There are several sweeping changes for businesses with an international presence to address as 2019 comes to a close. Stemming from tax reform, there are a number of compliance requirements with hefty fines attached if you don’t file correctly.
Below is an outline of the five most significant items to help you remain compliant. For the latest updates for international companies, you can also visit our pages for tax planning, tax reform and international tax.
Understand Compliance Requirements
The following items require attention because failure to correctly file could result in significant penalties.
1. Transition Tax (Section 965)
For taxable years of deferred foreign income corporations (DFICs) beginning before January 1, 2018, all US taxpayers are required to calculate a transition tax on their offshore earnings. In certain instances, taxpayers are allowed to pay the transition tax in installments over eight years, or defer the tax until there’s a triggering event if they are an S corporation shareholder. The installments are accelerated if taxpayers fail to pay an installment on time. Installments and deferred amounts are also accelerated for taxpayers who sell substantially all operating assets or S corporation stock, discontinue operations, or enter bankruptcy.
For more details, see this article.
- Are you a taxpayer who owns a specified foreign corporation?
- If you made an election to pay the transition tax over eight years, or you’re an S corporation shareholder that elected to defer the transition tax, do you anticipate any transactions or reorganizations that may accelerate the payment of the tax?
You’ll need to consider the transition tax going forward if you made an election to pay it in installments. If you’re an S corporation shareholder, you’ll need to consider if you’ll continue to defer the tax.
If you haven’t already done so, review your foreign legal entities to determine if you own a SFC. If you made an election to pay the transition tax over eight years, or to defer the tax as an S corporation shareholder, ensure that you make installment payments on time. Consider whether any business events will result in an acceleration of the transition tax due.
2. Outbound Transfers of Property
Tax reform repealed the active trade or business exception to gain recognition on outbound transfers. It also expanded the definition of intangible property to include goodwill, going concern, workforce in place, and similar previously excluded intangibles.
This means that outbound transfers of a trade or business and an incorporation of a foreign branch office are now taxable events.
- Are you thinking about incorporating a foreign branch office or making a check the box election for a foreign disregarded entity to become treated as a foreign corporation?
- Are you planning to transfer US assets to a foreign corporation in a nonrecognition transaction?
If you’re going to transfer property to a legal entity in a foreign country, consider if that will result in taxable income and additional tax due in the United States.
If you’re planning to transfer property to your overseas business, tax planning can help you understand the tax due as a result of the transfer. If tax is due, considering planning options such as entering into a gain recognition agreement or making a check-the-box election for your foreign legal entity to be treated as a disregarded entity.
3. Base Erosion and Anti-Abuse Tax (BEAT)
This tax imposes a minimum tax on C corporations for deductible payments made to foreign affiliates. An entity is subject to BEAT if it meets certain criteria and must pay the greater of BEAT or their regular tax liability.
Learn more details in this article.
- Did you have more than $500 million in revenue in any of the past three years?
- Do you make deductible payments to foreign affiliates?
- Is your entity owned by a taxpayer who owns other C corporations?
Start planning in 2019 to determine if you’re subject to BEAT and what information you’ll need to make the determination. If you’re subject to BEAT, consider conducting tax planning before year-end to mitigate the impact.
Determine if you’re subject to BEAT. If you are, conduct planning to identify options to mitigate the impact. If you’re owned by a foreign company, understand the foreign company’s ownership structure, and if it owns other C corporations in the United States.
Even if you aren’t subject to BEAT, you could still be required to file additional tax returns disclosing information. Incorrect filing could result in a $10,000 penalty.
4. New Form 8858 Requirements
US persons who are tax owners of foreign branches must file Form 8858 and Schedule M, a new IRS requirement that’s effective for tax years beginning in 2018. Before 2018, you only had to file this form if you had an actual legal entity. Now, Form 8858 is required if your activity in the foreign jurisdiction rises to the level of a branch operation regardless of whether or not you have a local entity.
You can learn more details in this article.
- Have you knowingly or unknowingly created a branch in a foreign location?
- Do you have any foreign branches for which a Form 8858 wasn’t previously filed?
This needs to be addressed before your tax return due date.
Determine if you’ve established a branch in a foreign country. If you’re required to File a Form 8858 and don’t, the potential penalty is $10,000 or more.
5. Withholding Tax on Disposition of Partnership Interests
Purchasers of an ownership interest in a partnership could be required to withhold 10% of the purchase price if gain or loss from the sale or exchange of a partnership interest is effectively connected income (ECI) and the seller is a foreign person.
- Are you planning on purchasing a US partnership interest from a foreign person? Do you have an affidavit from the seller certifying nonforeign status?
- Are you a foreign person that’s planning to dispose of a US partnership interest?
Consider these withholding requirements when you’re selling or purchasing a partnership interest.
Understand who you’re buying a partnership interest from. Consider obtaining an affidavit from the seller certifying they aren’t a foreign person. You may be responsible for paying the withholding (10% of the sales price) if it isn’t made at the time of sale.
If you’re a foreign person who’s selling a partnership interest, plan ahead for the withholding tax.
We’re Here to Help
There’s plenty of opportunity to tackle tax planning before the frenzy of year-end approaches. To learn more about tax strategies and how they might affect or benefit your multinational organization, contact your Moss Adams professional.
You can also visit our dedicated tax reform and tax planning pages for a deeper dive, and you can read more in our article Tax Planning: 6 Savings Considerations for Multinational Companies.