Conducting business internationally is the new norm, especially with technological advancements making it easy to reach consumers and investors in every country. However, unlike domestic businesses, international businesses have another layer of complexity when it comes to taxation with foreign owners.
With tax season gearing up, now is the time to understand your filing obligations and reporting requirements to begin preparing documents and setting your business up for success. In this article, we’ll cover how you can properly position your business going into the next filing season, including discussions on dividend reporting, contractors, and common mistakes to avoid.
Filing Deadlines
US tax returns with foreign components are still required to be filed on the normal due dates. C corporations have until April 15th while partnerships, multi-member LLCs, and s corporations only have until March 15th. If the deadline falls on a weekend, the return will be due on the next business day.
The business tax return and all foreign schedules must abide by these deadlines, unless an automatic six-month extension is requested. Remember, international businesses may also be required to file returns in other countries, which can have varying due dates. PWC has a great list of tax deadlines by country, which you can access here.

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Requirements for Forms 5472 and 5471
Businesses that have either an indirect or direct connection to the US or another country will be required to remit information surrounding the association. There are two main forms that report foreign interests: Form 5472 and Form 5471.
Form 5472 is filed by foreign corporations that engage in business with the US or a US corporation that is 25% foreign-owned. On the contrary, Form 5471 is filed by US-based businesses or individuals that hold stock in foreign companies.
Both returns are information returns, meaning no tax is calculated. The IRS simply wants to know the information surrounding foreign owners. Let’s break down each of these forms in more detail.
Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
If your business is foreign-based and has expanded to the US, you might need to file Form 5472. If one of the following two criteria is met, you will need to file this form:

1. You own, either individually or collectively with other foreign investors, 25% of a US-based corporation or disregarded entity.
2. You own a foreign corporation that is engaged in trade or business with the US.

This form is common for foreign businesses with US subsidiaries. Moreover, Form 5472 is based on ownership, not what you control. For example, you might not have control of a US subsidiary, but if you own more than 25%, you will still need to report this entity on your business tax return. Remember, this is a form filed on US income tax returns, not with your foreign return.
Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations
Any US citizen, partnership, trust, corporation, or estate that has an ownership interest in a foreign corporation of greater than 10% will generally be required to file Form 5471. To be more specific, if any of the following criteria is met, you should file this form:

1. You are a US person that owns shares in a foreign corporation that is controlled by a foreign corporation, and you had these shares as of the last day of the tax year.
2. You are a US person that owns shares in a foreign corporation that also has shares in a US-based corporation.
3. You are a US person that is an officer of a foreign corporation, and you hold 10% of ownership or voting power in the corporation.
4. You are a US person that has control of a foreign corporation during the accounting period of the foreign corporation.

Form 5471 is geared towards US citizens that have any type of control or ownership in foreign corporations. In addition to filing Form 5471, you might also be required to file foreign returns and pay income tax.
Dividends and Withholding
It’s not uncommon for foreign and US corporations to pay regular dividends. When dividends from foreign companies are received by US citizens, you will generally receive form 1099-DIV. This document outlines the dividends paid and any foreign income tax withheld. Form 1099-DIV can also be received by foreign citizens from US-based companies.
Foreign citizens that receive Form 1099-DIV with US withholding might be required to file Form 1042. This form reports US income and any respective withholding. Form 1042 is required to be filed if any of the following situations occur:

1. You file Form 1042-S.
2. You file Form 1042-S to report recipient tax withheld.
3. You pay investment income to foreign private foundations that are subject to withholding tax.
4. You withhold tax for payments to foreign persons for federal procurement.
5. You pay deferred compensation to a covered expatriate.
6. You are a QI, withholding foreign partnership, withholding foreign trust, participating financial institution, or reporting Model 1 FFI claiming a refund under an IRS agreement.

This form is due by March 15 of each year, unless the due date falls on a weekend. However, you can submit an automatic six-month extension request. Since Form 1099-DIV is required to file individual income tax returns, the IRS requires this form to be submitted by January 31 of each year. If your international business is making dividend payments to US companies or you are a US company paying foreign shareholders, have the 1099-DIV due date on your radar.
Moreover, contractors that your international business pays should be issued a 1099-NEC. The issuance of this tax document depends on the ownership structure of the contractor and how much you pay them. Only contractors that are sole proprietorships or single-member LLCs are required to have a 1099-NEC issued. In addition, contractors outside of the US will generally not receive a 1099-NEC from US-based companies.

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Gathering Your Information
International businesses with foreign and US components have a greater reporting obligation. After all, both the IRS and foreign governments want to be sure they are collecting the proper tax amounts. This calls on your business to be fully prepared going into tax season. The information you will need to furnish can vary by accountant. Nevertheless, start gathering these documents right after year-end:

• Income statement, profit & loss statement, or statement on expenses and revenue
• Balance sheet including inventory and production information
• List of owners, their domicile, outstanding loans, and ownership percentage
• Contractors, domestic and foreign, that need 1099s issued
• List of dividends paid and to who
• Sales to each country
• Ownership changes during the year
• Income tax paid and to which country

Ideally, you should have all of this information put together in January. This gives your accountant enough time to analyze your situation and put together an income tax estimate before the filing due date. In addition, being prepared allows you to request an extension to file without incurring any underpayment fines or penalties later in the year. 

Common Mistakes Made by International Businesses
International businesses can make mistakes when it comes to reporting and paying income tax. Although being prepared can help you reduce the risk of mistakes, overlooked errors can be inevitable. Here are some common mistakes made by international businesses and how you can avoid them:

• Mismatched Forms – International businesses are required to file business income tax returns and supplementary information returns. Mismatched information on these forms can trigger an inquiry. Be sure you review all filings before they are submitted to verify that your information lines up.
• Missed Deadlines – The US 1099 deadline approaches quickly after year-end. Without the proper preparation, you might miss this deadline and have the IRS and your shareholders knocking on your door. Prioritize your bookkeeping in the later months of the year to maximize your timeliness with 1099 filings.
• Unaccounted Ownership Changes – As your business begins to grow, you might be taking on new shareholders and partners. Failure to include these changes on your business tax return can raise red flags. Carefully track ownership changes throughout the year to report accurate data on your tax return.
• Improper Tax Withholding – Sometimes, when foreign dividends are paid, your organization is required to collect a flat tax rate on the individual’s behalf. Neglecting to collect this tax can leave you in mucky waters with regulatory agencies. Double check your withholding requirements prior to paying out dividends.

Avoiding these common mistakes will promote your compliance with each taxing authority and reduce your risk of receiving an audit request or letter assessing back taxes.
Getting Started
Are you ready to tackle tax season as an international business owner? When it comes to international taxation, it’s best to work with an accountant that understands the tax laws your company is subject to. Don’t wait until the filing deadline is approaching. Take the steps to set your business up for success today. 

Prepared by EDEAL.AI