I received a large stack of Express mail over a foot deep last month from the Bureau of Economic Analysis (the “BEA”), which has statutory authority to collect vast amounts of data on certain international investments both in the U.S. and abroad. The envelopes waiting for me in my in-box included BEA annual surveys (BE-11 forms) due May 31, 2014, with an estimated public reporting burden per reporter and form of approximately 86 hours. Thankfully, I have spent the past few years handling compliance with this little-known reporting obligation and have advised clients how to significantly reduce the public burden related to BEA compliance including the BE-11 forms. Unfortunately, this fact does not change the reporting duty.

The girth of the envelopes highlighted the need for a compliance update regarding the statute, especially since the potential penalties for non-compliance include financial penalties (up to $25,000 per reporter and form unfiled, subject to inflationary adjustments) and potential jail time for officers, directors, employees or agents engaging in willful non-compliance.

The purpose of this article is to outline current BEA reporting burdens for U.S. individuals and legal entities (“U.S. Persons”) who own 10% or more of a foreign business abroad and for U.S. Persons that are owned 10% or more by foreign individuals and legal entities (“Foreign Persons”), and to summarize efforts made by the BEA in 2013 which may impact persons currently complying with the reporting requirements.

As one of the most highly regarded statistical organizations in the world, the BEA analyzes data and releases reports on some of the most important economic indicators for the U.S. economy. Government, business and financial leaders in the White House, Congress, the Federal Reserve, and Wall Street rely on BEA data daily. This data includes the GDP growth rate, personal income and expenditures, international trade balance and the current account deficit, along with regional GDP estimates by state across multiple industries. The White House and Congress use BEA data and analysis to prepare budget estimates and projections. The Federal Reserve Banks use BEA data to set monetary policy, and trade policy officials use BEA data to negotiate international trade agreements.

The BEA is authorized through the International Investment and Trade in Services Survey Act (the “Act”) and Part 806 of the Code of Federal Regulations to obtain data on international investments made by U.S. Persons abroad and Foreign Persons in the United States.

In 2013, the BEA made significant changes to public reporting obligations under the Act. Prior to 2013, completion of all BEA surveys was mandatory, regardless of whether the BEA solicited a response. The BEA made attempts to change the mandatory reporting requirement in 2013 by issuing notices in the Federal Register with respect to required quarterly and annual surveys. The 2013 notices stated that any reporter required to file certain annual and quarterly surveys under the statute only had a duty to report if the reporter had been contacted directly by the BEA.

Unfortunately, this change did not apply to the BEA benchmark surveys (BE-12 forms) that were due on May 31, 2013. The BE-12 Report is required from all U.S. Persons who are owned 10% or more by a Foreign Person. The BEA is still collecting data related to the benchmark surveys through May 31, 2015. This survey is mandatory and is the most comprehensive and time consuming survey a reporter has a duty to complete -- estimated at approximately 96 hours per reporter/response and the maximum response time estimated at 633 hours. Furthermore, it is reasonable to expect that those who have a duty to report a benchmark survey will likely be contacted by the BEA and asked to complete the required quarterly and annual surveys going forward. The BEA has advised that it will continue to use discretion to evaluate quarterly and annual reporting requirements for all U.S. Persons owned 10% or more by Foreign Persons and all Foreign Persons owned 10% or more by U.S. Persons.

There Are Two Sides to Every Survey

Simply put, there are two circumstances when surveys must be filed by a U.S. Person: (i) when that U.S. Person owns 10% or more of a foreign entity, and (ii) when that U.S. Person is owned 10% or more by a Foreign Person. The Act deals separately with U.S. direct investment abroad and foreign direct investment in the United States and establishes multiple reporting requirements for each. The Act defines “direct investment” as the ownership or control of 10% or more of the voting securities of an incorporated business. The term “voting securities” is not independently defined in the Act or in the Code of Federal Regulations; however, the term is used interchangeably with “voting interest”. “Voting interest” is defined as the percentage of ownership in the voting equity of the relevant entity. Essentially, ownership of 10% of a foreign entity that establishes a capacity to vote and influence corporate action appears to be the defining feature of what constitutes a foreign direct investment abroad. On the flip side, ownership of 10% of a U.S. entity by a Foreign Person that establishes a capacity to vote and influence corporate action appears to be the defining feature of what constitutes a foreign direct investment in the United States.

Reporting U.S. Direct Investment Abroad

A U.S. Person with direct investment in a foreign business (“U.S. Reporter”) bears the dual obligation of reporting its own operations and its operations with respect to each of its “Foreign Affiliates” (an entity outside the United States in which the U.S. Person has a direct investment). However, a U.S. Reporter is exempt from reporting with respect to its Foreign Affiliate when (1) total assets, (2) net sales or gross operating revenues (excluding taxes), or (3) net income (loss) after foreign income taxes fall below certain financial thresholds for that affiliate. Certain real estate holdings must also be reported with an exception for real estate held or owned for personal use.

Below is a description of the forms, reporting criteria and exemptions for each required survey of U.S. direct investment abroad required by the Act. It should be noted that this article identifies the exemption levels (lowest level financial thresholds) and related forms in an effort to point out the absolute financial cut offs. Higher level thresholds exist and would require a reporter to fill out additional and different forms.

Annual Survey of U.S. Direct Investment Abroad – Form BE-11

At present it is estimated that over 50,000 U.S. Reporters are currently reporting direct investment abroad activities under the statutory scheme. U.S. Reporters that are contacted by the BEA (including those contacted by the BEA following receipt of the required benchmark surveys) must annually file a Form BE-11A regarding their own operations, and a Form BE-11B, Form BE-11C and/or Form BE-11D for each of their Foreign Affiliates exceeding the exemption threshold of $60 million (positive or negative) in (i) total assets, (ii) net sales or gross operating revenues (excluding taxes), or (iii) net income (loss) after foreign income taxes in the year, unless a Foreign Affiliate was in its first year of operation, or established or acquired in the reporting year, in which case the threshold is $25 million. One exemption to filing in this category would be if the affiliate is less than 20% owned by all U.S. Reporters of the affiliate combined. The due date for the BE-11 survey is May 31, 2014.

Quarterly Survey of U.S. Direct Investment Abroad – Form BE-577

A quarterly Form BE-577 must be filed by a reporter contacted by the BEA (including those contacted by the BEA following receipt of the required benchmark surveys) for each directlyowned Foreign Affiliate exceeding or expected to exceed an exemption level of $60 million (positive or negative) in (1) total assets, (2) annual sales or gross operating revenues (excluding taxes), or (3) annual net income (loss) after provision for foreign income taxes at any time during the reporting period. The U.S. Reporter must also report indirectly-owned Foreign Affiliates that meet the $60 million threshold with an intercompany debt balance with the U.S. Reporter that exceeds $1,000,000. Form BE-577 is due 30 days after the close of each calendar year or fiscal quarter or 45 days if the report is for the final quarter of the financial reporting year.

At the close of fiscal year 2014 the BEA will be conducting another five year benchmark survey for all U.S. Persons who own 10% or more of a Foreign Person. This 2014 Benchmark Survey of U.S. Direct Investment Abroad has not yet been released by the BEA, but the filing deadline is May 31, 2015, with reporting burdens similar to those outlined below.

Reporting Foreign Direct Investment in the United States

There are a number of reporting requirements for a U.S. entity in which a Foreign Person has a direct investment (“U.S. Affiliate”).

Annual Survey of Foreign Direct Investment in the United States – Form BE-15

A Form BE-15 must be completed within five months from the last day of each calendar year by each U.S. Affiliate contacted by the BEA (including those contacted by the BEA following receipt of the required benchmark surveys) exceeding an exemption level of $40 million (positive or negative) in (1) total assets, (2) net sales or gross operating revenues (excluding taxes), or (3) net income (loss) after foreign income taxes (real estate transactions to be analyzed similarly). Additional BE-15 forms are necessary for reporters who meet higher fi- nancial thresholds set by the government.

A Form BE-15 Claim for Exemption is required if foreign ownership in a U.S. Affiliate falls below 10 percent, the U.S. Affiliate is fully consolidated or merged into another U.S. Affiliate, or if all of the following three items for the U.S. Affiliate are $40 million or less (positive or negative): (1) total assets, (2) annual sales or gross operating revenues, and (3) annual net income (loss) after provision for U.S. income taxes. Exempt U.S. Affiliates should file a BE-15 Claim for Exemption. Provided the U.S. Affiliate continues to meet the exemption criteria, it is not necessary to file again. Form BE-15 is due on May 31, 2014.

Quarterly Survey of Foreign Direct Investment in the United States – Form BE-605

In most cases quarterly reports must be submitted on a Form BE-605 within 30 days of the close of each quarter by every U.S. Affiliate contacted by the BEA (including those contacted by the BEA following receipt of the required benchmark surveys) for all U.S. Affiliates in which one of the following exceeds an exemption level of $60 million (positive or negative): (1) total assets, (2) annual sales or gross operating revenues (excluding taxes), or (3) annual income (loss) after foreign income taxes (real estate transactions to be analyzed similarly). If the foreign ownership is indirect (through another U.S. Affiliate) and the U.S. Affiliate has no relationship with its Foreign Affiliate, then the U.S. Affiliate can discharge its reporting obligation by completing item C and the “Person to Consult” portion of Form BE-605 Certificate of Exemption — a requirement that is not derived from the Act or the regulations, but is specified only on the form itself. Form BE-605 is due 30 days after the close of each calendar year or fiscal quarter end or 45 days if the report is for the final quarter of the financial reporting year.

Benchmark Survey of Foreign Direct Investment in the United States – Form BE-12

Form BE-12A is required for all U.S. Persons who are majority-owned by a Foreign Person and have total assets, sales or gross operating revenues, or net income greater than $300 million (positive or negative). Form BE-12B is required for (i) all U.S. Persons who are majority owned by a Foreign Person and have total assets, sales or gross operating revenues, or net income greater than $60 million (positive or negative), but not greater than $300 million (positive or negative), and (ii) all U.S. Persons who are minority-owned (at least 10%) by a foreign business and have total assets, sales or gross operating revenues, or net income greater than $60 million. Form BE-12C is required for all U.S. Persons who are owned (at least 10%) by a Foreign Person and have total assets, sales or gross operating revenues, or net income less than or equal to $60 million (positive or negative). Form BE-12 (Claim for Not Filing) may be used for U.S. Persons who ceased to be owned by a Foreign Person within the timeframe of the survey, or for U.S. Persons that are not required to report on any of forms BE-12A, BE-12B and BE-12C and have been contacted by the BEA to do so.

Privacy Concerns?

Information collected under the Act is confidential and may not be published or made available in any manner such that the person to whom the information relates can be specifically identified. The exchange of collected information between government agencies is permitted in order to carry out the purposes of the Act, but the information may only be used for analytical or statistical purposes or for a proceeding under the penalty provisions. It cannot be used for taxation, investigation, or regulatory purposes, and copies retained by any U.S. Reporter are given extra protections from legal process.

Practical Advice

The first step towards compliance with this little-known statute is to understand the ever-changing reporting requirements and corresponding forms. The next step is to properly educate clients, legal counsel and financial advisors who are Simply put, there are two circumstances when surveys must be filed by a U.S. Person: (i) when that U.S. Person owns 10% or more of a foreign entity, and (ii) when that U.S. Person is owned 10% or more by a Foreign Person. best situated to access information needed to complete the forms. Lastly, it is necessary to set up a process for determining financial thresholds by calendar quarter and a system for compliance. The BEA is now accepting internet filings, which speeds the process considerably. Advisors may also review the BEA’s website for additional reporting requirements and forms for certain international service transactions at http://www.bea.gov/international/index.htm#surveys.