INTERNATIONAL TAX COMPLIANCE FOR GOVERNMENT CONTRACTORS

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1 INTERNATIONAL TAX COMPLIANCE FOR GOVERNMENT CONTRACTORS Mark T. Gossart Alison N. Dougherty September 26, All Rights Reserved 805 King Farm Boulevard Suite 300 Rockville, Maryland P F

2 Agenda International tax compliance and reporting requirements for outbound business activities in a foreign country U.S. nonresident tax withholding on payments of certain types of U.S. source income to foreign persons Other considerations foreign tax credits and transfer pricing 1

3 Outbound Business Activities Conducted through Foreign Company Owned by U.S. Person(s) 2

4 Formation or Acquisition of Foreign Company Foreign Entity Classification for U.S. Tax Purposes Form 8832 Check-the-Box Election Form 8832 check-the-box entity classification election is filed to treat foreign eligible entity as pass-through entity for U.S. tax purposes. The income of the foreign entity is taxable to the U.S. owner on its U.S. Federal tax return if Form 8832 is filed. Losses of the foreign entity are reportable on the U.S. owner s U.S. Federal tax return (subject to basis limitation for foreign partnerships). Foreign entity on per se list of foreign corporations is not eligible to make election and is required to be treated as a foreign corporation for U.S. tax purposes. See Treas. Reg. Section (b)(8) or Form 8832 instructions for the list of per se foreign corporations. Foreign eligible entity owned 100% by U.S. person may elect be treated as a foreign disregarded entity. Foreign eligible entity owned by two or more persons may elect to be treated as a foreign partnership. Effective date of Form 8832 election cannot be earlier than 75 days prior to date when election is filed. 3

5 U.S. International Tax Reporting for Foreign Company Owned by U.S. Person Foreign Corporations Form 5471 The Form 5471 is filed by U.S. persons who own an interest in a foreign entity that is required to be classified as a foreign corporation for U.S. tax purposes. Category 3 Filer - File Form 5471 if U.S. person acquires 10% interest in a foreign corporation. Category 4 Filer - File Form 5471 if U.S. person controls a foreign corporation (i.e., owns more than 50%). Category 5 Filer - File Form 5471 if U.S. person owns 10% or more of a foreign corporation of which more than 50% of the vote or value is owned by U.S. persons who each own at least 10% of the voting stock (CFC). Category 2 Filer - File Form 5471 if a U.S. person is an officer or director of a foreign corporation of which a U.S. person has acquired 10% of the vote or value or if a U.S. person acquires an additional 10%. File Form 5471 if a U.S. person owns any stock of a controlled foreign corporation (CFC) that is a captive insurance company. Form 5471 requires income statement of foreign corporation to be reported in functional foreign currency and U.S. dollars. Form 5471 requires balance sheet of foreign corporation to be translated from functional foreign currency to U.S. dollars in accordance with U.S. GAAP. Certain transactions between U.S. person filing the Form 5471 or any related parties and foreign corporation are required to be reported on Schedule M of the Form $10,000 penalty applies for the failure to timely file Form 5471 or if Form 5471 is considered to be incomplete or inaccurate when filed. Form 5471 is filed with U.S. filer s U.S. Federal tax return. The $10,000 penalty will apply automatically if the U.S. filer s tax return is filed late and the return includes the Form

6 U.S. International Tax Reporting for Foreign Company Owned by U.S. Person Controlled Foreign Corporations (CFCs) Foreign corporation of which more than 50% of the vote or value is owned (directly, indirectly or constructively) by U.S. persons who each own at least 10% of voting stock is a controlled foreign corporation (CFC) for U.S. tax purposes. CFCs are subject to Subpart F of U.S. Internal Revenue Code. I.R.C. Sections 951 et seq. If a CFC has Subpart F income or there is an increase in the earnings invested by the CFC in U.S. property for the tax year, the undistributed earnings of the CFC are taxable to the U.S. shareholder on its U.S. tax return before an actual dividend distribution is made. Otherwise, if a foreign corporation is not a CFC, the U.S. shareholder is subject to U.S. taxation only when actual dividend distributions are repatriated. Foreign Base Company Services Income (I.R.C. Section 954(e)) - CFC has Subpart F income if the CFC performs services for a U.S. parent company or a related party in a country other than the CFC s country of incorporation. Foreign Based Company Sales Income (I.R.C. Section 954(d)) - CFC has Subpart F income if (1) the CFC purchases goods or property from or sells them to a U.S. parent company or related party; (2) the purchased property is manufactured, produced, grown or extracted by a party other than the CFC outside of the CFC s country of incorporation; and (3) the CFC sells the property for use, consumption or disposition outside of the CFC s country of incorporation. For example, a Belgian subsidiary of a U.S. parent corporation has foreign base company sales income if the U.S. corporation manufactures consumer products in the United States, the U.S. corporation sells the products to the Belgian subsidiary, and the Belgian subsidiary sells the products to customers in Norway. This structure would also implicate transfer pricing to be discussed later. Subpart F income is required to be reported on the Form Please consult your tax advisor for other types of Subpart F income and technical rules that apply to CFCs under Subpart F. For instance, there are special tracing rules that apply so that the U.S. shareholder is not taxed twice on Subpart F income and the CFC s undistributed earnings attributable to the taxable Subpart F income that are later distributed as an actual dividend. 5

7 U.S. International Tax Reporting for Foreign Company Owned by U.S. Person Foreign Partnerships Form 8865 The Form 8865 is filed by a U.S. person who owns an interest in a foreign eligible entity that has elected on the Form 8832 to be classified as a foreign partnership for U.S. tax purposes. Category 1 Filer - File Form 8865 if a U.S. person owns more than 50% of a foreign partnership. Category 2 Filer - File Form 8865 if a U.S. person owned at any time during the tax year a 10% or greater interest in the partnership while the partnership was controlled by U.S. persons each owning at least 10% interests. If one U.S. person owned more than 50% of the foreign partnership at any time during the tax year, then any other Category 2 Filers do not need to File Form Category 3 Filer - File Form 8865 if a U.S. person contributed property to a foreign partnership in exchange for an interest in the foreign partnership if the U.S. person (1) owned directly or constructively at least a 10% interest in the foreign partnership immediately after the contribution, or (2) the value of the property contributed when added to the value of any other property contributed by such person or any related person during the 12 month period ending on the date of transfer exceeds $100,000. Form 8865 requires the foreign partnership s income statement and balance sheet to be reported in U.S. dollars translated from functional foreign currency in accordance with U.S. GAAP. Certain transactions between the U.S. person filing the Form 8865 or any related parties and the foreign partnership are required to be reported on Schedule N of the Form The U.S. person filing the Form 8865 is required to report transfers of property to the foreign partnership on Schedule O of the Form The types of property that must be reported include cash, marketable securities, inventory, tangible property used in a trade or business, intangible property and other property. The U.S. person filing the Form 8865 is also required to report the partnership s disposition of such transferred property that occurs while the U.S. person is still a direct or constructive partner. $10,000 penalty applies for the failure to timely file Form 8865 or if Form 8865 is considered to be incomplete or inaccurate when filed. Form 8865 is filed with the U.S. partner s U.S. Federal tax return. The $10,000 penalty will apply automatically if the U.S. partner s U.S. Federal tax return is filed late and the return includes the Form

8 U.S. International Tax Reporting for Foreign Company Owned by U.S. Person Foreign Disregarded Entity Form 8858 The Form 8858 is filed by a U.S. person who owns 100% of a foreign eligible entity that has elected on the Form 8832 to be classified as foreign disregarded entity for U.S. tax purposes. Category 1 Filer - File Form 8858 if a U.S. person owns 100% of a foreign disregarded entity. Category 2 Filer - File Form 8858 if a U.S. person is required to file Form 5471 for a CFC that is a tax owner of a foreign disregarded entity. Category 3 Filer - File Form 8858 if a U.S. person is required to file Form 8865 for a controlled foreign partnership that is a tax owner of a foreign disregarded entity. The income statement of the foreign disregarded entity is required to be reported on the Form 8858 in functional foreign currency and U.S. dollars. The balance sheet of the foreign disregarded entity is required to be reported on the Form 8858 in U.S. dollars translated from functional foreign currency in accordance with U.S. GAAP. Certain transactions between the U.S. person filing the Form 8858 or related parties and the foreign disregarded entity are required to be reported on Schedule M of the Form $10,000 penalty applies for the failure to timely file Form 8858 or if Form 8858 is considered to be incomplete or inaccurate when filed. The Form 8858 is filed with the U.S. owner s U.S. Federal tax return. The $10,000 penalty will apply automatically if the U.S. owner s U.S. Federal tax return is filed late and the return includes the Form

9 Outbound Business Activities Conducted Directly by U.S. company in Foreign Country or through Foreign Branch 8

10 Jurisdiction to Tax Income Earned in Foreign Country If a U.S. company performs a contract, provides services or does some type of work directly or through a branch in a foreign country, foreign tax could be imposed on the revenue earned in the foreign country. If the United States has a tax treaty with the foreign country, the business profits earned from the U.S. company s business activities in the foreign country are generally taxable in the foreign country only if the U.S. company has a permanent establishment which is an office, branch or fixed base in the foreign country. If the United States does not have a tax treaty with the foreign country, then other standards under foreign law could apply to determine if the foreign country has jurisdiction to tax the revenue earned by the U.S. company in the foreign country. A U.S. company which earns revenue from business activities in a foreign country is taxable on its worldwide income on its U.S. Federal tax return if it does not have a foreign subsidiary corporation. If a U.S. company earns revenue from conducting business activities directly in a foreign country or through a foreign branch, the foreign source income is taxable on the U.S. company s U.S. Federal tax return. A U.S. person which owns a foreign company that elects to be a foreign partnership or foreign disregarded entity for U.S. tax purposes is taxable on the income of the foreign company on its U.S. Federal tax return. Similarly, losses of the foreign company treated as a pass-through for U.S. tax purposes will be reportable on the U.S. owner s U.S. Federal tax return (subject to applicable basis limitation for foreign partnerships). 9

11 U.S. Company with U.S. Persons Working in Foreign Country U.S. employers must withhold Federal income tax from wages of U.S. citizens and resident aliens performing services in foreign country unless employer is required by foreign law to withhold foreign income tax. U.S. employers are not required to withhold Federal income tax from the portion of wages earned abroad by a U.S. citizen that is equal to the foreign earned income exclusion or foreign housing cost exclusion if the employer reasonably believes that the employee qualifies for the I.R.C. Section 911 exclusions. The exemption from Federal income tax withholding based on I.R.C. Section 911 exclusions is not an exemption from FICA or FUTA for U.S. employees working abroad. U.S. employees must provide Form 673 Statement for Claiming Exemption from Foreign Earned Income Eligible for I.R.C. Section 911 Exclusions to the U.S. employer. Form 673 requires the U.S. employee to indicate that they will meet either the bona fide residence test or physical presence test and to provide the amount of the estimated housing cost exclusion. Wages of certain U.S. citizens or resident aliens working abroad (generally employees of U.S. armed forces and their civilian contractors) that are exempt from foreign income tax under agreements and treaties between the United States and a foreign country may not be eligible for the I.R.C. Section 911 exclusions. 10

12 U.S. Company with U.S. Persons Working in Foreign Country - I.R.C. Section 911 Foreign Earned Income and Foreign Housing Cost Exclusions To claim the I.R.C. Section 911 exclusions, the U.S. person s tax home must be in a foreign country and they must meet either the bona fide residence test or physical presence test. Tax Home Test The U.S. person s tax home must be in a foreign country throughout the period of bona fide residence or physical presence. The tax home is the employee s principal place of employment, business or post of duty regardless of where the family residence is maintained. Bona Fide Residence Test The U.S. person must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire year. Physical Presence Test The U.S. person must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. Foreign Earned Income Exclusion Limitation = the excess of the foreign earned income over the foreign housing cost exclusion U.S. persons cannot exclude more than the smaller of: (1) $92,900 in the year 2011 or $95,100 in the year 2012, or (2) the excess of the foreign earned income for the tax year over their foreign housing cost exclusion. Foreign Housing Cost Exclusion Limitation The maximum limit on the foreign housing cost exclusion is $13,006 for the year 2011 and $13,314 for the year See IRS Publication 54 U.S. Citizens and Resident Aliens Abroad or the IRS Instructions to the Form 2555 for more information. 11

13 U.S. Company with Foreign Persons Working in Foreign Country A U.S. company that engages foreign persons to work as employees or independent contractors in a foreign country should obtain the Form W-8BEN from the foreign person. The Form W-8BEN certifies the status of the foreign person as the beneficial owner of the payments for services rendered. Depending on the applicable law in the foreign country, the U.S. employer may be required to comply with foreign employment tax or payroll reporting in the foreign country. 12

14 U.S. Company Engages Foreign Persons to Work in the United States 13

15 U.S. Company with Foreign Persons Working in the United States as Employees If a U.S. company engages a foreign individual to perform services in the United States as an employee, the foreign individual will be treated as a Form W-2 employee and must obtain a U.S. taxpayer identification number. The foreign individual who works as an employee in the United States is subject to U.S. Federal income tax withholding, FICA and FUTA unless the foreign country of citizenship has a Social Security Totalization Agreement in effect with the United States which may provide that FICA is not required if the foreign individual will not be working in the United States for more than 5 years. 14

16 U.S. Company with Foreign Persons Working in the United States as Independent Contractors If a U.S. company engages a foreign individual to perform services in the United States as an independent contractor, the compensation paid to the foreign individual is generally subject to 30% gross U.S. Federal income tax withholding referred to as U.S. nonresident tax withholding. The U.S. company must obtain the Form W-8BEN from the foreign individual who works in the United States as an independent contractor. The U.S. company making the payment to the foreign individual is required to file the Forms 1042 and 1042-S. The 30% U.S. nonresident withholding tax rate could be reduced under a provision of a U.S. tax treaty with the foreign individual s country of citizenship. If the U.S. nonresident withholding tax rate is reduced under a U.S. tax treaty, the Form 8233 can be filed to claim the exemption from the 30% U.S. nonresident withholding tax rate applicable to compensation for services performed by a foreign person in the United States as an independent contractor. The foreign individual must obtain a U.S. taxpayer identification number which must be reported on the Form 1042-S and Form 8233 in order to claim a reduced rate of U.S. nonresident tax withholding. 15

17 U.S. Nonresident Tax Withholding on Payments of Certain Types of U.S. Source Income to Foreign Persons 16

18 U.S. Nonresident Tax Withholding Forms 1042 and 1042-S Payments of certain types of U.S. source income to foreign persons are subject to U.S. nonresident tax withholding, i.e., 30% gross withholding at source. The types of U.S. source income subject to U.S. nonresident tax withholding include interest, dividends, rents, royalties and compensation for services performed by a foreign person in the United States as a consultant or contractor. The U.S. person making the payment must file the Forms 1042 and 1042-S to report the U.S. nonresident tax withholding and to claim an exemption from the requirement to withhold at the 30% tax rate. A reduced rate of U.S. nonresident tax withholding could apply under a U.S. tax treaty with the foreign payee s country of citizenship. The foreign payee must obtain a U.S. taxpayer identification number to claim a reduced rate of U.S. nonresident tax withholding which is reportable on the Forms 1042 and 1042-S. The U.S. person making the payment must obtain the applicable form W-8 from the foreign beneficial owner of the payment which is usually the foreign payee. 17

19 U.S. Nonresident Tax Withholding Examples Dividends - U.S. subsidiary corporation pays a dividend to a foreign shareholder. Interest - U.S. person pays interest on a loan obligation owing to a foreign person. Compensation for Services - U.S. company compensates a foreign person for the performance of services in the United States as an independent contractor. Rents - Foreign person owns U.S. rental real property and receives rental income payments. Royalties - U.S. company licenses software from foreign company and the services or products which integrate the licensed software are sold or distributed in the United States. The U.S. company s payments of royalties to the foreign company for the use of the software are U.S. source income subject to U.S. nonresident tax withholding. 18

20 Other U.S. International Tax Reporting Requirements 19

21 Other U.S. International Tax Reporting Requirements FBAR Form TD F Foreign Bank Account Report ( FBAR ) Form TD F is required to be filed by June 30 th following calendar year end if the U.S. person is the owner of or has signature authority over a foreign financial account including foreign bank deposit account or foreign investment account that had a maximum balance or value of greater than $10,000 at any time during the calendar year. U.S. person includes a corporation, partnership, LLC, individual citizen, individual resident, trust or estate for purposes of FBAR filing requirement. FBAR is filed with the U.S. Department of the Treasury in Detroit, Michigan and is not filed with the U.S. person s U.S. Federal tax return. 20

22 Other U.S. International Tax Reporting Requirements Form 8938 for Specified Foreign Financial Assets For tax years beginning after 3/18/2010, U.S. individuals are required to file Form 8938 with the U.S. Federal Form 1040 individual income tax return to report specified foreign financial assets. Specified foreign financial assets include: (1) deposit or custodial accounts at foreign financial institutions; (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons; or (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person; and (c) any interest in a foreign entity. Reportable interests include stock in a foreign corporation and an interest in a foreign trust or estate. Form 8938 Filing Threshold For unmarried individuals living in the United States, the Form 8938 must be filed if the total value of the specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 on any day during the tax year. Form 8938 Filing Threshold For married individuals filing a joint return living in the United States, the Form 8938 must be filed if the total value of the specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 on any day during the tax year. An interest in a foreign corporation reported on the Form 5471 or an interest in a foreign partnership reported on the Form 8865 is not required to be reported on Form 8938 but the form must be filed and a box must be checked to indicate which other form the interest is reported on. 21

23 Other U.S. International Tax Reporting Requirements Form 926 for Transfers of Property to a Foreign Corporation The Form 926 must be filed by a U.S. corporation, U.S. individual, U.S. estate or trust or U.S. partners in a U.S. partnership to report transfers of cash or property to a foreign corporation. Form 926 Filing Threshold The U.S. transferor must file Form 926 if (1) immediately after the transfer, the person holds directly or indirectly at least 10% of the total vote or value of the foreign corporation, or (2) the amount of cash transferred by the U.S. person to the foreign corporation during the 12 month period ending on the date of the transfer exceeds $100,000. Form 926 reporting requirement applies to transfers of intellectual property to a foreign corporation. The transfer of intellectual property to a foreign corporation also could require income recognition under I.R.C. Section 367(d). Form 926 must be filed with the U.S. transferor s U.S. Federal income tax return for the year that includes the date of the transfer. 22

24 Other U.S. International Tax Reporting Requirements Forms 8804, 8805 and 8813 Foreign Partner Tax Withholding Another type of U.S. nonresident tax withholding is foreign partner tax withholding which applies if a foreign person is a partner in a U.S. partnership. Quarterly estimated payments of foreign partner tax withholding are required to be made with Form The applicable rate of foreign partner tax withholding is generally 35% of the U.S. partnership s effectively connected taxable income (ECTI). The Forms 8804 Annual Return and 8805 Foreign Partner s Information Statement are required to be filed with the U.S. partnership s U.S. Federal Form 1065 partnership tax return. 23

25 Foreign Tax Credits 24

26 Foreign Tax Credits Foreign Taxes Paid by U.S. Company Conducting Business Activities Directly in Foreign Country or through Foreign Branch C corporation - A U.S. company that is a C corporation which conducts business in a foreign country directly or through a foreign branch may claim a foreign tax credit for foreign taxes paid. The foreign tax credit is subject to limitation and is an offset against the U.S. tax liability on the U.S. Federal income tax return. U.S. Partnership or S Corporation A U.S. partnership or S corporation which conducts business in a foreign country directly or through a foreign branch will pass through foreign source income and foreign taxes paid to the respective partners in the partnership or shareholders in the S corporation. The partners and shareholders may claim a foreign tax credit (subject to limitation) to offset their U.S. tax liability on their U.S. Federal tax return. Foreign Tax Credit Limitation - The foreign tax credit limitation is the U.S. tax liability against which the foreign tax credit is claimed multiplied times a fraction which is the U.S. taxpayer s foreign source income divided by the U.S. taxpayer s worldwide income for the tax year. 25

27 Foreign Tax Credits Foreign Taxes Paid by Foreign Company Classified as Foreign Partnership or Foreign Disregarded Entity for U.S. Tax Purposes If a U.S. person owns an interest in a foreign partnership or foreign disregarded entity, the income earned and the foreign taxes paid by the foreign entity will pass-through to the U.S. owner. If the U.S. owner is an individual or a C corporation, the foreign taxes are claimed as a foreign tax credit on the U.S. Federal tax return subject to limitation. If the U.S. owner is a U.S. partnership or an S corporation, the foreign source income and foreign taxes pass through to the partners of the partnership or the shareholders of the S corporation. The foreign taxes are claimed as a foreign tax credit on the U.S. Federal tax return of the respective partners in the U.S. partnership or the shareholders of the S corporation. 26

28 Foreign Tax Credits Foreign Taxes Paid by Foreign Company Classified as a Foreign Corporation for U.S. Tax Purposes Only a U.S. shareholder that is a C corporation which owns at least 10% of a foreign corporation and receives an actual dividend distribution from the foreign corporation may claim a foreign tax credit for the foreign taxes paid by the foreign corporation. If the foreign corporation is a CFC (more than 50% of the vote or value is owned by U.S. shareholders who each own at least 10% of the voting stock), the U.S. corporate shareholder is subject to special Subpart F rules to determine the calculation of the foreign tax credit depending on the taxable Subpart F income inclusions of undistributed earnings. For example, I.R.C. Section 960 allows the U.S. corporate shareholder to qualify for a foreign tax credit with respect to the foreign taxes paid by the CFC on the undistributed earnings that are taxable to the U.S. shareholder as Subpart F income. The provision prevents the U.S. shareholder from claiming a foreign tax credit twice with respect to the same earnings that are then subsequently distributed as a dividend. 27

29 Transfer Pricing General Principles, Penalties and Contemporaneous Documentation 28

30 Transfer Pricing General Principles Transfer pricing is relevant for U.S. companies with foreign subsidiaries or foreign parent companies that engage in certain intercompany transactions. U.S. transfer pricing rules require that intercompany pricing between a U.S. company and a foreign affiliate must be based on an arm s length price that would be charged in a similar transaction with an unrelated third party. The arm s length principle is typically applied to intercompany transactions in which goods, services or property are sold between a U.S. company and a foreign affiliate. The transfer pricing rules also can apply to intercompany transactions in which payments for intercompany loans or payments for the use of property are transferred between a U.S. company and a foreign affiliate. The IRS has authority under I.R.C. Section 482 to reallocate gross income, deductions or credits between two or more organizations, trades or businesses whether or not incorporated, organized in the United States or affiliated which are owned or controlled directly or indirectly by the same interests in order to clearly reflect income or to prevent the evasion of taxes. 29

31 Transfer Pricing Penalties I.R.C. Section 6662 Substantial Valuation Misstatement Penalty is 20% of underpayment of tax if (1) an income tax return understates taxable income and reports a transfer price that is 200% or more or 50% or less than the amount determined under I.R.C. Section 482 to be the correct transfer price (the Transactional Penalty), or (2) the net I.R.C. Section 482 transfer price adjustment for the taxable year exceeds the lesser of $5 million or 10% of the taxpayer s gross receipts (the Net Adjustment Penalty). Gross Valuation Misstatement Penalty is 40% of underpayment of tax if (1) an income tax return understates taxable income and reports a transfer price that is 400% or more or 25% or less than the amount determined under I.R.C. Section 482 to be the correct transfer price, or (2) the net I.R.C. Section 482 transfer price adjustment for the taxable year exceeds the lesser of $20 million or 20% of the taxpayer s gross receipts. Substantial Understatement of Income Tax Penalty is 20% of underpayment of tax if the understatement of income tax exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000. If taxpayer is a C corporation, 20% penalty applies if understatement exceeds the lesser of 10% of the tax required to be shown on the return (or $10,000 if greater), or $10 million. 30

32 Transfer Pricing Contemporaneous Documentation Requirement In an international tax audit, the IRS may impose transfer pricing penalties if intercompany pricing is above or below a certain benchmark range based on the arm s length transfer pricing standard. The IRS will allow a U.S. company to provide contemporaneous documentation to substantiate its transfer pricing methodology and policy to avoid transfer pricing penalties. The contemporaneous documentation should be in the form of a transfer pricing tax opinion and must be in place for the tax year by the due date of the respective U.S. Federal tax return. Transfer pricing penalties will not be imposed after an IRS allocation under I.R.C. Section 482 if the taxpayer (1) establishes that it reasonably used a method of determining its transfer prices specified in I.R.C. Section 482 (or another method that more reliably determined its transfer prices); (2) sets forth the method and procedure followed in evaluating or determining its transfer prices in documentation that is in existence at the time it files its tax return; and (3) provides such documentation to the IRS within 30 days of a request. Schedule M of the Form 5471 is the first place that the IRS will look to identify intercompany transactions between the U.S. company and a foreign affiliate corporation. 31

33 Please consult your tax advisor for more information. Thank you. 32

34 services. Alison N. Dougherty is a Tax Manager with Aronson LLC. Her responsibilities include federal and multi-state tax compliance for S corporations, C corporations, partnerships and individuals. She specializes in international tax compliance and planning as part of the international tax practice. She also provides transactional tax planning and structuring Prior to joining Aronson, Alison worked as a tax manager in the telecommunications and financial services industries. She also worked as a corporate tax attorney with large law firms in Washington, DC and Denver, Colorado. Alison completed the LL.M. in Securities and Financial Regulation in 2004 with academic distinction at Georgetown University Law Center. She completed the LL.M. in Taxation in 2000 and the Juris Doctor in 1999 at the University of Denver College of Law. She completed the Bachelor of Arts in Foreign Language in 1995 at Virginia Commonwealth University

35 Mark Gossart, CPA, is a Partner in the Firm s Tax Services Group. He earned his Bachelor s Degree in Accounting from Mount Saint Mary s College in Emmitsburg, MD in 1993 and has spent 15 years in the accounting profession. His clients include corporations, partnerships, limited liability companies and individuals in the government contracting industry. Mark specializes in income taxation, tax research and planning at the federal and state levels, and tax compliance, including the preparation and review of federal and state tax returns for a wide variety of individuals and business entities. Prior to joining Aronson LLC, Mark worked for a major mortgage company, where he handled the tax compliance and research for several multi-state corporations. Mark is a member of both the AICPA and MACPA. He is active in the Montgomery County Chamber of Commerce, the Frederick County Chamber of Commerce and sits on the chamber s GovConNet Council

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