Another rather difficult provision that we have seen in some distribution agreements is that distributors are terminated if they do not meet some kind of standard measured with an “average”. This is a complex conceptual problem. An average is based on a range of sales, and the definition of the average means that about half of the population will not accomplish it. Therefore, if the manufacturer does not wish to terminate half of its distributors each year, it will be able to consistently waive the “you must sell at least as much as average” requirement. It would be much better for the manufacturer and distributor to lower the standard to something that both parties deemed respectable – perhaps 10 or 15 percent. If the distributor is consistent in the bottom 10 percent of the players, it is possible that the relationship is not particularly profitable for either party, or that there are other serious problems and the relationship may end. As explained by the Internal Revenue Service (IRS), Form 5472 should be used to provide the information required under Sections 6038A and 6038C when reportable transactions occur in the relevant tax year of a reporting business with a foreign related party or a foreign business operating in a trade or activity in the United States. Needless to say, the official IRS statement of this form is not very clear. IRS Form 5472 is difficult to complete and submit, and if not executed correctly, it can cause serious problems. In this article, I explain what IRS Form 5472 is, why you need to submit it, and how to complete it.
What is IRS Form 5472? Foreign taxpayers and those working in international business or global trade often ask: What is Form 5472? The simplest answer is that IRS Form 5472 is in principle designed to prevent tax evasion. The U.S. government is concerned that companies with significant foreign assets could circumvent U.S. taxes through disguised transactions. IRS Form 5472 is used by the federal government to ensure that companies with significant foreign ownership accurately report complete financial information. IRS Form 5472: Understanding the Requirements As a starting point, you need to know if you are required to file Form 5472. To do this, you must determine whether your business is a “reporting entity” within the meaning of U.S. tax law. Reporting companies are companies that own 25% of a foreign person, foreign entity, or foreign company that conducts a business or activity in the United States. For reporting businesses, the disclosure requirements on Form 5472 are broad.
Among the transactions that can be reported are: sales or purchases by investors; the sale or purchase of real estate; licences and licensing agreements; commission paid or collected; loan or loan agreements; and any other consideration offered for goods or services. More simply, if a transaction with a related foreign company affects the reporting company`s U.S. tax obligations — meaning it has resulted in an increase in revenue or an increase in expenses — it is likely that the transaction would have to be reported using IRS Form 5472. With very limited exceptions, the IRS requires notification of all transactions with related companies and persons with international companies. Penalties There are severe penalties for failure to properly file IRS Form 5472. Indeed, the Tax Cuts and Jobs Act of 2017 has imposed increased penalties for violations of this tax law. As of December 31, 2017, failure to file Form 5472 could result in a fine of $25,000. . . .