Foreign corporations engaged in business in the United States must comply with particular record-keeping and international tax reporting obligations under the Internal Revenue Code. The code sections pertaining to foreign-owned domestic corporations and businesses also apply to U.S. taxpayers who engage in business with these companies. These rules are enumerated under IRC §§ 6038A and 6038C, which were enacted in the 1980s and later strengthened and expanded throughout the 1990s.
Reporting Obligations Prior to IRC § 6038
Prior to the enactment of IRC §6038A, U.S. parent corporations were required to report transactions that occurred between the corporation and its foreign affiliates and between foreign affiliates. However, the prior law did not require reporting of transactions between a U.S. subsidiary of a foreign corporation and its foreign affiliates. In order to “level the playing field” between U.S. affiliates of foreign corporations and U.S. corporations controlled by U.S. persons, Congress felt a need to enact legislation which would alert the IRS to the presence of these transactions. The code provisions in sections 6038A and 6038C were further strengthened in the 1990s to ensure that U.S. subsidiaries of foreign corporations were not paying less income tax per year than similarly-situated. U.S. corporations.
Analysis of the Reporting Rules
The reporting obligations enumerated in IRC §§ 6038A and 6038C apply to “reporting corporations,” which is defined in the code as a foreign corporation which has trade or business in the United States at any time during the taxable year. Domestic corporations may also be considered reporting corporations for these purposes when they have at least one “25-percent foreign shareholder” who is considered a nonresident alien or a foreign corporation or partnership. The “25-percent foreign shareholder” is also defined as an estate or trust that actually or constructively owns 25 percent of the U.S. company’s stock or voting rights.
The reporting rules at issue for foreign-owned domestic corporations and businesses apply to transactions between the reporting corporation and a “related party,” with the term “related party” being defined as a “25-percent foreign shareholder, a person related to such a shareholder, or an entity or trade or business owned or controlled by the same interests as the reporting corporation.”
Required Forms and Information Under the Reporting Obligation
A reporting corporation for these purposes is required to file a Form 5472 with its income tax return. The Form 5472 must include the business name, principal business location, and country of incorporation or residence of all related parties that had transactions with the reporting corporation during the taxable year. Each related party is also required to complete a Form 5472, and these forms must disclose the nature of the relationships and transactions. Under the code and regulations, certain types of transactions must be reported, including purchases and sales of goods, payments or receipts of rents or royalties, purchases and sales of intellectual property, payments or receipts for technical, managerial, or other services, commissions, borrowings and loans, interest receipts or payments, and insurance premiums.
Reporting corporations are also subject to record-keeping rules. For all reportable transactions, corporations subject to IRC § 6038 must maintain records sufficient to establish the proper tax treatment of the transaction and the company’s U.S. tax liability.
How a Tax Attorney Can Help with Reporting Obligations of Foreign-Owned Domestic Corporations
The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with tax issues related to their foreign assets since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.