Preparing for Tax Season for Companies Operating Internationally

With tax season approaching, it's time to understand your filing obligations and reporting requirements so you can begin preparing documents and set your business up for success. In this article we'll look at how to properly position your business for the coming tax season — including dividend reporting, working with contractors and common mistakes to avoid.

Preparing for tax season for international businesses
Running an international business has become the norm, especially with technological advances that make it easy to reach customers and investors in every country. Unlike domestic-only businesses, however, international companies have an extra layer of tax complexity when there are foreign owners involved.
With tax season around the corner, it's time to understand your filing obligations and reporting requirements so you can start preparing documents and set your business up for success. Below we'll walk through how to properly position your business for the next tax season, including dividend reporting, contractor work and common mistakes to avoid.

Filing deadlines
US tax returns with foreign components still need to be filed on the standard deadlines. C-corporations need to file by April 15, while partnerships, multi-member LLCs and S-corporations file by March 15. If the deadline falls on a weekend, the return is due on the next business day. The business income tax return and all foreign schedules must meet these deadlines unless an automatic six-month extension is requested. Keep in mind that international companies may also need to file returns in other countries, with deadlines that may differ. PWC maintains an excellent list of tax deadlines by country that you can reference.

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Form 5472 and 5471 requirements
Companies with direct or indirect ties to the US or another country must report information about that connection. There are two main forms that report foreign interests: Form 5472 and Form 5471. Form 5472 is filed by foreign corporations doing business with the US, or by a US corporation 25% owned by foreigners. By contrast, Form 5471 is filed by US companies or individuals that own shares in foreign companies.
Both returns are informational, meaning no tax is calculated. The IRS simply wants information about foreign owners. Let's take a closer look at each form.
Form 5472: Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business
If your business is based abroad and expanded into the US, you may need to file Form 5472. If either of the following two conditions is met, you must file this form:

• You own, individually or jointly with other foreign investors, 25% of a US corporation or disregarded entity.
• You own a foreign corporation engaged in a trade or business with the US.
• This form is common for foreign companies with US subsidiaries. Note that Form 5472 is based on ownership, not on whether you control the entity. For example, you may not have control of a US subsidiary, but if you own more than 25% you still need to report that entity on your US tax return. Remember — this form is filed with US tax returns, not with your foreign return.

Form 5471: Information Return of US Persons With Respect to Certain Foreign Corporations
Any US citizen, partnership, trust, corporation or estate that has more than a 10% ownership interest in a foreign corporation is generally required to file Form 5471. More specifically, if any of the following criteria is met, you must file this form:

• You are a US citizen owning stock in a foreign corporation, a controlled foreign corporation, and you held that stock on the last day of the tax year.
• You are a US citizen owning stock in a foreign corporation that also holds shares in a US corporation.
• You are a US citizen who is an officer of a foreign corporation and you own 10% or more of the corporation's ownership or voting power.
• You are a US citizen who controls a foreign corporation during the corporation's accounting period.

Form 5471 is designed for US citizens holding any type of control or ownership in foreign corporations. In addition to filing Form 5471, you may also need to file foreign tax returns and pay income tax.

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Dividends and tax withholding
It's not unusual for both foreign and US corporations to pay regular dividends. When US citizens receive dividends from foreign companies, they typically receive Form 1099-DIV. This document reports the dividends paid and any foreign income tax withheld. Form 1099-DIV may also be received by foreign individuals from US companies.
Foreign individuals receiving a Form 1099-DIV with US withholding may be required to file Form 1042. This form reports US income and related withholding. Form 1042 must be filed if any of the following applies:

• You file Form 1042-S.
• You file Form 1042-S to report withheld tax from a payee.
• You pay investment income to foreign private foundations subject to tax.
• You withhold tax on payments to foreign persons for federal procurement.
• You pay deferred compensation to a covered expatriate.
• You are a QI, foreign partnership withholding agent, foreign trust, participating financial institution or reporting Model 1 FFI required to file under an IRS agreement.

This form must be filed by March 15 each year unless the deadline falls on a weekend. However, you can request an automatic six-month extension. Since Form 1099-DIV is required for individual tax filings, the IRS requires it to be filed by January 31 each year. If your international business pays dividends to US companies, or you are a US company paying dividends to foreign shareholders, keep the 1099-DIV deadline in mind.
In addition, contractors your international business pays should receive 1099-NEC. Whether this document is issued depends on the contractor's ownership structure and the amount you pay them. Only contractors who are sole proprietors or single-member LLCs are required to receive a 1099-NEC. Non-US contractors typically do not receive a 1099-NEC from US companies.

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Gathering information
International businesses with foreign and US components have a lot of reporting ahead of them. After all, both the IRS and foreign governments want to be sure they are collecting the right amount of tax. That requires your business to be fully prepared for tax season. The information you'll need to provide can vary by accountant. Even so, start pulling together these documents as soon as the year closes:

• Income statement, profit and loss statement, or a revenue and expense report
• Balance sheet, including inventory and production information
• List of owners, their residence, outstanding loans and ownership percentage
• Contractors, both domestic and foreign, who need a 1099 issued
• List of dividends paid and to whom
• Sales to each country
• Changes in ownership during the year
• Income tax paid and to which country

Ideally, all of this information should be gathered in January. That gives your accountant enough time to analyze your situation and prepare an income tax estimate before the filing deadline. Being prepared also means you can request an extension without getting hit with penalties or underpayment interest later in the year.

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Common mistakes international companies make
International companies can make mistakes in reporting and paying income tax. While preparation can reduce the risk, some overlooked errors may be unavoidable. Here are some common mistakes international companies make, and how to avoid them:

• Inconsistent forms — international companies need to file business income tax returns and additional information returns. Inconsistent information across these forms can trigger a notice. Make sure you review every filing before sending to verify that the information matches.
• Missed deadlines — the US 1099 deadline arrives quickly after year end. Without proper preparation you can miss it and face issues from both the IRS and your shareholders. Prioritize accounting in the final months of the year to maximize on-time 1099 filings.
• Unreported ownership changes — as your business grows, you may add new shareholders and partners. Failing to report these changes on your business tax return can raise suspicions. Carefully track ownership changes throughout the year so you can report accurate data on the return.
• Incorrect tax withholding — sometimes when foreign dividends are paid, your organization is required to withhold a fixed tax rate on behalf of the individual. Neglecting to collect this tax can lead to issues with regulators. Double-check withholding requirements before paying dividends.

Avoiding these common mistakes will help keep you compliant with every tax authority and reduce the risk of receiving an audit notice or an assessment letter.

Getting started
Are you ready to take on tax season as an international business owner? When it comes to international taxation, it's best to work with an accountant who understands the tax laws your company is subject to. Don't wait until the filing deadline. Take steps today to set your business up for success.