Form 5471: Information Return of US Persons with Respect to Certain Foreign Corporations

Form 5471: Information Return of US Persons with Respect to Certain Foreign Corporations

This article will discuss the reporting requirements of foreign corporations owned by US taxpayers. Internal Revenue Code Section 6038, enacted in 1960 to assist the Service in preventing multinational corporations and other U.S. persons from evading tax through the abusive use of foreign subsidiaries, imposes a reporting requirement (Form 5471) on every U.S. person that “controls” a foreign corporation for an uninterrupted period of 30 days or more during the foreign corporation’s annual accounting period.

• “Control” for these purposes is defined as ownership of the corporation’s stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock.
• If the foreign corporation is a “Controlled Foreign Corporation” (CFC) under subpart F of the Internal Revenue Code, any “U.S. Person” that is a “U.S. Shareholder” of the CFC is also required to report.
• A “U.S. Shareholder” of a CFC is any U.S. person who owns, or is considered as owning under the IRS attribution rules, 10 percent or more of the total combined voting power of the CFC’s stock.
• A “U.S. Person” is any US citizen or alien admitted for permanent residence in the United States, and any corporation, partnership, or other organization organized under the laws of the United States.

Thus, there are two categories of persons required to file a Form 5471:

The information reported on Form 5471 is furnished for the annual accounting period of the foreign corporation ending with or within the reporting person’s taxable year. The Service uses Form 5471 to ensure that related party transactions of the foreign corporation satisfy the arm’s length standard of Section 482 as well as to enforce subpart F, foreign personal holding company, and foreign tax credit provisions.

The information reported to the IRS on Form 5471 includes:

• Ownership and Key Identification Information;
• Financial Results — Income Statement (presented in both the functional currency and US dollars) and Balance Sheet, both according to US GAAP;
• Earnings and Profits, both current and cumulative;
• Foreign income taxes paid or accrued, translated into US dollars at specified exchange rate;
• SubPart F Income (a future Withum Weekly Pulse will address the immediate income inclusion on this type of income);
• Acquisitions and Dispositions of Stock; and
• Related Party Transactions

Reportable related party transactions, the most important part of the return, are summarized on Schedule M of Form 5471. To be reportable, the transaction must have occurred during the foreign corporation’s annual accounting period and must have been between the foreign corporation and either the person filing the return, any corporation (domestic or foreign) controlled by the person filing the return, or any U.S. person owning at the time of the transaction 10 percent or more in value of any class of the foreign corporation’s stock or the stock of any corporation controlling the foreign corporation. The following types of transactions between the persons just described are reported on Schedule M:

• Sales and purchases of inventory;
• Purchases of tangible property other than inventory;
• Sales and purchases of intangible property (e.g., patents, inventions, copyrights, trademarks, secret formulae or processes);
• Compensation paid and received for the rendition of technical, managerial, engineering, construction, scientific, or like services;
• Commissions paid and received;
• Rents and royalties paid and received;
• Amounts loaned and amounts borrowed (except open accounts resulting from sales and purchases already reported);
• Dividends paid and received;
• Interest paid and received; and
• Premiums received for insurance or reinsurance.

The information regarding these related party transactions must be expressed in U.S. dollars translated from functional currency at the weighted average exchange rate for the year.
Form 5471 must be filed with the U.S. person’s income tax return on or before the due date of that return. An application for an extension of time to file the income tax return also extends the time for filing the return on Form 5471.

Failure to file a complete Form 5471 subjects the taxpayer to a monetary penalty of $10,000 for each annual accounting period of each foreign corporation with respect to which such failure occurs. If the failure continues for more than 90 days after the date on which notice of such failure is mailed to the taxpayer, an additional penalty of $10,000 is levied for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period expires. The additional monetary penalty cannot exceed $50,000.

In addition to the monetary penalty, failure to furnish the information required can also result in a reduction of the foreign tax credits otherwise allowed to the taxpayer. In computing the foreign tax credit, a U.S. person that has failed to file a required Form 5471 with respect to a foreign corporation, or has filed an incomplete return, is subject to a 10 percent reduction in the amount of foreign taxes paid or deemed paid by it during the taxable year. If the failure continues for 90 days or more after notice of the failure is mailed to the taxpayer, the 10 percent reduction is increased by an additional 5 percentage points for each three-month period (or fraction thereof) during which the failure continues after expiration of the 90-day period with respect to which the failure occurred. The taxpayer can avoid the dollar penalty and the foreign tax credit reduction penalty by making an affirmative showing that reasonable cause existed for its failure to file Form 5471. This showing must be made in writing, and under the penalties of perjury, to the district director or the director of the service center, who will determine whether the failure to file or furnish information was because of reasonable cause. If a Form 5471 has been filed, but some required information has been omitted or erroneously reported, the taxpayer will not be subject to penalties if it has substantially complied with Section 6038 and the Regulations thereunder.

The statute of limitations relating to returns containing Form 5471 is suspended if the form is incomplete.

For additional information regarding Form 5471, including specific filing requirements with respect to any foreign entities, please e-mail [email protected]. Follow our International Services Group on the Where in the World blog, check our webpage on Withum.com, or watch our Withumpedia videos on YouTube.

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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.