On December 13, 2016, the IRS issued T.D. 9796, new regulations that require U.S. disregarded entities owned by a foreign person to file U.S. Federal Form 5472. The new Form 5472 filing requirement applies for tax years beginning after December 31, 2016 and ending on or after December 13, 2017.
Form 5472 is required to be filed by a reporting corporation that engages in reportable transactions with a U.S. or foreign related party. For this filing requirement, a reporting corporation is defined as either a U.S. C Corporation owned directly or indirectly by a 25% foreign shareholder or a foreign corporation engaged in a U.S. trade or business. The new regulations now state that a reporting corporation for the Form 5472 will include a U.S. disregarded entity that is owned directly or indirectly by one foreign person. A U.S. disregarded entity is a company or a grantor trust which is owned 100% by one person that is treated as the owner of all assets, liabilities, and income of the entity. A U.S. disregarded entity is considered to be owned indirectly by a foreign person if it is owned through one or more other disregarded entities or grantor trusts. The new regulations also expand the scope of reportable transactions to include the foreign owner’s capital contributions to a U.S. disregarded entity and distributions from a U.S. disregarded entity to its foreign owner.
The IRS has not yet updated U.S. Federal Form 5472 to reflect the new changes beginning with the 2017 tax year. It is unclear whether a U.S. disregarded entity with reportable related party transactions will be required to file Form 5472 separately with the IRS apart from a U.S. tax return. Based on the new regulations, the U.S. disregarded entity is classified as a U.S. C Corporation solely for purposes of the Form 5472 filing requirement. The IRS has not yet announced whether the U.S. disregarded entity would be required to file a U.S. corporate income tax return with the Form 5472 attached to report transactions with related parties.
In order to file Form 5472 as a reporting corporation, the U.S. disregarded entity will be required to obtain a U.S. FEIN as a taxpayer identification number. When applying for a FEIN for the U.S. disregarded entity on the U.S. Federal Form SS-4, it is necessary to provide the name and U.S. FEIN, Social Security Number (SSN), or individual taxpayer identification number (ITIN) of the foreign owner as the responsible party. This will require a foreign nonresident individual owner of a U.S. disregarded entity to apply for an ITIN on U.S. Federal Form W-7. There are certain procedures that a nonresident individual must follow to file the Form W-7 ITIN application. The processing time for the Form W-7 ITIN application with the IRS can take several months.
The new regulations also exclude a U.S. disregarded entity with a foreign owner from certain regulatory exceptions to Form 5472 recordkeeping requirements. Those exceptions typically exempt small corporations from the recordkeeping requirements if the corporation has less than $10 million in gross receipts and $5 million or less of reportable related party transactions that are less than 10% of gross income. A U.S. disregarded entity with a foreign owner is not eligible for such exceptions.
Form 5472 is an important U.S. international tax reporting requirement that should not be overlooked. The failure to file or the late filing of the Form 5472 can result in a $10,000 USD penalty per related party, per year.
For more information, please contact Alison Dougherty at ADougherty@aronsonllc.com or 301.231.6290. Alison will be presenting a webinar on Form 5472 filing requirements and the new regulations on September 12, 2017. For more information and to register, please see visit the Strafford website.
The IRS released a Transfer Pricing Audit Roadmap on February 18, 2014. The Roadmap, which was issued through the IRS Transfer Pricing Operations of the Large Business and International (LB&I) division, was developed to provide audit techniques and tools for transfer pricing examinations. The Roadmap is designed as a comprehensive toolkit based on an audit timeline.
Transfer pricing involves an area of U.S. federal taxation which requires payments in certain intercompany transactions to be based on an arm’s length standard. The arm’s length standard is applied to determine whether intercompany pricing is consistent with pricing that would be prevalent in a transaction between unrelated parties. Section 482 of the U.S. Internal Revenue Code is the provision of U.S. federal taxation law that governs transfer pricing. Under I.R.C. Section 482, the IRS has the authority to reallocate income, expense, deductions, credits and allowances to clearly reflect income or to prevent the evasion of taxes. Section 482 applies to intercompany payments between commonly controlled entities. The regulations under Section 482 provide that the best method must be applied in determining the transfer price that is the most reliable measure of the arm’s length standard.
The IRS typically targets U.S. taxpayers for transfer pricing audits based on information disclosed on foreign reporting forms filed with the U.S. federal tax return. U.S. taxpayers who file the Form 5471, 8865 or 8858 to report ownership of a foreign company are subject to a high level of scrutiny concerning intercompany payments reported on such forms. The Transfer Pricing Audit Roadmap identifies these forms and other forms such as the Forms 5472 and 926 as the starting point when the IRS reviews a U.S. federal tax return for controlled transactions.
There are specific phases of a transfer pricing audit that are outlined in the Roadmap. The Planning Phase includes the pre-examination analysis, the opening conference, taxpayer orientations, and the preparation of the initial risk analysis and the examination plan. The Pre-Examination Analysis includes the review of the taxpayer’s contemporaneous transfer pricing documentation. The Planning Phase is a process that may continue for up to six months. The Execution Phase, which may continue for up to 14 months, includes fact finding and information gathering followed by issue development with economic analysis and a preliminary report with findings. The Resolution Phase includes issue presentation, issue resolution and case closing. The Resolution Phase is a process that may continue for up to six months.
Overall, the Audit Roadmap is a definitive indication that transfer pricing audits with the IRS are typically a lengthy process. Therefore, it is important to substantiate intercompany transfer pricing with the appropriate policy, methodology and documentation.
Please contact your Aronson LLC tax advisor, Alison N. Dougherty, International Tax Services, at 301.231.6290 for more information.