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The 2017 Tax Bill (commonly referred to as the Tax Cuts and Jobs Act or TCJA) expands the scope of (and further complicates the application of) the CFC/Subpart F rules. As mentioned in my earlier blogs on the 2017 Tax Bill, the potential impact on non-US investors needs to be assessed. The impact does not stop there however. Far from it. Many US Person taxpayers face the prospect of sudden inclusion in a regime that previously did not implicate their holdings and consequent surges in taxable phantom income over the coming years. Moreover, their non-US investment partners may start asking them questions about their unrelated holdings for their own CFC/Subpart F purposes. In short, these are the sorts of changes that catch law-abiding taxpayers unawares until the IRS deficiency notice arrives bristling with interest and penalties.
First though, some light background music: The CFC/Subpart F rules, in simplified essence, oblige US Shareholders of Controlled Foreign Corporations (CFCs) to include in current taxable income relevant items of income earned by such CFC (so-called Subpart F income), even if not yet distributed to the US Shareholder via a dividend. The theory underlying this special treatment is that US Person taxpayers should not be permitted to defer the recognition of income by holding it through an off-shore corporation if such US Person taxpayers could compel the corporation to pay them a dividend, which would be taxable under the standard income taxation provisions of the Internal Revenue Code. Basically, you cannot defer taxation on income earned through a foreign corporation so long as it’s within your power to cause it be taxed. The core concept is relatively straightforward, but the rules rely on several specifically defined terms, the scopes of which determine inclusion or exclusion from the regime and any of which might present tricky analyses in certain taxpayer situations. Further, these definitions just acquired a few more wrinkles. This blog addresses four major modifications to key definitions, while leaving aside a host of more minor modifications. Modification to a "US Shareholder" Prior to the 2017 Tax Bill, the term, “US Shareholder” for Subpart F purposes generally covered any US Person owning 10% or more of a non-US corporation by vote of all classes of outstanding shares. The limitation to voting shares was logical as the aim of these rules was to capture US Persons with the authority to compel the non-US corporations to cough up a dividend. As such, the amount of holdings by value was, in theory, inconsequential. In addition to segregating those with real control from those with purely passive investment stakes, however, it tended to incentivise tax planning. No surprises there. Affected taxpayers sought to restructure their holdings of possible CFCs in order to reduce formal voting control below10%, while retaining actual control and full entitlement to economic benefits. For that reason, presumably, the 2017 Tax Bill adds US Persons owning 10% or more of a non-US corporation by value of all classes of outstanding shares to the definition of US Shareholder. As such, more lucky folks will qualify as US Shareholders of CFCs. Modification to a "Controlled Foreign Corporation" The term CFC generally covers any non-US corporations owned greater than 50% by vote or value – directly or indirectly – by US Shareholders. In calculating the percentages of ownership for this purpose, certain attribution rules per §318 apply. The CFC definition long required the application of the so-called upwards attribution rules. As a result shares owned indirectly by a US Person through an entity (of any type, including, corporations, partnerships, trusts or estates) would be treated as constructively owned by that US Person for purposes of this calculation. The 2017 Tax Bill adds downwards attribution to the possible additional sources of constructively owned shareholdings in a CFC. What is this downwards attribution and how does it work? Well, if upwards attribution means that the holdings of an entity are attributable to its owners (e.g. shareholders, partners, beneficiaries, as the case may be), downwards attribution is the flipside of that: The holdings of one of an entity’s owners may be attributed to the entity itself. For example, in a sister company scenario, the presence of a US subsidiary alongside a non-US subsidiary, both wholly-owned by a non-US holding company, would now result in the downwards attribution of the holding company’s shares in the non-US subsidiary to the US subsidiary. As a result, the non-US subsidiary would qualify as a CFC and any US Shareholders (including US corporations) of the non-US holding company would start incurring potentially includible income if they previously hadn’t. Overall, many more non-US corporations will qualify as CFCs unless the IRS narrows the application of this rule (or suspends it, as it did per Revenue Notice 2018-13 for the Transition Tax rule described below). As an aside to non-US investors: Due to these downwards attribution ownership rules, the holdings of US Person co-investors may affect your own investments because some of your US holdings may need to start paying more tax than previously as they now qualify as CFCs. Modifications to includible income (two major modifications here) Last but not least (actually, last and most of all), the 2017 Tax Bill expands the types of income earned by CFCs that must be treated as currently includible in the incomes of their US Shareholders. While not technically Subpart F income, the rules newly treat the following amounts as currently includible for US Shareholders of CFCs: Deferred foreign income corporation (DFIC) earnings and profits (E&P) and Global Intangible Low Tax Income (GILTI). The Transition Tax DFIC taxation per §965 (a/k/a the Transition Tax) is the levy on any post-1986 accumulated E&P of Specified Foreign Corporations that was not yet distributed or otherwise subject to US federal taxation (for further elaboration on this topic, please refer to my prior blog, The Trump Tax Bill: What it means in Switzerland (Part III)). Not all Specified Foreign Corporations are CFCs; it is a broader definition. However, all CFCs are Specified Foreign Corporations, meaning that all CFCs with positive and as-yet untaxed post-1986 accumulated E&P must pay the Transition Tax, which may be paid in installments over eight years. US Shareholders of CFCs with calendar year tax periods owe the Transition Tax starting for tax year 2017, which is thus evidently due by 17 April 2018. Presumably, therefore, in advance of this date, affected US Shareholders must calculate the total amount owed and commit to the installment plan. Somehow. To further complicate the matter, so far, the IRS has issued no forms or guidance on the process. A postponement to this particular deadline may seem inevitable, but even a laxer timetable will necessitate prompt action. GILTI Whereas the Transition Tax is one-time levy on historical income irrespective of its derivation, GILTI under §951A, on the other hand, is an on-going tax on contemporaneous income flows derived from intangible assets. Its underlying objective is to disincentivize the stashing of IP and other intangible assets in low-taxed overseas subsidiaries. It aims to achieve this objective by compelling US Shareholders to include a portion of this income earned by CFCs in their current taxable income prior to the payment of any dividends. An in-depth explanation of the formula used to isolate the specific class of income targeted is beyond the scope of this blog. In essence, however, it taxes a certain amount of the net income earned by a CFC that is not otherwise taxable (e.g. as ECI, Subpart F income, etc.), but reduced by 10% of the adjusted costs bases of depreciable (but not amortizable) assets held by the CFC (an amount itself reduced by interest expenses). The low tax jurisdiction component is implicated by FTCs allowable for 80% of the taxes paid on the income by the CFC (subject to §904 bucket limitations). In short, if a CFC in a low tax jurisdiction is earning mainly non-passive income and holding mainly intangible assets, its US Shareholders are supposed to be handing a portion of that income over to the US fisc each year.
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Part I of this blog series addressed the larger thematic issues for Swiss financial institutions and investors from the new US tax code provisions. Part II set out the scope and consequences of the reduced corporate tax rate and changes relevant to taxation of certain US investments. Part III explores several more relevant topics, including the movement towards a territorial tax system for US corporations and notable miscellaneous provisions before ending with a light-hearted, non-technical look at some of the more idiosyncratic elements of the Trump Tax Bill.
Towards a Territorial Tax System Most countries operate a territorial tax system. That means, that income is taxed where earned, irrespective of where the taxpayer is located. Historically, the US does not. Instead, the US relies on a quasi-territorial system for corporate tax under which a US corporation was subject to taxation on income earned by its subsidiaries abroad. However, the US parent could defer such taxation until the subsidiary distributed such earnings to the parent by means of a dividend. Receipt of such a dividend payment often entitled the US parent corporation to claim a foreign tax credit (FTC) for taxes paid by the subsidiary in its home jurisdiction. Nonetheless, for dividend payments from subsidiaries operating out of tax-friendlier jurisdictions, the FTC was substantially lower than the tax rate imposed in the US. Therefore, many US corporations hoarded cash in overseas subsidiaries, rather than repatriate it. This approach was upended in December. Per the new tax bill, dividends paid from non-US subsidiaries (or at least the portion consisting of non-US earnings) are entitled to a 100% dividends received deduction (DRD). The result of this DRD is non-taxation of such dividends for the US corporate parent (provided it owns 10% or more of the non-US subsidiary). In parallel, the provision granting an FTC for any taxes paid by the non-US subsidiary is repealed (as is any FTC attached to any dividend entitled to the 100% DRD). The overall re-shaping through these two changes looks a lot like a move to a pure territorial tax system. However, there are other international bits of the US tax code – new and pre-existing – that maintain some aspects of the previous universal (i.e. non-territorial) system. The most obvious one is the treatment of the historical aggregate earnings and profits (E&P) of the non-US subsidiaries that were not yet distributed (i.e. the amount that would have been subject to US taxation had the dividends been paid under the previous system). Per the recent changes, this E&P will be deemed to have been repatriated (i.e. paid to the US parent as a dividend), even though it was not yet. This hoarded E&P will be taxed at varying rates, depending essentially on whether it is held in liquid (cash or equivalent) or non-liquid form (15.5% and 8%, respectively). The amount owed pursuant to the deemed repatriation provision may be paid in installments as set forth in the tax code. Once taxed, dividends containing such historical E&P are also entitled to the 100% DRD deduction. Furthermore, certain exceptions will constrain the 100% DRD going forward, such as:
Oddly, branch profits remittances seem not to enjoy similar tax exemptions, remaining subject to the existing quasi-universal system with US headquarters taxed on the difference between the local tax rate and the new US corporate tax rate. Additionally, a new loss limitation basket for FTCs was introduced specifically for foreign branch operations. This differential treatment is bound to influence the business judgment of US corporations when deciding on the form of their overseas operations. All things being equal, branch operations will be less attractive economically due to their US tax treatment. This differential seemingly violates a cardinal norm of international taxation: To avoid tax rules that distort business decisions. Meanwhile, in other parts of the tax code, the non-territorial aspects of the US corporate tax regime continue to prevail. Foremost, the controlled foreign corporation (CFC) rules remain intact, meaning that certain non-US corporations owned in part by US Persons will continue to pay US taxes on specified types of current income earned outside the US. Moreover, new treatments for certain types of income derived from intangible assets further muddy the subpart F waters. Non-US investors ought to take another look at the rules governing CFCs – the new ones and their effect on the existing ones – in order to spot any knock-on consequences to their investments. Miscellaneous Items of Interest Scattered changes that merit a mention include the following:
The Peculiarities In order to close on a lighter note, let’s consider some of the odder elements of the Trump tax bill. Sometimes, strange revisions may address quirks or lacunae in the current rules and are thus bonafide clean ups of debris leftover in the tax system from previous revisions. However, other times, these curios are the products of the personal leverage of individual politicos over the drafting process. Such “pork-barrel” provision are promoted by or promised to one or a small cadre of legislators for the benefit of a narrow and/or local constituency. A few provisions in the new bill stand out as particularly peculiar (and smell a bit bacon-y), such as:
If you have any questions on the above analyses or wish to be automatically notified when the next Millen Tax & Legal GmbH blog is posted, please send an email to blog@millentaxandlegal.ch and you will be added to our subscriber list.
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Part I of this blog series addressed the larger thematic issues for Swiss financial institutions and investors from the new US tax code provisions. Part II will explore the first of several significant topics, coupled with an analysis of the implications for Swiss financial institutions and investors.
Competitive Corporate Tax Rates Prior to the Tax Cuts and Jobs Act, the US imposed one of the developed world’s steeper corporate tax rates at 35% (coupled with a further tax of up to 39.6% on the shareholder for dividends received). The new bill slashes that rate to 21% (and repeals the alternative minimum tax for corporations). The business- and investor-friendliness of this rate reduction is indisputable. In a flash, it will enhance the post-tax return on investment for US corporations, which ought to make the US operations of Swiss companies more profitable and the investment holdings of non-US investors more valuable. As noted in Part I of this series of blogs, numerous non-tax factors may mitigate the intended impact, but the tax wind clearly gusts in the direction of higher corporate post-tax profits and thus presumably a more attractive investment destination (for further illustration of this attractiveness, please see ECI section below). One quirk of the rules for tax accounting, however, will result in an immediate harm to the balance sheets of US corporations (both US-headquartered companies or the subsidiaries of non-US parents) due to the reduction of the corporate tax rate. This harm is superficial, but may lead to some holes on the asset side of the balance sheets for US corporations with significant accumulated losses (called “net operating losses” in tax parlance or NOLs, for short). The US tax code permits US corporations to carry forward NOLs from one year for use against positive earnings in future years (subject to multiple limitations). As such, NOLs are valuable for reducing future tax costs and thus may be treated as an asset in the financial reports of the corporation. For accounting purposes, the amount of future deductible losses is known as a deferred tax asset (DTA) and boosts the asset side of a balance sheet so long as the corporation has a reasonable expectation that it will earn enough income to offset it in future years before it expires. Well, in 2008 a lot of banks lost a lot of money. A LOT. Since then, they have been carrying DTAs of up to USD 20B, inflating their balance sheets correspondingly. However, the amount of a DTA is a product of the total NOL multiplied by the corporate tax rate. For example, if you have an NOL of USD 100, it still can only offset USD 100 of future income. Going forward though, the value to the corporation on taxes saved will be 100 x 0.21 or a DTA of USD 21, whereas previously it would have been 100 x 0.35 or a DTA of USD 35. Fortunately, the financial markets tend to discount such tax elements of a balance sheet as they do not signal the overall health and future prospects of the corporation (arguably, a large DTA signals the opposite). Nonetheless, there may be some secondary effects in response to this tax accounting adjustment. Lower Rates on ECI, an Incoming Withholding Regime and More Effectively Connected Income or ECI is income earned through a direct investment in an active trade or business (mainly). At its most straightforward, the US branch or other permanent establishment-type operations of non-US corporations generate ECI. Non-US investors can also earn ECI through investments in private equity, venture capital or other investment funds that acquire ownership stakes in start up companies, which tend to operate as LLCs or in other flow through forms. In the absence of a “blocker” corporation, the earnings of the portfolio companies pass through to the investment fund and then on to the non-US fund investors as if such non-US fund investor had earned the active operating income directly. Accordingly, income earned through such investments is taxed at the rate applicable to US corporations, not the standard dividend or capital gains rates that typically avail for non-US investors in US securities. The new tax bill contains several provisions that will affect ECI calculations for non-US investors. It also institutes a new withholding requirement that will impose a further operations burden on QIs and other withholding agents. The core changes are as follows:
Part III of this blog series dissecting the new US tax code provisions will be published in a few days’ time. If you wish to be automatically notified when it’s posted, please send an email to blog@millentaxandlegal.ch and you will be added to our subscriber list.
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Hey, anyone hear the one about the new tax rules enacted by the US Congress in late 2017? Of course, we all did. Inevitably, unavoidably, somewhere, sometime in December, we read or heard something about the new US tax bill signed into law just before Christmas. However, what you have heard about it might be irrelevant to your circumstances or, worse, might generate “white noise”, distracting you from what is in fact relevant to your circumstances. Even more worrisome, the distinction may not be clear. The modification of an organism as vast, complex and ungainly as the US Internal Revenue Code is like dredging an ocean harbor to install port facilities: From the perspective of the harbor, the entire ocean is now different; from the perspective of the ocean, nothing much has changed at all. Therefore, a beneficial analysis of tax code revisions must understand when its readers are in the ports and when they are in the middle of the ocean.
Accordingly, this blog (or rather set of blogs) will seek to do just that, concentrating on the elements of the new tax laws that are relevant – either directly or indirectly – to its core readership: Swiss financial institutions and Swiss (or other non-US) investors in US financial assets. Thus, it will de-emphasize the parts that have little impact on an international readership (even the…. drumroll please… HEADLINE political news). Finally, it will seek to present a three-dimensional view of the package of changes that affect a specific type of non-US taxpayer or industry, rather than simply listing each changed provision while expecting the reader to integrate the various parts into a comprehensive understanding of the new US tax landscape. As I am a tax specialist, you’ll not be surprised when I begin with caveats. The blog will not cover the following topics in detail, though some or all may be critical to the impact of the new tax bill:
And thus, we move onwards to Part II, the actual analyses of the bill, which will be posted over the coming days and feature the following themes:
Part II of this blog series dissecting the new US tax code provisions will be published in a few days’ time. If you wish to be automatically notified when it’s posted, please send an email to blog@millentaxandlegal.ch and you will be added to our subscriber list
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Towards the end of 2017, the IRS published the final version of the updated Form 1042 along with the accompanying (available here), following the releases of the respective draft versions in August and early December. The Form 1042 is the annual report submitted by withholding agents to the IRS, documenting, aggregating, itemizing and reconciling a year’s worth of withholding activities. Conceptually, the Form 1042 summarises the information from the assorted Forms 1042-S that withholding agents provide to (and receive from) their counter-parties. Although not yet formally confirmed, it seems that the QDD section on the Form 1042 may supplant or limit the requirements for a QDD to prepare a Form 1120-F (see my prior blog on the draft Form 1120-F instructions for further elaboration and please note that those instructions remain in draft format).
The Form (long unloved by QIs) and its new §871(m) segments add to the incoming set of reporting obligations for QDDs. Accordingly, all QDDs must acquaint themselves with the Form and the instructions (or at least the §871(m) portions). Operationally, QDD filers must collect information on their transactions as a QDD in tax year 2017, even the ones exempt from taxation, well in advance of the initial submission in 2018. Usefully perhaps, the §871(m) information that needs to be collected by the filers of the Form 1042 significantly overlaps with the information required for the Form 1120-F and thus the two Forms may be prepared in parallel (provided that the Form 1120-F is even still necessary). New §871(m)-Related Content Requirements of the Form 1042 In its tax year 2017 incarnation, the Form 1042 remains densely populated with boxes for different payments types and other inputs. The sections directly relevant to a QDD, however, are segregated at the bottom of the Form and demarcated clearly:
On the Form, both these sections are misleadingly simple, requiring the filing entity that intermediated or made qualifying payments to check the box provided. Ominously though, the Form instructs the filer to refer to the instructions. As is typical, the instructions are the messenger of hardship. As noted above, the information required for Section 4 of the Form 1042 closely resembles the information required for the Form 1120-F. Specifically, a QDD filer must prepare the same table as the one that must be attached as part of the Form 1120-F (see Form 1042 instruction at 9). Similar to the draft Form 1120-F instructions, the Form 1042 instructions do not prescribe a format for the table or substantive elaboration on the content. They do, however, furnish some more clarity on a few open points (as highlighted below by means of bolded italics). The Section 4 table must include the following identifying information for each QDD home office and/or any QDD branches:
Substantively, it must contain the following information on payments, irrespective of whether such payments were subject to withholding:
Miscellaneous Matters In addition to the new content requirements articulated above, the Form 1042 instructions also explain the codes to be used on the Form (and on the Form 1042-S) and elaborate on the withholding tax deposit relief for tax year 2017, as set forth in IRS Notice 2016-76 (see Form 1042 instruction at 5). The deadline for filing a Form 1042 for tax year 2017 is 15 March 2018. However, a 6-month extension is readily available so long as the filer submits Form 7004 by the 15 March deadline (id. at 3). Section 10.01(C) of the 2017 QI Agreement grants relief for errors in implementation of a QDD’s duties so long as the QDD made a good faith effort at compliance. Nothing in the instructions to the Form 1042 explicitly applies this relief to the submission of the Form. However, pursuant to section 10.01(C), this relief applies to all provisions of the QI Agreement and Section 1.01 of the 2017 QI Agreement mandates that a QDD: “must report its QDD tax liability on the appropriate U.S. tax return (as prescribed by the IRS).” Seemingly, therefore, the Form 1042 should be subject to good faith efforts defense in the circumstance of any legitimate errors in its preparation. Want further information on this topic? Email: paul@millentaxandlegal.ch
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IS A TACTICAL RETREAT ON §871(M) COMING?10/11/2017 According to reports in the media and from attendees, a Treasury representative indicated at a conference in Washington D.C. last week, that the department was reconsidering the scope of the §871(m) regulations, limiting it to delta one products even in 2019 and beyond. As a refresher, the §871(m) regulations treat equity-linked derivative instruments that are “simple contracts” as in-scope if the delta is 0.8 or above and those that are “complex contracts” as in-scope through application of the substantial equivalent test against a 0.8 delta simple contract benchmark. However, pursuant to IRS Notices 2016-76 and 2017-42, only instruments with deltas of one are in-scope for instruments issued in 2017 and 2018. Prior to last week’s announcement, the general expectation had been that in 2019 the regime would revert to the broader scope set forth in the §871(m) regulations.
While it is premature to celebrate, the announcement signals an acknowledgement of industry’s concerns around the disruptive complexity to the market from the broad scope of the §871(m) regulations. Much uncertainty, however, remains around the reduced scope, such as whether delta one is determined mathematically or by design (e.g. no optionality) and whether complex contracts will be excluded entirely. We cannot be certain until the IRS releases a formal declaration of this modification with further elaboration. Hopefully, such formal publication will be forthcoming soon so that affected financial institutions will have ample time to adjust their systems and process in accordance with the newly revised rules. For further discussion on this topic, please email: paul@millentaxandlegal.c
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On 10 October, the IRS released draft instructions to the Form 1120-F, following release of the draft version of the form itself in August. This Form is a core component of the reporting obligations for QDDs. In advance of the initial submission in 2018, QDDs must acquaint themselves with the Form and its accompanying instructions, notably the need to gather information on their QDD transactions (even seemingly the ones exempt from taxation) and their QDD tax liability (as set forth in the 2017 QI Agreement, Section 3.09).
Form 1120-F Background and Overview The Form 1120-F may be unfamiliar to many readers. It is the IRS form used by non-US entities to report certain 1120-F US tax liabilities, commonly due to active business income earned in the US, income effectively connected to operations in the US (ECI) or income derived from real estate holdings/sales. Prior to this latest draft version, the Form 1120-F did not feature prominently in most QI/FATCA compliance programs. For purposes of reporting payments under those regimes, the IRS developed instead the Forms 1042/1042-S. Many QDDs may have assumed that these well-loved forms would also be the medium for payment reporting under §871(m) in light of §871(m)’s heavy reliance on the existing QI architecture for withholding and reporting. That assumption, while reasonable, is only partially correct: These forms will be in use for §871(m)-related payments made or intermediated, but not for the reporting of the QDD tax liability. Although one could question whether the IRS should not have re-designed the Forms 1042/1042-S for the sake of administrative convenience (to the benefit of both QDDs and the agency itself), the form change is not arbitrary. Conceptually, the use of a Form 1042 for the QDD tax liability would be inapt. The key conceptual difference between the two sets of forms is that the Forms 1042/1042-S are submitted by intermediary withholding agents, whereas the Form 1120-F is submitted by beneficial owners (BOs) of US-source income. Moreover, the Form 1120-F is not in use for all types of US-source income. So long as a non-US BO limited its US-source income to so-called FDAP income (primarily, dividends and interest payments from US corporations) and the taxes owed were deposited by a QI (or US withholding agent) on its behalf, the non-US BO never needed to file the Form 1120-F. That is no longer necessarily the case. All QDDs must submit a Form 1120-F, starting with payments received in tax year 2017 (i.e. first reports due in calendar year 2018). In its latest incarnation, the draft Form 1120-F remains densely populated with boxes for taxpayer inputs and the draft instructions remain lengthy and daunting. For a QDD in its role as a QDD, few of these boxes, however, are relevant. For any particular QDD though, the broader entity may conduct other operations that already require submission of a Form 1120-F (e.g. US branch activities). Thus, the first inquiry for any QDD’s §871(m) compliance team is to determine whether their colleagues already prepare and file a Form 1120-F and, if so, to coordinate their activities. Content Requirements for QDDs Once that topic is settled one way or another, the next inquiry ought to consider the new content requirements applicable to a QDD filer. These obligations are limited, but potentially burdensome, as information must be collected and submitted on both hedging and product issuing activities. Especially onerous is the need to complete information related to dividends received in the role as QDD, even though the 2017 QI Agreement and subsequent Notice 2017-42 relieved QDDs of any tax liabilities on such payments for 2017 and 2018, respectively. The inclusion of such data during the transitional period rang alarms in the industry at such volume that the IRS is rumored to be considering revising the draft instructions on this point. Nevertheless, as currently drafted, the instructions plainly oblige QDDs to collect and provide such data. The information on US-source dividends received is included in a table that must be attached to the QDD’s filing as part of Section CC, a new section on the Form specific to QDDs (see draft Form 1120-F instruction at 14). While specific formatting for the table is not prescribed in the draft instructions, it must have columns for the gross amount, the rate of tax, and the amount of tax liability (id. at 14). Accordingly, a basic table of three columns and five content rows (plus a heading row) seems acceptable. This table must include the following information broken out by QDD home office and QDD branches:
In addition to the table attached as part of Section CC, a QDD must also complete certain lines in Section 1 by listing assorted items of US-source income. The items germane to a QDD are the following:
An important note for the items of income included in Section 1: It does not matter whether any component of its QDD tax liability is subject to withholding or correctly withheld, they remain reportable in any case (id. at 14). Timing of Filing The deadline for filing a Form 1120-F is determined by two factors:
Generally, a non-US corporation with a place of business in the US has a deadline of the fifteenth day of fourth month following the end of its fiscal year (id. at 4). Accordingly, a calendar year taxpayer, for example, would need to submit its Form 1120-F for tax year 2017 on or before 15 April 2018 (extended to 16 April as the 15 April falls on a Sunday in 2018). This general rule is subject to modification for shortened fiscal years (id. at 4). A non-US corporation with no place of business in the US has a deadline of the fifteenth day of sixth month following the end of its fiscal year (id. at 4). Accordingly, a calendar year taxpayer, for example, would need to submit its Form 1120-F for tax year 2017 on or before 15 June 2018. Both deadlines may be extended for approximately six months, if the QDD:
No provisions of §871(m) or other tax rules seemingly limit the autonomy of a non-US corporation to select the applicable fiscal year for US tax purposes (see e.g. §6072(c)). Presumably, the date is established in its home jurisdiction and therefore not subject to alteration. However, a QDD (with no other types of reportable income relevant to the Form 1120-F) might consider adopting a calendar tax year in order to align with the other elements of its QDD reporting compliance (namely, Forms 1042/1042-S). Such an adoption is neither expressly forbidden nor permitted by any IRS guidance and thus is vulnerable to outright rejection, but it does appear harmless, while conferring massive operational benefits. Applicability of Good Faith Effort Relief to the Form 1120-F Section 10.01(C) of the 2017 QI Agreement grants relief for errors in implementation of a QDD’s duties so long as the QDD made a good faith effort at compliance. Nothing in the instructions to the Form 1120-F explicitly applies this relief to the submission of the Form. However, pursuant to section 10.01(C), this relief applies to all provisions of the QI Agreement and Section 1.01 of the 2017 QI Agreement mandates that a QDD: “must report its QDD tax liability on the appropriate U.S. tax return (as prescribed by the IRS).” Seemingly, therefore, the Form 1120-F should be subject to good faith efforts defense in the circumstance of any legitimate errors in its preparation. For further discussion on this topic, email: paul@millentaxandlegal.ch |
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