International Tax Alert - December 2016

December 2016

Final Regulations Issued Under Section 6038A


Summary

The Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) have issued final regulations under Internal Revenue Code (“IRC”) Section 6038A (the “Final Regulations”). The Final Regulations impact reporting, record maintenance and compliance for domestic disregarded entities wholly owned by a foreign person.


Background

On May 6, 2016, Treasury and the Service issued proposed regulations that would amend Treasury Regulation §301.7701-2(c) to treat a domestic disregarded entity that is wholly owned by one foreign person as a domestic corporation separate from its owner, for the limited purposes of the reporting and record maintenance requirements (including the associated procedural compliance requirements) under IRC Section 6038A. The proposed regulations are discussed in more detail in our Tax Alert IRS Proposes Regulations Requiring New Reporting Requirements Under Internal Revenue Code (“IRC”) Section 6038A for Foreign-Owned Domestic Disregarded Entities dated May 2016. The proposed regulations would have applied to taxable years of the entities described in §301.7701- 2(c)(2)(vi) ending on or after the date that is 12 months after the date of publication of the Treasury decision adopting the proposed rules as final regulations in the Federal Register.

In addition to generally soliciting comments on all aspects of the proposed rules, the preamble to the proposed regulations specifically requested comments on possible alternative methods for reporting a domestic disregarded entity's transactions in cases in which the foreign owner of the domestic disregarded entity already has an obligation to report the income resulting from those transactions—for example, transactions resulting in income effectively connected with the conduct of a U.S. trade or business. The Final Regulations reflect a limited number of changes by Treasury and the Service to the proposed regulations.  These changes are discussed below.


Final Regulations

First, the Treasury and the Service state in the preamble to the Final Regulations that the generally applicable exceptions to the requirements of Section 6038A should not apply to a domestic disregarded entity that is wholly owned by a foreign person. Accordingly, the proposed regulations provided that the exceptions to the record maintenance requirements in §1.6038A-1(h) and (i) for small corporations and de minimis transactions would not apply to these entities. However, the proposed regulations did not address the additional exception provided in §1.6038A-2(e)(3), under which a reporting corporation is not required to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under IRC Sections 6038A and 6038C), with respect to a related foreign corporation when a U.S. person that controls the related foreign corporation files a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, containing required information with respect to reportable transactions between the reporting corporation and the related foreign corporation for the taxable year. Similarly, the proposed regulations did not address the additional exception provided in §1.6038A-2(e)(4), under which a reporting corporation is not required to file Form 5472 with respect to a related foreign corporation that qualifies as a foreign sales corporation for a taxable year for which the foreign sales corporation files Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation. Upon final consideration of the proposed regulations, Treasury and the Service have concluded that, consistent with the scope and intent of the proposed regulations, the reporting requirements of the proposed regulations should apply without regard to the exceptions generally applicable under §1.6038A-2(e)(3) and (4). The exceptions in §1.6038A-2(e)(3) and (4) are revised accordingly in the Final Regulations.

Second, to facilitate entities' compliance with the requirements of Section 6038A, including the obligation of reporting corporations to file Form 5472, the Final Regulations provide that these entities have the same taxable year as their foreign owner if the foreign owner has a U.S. return filing obligation. If the foreign owner has no U.S. return filing obligation, the Final Regulations provide that the taxable year of these entities is the calendar year unless otherwise provided in forms, instructions, or published guidance.

Third, Treasury and the Service have concluded that for ease of administration, these regulations should apply to taxable years of entities beginning on or after January 1, 2017, and ending on or after December 13, 2017.

The proposed regulations would have applied to taxable years ending on or after the date that is 12 months after the date of publication of the final regulations in the Federal Register, without regard to the date on which the taxable year began.

The Final Regulations adopt the proposed regulations as so amended and with certain other minor clarifications.


BDO Insights

The Final Regulations expand the reporting that is required under IRC section 6038A. Please contact a BDO international tax specialist to assist you in reviewing how these rules may impact your Company’s reporting requirements.
 

For more information, please contact one of the following practice leaders:
 
Robert Pedersen
Partner and International Tax Practice Leader
         Chip Morgan        Partner 

 
Joe Calianno
Partner and International Tax Technical Practice Leader 
  Brad Rode
Partner 
 

 
William F. Roth III
Partner, National Tax Office
  Jerry Seade
Principal 

 
Scott Hendon
Partner 
  Monika Loving
Partner 

 
Annie Lee
Partner
  Sean Dokko
Senior Manager