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TEI member responses concerning Form 5471.

Note: These comments are a compilation of recommendations we received from TEI's members. We recognize that they are not necessarily consistent, but wanted to give the IRS the benefit of alternative approaches to simplifying the Form 5471.

General Comments

Information on CFCs:

* Eliminate individual filings for each controlled foreign corporation (CFC) and simply include a schedule of CFCs containing key information, including the balance in the E&P and tax pools. (These two items are always the most interest to auditors.) Taxpayers would still do the same calculations, but the compliance burden of filing the forms would be eliminated.

* Consider abbreviated forms for filing the necessary information. For example, eliminate balance sheet (or other detail) presentation where the taxpayer owns 100 percent of the foreign subsidiary, there is no subpart F income, and there are no changes in ownership during the year.

Information on 10/50 Companies:

* Obtaining information about foreign affiliates where the taxpayers lacks control is often very difficult. Several members believe that this is the biggest problem in filing the Form 5471. It becomes particularly acute when the taxpayer has disposed of its interest in the affiliate. While certain information and documentation is necessary to claim foreign tax credits, that is reported elsewhere. If the taxpayer is not claiming FTCs for the 10-50 subsidiary, no useful purpose is served.

Schedules A, C, E, F, H, and O are comprehensive and require information about the income statement and balance sheet, stock ownership, total shares outstanding, classes of stock issued and outstanding, ownership transfers, etc. Because the taxpayer does not control these companies, it often has a difficult time gathering information on a timely basis, if at all. This issue becomes even more difficult when the foreign company owns lower-tier subsidiaries. Often, the foreign company does not have separate company financials.

Optimally, the requirement to file the Form 5471 for non-CFCs should be eliminated. Alternatively, eliminate the requirement for providing separate company financials or allowing the taxpayer relief when it has shown reasonable effort in attempting to gather the information.

De Minimis Rules:

* Raise the filing threshold for dormant companies from $5,000 to $50,000. In addition, after the initial Form 5471 is filed for a dormant company, eliminate the need to file another one until the company becomes active. Perhaps the taxpayer could file one statement (similar to the high-tax election) that lists all the dormant companies instead of filing a 5471 for each one. A list of dormant companies that have been dissolved should be accepted in lieu of a Schedule O and Form 5471.

* Consider a "small company" category with reduced filing requirements. For example, companies with gross income/balance sheets of less than $100,000 and no dividend or subpart F inclusions should be required to file only page I of the form.

* Define thresholds under which a taxpayer is not required to "attach schedules" with respect to the balance sheet. For example, eliminate the need to require detailed attachments for "other" balance sheet accounts on Schedule F. Perhaps a document similar to the Form 1120, Schedule N could be used.

Financial Information

* Permit the use of spreadsheets or other electronic filing format to file the financial information. An effective bridge is needed from how the foreign company information is collected (and converted between currencies) to how it gets filed. This would be a great form to "pilot" e-filing for corporations. Another consideration would be the disk filing system that the Province of Ontario uses.

Permit taxpayers to report book earnings up until a taxable event triggers a correct calculation of tax E&P. Since taxpayers are working with a post-1986 tax pool, year-by-year adjustments to E&P due to reserves, deferred taxes, etc. do nothing but increase compliance burdens. Cumulative E&P adjustments can be made by adjusting balance sheet accounts to properly reflect appropriate accruals under U.S. tax concepts, etc., at the time tax E&P is needed.

A taxpayer may have to make year-by-year elections with respect to, say, depreciation, but the correct calculation of depreciation would only have to be done when a taxable event occurs. Taxpayers do not need accurate year-by-year E&P amounts if the overall pool concept is used. A significant amount of resources would be saved by not requiring calculations that no one uses.

Currency

* It is interesting to see the IRS changing the requirement for what currency is reported on the form and when throughout the years. I believe the requirement for Balance Sheet and Income Statement requires U.S. dollar amounts equivalent to U.S. GAAP translation. To compute the E&P amounts, however, you must use local currency data and not the dollar. Why can't the local currency data be translated at one exchange rate consistently on the form for all parts of the schedules (i.e., weighted average)? To technically comply with the rules as written, a taxpayer would be required to analyze the U.S. dollar GAAP information and the local currency GAAP adjusted data. Aren't the U.S. dollar amounts required just for presentation so the magnitude of the amounts on the form can easily be seen and for nothing else?

Specific Comments

General Information

* Permit the filing of a "consolidated" Form 5471 that lists all the foreign corporations in columnar format on page I (with continuation pages, if needed), addresses, and stock ownership.

* On page 1, line 1, add the weighted average exchange rate for the year.

* Remove boxes 2(c) and 2(d) on page 1 of the form. Alternatively, complete the boxes only if the information is different from that provided in box la.

* Provide a place to show the name of the foreign corporation on pages 2 through 4. Taxpayers end up either typing or writing this information at the top of each page to avoid confusion if the pages later become separated.

Schedule B (U.S. Shareholders of Foreign Corporation)

* If the CFC is owned 100 percent by a U.S. affiliated group, eliminate the need to complete the schedule.

* Condense this information by listing only the ultimate parent's total constructive ownership information rather than each related U.S. company. An ownership chart could be attached to document the direct and indirect ownership information more effectively.

* This schedule should be combined with Schedule A.

Schedules C (Income Statement) and F (Balance Sheet)

* Many members suggested eliminating the U.S. dollar income statement and balance sheet reporting, except for entities subject to DASTM or those using the U.S. dollar as their functional currency. E&P is calculated in functional currency and dividends (with the exception of subpart F) are translated at the spot rate on the date of payment. Alternatively, eliminate the requirement to "attach schedules" or reduce the schedule to presentation of control balances (i.e., total income) only. A box could be provided to list the appropriate exchange rate that would otherwise be used in conversion.

* Use the average exchange rate for all income statement items unless doing so would materially misstate the income statement. This would make it easier for the subsidiary accounting personnel to prepare the income statement and for taxpayers to reconcile to data used on Schedules H and M.

* CFC trial balance data (Schedule C--Income Statement, Schedule F--Balance Sheet, Schedule H--Current Earnings and Profits) reporting should be accomplished by using standard reports generated from standard tax preparation software program, thus eliminating the need to separately complete these schedules. These schedules take more effort to prepare than the standard reports and provide no more information. This is similar to the consolidated Form 1120 income statement and balance sheet supporting detail.

* For DASTM countries, remove the requirement that Schedule C be completed in both the local functional currency and U.S. dollar. Rather, have the schedule completed only in U.S. dollars.

* One member suggested that all schedules be prepared in U.S. dollar (or at least be uniform). Currently, some schedules are prepared in both functional currency and in U.S. dollar, for example: Schedule C, Income Statement, and Schedule H, Current E&P; while others are prepared only in U.S. dollars, for example: Schedule F, Balance Sheet and Schedule M, Transactions with Related Persons, and yet some are prepared only in functional currency: Schedule J, Accumulated E&P. This makes filing the form very confusing and increases compliance time.

Schedule F (Balance Sheet)

* Eliminate the balance sheet. If required, eliminate the requirement to "attach schedules." Alternatively, reduce the schedule to presentation of control balances (i.e., total assets) only.

Schedule G (Other Information)

* New for 2001, this schedule requires information concerning a CFC's interest in partnerships or trusts and its ownership in foreign subsidiaries that are "check-the-box" branches for U.S. tax purposes. For 2000 returns, comparable data were requested in a "blanket" format for all the U.S. taxpayer's foreign subsidiaries (Form 1120, Schedule N). The Schedule N approach is better, since the Schedule G requirements is duplicative. Schedule G requires much additional work because the Forms 5471 are system-generated (using tax return processing software). Separate attachments to any Form 5471 are not system-generated and must be created, tracked, and coordinated outside the automated system. This adds unnecessary complexity and manual procedural steps to the Form 5471 generation process (especially when you have hundreds of CFCs). To this end, efforts should be made to reduce the number of required attachments in any section of the Form 5471. Most large multinationals use software to generate Forms 5471, and requests for special attachments defeat the value of automated form generation. If there are other means to achieve a like result (e.g., having the U.S. parent attach a single comprehensive list to Form 1120), Form 5471 attachment requirements should be eliminated.

Schedule H (Current Earnings & Profits)

* Eliminate line 5d (Current E&P in U.S. dollars). This number is not used in any computations made on the form and the weighted average exchange rate can be disclosed elsewhere on the return.

Schedule I (Summary of Shareholder's Income from Foreign Corporation)

* There is currently no place to report a section 1248 transaction on Schedule I (or J).

* While not a large concern, it would be possible to eliminate Schedule I. The information is presented elsewhere on the Form 5471 or 1118.

Schedule J (Accumulated Earnings & Profits of CFC)

* Add an "other" line to lines 1-7 to allow for adjustments to E&P for check-the-box, adjustments to historical E&P resulting from audits, changes in functional currency, earnings restatements, adjustments in/ out of E&P pools due to mergers, etc.

Schedule M (Transactions Between CFC and Shareholders or Other Related Persons)

* Schedule M generated more comments than any other part of Form 5471. Many recommended eliminating the schedule. The information can be found elsewhere on the form and is somewhat redundant in light of the contemporaneous documentation required for transfer pricing under section 6662. Filling out the schedule is the most time-consuming part of filing the form. While some of the information would be needed to properly determine subpart F income, look-through calculations, etc., other information seems to be overkill for an information report. This data can always be requested by the auditors for subsidiaries in which they have an interest.

Currently, Schedule M requires a lot of detail (attempts to cover all allied income and expense flows, without regard to materiality or relevance re: U.S. inclusion). Other than dividend, interest, rents and royalty flows (which, for most of our foreign units, are identified and captured in our general ledger system), the detail required for this schedule is very difficult to collect from the foreign units (e.g., highest amount loaned/borrowed at any point in the year, detail of all service income/expense, all management fee income/expense, all sales/COGS). Since efforts during the return season are focused elsewhere (due to this data being for informational reporting purposes only), the integrity of this schedule for any taxpayer should be questioned, i.e., taxpayers have solid, common worldwide reporting systems and comply with the requirements of Schedule M to the best of their ability. However, due to the level of detail required, taxpayers frequently are forced to complete Schedule M imprecisely or without the requested detail. Delete Schedule M of Form 5471.

* Alternatively, the schedule should be revised to require only the information relevant in computing additional U.S. tax. In addition, the schedule should be streamlined. For example, limit the intercompany transactions to a $10 million threshold for large companies (or at least tier the amounts depending on the size of the corporation). Materiality standards should be added. Columns (e) and (f) should be limited to only those instances where the company may be filing on behalf of other U.S. shareholders.

* In respect of intercompany loans, it is often difficult to report the maximum balance of the loans between entities for the year. This information is not used for any subpart F or further E&P calculations. Many companies instead report the ending balance of the loan balance. In addition, reporting the highest intercompany loan balances during the year does not seem to serve any useful purpose.

* Schedule M reporting should be conformed to Form 5472 so that the same tax package request can be issued for CFCs and non-CFCs. For example, "sales of tangible property other than stock in trade" are reported on 5472, but not 5471. There is an "other amounts" line on 5472, but not 5471.

* Allow use of the same foreign currency exchange rate on Schedule M that as is used for Schedules C and F.

* Combine columns (b)--(f) in a format similar to the Form 5472. Additionally, set a de minimis materiality limit for inclusion of transactions.

* It should be sufficient to report the amount and nature of the intercompany transactions. The additional work to break down the other party (i.e., foreign and domestic subsidiaries) does not seem warranted.

Schedule O (Organization or Reorganization of Foreign Corporation and Acquisitions and Dispositions of Its Stock)

* Many members commented that the schedule is redundant because the majority of information is already required as part of the taxpayer's section 367 disclosures. For example, if a foreign subsidiary is liquidated under section 332, the taxpayer is already required to attach a statement outlining the transaction.

* Rather than having to complete Schedule O, move to a system where the Form 5471 cross-references the reorganization statements submitted with the tax return. Data on stock purchases could easily be incorporated into a format that reports changes in stock ownership. Alternatively, redesign Schedule O to replace and report all of the separate notices and disclosures required under the various code sections mentioned above.

Combining Forms

* Combine Form 5471 and Form 8865 into a single, comprehensive "informational return for foreign operations" return. The purpose of both forms, one for CFC reporting and the other for foreign partnership reporting, seems to be identical.

* Eliminate the need for separate form 926 reporting and section 351 reporting by providing a schedule on the Form 5471 to report these transactions.

Miscellaneous

Duplicate filings.

* At a minimum, consider eliminating the requirement to file the form both with the return and separately with the Philadelphia Service Center.

Timing

* Many CFC's don't finalize their books until the tax return is due, since tax laws in many countries change right up until the filing date and that may be the culture/tradition in many countries. Accordingly, it is often difficult for a U.S. parent company to get good information in time to meet the U.S. deadline. It is arrogant to impose our deadlines on our foreign associates. The IRS should consider allowing an optional one-year lag in Form 5471 reporting, in polite recognition of the cultural differences (e.g., a 2002-year U.S. return reports 5471 information for the CFC's 2001 year).
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Publication:Tax Executive
Date:Nov 1, 2002
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Previous Article:TEI comments on Form 5471: October 18, 2002.
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