Mastering Form 5471 for Interests in Foreign Entities: Determining Ownership Share and Correct Filing Status

Transcription

1 Mastering Form 5471 for Interests in Foreign Entities: Determining Ownership Share and Correct Filing Status TUESDAY, JUNE 23, 2015, 1:00-2:50 pm Eastern IMPORTANT INFORMATION 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 x10 (or 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 ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the 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.

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4 Mastering Form 5471 for Interests in Foreign Entities June 23, 2015 Alison N. Dougherty, J.D., LL.M. Aronson John Samtoy Holthouse Carlin & Van Trigt

5 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.

6 Mastering Form 5471 for Interests in Foreign Entities: Determining Ownership Share and Correct Filing Status John Samtoy, HCVT LLP June 23, 2015

7 Form 5471 Generally 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 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 entities 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 government estimates that recordkeeping burden for this form approaches 83 hours and preparation takes on average 24 hours. 7

8 Form 5471 Penalties IRC 6038(a) and 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. 8

9 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. Abatement, reduction, or modification of penalties is possible. Reasonable cause where taxpayer can demonstrate that failures to file are due to reasonable cause and not due to willful neglect. Streamlined Program for individual taxpayers. Offshore Voluntary Disclosure Program. 9

10 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 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. 10

11 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. 11

12 Determining CFC Status Is Foreign Corporation a CFC? Example 1 Example 2 6 different US Corps 5 US Indv 6 different US Corps 5 US Indv US Foreign Corporation 100% No Yes Foreign Corporation There are 11 US owners, each own 9.09% interest, no foreign owners. All owners are unrelated. 12

13 Attribution Determining Control, US Shareholder and CFC Status Determination of CFC and US shareholder status IRC 958(b). Determination of control Treas Reg (c). Acquisitions and dispositions total ownership determination (i). 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 Indv 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 is owned, then considered to own the stock owned by the corporation proportionately. d) To Pship pship 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

14 Form 5471 Attribution Example 1 Other US 60% P1 (US) CFC US1 20% 20% 20% 100% UK 20% P2 (US) US2 60% What is the total direct, indirect, and constructive ownership of CFC? 1. P1 100% 2. P2 20% 3. US1 20% 4. US2 0% 14

15 Form 5471 Attribution Example 2 Other US US 3 40% 20% P1 (US) 20% 50% US1 20% 20% UK 20% P2 (US) 50% US2 60% CFC US 1 is the son of US 2. US 3 is the daughter of US 1. What is the total direct, indirect, and constructive ownership of CFC? 1. P1 90% 2. P2 70% 3. US1 60% 4. US2 60% 5. US 3 30% 15

16 Form 5471 Control 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. 16

17 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 new instructions clarify that there is no statement that needs to be attached for persons claiming the constructive owners exception (previously some ambiguity). 17

18 Form 5471 Filing Exceptions Constructive Owners 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. 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

19 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 D on page 1 of the form. All persons identified in D must attach a statement to their income tax return. 19

20 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. 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. 20

21 Form 5471 Annual Accounting Period and Year-End CFCs with Subpart F income conforms to majority US shareholder tax year. IRC 898 requires taxable year to conform Treas. Prop Reg (c) contains exception where no Subpart F exists. Except for Schedule O report information for the tax year of the foreign corporation that ends with or within the foreign corporations tax year. For Schedule O, report transactions that occurred during the US Filer s tax year. Example India s tax year end is 3/31. An Indian corporation may be reported using the 3/31 year end financials if there is no Subpart F income. A question often arises as to what is required in the year of foreign entity is sold or liquidated. In the case of a sale, the full year s results regardless of ownership changes needs to be reported. In the case of liquidation, results are reported up through the date of liquidation. The balance sheet should reflect results through that date. In either case, a Schedule O is required. 21

22 Form 5471 Points to Keep in Mind 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. If you realize that you failed to complete a required return for the prior year, that oversight should be corrected immediately. If it is determined that a filed Form 5471 contained incorrect information, it can be amended. Technically, the amended Form should be filed with an amended U.S. tax return. 22

23 Form 5471 Points to Keep in Mind 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. Dormant foreign corporations. The IRS permits an abbreviated Form 5471 filing with respect to certain dormant foreign corporations. See Rev. Proc Filers, however, must verify each year that a foreign corporation meets the requirements for dormant company status. 23

24 Form 5471 Points to Keep in Mind 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. U.S. accounting methods apply, but Form 5471 is not a mechanism for accounting method elections. Filing on behalf of a U.S. consolidated group is permissible. Filing on behalf of others may be possible. U.S. translation rules apply. Specific rules apply to hyperinflationary currencies. E&P adjustments need to be considered. Virtually all foreign corporations require adjustments to reconcile U.S. GAAP books to U.S. E&P. 24

25 Form 5471 Points to Keep in Mind Attachments Required schedules should be completed on the form itself. Penalties can apply for non-compliance. Certain attachments are mandated by the instructions. U.S. individuals, partnerships, trusts, estates, and corporations can have filing obligations and some may apply to indirect owners as well. Special rules apply to captive insurance companies and dormant companies. 25

26 Form 5471 Form 5471 Issues and Spot-checking 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? 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 (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. 26

27 Form 5471 Filing Requirements Determined by Category 27

28 John Samtoy

29 ALISON N. DOUGHERTY SENIOR MANAGER ARONSON LLC FEBRUARY 10, 2015 FORM 5471 MASTERING FORM 5471 FOR INTERESTS IN FOREIGN ENTITIES: DETERMINING OWNERSHIP SHARE AND CORRECT FILING STATUS All Rights Reserved 805 King Farm Boulevard Suite 300 Rockville, Maryland P F

30 FORM 5471 INFORMATION RETURN OF U.S. PERSONS WITH RESPECT TO CERTAIN FOREIGN CORPORATIONS 2015 All Rights Reserved Aronson LLC Slide: 30

31 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 2015 All Rights Reserved Aronson LLC Slide: 31

32 SCHEDULES REQUIRED TO BE ATTACHED TO FORM 5471 BASED ON APPLICABLE U.S. FILER CATEGORY 2015 All Rights Reserved Aronson LLC Slide: 32

33 FORM 5471 SCHEDULES A & B 2015 All Rights Reserved Aronson LLC Slide: 33

34 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 2015 All Rights Reserved Aronson LLC Slide: 34

35 FORM 5471 SCHEDULE C INCOME STATEMENT 2015 All Rights Reserved Aronson LLC Slide: 35

36 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 2015 All Rights Reserved Aronson LLC Slide: 36

37 FORM 5471 SCHEDULE E INCOME TAXES PAID OR ACCRUED 2015 All Rights Reserved Aronson LLC Slide: 37

38 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 2015 All Rights Reserved Aronson LLC Slide: 38

39 FORM 5471 SCHEDULE F BALANCE SHEET 2015 All Rights Reserved Aronson LLC Slide: 39

40 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 2015 All Rights Reserved Aronson LLC Slide: 40

41 FORM 5471 SCHEDULES G, H & I 2015 All Rights Reserved Aronson LLC Slide: 41

42 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 2015 All Rights Reserved Aronson LLC Slide: 42

43 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 2015 All Rights Reserved Aronson LLC Slide: 43

44 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 2015 All Rights Reserved Aronson LLC Slide: 44

45 FORM 5471 SCHEDULE I SUMMARY OF SHAREHOLDER S INCOME FROM FOREIGN CORPORATION 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 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 2015 All Rights Reserved Aronson LLC Slide: 45

46 FORM 5471 SCHEDULE I SUMMARY OF SHAREHOLDER S INCOME FROM FOREIGN CORPORATION 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 2015 All Rights Reserved Aronson LLC Slide: 46

47 FORM 5471 SCHEDULE I SUMMARY OF SHAREHOLDER S INCOME FROM FOREIGN CORPORATION 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 2015 All Rights Reserved Aronson LLC Slide: 47

48 FORM 5471 SCHEDULE J ACCUMULATED EARNINGS & PROFITS (AEP) 2015 All Rights Reserved Aronson LLC Slide: 48

49 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 2015 All Rights Reserved Aronson LLC Slide: Slide: 49 49

50 FORM 5471 SCHEDULE M TRANSACTIONS BETWEEN CFC AND SHAREHOLDERS OR OTHER RELATED PERSONS 2015 All Rights Reserved Aronson LLC Slide: 50

51 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 report amounts paid by CFC Schedules should be maintained to reconcile amounts paid to and received from other related foreign corporations 2015 All Rights Reserved Aronson LLC Slide: 51

52 FORM 5471 SCHEDULE O ORGANIZATION OR REORGANIZATION OF FOREIGN CORPORATION, AND ACQUISITIONS AND DISPOSITIONS OF ITS STOCK 2015 All Rights Reserved Aronson LLC Slide: 52

53 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 2015 All Rights Reserved Aronson LLC Slide: 53

54 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 ) 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 2015 All Rights Reserved Aronson LLC Slide: 54

55 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 2015 All Rights Reserved Aronson LLC Slide: 55

56 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 2015 All Rights Reserved Aronson LLC Slide: 56

57 ALISON N. DOUGHERTY SENIOR MANAGER ARONSON LLC Alison N. Dougherty is a Senior Manager with Aronson LLC. She has extensive experience assisting clients with U.S. tax reporting and compliance for offshore assets and foreign accounts. She specializes in international tax compliance, planning and structuring as a subject matter leader of Aronson s international tax practice. Her responsibilities include U.S. Federal and multi-state tax compliance for C corporations, S corporations, partnerships and individuals. She also provides transactional tax planning and structuring services. Direct (301) Main (301) adougherty@aronsonllc.com 805 King Farm Blvd, Third Floor Rockville, MD Washington, DC Metro Area Alison completed the LL.M. in Securities and Financial Regulation in 2004 with academic distinction at Georgetown University Law Center. She completed the LL.M. in Taxation in 2000 and the Juris Doctor in 1999 at the University of Denver College of Law. She completed the Bachelor of Arts in Foreign Language in 1995 at Virginia Commonwealth University All Rights Reserved Aronson LLC Slide: 57