IRS to Deny Certain Changes to Foreign Corporations’ Accounting Periods The IRS has modified the circumstances under which it will approve requests for changes in annual accounting periods made by certain foreign corporations in 2017.  Under Revenue Procedure 2018-17, the IRS won’t approve any change to the annual accounting periods of some foreign corporations under both automatic or general rules if the change could result in the avoidance, reduction, or delay of the transition tax required by the Tax Cuts and Jobs Act (TCJA).
Generally, a taxpayer that wants to change its annual accounting period and use a new tax year must obtain the IRS’s approval. Changes in annual accounting periods are approved only if the taxpayer agrees to IRS terms, conditions and adjustments for putting the change into effect. IRS Concerns The IRS stated that the changes are needed to prevent a Section 965 specified foreign corporation with a taxable year ending on December 31, 2017, from avoiding the purposes of the newly enacted section by changing its taxable year. Sec. 965 was included in the TCJA and imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate, and the remaining earnings are taxed at a rate of 8%. The transition tax generally may be paid in installments over an eight-year period. For purposes of applying the new revenue procedure, a tax year of 52 to 53 weeks is deemed to begin on the first day of the calendar month nearest to the first day of that tax year. It is deemed to end or close on the last day of the calendar month nearest to the last day of the 52-53-week tax year (as applicable). How an Accounting Change Could Alter Taxation Specifically, the IRS noted: “For example, if a [deferred foreign income corporation (DFIC)] with the calendar year as its taxable year elected, effective for its taxable year beginning January 1, 2017, a taxable year closing on November 30, the election could defer by as much as 11 months a United States shareholder’s inclusion with respect to the DFIC under Section 965. Further, the election could, depending on the facts, reduce the amount of the tax liability of a United States shareholder of the DFIC by reason of Sec. 965, including through the reduction of the post-1986 earnings and profits of the DFIC.” That code section governs the “treatment of deferred foreign income upon transition to [the] participation exemption system of taxation.” Moreover, the election could, depending on the facts, reduce the amount of the tax liability of a U.S. shareholder, including through the reduction of the post-1986 earnings and profits of the DFIC. The IRS also has modified Revenue Procedures 2006-45 and 2009-39 to provide that — notwithstanding any other provision in those revenue procedures — neither will apply to a specified foreign corporation as defined in Sec. 965 if: - The specified foreign corporation’s tax year (determined without regard to the requested change) ends on December 31,
- The requested change was permitted, the first effective year of the corporation would begin on January 1, 2017, and would end on a date before December 31, 2017, and
- The specified foreign corporation has one or more U.S. shareholders that must include an amount in gross income with respect to the specified foreign corporation or any other specified foreign corporation (with such amount determined without regard to the requested change).
Change Aimed at Annual Periods Ending on December 31, 2017 The modification applies to any request to change an annual accounting period that ends on December 31, 2017, regardless of when the request was filed. |
FBAR Filing Extensions Will Become Automatic Starting this Year The Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, has explained that starting in 2018 it will automatically grant a six-month extension to October 15 to all taxpayers who miss the April 15, 2018, deadline for filing Reports of Foreign Bank and Financial Accounts (FBARs).  However, this year the filing date is April 17, rather than the traditional April 15. This year, April 15 falls on a Sunday, which would usually move the filing deadline to the following Monday — April 16. However, Emancipation Day — a legal holiday in the District of Columbia — falls on that Monday, which pushes the nation’s filing deadline to Tuesday, April 17, 2018. Under the tax law, legal holidays in the District of Columbia affect the filing deadline across the nation.
The previous due date was June 30 of the following calendar year and no extension was allowed. As part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, the FBAR due date was changed to April 15 to coincide with the federal income tax filing season. That legislation also mandates a maximum six-month extension of the filing deadline. Who must file an FBAR? United States persons are required to file an FBAR if: 1. They had a financial interest in or signature authority over at least one financial account located outside of the United States, and2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
United States persons include U.S. citizens, U.S. residents, entities — including but not limited to corporations, partnerships, or limited liability companies created or organized in the United States — and trusts or estates formed under the laws of the United States. There are filing exceptions for certain United States persons or foreign financial accounts, including: - Certain foreign financial accounts jointly owned by spouses,
- United States persons included in a consolidated FBAR,
- Correspondent/Nostro accounts (held by banks in a foreign currency in another bank),Foreign financial accounts owned by a governmental entity or by an international financial institution,
- Owners and beneficiaries of U.S. Individual Retirement Accounts,
- Participants in and beneficiaries of tax-qualified retirement plans,
- Certain individuals with signature authority over, but no financial interest in, a foreign financial account,
- Trust beneficiaries (if a U.S. person reports the account on an FBAR filed on behalf of the trust), and
- Foreign financial accounts maintained on a United States military banking facility.
Total Worldwide Income U.S. citizens and resident aliens are legally required to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Form 1040, Schedule B, “Interest and Ordinary Dividends,” to their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the countries where accounts are located. Certain taxpayers may also have to fill out and attach to their returns Form 8938, “Statement of Specified Foreign Financial Assets.” Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds $50,000 on the last day of the tax year, or $75,000 at any time during the tax year. Note: FinCEN Form 114 (FBAR) isn’t a tax form and isn’t filed with the IRS. The form must be filed electronically and is only available online through the Bank Secrecy Act E-Filing System website. |
IRS Boosts Fees on Advance Pricing Agreements The IRS is increasing the fee it charges multinational business taxpayers for a unilateral or bilateral advance pricing agreement (APA).  APAs are agreements that companies strike with the IRS to resolve potential transfer pricing disputes ahead of time. With an agreement on the prospective tax treatment of international commerce between related parties, the taxpayer gets greater certainty about its U.S. tax liability.
Two-Stage Process The increase will take effect in two-stages: 1. For APA requests filed after June 30, 2018, the fees will increase to $86,750 for new APAs, $48,500 for renewal APAs, $42,000 for small case APAs, and $17,750 for amendments to APAs.2. For APA requests filed after December 31, 2018, the fees will increase to $113,500 for new APAs, $62,000 for renewal APAs, $54,000 for small case APAs, and $23,000 for amendments.
Federal law and policy requires agencies, including the IRS, to charge a fee to recoup the cost of providing certain services to the public that confer special benefit to the recipients. In addition, the Internal Revenue Code authorizes or requires the IRS to charge user fees for other specified services. Generally, a user fee reimburses the IRS for the cost of providing the service. Periodically, federal agencies must review their user fees to determine whether they are recovering the full cost of providing relevant services and to determine if there are additional services for which the agencies should charge user fees. The last time APA fees were adjusted was in 2015 in the appendix of Revenue Procedure 2015-41. Apart from the changes above, the agency stated the fees in the appendix remain unchanged. Those fees are: - $60,000 for each APA request, except as otherwise specified,
- $35,000 for each request to renew an APA that does not propose a substantial expansion of the APA’s scope or a substantial change in the covered method(s) (other than updating of the results under the covered method(s)), provided that the pertinent facts remain substantially the same, unless such renewal is eligible for the small case APA user fee,
- $30,000 for each APA request eligible for the small case APA user fee, and
- $12,500 for each amendment to a current unilateral, bilateral or multilateral APA.
If multiple APA requests are filed by the same controlled group within a 60-day period, the maximum total fee charged will be $60,000, plus $30,000 for each foreign competent authority involved (if any) beyond the first two. Small Case APAs An APA request is eligible for the small case APA user fee only if the following apply: - The controlled group has sales revenues of less than $500 million in each of its most recent three back years,
- The aggregate value of the proposed covered issue(s) isn’t expected to exceed $50 million in any given year of the proposed APA years,
- The aggregate value of any transfer of rights in, or rights to use, intangibles isn’t expected to exceed $10 million in any given year of the proposed APA years, and
- No proposed covered issue involves intangible property arising from, or otherwise related to, an intangible development arrangement.
Partnership Withholding Tax  The United States tax system can be a little complicated and intimidating to foreign investors. It is important that investors know the different types of entity classifications available for them, and the tax implications of each. One of the various entities that investors can use is a Partnership. Although it is not the most recommended structure for foreign investors, it is available. Partnerships are considered flow-through entities; this means that the Partnership itself it not required to pay any income taxes. Although the entity is not subject to pay any income tax, it is required to file an annual tax return to report its activity for any given year. Along with the income tax return the Partnership issues forms K-1 to the partners. Forms K-1s report the income allocated to each partner. As simple as this process might sound, calculations can be complicated, especially when a foreign person owns a share of the partnership. According to Section 1446, if a partnership has effectively connected taxable income (ECTI) and any portion of such income is allocable to a partner who is not a U.S. Person, the partnership shall pay a withholding tax using the highest tax brackets on the gross amount of ECTI. Foreign person includes: A nonresident alien individual Foreign corporation Foreign partnership Foreign trust or Estate
What is ECTI? ECTI is all income from sources within the United States connected with the conduct of a trade or business. For example, Mr. Gonzalez is a Mexican citizen who is looking to invest in the United States. In a networking event, Mr. Gonzalez met Mr. Smith, an entrepreneur, citizen of the United States. Mr. Gonzalez explained to Mr. Smith that he owns a successful coffee shop in Mexico and he is interested in expanding his business into the United States. Mr. Smith likes the idea and decides to form a Partnership with Mr. Gonzalez’s, in which any income generated will be allocated 50 percent each. Mr. Gonzalez’s portion of income will be considered ECTI subject to withholding. How is the withholding calculated and paid? The withholding amount is calculated using the highest tax bracket applicable to the foreign person applied to the net amount of ECTI. The partnership, which is considered a withholding agent, remits four installments due on the 15th day of the fourth, sixth, ninth, and twelfth months of the calendar year. Filing Requirements The annual return for Partnership withholding tax is due on the 15th day of the third month after the Partnership’s tax year. The Partnership reports the ECTI income generated in the whole year and calculates the withholding amount, any excess withholding is paid when the annual withholding return is filed. On the other hand, the foreign partners are now responsible for filing a tax return in the United States. The tax return filed by the foreign partners will report the portion of the partnership income and the amount withheld allocated to them. The foreign partners will take a credit for the amount withheld and are eligible to receive a refund for any excess amount withheld. Penalties Penalties for late payment of tax go from 1/2 of 1% for each month the quarterly payment is late. If the annual return for Partnership withholding is filed late, there will be an additional penalty of 5% imposed for each moth the return is late. Penalties can escalate to up to 25%. Conclusion Partnerships with foreign investors as partners have additional filing requirements that can get complicated. It is important that foreign investors get professional advice before entering a partnership to evaluate the best type of entity for them.
Adriana Olivares, CPA is a Senior Tax Associate with Sol Schwartz & Associates, P.C. Adriana practices in various areas of public accounting including tax compliance and consulting for individual, corporate, S corporation and partnership taxation. She 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 Adriana via email at aoc@ssacpa.com or 210 384 8000. |
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