International Operations: Understand the Tax Reporting Requirements

Tax reporting can pose a challenge for any business, but the complexities grow when a company has operations in more than one country. A business with international operations or foreign ownership faces a large—and frequently changing—array of reporting requirements designed to provide information about a taxpayer’s foreign activities.

Failure to submit all required reports can lead to sizable fines, even if the business owners were simply unaware of the mandated obligations. Willful violations can also lead to criminal charges.

The reporting requirements vary, of course, depending on a company’s size and ownership structure, as well as the nature of its business transactions and the countries involved. While the following is not a complete list, here are a few of the most commonly required information reporting forms that international businesses must submit to the IRS.

Foreign Operations Reporting

Regardless of how their foreign operations are set up (as branches, subsidiaries, joint ventures, or some other structure), companies that conduct business in other countries must submit several forms to the IRS. In most instances, these reporting requirements apply to U.S.-based corporations, partnerships, estates, and trusts, as well as to individual taxpayers. Commonly required filings include:

  • Form 5471: This form is used to report information about foreign corporations in which U.S. taxpayers have a certain level of ownership (usually 10 percent or more). In addition to Form 5471, taxpayers also could be required to complete any of more than a dozen separate schedules, depending on the nature of the foreign entity and the shareholder’s interests, financial transactions, and other factors.
  • Form 926: Taxpayers must use this form to report the transfer of tangible or intangible property (including cash or securities) to a foreign corporation. The information required varies depending on the taxpayer’s level of ownership or control over the foreign corporation.
  • Form 8865: Businesses and individuals use Form 8865 to report information about foreign partnerships in which a U.S. taxpayer has more than a 10 percent interest. The required information includes the partnership’s balance sheet, income statement, and partner ownership levels.
  • Form 8858: This form is required for businesses that own foreign disregarded entities or foreign branches. The form provides information about the entity, its activities, and ownership. It also includes schedules such as balance sheets, income statements, tax reconciliation, and other financial information.

Foreign Ownership Reporting

Any U.S. business that has foreign owners or investors must file certain tax and foreign ownership disclosure forms, even if its operations occur only within the United States. Foreign ownership reports include the following:

  • Form 5472: U.S. businesses owned by foreign taxpayers must file Form 5472 to report details about their transactions, relationships, and financial interests.
  • Form 1042: U.S.-based withholding agents use this form to report tax withheld on certain income (such as interest or dividends) paid to foreign taxpayers including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts.
  • Form 8804: Any partnership that has effectively connected gross income that is allocable to a foreign partner must file Form 8804. This form reports information regarding the partners’ distributive share of the taxable income and is also used to pay the applicable withholding taxes.
  • Form 1120-F: Foreign corporations that have income, gains, or losses that are treated as if they were effectively connected with the conduct of a U.S. trade or business must file this form. The form is required even if the corporation does not have U.S.-sourced income or the income is exempt from U.S. tax under a tax treaty.
  • Form 1040-NR: Non-resident individuals earning income in the U.S. must file this form to report and pay their U.S. taxes.

Other Required Reporting

Businesses that engage in international transactions often need to maintain accounts in non-U.S. banks or other financial institutions. If the aggregate value of all such accounts exceeds $10,000 at any time during the year, the taxpayer must file a Financial Crimes Enforcement Network (FinCEN) Form 114. Although this form is not part of a federal tax return, the IRS is responsible for enforcing the FinCEN requirements and can penalize any business, individual, trust, or estate that fails to comply.

U.S. businesses that conduct transactions with foreign subsidiaries, affiliates, or parent companies should also maintain detailed transfer pricing documentation. The IRS can require businesses to demonstrate that transactions between related companies are conducted at arm’s length pricing to prevent improper shifting of profits to countries with lower tax rates.

The various reporting requirements and penalties change frequently, so it is easy to be unaware of changing rules. In addition, changes in a business’s operations can create new reporting requirements. Even unintentional noncompliance can trigger significant penalties, so any business with international interests should consult with their tax professionals frequently regarding their international activities. Contact us if you have any questions about IRS reporting.