Temporary Suspension of New Filing Requirements
The Hiring Incentives to Restore Employment Act (the 2010 HIRE Act) enacted new disclosure requirements (by adding new Section 6038D to the Internal Revenue Code) for tax years beginning after March 18, 2010. The new rule applies to individuals (and, to the extent provided in regulations, to certain domestic entities) who own “specified foreign financial assets” that have an aggregate value that exceeds $50,000 for the tax year. Specified foreign financial assets are any financial accounts maintained by a “foreign financial institution” as defined under Section 1471(d), any stock or financial instrument issued by a person other than a U.S. person, or any interest in a “foreign entity” as defined in Section 1473.
Under Section 6038D, taxpayers are required to annually report their “specified foreign financial assets” on Form 8938 (Statement of Specified Foreign Assets). However, Form 8938 has not been released by the IRS yet. The IRS announced on June 21, 2011, in Notice 2011-55, 2011-29 IRB, the suspension of the 6038D reporting requirement until the IRS releases Form 8938 in its final form (a draft version was released on the IRS website on June 30, 2011). After Form 8938 is published by the IRS in its final form, taxpayers for whom the filing obligation has been suspended under the above rules will be required to attach the form for the suspended taxable year to their next tax return required to be filed with the IRS.
The 2010 HIRE Act also imposed new disclosure requirements on shareholders of passive foreign investment companies (PFIC) by adding Section 1298(f). A PFIC is any foreign corporation, 75 percent or more of whose income is passive (as that term is defined) or 50 percent of whose assets produce, or are held to produce, passive income.
Prior to the enactment of the 2010 HIRE Act, shareholders were required to file IRS Form 8621, (Return by a Shareholder of a Passive Foreign Investment Company or Qualifying Electing Fund) in any year where the shareholder recognized gain or loss on the disposition of shares in a PFIC, received distributions from a PFIC, or made certain elections regarding the PFIC. Under the new law, shareholders are required to disclose information regarding the PFIC shares in any year they are shareholders of the PFIC for taxable years beginning after March 18, 2010, regardless of whether there has been a reportable disposition, distribution or election.
On April 6, 2010, in Notice 2010-34 (IRB 2010-17), the IRS provided that taxpayers who were required to file Form 8621 before Section 1298(f) was enacted must continue to do so, and that PFIC shareholders who otherwise were not required to file Form 8621 before 1298(f) became effective (March 18, 2010) wouldn’t be obliged to file the form for tax years beginning before that date solely as result of the addition of Section 1298(f).
More recently, the IRS issued Notice 2011-55, 2011-29 (June 21, 2011) to announce that it plans to publish a revised Form 8621 to reflect the new requirements imposed under Section 1298(f), and that PFIC shareholders who did not have a filing obligation prior to the enactment of Section 1298(f), but who may file a tax return for a year beginning on or after March 18, 2010, will not have an obligation to file Form 8621 until the IRS releases a revised Form 8621. On the other hand, other PFIC shareholders who are required to file Form 8621 under the previous rules, (e.g., to report taxable dispositions and distributions under Section 1291, or to report a mark-tomarket, deemed sale or deemed dividend, or Qualified Electing Fund election) must continue to file the current Form 8621. After the IRS releases the revised Form 8621, PFIC shareholders for whom the filing obligation has been suspended will be required to attach the form for the suspended taxable year to their next information return required to be filed with the IRS.
Proposal to Introduce New Category of Subpart F Income
U.S. federal income tax law requires that a U.S. shareholder that owns (directly, indirectly, or by application of constructive ownership rules) 10 percent or more of the voting power of a “controlled foreign corporation” (CFC) include in income its share of the CFC’s “Subpart F income” each year, whether or not distributed. A CFC is defined, generally, as a foreign corporation with respect to which U.S. shareholders (as defined) own more than 50 percent of the combined voting power or total value of the stock of the corporation.
Income subject to current inclusion under the Subpart F rules includes several types of income, but in particular includes “foreign base company income.” Foreign base company income consists of 1) foreign personal holding company income (certain passive or investmenttype income, such as dividends, interest, rents, royalties and gains from certain property transactions); 2) foreign base company services income (income derived by the CFC in connection with the performance of certain services outside the CFC’s country of incorporation for, or on behalf of, a related person); 3) foreign base company sales income (income earned by a CFC from buying or selling personal property from, to, or on behalf of related persons, if the personal property is (A) manufactured, produced, grown or extracted outside of the country in which the CFC is organized and (B) used, consumed or disposed of outside such country); and 4) income attributable to certain oil and gas activities.
On June 22, 2011, Rep. David N. Cicilline (D-RI) introduced H.R. 2280, the Offshoring Prevention Act (the “Proposed Legislation”), which would add to the list of Subpart F income categories “imported property income.” Under the Proposed Legislation, a CFC’s “imported property income” would be subject to current U.S. taxation under the Subpart F provisions. Imported property income is defined in the Proposed Legislation as “income derived in connection with manufacturing, producing, growing, or extracting imported property; the sale, exchange, or other disposition of imported property; or the lease, rental, or licensing of imported property,” and excludes certain foreign oil- and gas-related income.
The Proposed Legislation defines “imported property” as property that is imported into the United States by the CFC or a related person, and certain property imported by unrelated persons (i.e., property imported into the United States by an unrelated person if, when the property was sold to the unrelated person by the CFC (or a related person), it was reasonable to expect that the property would be imported into the United States or that the property would be used as a component in other property that would be imported into the United States). Imported property does not include any property that is imported into the United States and that, before substantial use in the United States, is sold, leased or rented by the CFC or a related person for direct use, consumption or disposition outside the United States, or is used by the CFC or a related person as a component of other property that is so sold, leased or rented.
The term “import” means entering, or withdrawal from warehouse, for consumption or use. The term “import” for this purpose generally includes licensing or any grant to use marketing or manufacturing intangibles in the United States.