How to Prepare Schedule E of Form 5471 for CFC Taxes Paid (New)

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Schedule E Form 5471

Schedule E Form 5471

Exploring Schedule E Form 5471 Tax Requirements

Exploring Schedule E Form 5471 Tax Requirements: Income, War & Excess Profits Tax: When it comes to Form 5471, one of the most complicated aspects of the form is the fact that every time you think you’re done with Form 5471 — a new separate schedule pops up for you to complete (depending on which category of filer you qualify). The IRS does not make it easy for US Taxpayers with foreign corporations. Some of the 5471 schedules are more complicated than others, and Form 5471 Schedule E is one of the more complicated schedules (as are most issues involving Subpart F). That is because for the several categories of filers who must file the Schedule E — it requires more than just a cursory understanding of international business law. The complexity of actually preparing the form depends largely on the type of form corporation being reported — as well the type of income being generated and taxes paid. Let’s explore into Schedule E Form 5471 to see what’s going on:

Schedule E, Form 5471 

The primary purpose of Schedule E is to claim foreign tax credits paid by a foreign corporation involving Subpart F Inclusions. There are different parts to the form, depending on whether or not the foreign tax credit can be taken/credited in the US or not. For reference, IRC 960 refers to special rules from distributions involving PTEP (previously taxes earnings and profits).

26 USC 960(b)

(a) In General

  • For purposes of subpart A of this part, if there is included in the gross income of a domestic corporation any item of income under section 951(a)(1) with respect to any controlled foreign corporation with respect to which such domestic corporation is a United States shareholder, such domestic corporation shall be deemed to have paid so much of such foreign corporation’s foreign income taxes as are properly attributable to such item of income.

(b) Special rules for distributions from previously taxed earnings and profits

For purposes of subpart A of this part—

    • (1) In general If any portion of a distribution from a controlled foreign corporation to a domestic corporation which is a United States shareholder with respect to such controlled foreign corporation is excluded from gross income under section 959(a), such domestic corporation shall be deemed to have paid so much of such foreign corporation’s foreign income taxes as—

      • (A) are properly attributable to such portion, and

      • (B )have not been deemed to have to [1] been paid by such domestic corporation under this section for the taxable year or any prior taxable year.

    • (2) Tiered controlled foreign corporations If section 959(b) applies to any portion of a distribution from a controlled foreign corporation to another controlled foreign corporation, such controlled foreign corporation shall be deemed to have paid so much of such other controlled foreign corporation’s foreign income taxes as—

      • (A) are properly attributable to such portion, and

      • (B) have not been deemed to have been paid by a domestic corporation under this section for the taxable year or any prior taxable year.

What Does This Mean?

It means with respect to the Gross Income of a Domestic Corporation which is a shareholder in a CFC — in accordance with IRC 951(a)(1) — which refers to amounts included in gross income of US shareholders and specifically CFC — the domestic corporation will be deemed to have paid such foreign corporation foreign income taxes attributable to that item of income.

Schedule E (Form 5471) Instructions 

As provided for in the instructions for the form:

    • In Part I, Section 1, list income, war profits, and excess profits taxes (income taxes) paid or accrued to each foreign country or U.S. possession for the foreign corporation’s foreign tax year(s) that end with or within its U.S. tax year.

    • With respect to dividends paid in tax years of foreign corporations beginning before January 1, 2018, the taxes reported on this schedule include taxes deemed paid with respect to a dividend from a lower-tier foreign corporation.

    • See section 902 before its repeal by the Act. In Part I, Section 2, report taxes deemed paid under section 960(b) with respect to distributions of PTEP from a lower-tier foreign corporation to the foreign corporation with respect to which this Schedule E (Form 5471) is being completed.

Here are the specific Schedule E Reporting Requirements

  • Column (a)

    • Amounts reported on Schedule E may include taxes paid or accrued by the foreign corporation or a pass-through entity (for example, partnership or disregarded entity) owned by the foreign corporation. If the tax is paid or accrued by the pass-through entity, enter the name of such entity instead of the name of the foreign corporation. If the tax paid or accrued by the foreign corporation is attributable to a branch or qualified business unit (QBU) of the foreign corporation, enter the name of the branch or QBU.

    • With respect to deemed paid taxes related to dividends received from lower-tier foreign corporations in tax years of foreign corporations beginning before January 1, 2018, column (a) should include the name of the lower-tier foreign corporation that paid the dividend instead of the recipient foreign corporation. With respect to deemed paid taxes related to PTEP distributions received from lower-tier foreign corporations in tax years of foreign corporations beginning before January 1, 2018, report such amounts on Part I, Section 2.

  • Column (b)

    • Enter the employer identification number (EIN) or reference ID number of the payor entity listed in column (a). A reference ID number is required only in cases in which no EIN was entered for the foreign corporation or pass-through entity owned by the foreign corporation. Filers are permitted to enter both an EIN and a Reference ID number for more information about reference ID numbers.

  • Column (c)

    • Enter the two-letter codes (from the list at IRS.gov/CountryCodes) of all foreign countries and U.S. possessions to which taxes were paid or accrued. If taxes were paid or accrued to more than one country with respect to the same income, include each tax paid or accrued to a different country on separate lines.

  • Column (d)

    • The foreign tax year under foreign tax law may not be the same tax year as the U.S. tax year of the foreign corporation. If the tax is attributable to a pass-through entity owned by a foreign corporation, the foreign tax year of the foreign corporation within which such pass-through entity’s year ends should be reported on this line.

  • Column (f)

    • Enter the income reported to the foreign tax authority under foreign tax law. This should be the foreign taxable income base for determining the tax reported in column (i).

  • Column (g)

    • Check the box if taxes were paid on U.S. source income.

  • Column (h)

    • Enter three-letter currency code for the local currency in which the tax is payable. Currency codes are available at www.iso.org/iso-4217-currencycodes.html or www.currency-iso.org/en/ home/tables/tables-a1.html.

  • Column (i)

    • Enter the tax paid or accrued in the local currency in which tax is payable and not the functional currency of the payor or foreign corporation. See sections 986(a) and 905(c).

  • Columns (j) and (k)

    • Enter the exchange rate in column (j) and the translated dollar amount in column (k). Translate the taxes entered in column (i) into dollars at the average exchange rate for the tax year to which the tax relates unless one of the exceptions below applies. See section 986(a). Exceptions. If one of the following exceptions applies, use the exchange rate in effect on the date the foreign corporation paid the tax. 1. The tax is paid before the beginning of the year to which the tax relates. 2. Accrued taxes are not paid before the date two years after the close of the tax year to which such taxes relate. 3. There is an election in effect under section 986(a)(1)(D) to translate foreign taxes using the exchange rate in effect on the date of payment. 4. The foreign corporation reports on the cash basis. See section 986(a). 5. The foreign tax is denominated in an inflationary currency. See section 986(a)(1)(C). Report the exchange rate using the “divide-by convention” specified under Reporting exchange rates on Form 5471, earlier.

  • Column (l)

    • Enter the tax in functional currency. E&P takes into account foreign income taxes paid or accrued by the foreign corporation. The foreign corporation’s E&P is determined in the foreign corporation’s functional currency. See section 986(b).

Part I Taxes for Which a Foreign Tax Credit Is Allowed

      • Name of Payor Entity

      • EIN or Reference ID Number of Payor Entity

      • Country or U.S. Possession to Which Tax Is Paid (Enter code—see instructions. Use a separate line for each.)

      • Foreign Tax Year of Payor Entity to Which Tax Relates (Year/Month/Day)

      • U.S. Tax Year of Payor Entity to Which Tax Relates (Year/Month/Day)

Section 2 — Taxes Deemed Paid (Section 960(b))

      • Name of Payor Entity

      • EIN or Reference ID Number of Payor Entity

      • Country or U.S. Possession to Which Tax Is Paid (Enter code—see instructions. Use a separate line for each.)

      • PTEP Group (enter code)

      • Annual PTEP Account (enter year)

Part II Election

      • For tax years beginning after December 31, 2004, has an election been made under section 986(a)(1)(D) to translate taxes using the exchange rate on the date of payment? Yes No If “Yes,” state date of election —

Part III Taxes for Which a Foreign Tax Credit Is Disallowed

      • Name of Payor Entity 

      • EIN or Reference ID Number of Payor Entity 

      • Section 901(j)

      • Section 901(k) and (l) 

      • Section 901(m)

      • U.S. Taxes

      • Taxes Related to Section 959(c)(3) E&P

      • Other

      • Total

Schedule E-1: Taxes Paid, Accrued, or Deemed Paid on Earnings and Profits (E&P) of Foreign Corporation

      • Balance at beginning of year (as reported in prior year Schedule E-1)

        • Beginning balance adjustments (attach statement)
        • Adjusted beginning balance (combine lines 1a and 1b)

      • Taxes unsuspended under anti-splitter rules

        • Taxes suspended under anti-splitter rules

      • Taxes reported on Schedule E, Part I, Section 1, line 5, column (k)

      • Taxes carried over in nonrecognition transactions

        • Taxes reclassified as related to hovering deficit after nonrecognition transaction

      • Taxes reported on Schedule E, Part I, Section 2, line 5, column (i)

      • Other adjustments (attach statement)

      • Taxes paid or accrued on current income/E&P or accumulated E&P (combine lines 1c through 7)

      • Taxes deemed paid with respect to inclusions under section 951(a)(1) (see instructions)

      • Taxes deemed paid with respect to inclusions under section 951A (see instructions)

      • Taxes deemed paid with respect to actual distributions

      • Taxes on amounts reclassified to section 959(c)(1) E&P from section 959(c)(2) E&P

      • Other (attach statement)

      • Taxes related to hovering deficit offset of undistributed post-transaction

      • Balance of taxes paid or accrued (combine lines 8 through 14 in column (a))

      • Reduction for tested income taxes not deemed paid

      • Reduction for other taxes not deemed paid

      • Balance of taxes paid or accrued at the beginning of the next year. Line 18, column (a), must always equal zero. So, if necessary, enter negative amounts on lines 16 and 17 of column (a) in amounts sufficient to reduce line 15, column (a), to zero. For the remaining columns, combine lines 8 through 14.

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