TEI comments on proposed Form 8858.
On March 2, 2004, Tax Executives Institute sent the following comments to the Internal Revenue Service on proposed Form 8858, relating to foreign disregarded entities. The submission was prepared under the aegis of TEI's International Tax Committee, whose chair is Bruce R. Maggin of IBM Corporation.
On December 30, 2003, the Internal Revenue Service issued Announcement 2004-4, requesting comments on proposed Form 8858, Information Return of U.S. Persons with respect to Foreign Disregarded Entities. The proposed form was published in the January 26, 2004, issue of the Internal Revenue Bulletin (2004-4 I.R.B.)
Tax Executives Institute is the preeminent association of business tax executives in North America. Our more than 5,400 members represent 2,800 of the leading corporations in the United States, Canada, and Europe. TEI represents a cross-section of the business community, and is dedicated to developing and effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.
Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by proposed Form 8858, Information Return of U.S. Persons with respect to Foreign Disregarded Entities.
Proposed Form 8858 was developed to enable the Internal Revenue Service to administer the tax laws more efficiently with respect to U.S. persons that own foreign disregarded entities (FDEs). A separate form will be required for each FDE directly owned by the U.S. taxpayer or a controlled foreign corporation (CFC) or controlled foreign partnership (CFP). Form 8858 must be filed in respect of annual accounting periods of tax owners of FDEs beginning on or after January 1, 2004
TEI believes that the new form significantly erodes the simplification of the U.S. tax system provided by the check-the-box (CTB) rules. See Treas. Reg. [subsection] 301.7701-2 & -3. The CTB regulations were a bold approach to resolving the manner in which business entities are classified for tax purposes. Prior to their issuance in December 1996, taxpayers and the government expended far too many resources addressing entity classification issues. The rules significantly simplified the tax law and reduced the administrative burden on taxpayers and the government alike. Regrettably, with the introduction of Form 8858, much of that simplification threatens to be lost because of the need to accumulate sufficient information to complete this form.
The CTB rules have been used by many companies to streamline the number of entities required to be reported in the corporate group and eliminate the need to review intercompany transactions. To the extent the CTB entity is included in the U.S. consolidated return, the Schedule M will highlight transactions the IRS may wish to review.
Moreover, many companies have foreign branches with the same functional currency as the tax owner; these companies do not file Forms 5471 and thus do not have the systems in place to collect the required data. Because foreign country requirements may well differ from U.S. requirements in both substance and timing, foreign tax filings will have little or no value in respect of compiling the information required for this form.
The proposed form will now require taxpayers to collect a significant amount of non-financial information, as well as include an income statement, balance sheet, current earnings and profits (E&P) reconciliation, and details of intercompany transactions for each FDE. In some cases, the proposed form requires taxpayers to submit more information in respect of disregarded entities than is currently required for CFCs. Moreover, many taxpayers maintain U.S. GAAP financial statements only on a consolidated basis, not a local entity basis. The new form will now force local country accounts to be reported in U.S. GAAP on a local entity basis. In these circumstances, the administrative burden on taxpayers to prepare the new form will be costly and time-consuming. The purpose served by this exercise may well not offset that additional burden.
TEI therefore urges the IRS not to undermine the simplified rules by imposing a strenuous annual reporting regime.
1. Proposed Exemptions from Filing Form 8858. In many cases, the information requested to be reported on proposed Form 8858 is duplicative of information filed on other forms. For example, for FDEs owned directly by U.S. taxpayers, information relating to income, expense, balance sheet items, etc. is already reported on the U.S. federal tax return (1120, 1120S, etc.). In the case of FDEs that "roll up" into CFCs, the information is likewise already reported on Form 5471. To capture related-party transactions with FDEs, an additional column could be added to Form 5471, Schedule M and Form 8865, Schedule N. If any information were reported in this column, then an organization chart could be required. This information should permit the IRS to identify the transactions that it desires to target and eliminate the need to file a separate Form 8858.
With respect to foreign branches included in a U.S. tax return, current Form 8832 requires information to be reported for entities that have elected disregarded entity status. The financial information--which the IRS proposes to be included in the Form 8858--is already included in the consolidated Form 1120. The proposed form will require a company to produce separate balance sheets on a U.S. GAAP basis--information that may not be readily available for some companies. With regard to income statements, if a foreign tax credit is claimed, then the income statement information is required to be reported on Form 1118. Taxpayers should be exempted from filing Form 8858 for these entities. If the IRS believes additional information on cross-branch information is required, the information can be provided on Form 1120, Schedule N.
Foreign trusts that are not business entities must now file Forms 3520 and 3520A. These entities should likewise be exempted from filing Form 8858.
2. De Minimis Rule. TEI recommends that the IRS adopt a de minimis filing requirement, below which a Form 8858 will not need be filed for an FDE. This will permit the IRS to focus on material issues while minimizing the reporting burden on taxpayers. The Institute suggests that an FDE with gross income of less than $1 million be exempted from the filing requirement.
3. Possible Alternatives. Schedule G of Form 5471 currently asks a question concerning whether a foreign company owns any foreign entities that were disregarded as entities under the CTB regulations. If so, the company is asked to supply the names and country of incorporation of the FDEs. TEI suggests that an FDE with the same functional currency and place of incorporation as its tax owner not be required to file a Form 8858. Alternatively, the taxpayer should be given the option of filing a single Form 8858 for all FDEs incorporated in the same country with the same functional currency and tax owner.
Another alternative to filing an annual Form 8858 is to permit an electing taxpayer to file a form similar to Form 966, Corporate Liquidation or Dissolution, upon an election to treat an entity as a disregarded entity and the deemed section 332 liquidation occurs. (Currently, deemed liquidations under the CTB rules are exempted from the Form 966 filing requirement.)
4. Organizational Charts. Item 5 in the introductory material on page 1 of the form requests a list or an organizational chart identifying the name, placement, percentage of ownership, and tax classification of all entities in the chain between the tax owner and the FDE. This is more information than currently required to be reported on the Form 5471 and seems over broad.
TEI recommends that taxpayers be permitted to satisfy this request by means other than a separate list or organizational chart. First, an organizational chart that includes all FDEs that "roll up" into a single CFC or CFP should satisfy the reporting requirement for all such entities. Second, a single organizational chart that includes all reporting FDEs within a U.S. person's legal structure should also satisfy the reporting requirement. This will reduce the reporting burden by permitting U.S. persons to attach their existing organizational charts.
In addition, the IRS should consider eliminating items 3 (name and address of FDE tax owner) and 4 (name and address of FDE direct owner) of the introduction because the requested information is redundant with providing an organizational chart.
5. Schedule C, Income Statement. The instructions provide that all information is to be reported in functional currency, as well as U.S. dollars translated from functional currency in accordance with U.S. GAAP. For many taxpayers (particularly foreign-owned multinationals), there is no other reason to convert local subsidiary accounts into U.S. dollars or U.S. GAAP, particularly at the separate entity level.
Moreover, the instructions should clarify whether a taxpayer must use the qualified business unit's functional currency (e.g., Euro, British Pounds, Swedish Krona, Swiss Franc) or the home office's functional currency to report the information on the functional currency column.
6. Schedule C-1, Section 987 Gain or Loss Information. Schedule C-1 requests data on remittances from FDEs and section 987 gain or loss. TEI recommends that FDEs with the U.S. dollar as their functional currency or with the same functional currency as their tax owner, and therefore with no section 987 gain or loss to report, be exempted from filling out Schedule C-1.1
7. Schedules C, F, and II: In. come Statements, Balance Sheets, and Current Earnings & Profits Schedules. TEI recommends that, at the taxpayer's option, the request for an income statement (on Schedule C), balance sheet (on Schedule F), and Current Earnings & Profits reconciliation (on Schedule H) may be satisfied by providing tabular schedules that set forth the required line items for all disregarded entity members of a CFC or CFP. Such tabular schedules are equivalent to the detail supporting the computation of taxable income on page one of Form 1120 in a consolidated return. This will permit a single schedule to substitute for multiple separate presentations of the data on separate Forms 8858.
Such an approach is similar to the tabular schedule found on Form 8873, Extraterritorial Income Exclusion, which explicitly permits taxpayers to supply such schedules in place of filling out the form in some circumstances. See Form 8873, Part I, item 5. Allowing tabular schedules may permit some taxpayers to satisfy the IRS's information request with an existing schedule.
The condensed versions of the income statement, balance sheet, and E&P reconciliation in the draft Form 8858 will reduce the compliance burden for many taxpayers and should be retained. For other taxpayers that already maintain the Form 5471 line format of these schedules for their FDEs, however, it may be easier to dispense with mapping the data to a different Form 8858 format. Thus, TEI suggests that taxpayers also be allowed to present the Form 8858 Schedules C, F, and H data in the line-item format similar to Schedules C, F, and H of Form 5471.
TEI is concerned that in some cases, field agents may wish to reconcile multiple Forms 8858 to their "tax owner" CFC or CFP, and request that taxpayers reverse the mapping. For example, an agent may request a breakdown of the Form 8858, Schedule C, line 6, amount, "Total deductions," into the seven Form 5471, Schedule C line items that comprise total deductions for purposes of CFC reporting. Taxpayers should be permitted to present the data in the less-condensed Form 5471 format on an attached tabular schedule to Form 8858 in the first instance
8. Schedule M, Transactions Between FDE of a Foreign Tax Owner and the Filer or Other Related Entity. Schedule M requests information concerning transactions between the FDE and persons related to a CFC or CFP. (2) This reporting will simply disaggregate--on an FDE-by-FDE basis--information already reported on Forms 5471 (for CFCs) and 8865 (for CFPs). Schedule M will place an enormous burden on companies that have adopted a regional holding structure model from a business and tax-reporting standpoint.
9. Short-Period Reporting. Form 8858 may apply to FDEs in existence for less than a full reporting period. For example, an entity that falls within the reporting requirements of either Form 5471 or 8865 for a substantial portion of the year may change its status to an FDE. Furthermore, when a short period for an FDE results from an acquisition from an independent third party, information to complete the proposed form may be unavailable because the information is contained in pre-acquisition financial records. In these circumstances, TEI recommends that the operations for the short period be included only in the Form 5471 or 8865; separate reporting should not be required until the next reporting period. In the alternative, short-period reporting should be limited to Schedules C, F, G, and H.
Tax Executives Institute appreciates this opportunity to present its views on proposed Form 8858, Information Return of U.S. Persons with respect to Foreign Disregarded Entities. If you have any questions, please do not hesitate to call Bruce R. Maggin, chair of TEI's International Tax Committee, at 914.765.4083, or Mary L. Fahey of the Institute's professional staff at 202.638.5601.
(1) Further exemptions may be required when the section 987 regulations are issued in final form.
(2) The form does not require the reporting of transactions between the FDE and its tax owner. Other exemptions should be considered.