If you have decided to expand your business to the U.S. or already have a presence there, it is important to ensure you are compliant with the many types of reporting requirements. As international tax becomes more complex and with the Internal Revenue Service (IRS) scrutinizing foreign activity, partnering with a trusted U.S. tax professional will assist in alleviating some of the stresses that may accompany international companies navigating the U.S. tax code.

The below factors would require filing in the U.S.

• Starting an entity in the U.S. (even if it is dormant)
• Having trade or business in the U.S.( even by a foreign entity)
• Having or creating a Permanent Establishment (PE)
• Having nexus or a physical presence in the U.S.

Along with federal requirements, each of the 50 States has their own filing requirements although most are similar to federal. To ensure that you are taking the right steps, there are a few different topics that you can address.

Corporate Structure

Having a strong understanding of your corporate structure is important. Every tax filer needs to have an organizational chart with ownership and proper entity classifications (i.e. corporation, partnership, etc.). Additionally, you should be able to identify any prior tax elections, any prior correspondence with the IRS, and  any tax representations made to customers for any company in the chart.  Most notably, this includes any employer identification numbers received from the IRS and the ability to identify any entities electing to be disregarded.

Related Party Transactions

Documentation is key when it comes to compliance. You want to ensure that if you are approached with an audit, you can clearly provide proof of how your business’s functions, actions, and risks are allocated between each involved party. This documentation is typically covered in transfer pricing and should be organized and clear in providing easy explanations to whomever has requested the documentation.  If there are any related party transactions, the transfer pricing documentation will be requested under any IRS exam.

If you have related party transactions with foreign related persons or entities, there will be additional reporting forms in the U.S. that will need to be completed.  If you have not properly completed the necessary forms, there may be penalties ranging from $10,000 – $25,000 per omission. Types of U.S. International reporting forms include:

• Form 5472: Required if taxpayer is owned 25% or more by a foreign person and has transactions with any related party
• Form 5471: Required typically if a U.S. person controls a foreign subsidiary taxed as a corporation or if there is a 10% change in ownership of the U.S. Person.
  
  • This can lead to income being reported on the U.S. Taxpayers tax return (GILTI)
• Form 8865: Required typically if a U.S. person controls a foreign subsidiary taxed as a partnership or if there is a 10% change in ownership of the U.S. Person.
  
  • Income flows through to U.S. Taxpayer
• Form 8858: Required when a U.S. person controls a foreign disregarded entity
  
  • Income flows through to U.S. Taxpayer
• Form 114A (FinCen): Require report of foreign financial accounts (checking, savings, brokerage) if a U.S. person / entity owns directly or indirectly or has signature authority over a foreign bank account
• Series W-8 (W-8BEN, W-8BEN-E, W-8IMY, W-8ECI): Requested by U.S. persons paying foreign persons
  
  • You may need to provide a W-8 form to a customer to document no withholding on their payments to you
• Form 1042, 1042-T, and 1042-S: Used to report certain payments to foreign persons (Interest, Dividends, Royalty, Rents, etc.) and similar to Form 1099 for U.S Individuals
• Form 926: Required for transfer of property to foreign persons. This should be filed when transferring property to start a foreign corporation or when cash transfers exceed $100,000.

The international income tax regulations can be complex. In addition to the above topics, other considerations may include Global Intangible Low-Taxed Income (GILTI), Foreign Derived Intangible Income, and Base Erosion Anti-Abuse Tax. Having a trusted team of tax experts and advisors by your side can help provide clarity and ensure compliance for yourself and your company.

At BGBC, many of our clients trade internationally or have offshore subsidiaries or joint ventures. As a result, we have developed a keen understanding of the tax services needed by businesses that operate multi-nationally. For additional information on how we can support your venture, contact us today.

Steven A. Eichenberger, CPA
stevee@bgbc.com
(317) 860-1060