ASU 2016-16 Adds Transparency and Simplifies Reporting
The presently prescribed method of accounting for income taxes on the sale of assets between affiliated companies (intra-entity transfers) has in recent years generated discord between accounting professionals and the Financial Accounting Standards Board (FASB). With FASB’s October 24, 2016 issuance of ASU 2016-16, however, the concerns of the accounting profession in this respect have been largely addressed.
FASB stipulations to this point have required that recognition of the income tax effects of intra-entity transfers be deferred until the asset is subsequently sold outside the affiliated group, a rule running counter to the general ASC 740 principle that current and deferred income taxes be recognized in the year that the event triggering them occurs.
Under the newly enacted ASU 2016-16, this deferral methodology goes away for all intercompany asset sales other than sales of inventory (which will remain under the previous FASB guidance). Companies will now be required to recognize the income tax effects (current and deferred) of intercompany non-inventory asset sales in the period in which they occur, despite the transaction being eliminated from consolidated pre-tax income. Thus, this new guidance both simplifies the accounting procedures for intra-entity transfers and adds transparency to their financial reporting, as the income statement tax effects recorded will typically coincide with any cash tax impact incurred in the same reporting period.
While FASB did not prescribe new financial statement disclosure requirements in this pronouncement, it has commented that existing disclosure requirements may apply to intra-entity transfers and their tax ramifications. For instance, companies may have to cite the tax effects of intra-entity transfers within their effective tax rate reconciliations or in disclosing the types of temporary differences giving rise to their deferred tax assets and liabilities.
ASU 2016-16 becomes effective for publicly traded companies in years beginning after December 15, 2017, including interim periods within those years (i.e., first quarter of 2018 for calendar-year companies). For non-public entities, they become effective for annual reporting periods beginning after December 15, 2018 and for interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted, but can only occur in the first quarter of a reporting year (e.g., first quarter 2017 for calendar year companies).
Questions? Contact us to discuss the new reporting requirements and what they might mean for your company.View full article
3 Questions that Define Reporting and Withholding Obligations
Most U.S. businesses understand that payments to U.S. contractors trigger reporting obligations at the end of the year. Once the amount paid to a contractor crosses certain thresholds, a Form 1099 is prepared and sent both to the business that performed the services and to the IRS. As the economy has become more global and work can easily be performed virtually from around the world, some U.S. businesses have been slow to realize that payments to foreign contractors may trigger similar reporting obligations.
It’s important to note that payments to foreign contractors may trigger reporting and withholding obligations on the part of the U.S. payor—but not in all cases. The reporting and withholding requirements on the U.S. payor depend on the answers to 3 questions.1. Is the payee a U.S. person or business?
It’s never safe to assume that a contractor is or is not a U.S. person. The Internet makes it easy for a business to create a virtual presence almost anywhere. The only safe way to determine whether or not the contractor is a U.S. person is to ask. If the contractor replies that the business is a U.S. business, most payors know to have that contractor fill out a Form W-9 to provide the information that will be used to report payments to the IRS.
If the contractor is not a U.S. business, the payor should require a Form W-8BEN-E (for entities) or Form W-8BEN (for individuals). Once the U.S. business receives this form, it does NOT forward it to the IRS. The U.S. payor simply maintains the form in its records. In the event of an audit, the form will substantiate why payments were not reported.2. Where did the payee perform the services?
If the U.S. payor has one of the Forms W-8BEN on file and the contractor performed all services outside of the U.S., it is likely that no reporting or withholding obligations exist regarding the payments made by the U.S. payor to the foreign contractor.
If the foreign contractor performed some or all of the work related to the contract in the U.S., the payor may have a reporting and withholding requirement related to those payments.3. If the payee performed services in U.S., what does the payor do?
If the foreign contractor did some or all of the work related to the contract in the U.S., the payor has additional obligations under IRS rules. Typically, the U.S. payor will have to report the payments related to the U.S.-sourced work to the IRS on a Form 1042. The payor is expected to not only report the amounts paid to non-U.S. contractors for work done in the U.S. but also to withhold U.S. taxes (typically 30%) from those payments. Note, the 30% rate could potentially be reduced if the payments are made to a country with which the U.S. has a treaty. Like other withholding requirements, failure to comply with them can subject the U.S. payor to penalties and interest. Failure to withhold also could entitle the IRS to go after the payor for the amount of tax that should have been withheld. Depending on the amount of U.S.-sourced work a company pays foreign contractors to perform, failure to properly withhold can quickly snowball into a significant tax obligation.
We’ve provided a quick overview here of the rules that apply when U.S.-based businesses make payments to foreign contractors. If your business engages contractors who may be based outside of the United States, it’s important to consult with a professional who is familiar with the details of the reporting and withholding rules. Contact us for help navigating complex U.S. and international tax rules.