The JamisonMoneyFarmer International Practice Group works with many foreign-owned companies on a variety of tax and accounting issues. As part of our recent US German Alliance meeting in Tuscaloosa, one of the sessions included a discussion about “Common Mistakes Foreign Direct Investors Make Entering the United States”. We have summarized that discussion as it relates directly to those companies as they make investments in Alabama.
IRS Hot Topics: Lack of Transfer Pricing Studies & Lack of Cost Sharing Agreements
Transfer Pricing Studies – These studies calculate and establish “arm’s length” pricing of goods and services for intercompany activities (i.e. US subsidiary sells products to sister company in US or the mother company in another country). This can lead to inconsistent treatment of intercompany loans, goods and services, and/or administrative expenses. Read more from: Do I need a Transfer Pricing Study?
Cost Sharing Agreements – These are agreements between related companies (either sister companies or parent-child companies) which often share the costs and risks of developing, producing or obtaining assets. They are used frequently with shared Research and Development (R&D) costs and intellectual property.
These are HIGHLY RECOMMENDED to have on file and are both very hot topics for the US IRS audit department.
Often Overlooked US Federal Tax Forms
Form 1042 – Annual Withholding Tax Return for US Source Income of Foreign Persons
This Form 1042 reports payments to foreign entities or persons and includes items such as Royalties, Interest, Dividends, Pensions, and Rents. This form is required to ensure taxes were properly withheld. In order to enable the reduced withholding rate, you must have on file form W-8BEN-E. Penalties will apply for late filing or failure to furnish correct forms.
Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation
The Form 5472 reports Intercompany Transactions, such as Inventory, Tangible Property, Rents, Commissions, Interest, etc. If you fail to file, you will be subject to a $10,000 fine.
While there are a number of issues surrounding having US residents or ex-pat employees from a foreign-owned company, the most common mistake is keeping employees on the German payroll when the employee should be on the US subsidiary payroll.
State and Local Tax Issues
While often companies understand the federal tax treaty between the US and the parent company country, investors often neglect state and local tax issues. For example, states ARE NOT bound by tax treaties, so there can be issues for state filings but in compliance on a federal basis.