With the repeal of Section 958(b)(4), a U.S. subsidiary of a foreign multinational is more likely to be required to file one or more Forms 5471. This constructive ownership determination could result in the stock of the foreign subsidiaries of a foreign parent being attributed to a U.S. subsidiary. The change in attribution effectively would cause the U.S. subsidiary to become a U.S. shareholder of all of the foreign multinational’s non-U.S. subsidiaries and create a Form 5471 filing obligation, even when the U.S. subsidiary has no direct ownership and will have no taxable income under Subpart F/Section 956.
The IRS provided some relief under the new rules in the guidance contained in Section 5 of Notice 2018-13. The notice indicates that the IRS intends to issue instructions for Form 5471 that will provide a filing exception for U.S. taxpayers who qualify as U.S. shareholders solely as a result of downward attribution from a foreign owner. The exception will apply provided no U.S. person (whether or not related to the constructive owner) qualifies as a U.S. shareholder by way of direct or indirect ownership. The notice provides a measure of relief, but constructive owners still would have a filing obligation under the notice if anyone qualified as a U.S. shareholder without constructive attribution. Because a third-party shareholder (the kind of shareholder least likely to be known to the U.S. constructive owner) could trigger the obligation, the change in the downward attribution rules is especially dangerous.
Failure to file the required Forms 5471 could lead to automatic penalties of $10,000 for each form. The irony is that U.S. subsidiaries could have substantial penalties for not reporting on the operations of foreign corporations over which they have no control and from which they will never be entitled to receive income.
Several commenters have requested the IRS provide additional guidance and relief for this issue. The American Institute rel="noopener noreferrer" of CPAs (AICPA) requested the IRS to provide prospective relief of penalties related to those who are first-time filers of Form 5471. Despite the actions of the AICPA and other commenters, there is no guarantee that the IRS will acquiesce. Therefore, it is essential that taxpayers consider whether they will be subject to the new reporting requirements now and, if so, determine how they will go about complying with them.
