TEI member comments on Form 5471: July 2007.

Note: These comments are a compilation of recommendations received from TEI's members on Form 5471.

After the June 6th meeting with the IRS, TEI circulated 13 questions among the members of its IRS Administrative Affairs and International Tax Committees, soliciting their views on issues relating to the Form 5471 and possible modifications. Many of the questions were drawn from issues discussed during the June 6th meeting. In addition, in its monthly email to members, TEI asked generally about issues relating to the form and possible modifications. Although the responding group is relatively small (17), the data they provided are extensive. The information provided by each respondent is enclosed.

Specifically, TEI asked its committee members the following questions:

1. What processes do companies have in place to collect data and prepare and review the form? Specifically, (a) do internal company management reporting systems support Form 5471 reporting; (b) how and in what format do companies assemble key Form 5471 information; (c) how (if at all) is Form 5471 data used for internal reporting; and (d) what processes are in place to ensure timely and accurate filing?

2. What specific problems have companies identified in either their data collection or form preparation?

3. What changes should be made to provide relevant information to the IRS without unduly burdening companies?

4. What questions, if any, have you received from your IRS examiner about Form 5471? The IRS expressed interest in questions about Schedule F (Balance Sheet), but members were asked not to limit their responses to that schedule.

5. Would an additional line or question on the form eliminate the inquiry?

6. What areas of the form do you prepare solely for the IRS?

7. One suggestion made during the meeting is the viability of using a series of "screening questions" to determine whether a company needs to submit the entire form. For example, if a company reported an item listed in Schedule I (Summary of Shareholder's Income from Foreign Corporation), it would be required to submit the entire form. If it did not report an item, it would need to submit only summary information. What do you see as the pros/cons of this "screening question" approach?

8. In addition, the possibility of adding a question to Schedule G (Other Information) was raised, specifically, inquiring whether any transactions covered by the form are the subject of a transfer pricing study. What do you think of this suggestion?

9. If the question pertained to section 338 elections, would you be able to collect the information fairly easily?

10. Do you believe the 2009 filing season is a realistic goal?

11. What are the specific steps that your company would need to undertake to revise internal systems to meet that deadline?

12. What costs (human, dollar) would you anticipate being involved in this effort?

13. If possible, please provide a rough timeline for the steps you have outlined above.

    Members' Summary Comments

    Respondent #1: There are opportunities to improve Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) through streamlining the information required, as well as using e-filing more efficiently.

    With the condensed time requirements in which companies must complete their financial reporting obligations--in addition to complying with the internal control requirements of the Sarbanes-Oxley Act of 2002 (SOX)--there has been an increase in the number of initiatives to leverage financial reporting system software and develop standardized information request packages that support the preparation of Form 5471. Consequently, most companies have the means by which they can gather and report financial reporting information and efficiently reflect this information on their Form 5471. This may not be the case, however, for mid-size and smaller companies that do not have this type of infrastructure in place.

    The proposal to use a series of "screening questions" could facilitate more focused, efficient, and accurate compliance reporting. This could come at a cost to the taxpayer, however, depending on the nature of the questions and the type of response (e.g., yes/no or taking action in response to a group of questions (category of filer)). For example, if yes/no questions were asked about the existence of foreign base company income and the underlying nature of that income (e.g., foreign personal holding company, foreign base company sales, or foreign base company services income), would inadvertent errors trigger the assessment of penalties? The "screening questions" approach would appear to be more useful to mid-size and smaller companies, but there is risk that a vehicle designed for their convenience could ultimately prove more costly.

    Alternatively, a group of "screening questions" could be used to determine a new category of filer (e.g., category 6 filer) that would be entitled to provide less information on Form 5471. The series of screening questions could consist of: (i) the type of activities engaged in; (ii) the magnitude of income statement; (iii) whether the company has generated foreign base company income; (iv) the size of balance sheet; and (v) whether the controlled foreign corporation has invested in U.S. property.

    An item not specifically addressed in the questions is the consequence of e-filing. Forms 5471 can no longer be filed as a PDF attachment with the filing of a consolidated Form 1120. What is potentially time consuming and ultimately inefficient for taxpayers is the e-filing of Form 5471 because specific diagnostics are syntax driven and must be cleared before an accurately prepared Form 5471 can be accepted as filed.

    Respondent #2: By way of background, our company profile is:

    * Software applications used by respondent company: (i) GDX-electronic intranet data gathering package; (ii) CorpTax--earnings and profits and form preparation; and (iii) CorpInternational--income inclusion and deemed paid foreign tax credit calculator;

    * 375 CFC Form 5471 filings for 2006, including 40 Form 8858 (Foreign Disregarded Entity (DRE)) filings;

    * Nearly 4,000 pages, an average of 10-11 pages per CFC;

    * Basic form is 6 pages, others are attached support schedules, report of changes in ownership, disclosures, elections;

    * 40 Form 8858 DRE filings with Form 5471;

    * 4 1/2 fulltime equivalents working on E&P, income inclusion calculations, and form processing (from March through August);

    * 1 international tax planning manager, reviewing E&P calculations (May through June);

    * 2 international division managers, reviewing income inclusion calculations (July) and reviewing Form 5471 filings (August).

    In our view, the Form 5471 serves the government two purposes: (i) statistic gathering, and (ii) the local international examiner's audit tool. Because there is no consolidated 5471, the individual CFC form does not tie to any line, on any form, elsewhere in the U.S. consolidated federal tax return. In our experience over the past 20 years of IRS international audit cycles, information document requests (IDRs) are generated from either the attachments to the basic form (elections, statements, disclosures) or from Schedule M (Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons). All other schedules containing financial information have generally changed from return as filed to taxpayer proposed changes at the time of the audit.

    Real simplification would be to use U.S. GAAP, not U.S. tax, rules for earnings and profits timing adjustments; permanent items and taxes paid would still be applied using U.S. tax rules.

    All schedules should be in a single currency--functional currency (FC) if different from U.S. dollar (USD)--except for the taxes paid and income inclusion information that must be in USD. Current schedules often change from USD to FC and back and forth. Cumulative E&P pools have to remain in functional currency.

    Current Schedules C (Income Statement) and F (Balance Sheet) are U.S. GAAP schedules. All other schedules are prepared on a U.S. tax basis. Keep in mind, U.S. tax basis contains DREs, although these DREs have no application to U.S. GAAP. Our software vendor has advised us that other clients using its software allow the DREs to roll up into the U.S. GAAP schedules. There is some controversy in the taxpayer community on whether the DREs should roll up into the U.S. GAAP financial statements. A true U.S. GAAP statement, in this company's view, should not reflect a roll up of DREs; a U.S. GAAP statement without a roll up, however, is not reflective of the U.S. tax status of the entity.

    Respondent #3: Instead of answering your questions by number, I am submitting the following, which is probably common for foreign-owned companies.

    My employer is the U.S. headquarters of a U.K.-based multinational corporation. Therefore, the U.S. entity does not have a large number of CFCs, as it is more tax efficient for our U.K. parent to own foreign subsidiaries outside of the U.S. Group rather than pay dividends up to a higher U.S. tax rate, then down a lower U.K. rate.

    We spend a considerable amount of resources, however, on the few CFCs we do have just to provide the financial information for the 5471s. A large portion of time is spent simply converting local books to U.S. GAAP. Since our U.K. parent reports under IFRS/IAS, the foreign subsidiaries report their year-end numbers directly to the U.K. in IFRS. Further, their locally issued audited financial statements are issued under local GAAP (such as Mexican, etc.), and so the financial accountants (U.S., Mexican, or wherever) never generate U.S. GAAP financials. Such task falls to the U.S. tax department (who are not experts in these alternative reporting systems), and we have to struggle and spend considerable time to obtain sufficient information and details (in English!) to do the conversions.

    Further, since our CFCs report their financial...