The IRS has released proposed regulations expanding the scope of business entities that must comply with section 6038A to include previously disregarded entities. The proposed regulations would strengthen rules requiring informational reporting and record maintenance. Section 6038A subjects domestic corporations that are 25% or more foreign-owned to informational reporting and record maintenance requirements. Currently, certain domestic business entities, such as single member LLCs, are treated as disregarded entities and thus exempt from the requirements of section 6083A, even if they’re foreign owned.
The proposed regulations would reclassify these disregarded entities as corporations separate from the foreign owner for the purposes of section 6038A. Thus, these entities will be subject to the reporting requirements. Additionally, the disregarded entities would be required to obtain an employee identification number by filing Form SS-4. This change in entity classification, for section 6038A purposes only, would require disregarded entities to report transactions between the domestic disregarded entity and its foreign owner, or other foreign related parties, on Form 5472. They’ll also be required to maintain records that demonstrate the accuracy of the information return.
In order to ensure that all transactions with foreign related parties are included, the proposed regulations expand the number of reportable transactions by referencing section 482 which includes:
- Transfers in an interest ,or right to use property or money
- Performances of any services for the benefit of, or on behalf of, another
Additionally, the proposed regulations would make the small business exception (for corporations with less than $10,000,000 in US gross receipts) and the de minimis transactions exception (for corporations with total payments to or from foreign related parties of i) $5,000,000 or less and ii) less than 10% of US gross income) unavailable to these disregarded entities.
The penalty of $10,000 due to failure to file Form 5472 and failure to maintain records will apply to disregarded entities affected by the proposed regulations.
The immediate impact of Brexit to US businesses with UK operations has been a large drop in the global equity markets and an approximately 12% devaluation of the British Pound sterling against the US dollar. From a tax perspective, however, the impact of Brexit remains very uncertain and will take a longer period for US businesses to see the impact as there will be at least a two-year process for the UK to fully exit the EU.
One of the European Union’s primary functions is to serve as a free trade zone for its member nations. Now that the UK is set to leave, companies importing and exporting in and out of the UK to other EU members could see increased customs and duties since the UK is no longer a member of the EU. During the transition period, the UK could enter into new free trade agreements that could soften this impact, but nothing is guaranteed in regards to this. US companies with existing UK distribution entities, or contemplating such structures, should watch closely as these issues are addressed.
From an income tax perspective, Brexit could bring both benefits and costs to US businesses with UK operations. One potential benefit of Brexit is that the UK will no longer be bound by EU regulations when putting in place new tax legislation. While a member of the EU, the UK was required to amend its group relief rules and controlled foreign company rules as they were deemed to be non-compliant by the Court of Justice of the European Union. The UK could now look to revise its tax law in an effort to make its tax system even more competitive in order to generate additional foreign investment. Such revisions could apply to corporate tax structures as well as to incentivize wealthy individuals to take up UK tax residency. This, in turn, could reduce a US business’ global tax expense if the UK were to make its tax system friendlier.
US businesses with a UK holding company structure could find some significant costs as a result of Brexit. When the UK was a member of the EU, companies residing there could rely on the EU Parent-Subsidiary directive to mitigate local country withholding tax on dividends from companies resident in other EU member countries. Now with Brexit, this directive cannot be used, thus UK companies could face increased local country withholding tax on distributions from subsidiaries in EU member countries. Similarly to the potential for new free trade agreements, the UK could look to revise its treaties with its former EU members to achieve lower withholding rates, but that also remains to be seen.
The only certainty with Brexit is that the UK will no longer be part of the EU. Whether the UK looks to enter in free trade agreements and new income tax treaties with its former EU members should be continually monitored by US businesses to gauge the tax impact of Brexit. With all of this uncertainty, it is important for US businesses with UK operations to review their tax structure and transaction flows to understand how these various changes could impact their bottom line and begin planning for the change.