mastering form 5472: new filing requirements for foreign...

WHO TO CONTACT DURING THE LIVE PROGRAM

For Additional Registrations:

-Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1)

For Assistance During the Live Program:

-On the web, use the chat box at the bottom left of the screen

If you get disconnected during the program, you can simply log in using your original instructions and PIN.

IMPORTANT INFORMATION FOR THE LIVE PROGRAM

This program is approved for 2 CPE credit hours. To earn credit you must:

• Participate in the program on your own computer connection (no sharing) – if you need to register

additional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1).

Strafford accepts American Express, Visa, MasterCard, Discover.

• Listen on-line via your computer speakers.

• Respond to five prompts during the program plus a single verification code.

• To earn full credit, you must remain connected for the entire program.

Mastering Form 5472: New Filing Requirements for Foreign

Individuals, LLCs and CompaniesTUESDAY, JULY 23, 2019, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

Tips for Optimal Quality FOR LIVE PROGRAM ONLY

Sound Quality

When listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, please e-mail [email protected]

immediately so we can address the problem.

mailto:[email protected]

July 23, 2019

Mastering Form 5472: New Filing Requirements for Foreign Individuals, LLCs and Companies

Daniel Kastner, Senior Tax Manager

Expat Tax Professionals

[email protected]

John Samtoy, Tax Principal

Holthouse Carlin & Van Trigt

[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

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

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.

FOCUS • CLARITY • COMMITMENT

MASTERING FORM 5472

July 23rd 2019John Samtoy, HCVT [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

TOPICS COVERED

• Overview and Background

• Key Terms and Definitions

• Filing Requirements

• Exceptions to Filing

• Completing Parts VII and VIII

• Penalties and Remediation

• Reporting Requirements for Foreign Owned DREs, Completing the Form – Covered by Daniel

6


OVERVIEW AND BACKGROUND

• Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

• Reporting required under 6038A and 6038C

• Information reporting on transactions between related parties.

• Provides the IRS data on related party transactions and pricing.

• Focus on transactions that may affect the determination of U.S. taxable income.

• Also provides IRS data on payments of U.S. sourced income that may be subject to withholding.

7


OVERVIEW AND BACKGROUND

• International Tax Enforcement

• Global efforts to combat base erosion, hybrid instruments -BEPS, CBCR, ATAD.

• Cooperation between tax authorities (J5)

• Push towards global transparency – FATCA, CRS

• IRS LB&I Campaigns – Related Party Transactions Campaign, Form 1120-F Non-Filer Campaign, Inbound Distributor Campaign

8


BACKGROUND – ENFORCEMENT ENVIRONMENT

Inbound Distributor Campaign -

• “U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive training strategy for this campaign that will aid revenue agents as they examine this IRC Section 482 issue. The treatment stream for this campaign will be issue-based examinations.”

9


KEY TERMS AND DEFINITIONS

• Reporting Corporation (“RC”):• 25% foreign owned U.S. corporation (by vote or value). • Foreign corporation engaged in a U.S. trade or business. • U.S. foreign owned DREs (covered by Daniel)

• 25% foreign owned corporation: • At least one direct or indirect 25% or greater foreign shareholder at any time during

the year. Constructive ownership and attribution rules of 318 apply with modifications.

• Related Party includes:• A direct or indirect 25% foreign shareholder of the RC • Related person to RC or related person to 25% foreign shareholder of RC under

267(b) or 707(b)(1) • Any other person who is related under 482 or the regulations thereunder.• Does not include a corporation filing a consolidated return with RC.• Rules of 318 apply with same modifications.

1 0



• Direct 25% foreign shareholder – A foreign person that directly owns at least 25% of the stock by vote or value

• Ultimate indirect 25% foreign shareholder – 25% shareholders whose interests are not attributed through entity attribution to another 25% foreign shareholder.• Chain of entities – top entity or individual 25% foreign shareholder.• Ownership of stock of the RC is not attributed under the principles of 958(a) to

any other 25% foreign shareholder.• Foreign person

• Individuals who are not citizens or residents of the U.S.. • Individuals who are citizens or residents of a U.S. possession but not otherwise a

citizen or resident of the U.S..• Individuals do not include individuals filing joint return with U.S. persons. • Foreign entities – foreign partnerships, corporations, trusts, and estates. • Foreign government or related entity engaged in a commercial activity under

892.

1 1



• Reportable Transaction

• Big picture – any transaction that could affect taxable income

• List of reportable transactions are on Part IV Page 2 of the Form 5472 (sales, rents, royalties, commissions, loans, interest payments, licenses, payments for services, cost sharing).

• Includes transactions for which monetary consideration was the sole consideration (Part IV).

• Also includes transactions for which any part of the consideration was not monetary or less than full consideration was paid or received (Part VI)

Expanded reported for DREs (covered separately). 1 2



1 3


ATTRIBUTION AND RELATED PARTIES

1 4

• Modification to 318 attribution rules: • Stock attribution threshold from corporation to shareholder reduced to 10% instead of 50%.• Limitation on downward attribution – attribution of stock from foreign persons to U.S. persons and

on foreign ownership of U.S. corporation where U.S. corporation would otherwise not be foreign owned.

• Attribution under 318 overview: • From family (spouse, parents, children, grandchildren)• From partnerships, trust, estates, and corporations, proportionately. • To partnerships, trusts, and estates. To corporations where more than 50% owned.

• Related parties under 267 / 707 overview:• Members of family (also includes siblings)• Fiduciary of a trust and: the grantor, beneficiary, fiduciary or beneficiary of another trust with same

grantor, corporation more than 50% owned by grantor.• A corporation and: individual owning more than 50% of stock, partnership or another corporation

if same person owns more than 50% of each.• Partnership and: person owning more than 50%, another partnership in which same person owns

more than 50%


FILING REQUIREMENTS

• Subject to exceptions every reporting corporation must file a Form 5472 if it had a reportable transaction with a foreign or domestic related party. •A reporting corporation files a separate Form 5472 for each related party that it had reportable transactions with. •Consolidated filings - Corporations that are members of a group with a consolidated filing can file a consolidated Form 5472 • Separate form each related party outside of the group with reportable

transactions.• Parent attaches schedule stating which members are reporting

corporations and which members are included in consolidated filing. • Members are not required to join consolidated filings. •Form 5472 is filed with the reporting corporation’s income tax return by the due date including extensions.

1 5


EXAMPLE – DEFINITIONS, ATTRIBUTION, FILING REQUIREMENTS

1 7

FP 1grantor

Foreign Trust

• U.S. 1 is a reporting corporation because it is a U.S. corporation with a 25% foreign shareholder.

• FC 1 is a direct 25% foreign shareholder

• FP 1, Foreign Trust, and FC 1 are 25% foreign shareholders and related parties.

• FP 1 is an ultimate indirect 25% shareholder.

• If FP 1 is FP 2’s parent then FP 2 and FC 2 are also 25% foreign shareholders and related parties.

• If there is a reportable transaction between U.S. 1 and any related party then U.S. 1 must file a Form 5472.

• If there is a reportable transaction between U.S. 1 and each related party then U.S. 1 must file 5 Forms 5472.

• If there are no reportable transactions between U.S. 1 and any related party then U.S. 1 is not required to file Form 5472.

FC 1

U.S. 1

100%

100%

FP 2

FC 2

100%


EXAMPLE – DEFINITIONS, FILING REQUIREMENTS

1 8

• China Co. has invested in U.S. commercial property. It has structured the investment to go through wholly owned subsidiaries HK Sub and BVI Co.

• U.S. Sub is a 25% owned foreign corporation.

• BVI Co is a 25% direct foreign shareholder.

• China Co is a 25% ultimate indirect foreign shareholder.

• HK Sub is an indirect shareholder.

• BVI Co, HK Sub, and China Co are related parties.

• U.S. Sub will have a reporting requirement if it has a reportable transaction with BVI Co, HK Sub, or China Co.

BVI Co

U.S. Sub

China Co

HK Sub


EXAMPLE – DEFINITIONS, FILING REQUIREMENTS

1 9

• China Co. has invested into a joint venture with a U.S. real estate developer to develop, operate, and eventually sell U.S. commercial real estate. It has structured the investment to go through a wholly owned subsidiary HK Sub.

• U.S. Sub is a 25% owned foreign corporation.

• China Co is a 25% ultimate indirect foreign shareholder.

• HK Sub is an indirect shareholder.

• HK Sub, and China Co are related parties.

• U.S. Sub will have a reporting requirement if it has a reportable transaction with HK Sub, or China Co.

U.S. Sub

China Co

HK Sub

U.S.P

100%

50%

100%

U.S. Co

50%


EXAMPLE – PARTNER IN A PARTNERSHIP

2 0

• USP is engaged in a U.S. trade or business.

• USP has reportable transactions with FC 2 and FC 3.

• The transactions that USP enters into are attributed to FC 1 and U.S. 1.

• FC 1 is considered to be engaged in a U.S. trade or business by being a partner in a partnership.

• Both FC 1 and U.S. 1 are reporting corporations that must file Form 5472.

• FC 1 must report its 75% share of transactions with FC 2 and U.S. 1 must report its 25% share of transactions with FC 3.

Example from 1.6038A-1

FC 2

FC 1 U.S. 1

75%

FC 3

USP

100% 100%

25%


EXCEPTIONS TO FILING

I. No reportable transactions.

II. U.S. person controlling foreign related corporation files Form 5471 and reports all reportable transactions on Schedule M (does not apply to DRE).

III. Related corporation qualifies as a foreign sales corporation for the tax year and files Form 1120-FSC (does not apply to DRE).

IV. Foreign corporation that does not have a PE in the U.S. and timely files Form 8833.

V. Foreign shipping and airline companies that are exempt under 883 that comply with related reporting requirements.

VI. Neither the reporting corporation or related party are U.S. persons and the transactions do not generate any U.S. source gross income or ECI or any expenses, losses, or deductions that are attributed to such income.

2 1


FILING REQUIREMENTS – ISSUE SPOTTING

2 2

• Review organizational charts

• Request a schedule of related party transactions

• Foreign corporation filing Form 1120-F with ECI

• Foreign persons that own U.S. real property

• Individual with vacation property

• Foreign corporation with real estate investments (no U.S. blocker) with LLCs for liability

• Foreign individuals or trusts with ‘dormant’ U.S. LLCs


COMPLETING THE FORM 5472

• Additional Information – Part VII

• Must be completed by all reporting corporations

• Two transfer pricing issues which are • Tax/customs value discrepancies Part IV – see §1059A• Cost sharing arrangements – see Reg § 1.482-7

• Amounts paid or accrued in hybrid transactions §267A

• Foreign-derived intangible income §250

• Base Erosion Payments / BEAT §59A Part VIII2 3


AMOUNTS PAID OR ACCRUED IN HYBRID TRANSACTIONS

2 4

• New §267A Denial of Deductions for Hybrid Transactions

• No deduction allowed for any disqualified related party amount paid or accrued under a hybrid transaction or by, or to, a hybrid entity

• A disqualified related party amount is any interest or royalty paid or accrued to a related party to the extent that it is not included in the income of the related party under local law or the related party is allowed a deduction for that amount under local law

Cayman LPCTB corp

Foreign Co Ltd

Debt financing/ interest


FOREIGN DERIVED INTANGIBLE INCOME (FDII)

• Foreign-Derived Intangible Income (FDII) is a new type of income category applicable to domestic corporations only. High level – includes income related to providing goods and services to foreign persons from a U.S. corporation.

• Effective U.S. Corporate Tax Rates on FDII

• 21% x (100%-37.5%) deduction = 13.125% (2018 – 2025)

• 21% x (100%-21.875%) deduction = 16.40625% (2026 and beyond)

• Related party transactions (member of affiliated group – 50% vote / value test)

• If property is sold to a related party who is not a U.S. person, then the property needs to be resold or used by that related party to or for another unrelated foreign person

• Services provided to a related foreign party will only be treated as foreign use if the same, or similar, services are not provided by that related party to persons located in the U.S.

• A sale of property is treated as a sale of each component of the property

2 5


BASE EROSION PAYMENTS / BEAT

• Base Erosion Anti-Abuse Tax (BEAT)

• BEAT tax is designed to prevent taxpayers from shifting profits outside of the U.S. (base erosion) through deductible payments to foreign related parties

• BEAT applies to any applicable taxpayers that:

• Are C corporations (does not include a RIC, REIT, or an S) and

• $500 million in gross receipts and

• Base erosion percentage is 3% or higher (2% for banks).

• Base erosion payment: deductible amounts paid/accrued to a foreign related party, amounts paid to a foreign related party to acquire depreciable/amortizable property, reinsurance payments to foreign related party, payments to foreign related party that result in a reduction in gross receipts.

2 6


COMPLETING THE FORM – PART VII

2 7


COMPLETING THE FORM – PART VIII

2 8


PENALTIES AND REMEDIATION

• Penalties for failure to file penalty and/or failure to maintain records under 6038A.

• After 12/31/17 – Penalty for failure to file increased to $25,000.

• If not filed within 90 days after IRS notice of failure an additional $25,000 penalty (per related party for which a failure occurs) is charged for each 30-day period, or fraction thereof.

• IRC §6501(c)(8) – Will keep the statute of limitations open indefinitely on the entire return.

2 9



• Penalties may be waived if reasonable cause can be shown.

• Reasonable cause – Where taxpayer can demonstrate that failures to file are due to reasonable cause and not due to willful neglect.

• The regulations under Reg §1.6038A-4 contain unique rules for reasonable cause:

• IRS instructed to “apply the reasonable cause exception liberally” to a corporation with less than $20mil in gross receipts, limited presence in the U.S., no knowledge of the filing requirements, and compliant with requests related to the Form 5472.

• Reliance on information available where Taxpayer does not or did not know that it was owned by a 25 percent foreign shareholder.

• Ordinary business care and prudence standard.3 0



• Reliance on a professional advisor constitutes reasonable cause where special training is required – U.S. 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. U.S.

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

3 1

3 2T 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]

mailto:[email protected]

Form 5472: Expanded Filing Requirements for Foreign-Owned

US Disregarded Entities

Daniel Kastner • Senior Tax Manager(718) 887-9933 • [email protected]

Overview

• Final Regulations were published on 12/13/2016

• Section 6038A now includes disregarded entities (DEs) as Corporations for this purpose only

• Expanded Form 5472 now imposes detailed federal tax reporting requirements on DEs

• Updates on the form since last year

35

Substance versus Reporting

Treas. Reg. 1.6038A-1:

“A domestic business entity that is wholly owned by one foreign person and that is otherwise classified under § 301.7701-3(b)(1)(ii) of this chapter as disregarded as an entity separate from its owner is treated as an entity separate from its owner and classified as a domestic corporation for purposes of section 6038A”

36

Reasoning Behind the Reporting Rule

Problem:• Foreign owners of LLCs were able to remain

somewhat anonymous• Reciprocal exchange of information obligations

under FATCA

Solution:• Expanded 5472 impose detailed federal tax

reporting requirements on disregarded entities

37

Who must file Form 5472?

“Reporting Corporation”

+

“Reportable Transaction”

+

“Related Party”

=

5472 Filing Requirement

38

Reporting Corporation

• A DE is classified as a corporation for purposes of

section 6038A if:• The entity is a US domestic entity; and• One foreign person has direct or indirect sole ownership of

the entity

• The tax year of a DE treated as a corporation under the new regulations is based on the owner’s taxable year, unless the foreign owner doesn’t have a U.S. filing obligation, in which case it must use the calendar year.

39

Reportable Transactions

• Significantly expanded definition – Section 1.482-1(i)(7)

• Includes amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the DE

• Includes contributions to and distributions from the DE

• If the DE does not have a bank account, report all transactions made by the owner or other related party on behalf of the DE.

40

Related Party

• The definition for related parties did not change

• A few noteworthy practical implications:

• Multiple Tiers

• US relatives of foreign owner

• Related corporations

41

Sample structure illustrations1 2 3 4

42

Single-Member

US LLC (DE)

US

Real Estate

Project

U.S. INC / MMLLC Foreign Corp

Single-Member

US LLC (DE)

Single-Member

US LLC (DE)

Single-Member

US LLC (DE)

Single-Member

US LLC (DE)

US

Real Estate

Project

US

Real Estate

ProjectUS

Real Estate

Project

Technical Revisions to Form 5472 (Dec. 2017)

• Part I Line 3 – check a box

• Part II Line 1b(3) – FTIN required

• Part V – check the box and attach a statement

43

Technical Revisions to Form 5472 (Dec. 2018)

• Part I – Line 1j was added

• Part II – check box was added for a surrogate foreign corporation

• Part III – Line 1b(3) was added

44

Revised Form (Dec 2018) – Part I

45

Revised Form – Part II

46

Revised Form – Parts III & IV

47

Revised Form – Parts V, VI, VII & VIII

4848

Insights into the Instructions

• Record Maintenance Requirements – Special lenient rules for small corporations do not apply for DEs

• Reasonable Estimates

• Small Amounts inaccurate instructions

• Exceptions

• These issues from the 2017 version were not corrected in the 2018 version

49

When, Where and How to File• Attach Form 5472 to a pro forma Form 1120 (name,

address, and items B and E) and sign only at the bottom of the 1120.

• Write “Foreign Owned US DE” on the top margin of Form 1120

• Due date for the 5472 is based on the 1120 – usually April 15th with an option to extend until October 15th

• The forms must be submitted via Mail or Fax

• E-file is not available for foreign owned US DEs

• Extension requests – Form 7004 code 12 by April 15th

50

Penalties and Abatement Opportunities

• Penalty for late filing is $25K (up from $10K in 2017)

• No published lenient policy during integration period

• First time abatement (FTA) is not available for this Form, however it might be granted unofficially

Regulation 1.6038A-4(b) – discusses reasonable cause:

• “Good Faith” standard – affirmative showing of facts to support the claim and honest misunderstanding of the law

• The reasonable cause exception is to be applied liberally in the case of a small corporation (annual gross receipts $20M or less)

51

THANK YOU!

52

mastering form 5472: new filing requirements for foreign...

Documents