IRS Issues Guidelines on Filing Deadlines for Foreign Corporations

 

The IRS Large Business and International Division (LB&I) has issued guidelines for handling delinquent Forms 1120-F, U.S. Income Tax Return of a Foreign Corporation, and for making filing deadline waivers.

Foreign corporations engaged in a trade or business within the U.S. can claim deductions and credits on income that are effectively connected with income associated with the conduct of a trade or business. Those tax breaks are also conditioned on the foreign corporation filing a true and accurate return, including all the information necessary to calculate the deductions and credits.

The IRS has the authority to waive filing deadlines if the foreign corporation shows that it failed to submit an income tax return although it acted reasonably and in good faith.

New Guidelines

The new LB&I guidelines apply in two scenarios:

1. A taxpayer not currently being examined informs the LB&I that it failed to file a Form 1120-F on time and that it now seeks to file a delinquent Form 1120-F. In some instances, a taxpayer’s representative may approach the LB&I on a no-name basis on behalf of a taxpayer. The taxpayer or representative may seek to submit a delinquent return or discuss the likelihood of a waiver from the filing deadline.

In this scenario, the LB&I should inform the taxpayer (or its representative) that, even though the form is delinquent, it must be filed according to the instructions on Form 1120-F. The LB&I shouldn’t accept a delinquent Form 1120-F or accept a request for a waiver from the taxpayer, or discuss it with the taxpayer.

2. The LB&I has been assigned the examination of a filed Form 1120-F and determines that the corporation failed to meet the relevant timely filing deadline.

In this scenario, the examination team should inform the taxpayer in writing of the option to request a waiver. However, the team is warned not to advise, instruct or otherwise signal the taxpayer to take any particular action. If the taxpayer does request a waiver, the team should make a recommendation on granting or denying it and again follow the procedures for processing the recommendation.

If the taxpayer doesn’t request a waiver, the team should continue the examination of the filed return. If the taxpayer submits a request in response to a proposed disallowance, the team should again determine a recommendation and follow the procedures for processing the recommendation.

Waiver Summary Analysis

The guidelines include a “Waiver Summary Analysis” that sets out factors that should be considered in granting a waiver. They include determining whether the corporation:

1. Cooperated in the process of determining its income tax liability for the tax year for which the return wasn’t filed,

2. Voluntarily identified itself to the IRS as having failed to file a U.S. income tax return before the IRS discovered the failure to file,

3. Was aware of its ability to file a protective return before the deadline for doing so,

4. Hadn’t previously filed a U.S. income tax return,

5. Failed to file a U.S. income tax return because, after exercising reasonable diligence, the corporation was unaware of the necessity for filing the return, and

6. Failed to file a U.S. income tax return because of intervening events beyond its control.

Examiners also are instructed to consider any other mitigating or exacerbating factors.

Effective Date

The LB&I memo states that its purpose is to ensure that examiners analyze waiver requests in a “fair, consistent and timely manner.” The guidelines are effective as of February 1, 2018, and will be added to the Internal Revenue Manual within two years of that date.

More than 100 Countries Agree to Seek Digital Tax Consensus by 2020

Some 110 countries have agreed to work toward forming an international consensus by 2020 on how to tax digital businesses across borders, according to the Organization for Economic Co-operation and Development (OECD).

In a report commissioned by G20 powers, the OECD said the countries had agreed to review decades-old pillars of the international tax system that the digital economy has increasingly rendered out of date. The report acknowledges that there was a range of positions that would need bridging, with some countries considering that nothing needs to be changed.

Sufficient Presence

At the heart of the issue are rules on what constitutes a sufficient presence of a company in a country for it to be taxed there, and how profits are allocated across borders in multinational groups. For years, big digital companies such as Google, Apple and Amazon could legally slash their tax bills in some countries, leaving other governments furious.

In the absence of an international solution, some countries like India, Australia and various European countries have set out on their own to close loopholes.

Pressed by France and Germany, the European Commission has proposed that large companies with significant digital revenues in the European Union face a 3% tax on their turnover in the 28-nation bloc.

“Positive and Important Step”

After meeting with his German counterpart in Paris, French Finance Minister Bruno Le Maire, who has made a political priority to recover more tax from digital companies, described the OECD report as a “positive and important step.”

U.S. Treasury Secretary Steven T. Mnuchin stated, “The U.S. firmly opposes proposals by any country to single out digital companies. Some of these companies are among the greatest contributors to U.S. job creation and economic growth. Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers.” He added, “I fully support international cooperation to address broader tax challenges arising from the modern economy and to put the international tax system on a more sustainable footing.”

IRS to End Offshore Voluntary Disclosure Program in September

The IRS announced it will begin to ramp down its Offshore Voluntary Disclosure Program (OVDP) and close it on Sept. 28, 2018. This gives taxpayers with undisclosed foreign financial accounts time to still use the program.

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.” The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed similar voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past noncompliance related to failure to report foreign financial assets and file foreign information returns.

Unlike the previous OVDPs, the current program doesn’t impose a deadline that taxpayers must meet to make the disclosure and be eligible for avoiding criminal prosecution and paying reduced penalties. However, the IRS has indicated that it can terminate the program at any time.

The tax agency stated that complete offshore voluntary disclosures must be received or postmarked by September 28, 2018, and can’t be partial, incomplete, or placeholder submissions. Practitioners and taxpayers must ensure complete submissions by the deadline to request to participate in the OVDP.

Since the program’s initial launch, more than 56,000 taxpayers have used the voluntary disclosure programs, paying a total of $11.1 billion in back taxes, interest and penalties.

Other Enforcement Tools and Options

The IRS stated that it will continue to use tools beyond voluntary disclosure to combat offshore tax avoidance, including taxpayer education, whistleblower leads, civil examination and criminal prosecution.

The tax agency also noted it has a separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations. These procedures are currently available to eligible taxpayers but, like the OVDP, may be ended by the IRS at some point.

Finally, the IRS noted that the passing of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure tax compliance have raised awareness of reporting obligations related to undisclosed foreign financial assets. Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:

    • IRS-Criminal Investigation Voluntary Disclosure Program,
    • Streamlined Filing Compliance Procedures,
    • Delinquent FBAR submission procedures, and
    • Delinquent international information return submission procedures.

Coming Forward

If you have an unreported foreign account and are interested in the IRS disclosure program, contact your tax advisor about how to proceed.

The Bureau of Economic Analysis 2018 Benchmark Survey 

The time has come again for the Bureau of Economic Analysis (BEA) to conduct the benchmark survey of foreign direct investments in the United States. The BEA conducts this survey every five years and it will take place in 2018 covering the year ended December 31, 2017.  The BEA uses the information collected to produce various statistics about foreign-owned U.S. businesses and their impact of direct investment on jobs, wages, productivity and taxes.  The survey is required by any U.S. business that had a foreign owner with a voting interest or control of 10% or more at the end of 2017.

The BEA has different benchmark forms as part of the survey. In determining which particular BEA form applies to your business will be dependent upon a series of factors, such as; gross sales, total assets, and net income or loss. As such, it is imperative that you discuss with your tax advisor as soon as possible to determine which form will apply in your specific circumstance, and what information will be required.      

The survey forms are due by May 31, 2018, and it is important to note the BEA can impose a series of civil penalties and members of the organization are vulnerable to imprisonment under extreme circumstances.

If you believe that you may have a filing requirement or have any further questions, please contact Sol Schwartz & Associates, P.C. at 210-384-8000 and one our experienced team members will be glad to assist you.

Subpart F Income

Overview

U.S businesses with foreign subsidiaries are required to pay tax on the foreign income only when they repatriate the foreign earnings through distribution of dividends. This is known as income tax deferral. Prior to Subpart F, many U.S. entities lowered tax liability by moving income to foreign subsidiaries in low or no-tax jurisdictions. Congress prohibited this type of deferral by enacting Subpart F.

Subpart F rules tax U.S shareholders on their pro rata share of certain income categorized as Subpart F income (later discussed what income is Subpart F) earned by Controlled Foreign Corporations (CFCs) regardless if there was an actual distribution. To be a CFC, the foreign entity must be owned by U.S. persons. Each U.S. person should own more than 10% of the foreign corporation’s stock and together the U.S. persons should own more than 50% of the foreign corporation’s stock. The stock ownership rule can be through direct, indirect, or constructively ownership.

When the CFC distributes its earnings and profits to the U.S. shareholders, they will not be taxed again. The earnings and profits have been previously taxed in the period that the CFC generated such earnings.

Types of Subpart F Income

As mentioned before, Subpart F income is taxable to U.S. shareholders in the year earned even if the CFC does not distribute the income. The income earned by CFC that qualifies as Subpart F income consists mainly of movable income. The major category is Foreign Base Company Income (FBCI). FBCI is divided further into Foreign Personal Holding Company Income (FPHCI), which includes dividends, interest, rents, and royalties.

In addition, other forms of FBCI are Foreign Base Company Sales Income (FBCSI), which is income received by a CFC from the purchase or sale of personal property involving a related person, and Foreign Base Company Service Income (FBCSI), which is income from services by or on behalf of a related person. Other types of Subpart F income include insurance income, international boycott income, and investment in earnings in U.S property.

Exclusions

Subpart F has exceptions. The most common exclusion is the amount included, as Subpart F income is limited to the CFC’s undistributed earnings and profits. Another common exclusion is the De minimis rule, which allows CFCs to not report Subpart F income only if the sum of FBCI and gross insurance income is less than 5% of the CFC’s total gross income or $1M. Opposite to the De minimis rule is the De maximus rule, which will treat all CFC’s income as Subpart F income if FBCI plus gross insurance income is more than 70% of CFC’s total gross income. A third exclusion is the high tax exception. This indicates that if an item is taxed at more than 90% of the highest U.S. rate (35% * 90%= 31.5%), the income will not be treated as Subpart F income.

This article is intended to provide general definitions and exclusions related to Subpart F. The provisions of Subpart F contain many other rules, exclusions, and limitations that must be carefully analyzed to comply with the tax law.

Please contact Sol Schwartz & Associates, P.C. for more information and any questions for your specific business.

Andy Najera is a Tax Associate with Sol Schwartz & Associates. Andy is a member of the firm’s International niche that specializes in identifying and implementing solutions to achieve the goals of the international (inbound and outbound) clientele we serve. You can contact Andy at 210.384.8000.