By Anthony Diosdi
Recently, the Internal Revenue Service (“IRS”) issued a draft of a new Schedule H for Form 5471. Schedule H is used to report a controlled foreign corporation’s (“CFCs”) current earnings and profits (“E&P”). Category 4 and Category 5 filers are required to attach a Schedule H to their Form 5471. A Category 4 filer is a U.S. person who had “control” of a CFC for an uninterrupted period of at least 30 days during the foreign corporation’s annual accounting period. Control for purposes of Category 4 is defined as more than 50 percent of voting power or value utilizing the attribution rules of Section 958. A Category 5 filer is a U.S. person who is a ten percent or greater shareholder in a corporation that was a CFC for an uninterrupted period of thrifty days during its annual accounting period and who owned stock in the CFC on its last day of its annual accounting period.
Prior to the IRS revising the Schedule H, CFC shareholders were required to categorize income on lines a and b. The categories of income were as follows:
1. Section 951A Category Income.
2. Foreign Branch Category Income.
3. Passive Category Income.
4. Section 901(j) Income.
5. Income Re-sourced by Treaty.
6. General Category Income.
A separate Schedule H was required to be prepared for each category of income. The new Schedule H eliminates lines a and b. As a result, CFC shareholders will no longer need to prepare a separate Schedule H for each category of income. Although it no longer appears that CFC shareholders will be required to prepare multiple Schedule H information returns, if a CFC has more than one category of income, the new Schedule H now requires CFC shareholders to disclose general category income, passive category income, and sanctioned income under a new line 5c. Anyone familiar with Schedule H will notice that the IRS no longer requires CFC shareholders to disclose GILTI or Section 951A Category Income on the schedule. Some tax professionals erroneously believe this means that CFC shareholders no longer need to report GILTI on Schedule H. This is not the case. There is no indication that the IRS intended CFC shareholders to exclude GILTI income from Schedule H. GILTI should be included under General Category income.
Reporting a CFC’s income and expenses on a Form 5471 is no easy task. If you have a Form 5471 reporting obligation, you should seek advice from a professional well versed in international tax.
We provide international compliance assistance and international tax planning services to domestic corporations. We also assist other tax professionals who need guidance regarding international tax compliance matters.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.