Form 1120-F Reporting for Foreign Corporations: Filing...

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Form 1120-F Reporting for Foreign Corporations:

Filing Obligations Under IRS Scrutiny

TUESDAY, OCTOBER 10, 2017, 1:00-2:50 pm Eastern

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Oct. 10, 2017

Form 1120-F Reporting for Foreign Corporations

Stanley Barsky, Partner

Fox Rothschild, New York

[email protected]

Dirk Gifford, Managing Director,

KPMG LLP

McLean, VA

[email protected]

Kimberlee S. Phelan, CPA, MBA, Tax Partner

WithumSmith+Brown, Princeton, N.J.

[email protected]

John Samtoy, Tax Principal

Holthouse Carlin & Van Trigt

Costa Mesa, Calif.

[email protected]





Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

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RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

WithumSmith+Brown, PC ▪ Certified Public Accountants and Consultants

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BE IN A POSITION OF STRENGTH

Form 1120-F: Who Must File Presented by Kimberlee S. Phelan


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Introduction

Kimberlee S. Phelan, CPA, MBA, CGMA

Partner

Practice Leader, International Services Group

WithumSmith+Brown, PC

506 Carnegie Center, Suite 400

Princeton, NJ 08540

[email protected]

p. 609-945-7910

c. 609-306-5263



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Form 1120-F

Introduction

• US Income Tax Return of a Foreign Corporation

Not Life Insurance Companies (Form 1120-L)

Not Property & Casualty Insurance Companies (Form

1120-PC)

Not Foreign Sales Corporations, if election still in effect

(Form 1120-FSC)

• Consolidated Returns not permitted

• If total assets >$10 million OR >250 returns per year are

required, return must be submitted Electronically


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Form 1120-F

New Due Date of Returns

• With an Office or Place of Business in the US: 15th day of

the 4th Month

• Short initial or final years

• Except for foreign corporations with a fiscal year ending in

June – Due date remains 15th day of the 3rd Month

• With NO Office or Place of Business in the US: 15th day of

the 6th Month

• Extensions of Time to File Available


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Form 1120-F

Why File?

• To Report the Income, Gains, Losses, Deductions, Credits of

a Foreign Corporation and

• To figure the US Income Tax Liability of a Foreign

Corporation

• To Claim a Refund that is Due

• To Transmit Form 8833, Treaty-Based Return Disclosure

• To Calculate and Pay a Foreign Corporation’s Branch

Profits Tax and Tax on Excess Interest


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Form 1120-F

Who must File?

• Taxpayers engaged in conduct of U.S. trade or business (or

that have U.S.-source taxable capital gains ) must file

income tax returns.

Whether or Not US-Source Income from that Trade or Business

Whether or Not Income from Such Trade or Business is Exempt from US Tax Under Treaty

Had Income, Gains. Losses TREATED as if they were Effectively

Connected with a US Trade or Business


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Form 1120-F

Who Must File?

• Foreign corporations that carry on business in the U.S. through a

“permanent establishment” (PE) are subject to U.S. tax on a

“net” basis.

Gross income attributable to the PE = effectively connected

income

• “Permanent establishment” (PE): Standard definition

Fixed place of business

Dependent agent that has authority and does conclude

contracts


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Form 1120-F

Who Must File?

• Taxpayers not engaged in a U.S. trade or business do not

file if all tax is collected by the withholding agent; a return

must be filed to claim a refund.

• If no exemption applies, the withholding agent (typically,

the payor) must withhold the 30% tax and file an

information return.

• If a treaty exemption or reduction applies, withholding

agent must have certification from payee:

Form W-8 BEN or Form W-8BEN-E: “beneficial owner” of

income and/or entitlement to treaty benefits


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Form 1120-F

Who Must File?

• A foreign corporation claiming the benefit of any

deductions or credits

• A foreign corporation making a claim that a income tax

treaty overruled or modified any provision of the Internal

Revenue Code with respect to income derived by the

foreign corporation at any time during the tax year

Form 8833, Treaty-Based Return Position, is required

• Entities electing to be classified as a Foreign Corporation

must file Form 1120-F under the same circumstances as per

se corporations


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Form 1120-F

Exceptions from Filing

• A foreign corporation if it did not engage in a US Trade or

Business during the year and its full US tax was withheld at

source

• A foreign corporations whose only source of income is

exempt from US taxation under IRS Section 881(c) or (d)

Portfolio Debt Investments

Certain Interest and Dividends per Section 871(i)(2)

• A foreign corporation that is a beneficiary of an estate or

trust engaged in a US Trade or Business


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Form 1120-F

Who Must Sign?

• The President, Vice President, Treasurer, Assistant Treasurer

or Chief Accounting Officer, or

• Any other Corporate Offices (such as a tax officer)

authorized to sign

• Paid Preparers must sign


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Form 1120-F

Tax base: Effectively connected income (§864(c))

U.S.-source business income

Selected types of foreign-source business income

Selected types of U.S.-source, non-business income

Lookback rules for property dispositions: 10 years, under §864(c)(7)

Tax rate schedule: Same as domestic corporation

Basis of accounting

• U.S. tax forms are filled out in accordance with U.S. tax accounting principles.

• Taxpayers must convert U.S. GAAP financial records to U.S. tax basis of accounting, by making tax adjustments.’

CFCs – Required to have the tax year of its Majority US Shareholder


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Form 1120-F

Interest expense

• A foreign corporation is generally required to use a three-step calculation to determine the amount of interest expense that is allocable under Sect. 882(c) to income effectively connected (or treated as effectively connected) with the foreign corporation’s conduct of a trade or business within the U.S.

• Fungibility principle

Allocate interest to all gross income, even if borrowing relates to specific asset

• Apportionment base

Two methods available: Fair market value or tax book value §864(e)(2)

• Affiliated groups

Treated as a single corporation, for purposes of apportioning interest expense


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Form 1120-F

Other Forms:

• Form 5472, Information Return of a 25% Foreign-Owned US

Corporation or a Foreign Corporation Engaged in a US

Trade or Business

• Form 8832, Entity Classification Election

• Form 8833, Treaty-Based Return Position Disclosure

• Form 8886, Reportable Transaction Disclosure Statement


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Form 1120-F

Statements:

• Transfers to a Corporation Controlled by the Transferor –

Treasury Regulation Section 1.351-3(d)

• Distributions of Stock or Securities of a Controlled

Corporation – Treasury Regulation Section 1.355-5


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Any Questions?

Kimberlee S. Phelan, CPA, MBA, CGMA

Partner

Practice Leader, International Services Group

WithumSmith+Brown, PC

506 Carnegie Center, Suite 400

Princeton, NJ 08540

[email protected]

p. 609-945-7910

c. 609-306-5263

Thank you!


FOCUS • CLARITY • COMMITMENT

FORM 1120-F: TRANSACTIONS SUBJECT TO FORM 1120-F REPORTING

John Samtoy, HCVT LLP [email protected]

T A X | A U D I T | B U S I N E S S M A N A G E M E N T | M E R G E R S & A C Q U I S I T I O N S

FORM 1120-F – TRANSACTIONS SUBJECT TO FORM 1120-F REPORTING

•Transactions subject to reporting under the IRC. • Application of income tax treaties and permanent establishment will be

discussed separately.

•Filing Requirements for Form 1120-F

•Conduct of a trade or business in the US. • What constitutes engaging in a trade or business in the US • Examples of specific types of transactions • Attribution of activities conducted by an agent

• Investments that can give rise to filing requirements • Partnerships • Real Estate

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FORM 1120-F – FILING REQUIREMENTS

•Form 1120-F must be filed by a foreign corporation that

• Engaged in a trade or business in the US whether or not income from such trade or business is exempt from United States tax under a tax treaty.

• Has income, gains, or losses treated as if they were effectively connected with the conduct of a U.S. trade or business.

• Has income from U.S. sources if its tax liability has not been fully satisfied by withholding of tax at source .

• Is making a claim for refund of an overpayment of tax.

• Is making a claim that an income tax treaty overrules or modifies US tax law and is required to disclose each treaty position on Form 8833.

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FORM 1120-F – ENGAGED IN A TRADE OR BUSINESS IN THE US

•Being “engaged in a trade or business in the US” is not clearly defined in the code or regulations.

•Section 864(b) states that a trade or business within the United States includes the performance of personal services within the United States at any time during the year.

• The definition is limited - It identifies a situation where a foreign corporation is engaged in a US trade or business but not all situations.

• Regulation 1.864-2(e) clarifies this: “The fact that a person is not determined by reason of this section to be not engaged in trade or business with the United States is not to be considered a determination that such person is engaged in trade or business within the United States. Whether or not such person is engaged in trade or business within the United States shall be determined on the basis of the facts and circumstances in each case”

• Excluded activities include trading in stocks, securities, or commodities through a broker or independent agent or on a taxpayer’s own account.

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• The determination of whether a foreign corporation is engaged in a trade or business is therefore a facts and circumstances test.

• The IRS will not ordinarily issue PLRs on whether a foreign corporation is engaged (see Rev Proc 2017-7)

• Generally a US trade or business will exist where a foreign corporation engages in “active” activities that are “considerable, continuous, and regular” for profit. • Active – more than a mere passive investment and collection of income • Imputed activity from agents, partnerships, trusts, and estates will cause a

foreign corporation to be considered engaged in a US trade or business. • Lewellyn v. Pittsburgh, B. & L.E.R. Co, De Amodio v. Commissioner, Lewenhaupt

v. Commissioner

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• A taxpayer is not engaged in a trade or business as the result of isolated transactions or a single transaction.

• Continental Trading Inc, Pasquel v. Commissioner

• Activities are considerable if they relate to earning income directly and are not merely incidental to trade or business (ex. clerical and administrative activities).

• Scottish American Investment Co. Ltd., Spermacet Whaling & Shipping Co. v. Commissioner

• Actually engaging in a business is necessary. Intent alone is not enough. • Linen Thread Co., Ltd

• Even with the case law what constitutes engaging in a trade or business under the code is less clear than under the permanent establishment rules (contained in various tax treaties) and must be tested and analyzed on a case by case basis.


FORM 1120-F – EXAMPLES OF SPECIFIC TYPES TRANSACTIONS

•Performance of services in the US – very low threshold if services relate to income generating activities.

• IT outsourcing company sends personnel to the US to meet new clients and work in their office for two weeks to learn their systems before returning to home country to work on the client remotely.

• Mining company (FC) in Latin America receives a contract in the US to identify where to dig. Analysis and planning is done in FC’s country but they send engineers to the US to survey the site initially and to oversee drilling operations.

• Sales of products in the US

• Including sales through an agent in the United States – Rev Ruling 70-424

• FC conveyed sole agency of its products to DC. DC agreed to sell FC’s products in the US and to not sell similar products from competitors without permission from FC or take a financial interest in any competitor of FC. Along with other factors the arrangement was held to be one of principal and agent and FC was therefore found to be engaged in a US trade or business.

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•Solicitation of customers and orders

• Mere solicitation of customers without an office/fixed place of business or agent in the US is not considered conduct of a trade or business in the US. See Piedras Negras Broadcasting Co. v. Commissioner • Ex. Advertising over radio, TV, internet

• By contrast solicitation via an office or fixed place of business may be considered the conduct of a trade or business in the US even if FC has no other US activities.

•Purchasing of products in the US for resale abroad

• While maintaining a US office may be a US trade or business.

• Without maintaining a US office is not a US trade or business.

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•Rental activity

• Mere collection of rents is treated as a passive activity and is not a US trade or business.

• Active management can make rental activity a US trade or business. Activities such as leasing properties, executing those leases, paying operating expenses, collecting rents, and supervising repairs may push rental activity to be active.

• Taxpayers will often elect to treat rental activity as a trade or business (net basis taxation on ECI vs gross basis taxation on FDAP).

•Trading in stocks, securities, or commodities

• Per the safe harbors of 864 trading in stocks, securities, or commodities through a broker or independent agent or on a taxpayer’s own account is not considered a US trade or business.

• Note that this exception is not available to taxpayers who are dealers in stocks, securities, or commodities.

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•Loan origination

• Lending activities of a foreign corporation can be considered a US trade or business. • They are considered a trade or business where the foreign corporation lends money to

customers on a considerable, regular, and continuous basis with the intention of earning a profit. If applicable they are considered to be engaged in a banking, financing, or similar business (“BFS business”).

• The trade or business is considered to be conducted in the US when the activities occur in the United States.

• When an agent performs origination activities in the US then those activities, and the office of the US agent, are attributed to the foreign corporation.

• The interest income earned on those loans by the foreign corporation may also be considered ECI. • US sourced interest income derived by a foreign corporation engaged in a BFS business is

considered ECI only if the securities giving rise to the income are attributable to a US office through which the activities were conducted and the securities were acquired in one of the specific ways listed in the regulations which include making loans to the public.

• See AM 2009-010

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FORM 1120-F – ATTRIBUTION OF ACTIVITIES CONDUCTED BY AN AGENT

•Activities of employees or dependent agents will be imputed to a FC. • Degree of control; ability to conclude contracts; other clients/business. • Office of a dependent agent is attributed to a FC where a dependent agent has the authority to

conclude contracts and regularly exercises that authority or where they have stock or merchandise belonging to a FC from which orders are filled.

• Independent agent – defined as a person acting in ordinary course of business in that capacity.

•Determining whether activity of an ‘independent agent’ will be imputed to FC is not always straightforward.

• The courts have looked at this both ways. Facts and circumstances based; no bright line tests.

• Stock or securities through an independent agent is not a US trade or business.

• “… it can hardly be that when an alien employs agents in this country to do things from which he collects a profit, Congress intended him to escape, though it meant to tax him, if he came here to do them himself” Helvering v Boekman

• Is the taxpayer being compensated for activities performed by the agent or is the taxpayer being compensated for a separate activity?

• How regularly is agent conducting activities on behalf of taxpayer?

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FORM 1120-F – ATTRIBUTION OF ACTIVITIES CONDUCTED BY AN AGENT

•Management of real estate by independent agents on behalf of a foreign taxpayer was a US trade or business. Amodi v. Commissioner • Activities were regular and continuous.

•Substantial sales through a US distributor (DC) that was an agent on behalf of a foreign person (FC). Handfield v. Commissioner • Agency relationship: DC not obligated to buy definite amount of

merchandise – only merchandise it sold, all unsold merchandise could be returned, FC would pay transportation cost of merchandise and give full credit regardless of condition, FC controlled retail price under agreement.

• In contrast sales of stock directly to US person, even a US subsidiary, is not a US trade or business.

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FORM 1120-F – A LOOK AT INVERWORLD

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•InverWorld Ltd (FC) was a Cayman investment management and financial services company. FC owned all of the stock of InverWorld Inc (DC) its domestic subsidiary.

•DC acted exclusively on behalf of FC and its clients.

•DC maintained FC’s client account files in its Texas office, purchased sold and redeemed financial instruments in the names of clients or in FC’s name on a regular basis, provided FC with investment advice, and maintained the books and ledgers for such transactions on behalf of FC.

•The contract between FC and DC specified that DC “shall for all purposes be an independent contractor and not an agent or employee of [FC], and [DC] shall have no authority to act for, represent, bind or obligate [FC], any of its affiliates or any account managed or advised by [FC].”

•The court disregarded this disclaimer and instead focused on the on how DC and FC actually conducted business. The finding was that DC was a dependent agent that regularly executed contracts on behalf of FC.

•The court also concluded that FC required a fixed place of business and that it’s place of business was DC’s office in the US – the Texas office’s address was used on financial documents, on FC’s return, and client files were maintained there.

•Highlighted impact of unintended conduct of a trade or business in the US by FC: DC subject to tax on service income, FC subject to tax on remainder of US source income, penalties for failure to file, disallowance of deductions (because of failure to timely file return).


FORM 1120-F – INVESTMENTS IN PARTNERSHIPS

•A partner of a partnership that is engaged in a US trade or business is itself engaged in a US trade or business.

• Applies to limited partners, LLC members.

• Applies through chains of partnerships (tiered partnerships).

•A FC that is engaged by reason of being a partner is required to file Form 1120-F.

• Withholding at the max rate applies at the partnership level so filing can be advantageous.

• Losses will carry forward, deductions may be apportioned if appropriate, if FC has multiple partnership investments income and losses will offset (ex. Fund of funds).

•Determination is made at partnership level. Partners can determine if a partnership is engaged by: Receipt of Form 8805, K-1s shows US ordinary or rental income, review of K-1 footnotes indicates US trade or business activity/ECI.

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FORM 1120-F – INVESTMENT IN US REAL ESTATE

•The Foreign Investment In Real Property Tax Act (FIRPTA) provides that gain or loss from the sale of US real estate shall be taken into account as if a FC was engaged in a US trade or business and the income was effectively connected.

• Directly held real estate. • Proportionate ownership of assets held by partnership, trusts, and estates. • US corporations that are USRPHC.

• FMV of real estate exceeds 50% total assets • Exceptions: US real estate disposed of before sale, publicly traded securities where less

than 5% of stock is held (10% for REITs).

•Generally overrides non-recognition provisions except where USRPI is exchanged for another USRPI. Example - 351

• Directly held real estate

•Distributions from qualified investment entities are subject to a look through rule (REITs, RICs) • If distribution is attributable to gain on the sale of a USRPI then gain will be recognized by

FC as if FC had disposed of USRPI. Example – REIT Capital gain dividends • Does not apply if publicly traded and less than 5% held or 10% for a REIT.

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37 T A X | A U D I T | B U S I N E S S M A N A G E M E N T | M E R G E R S & A C Q U I S I T I O N S

JOHN SAMTOY – INTERNATIONAL TAX PRINCIPAL HCVT LLP

[email protected]


© 2017 Fox Rothschild

Practical Guide To Form

1120-F

Stanley Barsky, Esq.

[email protected]

212-878-7949

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Practical Guide To Form 1120-F

•Treaty Provisions

•Protective Returns

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Treaty Provisions

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Treaty Provisions

• If a taxpayer takes a “return position” that any treaty of the United States (including an income tax treaty) overrules or modifies any provision of the Internal Revenue Code, the taxpayer must disclose the position on Form 8833 and attach it to the tax return. Treas. Reg. section 301.6114-1(a)(1)(i).

• If a return is not otherwise required, claiming a treaty-based return position nevertheless requires the taxpayer to file a return that includes the taxpayer's name, address, and taxpayer identifying number; and the return must be signed under penalties of perjury (as well as the subject disclosure). The taxpayer's taxable year shall be deemed to be the calendar year (unless the taxpayer has previously established, or timely chooses for this purpose to establish, a different taxable year). Treas. Reg. section 301.6114-1(a)(1)(ii).

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Treaty Provisions

• A taxpayer is deemed to adopt a “return position” when the taxpayer determines its tax liability with respect to a particular item of income, deduction or credit.

• To determine whether a return position is a “treaty-based return position” so that reporting is required the taxpayer must compare:

‒ (A) the tax liability (including credits, carrybacks, carryovers, and other tax consequences or attributes for the current year as well as for any other affected tax years) to be reported on a return of the taxpayer, and

‒ (B) the tax liability (including such credits, carrybacks, carryovers, and other tax consequences or attributes) that would be reported if the relevant treaty provision did not exist. If there is a difference (or potential difference) in these two amounts, the position taken on a return is a treaty-based return position that must be reported.

‒ Treas. Reg. section 301.6114-1(a)(2).

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Treaty Provisions

‒ For example, assume that X, a Country A corporation, claims the benefit of a provision of the income tax treaty between the United States and Country A that modifies a provision of the Code. This position does not result in a change of X's U.S. tax liability for the current tax year but does give rise to, or increases, a net operating loss which may be carried back (or forward) such that X's tax liability in the carryback (or forward) year may be affected by the position taken by X in the current year. X must disclose this treaty-based return position with its tax return for the current tax year. Treas. Reg. section 301.6114-1(a)(3) Example 1.

• What if the taxpayer concludes that the same result would be reached under both a treaty provision and the domestic tax law? A return position is a treaty-based return position unless the taxpayer's conclusion that no reporting is required has a substantial probability of successful defense if challenged.

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Treaty Provisions

• Disclosure of a treaty-based return position is required unless expressly waived by the regulations. The regulations expressly list certain items that require disclosure (a non-exhaustive list). Treas. Reg. section 1.6114-1(b). These items include positions that:

‒ A treaty exempts from tax, or reduces the rate of tax on, interest or dividends paid by a foreign corporation that are from sources within the United States by reason of section 861(a)(2)(B) or section 884(f)(1)(A).

‒ Income that is effectively connected with a U.S. trade or business of a foreign corporation is not attributable to a permanent establishment or a fixed base of operations in the United States and, thus, is not subject to taxation on a net basis.

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Treaty Provisions

• The regulations expressly waive disclosure with respect to certain items. Treas. Reg. section 1.6114-1(c). These items include:

‒ Items with respect to positions that are disclosed by a partnership, trust, or estate that has the taxpayer as a partner or beneficiary on its information return (and that must otherwise be disclosed by the taxpayer).

‒ Items received by a foreign corporation that receives amounts of income that have been properly reported on Form 1042-S, that do not exceed $500,000 in the aggregate for the taxable year and that are not received through an account with an intermediary, or with respect to interest in a flow-through entity.

• Certain exceptions are listed in the instructions to Form 8833, including for foreign corporations that are residents in a foreign jurisdiction whose tax treaty with the United States is invoked, as well as in another foreign jurisdiction that has a tax treaty with the first foreign jurisdiction. See Rev. Rul. 2004-76, 2004-2 C.B. 111.

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Treaty Provisions

• Information reported on Form 8833: ‒ Taxpayer’s name, address, and tax identification

number.

‒ Tax treaty relied on (including the article) and the Code provisions that the treaty overrules or modifies.

‒ Name, US address and tax identification number (if available) of the payor of income (if FDAP).

• FDAP income means all fixed or determinable, annual or periodic items.

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Treaty Provisions

• Information reported on Form 8833: ‒ Treaty’s limitation on benefits article provisions the

taxpayer relies on to claim the treaty benefits. • The limitation on benefits tests generally include:

‒ Publicly-traded companies and their subsidiaries

‒ Stock ownership and base erosion

‒ Active business

‒ Derivative benefits

‒ Discretionary determination

• Very few treaties do not have a limitation on benefits article

‒ Whether an item is expressly required to be disclosed under Treas. Reg. section 1.6114-1(b).

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Treaty Provisions

• Information reported on Form 8833: ‒ A statement explaining the treaty-based position,

the relevant facts, and nature and amount (or reasonable estimate) of income or other items for which a treaty benefit is claimed.

• For purposes of determining the nature and amount, if a taxpayer takes (and discloses) a position that it does not have a permanent establishment, it does not need to separately report its payment of actual or deemed dividends or interest exempt from tax by reason of a treaty (or any liability for branch profits tax).

• Certain amounts may be aggregated and treated as single payment or income item.

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Protective Returns

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Protective Returns

• A foreign corporation generally must file a federal tax return unless (i) the foreign corporation is not engaged in a US trade or business at any time during the taxable year, (ii) the foreign corporation does not claim a treaty-based position, and (iii) the tax liability of the foreign corporation is fully satisfied by withholding of tax at source. Treas. Reg. section 1.6012-2(g)(2). ‒ Thus, a return is required if a foreign corporation has

income that is effectively connected with a US trade or business (“ECI”), or takes a positon that income is reduced or exempt under a tax treaty. Treas. Reg. sections 1.6012-2(g)(1)(i), 301.6114-1.

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Protective Returns

• Foreign corporations are taxed at graduated rates on ECI. Code section 882(a).

• Deductions and credits generally reduce ECI only if a foreign corporation files a tax return on a timely basis. Code section 882(c); Treas. Reg. sections 1.882-4(a); 1.6012-2(g)(4).

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Protective Returns

• The return must be filed on a timely basis ‒ Within 18 months after the due date for the return, if (i) a

return was filed for the immediately preceding taxable year, or (ii) the current taxable year is the first taxable year for which a return is required to be filed.

‒ If a return for the preceding taxable year was not filed (but was required), a return for the current taxable year is filed on a timely basis if it is filed by the earlier of (i) 18 months after the due date for the return for the current taxable year, or (ii) the date the IRS mails a notice that the current year tax return has not been filed.

‒ Treas. Reg. section 1.882-4(a)(3)(i)

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Protective Returns

• The return must be filed on a timely basis ‒ The timely filing requirement may be waived if the foreign

corporation acted reasonably and in good faith in failing to file the return (including a protective return). The following factors would be taken into account:

• Whether the corporation voluntarily identifies itself to the IRS before the IRS discovers the failure to file.

• Whether the corporation was aware of ability to file a protective return.

• Whether the corporation had not previously filed a US income tax return.

• Whether the corporation was unaware of the filing requirement after exercising reasonable diligence (taking into account its experience and level of sophistication).

• Whether there were intervening events beyond the corporations’ control.

• Any other mitigating or exacerbating factors.

‒ Treas. Reg. section 1.882-4(a)(3)(ii)

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Protective Returns

• The return must be filed on a timely basis ‒ Treasury regulations take the position that a foreign

corporation that qualifies for tax treaty benefits and has a permanent establishment is subject to the filing deadlines.

‒ Treas. Reg. section 1.882-4(a)(3)(v)

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Protective Returns

• The return must be filed on a timely basis ‒ A foreign corporation that conducts limited activities in the US

and determines that it does not have ECI may nonetheless file a protective return on a timely basis to protect the right to receive the benefit of credits and deductions if it is later determined that the original determination is incorrect.

• The protective return does not have to report any ECI, but should include a statement indicating the return is a protective return.

‒ A foreign corporation that conducts limited activities in the US and determines that only some of these activities give rise to ECI must file a return on a timely basis to report the ECI, and should attach a statement with regard to the other activities.

‒ Similar procedures should be followed if the foreign corporation determines that it has no US tax liability under the provisions of an applicable treaty. (In addition, the treaty position must be reported in accordance with section 6114, discussed above.)

‒ Treas. Reg. section 1.882-4(a)(3)(v)

55

Protective Returns

• If a treaty applies, could the foreign corporation argue that the treaty would override the timely filing requirement in Treasury regulations section 1.882-4(a)?

56

Protective Returns

• Form 1120-F Instructions discussion of protective returns is consistent with the above authorities:

‒ If a foreign corporation conducts limited activities in the United States in a tax year that the foreign corporation determines does not give rise to ECI, the foreign corporation should file a protective return to safeguard its right to receive the benefit of the deductions and credits attributable to that income if it is subsequently determined that the original determination was incorrect.

‒ A foreign corporation should also file a protective return if it determines initially that it has no U.S. tax liability under the provisions of an applicable income tax treaty (for example, because its income is not attributable to a permanent establishment in the United States).

57

Protective Returns

• US Trade or Business – Examples of Gray Areas ‒ The IRS will not “ordinarily” rule on whether a

foreign person is engaged in a US trade or business. Rev. Proc. 2017-7 Section 4.01(4).

‒ Sale of partnership interests. • Rev. Rul. 91-32

• Grecian Magnesite Mining

‒ Loan origination. AM 2009-010 (Sept. 22, 2009).

58

Protective Returns

• Permanent Establishment – Examples of Gray Areas ‒ IRS must successfully assert that profits it seeks to

tax are “attributable” to a foreign corporation’s “permanent establishment.”

59

Stanley Barsky, Esq.

[email protected]

212-878-7949

60


Form 1120-F: Filing Exceptions & IRS Audit Campaign

KPMG LLP – Tysons Corner, VA

October 10, 2017

63 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights reserved.

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax advisor.

Notice

1120-F Filing Exceptions



Exceptions to Filing the Form 1120-F

A foreign corporation generally does not need to file a Form 1120-F

if any of the following apply:

• It did not engage in a US trade or business during the year, and its full

U.S. tax on US source income was withheld at source;

• It is the beneficiary of an estate or trust engaged in a US trade or

business, but would itself otherwise not need to file; and

• Its only US source income is exempt from US taxation under Section

881(c) or 881(d).



A foreign corporation generally can be taxed one of two ways,

potentially triggering a 1120-F filing requirement:

Exceptions to Filing – No US Trade or

Business

• Having effectively connected income (“ECI”) with the conduct of a US

trade or business (including the sale of US real property (“FIRPTA”));

and/or

• Having US source fixed, determinable, annual, or periodical (“FDAP”)

income (Sections 871(a)(1) and 881(a)).

Examples:

- Interest, dividends, rents, and royalties

- Gains from disposal of timber, coal, or domestic iron ore

- Gains from sale or exchange of patents, copyrights, etc…

FDAP income tax liability normally is settled through withholding

by the payor.



However, there are special rules for foreign corporations that do not

have a US trade or business:

• Treas. Reg. Sec. 1.6012-2(g)(2): If a foreign corporation does not

have a US trade or business, it is not required to file a Form 1120-F as

long as any withholding tax due on other US source income was

properly withheld and reported on Form 1042-S.

• Even where there is no US trade or business, a foreign corporation

still is required to file a Form 1120-F in the following circumstances:

If it receives income treated by that corporation as ECI with a US

trade or business under Section 882(d) or 882(e);

Has overwithheld tax for which it is claiming a refund;

Has gross transportation tax; or

Is subject to the accumulated earnings tax.

Exceptions to Filing – No US Trade or

Business

68 network of independent member firms

affiliated with KPMG International

Cooperative (“KPMG International”),

a Swiss entity. All rights reserved.

The KPMG name and logo are

registered trademarks or trademarks of

KPMG International.

© 2016 KPMG LLP, a Delaware limited

liability partnership and the U.S.

member firm of the KPMG

Exceptions to filing – Beneficiaries of

Estates and Trusts Treas. Reg. Sec. 1.6012-2(g)(2)(ii): A foreign corporation that is a

beneficiary of an estate or trust that is engaged in a US trade or

business is not required to file a Form 1120-F

• Clarifies that corporate taxpayers that are deemed to have a US trade

or business pursuant to Section 875(2) do not have a filing

requirement.

• However, if that same corporate taxpayer is otherwise engaged in a

US trade or business, that taxpayer still will have an obligation to file.



A foreign corporation also does not need to file a Form 1120-F

where Its only US source income is exempt from US taxation under

section 881(c) or 881(d)

Exceptions to Filing – Portfolio Interest

and Other Situations

• Section 881(c): exempts portfolio interest received by a foreign corporation.

Portfolio interest – interest that is paid on an obligation (i) that is in registered

form, and (ii) the lender is a non-US person.

• Section 881(d): Certain interest and dividend income described in Section 871(i)(2).

Section 871(i)(2) includes:

- Interest on deposits, as long as interest is not ECI with a US Trade or

Business;

- The active foreign business percentage of any dividend/interest paid by an

existing 80/20 company;

- Income derived by a foreign central bank; and

- Dividends paid by a foreign corporation which are treated as income from

sources in the US.

IRS Audit Priority Campaign







KPMG International.





In January of 2017, the IRS Large Business and International (LB&I)

division announced the identification and selection of 13

campaigns. One of the campaigns focused on Form 1120-F Non-

Filers:

“Foreign companies doing business in the US are often required to file

Form 1120-F. LB&I has data suggesting that many of these companies

are not meeting their filing obligations. In this campaign, LB&I will use

various external data sources to identify these foreign companies and

encourage them to file their required returns. The treatment stream for

this campaign will involve soft letter outreach. If the companies do not

take appropriate action, LB&I will conduct examinations to determine the

correct tax liability. The goal is to increase voluntary compliance by

foreign corporations with a US business nexus.”







KPMG International.





What are the reasons for the campaigns?

• Historically, the LB&I has focused on the largest 1,500 taxpayers, with

daily/weekly contact.

• These campaigns are trying to move from client focus to issue focus,

with the idea that focus on specific items will increase efficiencies and

subject matter expertise within the IRS.







KPMG International.





How will the campaign for 1120-F Non-Filers work:

• Uncertain at this time whether the campaigns will be run from a discrete

office/region in the country or dispersed geographically.

• Identification of targeted taxpayers:

• “Low-hanging fruit” (from the IRS perspective): foreign corporations with

fixed places of business and/or a dependent agent in the US.

• How done: Research of publicly available information (e.g., internet)

• Soft letter outreach:

• The letter does not signify the beginning of an examination.

• Question: Once a taxpayer receives the soft letter, is there still an

opportunity to obtain reasonable cause relief?

• “Taking appropriate action:” Is the presumption that the taxpayer receiving the

soft letter must file a Form 1120-F?

Contact

DIRK GIFFORD

Managing Director, International Tax

KPMG LLP

1676 International Drive

McLean, VA 22102

O: 703-286-8675

C: 703-728-0883

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of

independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on

such information without appropriate professional advice after a thorough examination of the particular situation.

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