This is a newsletter from
J.D. Choi of
Tax Technologies, Inc. to tax
professionals whose interests are improving the tax management processes.
Table of Contents
- Form 8865 Background and Issues
- So, ARE YOU READY?
1. Form 8865 Background and Issues - Are you ready?
The Form 8865 is here to stay and many of us will have to deal with it. Are you ready to take the challenge?
Based on my discussions with the IRS, the final form for tax year 2000 will be released by the end of
the year. The reporting of the Form 8865 is required for foreign partnerships with a year ending on or
after December 31, 2000. Therefore, most of the calendar year foreign partnerships will have to file the
form 8865 this year. Further, contributions made to the foreign partnerships since August 5, 1997, need to
be filed with the first Form 8865 filed with the IRS if they had not been reported previously. Because the
Form 8865 requires so much information and there are inherent complexities associated with foreign partnership
calculations, I have decided to devote this month's newsletter to Form 8865 compliance issues.
In this newsletter, I simplify the issues surrounding Form 8865 compliance, provide a brief background,
and discuss filing requirements, data collection and maintenance issues, partnership allocation and sourcing
issues, and other miscellaneous issues surrounding the 8865. Based on the fact that even the IRS has
estimated approximately 46 hours for record keeping and compliance associated with each Form 8865, I
envision that it will require a significant undertaking by the corporate tax departments to comply with the
filing requirements. If you have any other questions regarding Form 8865 compliance, please feel free to
call me at (866) 239-4884.
I am pleased to announce that Tax Technologies, Inc. is near completion of our development of a Form 8865
application. We will start beta testing sometime in December and expect the program to be completed soon after
the IRS releases the final form for the year 2000. We expect to make it available for calendar year corporations
for the tax year 2000. If you would like to participate in our 8865 beta test program, please call me.
Background:
On December 28, 1999, the IRS issued the final Form 8865 along with related final regulations. On that
form, the IRS had stamped "information only" for the significant portions of the form. The information for
the portions stamped as "information only" was not required for the calendar year 1999. However, the IRS
clearly put the corporate taxpayers on notice that there will be a significant information reporting
requirement for foreign partnerships.
As of September 25, 2000, the IRS published the draft form 8865 and related schedules for the year 2000.
The new draft had been slightly modified from last year's final Form 8865. Also, the draft removed
"information only" stamp from all pages of the form. Consequently, the new draft requires reporting of all
financial information and other partnership information.
The reporting of the Form 8865 is governed by the regulations under Sections 6038, 6038B and 6046A that
were finalized in 1999. There are significant penalty provisions in each of the regulations. In summary,
non-compliance of each form will result in a significant monetary penalty and a loss of foreign tax
credits. It may also jeopardize the transaction in place using the foreign partnership structures. For the
details of the filing requirements and penalty provisions, please review.
Data Collection issues:
Form 8865 is considered by many as a combination of the Forms 1065 and 5471. There are significant
differences, however. Form 8865 requires reporting of section 904 characterization of assets, income and
expenses. Such level of detail was never required on Form 5471. On the other hand, it does not require
reporting of the pool of partnership earnings (similar to the schedule J of Form 5471 for E&P) although it
is required to compute translation gains and losses.
In any event, because it is possible that a foreign partnership is owned by one or a group of CFCs and
US companies, the information gathered must also be able to support the income sourcing for foreign tax
credit computations based on Section 904 characterization and Subpart F income determinations based on the
characterization of income under Section 954. Thus, when a corporate department is developing a data
collection package for the Form 8865, it must consider the underlying computational implications on its
partners as well as the form compliance for the partnership. It should define the data needed to be
collected based on the facts whether the partners are CFCs, US companies or combination of both.
Data Maintenance issues:
There are calculations at the partnership level as well as at the partner level. Once calculated, such
calculated data must be properly maintained to accommodate the future use of the computed data. In order to
properly compute translation gains and losses resulting from the partnership distribution (similar to the
PTI exchange gain or loss calculation in the case of a CFC) the partnership allocated data must be properly
maintained. There are other calculated tax attributes (that may not necessarily be a part of data collected),
which need to be maintained for proper calculation of the ultimate US taxable income.
Although the maintenance of such data has always been required in the past for the computation of US
taxable income, not many companies have a structured approach to maintain such data in place since there
were no visible compliance requirements. With the commencement of Form 8865 filing, however, it will be
difficult to present a consistent set of reporting from one year to the next unless structured data is
properly maintained and readily accessible.
Partnership allocation issues:
Because a partnership is a pass-through entity, its assets, liabilities and earnings must be attributed
to its partners. Simply stated, the financial results of a partnership must be allocated based on the
partnership allocation rules (which, by the way, can be altered by contracts in a variety of formula) to
its partners. In accounting terms, the trial balance adjusted for tax adjustments must be allocated to the
partners for its proportionate shares based on the partnership agreements.
This creates complex mechanical issues, including: the inconsistencies between the partnership chart of
accounts and the partner chart of accounts, translation of one functional currency to potentially multiple
functional currencies, and allocation of corresponding adjustments. This is a very laborious process
although the allocation calculation itself can be simple by itself.
The partnership allocation also creates the need for proper maintenance of non-financial data. If a
company does not maintain non-financial data, such as partnership allocation percentage detail or equity
ownership detail in an easily retrievable format, it will take a lot of time to get the partnership
financials properly allocated. This is particularly true if the partnership structure was put in place to
attribute a set of beneficial tax attributes to particular partners to accommodate the tax situations of the
partners.
Sourcing Issues:
The Form 8865 requires sourcing of asset, income, and expenses based on the characterization under IRC
Section 904. The characterization is done at the partnership level and attributed to each partner. This
aspect of the reporting requirements necessitates what I view as a "dual allocation" and "multiple translation"
of the partnership financials.
In addition, if any of the partners is a CFC, the reporting partnership must maintain additional income
attributes, such as intercompany transaction details, in order to properly characterize the income when attributed
to a CFC partner for the purposes of Subpart F income characterization.
The sourcing (in combination with the partnership allocation) is what makes the Form 8865 truly unique
and makes it so difficult to comply. Mechanically, it requires two level of allocation (partnership
allocation in addition to the asset sourcing, income sourcing and expense apportionment) and attribution to
the partners through multiple currency translation. Further, the partnership calculation must be performed
in the context of other CFC calculations such as look-through ordering.
Miscellaneous Issues:
The computation of the partnership income and expenses must be completed before partners' income and
expenses can be computed. This presents a problem from the processing point of view. Especially from the
perspective of look-through, the partnership in the look-through chain of intercompany payments will present
unique challenges in the tax processing.
Similar to how Schedule O of Form 5471 requires filing multiple copies for multiple transactions, some Form
8865 schedules require multiple attachments of the same schedules. The schedule K-1s must be prepared for each
of the partners. Likewise, multiple copies of schedules Os and Ps may need to be filed with one Form 8865.
The regulations requiring the filing of the Form 8865 specified that duplicate filing is required if the form
instructions require duplicate filing. The instructions for the final Form 8865 for the tax year 1999,
however, did not require a duplicate filing. I envision that the IRS will ultimately require the duplicate filing
similar to that of the Form 5471.
2. So, ARE YOU READY? »
Return top
Obviously, the complexity of your compliance will depend on your company's structure. However, since the
foreign partnership structure has been used frequently (since the early 90's) for various tax reasons, it
is not difficult to imagine that there will be a significant compliance burden added to the corporate tax
departments. Since, many corporate tax department budgets and headcount have declined in last decade, it
will present a particular challenge to the remaining tax compliance people.
Under my guidance, Tax Technologies, Inc. has been developing a tax program that will ease the Form 8865
compliance burden. In fact, we are nearly completed with our development and soon will be ready to work
through the beta testing stage. I would like to invite some of you to be our beta testers. By participating
in this program, you can gain a better understanding of what it takes to complete the Form 8865 and
influence future changes in the product. If you are interested in having your company become a beta
testing site, please call me.
In addition, Tax Technologies, Inc. has completed a data collection package for the Form 8865. We have
already licensed it to some large companies for customization. If you are interested in the data collection
package for the controlled foreign partnership reporting, please send me an e-mail at
Choi@TaxTechnologies.com.
See you all in Salt Lake City, Utah - ACT Conference
I was invited to the ACT annual conference to speak on the subject of International Tax Compliance and
Planning via the Internet. The conference will be in Salt Lake City on February 13th through 15th. Please
check out
http://www.taxact.org/conf201.pdf for the details of the conference schedule and other
information regarding the conference.
As most of you already know, the Association for Computers & Taxation ("ACT") is a nonprofit, national
organization designed to assist its members in identifying and solving the problems involved in automating
the corporate tax function. Over the years, it has grown as one of the most influential entities among tax
professionals.
I am very excited about being invited to the conference as a speaker on the subject of international
taxation. I hope to see many of you there.
Check out our bulletin
Check out our bulletin to see if you would like to list a job or would like to find a job. Since most of
our visitors are from big four accounting firms and international tax people from corporate tax departments,
it would be a good forum to recruit employees for international tax jobs. So, if you have an opening, send
us an e-mail. We currently have one international tax manager position listed for a Fortune 200 company and
we also have been informally working with a few clients to help them find international tax people.
We also expect a large increase in our client engagements during the tax year 2000. Thus, if you would
like to work with us as our consultant, please let us know. For details about what we are looking for,
please check out our web site www.TaxTechnologies.com and click on the "careers" page.
The content of this e-mail is reproduced in the "Newsletter" section of our website
www.TaxTechnologies.com one week after its release to our subscribers.
If you do not wish to receive our newsletter, please reply to this e-mail with a
comment "I do not wish to receive this e-mail in the future." On the other hand, if
you know someone who can use this information, please feel free to forward this
e-mail and ask us to add the person to our distribution list.
Regards,
J.D. Choi
CEO, Tax Technologies, Inc.
201-387-9451
|
