The 2017 Tax Cuts and Jobs Act (TCJA) enacted significant changes to the U.S. international tax regime. U.S. shareholders are affected by the changes that impact the U.S. tax consequences of owning a foreign corporation. The TCJA revised the technical rules applicable to U.S. shareholders of controlled foreign corporations (CFCs). Along with issuing guidance on how to calculate and report taxable earnings of CFCs, the IRS has updated and revised the U.S. federal Form 5471.
A U.S. shareholder of a foreign corporation may be required to file the Form 5471. There is a $10,000 USD penalty for the failure to file a complete and accurate Form 5471 on time. A continuation penalty of $10,000 USD may apply for each 30-day period that the delinquency continues after the IRS sends a notice.
The Form 5471 is filed on an annual basis by a U.S. shareholder that owns at least 10% of the vote or value of a CFC. The Form 5471 is also required to be filed in a year when a U.S. shareholder acquires or disposes of a 10% ownership interest in a foreign corporation. A nonresident individual must file a Form 5471 in a year when the individual becomes a U.S. tax resident while owning at least 10% of a foreign corporation. A U.S. individual officer or director must file the Form 5471 in a year when any U.S. person acquires at least 10% ownership of a foreign corporation. A U.S. shareholder that controls a foreign corporation must file the Form 5471 each year. There are different attribution of ownership rules that may apply in determining control for the Form 5471 reporting and whether a foreign corporation is a CFC. It is possible that a U.S. shareholder would be required to file the Form 5471 based on control due to constructive ownership from a nonresident person even though the foreign corporation is not a CFC.
The TCJA’s reinstatement of downward attribution also has made a significant impact in determining whether a foreign corporation is a CFC. However, a possible Form 5471 filing exception may apply to mitigate the reporting burden. Downward attribution may attribute a foreign person’s ownership of a foreign corporation to a U.S. corporation to create CFC ownership. This can happen when the foreign corporation is owned directly or indirectly by the same foreign person that also owns at least 50% directly or indirectly of the U.S. corporation.
The many changes to the Form 5471 include the addition of a new filer category applicable to U.S. shareholders of specified foreign corporations for purposes of the IRC section 965 transition tax. A specified foreign corporation is a CFC or a foreign corporation that is not a CFC if there is at least one 10% U.S. C corporation shareholder. A 10% U.S. shareholder of a specified foreign corporation files the Form 5471 as a Category 1 filer on an annual basis. This new filing requirement applies even if the U.S. shareholder did not report transition tax with respect to the specified foreign corporation.
Other changes to the Form 5471 include substantive revisions and new schedules added. The Schedules C, E, E-1, F, G, I-1, J, and P were updated with changes for reporting effective beginning with the year 2018. The Schedule E now includes comprehensive tracking and reporting of foreign income taxes paid or accrued by the foreign corporation. The foreign taxes are now reported on Schedules E and E-1 according to the various categories of non-previously taxed earnings profits and the previously taxed earnings and profits, referred to as PTEP, to which the taxes relate. PTEP is created when a U.S. shareholder of a CFC has a taxable income inclusion of undistributed earnings from a CFC. These inclusions may arise from IRC section 965 transition tax, Subpart F income, IRC section 956 for CFC earnings invested in U.S. property, and from IRC section 951A global intangible low-taxed income (GILTI). The Form 5471, Schedule I-1 is the new schedule that reports GILTI.
The revised Form 5471, Schedule G now includes an extensive list of technical questions that require specialized competence in U.S. international tax reporting to be able to address accurately. The last question on the Schedule G incorporates by reference another extensive list of questions that are set forth in a schedule in the IRS Form 5471 filing instructions.
The Form 5471, Schedule J also includes much more detailed tracking and reporting of earnings and profits based on the various categories of non-previously taxed earnings and profits and PTEP. The Schedule J reports 100% of the foreign corporation’s current earnings and profits (CEP) and accumulated earnings and profits (AEP). The new Schedule P reports only the U.S. filer’s share of the PTEP. Schedules J and P are particularly important and useful for the tracking of a CFC’s distributions out of different categories of earnings and profits. There can be different U.S. tax consequences to the U.S. shareholder depending on whether a CFC distribution is made out of PTEP or non-previously taxed E&P. Additional technical requirements apply to CFC distributions depending on whether a U.S. individual shareholder has an IRC section 962 election in effect for the year of an inclusion of undistributed earnings.
The IRS has issued Notice 2019-01 which provides guidance for the ordering rules applicable to distributions from CFCs out of the various categories of PTEP. The IRS is working on the new regulations under IRC section 959 regarding the ordering rules for distributions of a CFC’s earnings and profits. To date, the IRS has not issued the new regulations.
Aronson LLC’s international tax services team has developed a high level of proficiency and capability with the preparation of the revised and updated U.S. federal Form 5471. We also bring specialized capability to U.S. taxpayers regarding the proper classification of PTEP in the respective categories and the impact of CFC distributions with and without the IRC section 962 election for individuals.
For more information regarding how the Form 5471 reporting requirement may apply to a U.S. taxpayer, please contact Alison Dougherty at 301.222.8262.