International Finance and Accounting Handbook

29.4 FOREIGN-OWNED BUSINESSES DOING BUSINESS IN THE UNITED STATES.
Foreign-owned U.S. companies that are doing business in the United States could be
subject to two U.S. tax regimes. The business has a dual tax responsibility if:

• A business is engaged in intercompany transactions, and


• A principal shareholder of the business is foreign

The two U.S. tax regimes include:

1.Transfer pricing

2. Foreign-owned U.S. corporation reporting and record keeping

These two regimes have different objectives, and, as such, interrelate on specified
occasions. This portion of the chapter specifically addresses the rules for foreign-
owned U.S. corporations.

(a) Responsibilities Imposed. The U.S. tax law imposes extensive responsibilities
on the foreign-owned U.S. corporations. The U.S. tax law also imposes responsibil-
ities on the foreign owners, but these responsibilities are only derivative (i.e. the re-
sponsibilities relate to the parent–subsidiary relationship), and limited in scope. This
peculiar relationship toward the foreign owners exists because the United States rec-
ognizes that its long arm of the U.S. tax law is limited by international law concepts,
and does not apply directly to the foreign owners. The full responsibility falls on the
U.S. subsidiary because the U.S. courts have power over this subsidiary because of
its presence in the United States.
Foreign-owned U.S. corporations have two responsibilities:

1.To prepare and retain specified records

2.To file specified documents with the IRS

The foreign-owned U.S. corporation provisions may potentially have the follow-
ing impact on the U.S. company:

• May cause the U.S. company to be subject to penalties


• May require the U.S. company to enter into an authorization agreement with the
  foreign owners


• May subject the U.S. company to a summons


• May subject the U.S. company to special harsh penalties for non-compliance

(b) Reporting Requirements. Foreign-owned U.S. corporations must file Form 5472
on an annual basis to reflect intercompany transactions with eachaffiliate. For ex-
ample, a foreign-owned business has four subsidiaries overseas and three subsidiaries
in the United States. Assume that each entity in the United States does business with
the four subsidiaries of the parent and the parent itself. Each U.S. entity would have
to file five Forms 5472. Since there are three U.S. subsidiaries, 15 Forms 5472 would
be needed in all.
The term U.S. owneris broader than the ownership and control of a subsidiary. In
fact, the tax rules require that the U.S. company reflect a shareholding of 25% or

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