This alert was posted prior to the passing of more recent tax legislation. Before acting on any of the information in the following piece, please consult with a tax expert to learn if and how current legislation might impact or nullify what is stated in this article.
13 issues were identified by the IRS’ Large Business and International (LB&I) division as key audit indicators. Within the top 13 issues, 2 specific areas related to international tax compliance:
- Based on LB&I’s data, it has become evident that many foreign companies doing business in the US are not meeting the filing requirements of Form 1120-F. This is the form foreign companies report their income, gains, losses, deductions, credits, and figure their U.S. income tax liability on income effectively connected with the conduct of a U.S. trade or business. If form 1120-F is not filed, the company loses the right to deduct expenses against U.S. income. In an effort to encourage voluntary compliance, LB&I will send letters to the identified companies to encourage them to take action. If the companies don’t take action, LB&I will audit and decide the correct tax liability. As a result of this increased focus on noncompliance, it is becoming even more important to file a “protective return” in cases of borderline U.S. presence.
- Documentation is your best ally when dealing with LB&I’s regulation of Inbound Distributors. Without thorough transfer pricing documents, U.S. distributors with goods sourced from foreign-related parties are at increased risk of the IRS imposing their own interpretation of an arms’ length arrangement, levying distributors with transfer pricing adjustments that are unfavorable to the taxpayer. LB&I has a comprehensive training strategy to aid revenue agents as they examine IRC section 482 Therefore, taxpayers with foreign related parties should proactively evaluate and document an appropriate and consistent business arrangement before commencing cross-border intercompany charges.
If you would like a consultation on either of these international issues please let us know.