Mastering Form 5472: New Filing Requirements for …media.straffordpub.com/products/mastering-form-5472-new-filing... · MASTERING FORM 5472: NEW FILING REQUIREMENTS FOR FOREIGN INDIVIDUALS,

WHO TO CONTACT DURING THE LIVE EVENT

For Additional Registrations:

-Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10)

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 x10 (or 404-881-1141 x10). 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. You will have to write

down only the final verification code on the attestation form, which will be emailed to registered

attendees.

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

Mastering Form 5472: New Filing Requirements

for Foreign Individuals, LLCs, and Companies

WEDNESDAY, MAY 24, 2017, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

Tips for Optimal Quality

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.

FOR LIVE PROGRAM ONLY

mailto:[email protected]

May 24, 2017

Mastering Form 5472

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

Aronson, Rockville, Md.

[email protected]

Kirsten Burmester, Member

Caplin & Drysdale, Washington, D.C.

[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.

Kirsten Burmester

5

6038A and 6038C are designed to assist the IRS in its enforcement efforts with respect to U.S. subsidiaries of foreign multinational groups and foreign corporations engaged in a U.S. trade or business

Provides the IRS with powerful tools to obtain information about transactions between such taxpayers and related persons by imposing reporting and record maintenance requirements

Requirements of 6038A and 6038C “Reporting corporation” must file a Form 5472 “Reporting corporation” must maintain records appropriate to determine the

correct treatment of transactions with “related parties” Foreign “related party” must authorize the “reporting corporation” to act as its

limited agent for purposes of both requests for information and the service of legal process in connection with summonses for the production of documents and testimony under sections 7602 through 7604

6

MASTERING FORM 5472:

NEW FILING REQUIREMENTS

FOR FOREIGN INDIVIDUALS, LLCS, AND COMPANIES

Alison N. Dougherty May 24, 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

8 © 2015 | All Rights Reserved | Aronson LLC | www.aronsonllc.com | www.aronsonllc.com/blogs |

Form 5472

INFORMATION RETURN OF A 25% FOREIGN-OWNED

U.S. CORPORATION OR A FOREIGN CORPORATION

ENGAGED IN A U.S. TRADE OR BUSINESS

http://www.aronsonllc.com/

http://www.aronsonllc.com/blogs


FORM 5472 INFORMATION RETURN OF A 25% FOREIGN-OWNED









• Form 5472 is filed only when there is a reportable

transaction between a reporting corporation and

any U.S. or foreign related party

–Reporting corporation =

1. 25% foreign-owned U.S. corporation (by

vote or value)

2. Foreign corporation engaged in a U.S. trade

or business







• 25% Foreign-owned = at least one direct or indirect 25% foreign shareholder at any time during the tax year

• 25% foreign shareholder = a foreign person that owns directly or indirectly at least 25% of total vote or value of the corporation

• To determine 25% foreign shareholder and related parties, I.R.C. § 318 attribution and constructive ownership rules apply with modification for 10% threshold instead of 50%







• Form 5472 is filed only when there is a reportable

transaction between a reporting corporation and any

U.S. or foreign related party – Related party =

1. Any direct or indirect 25% foreign shareholder of the reporting corporation

2. Any person who is related by more than 50% ownership to the reporting

corporation

3. Any person who is related by more than 50% ownership to a 25% foreign

shareholder of the reporting corporation

4. Any person who is related within the meaning of I.R.C. § 482

5. Does not include any corporation filing a U.S. consolidated tax return with the

reporting corporation







• Form 5472 is filed only when there is a reportable transaction

between a reporting corporation and any U.S. or foreign related

party

– Reportable transaction =

1. Any transaction listed on Part IV for which monetary

consideration was paid or received during the reporting

corporation’s tax year

2. Any transaction listed on Part IV for which part of the

consideration was non-monetary or less than full

consideration was paid or received




FORM 5472 FILING EXCEPTIONS

• A reporting corporation is not required to file Form 5472 if: 1. It had no reportable transactions

2. A U.S. person in control of a foreign related corporation files Form 5471 for the tax year to report information on Schedule M which shows all reportable transactions between the reporting corporation and the related party (the overlap rule)

3. The related corporation qualifies as a foreign sales corporation for the tax year and files Form 1120-FSC

4. A foreign corporation that otherwise would be required to file does not have a permanent establishment in the United States under an applicable U.S. income tax treaty and timely files Form 8333 Treaty-Based Return Position Disclosure




FORM 5472 FILING EXCEPTIONS

• A reporting corporation is not required to file Form 5472 if:

5. A foreign corporation whose gross income is exempt from U.S.

Federal tax under I.R.C. Section 883 and timely and fully complies

with the reporting requirements

6. Both the reporting corporation and the related party are not U.S.

persons and the transactions will not generate in any tax year:

• U.S. source gross income or effectively connected income from a U.S.

trade or business, or

• Any expense, loss or other deduction that is allocable or apportionable to

such income




FORM 5472 CONSOLIDATED REPORTING

• If a reporting corporation is a member of an affiliated group filing a consolidated U.S. Federal income tax return then it can satisfy the requirements by filing a consolidated Form 5472.

• The common parent must attach a schedule stating which members of the U.S. affiliated group are reporting corporations and which of those members are joining in the consolidated Form 5472 filing.

• The schedule must show the name, address and FEIN of each member who is including transactions on Form 5472.

• A member of an affiliated group is not required to join in the consolidated Form 5472 filing just because other members do.




FORM 5472 PAGE TWO




FORM 5472 REPORTABLE TRANSACTIONS

• Inventory and tangible property transactions

• Rents and royalties

• Sales, leases, licenses, royalties, etc. of intangible property

• Compensation for different types of services

• Commissions

• Amounts loaned and borrowed

• Interest

• Premiums

• Platform contribution transactions

• Cost sharing transactions

• Other amounts

• Part IV lines 1 to 13 report amounts received by the reporting corporation

• Part IV lines 14 to 26 report amounts paid by the reporting corporation




FORM 5472 REPORTABLE TRANSACTIONS

• Parts IV and V report monetary, nonmonetary and less than full consideration transactions between the reporting corporation and a foreign related party

• The terms paid and received include accrued payments and accrued receipts

• Do not complete Parts IV and V for transactions between the reporting corporation and a U.S. related party

• Part V – – Attach a schedule with a description of transaction sufficient to

determine the nature and approximate monetary value of the transaction

– Should include a reasonable estimate of value




FORM 5472 WHEN AND WHERE TO FILE

• Attach Form 5472 to the reporting corporation’s U.S.

Federal tax return and file by the due date including

extensions

• For tax years ending after 12/23/2014, Form 5472 cannot

be filed separately from U.S. Federal tax return

• For tax years ending before 12/24/2014, Form 5472 must

be filed timely even if U.S. Federal tax return is not filed

timely




FORM 5472 PENALTIES

• $10,000 USD penalty per Form 5472 for the failure to file a

substantially complete return or maintain records

• Additional $10,000 USD penalty per related party for the

failure to file for each 30-day period that failure continues

after 90 days since notification by IRS

• Statute of limitations stays open on entire U.S. Federal tax

return unless it is possible to establish reasonable cause




FORM 5472 COMMON MISTAKES AND ISSUES

• Failure to properly classify the categories of intercompany

transactions

• Reporting amounts paid by the reporting corporation on Part IV

lines 1 through 13 and amounts received by the reporting

corporation on Part IV lines 14 through 26

• Failure to report reference IDs for 25% foreign shareholders

and foreign related parties without U.S. FEIN

• Motivating taxpayers to disclose intercompany transactions

• Motivating foreign persons to disclose identifying information

• Substantially incomplete forms




FORM 5472 PREPARATION EXAMPLE

• Forco., Ltd. is a U.K. corporation which wholly owns U.S. Co., Inc. which is a U.S. subsidiary corporation.

• Forco., Ltd. manufactures widgets which it sells to its U.S. subsidiary corporation U.S. Co., Inc.

• U.S. Co., Inc. purchases $1,000,000 USD of widgets from its foreign parent corporation Forco., Ltd. U.S. Co., Inc. resells the widgets through its online retail business in the United States.

• U.S. Co., Inc. also performs market research in the United States for its foreign parent Forco., Ltd. to determine if the U.S. customers are fully satisfied with the quality of the widgets. Forco., Ltd. pays $500,000 USD to its U.S. subsidiary U.S. Co., Inc. as arm’s length compensation for the services performed.




FORM 5472 PREPARATION EXAMPLE




FORM 5472 IRS INFORMATION REQUESTS

• IRS can request documentation of transactions between a

reporting corporation and a foreign related party.

• If the requested documentation is not provided to the IRS

from a foreign person, the IRS is permitted to determine

the amount paid for or incurred by the reporting corporation

with respect to the transactions at issue based on its own

knowledge.

• The IRS could deny deductions of the reporting

corporation due to lack of documentation.




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.




Kirsten Burmester

29

Regulations were promulgated in an effort to combat the perception that the U.S. serves as a tax haven for non-U.S. persons Many jurisdictions, such as Delaware, permit LLCs to register without

disclosing their beneficial ownership

Prior to the promulgation of the regulations, DREs had no federal tax reporting requirements

The U.S. has reciprocal exchange of information obligations under its FATCA IGAs but, prior to the promulgation of the new regulations, had no mechanism for gathering the information necessary to comply with such obligations

30

New regulations add provisions to Treas. Reg. § 301.7701-2 that classify a DRE as a corporation for purposes of section 6038A if The entity is a domestic entity; and One foreign person has direct or indirect sole ownership of the entity

• “Indirect sole ownership” means ownership by one person entirely through one or more DREs or grantor trusts

The taxable year of a DRE treated as a corporation under the new regulations is The same as the taxable year of foreign owner if that person has a

U.S. income tax or information return filing obligation for its taxable year; or

If the foreign owner has no U.S. filing obligation, the calendar year

31

DREs classified as corporations for purposes of section 6038A must file a Form 5472

Regulatory exceptions to the 6038A record-keeping requirements and requirement to act as an agent for related parties for small corporations and corporations with de minimis related party transactions do not apply to DREs

Regulatory exception for reporting related corporations that qualify as foreign sales corporations filing Form 1120-FSC does not apply to DREs

32

Solely for DREs, the new regulations expand the definition of reportable foreign related party transactions to include any transaction defined by section 1.482-1(i)(7) Includes amounts paid or received in connection with the formation,

dissolution, acquisition and dispositions of the DRE Includes contributions to and distributions from the DRE

Examples clarify that the following transactions must be reported: Contributions to a domestic DRE from is foreign owner and

distributions from a domestic DRE to its foreign owner Transactions between tiers of DREs with a single ultimate foreign

owner are reportable related-party transactions

33

New regulations apply to tax years of reporting DREs beginning after December 31, 2016, and ending on or after December 13, 2017

Commissioner is delegated the authority to prescribe the time and manner of filing of the Form 5472 for DREs Form has yet to be updated

34

Kirsten Burmester

35

$10,000 penalty for each year a reporting corporation fails to file Form 5472 Substantially incomplete filing constitutes a failure to file

$10,000 penalty for each year and each related party with respect to which the reporting corporation fails to keep records

If IRS mails a notice of failure to the reporting corporation and the corporation does not remedy the failure within 90 days, there is an additional $10,000 penalty for each 30 days or fraction thereof during which the failure continues No cap on this penalty

Criminal penalties under section 7203 for willful failure to file and under 7206 for filing a false or fraudulent return

Note that the IRS also has broad discretion to determine the income tax consequences of related party transactions where there is a failure of foreign related party to authorize the reporting corporation as an agent or the reporting corporation fails to respond to summonses

36

Penalties for failure to file Form 5472 and maintain records may be excused upon a showing that the taxpayer acted reasonably and in good faith

Good faith standard is defined in 6038A regulations Reporting corporation must make an affirmative showing of facts

supporting reasonable cause in a written declaration under penalties of perjury

Honest misunderstanding of fact and law that is reasonable in light of the experience and knowledge of taxpayer

Reasonable reliance on professional

Reasonable cause is deemed not to exist after the date on which the IRS mails notice of failure to file or maintain records

37

Reasonable cause standard applied liberally for small corporations (<$20 million gross receipts) if: Corporation has no knowledge of the 6038A; Has limited presence in and contact with the United States; and Promptly complies with all requests to file 5472 and furnish records

Accrual of penalties for continued failure to file after notice has been mailed will stop if reporting corporation files Form 5472, furnishes information necessary to complete the Form 5472, or, in the case of failure to maintain records, demonstrates compliance with maintenance of records for the taxable year in which the examination occurs and subsequent years to the satisfaction of the District Director

38

______________________________________________

Disclaimer This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome. Attorney Advertising It is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation. © 2017 Caplin & Drysdale, Chartered

All Rights Reserved.

Kirsten Burmester Member, Caplin & Drysdale, Chartered [email protected]

39

Documents

Mastering Form 5472: New Filing Requirements for …media.straffordpub.com/products/mastering-form-5472-new-filing... · MASTERING FORM 5472: NEW FILING REQUIREMENTS FOR FOREIGN INDIVIDUALS,