United States: Changes Proposed To US Tax Reporting Rules For "Outbound" Transfers

US IRS Proposes Amendments to "Gain Recognition Agreement" Rules, Clarifying Reporting Obligations

On January 30, 2013, the US Treasury Department (IRS) proposed amendments to existing gain recognition agreement ("GRA") regulations that apply to US persons who transfer stock of a US corporation or a foreign corporation to a foreign corporation. The proposed changes to the GRA regulations address the consequences to US persons for failing to file GRAs and related documents (failure to file), to comply in any material respect with the terms of, or rules governing, GRAs (failure to comply), or to satisfy other reporting obligations. The proposed changes would affect not only future reorganizations and contributions of stock to foreign corporations, but also prior transfers that continue to be subject to GRA reporting. The proposed changes also provide similar failure to comply rules with respect to liquidating distributions to foreign corporations and certain other document filing requirements arising with a US person's transfer of stock or assets to certain foreign corporations.

The announced changes are merely proposed and would be effective only upon the promulgation of final regulations. Consistent with the public statements of IRS officials, however, the proposed regulations confirm that the IRS intends to tighten the IRS directive originally implemented in 2010 that effectively permits automatic correction of a previously-filed GRA if certain requirements are met.

Background

Section 367(a)(1) of the US Internal Revenue Code generally provides that if a US person (US transferor) transfers property to a foreign corporation, the US transferor must recognize gain, but not loss, on the transfer, notwithstanding that the transfer otherwise qualifies as a nontaxable exchange. Section 367(a) is intended to prevent US persons from avoiding US tax by transferring appreciated property to foreign corporations in nontaxable exchanges, with the intent of having the foreign corporation dispose of such property outside of the US taxing jurisdiction. Section 367(e)(2) provides similar gain recognition rules in the context of otherwise nontaxable liquidations of subsidiary corporations into foreign parent corporations.

With respect to certain transfers of stock or securities to a foreign corporation, a US transferor may avoid gain recognition under Section 367(a)(1) by filing a GRA and other related documents describing the transfer. Under a GRA, the US transferor agrees to recognize gain realized on the initial transfer and pay interest on any additional tax due if a gain recognition event occurs during the 5-year term of the GRA. A failure to file or comply, unless such failure was due to reasonable cause and not willful neglect, is currently a gain recognition event.

If a GRA has not properly been filed, the US transferor is required to file IRS Form 926 "Return by a U.S. Transferor of Property to a Foreign Corporation," describing the transfer, pursuant to Internal Revenue Code Section 6038B and regulations. The penalty for failure to satisfy this reporting requirement is 10% of the fair market value (FMV) of the property at the time of initial transfer, but not in excess of $100,000 unless the failure was due to intentional disregard. If the failure was due to reasonable cause and not willful neglect, however, no penalty is imposed.

Overview of Proposed Regulations

  • Willful Failure to File or Comply. The reasonable cause standard for relief for a failure to file or comply would be replaced with a willfulness standard, which would include a failure due to gross negligence, reckless disregard, or willful neglect, and would be determined by the Director of Field Operations International, Large Business & International Division based on all relevant facts and circumstances. 
    • On its face, this change is a relaxation of the current regulatory standard of "reasonable cause." Nonetheless, the change may not always be welcome for a couple of reasons. First, the definition of "willful" is not entirely clear, especially in light of the examples of willfulness that the IRS cites. In one of these example, the facts that a US transferor has a history of failing to file tax returns, and that it lacks adequate procedural safeguards to ensure timely filing of GRAs, would be indicative of a willful failure. In addition, merely providing that the basis or FMV of property is "available upon request" but failing to include such information in a GRA would be considered willful. By contrast, only one example is provided of an instance in which the failure is not willful: a failure to file due to an isolated and accidental oversight would not be considered a willful failure to comply. Second, the current regulatory rules are relaxed substantially in practice due to an IRS directive that effectively allows automatic correction of previously-filed GRAs if certain requirements are met.
    • Moreover, relief would no longer be granted solely because the IRS fails to respond to a request within 120 days. 
  • Section 6038B and Form 926 Reporting. The reasonable cause standard for US transferors seeking Section 6038B penalty relief would be retained, but information reporting obligations on Form 926 would be expanded as follows. First, a US transferor would be required to include on Form 926 the basis and fair market value of the property transferred. Second, a US transferor would be required to file a Form 926 even if it has otherwise properly filed a GRA.
  • Other Reporting. Rules similar to the ones described above would be provided with respect to reporting and filing obligations governing:
    • Liquidating distributions to foreign parent corporations under Section 367(e)(2) and regulations;
    • Certain transfers by domestic corporations of their stock or securities or assets to foreign corporations.

Open Issues

  • IRS Directive Relief. As discussed above, an IRS directive (LMSB-4-0510-017) currently effective "until further notice is provided," allows US transferors to correct existing GRAs or file new GRAs, but not for initial transfers, without establishing reasonable cause. Although US transferors should be able to rely on the directive for now, the IRS has previously indicated its plans to withdraw the directive and the need for US taxpayers to "clean up" insufficient GRAs as soon as possible. Taxpayers should act quickly to get their GRA and reporting house in order. 
  • Scope of Proposed "Willfulness" Standard. Although presumably more favorable than the current regulatory standard (at least in the absence of relief under the directive), the application of the new willfulness standard is uncertain, especially given the Director's discretion in making this facts and circumstances determination. Moreover, the proposed regulations still do not provide examples illustrating the reasonable cause standard under the Section 6038B reporting requirements. The IRS is likely to receive requests for greater clarification, especially regarding the interaction of the new standard with the reasonable cause standard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions