Is your company a foreign-owned U.S. subsidiary or a foreign company doing business in the U.S.? Are you a foreign individual living and working in the U.S.? Is your U.S. company paying interest, dividends, or royalties to a foreign party?
If the answer is “yes” to any of these questions, making sure all the Internal Revenue Service (IRS) reporting requirements applicable to your circumstance are filed is critical to avoid penalties and take full advantage of tax treaty benefits.
As the global economy grows, the IRS continues to scrutinize the reporting requirements applicable to foreign persons and U.S. companies with foreign transactions. It is important to fully understand any U.S. obligations, because failure to report income, activities, and investments can lead to extensive penalties. Below is an overview of some common U.S. reporting requirements.
Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
Form 5472 is a high exposure reporting requirement and can be considered the IRS’s roadmap to understanding global transactions between domestic and foreign related parties. Many of the transactions reported on Form 5472 require other reporting or U.S. tax withholding with applicable penalties for noncompliance. Penalties of $10,000 will be assessed by the IRS for failure to file a Form 5472 when due, and in the manner prescribed.
Form 5472 applies to any U.S. corporation with 25 percent direct, or indirect, foreign ownership and reportable transactions with a foreign- or domestic-related party during the tax year. Reportable transactions include loans, sales of goods and services, commissions, rent, royalties, interest and other amounts paid or received. Separate 5472s are required for each related party with reportable transactions. This form is included in the taxpayer’s U.S. corporate income tax return.
W-8BEN and W-8BEN-E – Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals and Entities)
U.S. tax withholding is required on fixed or determinable, annual or periodical (FDAP) payments, such as interest, dividends, rents, royalties, and other similar payments to foreign parties, individual or entities. The U.S. tax withholding rate is 30 percent; however, income tax treaties often reduce or eliminate the withholding.
A U.S. entity making FDAP payments to a foreign party is required to obtain documentation, generally a Form W-8BEN or W-8BEN-E, to support a payee’s status and treaty benefit claims and to determine the U.S. tax withholding before making the payment. It is a best practice for U.S. companies to request a W-8 from every foreign party to which it makes any type of payment, not just FDAP payments.
With the increased enforcement of the Foreign Account Tax Compliance Act (FATCA) rules, a non-resident alien individual or foreign entity should anticipate the request to provide a Form W-8BEN or W-8BEN-E when conducting any type of business with a U.S. entity. A U.S. Taxpayer Identification Number (TIN) or foreign TIN may be required.
Form 1042–Annual Withholding Tax Return for U.S. Source Income of Foreign Person
Form 1042 is used to report payments of FDAP income such as interest, dividend, rent, and royalty to foreign parties (individual or entities). This form is required whether or not U.S. tax was required to be withheld.
Form 1042 is required to be filed by March 15 of the year following the calendar year being reported, and Form 1042-S must be provided to the recipient of the income.
Form 8926 – Disqualified Corporate Interest Expense
Form 8926 is required in certain circumstances to prevent earnings stripping, and may be applicable when a corporation has a debt-to-equity ratio exceeding 1.5 to 1. When interest is paid or accrued to a related party who is either not subject to U.S. income tax on interest or has a reduced rate of U.S. income tax on interest due to an income tax treaty, this form is used to calculate how much of the interest expense is currently deductible. Form 8926 is included in the taxpayer’s U.S. corporate income tax return.
1120-F – U.S. Income Tax Return of a Foreign Corporation
Form 1120-F is used to report income, gains, losses, deductions, credits, and to calculate the U.S. income tax liability of a foreign corporation. It is also used to claim any refund that is due, to file a treaty-based position on Form 8833 or to calculate and pay branch profits tax liability. Form 1120-F is due by the 15th day of the third month or sixth month after the end of the foreign corporation’s tax year, depending on whether the foreign corporation has an office or place of business in the U.S.
1040NR – U.S. Non-resident Alien Income Tax Return
All non-resident alien individuals are required to file Form 1040NR if they are engaged in trade or business within the United States, if they have U.S. source income or if they are claiming a treaty-based position. Form 1040NR is due on April 15 for the previous calendar year end. If the non-resident alien did not receive wages as an employee subject to U.S. income tax withholding, Form 1040NR is due on June 15 for the previous calendar year end.
Form 8938 – Statement of Specified Foreign Financial Assets
Specified individuals, including U.S. resident aliens, are required to file Form 8938 if they have an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold. Form 8938 is included with the taxpayer’s individual income tax return.
The IRS anticipates issuing regulations that will require a domestic entity to file Form 8938, but until they do, the filing requirement only applies to individuals.
The above provides a brief summary of the most common forms encountered by foreign parties and U.S. parties with global transactions. There are many other forms that could also apply. When coming to the U.S., we recommend speaking to a U.S. tax advisor to assist with meeting reporting obligations in order to avoid penalties and to take advantage of treaty benefits.