACTIONS BETWEEN CFC

AND SHAREHOLDERS OR OTHER RELATED PERSONS




FORM 5471 SCHEDULE M TRANSACTIONS BETWEEN CFC

AND SHAREHOLDERS OR OTHER RELATED PERSONS

• Only Category 4 filers need to attach Schedule M to Form 5471

• Report amounts in USD translated at average exchange rate

• Report transactions between CFC and: – U.S. filer

– Any U.S. or foreign corporation or partnership controlled by U.S. filer

– Any 10% or more U.S. shareholder of CFC other than U.S. filer

– Any 10% or more U.S. shareholder of any corporation controlling CFC

• IRS determines transfer pricing issues from Schedule M

• Schedule M may reflect Subpart F income (interest, dividends, rents, royalties, income from services or sales of property received) or I.R.C. Section 956 inclusion issues (amounts loaned by CFC to U.S. person or other accounts receivable due from U.S. person)

• Accrued amounts must be reported if accrual method CFC

• Lines 1-12 report amounts received by CFC

• Lines 13-26 report amounts paid by CFC

• Schedules should be maintained to reconcile amounts paid to and received from other related foreign corporations




FORM 5471 SCHEDULE O ORGANIZATION OR REORGANIZATION OF FOREIGN

CORPORATION, AND ACQUISITIONS AND DISPOSITIONS OF ITS STOCK




FORM 5471 SCHEDULE O ORGANIZATION OR REORGANIZATION OF FOREIGN

CORPORATION, AND ACQUISITIONS AND DISPOSITIONS OF ITS STOCK

• Schedule O, Part I is completed by Category 2 filers – Report U.S. shareholders who have acquired 10% vote or value

• Schedule O Part II is completed by Category 3 filers – Section A reports U.S. shareholder information

– Section B reports U.S. officers and directors

– Section C reports U.S. filer’s acquisition information

– Section D reports U.S. filer’s disposition information • Report constructive dispositions such as sale of U.S. company with foreign

subsidiary corporations, redemption, dilution and gifts

– Section E reports I.R.C. Section 351 transactions and reorganizations • Description of assets, fair market value and basis of assets transferred to and

by foreign corporation

– Section F requires statement if U.S. tax return filed in last three years, date of any reorganization in last four years and organization chart




FORM 5471 NOT FILED FOR PRIOR YEARS

• How to resolve prior year delinquencies depends on whether the taxable income from the foreign corporation was reported on the U.S. shareholder’s U.S. Federal tax return.

• All taxable income was reported with non-willful failure to file - Amend the prior year U.S. Federal tax return and attach the Form 5471 with a reasonable cause statement

• Not all taxable income was reported with non-willful failure to file – Consider IRS Streamlined Domestic Offshore filing procedure with 5% penalty or IRS Streamlined Foreign Offshore filing procedure

• Not all taxable income was reported with willful or intentional failure to file – Consider IRS Offshore Voluntary Disclosure Program

• Consider impact of failure to file FinCEN Form 114 (f/k/a TD F 90-22.1) Foreign Bank Account Reports to report U.S. majority shareholder’s or U.S. officer or director’s financial interest in or signature authority over foreign accounts owned by the foreign corporation




OTHER REPORTING REQUIREMENTS

FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY

TO A FOREIGN CORPORATION

• U.S. citizen or resident, U.S. corporation, U.S. trust or estate must file Form

926 to report certain transfers of property to a foreign corporation

• U.S. partners in U.S. partnership transferor file the Form 926

• Report cash transfers if:

– immediately after the transfer the U.S. person holds directly or indirectly at least 10% of the vote or value of the foreign corporation, or

– The cash transferred within the 12 months before the date of transfer exceeds $100,000 USD

• File Form 926 to report transfers of stock or securities subject to gain recognition agreement

• Failure to file penalty is 10% of FMV of property on date of transfer limited to a maximum of $100,000 unless intentional disregard

• Statute of limitations is extended to three years after required information is reported




OTHER REPORTING REQUIREMENTS

FORM 8938 STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS

• U.S. individuals file Form 8938 with U.S. Federal Form 1040

• Take into account value of stock in foreign corporation for Form 8938 filing threshold 1. Single living in United States - >$50,000 at 12/31 or >$75,000 at any

time during calendar year

2. Married filing jointly living in United States - >$100,000 at 12/31 or >$150,000 at any time during calendar year

• If filing Form 5471, still must attach Form 8938 if within filing threshold

• If not filing Form 5471, must report information regarding foreign corporation on Form 8938 if within filing threshold




ALISON N. DOUGHERTY

DIRECTOR, TAX SERVICES

ARONSON LLC

Direct (301) 231-6290

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.




mastering form 5471 for interests in foreign entities...

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