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| Jim Fuller |
David Forst |
Changes to reporting rules in the US are intended to provide
the Internal Revenue Service (IRS) with improved access to
information that it needs to satisfy its obligations under US
tax treaties, tax information exchange agreements (TIEAs) and
similar international conventions, as well as to strengthen the
enforcement of US tax laws.
In December 2016, the Treasury and IRS finalised regulations
that treat a domestic disregarded entity (DRE) wholly owned by
a foreign person as a domestic corporation separate from its
owner for the limited purposes of the reporting, record
maintenance and associated compliance requirements that apply
to 25% foreign-owned domestic corporations under § 6038A.
The regulations amended Treas. Reg. § 301.7701-2(c) (part
of the check-the-box regulations).
Because the regulations treat the affected domestic entities
as foreign-owned domestic corporations for the specific
purposes of § 6038A, they would be reporting corporations
within the meaning of § 6038A. Consequently, they will be
required to file Form 5472 with respect to reportable
transactions between the entity and its foreign owner or other
foreign related parties.
Some disregarded entities are not obligated to file a US
federal tax return or to obtain an employer identification
number (EIN). The proposed regulation's preamble stated that in
the absence of a return filing obligation (and associated
record maintenance requirements) or the identification of a
responsible party as required in applying for an EIN, it is
difficult for the US to carry out the obligations it has
undertaken in its tax treaties, TIEAs and similar international
agreements.
Section 6001 provides that every person liable for any tax
imposed by the Code, or for the collection thereof, must keep
records, render statements, make returns and comply with the
rules and regulations as the Treasury and the IRS may from
time-to-time prescribe.
Entities, including disregarded entities, must have an EIN
to file a required return. An entity also must have an EIN in
order to elect to change its classification. Because a domestic
single-member LLC is classified as a disregarded entity by
default, rather than by election and has no separate federal
tax return filing requirements, previously there was typically
no federal tax requirement for it to obtain an EIN.
The regulations specify as an additional reportable category
of transactions for these purposes any transaction within the
meaning of Treas. Reg. § 1.482-1(i)(7) (with these
entities being treated as separate taxpayers for the purpose of
identifying transactions and being subject to requirements
under § 6038A) to the extent that they are not already
covered by another reportable category. The term 'transaction'
is defined in Treas. Reg. § 1.482-1(i)(7) to include any
sale, assignment, lease, license, loan, advance, contribution,
or other transaction of any interest in or a right to use any
property or money, as well as the performance of any services
for the benefit of, or on behalf of, another taxpayer.
Thus, contributions and distributions are considered
reportable transactions with respect to these entities.
The penalty provisions associated with failure to file Form
5472 and failure to maintain records apply to these entities as
well.
The regulations are applicable to taxable years of reporting
corporations beginning after December 31 2016, and ending on or
after December 31 2017.
Jim Fuller (jpfuller@fenwick.com)
and David Forst (dforst@fenwick.com)
Fenwick & West
Website: www.fenwick.com