- The IRS handles direct tax administration in the United States.
- The US has a classical system of corporate taxation.
- Profits are taxable in the year and dividends are taxable in the hands of shareholders.
- Tax liability is calculated based on the calendar year or fiscal year.
- A fiscal year is a 52-53 week year used by the taxpayer keeping its books on a regular basis.
- Corporate tax returns must be filed on or before the fifteenth day of the third month following the end of the tax year.
- The tax due must also be paid by that date.
- Taxpayers can file an election for an automatic extension of the due date for six months.
- The extension must be filed before the due date for the tax return.
- The estimated tax due must also be paid.
Transfer Pricing Information Return:
- Section 6001 of the IRC requires corporations to maintain permanent books of accounts or records to establish the correctness of their federal income tax return.
- US taxpayers with foreign businesses they control must file an annual information return on IRS Form 5471 for each controlled foreign entity.
- Form 5471 requires detailed information about the foreign-controlled entity for review by the IRS for potential transfer pricing issues.
- US corporations with at least 25% foreign ownership must file IRS Form 5472 and maintain appropriate records.
- Form 5472 reports all types of intercompany transactions, such as those involving tangible property, intangible property, services, loans, etc.
- Foreign corporations engaged in a US trade or business must also provide similar information on Form 5472 and maintain records.
- Penalties are imposed for failing to file Forms 5471/5472 on time, and the IRS has the powers to seek the information it needs.
- Final and proposed regulations provide guidance on the filing requirements and manner of filing Form 5472, effective from 6 June 2014 and 24 December 2014, respectively.
- Form 5472 must be filed with the income tax return by the due date for the return.
- The US tax system operates on a self-assessment basis where taxpayers compute their own tax liability and file a tax return.
- Taxpayers are required to make estimated tax payments on a quarterly basis during the tax year.
- Estimated tax payments amount to 25% of the annual liability.
- Corporations with USD 1 billion or more assets have special estimated payment requirements.
- Due to the health crisis, corporations can defer federal income tax payments from 15 April 2020 to 15 July 2020 without penalties and interest.
- The relief is automatic, and taxpayers do not need to complete forms or contact the IRS.
Practical Issues and Statutory Guidance of Transfer Pricing Regime:
- The Large Business and International Division of the IRS is responsible for dealing with tax affairs of large corporations and wealthy individuals, including transfer pricing issues.
- The IRS has regional and local units throughout the US that audit transfer pricing information in tax returns.
- The transfer pricing council was established in late 2008 to coordinate the IRS approach to transfer pricing strategy and policy.
- The council has twelve members who meet every four to six weeks to evaluate strategic decisions and review available resources.
- The transfer pricing practice pilot program aims to systematically administer transfer pricing issues in the IRS and coordinate them at a strategic level.
- The transfer pricing practice is a team of experts who work on transfer pricing issues.
- The IRS is working with foreign tax administrations to explore ways of performing joint transfer pricing audits of multinational groups with those foreign jurisdictions.
Ongoing Developments under the OECD/G20 BEPS:
- Action plan on Base Erosion and Profit Shifting (BEPS) aims to align tax liability with value creation by providing recommendations on domestic and international rules.
- BEPS package was adopted in September 2015 and includes an explanatory statement and fifteen reports corresponding to the fifteen BEPS action points.
- The US released final regulations on CbC reporting in 2017 and introduced BEPS-related measures through the Tax Cuts and Jobs Act.
- The US has joined the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy to reform international tax rules.
- Base Erosion Minimum Tax (BEAT) aims to prevent companies from stripping earnings out of the US by making payments to foreign affiliates that are deductible for U.S. tax purposes.
- BEAT applies to corporations, except for RICs, REITs, and S corporations, with average annual gross receipts of at least USD 500 million for the three-tax year period ending with the preceding tax year and a “base erosion percentage” of at least 3%.
- Credits are taken into account in computing the taxpayer’s regular tax liability, increasing the likelihood that the minimum tax will apply, but the base erosion minimum tax can be offset by a taxpayer’s research credits and certain investment credits.
- A taxpayer that reduces its tax liability to an amount that is less than 10% of its modified taxable income has to pay the base erosion minimum tax.
- The taxpayer’s base will be increased from 10% to 12.5% of modified taxable income for tax years beginning after 31 December 2025.
- A corporation’s “modified taxable income” for a year is either its taxable income, determined without regard to any “base erosion tax benefit” from any “base erosion payment”; or it is the “base erosion percentage” of any allowable net operating loss deduction allowed under section 172 for the tax year.
- Form 8991 entitled Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts should be used for reporting under the base erosion and anti-abuse tax.
- The IRS issued a set of proposed regulations in December 2018 on the base erosion and anti-abuse tax that provide guidance on which taxpayers are subject to IRC section 59A, the determination of what is a base erosion payment, the method for calculating the base erosion minimum tax amount, and the required tax resulting from that calculation.