tax nasc far western chapter annual conference international tax update and reporting monterey,...

TAX

NASC Far Western Chapter Annual Conference

International Tax Update and Reporting

Monterey, CaliforniaMay 27, 2010

NASC Far Western Chapter Annual Conference

International Tax Update and Reporting

Monterey, CaliforniaMay 27, 2010

2 © 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

FOR INTERNAL USE ONLY.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED,

AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF

(i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to

specific situations should be determined through consultation with your tax adviser.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED,

AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF

(i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to

specific situations should be determined through consultation with your tax adviser.



DATED MATERIAL

The material contained in these course materials is current as of the date produced. The materials have not been and will not be updated to incorporate any technical changes to the content or to reflect any modifications to a tax service offered since the production date. You are responsible for verifying whether or

not there have been any technical changes since the production date and whether or not the firm still approves

any tax services offered for presentation to clients. You should consult with Washington National Tax and Risk Management-Tax as part of your due diligence.

DATED MATERIAL

The material contained in these course materials is current as of the date produced. The materials have not been and will not be updated to incorporate any technical changes to the content or to reflect any modifications to a tax service offered since the production date. You are responsible for verifying whether or

not there have been any technical changes since the production date and whether or not the firm still approves

any tax services offered for presentation to clients. You should consult with Washington National Tax and Risk Management-Tax as part of your due diligence.

© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.FOR INTERNAL USE ONLY. 4

ObjectivesObjectives

Discuss the tax compliance activities for cooperatives relating to international operations or transactions

Identify common issues, elections, and planning opportunities that may arise when dealing with multinational cooperatives


AgendaAgenda

Part I: U.S. Reporting Overview

Part II: Forms and Schedules

Part III: Other Items of Importance



Part I: U.S. Reporting OverviewPart I: U.S. Reporting Overview


U.S. Reporting OverviewU.S. Reporting Overview

US COOPERATIVE

FOREIGN ENTITY

Form 1120-C (and Form 1118 if elected)


U.S. Reporting OverviewForms 5471 and 5472U.S. Reporting OverviewForms 5471 and 5472

US CO-OP

Form 5471

51%

FOREIGN

49%

Controlled Foreign CorporationCFC

US CO-OP

Form 5472

FOREIGN

From 1120F if:U.S. trade or business, regardless whether or not it had U.S. source income or exemption under a treatyIncome effectively connected to a U.S. trade or businessU.S. source incomeClaiming treaty benefits with respect to the items listed above

FOREIGN ENTITY(income effectively connect to a USTB)

FOREIGN

Form 5472


U.S. Reporting OverviewForms 8865 and 1065U.S. Reporting OverviewForms 8865 and 1065

US CO-OP

Form 8865

ForeignPartnership

51%

FOREIGN

49%

US CO-OP

25%

FOREIGN

75%

Form 1065*

ForeignPartnership

Form 1065*

If ECI or U.S. Source FDAP If ECI or U.S. Source FDAP

If a reportable event

Form 8865

*K-1s required for U.S. partners and passthrough U.S. partners only


U.S. Reporting OverviewForm 1065U.S. Reporting OverviewForm 1065

Form 1065 is used by both U.S. and foreign partnerships

Generally, a foreign partnership files Form 1065 if it has gross income:

Effectively connected to a trade or business within the U.S.

or

Derived from sources within the U.S.

A foreign partnership required to file Form 1065 generally must report all of its foreign and U.S. source income

A foreign partnership filing Form 1065 solely to make an election need only provide its name, address, and EIN on page 1 and attach the appropriate statement


U.S. Reporting OverviewForm 1065—ExceptionsU.S. Reporting OverviewForm 1065—Exceptions

Exceptions to Filing

Foreign partnerships that has U.S. source income equal to or less than $20,000 and has no ECI

And only if: Less than 1% of any partnership item of income, gain, loss, deduction, or credit was allocable to direct U.S. partners

Foreign partnership that has U.S. source income, but has no ECI and no U.S. partners

All required Forms 1042 and 1042-S were filed,

The tax liability of each partner was withheld at the source (if applicable), and

Not a withholding foreign partnership

Other foreign partnerships with no ECI may have modified filing obligations


U.S. Reporting OverviewU.S. Reporting Overview

US CO-OP US CO-OP

51%

FOREIGN

49%

Disregarded EntityFDE

Form 8858 Form 5471

Foreign Reverse HybridF—Ptnr

US—Corp

US CO-OP

51%

FOREIGN

49%

Hybrid Foreign EntityF—CorpUS—Ptnr

Form 8865

Form 1120F Form 1065

If USTB, ECI orU.S. Source FDAP

If ECI or U.S. Source FDAP



Part Ii: Forms and SchedulesPart Ii: Forms and Schedules


Forms and SchedulesForms and Schedules

Form 5471, CFC Information Return

Form 5472, 25% Foreign-owned U.S. Corp or Foreign Corp with ETB

Form 926, Transfer of U.S. Property to a Foreign Corp

Form 1120F, Foreign Corp Tax Return

Form 8865, CFP Information Return

Form 8858, FDE Information Return

Form 1118, Foreign Tax Credit


Form 5471—Annual Accounting PeriodForm 5471—Annual Accounting Period

Except for Schedule O report information for the tax year of the foreign corporation that ends with or within your tax year Example

For Schedule O, report acquisitions, dispositions, and organizations or reorganizations that occurred during the U.S. person’s tax year

1/1 12/316/30Foreign Corporation

U.S. Person

The U.S. Person would report the foreign corporation’s activity for the annual year ended 12/31.


Form 5471—Benefits of Good ReportingForm 5471—Benefits of Good Reporting

Benefits of Reporting Accurate and Complete Information on Form 5471

Earnings and profits history—minimizes the complexity and cost of a study

History of foreign income taxes paid—facilitates calculation of dividend income and deemed paid credit

Source of information regarding foreign financial statements, subpart F income, distributions, foreign taxes paid or accrued, etc.

Information may be needed for future restructurings and reorganizations

Minimizes costly and time-consuming examinations

Avoids penalties

ILM 200748006—Form 5471 Reasonable Cause May Apply

Changes in HIRE ACT


Form 5472—PurposeForm 5472—Purpose

Generally, a reporting corporation must file Form 5472 if it had a reportable transaction with a foreign or domestic related party

Form 5472 is used by the IRS to obtain information about transactions between the related parties to conduct a proper audit

The IRS’ procedures relate directly to possible adjustments under § 482 and all other Code sections that affect the tax treatment of transactions between related parties



Form 926, Transfer of Property to a Foreign Corp

Form 926, Transfer of Property to a Foreign Corp



Transfers of property offshore creates the possibility of tax avoidance when nonrecognition provisions would normally render the transaction tax-freeForm 926 provides the IRS with detailed information on transfers by U.S. persons of property to a foreign corporation.


Form 926—Who Must FileForm 926—Who Must File

U.S. persons that make certain outbound transfers of property to foreign corporations pursuant to the corporate liquidation, organization and reorganization provisions of the Internal Revenue Code (§§ 332, 351, 354, 355, 356, or 361)

Note: A U.S. person who transfers property to a foreign partnership in a contribution described in § 721 reports this transfer on Schedule O, of Form 8865



Form 8865 CFP Information Return

Form 8865 CFP Information Return



Reporting rules similar to those applicable for controlled foreign corporations

Used by the IRS to monitor transactions between U.S. persons and foreign partnerships, including:

Contributions of property by U.S. 10% or greater partners to the foreign partnership

Acquisitions, dispositions and substantial changes of proportional interests of U.S. partners in the foreign partnership


Form 8865—Categories of FilersCategory 1Form 8865—Categories of FilersCategory 1

A U.S. person who controlled the foreign partnership at any time during the partnership’s tax year

Control = 50% or more direct or constructive interest in the partnership

A 50% interest is equal to:50% of capital,

50% of profits, or

50% of the deductions of losses

For determining constructive ownership refer to the rules under § 267(c) (excluding § 267(c)(3))

There may be more than one Category 1 filer for a partnership for a particular partnership tax year


Form 8865—Categories of FilersCategories 2 and 3Form 8865—Categories of FilersCategories 2 and 3

Category 2 Filer

A U.S. person who owned 10% of the partnership during the year while the partnership was controlled by 10% or greater U.S. partners

If the partnership had a Category 1 filer, no partner will be considered a Category 2 filer

Category 3 Filer

A U.S. person who contributed property to a foreign partnership in a section 721 transaction if the U.S. person:

Owned 10% of the partnership, directly or constructively, or

The value of the property contributed exceeds $100,000


Form 8865—Categories of FilersCategory 4Form 8865—Categories of FilersCategory 4

A U.S. person that had a reportable event under section 6046A during the year, including:

Certain acquisitions of interests in the foreign partnership where either:

The U.S. persons direct interest in the partnership increased to 10% (e.g., from a 9% interest to a 10% interest), or

The U.S. persons direct interest in the partnership increased by 10 percentage points (e.g., from 11% to 21%)

Certain dispositions of foreign partnership interests

Certain changes in proportionate interest in the foreign partnership


Form 8858—DefinitionsForm 8858—Definitions

Foreign Disregarded Entity (FDE)A business entity that is not formed in the U.S. and is treated for U.S. tax purposes as disregarded as an entity separate from its owner pursuant to a CTB election (Treas. Reg. § 301.7701-2 and 3)

Form 8858 does not apply to a “true branch” (unincorporated operation)

Tax Owner of the FDEPerson that is treated as owning the assets and liabilities of the FDE for U.S. federal tax purposes

Direct Owner of the FDELegal owner of the FDE


FDE(Germany)

Form 8858—DefinitionsTax Owner and Direct Owner Example 1Form 8858—DefinitionsTax Owner and Direct Owner Example 1

CFC is a tax owner of the FP and FDE

CFC is a direct owner of FP

FP is a tax owner and direct owner of FDE

U.S. CO-OP

CFC(Canada)

FP(France)



Form 1118, Foreign Tax CreditForm 1118, Foreign Tax Credit


Foreign Income TaxesCredit vs. DeductionForeign Income TaxesCredit vs. Deduction

Foreign Tax Credit

Annual Election

Dollar for dollar credit against U.S. tax payable.Subject to limitation

Available for creditable foreign income taxes and for any taxes paid in lieu of an income tax

File Form 1118 to claim the credit

Deduction to Taxable Income

Deduction may be taken in lieu of credit (§ 164(a))


Other Items of ImportanceOther Items of Importance

Relevant Information Reporting Code SectionsPenalties for failure to submit information Statute of LimitationsWithholding TaxMaking an Initial Entity Classification ElectionForm 1120-C, Schedule N, Foreign Operations of U.S. CorporationsForm 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing FundList of other relevant forms


Relevant Information Reporting Code Sections Relevant Information Reporting Code Sections

For your reference below is a list of the Internal Revenue Code sections that require information reporting with respect to Forms 5471, 5472, 926, 8865, and 8858. Further guidance is available in the regulations under these Code sections

§ 6038 requires U.S. persons that control certain foreign corporations and/or partnerships to report certain transactions of the foreign corporation and/or partnership

Form 5471, 8858, and 8865

§ 6038B requires U.S. persons to report certain transfers of property to foreign corporations and foreign partnerships, as well as certain liquidation distributions to non-U.S. persons

Forms 8865 and 926


Relevant Information Reporting Code Sections (Cont’d)Relevant Information Reporting Code Sections (Cont’d)

§ 6038A and 6038C requires a 25% foreign owned U.S. corporation or a foreign corporation engaged in a USTB to report certain transactions with a foreign or domestic related party

Form 5472

§ 6046 requires a return to be made by certain U.S. persons who are or become officers or directors of foreign corporations, or make certain acquisitions of the stock of foreign corporations;

Form 5471

§ 6046A requires U.S. persons to report certain acquisitions and dispositions of interests in foreign partnerships, along with substantial changes in the proportional interests in foreign partnerships

Form 8865



Penalties for Failure to Submit Information

Penalties for Failure to Submit Information


Civil Penalties§ 6038 Information ReportingCivil Penalties§ 6038 Information Reporting

Applies to Forms 5471, 8865, and 8858

$10,000 penalty for failure to furnish required information for each annual accounting period for each entity

If failure-to-file continues for more than 90 days after IRS notice, IRS may impose an additional $10,000 penalty for each 30-day period (or fraction thereof), up to $50,000 maximum additional penalty for each entity

FTC reduction penalty: Potential loss of a portion of foreign taxes available for credit under §§ 901, 902, and 960


Civil Penalties§ 6038A Information ReportingCivil Penalties§ 6038A Information Reporting

Applies to Form 5472

$10,000 penalty for failure to furnish required information for each annual accounting period for each entity

Each member of a group of corporations filing a consolidated information return is a separate reporting corporation subject to a separate $10,000 penalty

If failure-to-file continues for more than 90 days after IRS notice, IRS may impose an additional $10,000 penalty for each 30-day period during which the failure continues after the 90-day period ends


Civil Penalties § 6038B Transfers to Foreign PersonsCivil Penalties § 6038B Transfers to Foreign Persons

Applies to Forms 926 and 8865, Sch. O

A penalty equal to 10% of the FMV of the property at the time of the transfer

Limited to $100,000, unless the failure is due to intentional disregard

The transferor must recognize gain on the contribution as if the contributed property had been sold for its FMV


Civil Penalties§§ 6046 and 6046A Reportable TransactionsCivil Penalties§§ 6046 and 6046A Reportable Transactions

Applies to Forms 5471 and 8865

$10,000 penalty for each failure to file for each reportable transaction

If failure-to-file continues for more than 90 days after IRS notice, IRS may impose an additional $10,000 penalty for each 30-day period (or fraction thereof), up to $50,000 maximum

§ 6046 penalties implemented by § 6679


Criminal PenaltiesCriminal Penalties

Criminal penalties under § 7203, 7206, and 7207 may also apply for failure to submit information or for filing false or fraudulent information


Recent Developments for Forms 5471Recent Developments for Forms 5471

IRS LMSB Letter Concerning Form 5471

“Beginning January 1, 2009, the Internal Revenue Service Center will automatically assert appropriate penalties on late filed Forms 1120 with Forms 5471 attached”

This will not preclude the IRS from assessing penalties prior to January 1, 2009

The penalty for a late filed or incomplete Form 5471 applies even if no tax is due



Statute of LimitationsStatute of Limitations


Statute of Limitations§ 6501(c)(8)Statute of Limitations§ 6501(c)(8)

§ 6501(c)(8) provides rules for failure to report information under IRC §§ 6038, 6038A, 6038B. 6046, 6046A, and 6048 Similar to other U.S. income tax returns the statute of limitation is limited to three yearsThe three-year statute of limitation begins to run when the form is timely filed and complete

E.g. A taxpayer timely files Form 1120-C for its year end 1999, but fails to attach Form 5471. In 2002, this taxpayer files the Form 5471 to report its 1999 transactions, which was originally due in 2000 with its 1999 Form 1120-C. In this case the statute of limitations runs from 2002–2005 FORMER LAW: This extension of the statute of limitations does not apply to the entire income tax return. In the above example, the statute of limitations for the Form 1120 is not affected by the late filing of the Form 5472


Statute of LimitationsRecent Changes to § 6501(c)(8)Statute of LimitationsRecent Changes to § 6501(c)(8)

Public Law No. 111-147 significantly changes the limitations period for taxpayers required to file Forms 926, 3520, 3520-A, 5471, 5472, 8621, 8858 and 8865The period for assessment of tax for the entire return is extended until 3 years following reporting the appropriate information on those formsThat is, tax may be assessed on any return, even if unrelated to the information that was not reported, for a period 3 years following the date that information was appropriately reported.Congress has called these changes a “clarification of existing law”

As a result, any tax return that did not include information required under any of the relevant forms is potentially open for assessment


Statute of Limitations§ 6501(c)(8) (Cont’d)Statute of Limitations§ 6501(c)(8) (Cont’d)

Substantially Incomplete Forms

The determination of substantially incomplete forms is based on the rules provided under the relevant code section (IRC §§ 6038, 6038A, 6038B. 6046, 6046A, or 6048)

§ 6501(c)(8) will apply as if the form had not been filed



Withholding TaxWithholding Tax


U.S. Taxation of Investment IncomeU.S. Taxation of Investment Income

Generally, the United States taxes the gross amounts of a foreign person’s U.S. source non-business investment income that is not ECI

This non-business income is referred to as “FDAP” income

E.g., interest, dividends, rents, royalties, etc.

Generally, the person controlling the payment of income must deduct and withhold U.S. tax at 30% (or lower treaty rate)Certain FDAP items of a foreign person are not subject to gross-basis taxation

E.g., short-term OID, “portfolio interest”


Withholding FormsWithholding Forms

Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons Form1042-S, Foreign Person's U.S. Source Income Subject to WithholdingForm 1042-T, Annual Summary and Transmittal of Forms 1042-S


Withholding Forms (Cont’d)Withholding Forms (Cont’d)

W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding W-8 IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding W-8 ECI, Certificate of Foreign Persons Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States Form 8804, Annual Return for Partnership Withholding TaxForm 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax


Withholding Forms (Cont’d)Withholding Forms (Cont’d)

Form 8813, Partnership Withholding Tax Payment Voucher

From 8288, U.S. Withholding Tax Return for Disposition by Foreign Persons of U.S. Real Property Interests

Form 8828-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests

Form 8828-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests



Making an Initial Entity Classification ElectionMaking an Initial Entity Classification Election


Making an Initial Entity Classification ElectionMaking an Initial Entity Classification Election

Form 8832, Entity Classification

The form of the entity may be selected upon the inception of the business or at anytime during the operation of the business

A classification election, excluding an initial election, must be maintained for five years

See Treasury Regulation § 301.7701-2(b)(8) for the per se entity list

Due within 75 days from the date the entity was formed

An election will be effective on the date specified in the Form 8832 so long as the date specified is not more than 75 days prior to the date the election is filed and not more than 12 months after the date the election is filed



Form 1120-C, Schedule NForm 1120-C, Schedule N


Form 1120-C, Schedule N, Foreign Operations of U.S. CooperativesForm 1120-C, Schedule N, Foreign Operations of U.S. Cooperatives

Who Must File

U.S. domestic cooperatives that, at any time during the year, had assets in or operated a business in a foreign country or a U.S. possession may have to file Schedule N

Includes indirect ownership through subsidiaries, partnerships or disregarded entities



Form 8621, Return by a Shareholder of a PFIC or QEF

Form 8621, Return by a Shareholder of a PFIC or QEF


PFIC OverviewPFIC Overview

Anti-deferral regime prohibiting the ability of U.S. persons to defer U.S. taxation on passive investments channeled through foreign entities A PFIC is generally any foreign corporation that meets either an income test or an asset test

Income test—75% or more of its gross income for a taxable year is “passive income” Asset test—the average percentage of assets held by the corporation during the taxable year produce passive income or which are held for the production of passive income is at least 50%

Look-through—25% (assets and income)



List of Other Relevant FormsList of Other Relevant Forms


List of Other Relevant FormsList of Other Relevant Forms

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts

Form 8838, Consent to Extend the Time to Assess Tax Under Section 367-Gain Recognition Agreement

Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)


Presenter contact InformationPresenter contact Information

Phil Mogen

Principal

KPMG International Corporate Services

San Francisco, CA

(415) 963-7312

[email protected]

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