International Corporate Compliance (Inbound)
Form 1120-F Interest Expense/Home Office Expense
- Rollout: September 18, 2018
- IPB Contact: Jeff Moeller
- LB&I Summary: This campaign addresses compliance on two of the largest deductions claimed on Form1120-F U.S. Income Tax Return of a Foreign Corporation. Treasury Regulation Section 1.882-5 provides a formula to determine the interest expense of a foreign corporation that is allocable to their effectively connected income. The amount of interest expense deductions determined under Treasury Regulation Section 1.882-5 can be substantial. Treasury Regulation Section 1.861-8 governs the amount of Home Office expense deductions allocated to effectively connected income. Home Office Expense allocations have been observed to be material amounts compared to the total deductions taken by a foreign corporation.
The campaign compliance strategy includes the identification of aggressive positions in these areas, such as the use of apportionment factors that may not attribute the proper amount of expenses to the calculation of effectively connected income. The goal of this campaign is to increase taxpayer compliance with the interest expense rules of Treasury Regulation Section 1.882-5 and the Home Office expense allocation rules of Treasury Regulation Section 1.861-8. The treatment stream for this campaign is issue-based examinations.
- Relevant LB&I Practice Units: “Interest Expense of a Foreign Corporation Engaged in a U.S. Trade/Business (Non-Bank, Non-Treaty);" “Interest Expense of U.S. Branch of a Foreign Bank Non-Treaty;" “Section 861 Home Office and Stewardship Expenses.”
Form 1120-F Non-Filer
- Rollout: January 31, 2017
- IPB Contact: Doug Andre or Jeff Moeller.
- LB&I summary: Foreign companies doing business in the U.S. are often required to file Form 1120-F. LB&I has data suggesting that many of these companies are not meeting their filing obligations. In this campaign, LB&I will use various external data sources to identify these foreign companies and encourage them to file their required returns. The treatment stream for this campaign will involve soft letter outreach. If the companies do not take appropriate action, LB&I will conduct examinations to determine the correct tax liability. The goal is to increase voluntary compliance by foreign corporations with a U.S. business nexus.
1120-F Delinquent Returns
- Rollout: October 30, 2018
- IPB Contact: Doug Andre or Jeff Moeller
- LB&I summary: The objective of the Delinquent Returns Campaign is to encourage foreign entities to timely file Form 1120-F returns and address the compliance risk for delinquent 1120-F returns. This is accomplished by field examinations of compliance risk delinquent returns and external education outreach programs. The campaign addresses delinquent-filed returns, Form 1120-F U.S. Income Tax Return of a Foreign Corporation.
Form 1120-F must be filed on a timely basis and in a true and accurate manner for a foreign corporation to claim deductions and credits against its effectively connected income. For these purposes, Form 1120-F is generally considered to be timely filed if it is filed no later than 18 months after the due date of the current year's return. The filing deadline may be waived, in situations based on the facts and circumstances, where the foreign corporation establishes to the satisfaction of the commissioner that the foreign corporation acted reasonably and in good faith in failing to file Form 1120-F per Treas. Reg. Section 1.882-4(a)(3)(ii). LB&I Industry Guidance 04-0118-007 dated 2/1/2018 established procedures to ensure waiver requests are applied in a fair, consistent and timely manner under the regulations.
- Rollout: January 31, 2017
- IPB Contact: Jamie Brown, Heléna Klumpp or Jeff Moeller
- LB&I summary: U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive training strategy for this campaign that will aid revenue agents as they examine this IRC Section 482 issue. The treatment stream for this campaign will be issue-based examinations.
- IP&B comments: LB&I has stated that this campaign is intended to target what it calls the “mid-market” segment (which LB&I does not define, but may refer to taxpayers with at least $10 million in assets, but not large enough to be subject to coordinated industry case procedures). As of May, 2017, LB&I was evaluating whether inbound distributors are in fact not complying with the arm’s length standard, or whether there is only an IRS perception of noncompliance. Thus, LB&I had not determined that it will in fact target returns of inbound distributors.
- Relevant LB&I Practice Units: “Comparison of the Arm’s Length Standard with Other Valuation Approaches—Inbound” (September 23, 2016), “Inbound Resale Price Method Routine Distributor” (March 18, 2016), “Purchase of Tangible Goods from a Foreign Parent CUP Method” (December 15, 2014), “CPM Simple Distributor Inbound” (December 15, 2014), “Best Method Determination for an Inbound Distributor” (December 15, 2014), “Comparability Analysis for Tangible Goods Transactions – Inbound” (December 15, 2014), “Review of Transfer Pricing Documentation by Inbound Taxpayers” (December 15, 2014), “Sale of Tangible Goods from a CFC to a USP CUP Method” (December 15, 2014), “Advance Pricing Agreement for Tangible Goods Transactions—Inbound” (November 6, 2017), “Revenue Procedure 99-32 Inbound Guidance” (February 19, 2016).