Regs. § 1.6012-2 Corporations required to make returns of income.
Regs. § 1.6038A-0 Table of contents.
Regs. § 1.6038A-1 General requirements and definitions.
Regs. § 1.6038A-2 Requirement of return.
Regs. § 1.6038A-3 Record maintenance.
Regs. § 1.6038A-4 Monetary penalty.
Regs. § 1.6038A-5 Authorization of agent.
Regs. § 1.6038A-6 Failure to furnish information.
Regs. § 1.6038A-7 Noncompliance.
Regs. § 301.6114-1 Treaty-based return positions.
(a) In general
(1) Requirement of return
Except as provided in paragraphs (e) and (g)(1) of this section with respect to charitable and other organizations having unrelated business income and to certain foreign corporations, respectively, every corporation, as defined in section 7701(a)(3), subject to taxation under Subtitle A of the Code shall make a return of income regardless of whether it has taxable income or regardless of the amount of its gross income.
(2) Existence of corporation
A corporation in existence during any portion of a taxable year is required to make a return. If a corporation was not in existence throughout an annual accounting period (either calendar year or fiscal year), the corporation is required to make a return for that fractional part of a year during which it was in existence. A corporation is not in existence after it ceases business and dissolves, retaining no assets, whether or not under State law it may thereafter be treated as continuing as a corporation for certain limited purposes connected with winding up its affairs, such as for the purpose of suing and being sued. If the corporation has valuable claims for which it will bring suit during this period, it has retained assets and therefore continues in existence. A corporation does not go out of existence if it is turned over to receivers or trustees who continue to operate it. If a corporation has received a charter but has never perfected its organization and has transacted no business and has no income from any source, it may upon presentation of the facts to the district director be relieved from the necessity of making a return. In the absence of a proper showing of such facts to the district director, a corporation will be required to make a return.
(3) Form of return
The return required of a corporation under this section shall be made on Form 1120 unless the corporation is a type for which a special form is prescribed. The special forms of returns and schedules required of particular types of corporations are set forth in paragraphs (b) to (g), inclusive, of this section.
(b) Personal holding companies
A personal holding company, as defined in section 542, including a foreign corporation within the definition of such section, shall attach Schedule PH, Computation of U.S. Personal Holding Company Tax, to the return required by paragraph (a) or (g), as the case may be, of this section.
(c) Insurance companies
(1) Life insurance companies
A life insurance company subject to tax under section 802 or 811 shall make a return on Form 1120L. There shall be filed with the return (i) a copy of the annual statement, the form of which has been approved by the National Association of Insurance Commissioners, which is filed by the company for the year covered by such return with the insurance departments of States, Territories, and the District of Columbia, and which shows the reserves used by the company in computing the taxable income reported on its return, and (ii) copies of Schedule A (real estate) and Schedule D (bonds and stocks) of such annual statement.
(2) Mutual insurance companies
A mutual insurance company (other than a life or marine insurance company and other than a fire insurance company subject to the tax imposed by section 831) or an interinsurer or reciprocal underwriter subject to tax under section 821 shall make a return on Form 1120M. See paragraph (a)(3) of section 1.821-1. There shall be filed with the return (i) a copy of the annual statement, the form of which has been approved by the National Association of Insurance Commissioners, which is filed by the company for the year covered by such return with the insurance departments of States, Territories, and the District of Columbia, and (ii) copies of Schedule A (real estate) and Schedule D (bonds and stocks) of such annual statement.
(3) Other insurance companies
Every insurance company (other than a life or mutual insurance company), every mutual marine insurance company, and every mutual fire insurance company, subject to tax under section 831, and every mutual savings bank conducting a life insurance business and subject to tax under section 594, shall make a return on Form 1120. See paragraph (c) of section 1.831-1. There shall be filed with the return a copy of the annual statement, the form of which has been approved by the National Association of Insurance Commissioners, which contains the underwriting and investment exhibit for the year covered by such return.
(4) Foreign insurance companies
The provisions of subparagraphs (1), (2), and (3) of this paragraph concerning the returns and statements of insurance companies subject to tax under section 802 or 811, section 821, and section 831, respectively, are applicable to foreign insurance companies subject to tax under such sections, except that the copy of the annual statement, the form of which has been approved by the National Association of Insurance Commissioners, required to be submitted with the return shall, in the case of a foreign insurance company, be a copy of the statement relating to the United States business of such company.
(d) Affiliated groups
For the forms to be used by affiliated corporations filing a consolidated return, see section 1.1502-75.
(e) Charitable and other organizations with unrelated business income
Every organization described in section 511(a)(2) which is subject to the tax imposed by section 511(a)(1) on its unrelated business taxable income shall make a return on Form 990-T for each taxable year if it has gross income, included in computing unrelated business taxable income for such taxable year, of $1,000 or more. The filing of a return of unrelated business income does not relieve the organization of the duty of filing other required returns.
(f) Farmers' cooperatives
Farmers' cooperative organizations described in section 521 are required to make a return of income whether or not such organizations are subject to the taxes imposed by sections 11 and 1201 as prescribed in section 522 or 1381. The return shall be made on Form 990-C.
(g) Returns by foreign corporations.
(1) Requirement of return
(i) In general
Except as otherwise provided in subparagraph (2) of this paragraph, every foreign corporation which is engaged in trade or business in the United States at any time during the taxable year or which has income which is subject to taxation under Subtitle A of the Code (relating to income taxes) shall make a return on Form 1120-F. Thus, for example, a foreign corporation which is engaged in trade or business in the United States at any time during the taxable year is required to file a return on Form 1120-F even though (a) it has no income which is effectively connected with the conduct of a trade or business in the United States, (b) it has no income from sources within the United States, or (c) its income is exempt from income tax by reason of an income tax convention or any section of the Code. However, if the foreign corporation has no gross income for the taxable year, it is not required to complete the return schedules but must attach a statement to the return indicating the nature of any exclusions claimed and the amount of such exclusions to the extent such amounts are readily determinable.
(ii) Treaty income
If the gross income of a foreign corporation includes treaty income, as defined in paragraph (b)(1) of section 1.871-12, a statement shall be attached to the return on Form 1120-F showing with respect to that income:
(a) The amounts of tax withheld,
(b) The names and post office addresses of withholding agents, and
(c) Such other information as may be required by the return form or by the instructions issued with respect to the form, to show the taxpayer's entitlement to the reduced rate of tax under the tax convention.
(iii) Balance sheet and reconciliation of income
At the election of the taxpayer, the balance sheets and reconciliation of income, as shown on Form 1120-F, may be limited to:
(a) The assets of the corporation located in the United States and to its other assets used in the trade or business conducted in the United States, and
(b) Its income effectively connected with the conduct of a trade or business in the United States and its other income from sources within the United States.
(2) Exceptions
(i) Return not required when tax is fully paid at source
(a) In general
A foreign corporation which at no time during the taxable year is engaged in a trade or business in the United States is not required to make a return for the taxable year if its tax liability for the taxable year is fully satisfied by the withholding of tax at source under Chapter 3 of the Code. For purposes of this subdivision, some of the items of income from sources within the United States upon which the tax liability will not have been fully satisfied by the withholding of tax at source under Chapter 3 of the Code are:
(1) Interest upon so-called tax-free covenant bonds upon which, in accordance with section 1451 and section 1.1451-1, a tax of only 2 percent is required to be withheld at source,
(2) In the case of bonds or other evidence of indebtedness issued after September 25, 1965, amounts described in section 881(a)(3),
(3) Accrued interest received in connection with the sale of bonds between interest dates, which, in accordance with paragraph (h) of section 1.1441-4, is not subject to withholding of tax at source.
(b) Corporations not included
This subdivision (i) shall not apply:
(1) To a foreign corporation which has income for the taxable year which is treated under section 882(d) or (e) and section 1.882-2 as income which is effectively connected for the taxable year with the conduct of a trade or business in the United States by that corporation,
(2) To a foreign corporation making a claim under section 301.6402-3 of this chapter (Procedure and Administration Regulations) for the refund of an overpayment of tax for the taxable year, or
(3) To a foreign corporation described in paragraph (c)(2)(i) of section 1.532-1 whose accumulated taxable income for the taxable year is determined under paragraph (b)(2) of section 1.535-1.
(ii) Beneficiaries of estates or trusts
A foreign corporation which is a beneficiary of an estate or trust which is engaged in trade or business in the United States is not required to make a return for the taxable year merely because it is deemed to be engaged in trade or business within the United States under section 875(2). However, such foreign corporation will be required to make a return if it otherwise satisfies the conditions of subparagraph (1)(i) of this paragraph for making a return.
(iii) Special returns and schedules
The provisions of paragraphs (b) through (f) of this section shall apply to a foreign corporation except that a foreign corporation which is an insurance company to which paragraph (c)(3) of this section applies shall make a return on Form 1120-F and not on Form 1120. If a foreign corporation which is an insurance company to which paragraph (c) (1) or (2) of this section applies has income for the taxable year from sources within the United States which is not effectively connected for that year with the conduct of a trade or business in the United States by that corporation, the corporation shall attach to its return on Form 1120L or 1120M, as the case may be, a separate schedule showing the nature and amount of the items of such income, the rate of tax applicable thereto, and the amount of tax withheld therefrom under Chapter 3 of the Code.
(3) Representative or agent for foreign corporation
(i) Cases where power of attorney is not required
The responsible representative or agent within the United States of a foreign corporation shall make on behalf of his principal a return of, and shall pay the tax on, all income coming within his control as representative or agent which is subject to the income tax under Subtitle A of the Code. The agency appointment will determine how completely the agent is substituted for the principal for tax purposes. Any person who collects interest or dividends on deposited securities of a foreign corporation, executes ownership certificates in connection therewith, or sells such securities under special instructions shall not be deemed merely by reason of such acts to be the responsible representative or agent of the foreign corporation. If the responsible representative or agent does not have a specific power of attorney from the foreign corporation to file a return in its behalf, the return shall be accompanied by a statement to the effect that the representative or agent does not possess specific power of attorney to file a return for such corporation but that the return is being filed in accordance with the provisions of this subdivision.
(ii) Cases where power of attorney is required
Whenever a return of income of a foreign corporation is made by an agent acting under a duly authorized power of attorney for that purpose, the return shall be accompanied by the power of attorney in proper form, or a copy thereof specifically authorizing him to represent his principal in making, executing, and filing the income tax return. Form 2848 may be used for this purpose. The agent, as well as the taxpayer, may incur liability for the penalties provided for erroneous, false, or fraudulent returns. For the requirements regarding signing of returns, see section 1.6062-1. The rules of paragraph (e) of section 601.504 of this chapter (Statement of Procedural Rules) shall apply under this subparagraph in determining whether a copy of a power of attorney must be certified.
(iii) Limitation
A return of income shall be required under this subparagraph only if the foreign corporation is otherwise required to make a return in accordance with this paragraph.
(4) Disallowance of deductions and credits
For provisions disallowing deductions and credits when a return of income has not been filed by or on behalf of a foreign corporation, see section 882(c)(2) and the regulations thereunder, and paragraph (b) (2) and (3) of section 1.535-1.
(5) Effective date
This paragraph shall apply for taxable years beginning after December 31, 1966, except that it shall not be applied to require (i) the filing of a return for any taxable year ending before January 1, 1974, which, pursuant to instructions applicable to the return, is not required to be filed or (ii) the amendment of a return for such a taxable year which, pursuant to such instructions, is required to be filed. For corresponding rules applicable to taxable years beginning before January 1, 1967, see 26 CFR 1.6012-2(g) (Revised as of January 1, 1967).
(h) Electing small business corporations
An electing small business corporation, whether or not subject to the tax imposed by section 1378, shall make a return on Form 1120-S. See also section 6037 and the regulations thereunder.
(i) Items of tax preference
(1) In general
Every corporation required to make a return under this section, and having items of tax preference (described in section 57 and the regulation thereunder) in an amount specified by Form 4626, shall file such form as part of its return.
(2) Organizations with unrelated business income and foreign corporations
Regardless of the provisions of paragraphs (e) and (g) of this section, any organization described in either such paragraph having items of tax preference (described in section 57 and the regulations thereunder) in any amount entering into the computation or unrelated business income is required to make a return on form 990-T or form 120F, respectively, and to attach the required form as part of such return.
(j) Other provisions
For returns by fiduciaries for corporations, see section 1.6012-3. For information returns by corporations regarding payments of dividends, see sections 1.6042-1 to 1.6042-3, inclusive; regarding corporate dissolutions or liquidations, see section 1.6043-1; regarding distributions in liquidation, see section 1.6043-2; regarding payments of patronage dividends, see sections 1.6044-1 to 1.6044-4, inclusive; and regarding certain payments of interest, see sections 1.6049-1 and 1.6049-2. For information returns of officers, directors, and shareholders of foreign personal holding companies, as defined in section 552, see sections 1.6035-1 and 1.6035-2. For returns as to formation or reorganization of foreign corporations, see sections 1.6046-1 to 1.6046-3, inclusive.
This section lists the captions that appear in the regulations under section 6038A.
Section 1.6038A-1 GENERAL REQUIREMENTS AND DEFINITIONS
(a) Purpose and scope
(b) In general
(c) Reporting corporation
(1) In general
(2) 25-percent foreign-owned
(3) 25-percent foreign shareholder
(i) In general
(ii) Total voting power and value
(iii) Direct 25-percent foreign shareholder
(iv) Indirect 25-percent foreign shareholder
(4) Application to prior open years
(5) Exceptions
(i) Treaty country residents having no permanent establishment
(ii) Qualified exempt shipping income
(iii) Status as a foreign related party
(d) Related party
(e) Attribution rules
(1) Attribution under section 318
(2) Attribution of transactions with related parties engaged in by a partnership
(f) Foreign person
(g) Foreign related party
(h) Small corporation exception
(i) Safe harbor for reporting corporations with related party transactions of de minimis value
(1) In general
(2) Aggregate value of gross payments made or received
(j) Related reporting corporations
(k) Consolidated return groups
(1) Required information
(2) Maintenance of records and authorization of agent
(3) Monetary penalties
(l) District Director
(m) Examples
(n) Effective dates
(1) Section 1.6038A-1
(2) Section 1.6038A-2
(3) Section 1.6038A-3
(4) Section 1.6038A-4
(5) Section 1.6038A-5
(6) Section 1.6038A-6
(7) Section 1.6038A-7
Section 1.6038A-2 REQUIREMENT OF RETURN
(a) Form 5472 required
(1) In general
(2) Reportable transaction
(b) Contents of return
(1) Reporting corporation
(2) Related party
(3) Foreign related party transactions for which only monetary consideration is paid or received by the reporting corporation
(4) Foreign related party transactions involving nonmonetary consideration or less than full consideration
(5) Additional information
(6) Reasonable estimate
(i) Estimate within 25 percent of actual amount
(ii) Other estimates
(7) Small amounts
(8) Accrued payments and receipts
(c) Method of reporting
(d) Time and place for filing returns
(e) Untimely filed return
(f) Exceptions
(1) No reportable transactions
(2) Transactions solely with a domestic reporting corporation
(3) Transactions with a corporation subject to reporting under section 6038
(4) Transactions with a foreign sales corporation
(g) Filing Form 5472 when transactions with related parties engaged in by a partnership are attributed to a reporting corporation
(h) Effective dates for certain reporting corporations
Section 1.6038A-3 RECORD MAINTENANCE
(a) General maintenance requirements
(1) Section 6001 and section 6038A
(2) Safe harbor
(3) Examples
(b) Other maintenance requirements
(1) Indirectly related records
(2) Foreign related party for third-party maintenance
(3) Translation of records
(4) Exception for foreign governments
(c) Specific records to be maintained for safe harbor
(1) In general
(2) Descriptions of categories of documents to be maintained
(i) Original entry books and transaction records
(ii) Profit and loss statements
(iii) Pricing documents
(iv) Foreign country and third party filings
(v) Ownership and capital structure records
(vi) Records of loans, services, and other non-sales transactions
(3) Material profit and loss statements
(4) Existing records test
(5) Significant industry segment test
(i) In general
(ii) Form of the statements
(iii) Special rule for component sales
(iv) Level of specificity required
(v) Examples
(6) High profit test
(i) In general
(ii) Return on assets test
(iii) Additional rules
(7) Definitions
(i) U.S.-connected products or services
(ii) Industry segment
(iii) Gross revenue of an industry segment
(iv) Identifiable assets of an industry segment
(v) Operating profit of an industry segment
(vi) Product
(vii) Related products or services
(viii) Model
(ix) Product line
(8) Example
(i) Facts
(ii) Existing records test
(iii) Significant industry segments
(iv) High profit test
(v) Material profit and loss statements
(d) Liability or certain partnership record maintenance
(e) Agreements with the District Director or the Assistant Commissioner (International)
(1) In general
(2) Content of agreement
(i) In general
(ii) Significant industry segment test
(iii) Example
(3) Circumstances of agreement
(4) Agreement as part of APA process
(f) U.S. maintenance
(1) General rule
(2) Non-U.S. maintenance requirements
(3) Prior taxable years
(4) Scheduled production for high volume or other reasons
(5) Required U.S. maintenance
(g) Period of retention
(h) Application of record maintenance rules to banks and other financial institutions. [Reserved]
(i) Effective dates
Section 1.6038A-4 MONETARY PENALTY
(a) Imposition of monetary penalty
(1) In general
(2) Liability for certain partnership transactions
(3) Calculation of monetary penalty
(b) Reasonable cause
(1) In general
(2) Affirmative showing required
(i) In general
(ii) Small corporations
(iii) Facts and circumstances taken into account
(c) Failure to maintain records or to cause another to maintain records
(d) Increase in penalty where failure continues after notification
(1) In general
(2) Additional penalty for another failure
(3) Cessation of accrual
(4) Continued failures
(e) Other penalties
(f) Examples
Example (1) -- Failure to file Form 5472
Example (2) -- Failure to maintain records
(g) Effective dates
Section 1.6038A-5 AUTHORIZATION OF AGENT
(a) Failure to authorize
(b) Authorization by related party
(1) In general
(2) Authorization for prior years
(c) Foreign affiliated groups
(1) In general
(2) Application of noncompliance penalty adjustment
(d) Legal effect of authorization of agent
(1) Agent for purposes of commencing judicial proceedings
(2) Foreign related party found where reporting corporation found
(e) Successors in interest
(f) Deemed compliance
(1) In general
(2) Reason to know
(3) Effect of deemed compliance
(g) Effective dates
Section 1.6038A-6 FAILURE TO FURNISH INFORMATION
(a) In general
(b) Coordination with treaties
(c) Enforcement proceeding not required
(d) De minimis failure
(e) Suspension of statute of limitations
(f) Effective dates
Section 1.6038A-7 NONCOMPLIANCE
(a) In general
(b) Determination of the amount
(c) Separate application
(d) Effective dates
(a) Purpose and scope
This section and sections 1.6038A-2 through 1.6038A-7 provide rules for certain foreign-owned U.S. corporations and foreign corporations engaged in trade or business within the United States (reporting corporations) relating to information that must be furnished, records that must be maintained, and the authorization of the reporting corporation to act as agent for related foreign persons for purposes of sections 7602, 7603, and 7604 that must be executed. Section 6038A(a) and this section require that a reporting corporation furnish certain information annually and maintain certain records relating to transactions between the reporting corporation and certain related parties. This section also provides definitions of terms used in section 6038A. Section 1.6038A-2 provides guidance concerning the information to be submitted and the filing of the required return. Section 1.6038A-3 provides guidance concerning the maintenance of records. Section 1.6038A-4 provides guidance concerning the application of the monetary penalty for the failure either to furnish information or to maintain records. Section 1.6038A-5 provides guidance concerning the authorization of an agent for purposes of sections 7602, 7603, and 7604. Section 1.6038A-6 provides guidance concerning the failure to furnish information requested by a summons. Finally, section 1.6038A-7 provides guidance concerning the application of the noncompliance penalty for failure by the related party to authorize an agent or by the reporting corporation to substantially comply with a summons.
(b) In general
A reporting corporation must furnish the information described in section 1.6038A-2 by filing an annual information return (Form 5472 or any successor), and must maintain records as described in section 1.6038A-3.
(c) Reporting corporation
(1) In general
For purposes of section 6038A, a reporting corporation is either a domestic corporation that is 25-percent foreign-owned as defined in paragraph (c)(2) of this section, or a foreign corporation that is 25-percent foreign-owned and engaged in trade or business within the United States. After November 4, 1990, a foreign corporation engaged in a trade or business within the United States at any time during a taxable year is a reporting corporation. See section 6038C.
(2) 25-percent foreign-owned
A corporation is 25-percent foreign-owned if it has at least one direct or indirect 25-percent foreign shareholder at any time during the taxable year.
(3) 25-percent foreign shareholder
(i) In general
A foreign person is a 25-percent foreign shareholder of a corporation if the person owns at least 25 percent of--
(A) The total voting power of all classes of stock of the corporation entitled to vote, or
(B) The total value of all classes of stock of the corporation.
(ii) Total voting power and value
In determining whether one foreign person owns 25 percent of the total voting power of all classes of stock of a corporation entitled to vote or 25 percent of the total value of all classes of stock of a corporation, consideration will be given to all the facts and circumstances of each case, under principles similar to section 1.957-1(b)(2) (consideration of arrangements to shift formal voting power away from a foreign person).
(iii) Direct 25-percent foreign shareholder
A foreign person is a direct 25-percent foreign shareholder if it owns directly at least 25 percent of the stock of the reporting corporation, either by vote or by value.
(iv) Indirect 25-percent foreign shareholder
A foreign person is an indirect 25-percent foreign shareholder if it owns indirectly (or under the attribution rules of section 318 is considered to own indirectly) at least 25 percent of the stock of the reporting corporation, either by vote or by value.
(4) Application to prior open years
For taxable years beginning before July 11, 1989, the definition of a reporting corporation under this paragraph applies in determining whether a foreign-owned corporation is a reporting corporation. An examination may be reopened if the statute of limitations period for that taxable year has not expired. A taxable year may not be reopened under section 6038A for examination purposes if the taxable year is open under section 6511 only for purposes of the carryback of net operating losses or net capital losses.
(5) Exceptions
(i) Treaty country residents having no permanent establishment
A foreign corporation that has no permanent establishment in the United States under an applicable income tax convention is not a reporting corporation for purposes of section 6038A and this section. Accordingly, such a foreign corporation is not subject to sections 1.6038A-2, 1.6038A-3, and 1.6038A-5. It must timely and fully provide the required notice to the Commissioner under section 6114. See section 6114 and the regulations thereunder for the notice that such a corporation must file and the applicable penalties for failure to file such notice.
(ii) Qualified exempt shipping income
A foreign corporation whose gross income is exempt from U.S. taxation under section 883 is not a reporting corporation provided that it timely and fully complies with the reporting requirements required to claim such exemption. In the event that such a corporation does not timely and full comply with the reporting requirements under sections 887 and 883, it will be a reporting corporation subject to section 6038A, including the application of the monetary penalty for failure to file required information.
(iii) Status as foreign related party
Nothing in this paragraph affects the determination of whether a person is a foreign related party as defined in paragraph (g) of this section.
(d) Related party
The term "related party" means--
(1) Any direct or indirect 25-percent foreign shareholder of the reporting corporation,
(2) Any person who is related within the meaning of sections 267(b) or 707(b)(1) to the reporting corporation or to a 25-percent foreign shareholder of the reporting corporation, or
(3) Any other person who is related to the reporting corporation within the meaning of section 482 and the regulations thereunder.
However, the term "related party" does not include any corporation filing a consolidated federal income tax return with the reporting corporation.
(e) Attribution rules
(1) Attribution under section 318
For purposes of determining whether a corporation is 25-percent foreign-owned and whether a person is a related party under section 6038A, the constructive ownership rules of section 318 shall apply, and the attribution rules of section 267(c) also shall apply to the extent they attribute ownership to persons to whom section 318 does not attribute ownership. However, "10 percent" shall be substituted for "50 percent" in section 318(a)(2)(C), and section 318(a)(3)(A), (B), and (C) shall not be applied so as to consider a U.S. person as owning stock that is owned by a person who is not a U.S. person. Additionally, section 318(a)(3)(C) and section 1.318-1(b) shall not be applied so as to consider a U.S. corporation as being a reporting corporation if, but for the application of such sections, the U.S. corporation would not be 25-percent foreign owned.
(2) Attribution of transactions with related parties engaged in by a partnership
The transactions in which a domestic or foreign partnership engages shall be attributed to any reporting corporation whose interest in the capital or profits of the partnership, either directly or indirectly, combined with the interests of all related parties of the reporting corporation partner, equals 25 percent or more of the total partnership interests. Attribution of such transactions shall be made only to the extent of the partnership interest held by that reporting corporation partner. See sections 875 and 702(a) and the regulations thereunder. (Attribution shall not be made, however, of transactions directly between the partnership and a reporting corporation.) Accordingly, a reporting corporation partner that is deemed to engage in transactions with related parties under this rule is subject to the information reporting requirements of section 1.6038A-2, to the record maintenance requirements of section 1.6038A-3, to the monetary penalty under section 1.6038A-4, to the requirement of authorization of agent under section 1.6038A-5, to the rules of section 1.6038A-6 relating to the requirement to produce records, and to the noncompliance penalty adjustment under section 1.6038A-7.
(f) Foreign person
For purposes of section 6038A, a foreign person is--
(1) Any individual who is not a citizen or resident of the United States, but not including any individual for whom an election under section 6013(g) or (h) (relating to an election to file a joint return) is in effect;
(2) Any individual who is a citizen of any possession of the United States and who is not otherwise a citizen or resident of the United States;
(3) Any partnership, association, company, or corporation that is not created or organized in the United States or under the law of the United States or any State thereof;
(4) Any foreign trust or foreign estate, as defined in section 7701(a)(31); or
(5) Any foreign government (or agency or instrumentality thereof). To the extent that a foreign government is engaged in the conduct of commercial activity as defined under section 892 and the regulations thereunder, it will be treated as a foreign person under section 6038A and this section only for purposes of the information reporting requirements of section 1.6038A-2. A foreign government will not be treated as a foreign related party for purposes of sections 1.6038A-3 and 1.6038A-5.
For purposes of section 6038A, a possession of the United States shall be considered to be a foreign country.
(g) Foreign related party
A foreign related party is a foreign person as defined under paragraph (f) of this section that is also a related party as defined under paragraph (d) of this section.
(h) Small corporation exception
A reporting corporation that has less than $10,000,000 in U.S. gross receipts for a taxable year is not subject to sections 1.6038A-3 and 1.6038A-5 for that taxable year. Such a corporation, however, remains subject to the information reporting requirements of section 1.6038A-2 and the general record maintenance requirements of section 6001. For purposes of this paragraph, U.S. gross receipts includes all amounts received or accrued to the extent that such amounts are taken into account for the determination and computation of the gross income of the corporation. For purposes of this test, the U.S. gross receipts of all related reporting corporations shall be aggregated.
(i) Safe harbor for reporting corporations with related party transactions of de minimus value
(1) In general
A reporting corporation is not subject to 1.6038A-3 and 1.6038A-5 for any taxable year in which the aggregate value of all gross payments it makes to and receives from foreign related parties with respect to related party transactions (including monetary consideration, nonmonetary consideration, and the value of transactions involving less than full consideration), is not more than $5,000,000 and is less than 10 percent of its U.S. gross income. Such a corporation, however, remains subject to the information reporting requirements of section 1.6038A-2 and the general record maintenance requirements of section 6001. For purposes of this paragraph, U.S. gross income means the gross income reportable by the reporting corporation (or the aggregate gross income reportable by all related reporting corporations) for U.S. income tax purposes. Gross payments made to or received from foreign related parties cannot be netted; rather, the gross payments made to and received from foreign related parties are to be aggregated. Thus, for example, if a reporting corporation receives $4,700,000 of gross payments from a related party and makes $500,000 of gross payments to the same related party, it has aggregate gross payments of $5,200,000, and, therefore, does not qualify for the safe harbor under this paragraph.
(2) Aggregate value of gross payments made or received
The aggregate value of gross payments made to (or received from) a foreign related party with respect to foreign related party transactions is determined by totaling the dollar amounts of foreign related party transactions as described in section 1.6038A-2(b)(3) and (4) on all Forms 5472 filed by the reporting corporation or related reporting corporations.
(j) Related reporting corporations
A reporting corporation is related to another reporting corporation if it is related to that other reporting corporation under the principles described in paragraphs (d) and (e) of this section.
(k) Consolidated return groups
(1) Required information
If a reporting corporation is a member of an affiliated group for which a U.S. consolidated income tax return is filed, the return requirement of section 1.6038A-2 may be satisfied by filing a consolidated Form 5472. The common parent, as identified on Form 851, must attach a schedule to the consolidated Form 5472 stating which members of the U.S. affiliated group are reporting corporations under section 6038A, and which of those are joining in the consolidated Form 5472. The schedule must provide the name, address, and taxpayer identification number of each member whose transactions are included on the consolidated Form 5472. A member is not required to join in filing a consolidated Form 5472 merely because other members of the group choose to file one or more Forms 5472 on a consolidated basis.
(2) Maintenance of records and authorization of agent
Either the common parent or the principal operating company of an affiliated group filing a consolidated income tax return may be authorized under section 1.6038A-5 to act as the agent for foreign related persons engaged in transactions with members of the group solely for purposes of section 7602, 7603, and 7604 under section 6038A(e)(1) and section 1.6038A-5. Each member of the group, however, must maintain the records required under section 6038A(a) and section 1.6038A-3 relating to its related party transactions.
(3) Monetary penalties
The common parent (or principal operating company) and all reporting corporations that join in the filing of a consolidated Form 5472 are liable jointly and severally for penalties for failure to file Form 5472 and for failure to maintain records under section 6038A(d) and section 1.6038A-4(e). See section 1.1502-77(a) regarding the scope of agency of the common parent corporation.
(l) District director
For purposes of the regulations under section 6038A, the term "District Director" means any District Director, or the Assistant Commissioner (International) when performing duties similar to those of a District Director with respect to any person over which the Assistant Commissioner (International) has appropriate jurisdiction.
(m) Examples
The following examples illustrate the rules of this section.
EXAMPLE 1. P, a U.S. partnership that is engaged in a U.S. trade or business, is 75 percent owned by FC1, a foreign corporation that, in turn, is wholly owned by another foreign corporation, FC2. The remaining 25 percent of P is owned by Corp, a domestic corporation, that is wholly owned by FC3. P engages in transactions solely with FC2 and FC3. These transactions are attributed to FC1 and Corp. Under section 875, FC1 is considered as being engaged in a U.S. trade or business. For purposes of section 6038A and this section, FC1 and Corp are reporting corporations and must report their pro rata shares of the value of the transactions with FC2 and FC3. Thus, Corp must report 25 percent of P's transactions with FC3 and FC1 must report 75 percent of P's transactions with FC2.
EXAMPLE 2. FC2 and FC3 are both foreign corporations that are wholly owned by FC1, also a foreign corporation. FC2 engages in a trade or business in the United States through a branch. The branch engages in related party transactions with FC1. FC2 is a reporting corporation. FC3 is a foreign related party. FC1 is a direct 25-percent foreign shareholder of both FC2 and FC3. Neither FC1 nor FC3 is a reporting corporation.
EXAMPLE 3. FC1 owns 25 percent of total voting power in each of FC2 and FC3. FC2 and FC3 each own 20 percent of the total voting power of Corp, a domestic corporation. The remaining stock of Corp is owned by an unrelated domestic corporation. Neither FC2 nor FC3 is engaged in a U.S. trade or business. Under section 318(a)(2)(C) and paragraph (e) of this section, FC1 constructively owns its proportionate share of the stock of Corp owned directly by FC2 and FC3. Thus, FC1 is treated as constructively owning five percent of Corp through each of FC2 and FC3 or a total of 10 percent of the Corp stock. Consequently, Corp is not a reporting corporation because no 25 percent shareholder exists.
EXAMPLE 4. FP owns 100 percent of FC1 which, in turn, owns 100 percent of FC2. FC2 owns 100 percent of FC3 which owns 100 percent of RC. FP, FC1, and FC2 are indirect 25-percent foreign shareholders of RC, and FC3 is a direct 25-percent foreign shareholder.
EXAMPLE 5. FP owns 100 percent of USS, a U.S. corporation, and 25 percent of FS, a foreign corporation. The remaining 75 percent of FS is publicly owned by numerous small shareholders. Sales transactions occur between USS and FS. Applying the rules of this section, USS is a reporting corporation. It is determined that USS and FS are each controlled by FP under section 482 and the regulations thereunder. Therefore, FS is related to USS within the meaning of section 482 and is a related party to USS. Accordingly, the sales transactions between USS and FS are subject to section 6038A.
EXAMPLE 6. The facts are the same as in Example 5, except that the remaining 75 percent of FS is owned by one shareholder that is unrelated to the FP group and it is determined that FS is not controlled by FP for purposes of section 482. Under these facts, FS is not a related party of either FP or USS. Accordingly, section 6038A does not apply to the sales transactions between FS and USS.
EXAMPLE 7. P, a U.S. multinational, is a holding company that wholly owns X, a U.S. operating company, which in turn wholly owns FS, a controlled foreign corporation. Applying the rule of section 318(a)(3)(C), FS is deemed to own the stock of X that is actually held by P. However, under the rules of paragraph (e) of this section, X will not be a reporting corporation by reason of section 318.
(n) Effective dates
(1) Section 1.6038A-1
Paragraphs (c) (relating to the definition of a reporting corporation), (d) (relating to the definition of a related party), (e)(1) (relating to the application of section 318), and (f) (relating to the definition of a foreign person) of this section are effective for taxable years beginning after July 10, 1989. The remaining paragraphs of this section are effective December 10, 1990, without regard to when the taxable bar began.
(2) Section 1.6038A-2
Section 1.6038A-2 (relating to the requirement to file Form 5472) is generally effective for taxable years beginning after July 10, 1989. However, section 1.6038A-2 as it applies to reporting corporations whose sole trade or business in the United States is a banking, financing, or similar business as defined in section 1.864-4(c)(5)(i) is effective for taxable years beginning after December 10, 1990.
(3) Section 1.6038A-3
Section 1.6038A-3 (relating to the record maintenance requirement) is generally effective December 10, 1990. However, records described in section 1.6038A-3 in existence on or after March 20, 1990, must be maintained, without regard to when the taxable year to which the records relate began.
(4) Section 1.6038A-4
Section 1.6038A-4 (relating to the monetary penalty) is generally effective for taxable years beginning after July 10, 1989, for the failure to file Form 5472. For the failure to maintain records or the failure to produce documents under section 1.6038A-4(f)(2), the section is effective December 10, 1990, without regard to when the taxable year to which the records relate began.
(5) Section 1.6038A-5
Section 1.6038A-5 (relating to the authorization of agent requirement) is effective December 10, 1990, without regard to when the taxable year to which the records relate began.
(6) Section 1.6038A-6
Section 1.6038A-6 (relating to the failure to furnish information under a summons) is effective November 6, 1990, without regard to when the taxable year to which the summons relates began.
(7) Section 1.6038A-7
Section 1.6038A-7 (relating to the noncompliance penalty adjustment) is effective December 10, 1990, without regard to when the taxable year began.
(a) Form 5472 required
(1) In general
Each reporting corporation as defined in section 1.6038A-1(c) (or members of an affiliated group filing together as described in section 1.6038A-1(k)) shall make a separate annual information return on Form 5472 with respect to each related party as defined in section 1.6038A-1(d) with which the reporting corporation (or any group member joining in a consolidated Form 5472) has had any reportable transaction during the taxable year. The information required by section 6038A and this section must be furnished even though it may not affect the amount of any tax due under the Code.
(2) Reportable transaction
A reportable transaction is any transaction of the types listed in paragraphs (b)(3) and (4) of this section. However, if neither party to the transaction is a United States person as defined in section 7701(a)(30) and the transaction--
(i) Will not generate in any taxable year gross income from sources within the United States or income effectively connected, or treated as effectively connected, with the conduct of a trade or business within the United States, and
(ii) Will not generate in any taxable year any expense, loss, or other deduction that is allocable or apportionable to such income,
the transaction is not a reportable transaction.
(b) Contents of return
(1) Reporting corporation
Form 5472 must provide the following information in the manner the form prescribes with respect to each reporting corporation:
(i) Its name, address (including mailing code), and U.S. taxpayer identification number; each country in which the reporting corporation files an income tax return as a resident under the tax laws of that country; its country or countries of organization, and incorporation; its total assets for U.S. reporting corporation; the places where it conducts its business; and its principal business activity.
(ii) The name, address, and U.S. taxpayer identification number, if applicable, of all its direct and indirect 25-percent foreign shareholders (for an indirect 25-percent foreign shareholder, explain the attribution of ownership); each country in which each 25-percent foreign shareholder files an income tax return as a resident under the tax laws of that country; the places where each 25-percent shareholder conducts its business; and the country or countries of organization, citizenship, and incorporation of each 25-percent foreign shareholder.
(iii) The number of Forms 5472 filed for the taxable year and the aggregate value in U.S. dollars of gross payments as defined in section 1.6038A-1(h)(2) made with respect to all foreign related party transactions reported on all Forms 5472.
(2) Related party
The reporting corporation must provide information on Form 5472, set forth in the manner the form prescribes, about each related party, whether foreign or domestic, with which the reporting corporation had a transaction of the types described in paragraphs (b)(3) and (4) of this section during its taxable year, including the following information:
(i) The name, U.S. taxpayer identification number, if applicable, and address of the related party.
(ii) The nature of the related party's business and the principal place or places where it conducts its business.
(iii) Each country in which the related party files an income tax return as a resident under the tax laws of that country.
(iv) The relationship of the reporting corporation to the related party.
(3) Foreign related party transactions for which only monetary consideration is paid or received by the reporting corporation
If the related party is a foreign person, the reporting corporation must set forth on Form 5472 the dollar amounts of all reportable transactions for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the taxable year of the reporting corporation. The total amount of such transactions, as well as the separate amounts for each type of transaction described below, must be reported on Form 5472, in the manner the form prescribes. Where actual amounts are not determinable, a reasonable estimate (as described in paragraph (b)(6) of this section) is permitted. The types of transactions described in this paragraph are:
(i) Sales and purchases of stock in trade (inventory);
(ii) Sales and purchases of tangible property other than stock in trade;
(iii) Rents and royalties paid and received (other than amounts reported under paragraph (b)(3)(iv) of this section);
(iv) Sales, purchases, and amounts paid and received as consideration for the use of all intangible property, including (but not limited to) copyrights, designs, formulas, inventions, models, patents, processes, trademarks, and other similar intangible property rights;
(v) Consideration paid and received for technical, managerial, engineering, construction, scientific, or other services;
(vi) Commissions paid and received;
(vii) Amounts loaned and borrowed (except open accounts resulting from sales and purchases reported under other items listed in this paragraph (b)(3) that arise and are collected in full in the ordinary course of business);
(viii) Interest paid and received;
(ix) Premiums paid and received for insurance and reinsurance; and
(x) Other amounts paid or received not specifically identified in this paragraph (b)(3) to the extent that such amounts are taken into account for the determination and computation of the taxable income of the reporting corporation.
Amounts required to be reported under paragraph (b)(3)(vii) of this section shall be reported as monthly averages or outstanding balances at the beginning and end of the taxable year, as the form shall prescribe.
(4) Foreign related party transactions involving nonmonetary consideration or less than full consideration
If the related party is a foreign person, the reporting corporation must provide on Form 5472 a description of any reportable transaction, or group of reportable transactions, listed in paragraph (b)(3) of this section, for which any part of the consideration paid or received was not monetary consideration, or for which less than full consideration was paid or received. A description required under paragraph (b)(4) of this section shall include sufficient information from which to determine the nature and approximate monetary value of the transaction or group of transactions, and shall include:
(i) A description of all property (including monetary consideration), rights, or obligations transferred from the reporting corporation to the foreign related party and from the foreign related party to the reporting corporation;
(ii) A description of all services performed by the reporting corporation for the foreign related party and by the foreign related party for the reporting corporation; and
(iii) A reasonable estimate of the fair market value of all properties and services exchanged, if possible, or some other reasonable indicator of value.
If, for any transaction, the entire consideration received includes both tangible and intangible property and the consideration paid is solely monetary consideration, the transaction should be reported under paragraph (b)(3) of this section if the intangible property was related and incidental to the transfer of the tangible property (for example, a right to warranty services.)
(5) Additional information
In addition to the information required under paragraphs (b)(3) and (4) of this section, a reporting corporation must provide on Form 5472, in the manner the form prescribes, the following information:
(i) If the reporting corporation imports goods from a foreign related party, whether the costs taken into account in computing the basis or inventory cost of such goods are greater than the costs taken into account in computing the valuation of the goods for customs purposes, adjusted pursuant to section 1059A and the regulations thereunder, and if so, the reasons for the difference.
(ii) If the costs taken into account in computing the basis or inventory cost of such goods are greater than the costs taken into account in computing the valuation of the goods for customs purposes, whether the documents supporting the reporting corporation's treatment of the items set forth in paragraph (b)(5)(i) of this section are in existence and available in the United States at the time Form 5472 is filed.
(6) Reasonable estimate
(i) Estimate within 25 percent of actual amount
Any amount reported under this section is considered to be a reasonable estimate if it is at least 75 percent and not more than 125 percent of the actual amount.
(ii) Other estimates
If any amount reported under this paragraph (b) of this section fails to meet the reasonable estimate test of paragraph (b)(6)(i) of this section, the reporting corporation nevertheless may show that such amount is a reasonable estimate by making an affirmative showing of relevant facts and circumstances in a written statement containing a declaration that it is made under the penalties of perjury. The District Director shall determine whether the amount reported was a reasonable estimate.
(7) Small amounts
If any actual amount required under this section does not exceed $50,000, the amount may be reported as "$50,000 or less."
(8) Accrued payments and receipts
For purposes of this section, in the case of an accrual basis taxpayer, the terms "paid" and "received" shall include accrued payments and receipts, respectively.
(c) Method of reporting
All statements required on or with the Form 5472 under this section and section 1.6038A-5 shall be in the English language. All amounts required to be reported under paragraph (b) of this section shall be expressed in United States currency, with a statement of the exchange rates used.
(d) Time and place for filing returns
A Form 5472 required under this section shall be filed with the reporting corporation's income tax return for the taxable year by the due date (including extensions) of that return. A duplicate Form 5472 (including any attachments and schedules) shall be filed at the same time with the Internal Revenue Service Center, Philadelphia, PA 19255.
(e) Untimely filed return
If the reporting corporation's income tax return is untimely filed, Form 5472 (with a duplicate to Philadelphia) nonetheless shall be timely filed at the service center where the return is due. When the income tax return is ultimately filed, a copy of Form 5472 must be attached.
(f) Exceptions
(1) No reportable transactions
A reporting corporation is not required to file Form 5472 if it has no transactions of the types listed in paragraphs (b)(3) and (4) of this section during the taxable year with any related party.
(2) Transactions solely with a domestic reporting corporation
If all of a foreign reporting corporation's reportable transactions are with one or more related domestic reporting corporations that are not members of the same affiliated group, the foreign reporting corporation shall furnish on Form 5472 only the information required under paragraphs (b)(1) and (2) of this section, if the domestic reporting corporations provide the information required under paragraphs (b)(3) through (5) of this section. Such a foreign reporting corporation nonetheless is subject to the record maintenance requirements of section 1.6038A-3 and the requirements of sections 1.6038A-5 and 1.6038A-6. The name, address, and taxpayer identification number of each domestic reporting corporation that provided such information must be indicated on Form 5472 in the space provided for the information under paragraphs (b)(1) and (2) of this section.
(3) Transactions with a corporation subject to reporting under section 6038
A reporting corporation is not required to make a return of information on Form 5472 with respect to a related foreign corporation for a taxable year for which a U.S. person that controls the foreign related corporation makes a return of information on Form 5471 that is required under section 6038 and this section, if that return contains information required under section 1.6038-2(f)(11) with respect to the reportable transactions between the reporting corporation and the related corporation for that taxable year. Such a reporting corporation also is not subject to section 1.6038A-3 and 1.6038A-5. It remains subject to the general record maintenance requirements of section 6001.
(4) Transactions with a foreign sales corporation
A reporting corporation is not required to make a return of information on Form 5472 with respect to a related corporation that qualifies as a foreign sales corporation for a taxable year for which the foreign sales corporation files Form 1120-FSC.
(g) Filing Form 5472 when transactions with related parties engaged in by a partnership are attributed to a reporting corporation
If transactions engaged in by a partnership are attributed under section 1.6038A-1(e)(2) to a reporting corporation, the reporting corporation need report on Form 5472 only the percentage of the value of the transaction or transactions equal to the percentage of its partnership interest. Thus, for example, if a partnership buys $1000 of widgets from the foreign parent of a reporting corporation whose partnership interest in the partnership equals 50 percent of the partnership interests (and the remaining 50 percent is held by unrelated parties), the reporting corporation must report $500 of purchases from a foreign related party on Form 5472.
(h) Effective dates for certain reporting corporations
For effective dates for this section, see section 1.6038A-1(n).
(a) General maintenance requirements
(1) Section 6001 and Section 6038A
A reporting corporation must keep the permanent books of account or records as required by section 6001 that are sufficient to establish the correctness of the federal income tax return of the corporation, including information, documents, or records ("records") to the extent they may be relevant to determine the correct U.S. tax treatment of transactions with related parties. Under section 6001, the District Director may require any person to make such returns, render such statements, or keep such specific records as will enable the District Director to determine whether or not that person is liable for any of the taxes to which the regulations under Part I have application. See section 6001 and the regulations thereunder. Such records must be permanent, accurate, and complete, and must clearly establish income, deductions, and credits. Additionally, in appropriate cases, such records include sufficient relevant cost data from which a profit and loss statement may be prepared for products or services transferred between a reporting corporation and its foreign related parties. This requirement includes records of the reporting corporation itself, as well as to records of any foreign related party that may be relevant to determine the correct U.S. tax treatment of transactions between the reporting corporation and foreign related parties. The relevance of such records with respect to related party transactions shall be determined upon the basis of all the facts and circumstances. Section 6038A and this section provide detailed guidance regarding the required maintenance of records with respect to such transactions and specify penalties for noncompliance. Banks and other financial institutions shall follow the specific record maintenance rules described in paragraph (h) of this section.
(2) Safe harbor
A safe harbor for record maintenance is provided under paragraph (c) of this section, which sets forth detailed guidance concerning the types of records to be maintained with respect to related party transactions. The safe harbor consists of an all-inclusive list of record types that could be relevant to different taxpayers under a variety of facts and circumstances. It does not constitute a checklist of records that every reporting corporation must maintain or that generally should be requested by the Service. A specific reporting corporation is required to maintain, and the Service will request, only those records enumerated in the safe harbor (including material profit and loss statements) that may be relevant to its business or industry and to the correct U.S. tax treatment of its transactions with its foreign related parties. Accordingly, not every item listed in the safe harbor must be maintained by every reporting corporation. A corporation that maintains or causes another person to maintain the records listed in paragraph (c)(2) of this section that may be relevant to its foreign related party transactions and to its business or industry will be deemed to have met the record maintenance requirements of section 6038A.
(3) Examples
The following examples illustrate the rules of this paragraph.
EXAMPLE 1. RC, a U.S. reporting corporation, is owned by two shareholders, F and P. F is a foreign corporation that owns 30 percent of the stock of RC. P is a domestic corporation that owns the remaining 70 percent. RC purchases tangible property from F; however, the only potential audit issue with respect to these transactions is their treatment under section 482. It is determined that F does not in fact control RC and the two corporations do not constitute a group of "controlled taxpayers" for purposes of section 482 and the regulations thereunder. There are no other reportable transactions between RC and F. Under section 1.6038A-1(g), F is a foreign related party with respect to RC. Accordingly, RC is required to report its purchases of property from F under the reporting requirements of section 1.6038A-2. Nevertheless, because section 482 is not applicable to the transactions between RC and F, the records created by F with respect to its sales to RC are not relevant for purposes of determining the correct tax treatment of these transactions. RC is required to maintain its own records of these transactions under the requirements of section 6001, but the transactions are not subject to the record maintenance requirements of this section. If, however, on audit it is determined that F does control RC, all records relevant to determining the arm's length consideration for the tangible property under section 482 will be subject to these requirements.
EXAMPLE 2. FP, a foreign person, owns 30 percent of the stock of RC, a reporting corporation. The remaining 70 percent of RC stock is held by persons that are not 25-percent foreign shareholders. It is determined that FP is related to RC within the meaning of section 482 and the regulations thereunder. The only transactions between FP and RC are FP's capital contributions, dividends paid from RC to FP, and loans from FP to RC. Under section 6001, RC is required to maintain all documentation necessary to establish the U.S. tax treatment of the capital contributions, dividends, and loans. RC is not required to maintain records in other categories listed in paragraph (c)(3) of this section because they are not relevant to the transactions between FP and RC. Records of FP not related to these transactions are not subject to the record maintenance requirements under section 6038A(a) and this section.
EXAMPLE 3. G, a foreign multinational group, creates Sub, a wholly-owned U.S. subsidiary, in order to purchase tangible property from unrelated parties in the United States and resell such property to G. The property purchased by Sub is either used in G's business or resold to other unrelated parties by G. Sub's sole function is to act as a buyer for G and these purchases are the only transactions that G has with any U.S. affiliates. Under all the facts and circumstances of this case, it is determined that an analysis of the group's worldwide profit attributable to the property it purchases from Sub is not relevant for purposes of determining the tax treatment of the sales from Sub to G. Therefore, the records with respect to the profitability of G are not subject to the record maintenance requirements of this section. However, all records related to the appropriate method under section 482 for determining an arm's-length consideration for the property sold by Sub to G are subject to the record maintenance requirements of this section.
EXAMPLE 4. S, a U.S. reporting corporation, is the purchasing agent for its multinational parent group. It arranges for the purchase and export of miscellaneous tangible property to X, Y, and Z, each of which is a foreign related party. The miscellaneous tangible property is purchased from unrelated third parties for resale to X, Y, and Z. These resales of miscellaneous tangible property constitute the sole transactions between S and X, Y, and Z. The purchasing agent activity of S is not an integral part of the business activity of S or of any beneficiary of the purchasing agent services provided by S as defined in section 1.482-2(b)(7). Under section 1.482-2(b)(7), the arm's-length charge is deemed to be equal to the costs or deductions incurred with respect to the provision of the purchasing agent services. S is required to maintain records to permit verification upon audit of such costs or deductions. The records of X, Y, and Z are not relevant to the costs or deductions incurred by S with respect to its purchasing agent activities. Therefore, under section 6038A and this section, only the records maintained by S that permit verification of the costs and deductions of the purchasing agent services are relevant. Accordingly, solely with respect to these transactions, records of R, Y, and Z need not be maintained under section 6038A or this section. If, however, upon audit it is determined that S is not merely engaging in services not integral to its business as defined in section 1.482-2(b)(7), the record maintenance requirements under section 6038A(a) and this section will be applicable to the records of S, X, Y and Z to the extent that such records are relevant for determining the correct tax treatment of transactions engaged in by X, Y, or Z with S. If S has other transactions with X, S must maintain or cause to be maintained records that may be relevant with respect to those transactions.
(b) Other maintenance requirements
(1) Indirectly related records
This section applies to records that are directly or indirectly related to transactions between the reporting corporation and any foreign related parties. An example of records that are indirectly related to such transactions is records possessed by a foreign subsidiary of a foreign related party that document the raw material or component costs of a product that is manufactured or assembled by the subsidiary and sold as a finished product by the foreign related party to the reporting corporation.
(2) Foreign related party or third-party maintenance
If records that are required to be maintained under this section are in the control of a foreign related party, the records may be obtained or compiled (if not already in the possession of the foreign related party or already compiled) under the direction of the reporting corporation and then maintained by the reporting corporation, the foreign related party, or a third party. Thus, for example, a foreign related party may either itself maintain such records outside the United States or permit a third party to maintain such records outside the United States, provided that the conditions described in paragraph (f) of this section are met. Upon a request for such records by the Service, a foreign related party or third party may make arrangements with the District Director to furnish the records directly, rather than through the reporting corporation.
(3) Translation of records
When records are provided to the Service under a request for production, any portion of such records must be translated into the English language within 30 days of a request for translation of that portion by the District Director. To the extent that any requested documents are identical to documents that have already been translated, an explanation of how such documents are identical instead may be provided. An extension of this time period may be requested under paragraph (f)(4) of this section. Appropriate extensions will be liberally granted for translation requests where circumstances warrant. If a good faith effort is made to translate accurately the requested documents within the specified time period, the reporting corporation will not be subject to the penalties in sections 1.6038A-4 and 1.6038A-7.
(4) Exception for foreign governments
A foreign government is not subject to the obligation to maintain records under this section.
(5) Records relating to conduit financing arrangements
See section 1.881-4 relating to conduit financing arrangements.
(c) Specific records to be maintained for safe harbor
(1) In general
A reporting corporation that maintains or causes another person to maintain the records specified in this paragraph (c) that are relevant to its business or industry and to the correct U.S. tax treatment of its transactions with its foreign related parties will be deemed to have met the record maintenance requirements of this section. This paragraph provides general descriptions of the categories of records to be maintained; the particular title or label applied by a reporting corporation or related party does not control. Functional equivalents of the specified documents are acceptable. Record maintenance in accordance with this safe harbor, however, requires only the maintenance of types of documents described in paragraph (c)(2) of this section that are directly or indirectly related to transactions between the reporting corporation and any foreign related party. Additionally, to the extent the reporting corporation establishes that records in a particular category are not applicable to the industry or business of the reporting corporation and any foreign related party, maintenance of such records is not required under this paragraph. Record maintenance in accordance with this paragraph (c) generally does not require the original creation of records that are ordinarily not created by the reporting corporation or its related parties. (If, however, a document that is actually created is described in this paragraph (c), it is to be maintained even if the document is not of the type ordinarily created by the reporting corporation or its related parties.) There are two exceptions to the rule. First, basic accounting records that are sufficient to document the U.S. tax effects of transactions between related parties must be created and retained, if they do not otherwise exist. Second, records sufficient to produce material profit and loss statements as described in paragraphs (c)(2)(ii) and (3) of this section that are relevant for determining the U.S. tax treatment of transactions between the reporting corporation and foreign related parties must be created if such records are not ordinarily maintained. All internal records storage and retrieval systems used for each taxable year must be retained.
(2) Descriptions of categories of documents to be maintained
The following records must be maintained in order to satisfy this paragraph (c) to the extent they may be relevant to determine the correct U.S. tax treatment of transactions between the reporting corporation and any foreign related party.
(i) Original entry books and transaction records
This category includes books and records of original entry or their functional equivalents, however designated or labeled, that are relevant to transactions between any foreign related party and the reporting corporation. Examples include, but are not limited to, general ledgers, sales journals, purchase order books, cash receipts books, cash disbursement books, canceled checks and bank statements, workpapers, sales contracts, and purchase invoices. Descriptive material to explicate entries in the foregoing types of records, such as a chart of accounts or an accounting policy manual, is included in this category.
(ii) Profit and loss statements
This category includes records from which the reporting corporation can compile and supply, within a reasonable time, material profit and loss statements of the reporting corporation and all related parties as defined in section 1.6038A- 1(d) (the "related party group") that reflect profit or loss of the related party group attributable to U.S.-connected products or services as defined in paragraph (c)(7)(i) of this section. The determination of whether a profit and loss statement is material is made under the rules provided in paragraph (c)(3) of this section. The material profit and loss statements described in this paragraph (c)(2)(ii) must reflect the consolidated revenue and expenses of all members of the related party group. Thus, records in this category include the documentation of the cost of raw materials used by a related party to manufacture finished goods that are then sold by another related party to the reporting corporation. The records should be kept under U.S. generally accepted accounting principles if they are ordinarily maintained in such manner; if not, an explanation of the material differences between the accounting principles used and U.S. generally accepted accounting principles must be made available. The statements need not reflect tracing of the actual costs borne by the group with respect to its U.S.-connected products or services; rather, any reasonable method may be used to allocate the group's worldwide costs to the revenues generated by the sales of those products or services. An explanation of the methods used to allocate specific items to a particular profit and loss statement must be made available. The explanation of material differences between accounting principles and the explanation of allocation methods must be sufficient to permit a comparison of the profitability of the group to that of the reporting corporation attributable to the provision of U.S.-connected products or services.
(iii) Pricing documents
This category includes all documents relevant to establishing the appropriate price or rate for transactions between the reporting corporation and any foreign related party. Examples include, but are not limited to, documents related to transactions involving the same or similar products or services entered into by the reporting corporation or a foreign related party with related and unrelated parties; shipping and export documents; commission agreements; documents relating to production or assembly facilities; third-party and intercompany purchase invoices; manuals, specifications, and similar documents relating to or describing the performance of functions conducted at particular locations; intercompany correspondence discussing any instructions or assistance relating to such transactions provided to the reporting corporations by the related foreign person (or vice versa); intercompany and intracompany correspondence concerning the price or the negotiation of the price used in such transactions; documents related to the value and ownership of intangibles used or developed by the reporting corporation or the foreign related party; documents related to cost of goods sold and other expenses; and documents related to direct and indirect selling, and general and administrative expenses (for example, relating to advertising, sales promotions, or warranties).
(iv) Foreign country and third party filings
This category includes financial and other documents relevant to transactions between a reporting corporation and any foreign related party filed with or prepared for any foreign government entity, any independent commission, or any financial institution.
(v) Ownership and capital structure records
This category includes records or charts showing the relationship between the reporting corporation and the foreign related party; the location, ownership, and status (for example, joint venture, partnership, branch, or division) of all entities and offices directly or indirectly involved in the transactions between the reporting corporation and any foreign related party; a worldwide organization chart; records showing the management structure of all foreign affiliates; and loan documents, agreements, and other documents relating to any transfer of the stock of the reporting corporation that results in the change of the status of a foreign person as a foreign related party.
(vi) Records of loans, services, and other non-sales transactions
This category includes relevant documents relating to loans (including all deposits by one foreign related party or reporting corporation with an unrelated party and a subsequent loan by that unrelated party to a foreign related party or reporting corporation that is in substance a direct loan between a reporting corporation and a foreign related party); guarantees of a foreign related party of debts of the reporting corporation, and vice versa; hedging arrangements or other risk shifting or currency risk shifting arrangements involving the reporting corporation and any foreign related party; security agreements between the reporting corporation and any foreign related party; research and development expense allocations between any foreign related party and the reporting corporation; service transactions between any foreign related party and the reporting corporation, including, for example, a description of the allocation of charges for management services, time or travel records, or allocation studies; import and export transactions between a reporting corporation and any foreign related party; the registration of patents and copyrights with respect to transactions between the reporting corporation and any foreign related party; and documents regarding lawsuits in foreign countries that relate to such transactions between a reporting corporation and any foreign related party (for example, product liability suits for U.S. products).
(vii) Records relating to conduit financing arrangements
See section 1.881-4 relating to conduit financing arrangements.
(3) Material profit and loss statements
For purposes of paragraph (c)(2)(ii) of this section, the determination of whether a profit and loss statement is material will be made according to the following rules. An agreement between the reporting corporation and the District Director as described in paragraph (e) of this section may identify material profit and loss statements of the related party group and describe the items to be included in any profit and loss statements for which records are to be maintained to satisfy the requirements of paragraph (c)(2)(ii) of this section. In the absence of such an agreement, a profit and loss statement will be material if it meets any of the following tests: the existing records test described in paragraph (c)(4) of this section, the significant industry segment test described in paragraph (c)(5) of this section, or the high profit test described in paragraph (c)(6) of this section.
(4) Existing records test
A profit and loss statement is material under the existing records test described in this paragraph (c)(4) if any member of the related party group creates or compiles such statement in the course of its business operations and the statement reflects the profit or loss of the related party group attributable to the provision of U.S.-connected products or services (regardless of whether the profit and loss attributable to U.S.- connected products or services is shown separately or included within the calculation of aggregate figures on the statement). For example, a profit and loss statement is described in this paragraph if it was produced for internal accounting or management purposes, or for disclosure to shareholders, financial institutions, government agencies, or any other persons. Such existing statements and the records from which they were compiled (to the extent such records relate to profit and loss attributable to U.S.-connected products or services) are subject to the record maintenance requirements described in paragraph (c)(2)(ii) of this section.
(5) Significant industry segment test
(i) In general
A profit and loss statement is material under the significant industry segment test described in this paragraph (c)(5) if--
(A) The statement reflects the profit or loss of the related party group attributable to the group's provision of U.S.-connected products or services within a single industry segment (as defined in paragraph (c)(7)(ii) of this section);
(B) The worldwide gross revenue attributable to such industry segment is 10 percent or more of the worldwide gross revenue attributable to the group's combined industry segments; and
(C) The amount of gross revenue earned by the group from the provision of U.S.-connected products or services within such industry segment is $25 million or more in the taxable year.
(ii) Form of the statements
Profit and loss statements compiled for the group's provision of U.S.-connected products or services in each significant industry segment must reflect revenues and expenses attributable to the operations in such segment by all members of the related party group. Statements may show each related party's revenues and expenses separately, or may be prepared in a consolidated format. Any reasonable method may be used to allocate the group's worldwide costs within the industry segment to the U.S.- connected products or services within that segment. An explanation of the methods used to prepare consolidated statements and to allocate specific items to a particular profit and loss statement must be made available, and the records from which the consolidations and allocations were prepared must be maintained.
(iii) Special rule for component sales
Where the U.S.-connected products or services consist of components that are incorporated into other products or services before sale to customers, the portion of the total gross revenue derived from sales of the finished products or services attributable to the components may be determined on the basis of relative costs of production. Thus, where relevant for determining whether the $25 million threshold in paragraph (c)(5)(i)(C) of this section has been met, the amount of gross revenue derived by the related party group from the provision of the finished products or services may be reduced by multiplying it by a fraction, the numerator of which is the costs of production of the related party group attributable to the component products or services that constitute U.S.-connected products or services and the denominator of which is the costs of production of the related party group attributable to the finished products in which such components are incorporated.
(iv) Level of specificity required
In applying the significant industry segment test of this paragraph (c)(5), groups of related products and services must be chosen to provide a reasonable level of specificity that results in the greatest number of separate significant industry segments in comparison to other possible classifications. This determination must be made on the basis of the particular facts presented by the operations of the related party group. The following rules, however, provide general guidelines for making such classifications. First, the related party group's operations that involve the provision of U.S.-connected products should be grouped into product lines. The rules of this paragraph (c)(5) should then be applied to determine if any such product line would, standing alone, constitute a significant industry segment when compared to the related party group's operations as a whole. Any significant industry segments determined at the level of product lines should be further segregated, and tested for significant industry segments, at the level of separate products. Finally, any significant industry segments determined at the level of separate products should be segregated, and tested for significant industry segments, at the level of separate models. Similar principles should be applied in classifying and testing types of services. A profit and loss statement reflecting the related party group's provision of any product or service (or group of products or services as classified under these rules) that constitutes a significant industry segment will be considered material for purposes of this paragraph (c)(5). For definitions of the terms "product", "related products or services", "model", and "product line", see paragraph (c)(7) of this section.
(v) Examples
The rules for determining reasonable levels of specificity for significant industry segments may be illustrated by the following examples.
EXAMPLE 1. A related party group is engaged in the manufacture and worldwide sales of automobiles and aftermarket parts. The group's operations within the categories of "automobiles" and "aftermarket parts" are each sufficient to constitute significant industry segments for the group under the rules of this paragraph (c)(5). No narrower classification of aftermarket parts results in any significant industry segments. Automobiles produced by the group are generally classified for marketing purposes by trade names; aggregating groups of automobiles by these trade names results in three significant industry segments, those for trade names A, B, and C. Finally, two car models sold under the trade name A ("A1" and "A2") and one car model sold under the trade name B ("B3"), produce sufficient revenue to constitute significant industry segments. Such classifications into trade names and car models are generally used in the related party group's industry; moreover, different types of classifications would produce fewer significant industry segments. Accordingly, a reasonable level of specificity for this related party group's industry segments would be eight categories of products consisting of "automobiles", "aftermarket parts", "A", "B", "C", "Al", "A2", and "B3".
EXAMPLE 2. A related party group is engaged in manufacturing electronic goods that are distributed at retail in the United States by the reporting corporation. The group sells three types of products in the United States: televisions, radios, and video cassette recorders (VCRs). Each of these three broad product areas constitutes a significant industry segment for the group as a whole. VCRs can be further segregated by price into high-end and low-end models, and the provision of each constitutes a significant industry segment for the group. Revenues from only one VCR model, model number VCRX-10, are sufficiently large to make the provision of that model a significant industry segment. With respect to tele