Reporting Requirements Under the Code for International Transactions and Foreign Assets (Portfolio 6840)

The U.S. tax reporting requirements for cross-border situations, penalties for failure to comply with them, and IRS scrutiny of such compliance have rapidly increased. Tax Management Portfolio, Reporting Requirements Under the Code for International Transactions, discusses some of the special tax compliance issues for U.S. persons with foreign operations, subsidiaries, or other assets, and foreign persons with U.S. operations, subsidiaries, or other assets.

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Description

The U.S. tax reporting requirements for cross-border situations, penalties for failure to comply with them, and IRS scrutiny of such compliance have rapidly increased. As summarized below, Tax Management Portfolio, Reporting Requirements Under the Code for International Transactions and Foreign Assets, No. 6840, discusses some of the special tax compliance issues for U.S. persons with foreign operations, subsidiaries, partnerships, or other assets, and foreign persons with U.S. operations, subsidiaries, partnerships, or other assets.

Section 6038 and §6046 require U.S. owners of interests in foreign corporations, and U.S. officers and directors of such corporations, to provide detailed information on Form 5471. Section 367 and §6038B require certain organizations, capital contributions, liquidations, reorganizations, and other transactions with respect to foreign corporations to be reported on Form 926 and otherwise. Investments in certain “passive foreign investment companies” governed by §1291–§1298 may be required to be reported on Form 8621. Foreign partnerships may be required under §6031 to file a tax return on Form 1065, and certain U.S. owners of interests in such partnerships may be required under §6038 and §6046A to file Form 8865. Foreign-owned U.S. corporations and foreign corporations with a U.S. branch are required under §6038A and §6038C to report information on Form 5472. Foreign corporations with a U.S. relationship may be required to file a U.S. income tax return on Form 1120-F. U.S. persons that directly or indirectly own interests in foreign entities that have elected to be disregarded for U.S. income tax purposes may have to report information with respect to such entities on Form 8858. Certain U.S. and foreign persons claiming benefits under a U.S. income tax treaty may be required, under §6114, to report that fact on Form 8833. U.S. persons having financial interests in, or signature or similar authority over, a foreign bank or other financial account may have to report that on FinCEN Form 114 (formerly known as FinCEN Form TD F 90-22.1). Section 6038D requires any individual (and, commencing for years beginning after 2015, certain domestic entities) who files an annual return and has interests in foreign financial assets of a certain value to disclose those assets on Form 8938. Such reporting on Form 8938 is in addition to (and partially duplicative of) reporting on FinCEN Form 114. U.S. persons that have operations in or related to boycotting countries (regardless of whether they receive boycott requests or enter into boycott agreements) have to report such operations and any requests or agreements on Form 5713. For tax years beginning after June 30, 2016, U.S.-headed multinational groups will be required to perform “country by country” reporting on Form 8975.

This Portfolio also discusses the interaction of the international tax compliance project with the transfer pricing rules, and the effect of the dual consolidated loss rules in §1503(d) on persons with losses deductible on both a U.S. and a foreign tax return. This portfolio also explains additional compliance requirements under proposed regulations under §6038 and §6038A.

This Portfolio may be cited as Blum, Lippe, Parsch, Messing & Mehrotra, 6840 T.M., Reporting Requirements Under the Code for International Transactions and Foreign Assets.

Table of Contents

Detailed Analysis

I. Introduction

A. Overview of Outbound Reporting

B. Overview of Inbound Reporting

C. Transfer Pricing

II. Pervasive Practical Issues

A. Tax/U.S. GAAP/Foreign GAAP (non)Conformity

B. Obtaining Information

1. Structural Information

2. Financial Information

C. Reorganizations and Restructurings

III. U.S. Owners of Foreign Corporations - Form 5471 Issues

A. Introduction

B. Mechanics and Practical Issues

1. Who Must File

a. Category 1 Filer (pre-2005 years)

b. Category 2 Filer

c. Category 3 Filer

d. Category 4 Filer

e. Category 5 Filer

f. Special Rules and Overlaps

g. Dual Residents

2. Filing Mechanics: When/Where/How

a. In General

b. Dormant Corporations

3. What Goes on the Form and How to Get It

a. Introduction

b. Category 1 Filers

c. Category 2 Filers

d. Category 3 Filers

e. Category 4 Filers

f. Category 5 Filers

g. Other Practical Issues

C. Penalties

1. Introduction

2. Category 1 Filers

3. Category 2 and 3 Filers

4. Category 4 and 5 Filers

IV. Creation/Liquidation/Reorganization/Funding of Foreign Corporations - Form 926 Issues and 367 Notices

A. Introduction

B. Form 926: Reporting of Outbound Transfers by U.S. Persons

1. Introduction

2. Mechanics and Practical Issues

3. Section 6038B

a. History of § 6038B

b. Persons Required to File Information Returns

c. Exceptions for Transfers of Stock or Securities

d. Cash Transfers to Foreign Corporations

e. Special Rules for Spinoffs and Other § 355 Transfers

f. Special Rules for § 332 Liquidating Distributions

g. Special Rules for Certain Reorganizations

h. Transfers of Intangible Property and Subsequent Filings

4. Information Required To Be Filed: Form 926 and Attachments

5. Consequences of Noncompliance

a. Loss of Beneficial § 367(a) Treatment

b. Monetary Penalty

c. Extension of the Statute of Limitations

C. Section 367(a) Notice Requirement for U.S. Corporations Transferred to Foreign Corporations

1. Introduction

2. Form of Statement and Disclosure Requirements

3. Consequences of Non-Compliance

D. Section 367(b) Notice Requirements for Inbound and Foreign-to-Foreign Reorganizations

1. Persons Subject to the § 367(b) Notice Requirement

a. In General

b. Repatriation of Foreign Assets - 10% Voting Shareholders

c. Repatriation of Foreign Assets - Other Shareholders

d. Foreign-to-Foreign Reorganizations

e. Foreign Spinoffs, Split-Offs, and Split-Ups

f. Foreign § 381 Transactions

2. Time and Manner of Filing Notice

3. Consequences of Not Providing § 367(b) Notice

V. Passive Foreign Investment Companies - Form 8621

A. Introduction

B. Mechanics and Practical Issues

1. Who Must File

2. Filing Mechanics: When/Where/How

3. What Goes on the Form and How to Get It

a. Identification Information and Attachment

b. Part I - Elections

c. Part II - Income from a Qualified Electing Fund

d. Part III - Gain/Loss from a Mark-to-Market Election

e. Part IV - Distributions and Dispositions of § 1291 Funds

f. Part V - Status of § 1294 Elections

4. Protective Filings

5. Dispositions

6. Traps for the Unwary

C. Failure to File

VI. Reporting Requirements for Foreign Partnerships - Forms 1065 and 8865

A. Introduction

B. Foreign Partnerships - Form 1065 Filing Requirements

1. Introduction

2. Mechanics and Practical Issues

a. Which Foreign Partnerships Must File

b. What Goes on the Return?

c. Due Dates for Return

d. Signing Returns

e. Skeleton Returns for Making Elections

3. Penalties

a. Monetary Penalty

b. Disallowance of Certain Deductions and Credits

C. U.S. Partners of Foreign Partnerships - Form 8865 Reporting Requirements

1. Introduction

2. History

3. Mechanics and Practical Issues

a. Who Must File

(1) Category 1 Filer

(2) Category 2 Filer

(3) Category 3 Filer

(4) Category 4 Filer

(5) Overlap Rules

(6) Special Rules and Exceptions

(7) Tax Year Issues

b. Filing Mechanics: When/Where/How

c. What Goes on the Form and How to Get It

(1) Category 1 Filers

(2) Category 2 Filers

(3) Category 3 Filers

(4) Category 4 Filers

(5) Form 1065/Form 8865 Overlap Rules

d. Penalties

(1) Category 1 and 2 Filers/§ 6038

(2) Category 3 Filers/§ 6038B

(3) Category 4 Filers/§ 6046A

VII. Foreign-Owned U.S. Corporations and Foreign Corporations with a U.S. Trade or Business - Form 5472 and Related Issues, and § § 6038A and 6038C

A. Introduction

B. Mechanics and Practical Issues

1. Who Must File

a. Introduction

b. Reporting Corporation

(1) 25-Percent Foreign-Owned Domestic Corporations

(2) Foreign Corporations with U.S. Trade or Business

c. Related Party

d. Attribution Rules

e. Reportable Transaction

f. Form 5471/5472 Overlap

g. Consolidated Returns

2. When/Where/How to File

3. Interaction with Transfer Pricing

C. What Goes on the Form and How to Get It

1. Introduction

2. Headline Information: Parts I, II and III

3. Parts IV and V: Transactions with Foreign Related Parties

4. Part VI: Additional Information

D. Consequences of Non-Compliance

1. Introduction

2. Monetary Penalty

3. Extension of Statute of Limitations

VIII. Foreign Corporations Engaged in a U.S. Trade or Business - Form 1120-F

A. Introduction

B. Mechanics and Practical Issues

1. Who Must File

a. In General

b. Treaty Situations

c. Protective Returns

d. Group Issues

e. Refund Claims

2. Employer Identification Number

3. Due Dates

4. Payment of Balance Due

C. What Goes on the Form and How to Get It

1. Introduction

2. When Is Income ECI?

a. In General

b. Real Estate Income

c. The Branch Balance Sheet

3. Form 1120-F

a. Identifying Information

b. Computation of Tax Due

c. Section I: Income Not Effectively Connected

d. Section II: Effectively Connected Income

e. Section III: Branch Taxes

f. Balance Sheet and Book Income Reconciliation

D. Consequences of Non-Compliance

IX. Transfer Pricing Documentation

A. General - Contemporaneous Documentation Rule

B. Relationship of the Transfer Pricing Study and the Return

1. The Transfer Pricing Study as a Data Source for the Return

2. The Search for Transfer Pricing Issues

3. The Return as a Check on the Transfer Pricing Study

C. Cost-Sharing Arrangements

D. Penalties

X. Dual Consolidated Losses

A. Introduction

B. Overview of the Current DCL Regulations and Related Filings

1. What Is a DCL?

2. Consequences of a DCL

3. The Domestic Use (Previously (g)(2)) Agreement

a. The Initial Agreement

b. Ongoing Certifications

4. No Possibility of Foreign Loss

5. Subsequent Transactions

C. Failure to Make Elections and Certifications on a Timely Basis

D. Transition Issues

XI. Form 8858: Disregarded Entities

A. Introduction

B. Mechanics and Practical Issues

1. Who Must File

a. In General

b. Tax-Exempt Entities

c. Multiple Filers of the Same Information

2. Filing Mechanics: When/Where/How

a. In General

b. Dormant FDEs

3. What Goes on the Form & How to Get It

a. In General

b. Direct U.S. Tax Owners

(1) Introduction

(2) Schedule C

(3) Schedule C-1

(4) Schedule F

c. Form 5471 Filers

d. Form 8865 Filers

C. Penalties

XII. Treaty-Based Return Positions - § 6114

A. Introduction

B. Who Must File

1. In General

2. Overriding Exceptions for Income Otherwise Reported

3. Other Exceptions for Interest, Dividends, Royalties, etc.

4. De Minimis Exceptions

5. Other Exceptions

C. Mechanics of Filing

D. Penalties for Failure to Disclose Treaty-Based Return Positions

XIII. Returns Relating to Foreign Bank Financial Accounts

A. Introduction

B. Who Must File

1. In General

2. United States Person

3. Financial Account

4. Foreign Country

5. Financial Interest

6. Signature Authority

7. Exceptions from Filing

C. Mechanics of Filing: What/When/How

D. Penalties for Failure to File

E. Practical Observations

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 List of Relevant IRS Forms

Bibliography

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Treasury Regulations:

Other Federal Statutory Provisions and Related Administrative Acts:

Treaties and Agreements:

Legislative History:

Treasury Rulings:

Cases:

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