Each year the Department of Treasury and the IRS issue new rules that ultimately have the impact of increasing the compliance burden on taxpayers. Recently-issued final regulations are no exception.
They treat a domestic disregarded entity (“DRE”) wholly-owned by a foreign person as a domestic corporation for reporting purposes and record maintenance.  A common example of a DRE we see in practice is a US limited liability company. This could occur where the foreign owner prefers US legal liability protection and does not mind being the “taxpayer” for US purposes. We also see this in areas where the foreign owner does not otherwise have a US filing obligation (e.g., no US trade or business) or prefers to file a “protective” tax return. Non-US e-commerce sellers via Amazon, Shopify or others often fit into this category.
Prior to 2017, a DRE wholly-owned by a foreign person did not necessarily have a filing obligation. Beginning in tax year 2017, this DRE must comply with the same reporting obligations as a foreign owned domestic corporation. The new regulations apply to taxable years beginning on or after January 1, 2017 and ending on or after December 31, 2017. The regulations also require a Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business – to be filed to report the foreign owner and any related party transactions.
Where additional frustration may arise is a DRE wholly-owned by a foreign person must have a US tax ID number (specifically, an Employer Identification Number “EIN”) for Form 5472 purposes. If it does not have an EIN it must apply for one. As many of you know, this has the possibility of becoming an administrative headache. To make things slightly more complicated, the DRE must have a “responsible party”, and the IRS may require the “responsible party” to have a US tax ID number (SSN, EIN, ITIN, etc.). For many of these DREs, the only decision-makers are non-US persons, meaning a non-US person must apply for the US tax ID number as well.
As the IRS can be capricious in practice in assigning ITINs, we envision sales of headache medicine will rise during the next eighteen (18) months. While we understand the need for transparency, we hope the increased compliance / administrative burden will be handled efficiently within the IRS. Given the IRS’ average employee is overworked and the organization is being told to do more with less, we’re not holding our collective breath on increased efficiency.
In summary, with the IRS’s goal of transparency, these rules require additional compliance, and we believe many are still unaware of the above changes. If you would like to discuss, feel free to contact us.
 TD 9796 (12/13/2016)
 Reg. Sec. 1.6038A-1 & 1.6038A-2