Navigating individual tax returns involving foreign entities or assets presents significant challenges.
Treasury Decision 9960 materially altered the reporting of international tax items for domestic Partnerships and S-Corporations (flow-through entities). For tax years beginning after January 25, 2022, such entities report items of Subpart F as pass-through items and not at the entity level.
McGuire Sponsel identified an opportunity for a California-based plant that specializes in designing, manufacturing and installing farm equipment for different edible nut industries domestically and internationally. The S-Corporation had approximately $21.3 million in annual revenue, including about $6.5 million in international sales.
As the buzz around March Madness comes to its conclusion, for many taxpayers and preparers alike, April Madness is right around the corner. Many eyes will turn away from their TV screens and look ahead to the coming tax compliance requirements for the year.
Caterpillar Inc. (CAT) is one of the biggest heavy equipment manufacturers in the world, and almost everyone recognizes its iconic CAT logo. CAT is a multinational company with several subsidiaries around the globe. One such subsidiary, CSARL, the Swiss entity, caught lawmakers’ attention a while ago, leading to an investigation into CAT’s tax strategy called the “Global Value Enhancement or GloVE program.”
The United States Treasury explains several international tax proposals in the administration’s F.Y. 2025 budget. Most proposals presented in this year’s Budget appeared in the F.Y. 2024 budget.
The OECD released Pillar One – Amount B, in continuation of their two-pillar approach to combat base erosion and profit shifting, particularly targeted towards large MNEs.
As taxpayers and tax preparers ramp up for the 2023 tax season, the IRS released a bulletin containing guidance on the correct filing of Form 1042-S, which attempts to help correct common errors made by taxpayers and tax preparers before the upcoming filing deadlines.
While the Farhy case specifically addressed penalties under Section 6038, the reasoning could be extrapolated to other forms, such as Form 5472 and 3520. Indeed, the Tax Court may have hindered, in a very real way, the IRS’ primary tool to ensure taxpayers provided important information regarding offshore entities and activities.
A cryptic IRS memo, General Legal Advice Memorandum (GLAM), is upending the lending landscape for global corporations. Its reinterpretation of the “arm’s-length” rule for internal loans throws them into a web of ambiguity.
Individual Tax Issues: Owning Foreign Entities or Assets
Navigating individual tax returns involving foreign entities or assets presents significant challenges. Traditionally, CPA firms have handled these returns with confidence, but recent shifts in tax laws mean that longstanding practices may no longer suffice. Furthermore, the IRS now possesses more robust enforcement measures, and penalties for non-compliance are more severe than ever.
Here are some key changes and additions to international tax laws in recent years:
- The U.S. has transitioned to a modified territorial tax system, introducing the Global Intangible Low-Taxed Income (GILTI) tax.
- Previously, U.S. persons were typically taxed on foreign income upon distribution. Now, certain individuals must report their share of income regardless of distribution.
- Two new categories of foreign income have been introduced for foreign tax credit purposes:
- Section 951A income(GILTI)
- Foreign branch income
- International reporting forms, such as Form 5471, have become more complex.
Failure to report or under-report can lead to severe penalties. For instance, individuals may need to report foreign financial accounts annually on Form 114, even if no tax is owed. Failure to do so can result in penalties of up to $10,000 per account per year. Willful violations could escalate penalties to 50% of the account’s value per year. Additionally, failure to file required forms like 5471, 8858, or 8865 could incur penalties of $10,000 per form per year.
This blog merely scratches the surface of compliance requirements in this complex area. For a more detailed discussion of client situations, we encourage you to contact McGuire Sponsel’s Global Business Services team.
Greg Lambrecht, CPA, is a Shareholder in the firm’s Global Business Services practice and advises clients on international tax matters including understanding the consequences and opportunities associated with global tax planning decisions. He also assists clients in managing increasingly complex compliance requirements of companies with international operations.
Lambrecht joins McGuire Sponsel from the Big Four with over a decade of experience leading complex international tax projects for Fortune 150 clients and over 20 years of total experience in international tax.
Recent Resources
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