u.s.-mexico dual taxation: residency rules, filing...
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U.S.-Mexico Dual Taxation: Residency Rules, Filing
Requirements, Planning OpportunitiesTHURSDAY, JULY 18, 2019, 1:00-2:50 pm Eastern
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July 18, 2019
U.S.-Mexico Dual Taxation: Residency Rules, Filing Requirements, Planning Opportunities
Patrick J. McCormick, J.D., LL.M., Principal
Drucker & Scaccetti
David A. Matos, CPA, CISA, CRFAC, RFI, Partner
MATOS & JAWAD PLLC
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
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
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.
Patrick J. McCormick, JD, LLM
U.S.-Mexico Dual
Taxation: Rules,
Requirements, and
Planning Opportunities
© Copyright 2018 Drucker & Scaccetti
PATRICK J. MCCORMICK
• Patrick J. McCormick is a principal with Drucker & Scaccetti, P.C. He earned his J.D. from Vanderbilt University Law School in 2008, and his LL.M. from New York University School of Law in 2009.
• The exclusive focus of Patrick’s practice is international taxation; Patrick regularly publishes articles and gives presentations on all areas of international tax law, with a significant subset of his clients having Mexican assets and/or residency.
6
INTRODUCTION
• Mexican taxpayers – whether individual or corporate –
increasingly engage in United States business activities
• For individuals, United States investments can be
intertwined with exploration of United States residency
• Significant planning opportunities exist in the pre-U.S.
taxpayer period
• Mexican corporate entities with United States operations
are subject to tax on United States-sourced business profits
• United States taxpayers with Mexican operations are
also subject to special tax rules by both jurisdictions
• Cognizance of Mexican-specific factors – both from the tax
and business perspective – is critical when entering the
Mexican market
7
MEXICAN TAXPAYERS – UNITED STATES
INCOME TAX
• Under default U.S. rules, Mexican nonresident
aliens/corporate entities are subject to United States tax
on:
• (1) income effectively connected with a United States trade
or business, and
• (2) fixed or determinable annual or periodic income
• Non-U.S. taxpayers are subject to U.S. tax primarily
on income items sourced to the United States
• Detailed sourcing rules for income items exist; for example,
interest/dividend income is sourced to the payor’s location
• Rent/royalties sourced to the place of use of the asset
• Personal services sourced to where services performed
8
MEXICAN TAXPAYERS – EFFECTIVELY
CONNECTED INCOME
• Under default rules, income earned by individuals
effectively connected to a United States trade or
business is subject to tax
• “Trade or business” undefined in the Code/regulations – but
profit-oriented activities carried on in the United States
which are regular, substantial, and continuous are properly
classified as a trade or business for these purposes
• Effectively connected income includes performance of
U.S.-based personal services
• Macro-level – relatively light requirements to be
considered engaged in a U.S. trade or business
• Effectively connected income taxed by the United States at
graduated rates, with deductions/credits available
9
MEXICAN ENTITIES – BRANCH PROFITS TAX
• Branch profits tax is imposed as a second tax on foreign
corporations engaged in a United States trade or
business through branch operations
• Tax equal to 30% of the corporation’s “dividend equivalent
amount” for the year
• Dividend equivalent amount – U.S. effectively
connected E&P minus amounts reinvested in U.S.
assets
• Branch profits tax intended to equalize branch operations
with subsidiary operations
• Latter often preferable as a result of branch profit rules
10
MEXICAN TAXPAYERS – FIRPTA
• Under the Foreign Investment in Real Property Tax Act of 1980, gain from disposition of United States real property interest by a foreign taxpayer is subject to tax
• Gains are automatically classified as ECI!
• United States real property interest: any interest in United States real property or an interest in a domestic corporation unless such corporation was not a United States real property holding corporation for the prior five years
• United States real property holding corporation: corporation where more than 50% of the corporation’s assets are United States real property interests
• Transferee must withhold on disposition at a rate of 15% of the amount realized
• Vitally, nonresident aliens generally not subject to capital gains tax on non-ECI U.S.-sourced gains
11
MEXICAN TAXPAYERS – FDAP INCOME
• Fixed or determinable annual or periodic income (“FDAP income”) also subject to tax by the United States (for income items sourced to the U.S.)
• FDAP income functions as a catch-all for U.S.-sourced income items (aside from capital gains) not otherwise subject to U.S. tax
• Includes interest (subject to expansive exceptions), dividends, rent, salaries, wages, premiums, annuities, compensation, remuneration, etc.
• Interplay exists between ECI and FDAP income
• US-sourced income is classified as effectively connected to a U.S. trade or business rather than FDAP if it satisfies an asset use test or a business activities test
• FDAP income generally subject to a flat 30% rate of tax (with tax collected through withholding by payors)
• Deductions not permitted for FDAP income
12
MEXICAN TAXPAYERS – U.S.-MEXICO INCOME
TAX TREATY
• The United States and Mexico maintain an income tax
treaty, which (upon election) can alter tax ramifications
for Mexican taxpayers with United States-sourced
income
• Under treaties, residents of a treaty country can be taxed at
a reduced rate, or even exempted from tax, on specified
items of income from the other country
• i.e. withholding taxes on United States-sourced income
• Savings clause prevents a United States
citizen/resident/entity from using a tax treaty to alter tax on
US-source income
• Treaty-based positions generally must be disclosed
• Subject to exemptions under the Regulations
13
MEXICAN TAXPAYERS – U.S.-MEXICO INCOME
TAX TREATY
• Residency takes on importance in this realm – generally foreign taxpayers are entitled to treaty benefits only when they are residents of a treaty party country
• Treaty definitions of residence normally include persons liable for tax to a country based on domicile, residence, citizenship, place of management, or place of incorporation
• Corporations are residents of countries for these purposes if liable for tax based on the country being its place of management
• Can have conflicts as to residence where place of management and place of incorporation differ
• Tiebreaker typically is the treaty between those two countries
• Rules exist to prevent “treaty shopping” – entity creation solely for purposes of treaty benefits
4-16
14
MEXICAN TAXPAYERS – U.S.-MEXICO INCOME
TAX TREATY
• Treaty modifications for business income – “effectively
connected to a United States trade or business” shifted to
business profits attributable to a permanent establishment
• Treaty Article 7(1)
• Heightened standard for U.S. taxation – though threshold still
low
• Dividends – if a U.S. company pays a dividend to a Mexican
shareholder, the U.S. tax rate is capped at 10% (and can be
reduced to 0 or 5% under specified circumstances)
• Treaty Article 10(2)
• Branch profits tax generally reduced so that tax ramifications of
U.S. branch operations match U.S. subsidiary ramifications
15
MEXICAN TAXPAYERS – U.S.-MEXICO INCOME
TAX TREATY
• Treaty modifications for independent (non-employee) personal services – income taxable if attributable to a regularly available fixed base or if nonresident spends >183 days in source country in a 12-month period
• Treaty Article 14(1)
• Treaty modifications for dependent (employee) personal services – income taxable by source country except if (1) employee present in source country for <184 days, (2) compensation paid by an employer not a resident of the source country, and (3) compensation not deducted by a permanent establishment or fixed base of the employer in the source country
• Treaty Article 15(1)
4-16
16
MEXICAN NONRESIDENT ALIENS –
TRANSFER TAXES
• Estate tax: nonresident aliens subject to tax on all
property (whether tangible or intangible) sitused within
the U.S.
• Subject to some exceptions (such as bank accounts not
used in association with a U.S. trade or business)
• Real property and tangible personal property are sitused in
accordance to where the assets are physically located
• Shares of a corporation are sitused in the country in
which the corporation is formed
• Nonresident aliens receive a $60,000 estate tax exclusion
with a maximum 40% rate of tax applicable
18
MEXICAN NONRESIDENT ALIENS –
TRANSFER TAXES
• Gift tax: nonresident aliens normally are subject to gift
tax on lifetime gratuitous transfers of tangible property
within the United States
• Generally comprising real property situated within the
country and tangible personal property within the U.S. at
the time of the gift, including hard currency or cash situated
within the U.S.
• Intangible property (i.e. shares of a corporation) is not
subject to gift tax for nonresident alien donors
• No specific gift tax exclusion for nonresident aliens,
though the $15,000 per donee annual exclusion is
available
19
MEXICAN NONRESIDENT ALIENS –
TRANSFER TAXES
• What isn’t subject to transfer tax?
• Non-U.S. sitused assets are not subject to U.S. transfer tax
when donor is a NRA
• Foreign property, foreign holdings are not subject to
U.S. transfer taxes
• Intangible assets are not subject to gift tax for NRA donor
regardless of situs
• i.e. stock in a U.S. corporation generally will not be
subject to gift tax
• Reliance on ability to gift asset pre-death to remove
from taxable estate an option, but carries risk (i.e.
sudden death)
20
MEXICAN NONRESIDENT ALIENS –
TRANSFER TAXES
• How should Mexican nonresident alien investments into
the United States be structured?
• Nonresident alien investors typically focus on three United
States tax factors: (1) income tax consequences, (2)
estate/gift tax consequences, (3) anonymity; and (4)
simplicity of structure/minimization of filing requirements
• Anonymity – nondisclosure of identity to the United
States government
• Foreign corporations do not face estate/gift tax exposure,
but are subject to branch profits tax
• Branch profits tax avoidance available by having
foreign corporation own a separate U.S. corporation
21
MEXICAN NONRESIDENT ALIENS –
TRANSFER TAXES
• Common ownership structures
• Individual ownership of a U.S.-sitused income generating
asset (or ownership through a DRE)
• Benefits: exemption from capital gains tax (if gain from
asset sale not classified as ECI – real estate gains not
exempt), long-term assets which are ECI subject to
capital gains rates on disposition (though can be
subject to FIRPTA withholding)
• Detriments – estate/gift tax exposure, need to file
individual U.S. tax returns if ECI generated
22
MEXICAN NONRESIDENT ALIENS –
TRANSFER TAXES
• Common ownership structures
• Ownership of a U.S.-sitused income generating asset
through a foreign corporation
• Benefits: same exemption from capital gains tax as for
NRA ownership; protection from estate/gift tax
exposure (as NRA owns a foreign corporation – non-
U.S. sitused asset); subject to corporate tax rates on
income
• Detriments – exposure to branch profits tax on earned
income; Form 1120-F can require disclosure of
underlying ownership; no differentiated tax rate for
LTCG
23
MEXICAN NONRESIDENT ALIENS –
TRANSFER TAXES
• Common ownership structures
• Ownership of a U.S.-sitused income generating asset
through a foreign corporation owned by a domestic
corporation
• Benefits: protection from estate/gift tax exposure; no
branch profits tax; no disclosure of ownership required
(as Form 1120 filed showing foreign corporation as
owner); subject to corporate tax rates on income
• Detriments – no differentiation for LTCG; no exemption
for non-ECI capital gains (as asset owned by domestic
corporation)
24
MEXICAN NONRESIDENT ALIENS –
TRANSFER TAXES
• Common ownership structures
• Ownership of a U.S.-sitused income generating asset
through a foreign nongrantor trust
• Benefits: protection from estate/gift tax exposure; no
branch profits tax; subject to LTCG rates
• Detriments – potential ramifications for U.S.
beneficiaries of trust; need disclosure of identity on tax
return; subject to individual tax rates on ordinary
income
25
MEXICAN NONRESIDENT ALIENS –
TRANSFER TAXES
• Critically, proper structure will hinge on the specific
investment – and investor - involved
• Multitude of questions needs to be asked in order to
properly structure the investment’s ownership
• Questions will typically focus on the types of
income/gains anticipated from an investment, the type
of taxpayer making the investment, treaty application,
etc.
• Additional layer of questions – what are the Mexican tax
implications?
26
U.S. TAXPAYERS – INCOME TAXES
• United States citizens and residents are taxable on their
worldwide income
• Sourcing determinations less relevant – taxable on all
income, whether domestic or foreign-sourced
• Foreign tax credits alleviate burdens of double taxation
for U.S. taxpayers with Mexican-sourced income
• Generally, citizens/residents utilize FTC rather than income
tax treaties
• Tax treaties contain “saving” clause, exempting
citizens/residents from most treaty benefits
• United States taxpayers subject to capital gains on
worldwide asset dispositions
27
U.S. TAXPAYERS – INCOME TAXES
• Which individuals are U.S. taxpayers?
• Citizenship – persons born in the United States, naturalized in the United States, or (under specified circumstances) where parents were United States citizens at the time of their birth
• Classified as a “resident” for United States income tax purposes under default rules if:
• Lawfully admitted for permanent residence (green card holder); or
• Meet substantial presence requirements
• Substantial presence – 31 days in the current year in the United States and the sum of days in the last three years (after applicable multipliers) exceeds 183
28
U.S. TAXPAYERS – INCOME TAXES
• Which individuals are U.S. taxpayers?
• Special rules exist which can reclassify individuals who meet U.S. tax residency requirements as nonresident aliens
• “Closer connection exception” can reclassify substantial presence residents as NRAs
• U.S.-Mexico Treaty Art. 4(2) – if an individual is treated as a resident of both the U.S. and Mexico under default rules, tiebreaker provisions reclassify them as a resident of only one
• Applies to substantial presence residents and green card holders!
• Both closer connection/treaty tiebreaker rules inapplicable to citizens
29
U.S. TAXPAYERS – INCOME TAXES
• Pre-immigration transfer tax planning options where a Mexican nonresident alien seeks become a resident/citizen (i.e. investor looking for residency options)?
• Income tax: goal is to achieve basis step-ups (on non-U.S. assets) and income recognition (on non-U.S. income) prior to U.S. taxpayer status
• Transfer tax: want to transfer non-United States assets prior to residency/citizenship if potentially be subject to domestic transfer taxes (and can live without the assets to be transferred)
• Whether an individual will face transfer tax exposure depends on a multitude of variables – length of anticipated stay, age/asset growth potential, potential for reduction in citizen/resident exemption amounts
30
U.S. TAXPAYERS – INTERESTS IN MEXICAN
ENTITIES
• Special tax rules come into play for U.S. taxpayers with interests in foreign corporations
• Technically, the foreign corporation is respected as a separate taxpayer; however, current inclusion (irrespective of corporate distributions) can be required for U.S. shareholders
• Subpart F/GILTI regimes create current inclusion for significant income amounts if ownership thresholds met
• Passive foreign investment company (“PFIC”) rules do not require ownership thresholds, and carry potential for punitive tax ramifications on dispositions/excess distributions
• Special anti-deferral rules inapplicable to flow-through entities – because no deferral occurs!
• Threshold question: How is a Mexican entity classified for U.S. tax purposes?
31
U.S. TAXPAYERS – INTERESTS IN MEXICAN
ENTITIES
• Foreign-domiciled business entities generally are able to elect their entity classification for United States tax purposes
• EXCEPTION: Per-se corporations (as listed in the Regulations)
• Mexican Sociedad Anonima automatically classified as a corporation under U.S. rules
• Default rules for classification exist, which hinge on the limited liability of owners/members
• If limited liability for owner/owners – association taxable as a corporation
• If no limited liability for at least one owner – partnership if multiple members, disregarded entity if one
• Elections out of default rules are available - can elect to be a partnership, corporation, or disregarded entity
• Election made on Form 8832 – initial election required within 75 days of entity becoming “relevant”
32
U.S. TAXPAYERS – INTERESTS IN MEXICAN
ENTITIES
• Subpart F imposes a direct tax on a U.S. shareholder of a controlled foreign corporation (“CFC”) as to the CFC’s Subpart F income
• Tax imposed directly on U.S. shareholder, regardless of whether distributions of income are made to the shareholder
• Provides a method for the United States to disincentivize transactions improperly sourcing income to foreign jurisdictions
• Threshold requirements must be met for Subpart F regime to apply
• Requirements: look to (1) whether a U.S. shareholder exists, (2) whether there is a CFC, and (3) whether the CFC has Subpart F income
• U.S. shareholder – United States person owning at least 10% of the foreign corporation’s voting stock or value
• Controlled foreign corporation exists if on any day during a given year U.S. shareholders own more than 50% of the stock of the foreign corporation
33
U.S. TAXPAYERS – INTERESTS IN MEXICAN
ENTITIES
Subpart F income is primarily comprised of “movable income” –income that can be shifted to foreign jurisdictions more easily
• Foreign base company income is typically the largest component of Subpart F income
• Includes foreign personal holding company income, foreign base company sales income, foreign base company services income, etc.
• Foreign personal holding company income: dividends, interest, rents, royalties, annuities
• Also includes certain net gains from sale of property which generates passive income
• Foreign base company sales/services income –look to activities outside the corporation’s country of domicile and the transactions with related persons
34
U.S. TAXPAYERS – INTERESTS IN MEXICAN
ENTITIES
• What if Subpart F application requirements are not met?• No mechanism for immediate tax is implemented; however,
prospective distributions by the foreign corporation (or dispositions of the shares of the foreign corporation) potentially subject to PFIC regime
• PFIC – punitive ramifications for shareholders of foreign corporations with significant passive income
• Income automatically classified as ordinary (taxable at highest rates), with an interest charge applicable based on the holding period for the interest
• Sec. 1297(d) – if a shareholder’s interest in a foreign corporation meets both Subpart F and PFIC requirements, only Subpart F applies
• Often preferable to apply Subpart F – tax accelerated, but punitive PFIC ramifications avoided
35
U.S. TAXPAYERS – INTERESTS IN MEXICAN
ENTITIES
• Under Sec. 951A, U.S shareholders of a controlled foreign corporation must include their share of global intangible low-taxed income in US tax
• GILTI: Excess of the shareholder’s net CFC tested income over the shareholder’s net deemed tangible income return
• U.S. shareholder and controlled foreign corporation concepts mirror Subpart F
• GILTI inclusion treated similarly to Subpart F in many ways, but not technically a component of Subpart F
• 50% deduction available for GILTI, but ONLY for C-Corporations!
• Makes the effective tax rate for corporate shareholders 10.5%
• For non-corporate U.S. shareholders, rate can be 37%
36
U.S. TAXPAYERS – INTERESTS IN MEXICAN
ENTITIES
• GILTI Application
• Functionally, GILTI essentially is tax imposed on U.S.
shareholders of a CFC on the excess of an assumed 10%
rate of return on tangible business assets of the CFC
• GILTI imposes a minimum tax on foreign earnings that
exceed a standard rate of return amount
• No direct reference to intangibles is made in Sec. 951A
• Aim may have been intangible income, but application
will be significantly more far-reaching, and not limited to
one type of income (i.e. movable income)
37
U.S. TAXPAYERS – DIRECT MEXICAN
ACTIVITIES
Foreign-Derived Intangible Income (“FDII”)
• A deduction is allowed to domestic corporations in an amount equal to 37.5% of the FDII of the domestic corporation for the tax year
• Deduction ONLY available to C-corporations!
• FDII equals deemed intangible income multiplied by a fraction: foreign-derived deduction eligible income over deduction eligible income.
• FDII is the portion of intangible income derived from serving foreign markets; like GILTI, it assumes a 10% rate of return on tangible assets
• FDII concept offers a special reduced effective tax rate on income from US-held intangibles; concept does not explicitly look at intangibles but assumes a fixed rate of return on business assets with the balance of income being from intangibles
38
U.S. TAXPAYERS – TRANSFER TAXES
• United States citizens/domiciliaries taxable on transfers
of worldwide assets, whether during life or at death
• However, given a lifetime exclusion of roughly $11.4 million
(as per TCJA increases)
• Treated as a domiciliary for estate/gift tax purposes when
maintaining a United States domicile – person is a United
States resident with no present intention of leaving
• Facts and circumstances determination – look to length
of stay, ties to U.S. versus other countries, etc.
• Imposes an elevated standard for presence-based tax
as compared to income tax requirements!
• No U.S.-Mexico estate/gift tax treaty!
39
U.S. TAXPAYERS – TRANSFER TAXES
• Special rules can apply to interests in/transfers to
Mexican trusts
• United States beneficiaries of foreign nongrantor trust are
subject to tax via the “throwback” rule on accumulated
distributions
• Replicates PFIC tax – creates punitive tax ramifications
• For foreign trusts created by a nonresident alien who
becomes a United States citizen or resident within five
years of transfers to the trust, the trust is treated as a
grantor trust if it has any United States beneficiaries
• Importantly, this rule applies for income tax purposes –
but NOT transfer tax purposes
40
INTRODUCTION
David A. Matos
• Matos & Jawad PLLC – Partner
• Matos CPA LLC - Owner
• Pride International, Inc. - Country
Controller – Mexico
• Nabors, Inc. - Finance Director –
Mexico
• Weatherford, Inc. – Corp.
Accounting Systems Manager
• Continental Airlines – Sr.
Information Systems Auditor
• Deloitte & Touché - Systems
Auditor44
GENERAL REPORTING REQUIREMENTS – FBAR
FinCEN Report 114 (“FBAR”) – filed by United States persons with
financial interests in or signature authority over foreign financial
accounts where the aggregated value of accounts exceeds
$10,000 at any point during the year
United States persons – U.S. citizens, residents, corporations,
trusts, estates, partnerships, LLCs
Reportable accounts – checking/savings accounts, mutual
funds, policies with cash values, securities accounts, etc.
Financial interest – owner of record/holder of legal title or
person with beneficial interest
Also required to file where no financial interest is maintained but signature authority exists
45
FBAR PENALTY ASSESSMENTS
Nonwillful Penalties
Can be penalized up to $10,000 per account per year
Willful Failures
Willful failures – penalty can be the greater of $100,000 or 50% of the aggregated balance of unreported accounts;
penalties can be assessed on a per-year basis (six-year
statute of limitations)
Retroactive reporting options
Streamlined Program
46
GENERAL REPORTING REQUIREMENTS - FORM 8938
Used to report interests in specified foreign financial assets
Largely duplicates FBAR – look to accounts, financial assets,
etc.
ONLY NEED TO FILE WHERE A FINANCIAL INTEREST EXISTS
Unrequired for mere signature authority, unlike the
FBAR
Accounts, securities held outside accounts, interests in foreign entities, etc.
Filing thresholds:
Residents of United States – aggregated value of $50,000
at end of year or $75,000 at any time during year;
$100,000/$150,000 if married filing jointly
Residing overseas - $200,000/$300,000 if single;
$400,000/$600,000 if married filing jointly
47
FORM 8938 PENALTY ASSESSMENTS
$10,000 penalty assessable for failure to file (with additional
penalties up to $50,000)
Treasury notifies of failure to file; after 90 days, if still not filed,
$10,000 penalties are assessed up to $50,000
Failure to file when required can cause statute of limitations for
entire tax return to stay open until three (3) years after the form is
filed
Reasonable cause exception exists
Form first required in 2011
48
GENERAL REPORTING REQUIREMENTS – FORMS 5471
FORM 5471 is used to report specified interests of United States
persons in foreign corporations
Required for U.S. person who is an officer or director in a
foreign corporation in which a U.S. person has acquired a 10%
interest
Required for U.S. person who acquires 10% interest in a foreign
corporation or who disposes of sufficient stock to reduce his/her interest below 10%
Required for U.S. person who had control of a foreign
corporation for an uninterrupted period of at least 30 days
during the annual accounting period of the foreign
corporation
Required for U.S. shareholder who owns stock in a foreign
corporation which is a CFC for an uninterrupted period of 30
days or more49
FORM 5471 PENALTY ASSESSMENTS
A $10,000 penalty is imposed for each annual accounting period
of each foreign corporation for failure to furnish the information
required by section 6038(a) within the time prescribed. If the
information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000
penalty (per foreign corporation) is charged for each 30-day
period, or fraction thereof, during which the failure continues after
the 90-day period has expired. The additional penalty is limited to
a maximum of $50,000 for each failure.
50
GENERAL REPORTING REQUIREMENTS – FORMS 5472
FORM 5472 is used by a reporting corporation if it had a reportable
transaction with a foreign or domestic related party
Reporting corporation: either a 25% foreign-owned U.S.
corporation or a foreign corporation engaged in a trade or
business within the United States
Reportable transaction: certain transactions listed in Part IV of
Form 5472 (i.e. sales, rents, etc.) for which monetary
consideration was the sole consideration paid or received
during the reporting corporation’s tax year or any transaction
or group of transactions listed in Part IV if (1) any part of the
consideration paid or received was not monetary
consideration or less than full consideration was paid or
received
Related party for instance any direct or indirect 25% foreign
shareholder51
FORM 5472 PENALTY ASSESSMENTS
A penalty of $25,000 will be assessed on any reporting corporation
that fails to file the form when due and in the manner prescribed.
The penalty also applies for failure to maintain records as required
by Regulations section 1.6038A-3. Filing a substantially incomplete
Form 5472 constitutes a failure to file Form 5472. Each member of
a group of corporations filing a consolidated information return is a separate reporting corporation subject to a separate $25,000
penalty and each member is jointly and severally liable. If the
failure continues for more than 90 days after notification by the
IRS, an additional penalty of $25,000 will apply. This penalty
applies with respect to each related party for which a failure
occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.
52
GENERAL REPORTING REQUIREMENTS - NONRESIDENT
ALIENS
A non-U.S. citizen who does not pass the green card test or the
substantial presence test is considered a “non-resident alien.”
If a non-citizen currently has a green card they would pass the
green card test and would be classified as a US resident alien.
If the individual has resided in the U.S. for more than 31 days in
the current year and has resided in the U.S. for more than 183
days over a three-year period, including the current year, they
would pass the substantial presence test and also be classified as
a US resident alien.
Nonresident aliens with U.S.-source reportable income use Form 1040-NR
53
FORM 8833 - TREATY-BASED RETURN POSITION DISCLOSURE
Used by taxpayers to make treaty-based return position
disclosures required for many treaty benefits
Taxpayer takes a treaty-based return position by maintaining
that a treaty of the United States overrules or modifies a
provision of the Internal Revenue Code and thereby causes
(or potentially causes) a reduction of tax on the taxpayer’s tax
return
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FORMS W-8BEN - W-8BEN-E - W-8ECI
Form W-8BEN - Used to provided to withholding agents or payers
by nonresident aliens who are the beneficial owners of an
amount subject to withholding
Form W-8BEN-E - Used by foreign entities
Form W-8ECI - Supplied by foreign persons to prevent withholding
on United States-sourced income which is effectively connected
with the conduct of a United States trade or business
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David A. Matos, CPA, CISA, CRFAC, RFI
PartnerMATOS & JAWAD PLLC
250 Ed English Drive Building 3 Unit C
Shenandoah, TX 77385
Cell: (713) 245-6274
Fax: (713) 999-4929
www.matosjawad.com
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