Reporting Requirements for International Transactions and Business Relations Outside the U.S.
By Abhishek Gupta, Manager, Tax & Business Services
The U.S. has always provided flexibility to its residents to operate business activities and enter into business transactions with foreigners outside the country’s borders. At the same time, the U.S. has also provided flexibility to foreigners to conduct business operations here. This policy, among other factors, has resulted in an increase in cross-border transactions over the years. While global economics has prospered due to this increased trade, it has also resulted in greater tax reporting to the Internal Revenue Service, Department of the Treasury, and other government agencies. Following are a few of the reporting requirements that need to be submitted on periodic or transactional basis. This list is not comprehensive and, depending on the business transactions, additional, or other, reporting requirements may be necessary.
When a U.S. person owns shares in any foreign corporation, the U.S. person may be required to file a Form 5471, the Information Return of U.S. Persons with Respect to Certain Foreign Corporations, to report the ownership and activities of the foreign corporation. This is applicable to U.S. individuals, corporations, and pass-through entities (e.g., partnerships or certain LLCs). Depending on the business activities of the foreign corporation and its assets, the U.S. person may have to include all, or a portion of, the foreign corporation’s income in their U.S. income tax return on a current basis (i.e., prior to distribution.) In addition, such person may, or may not, be entitled to a tax credit for local taxes paid by the foreign corporation. Form 5471 may be required annually for certain owners of a foreign corporation, and a late filing or non-filing of such form may lead to a penalty of USD $10,000 per form for each year that the filing has been neglected or late.
The Tax Cuts and Jobs Act (TCJA) created more tax reporting requirements by introducing new forms such as Form 8992, which is used to report U.S. shareholder calculation of Global Intangible Low-Taxed Income (GILTI) under newly enacted section 951A. This new section requires U.S. shareholders of controlled foreign corporations (CFCs) to include in gross income on a current basis the shareholder’s GILTI for years in which they are U.S. shareholders of CFCs with tax years beginning after 2017.
The TCJA also provided certain deductions for export of specified sales and services and certain deductions related to GILTI under section 250. Form 8993 is used by U.S. persons to calculate deductions under section 250 for the eligible percentage of Foreign-Derived Intangible Income (FDII) and GILTI. The deduction for FDII is available only to U.S. C corporations, but the deduction to reduce GILTI income may be available to U.S. individuals through the use of other elections.
A U.S. corporation owned 25% or more by a foreign person or a foreign- owned disregarded entity may be required to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, to report transactions with either the foreign or the domestic related parties. This form is required for each tax year during which such reportable business transactions exist between the U.S. company (or disregarded U.S. entity) and the foreign related party. The penalty for not filing such a form has recently increased from $10,000 to $25,000.
If a U.S. person wholly owns, directly or indirectly, a foreign disregarded entity (DRE) or foreign branch, the U.S. person may need to file a form 8858, the Information Return of U.S. Persons with Respect to Foreign Disregarded Entities and Foreign Branches (FBs). Note that there are special U.S. “check-the-box” election rules that allow a U.S. person to treat foreign corporations as flow-through for U.S. federal income tax purposes, regardless of how they are treated for non-U.S. legal or tax purposes.
If a U.S. person owns an interest, directly or indirectly, in a foreign partnership, the U.S. person may need to file a form 8865, the Return of U.S. Persons with Respect to Certain Foreign Partnerships. The filing requirements vary on factors such as ownership percentage, contributions made to the foreign partnership, or a reportable transaction. Note again here that a corporate legal entity may be treated for U.S. federal income tax purposes as a partnership under the check-the-box rules.
A U.S. partnership that has a foreign partner may have to file a Form 8804 to report the effectively connected income allocated to the foreign partners. Form 8813 may be required to report and pay withholding taxes to the Internal Revenue Service by the partnership. Form 8805 is the withholding certificate showing the amount of effectively connected income allocated to each partner and withholding on such income paid on behalf of each partner.
U.S. persons who have assets, financial accounts, or ownership in business entities outside the U.S. may be required to report such assets if the value of such assets exceeds a certain amount on Form 8938, the Statement of Specified Foreign Financial Assets.
U.S. persons owning interest in or having signing authority in foreign bank or other financial accounts may have to file a Form 114, Foreign Bank Account Report, if the aggregate maximum balance on any day during the year in all such foreign accounts exceeds $10,000. The U.S. person may have to report the names, addresses, and account numbers of all such accounts depending on the total amount and number of accounts reportable for a particular tax year.
Some of the reports and forms mentioned above are for reporting purposes only and may not involve any additional tax burden. But if these forms are not timely filed, taxpayers may incur heavy penalties and interest.
To optimize the cross-border taxation, it is important, now more than ever, to understand all of the reporting and tax payment requirements of the U.S. government and to evaluate the business structure in light of such requirements. The restructuring of an organization and understanding the tax results from using the check-the-box rules may provide a more efficient and cost effective approach to tax compliance and, ultimately, to the global effective income tax rate.
Analysis of current organizational structure and thoughtful consideration of restructuring can benefit the taxpayer by reducing the reporting requirement or effective overall tax in long run. With more and more countries following up on the tax regimes adopted by the U.S. in recent years, it is imperative to review international organizational structure on a continual basis.
If you believe you have any cross-border transactions or other U.S. connections that may be required to be reported on any U.S. tax forms, please consult an associate of Marcum’s International Tax Department.