Globalization has brought many
new opportunities for U.S. businesses. By pursuing
broader horizons, however, your clients can find
themselves in unfamiliar shoals of the tax code.
Here are 10 of the leading situations in which
clients might need help navigating through
international transactions. A “person,” in these
tips, can mean a business entity, estate or trust,
as well as an individual.
U.S. property is purchased from a
foreign person. Withholding tax,
generally 10%, can be required for purchases of
U.S. real estate from a foreign person—even for a
personal residence, if the amount realized exceeds
$300,000, under IRC section 1445(b)(5). Even a
buyer of non-publicly traded stock in a U.S.
corporation may be liable for withholding if the
corporation owns or owned real property.
Payments are made to a foreign person.
Payees need to be aware of the types
of income that are subject to withholding. They
include rent, royalties, interest, dividends,
license fees and U.S. source income that is not
“effectively connected” with a U.S. trade or
business. Persons making payments should either
obtain representations from sellers that they are
not subject to withholding or determine the proper
withholding before any payments change hands.
Payments may need to be reported on forms 1042,
1042-S or 1042-T.
A foreign person acquires stock in a
U.S. corporation. U.S.
corporations may be subject to reporting
requirements in addition to withholding. A
corporation that becomes at least 25% foreign
owned may be required to file form 5472,
Information Return of a 25% Foreign-Owned
U.S. Corporation or a Foreign Corporation
Engaged in a U.S. Trade or Business.
A foreign person becomes a partner in a
U.S. partnership. A U.S.
partnership’s reporting requirements increase when
it has foreign partners. For example, the
partnership may be required to file form 8805,
Foreign Partner’s Information Statement of
Section 1446 Withholding Tax.
A U.S. person becomes a partner in a
foreign partnership. U.S.
members of foreign partnerships, including LLCs
that elect to be treated as a partnership or
disregarded entity, cannot assume the partnership
will file U.S. taxes. Thus, they may be required
to file form 8865, Return of U.S. Persons With
Respect to Certain Foreign Partnerships.
Transactions are denominated in a
foreign currency. The number and
complexity of book-to-tax adjustments increase
with international transactions. A common example
is when transactions are denominated in a foreign
currency. Open transactions are recorded for book
purposes but are not included in taxable income
until the transaction closes.
A U.S. person controls or has an
interest in a foreign account.
U.S. persons with an interest in or
control over foreign bank or other financial
accounts may be required to file form TD F
90-22.1, Report of Foreign Bank and Financial
Accounts, if the accounts’ aggregate value
exceeds $10,000 at any time in a calendar year.
The form is an informational return only and does
not generate a tax liability. But failing to file
it can result in monetary and criminal penalties,
says CPA Linda C. Maxwell-Fisher. “The Treasury
Department, together with Homeland Security, is
attempting to trace large sums of money of U.S.
citizens and residents,” she said.
Property or currency is transferred into
or out of the United States.
Aggregate transfers of more than
$10,000 may need to be reported on FinCEN form
105, Report of International Transportation of
Currency or Monetary Instruments. Monetary
instrument is defined broadly and includes signed
checks where the payee’s name has been omitted.
Property transfers may need to be reported on IRS
form 8865, schedule O, Transfer of Property to
a Foreign Partnership; form 926, Return
by a U.S. Transferor of Property to a Foreign
Corporation; or form 3520, Annual
Return to Report Transactions With Foreign
Trusts and Receipt of Certain Foreign Gifts.
Operations are conducted in a foreign
country. Businesses need to be
aware of what types of activities subject them to
another country’s filing and tax requirements.
Even a small adjustment may avoid a tax liability.
International transactions are conducted
with a related person (transfer pricing).
The definition of related party
is broad, and IRC section 482 is not limited
to situations where one entity owns more than half
of another. Any type of transfer, including a
transfer of intangibles, can be subject to
By Susan M. Sorensen, CPA,
Ph.D., assistant professor of accounting at the
University of Houston, Clear Lake, Texas. Her
e-mail address is