What is Form 5472?
International tax compliance is a critical piece in managing global business and should not be overlooked. A key form for foreign-owned U.S. corporations is Form 5472. Most IRS international tax compliance forms are focused on the taxable foreign activity of U.S. persons and businesses. Form 5472 is unique because its purpose is to capture the intercompany transaction activity of foreign persons and businesses with ownership in U.S. companies or subsidiaries.
- Form name: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
- Due date: Income tax deadline with extensions
- Penalty: $25,000 failure to file penalty for each reporting corporation that fails to file by due date in in the manner prescribed
- Max penalty: Additional penalty of $25,000 is charged for each 30-day period beginning 90 days from the date of notification from the IRS. This penalty provision has no stated maximum.
The form was created due to historical issues with the IRS obtaining financial information from foreign parties for U.S. tax purposes, leading to difficulties in determining the arm’s length price of intercompany transactions between foreign parties and their U.S. businesses. The implementation of Form 5472 improved this intercompany reporting, helping to reduce U.S. base erosion and tax evasion from foreign parties.
When completing this form, a critical piece focuses on reportable monetary transactions between reporting corporations and foreign related entities, including – among others – rents, sales, commissions, and royalties. In order to support any reportable monetary transactions between the reporting corporation and its related foreign entity, a transfer pricing study must be completed and on file before filing Form 5472. A transfer pricing study will serve two purposes for persons required to file a Form 5472. First, through benchmarking analysis, a transfer pricing study will help the reporting entity determine their acceptable arm’s length range for the monetary transactions they will be required to report on their Form 5472. Second, a transfer pricing study provides the reporting entity with a quick, well-structured and logical defense for their reportable monetary transactions. These reasons demonstrate why it is important to have a transfer pricing study completed annually and on file before filing any Form 5472. An annual transfer pricing study not only helps a company in the invent of an IRS audit, providing rationale and support for their intercompany transactions, it also helps a company strategically plan, providing comparable benchmarking, to ensure they are correctly pricing their intercompany transactions.
Although there are many important steps in accurately completing Form 5472 and a supporting Transfer Pricing Study, the form itself is an example of a straightforward, informational tax form. The IRS continues to show a strong interest in controlling base erosion payments and profit sharing (BEPS). This focus from the IRS, coupled with the $25,000 fine for not filing a Form 5472, makes it a critical form for taxpayers to accurately complete and timely file each year.
U.S. International Tax Compliance is too often made out to be an impossible endeavor for taxpayers and their tax preparers, and potential penalties can be daunting. However, with accurate and current financial detail, forms such as this can be completed accurately and efficiently, adding little extra cost to a taxpayer’s tax preparation and filing expenses.
If you have any questions about Form 5472, Transfer Pricing, or need guidance on staying up to date on international tax compliance and reporting, contact our Global Business Services team.
Josh Babb is a consultant for the Global Business Services practice. His primary responsibilities include assisting and advising clients on international income tax compliance reporting, transfer pricing, and IC-DISC calculations.