Council for International Tax Education (CITE)Reporting the Results of Foreign OperationsJanuary 24, 2011Randy Free, Partn...
Circular 230 Disclosure<br />To ensure compliance with requirements imposed by<br />the IRS, any U.S. federal tax advice c...
Reporting the Results of Foreign Operations<br />Topics<br />Obtaining the data from overseas for U.S. foreign information...
Obtaining the data from overseas for U.S. foreign informational forms<br />Identify sources of information<br />Structural...
Structural Information<br />Identify entities<br />Critical because of penalties for failure to make the proper filings,<b...
Financial Information needed<br />Request early<br />US GAAP income statement and balance sheet in local/functional curren...
Challenges to obtaining reliable information<br />Language / terminology barrier <br /><ul><li>Local or regional controlle...
If information cannot be obtained in time to meet filing deadlines<br />Try to avoid by starting early with clear comprehe...
Key issues in reviewing Form 5471 for foreign affiliates<br />Form 5471 –  Top 10 Mistakes<br />Not filed or filed incompl...
Risks of mistakes<br />Penaltiesfor not filing or incomplete filing<br />$ 10,000 for each failure to furnish the required...
Know when Form 5471is required<br />Filed for each Controlled Foreign Corporation ("CFC")<br />More than 50% Level of US O...
Information required<br /><ul><li>Required disclosures vary with category of filer with categories 4 and 5 requiring the m...
Foreign currency convention: "divide by"
Answer every question</li></li></ul><li>What to look for: “Tainted” Low-Taxed Income<br />Subpart F Income taxable to US S...
What’s the origin?
 Who manufactured it?
 What’s the destination?</li></ul>Currently taxable amount of Subpart F Income limited to current E&P<br />
What to look for: Investment in US property (Sec. 956)<br />Income taxable to US Shareholder as a “deemed dividend”<br />	...
What to look for: Changes in shareholdings<br />Additional disclosures and elections<br />	On Page 1 – <br /><ul><li>Categ...
Indicates what schedules need to be included
Indirect Filers</li></ul>Controlling shareholder of US corporate shareholder of CFC<br />	On Schedule A and B – Shareholdi...
What to look for: Some specific issues<br />Pay attention to the details<br /><ul><li>On Schedule E – Foreign taxes</li></...
Computing earnings and profits – reconciliation with financial statement retained earnings<br />Purpose for Controlled For...
Earnings and Profits<br />Purpose :<br />To determine taxable amount of distributions<br />E&P represents a corporation's ...
E&P Functional Currency Concept<br />In 1981, Financial Accounting Standards No. 52 (FASB 52) introduced the “functional c...
Methods of calculating the E&P of a qualified business unit (QBU)<br />
E&P and tax “pools”<br />E&P and foreign taxes are calculated annually, and accumulated in <br />separate pools<br />For t...
E&P of a CFC must be categorized into baskets, pools, and layers, and characterized by source<br />The identification of E...
E&P Adjustments Required for CFCs<br />Code Sec. 964<br />E&P determined using rules similar to those applicable to domest...
E&P Adjustments Required<br />Elections by CFC<br />An election or to adopt a taxable year or method of accounting shall n...
Other significant U.S. international reporting forms  <br /><ul><li>Form 8832  Entity Classification Election
Form 8865  Report of U.S. Persons With Respect to Certain Foreign Partnerships
Form 8858  Information Return of US Persons With Respect to Foreign Disregarded Entities
Form 926   Report by a U.S. Transferor of Property to a Foreign Corporation
Form 8838  Consent to Extend the Time to Assess Tax Under Section 367 - Gain Recognition 		          Agreement
Form 8621  Return by a Shareholder of a Passive Foreign Investment Company or Qualified 	       	          Electing Fund
Form 5713 International Boycott Report
Form TDF 90-22.1  Report of Foreign Bank and Financial Accounts</li></li></ul><li>Form 8832 Entity Classification Election...
Form 8865Report of U.S. Persons With Respect to Certain Foreign Partnerships<br />Purpose:  To report information required...
Form 8865Information required <br />A separate form 8865 is required for each foreign partnership <br />Answer every quest...
Description of the property transferred including the type of property and date of transfer
Fair market value, adjusted basis, realized gain, etc. on the transfer of property to the partnership</li></li></ul><li>Fo...
Form 8858   Information Return of US Persons With Respect to Foreign Disregarded Entities<br />
Form 8858  Multi-purpose<br /><ul><li>Disclosure of ownership chain</li></ul>Provides limited P&L and Balance Sheet disclo...
Translated to US dollars at average exchange rate for the year</li></ul>Schedule G<br />Questions highlight potential audi...
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Cite Reporting The Results Of Foreign Operations Jan 2011

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  • It is imperative that the data for calculating E&amp;P is gathered on a yearly basis. Important data and possibly foreign income tax returns may be discarded by the foreign corporation once the foreign country&apos;s tax statute of limitations lapses. In addition, the IRS will most likely require the documentation upon audit. If the data is not gathered currently it may be difficult if not impossible to subsequently obtain.
  • A CFC (Controlled Foreign Corporation) is defined in §957 as foreign corporation with U.S. Shareholders that own (directly, indirectly or constructively, within the meaning of sections 958(a) and (b), on any day of the tax year of the foreign corporation, more than 50% of:The total combined VOTING power of all classes of its voting stock; ORThe total VALUE of the stock of the corporation. In determining ownership, the attribution rules of §318 apply, however, the 50% ownership attribution is reduced to 10% by §6038(e)(2)(B).
  • Units of functional currency that equal USD 118.0532 Yen to 1 USD
  • Participation in, or cooperation with, an international boycott occurs when a person, in order to do business in one country, agrees not to do business with a specified country or with other companies doing business in specified countries. An agreement not to hire employees or do business with other companies whose employees are of a specified nationality, race or religion also constitutes boycott activity.
  • Cite Reporting The Results Of Foreign Operations Jan 2011

    1. 1. Council for International Tax Education (CITE)Reporting the Results of Foreign OperationsJanuary 24, 2011Randy Free, Partner, SoCal International Tax Practice Leader<br />
    2. 2. Circular 230 Disclosure<br />To ensure compliance with requirements imposed by<br />the IRS, any U.S. federal tax advice contained in this<br />document is not intended or written to be used, and<br />cannot be used, for the purpose of (i) avoiding<br />penalties under the Internal Revenue Code or (ii)<br />promoting, marketing, or recommending to another<br />party any transaction or matter that is contained in<br />this document.<br />
    3. 3. Reporting the Results of Foreign Operations<br />Topics<br />Obtaining the data from overseas for U.S. foreign informational forms<br />Key issues in reviewing Form 5471 for foreign affiliates<br />Computing earnings and profits – reconciliation with financial statement<br />Other significant U.S. international reporting forms<br />
    4. 4. Obtaining the data from overseas for U.S. foreign informational forms<br />Identify sources of information<br />Structural Information<br />Financial data<br />Include tax information request in financial statement “Reporting Package”<br />Reorganizations<br />Challenges<br />Act early to overcome<br />Failure to obtain<br />
    5. 5. Structural Information<br />Identify entities<br />Critical because of penalties for failure to make the proper filings,<br />Auditor's workpapers may ignore inactive companies for which no statutory financial statements are required<br />Consult with the company's legal counsel for acquisitions or other changes<br />Create and maintain a legal entity structure document that includes<br />Full corporate name and address <br />Country of incorporation <br />Country of residence for tax purposes <br />Corporate form, date of formation <br />Capital structure and share ownership <br />List of directors/officers<br />Tax classification in country of tax residence (e.g., corporation, partnership, etc.)<br />Classification for US tax purposes <br />Function of each legal entity in the group<br />
    6. 6. Financial Information needed<br />Request early<br />US GAAP income statement and balance sheet in local/functional currency<br />Calculation of current and deferred income tax expense<br />Local tax returns, with English translation, and supporting workpapers<br />Receipts or other documentation supporting cash tax payments made<br />Support for any foreign audit settlement<br />Information about intercompany transactions including a description of the transaction, date entered into, payment made<br />Transfer Pricing documentation report<br />Information about changes in business and functions during the year.<br />Best practice is to request as much of the tax compliance information as possible <br />as part of financial reporting process to avoid multiple requests<br />
    7. 7. Challenges to obtaining reliable information<br />Language / terminology barrier <br /><ul><li>Local or regional controller probably is not familiar with US tax concepts and may not speak or understand English fluently</li></ul>Lack of cooperation<br />Local management may object to requests to compile information to satisfy the US owner's tax compliance requirements, but produces no local benefit <br />Inadequate records <br />Complex foreign transactions may require additional U.S. disclosures/elections<br />Recent foreign acquisitions can pose particular problems, because of special-purpose entities created as part of structuring the acquisition, and poor records from the pre-acquisition period<br />Preparer penalties<br />US tax return preparer will need to consider likelihood of outcome of tax positions and requisite disclosure standards<br />
    8. 8. If information cannot be obtained in time to meet filing deadlines<br />Try to avoid by starting early with clear comprehensive requests and explanations<br />There is no official guidance <br />Best practices would suggest:<br />File your best information<br />Prepare the forms to set the stage to request abatement of penalties due to reasonable cause <br />Consider disclosure that forms are incomplete on their face, but were completed using the best information available<br />Document in the files why incomplete and what was done to obtain the missing information<br />Writing “information available on request” is an audit trigger<br />
    9. 9. Key issues in reviewing Form 5471 for foreign affiliates<br />Form 5471 – Top 10 Mistakes<br />Not filed or filed incompletely<br />Wrong filing category used<br />Income statement: Tax instead of GAAP<br />Balance sheet reported in functional currency<br />E&P ignored – income statement replicated<br />Subpart F income worksheets not completed<br />Accumulated E&P categories not tracked<br />Indirect transfer pricing information omitted<br />Officer/shareholder information incomplete<br />Duplicate filing not made<br />
    10. 10. Risks of mistakes<br />Penaltiesfor not filing or incomplete filing<br />$ 10,000 for each failure to furnish the required information within time prescribed<br />Additional $ 10,000 for each 30 day period or fraction thereof up to $ 50,000 if IRS has mailed a notice of failure and such information is not furnished within 90 days after such request<br />Possible reduction in the foreign taxes available for deduction or as a foreign tax credits<br />Automatic penalty if filed with delinquent Form 1120<br />HIRE Act holding statute open<br />assessment statute not expired by March 18, 2010<br />Willful neglect<br />
    11. 11. Know when Form 5471is required<br />Filed for each Controlled Foreign Corporation ("CFC")<br />More than 50% Level of US Ownership in vote OR value<br />Filed by US shareholder (10% or more voting power) <br />Categories of filers<br />No longer applicable<br />Officer or director of foreign corporation in which a US person has acquired 10% or more<br />Acquisition or disposition of stock in a foreign corporation of 10% or greater ownership of ANY foreign corporation<br />Control (more than 50%) of a foreign corporation for an uninterrupted 30 day period during the tax year – directly or indirectly<br />US shareholder of a CFC on the last day of the CFC's year<br />Exceptions<br />Dormant CFC<br />Multiple filers for same CFC<br />
    12. 12. Information required<br /><ul><li>Required disclosures vary with category of filer with categories 4 and 5 requiring the most information including: </li></ul>Stock information<br />Names of US shareholders<br />Income statement and balance sheet<br />Income taxes paid or accrued for year<br />Current earnings and profits<br />Current inclusions of Subpart F Income, distributions<br />Accumulated earnings and profits reconciliation<br />Transactions between the CFC, its shareholders and affiliates<br /><ul><li>Category 3 filers also report acquisition/disposition details
    13. 13. Foreign currency convention: "divide by"
    14. 14. Answer every question</li></li></ul><li>What to look for: “Tainted” Low-Taxed Income<br />Subpart F Income taxable to US Shareholder as a “deemed dividend”<br /> On Schedule C - Income Statement<br /><ul><li>5% of Gross Income Threshold</li></ul>Interest<br />Dividends<br />Rents/Royalties<br />Capital Gains<br />On Schedule M - Intercompany Transactions<br /><ul><li>Ask about intercompany sales or services
    15. 15. What’s the origin?
    16. 16. Who manufactured it?
    17. 17. What’s the destination?</li></ul>Currently taxable amount of Subpart F Income limited to current E&P<br />
    18. 18. What to look for: Investment in US property (Sec. 956)<br />Income taxable to US Shareholder as a “deemed dividend”<br /> On Schedule F – Balance Sheet<br />Loans to US shareholder<br />Receivables from US shareholder or US affiliates<br />Netting rule<br />Prepare worksheet B<br />Sec. 956 taxable amount NOTlimited to current E&P<br />Quarterly average increase in investment in U.S. property by CFC<br />
    19. 19. What to look for: Changes in shareholdings<br />Additional disclosures and elections<br /> On Page 1 – <br /><ul><li>Categories of Filers
    20. 20. Indicates what schedules need to be included
    21. 21. Indirect Filers</li></ul>Controlling shareholder of US corporate shareholder of CFC<br /> On Schedule A and B – Shareholdings<br />Number of shares outstanding<br />Number of shares owned by US shareholders<br /> On Schedule O - <br /><ul><li>Organizations, Reorganizations, Acquisitions and Dispositions</li></ul>Taxable transfers to foreign corporation<br />Tax-free incorporation<br />Reporting another’s acquisition by officer and director<br />Additional forms may need to be included<br />
    22. 22. What to look for: Some specific issues<br />Pay attention to the details<br /><ul><li>On Schedule E – Foreign taxes</li></ul>Current income tax paid and accrued<br />Translated into US dollars at average rate for the year<br />NOT the total tax provision on Schedule C<br />Results in E&P adjustment for deferred tax<br />On Schedule J – Accumulated earnings and profits<br />Should reflect E&P from Schedule H<br />Keep track of pools in functional currency<br />Historical record of previously taxed income<br />Distributions from E&P should reconcile to Schedule I<br />
    23. 23. Computing earnings and profits – reconciliation with financial statement retained earnings<br />Purpose for Controlled Foreign Corporations (CFC)<br />Methods for E&P Adjustments<br />When event requires computation<br />Follows domestic concepts<br />Annual and cumulative disclosure<br />Maintain records<br />Post-86 Pool<br />Separate company<br />Separate baskets<br />Tier up when dividends distributed<br />
    24. 24. Earnings and Profits<br />Purpose :<br />To determine taxable amount of distributions<br />E&P represents a corporation's economic gains and losses, its capacity to distribute corporate earnings<br />Different from both the accounting concept of net income and the corporation's taxable income<br />E&P generally includes all income, expenses, gains and losses realized by the corporation<br />E&P represents an increase or decrease in the amount of net assets of the corporation other than assets received from its shareholders as contributions to capital or distributions of assets to its shareholders<br />
    25. 25. E&P Functional Currency Concept<br />In 1981, Financial Accounting Standards No. 52 (FASB 52) introduced the “functional currency” approach, under which the currency of the economic environment in which a foreign entity operates is generally used as the unit of measure for exchange gains and losses<br />Section 985(a) implements the functional currency concept and provides that “unless otherwise provided in regulations, all determinations under this subtitle must be made in the taxpayer's functional currency<br />The adoption of, or the election to use a functional currency is a method of accounting, and any change in the functional currency is treated as a change in the taxpayer's method of accounting. <br />Generally, the determination of the functional currency for a foreign entity will be obvious<br />currency of the economic environment in which a significant part of the QBU's activities is conducted, provided the QBU keeps (or is presumed to keep under Reg. §1.985-1(c)(3)) books and records in that currency <br />
    26. 26. Methods of calculating the E&P of a qualified business unit (QBU)<br />
    27. 27. E&P and tax “pools”<br />E&P and foreign taxes are calculated annually, and accumulated in <br />separate pools<br />For the purpose of determining the tax of a shareholder of a foreign corporation, the earnings and profits of the corporation are maintained in the corporation's functional currency. These earnings and profits are translated into dollars at the appropriate exchange rate when they are actually distributed to the shareholder, or are deemed distributed to the shareholder in the case of the subpart F income of a controlled foreign corporation or gain treated as a dividend under Code Sec. 1248.(Code Sec. 986(b)(1))<br />In determining the amount of foreign taxes paid by a taxpayer under Code Sec. 901 or deemed paid by a domestic corporation shareholder in a foreign corporation under Code Sec. 902 and Code Sec. 960, a foreign income tax is translated into U.S. dollars using the exchange rate in effect as of the time the current income taxes are accrued. (Code Sec. 986(a)(2)(A))<br />
    28. 28. E&P of a CFC must be categorized into baskets, pools, and layers, and characterized by source<br />The identification of E&P by categories is required to determine the following:<br />Foreign tax credit basket classification of dividends<br />US or foreign source of the dividend<br />Taxability of actual distributions as dividends<br />Amount of exchange gains or losses on distributions of PTI and the appropriate foreign tax credit basket classification<br />Information required for reporting purposes<br />Deemed-paid foreign tax credit<br />Taxability of deemed dividends under the Subpart F income and investments of earnings in U.S. property rules<br />Dividend recharacterization resulting from the sale or exchange of a CFC's stock<br />Addition or attribution of E&P with respect to transactions under §367<br />E&P adjustments to the stock basis of a CFC for interest expense allocation purposes at the US shareholder level<br />
    29. 29. E&P Adjustments Required for CFCs<br />Code Sec. 964<br />E&P determined using rules similar to those applicable to domestic corporations<br />Illegal bribes, kickbacks or other payments (as defined under the Foreign Corrupt Practices Act of 1977) may not be taken into account<br />Steps to determine the earnings and profits of a CFC:<br /> A profit and loss statement must be prepared for a tax year from the books of account regularly maintained by the foreign corporation for the purposes of accounting to its shareholders<br />Adjust for material items to conform the statement to US accounting principles<br />the accounting principles to be applied are those generally accepted in the United States to reflect in the financial statement of a domestic corporation the operations of its foreign affiliates:<br />clear reflection of income<br />physical assets be taken into account at historical cost<br />no systematic undervaluation of assets or overvaluation of liabilities<br />income and expense taken into account without regard to equalization over more than one accounting period <br />Adjust for tax accounting standards, with allowable elections<br />
    30. 30. E&P Adjustments Required<br />Elections by CFC<br />An election or to adopt a taxable year or method of accounting shall not be required until the due date (including extensions) of the return for a controlling domestic shareholder's first taxable year with or within which ends the foreign corporation's first taxable year in which the computation of its E&P is significant for US tax purposes with respect to its controlling domestic shareholders<br />When “significant”?<br />Filing a Form 5471 is not a significant event<br />For taxable years beginning after April 25, 2006, significant events include:<br />A distribution from the foreign corporation to its shareholders with respect to their stock.<br />An amount is includible in gross income with respect to such corporation under section 951(a).<br />An amount is excluded from subpart F income of the foreign corporation or another foreign corporation by reason of section 952(c).<br />Any event making the foreign corporation subject to tax under section 882.<br />The use by the foreign corporation's controlling domestic shareholders of the tax book value (or alternative tax book value) method of allocating interest expense under section 864(e)(4).<br />A sale or exchange of the foreign corporation's stock of the controlling domestic shareholders that results in the recharacterization of gain under section 1248.<br />
    31. 31. Other significant U.S. international reporting forms <br /><ul><li>Form 8832 Entity Classification Election
    32. 32. Form 8865 Report of U.S. Persons With Respect to Certain Foreign Partnerships
    33. 33. Form 8858 Information Return of US Persons With Respect to Foreign Disregarded Entities
    34. 34. Form 926 Report by a U.S. Transferor of Property to a Foreign Corporation
    35. 35. Form 8838 Consent to Extend the Time to Assess Tax Under Section 367 - Gain Recognition Agreement
    36. 36. Form 8621 Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
    37. 37. Form 5713 International Boycott Report
    38. 38. Form TDF 90-22.1 Report of Foreign Bank and Financial Accounts</li></li></ul><li>Form 8832 Entity Classification Election<br />A foreign eligible entity uses Form 8832 to elect how it will be classified<br />for federal tax purposes<br />Timing<br />An election cannot take effect more than 75 days prior to the date filed<br />Or later than 12 months after the date the election is filed<br />Late election relief<br />A newly formed entity may be eligible for late election relief under Rev. Proc. 2002-59, 2002-39 I.R.B. 615 if: The entity failed to obtain its desired classification solely because Form 8832 was not timely filed. The due date for the entity’s desired classification tax return (excluding extensions) for the tax year beginning with the entity’s formation date has not passed, and The entity has reasonable cause for its failure to make a timely election<br />
    39. 39. Form 8865Report of U.S. Persons With Respect to Certain Foreign Partnerships<br />Purpose: To report information required under<br />Sec 6038 - controlled foreign partnerships (CFP) <br />Sec 6038B - transfers to foreign partnerships <br />Sec 6046A - acquisitions, dispositions, and changes in foreign partnership interests<br />Controlled Foreign Partnerships<br />Where US persons, at any time during the partnership’s tax year end, possess a 10% or greater ownership interest (in either capital, profits, deductions or losses), including constructive ownership, where these US persons own more than a 50% interest in the foreign partnership <br />A U.S. person is defined under Code Section 7701(a)(30) as a U.S. citizen or resident, a domestic partnership, a domestic corporation, and any estate or trust that is not foreign.<br />
    40. 40. Form 8865Information required <br />A separate form 8865 is required for each foreign partnership <br />Answer every question<br />Required Disclosures vary with category of filer <br />Certain information including names, addresses, etc with respect to the other 10% direct owners and certain related parties partners in the foreign partnership<br />CFP requires P&L information and K-1 for US tax reporting by partners<br />Transfers to the partnership<br /><ul><li>Name, address and identification number of the U.S. person making the transfer
    41. 41. Description of the property transferred including the type of property and date of transfer
    42. 42. Fair market value, adjusted basis, realized gain, etc. on the transfer of property to the partnership</li></li></ul><li>Form 8865Penalties<br />Failure to timely file and/or for providing inaccurate or incomplete information <br />Penalty is $10,000. Increases by an additional $10,000 for each 30 day period (up to a maximum of $ 50,000) for each failure to comply which has not been cured within 90 days after receipt of notification of such failure from the IRS. <br />Foreign taxes eligible for credit may be reduced<br />Failure to Report Transfer of Property<br />Absent reasonable cause, the penalty is equal to 10% of the fair market value of the contributed property at the time of the contribution, limited to $ 100,000, (unless due to intentional disregard).<br />Gain must also be recognized, as if the property had been sold at its fair market value at the time of the contribution. <br />Adjustments to the partnership’s basis in the contributed property or the partner’s basis in the partnership as a result of the recognition of the gain are made as if the gain was recognized in the year the failure to report was finally determined<br />
    43. 43. Form 8858 Information Return of US Persons With Respect to Foreign Disregarded Entities<br />
    44. 44. Form 8858 Multi-purpose<br /><ul><li>Disclosure of ownership chain</li></ul>Provides limited P&L and Balance Sheet disclosure<br /><ul><li>Schedule H </li></ul>To compute reportable taxable income or earnings and profits of the FDE<br /><ul><li>Reconciliation of “book” P&L in functional currency to US taxable concepts
    45. 45. Translated to US dollars at average exchange rate for the year</li></ul>Schedule G<br />Questions highlight potential audit issues for IRS examiners<br /><ul><li>if the FDE made its election to be treated as disregarded from its owner during the tax year: Did the tax owner claim a loss with respect to stock or debt of the foreign disregarded entity as a result of the election ?
    46. 46. If the FDE is owned directly or indirectly by a domestic corporation and the foreign disregarded entity incurred a net operating loss for the taxable year, is the FDE a “separate unit” as defined under the dual consolidated loss rules?
    47. 47. if the tax owner of the DRE is a CFC: were there any intracompany transactions between the FDE and the CFC or any other branch of the CFC during the taxable year, in which the FDE acted as a manufacturing, selling, or purchasing branch? </li></li></ul><li>Form 8858Foreign currency gain or loss<br />Schedule C-1<br />To disclose currency gain and loss when remittances are made between branches using different “functional currencies” <br /><ul><li>Reporting with respect to the “currency branch” rules of Sec 987
    48. 48. The tax rules for translating currency gains and losses are based on principles completely different from GAAP
    49. 49. Currency gain and loss is not recognized for tax purposes until there has been a “remittance” from a branch with a different functional currency.
    50. 50. Lack of regulatory authority
    51. 51. Section 987 has been in the statute since 1986, and the IRS views it as self-executing
    52. 52. Proposed regulations originally issued in 1991
    53. 53. In September 2006, the IRS withdrew 1991 proposed regulations
    54. 54. New regulations proposed, but not finalized as of 12/31/09</li></li></ul><li>To report certain transfers of tangible or intangible property to a foreign<br />corporation required by Sec 6038B<br /><ul><li>Transfers to a controlled foreign subsidiary under §351
    55. 55. Transfers in a liquidation of a US corporation into a foreign parent under §332
    56. 56. Transfers to a foreign corporation in a tax-free reorganization, under §354, §356, or §361 (including certain deemed transfers)
    57. 57. Transfer of a foreign corporation in a tax-free spinoff, etc., under §355 — regardless, in some cases, of whether the transferee is a foreign corporation
    58. 58. Cash transfers to a foreign corporation if
    59. 59. The US persons holds directly or indirectly at least 10% of the total voting power or value of the foreign corporation
    60. 60. OR the amount of cash transferred by the US person ion during the 12-month entity and the income exceeds $100,000</li></ul>Transfers by a partnership must be filed by the partner<br />Penalty for failure to file<br />10% of the fair market value of the transferred property<br />Form 926 Report by a U.S. Transferor of Property to a Foreign Corporation<br />
    61. 61. Form 926Information to be reported<br />Form 926 is attached to the transferor's tax return and does not need to be<br />separately signed.<br />The form itself has three information sections:<br /><ul><li>Part I - about the transferor
    62. 62. Identifying information about the transferor, (including identification of its controlling shareholders, if the transferor is a corporation that went out of existence, e.g., in a split-up or liquidation)
    63. 63. If the actual transfer was performed by a partnership, and the person filing the return is one of the partners, the partnership also must be identified
    64. 64. Part II - about the transferee
    65. 65. Identifying information about the transferee, including whether it is a controlled foreign corporation and how it is characterized (e.g., as a partnership or corporation) under foreign law.
    66. 66. Part III - about the transferred property
    67. 67. Information about the transfer itself. This includes the date, the type of transfer under U.S. law (e.g., §351 transfer to controlled subsidiary, §332 liquidation), a description of the transferred property, whether the transfer was the result of a “check-the-box” entity classification election, and whether any intangible property was transferred (and if so, a description of the rights transferred). In certain cases under §367(a), a person transferring property to a foreign corporation must include amounts in income</li></ul>Supplemental information also must be attached, as summarized in the Instructions, and <br />described in far more detail in the regulations. <br />
    68. 68. Form 926Taxable or tax-free transfers<br />Income inclusion may be required<br /><ul><li>Pursuant to Sec 367(a), a US person transferring property to a foreign corporation must include amounts in income due to one or more of the following:</li></ul>Recapture with respect to certain depreciated property used in the US<br />Certain property to be leased by the transferee, or to be sold outside of the ordinary course of the transferee's business<br />Inventory<br />Certain intellectual property<br />Certain installment obligations and accounts receivable<br />Foreign currency or property denominated in foreign currency<br />Property that had been leased by the transferor at the time of the transfer<br />Foreign branches with previously deducted losses<br /><ul><li>Tax-free transactions</li></ul>A Gain Recognition Agreement on Form 8838 is required<br />
    69. 69. Form 8838 Consent to Extend the Time to Assess Tax Under Section 367 - Gain Recognition Agreement <br /><ul><li>Transfer of stock or securities by a US person to a foreign corporation </li></ul> are taxable<br />Unless the transfer qualifies for an exception <br />And the transferor enter into a gain recognition agreement with the IRS<br />And consents to an extension of the statute of limitations<br />Form 8838 must be separately signed under penalty of perjury<br />Filed with the transferor’s income tax return<br />
    70. 70. Form 8621 Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund<br />Any level of ownership in a "PFIC"<br />Direct or indirect<br />A foreign corporation is a PFIC if:<br />75% or more of its gross income constitutes “passive income” or<br />50% or more of its assets produce, or are held for the production of, passive income.<br />Once a PFIC, always a PFIC<br />US persons who hold stock in a PFIC are subject to an adverse tax regime with respect to “excess distributions” from a PFIC, which includes gain on the disposition of stock of a PFIC, including a pledge of its stock.<br />Excess distribution is taxable at highest marginal rate, pro rata over holding period of shares, plus an interest charge.<br />To QEF or not to QEF<br />To report ordinary income and capital gains currently (similar to a US mutual fund).<br />Shareholder information statement from PFIC<br />Timing is key to the pedigree<br />
    71. 71. Form 8621Procedures<br />Filed with tax return of shareholder<br />A separate form is filed for each PFIC.<br />Not required for US shareholder if PFIC is also a CFC. <br />Elections generally made by first US person in chain of ownership<br />QEF election<br />Deemed sale election<br />Deemed dividend election<br />Extend the time to pay the tax for QEF<br />Mark-to-Market election<br />
    72. 72. Form 5713 International Boycott Report<br />Filed by US person to report<br />Operations in or related to "boycotting countries"<br />Receipt of boycott requests or agreements made<br />Participation in boycott may result in loss of tax benefits<br />Foreign tax credit<br />CFC deferral<br />Filed in duplicate<br />With US person's income tax return<br />To IRS in Philadelphia<br />Penalties for willful failure to file<br />$25,000 fine<br />Imprisonment up to one year<br />Both<br />
    73. 73. Form 5713Boycotting Countries<br />List updated by Treasury<br />Kuwait<br />Lebanon<br />Libya<br />Qatar<br />Saudi Arabia<br />Syria<br />United Arab Emirates<br />Yemen<br />Any other country that requires participation in an international boycott per Sec 999(a)(3)<br />
    74. 74. Form TDF 90-22.1 <br />Report of Foreign Bank and Financial Accounts<br />Annual filing by each US Person <br />with a financial interest in or<br />signature authority or other authority <br />Any financial account ( bank, securities, etc.) in a foreign country and<br />The aggregate value exceeds $10,000 at any time during the tax year<br />Due June 30th<br />No extensions<br />Sent to Department of the Treasury<br />
    75. 75. Form TDF 90-22.1 U.S. "Ownership"<br />Financial interest includes: <br />Owner of record or legal title<br />Acting as agent, nominee, attorney or other capacity on behalf of US Person<br />Entity in which the US person owns directly or indirectly 50% or more of total value<br />Signature or Other Authority Over an Account<br />Control the disposition of money or other property by delivery of a document with signature to the bank or other institution.<br />
    76. 76. Form TDF 90-22.1 Penalties<br />
    77. 77. Contact Information<br />Randy Free<br />Partner – SoCal International Tax Practice Leader<br />Grant Thornton LLP<br />18400 Von Karman Ave, Suite 900<br />Irvine, California 92612<br />949.608.5311 (office)<br />949.606.6859 (cell)<br />Randy.Free@US.gt.com<br />
    78. 78. Tax Professional Standards StatementThis document supports Grant Thornton LLP’s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.<br />

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