Filing Form 1120-F for foreign corporation - specific questions

Thanks so much for this detailed response! For our R&D allocation, would you recommend using the gross receipts method since it's more straightforward? Our US operations represent about 22% of our global revenue. Also, regarding the ECI documentation - we have some software licensing revenue from US customers that's handled through our Japanese parent but supports our US operations. How should we treat that for 1120-F purposes?

The gross receipts method can work well for allocating R&D if there's a reasonable correlation between sales and R&D benefits. Just document your methodology thoroughly in case of review. For software licensing revenue through your Japanese parent that supports US operations, this is a complex area. It depends on whether the US entity is involved in generating that income. If US personnel are negotiating licenses or providing customer support, some portion might be ECI. However, if all activities occur in Japan and there's just passive licensing to US customers, it might not be ECI. Consider a transfer pricing study to properly document these transactions between related entities.

Does taxr.ai handle complicated stuff like Subpart F income and GILTI calculations? Our parent company is structured with multiple tiers and I'm drowning in trying to figure out what we need to report on the 1120-F versus what stays on the foreign parent's books.

I'm interested but skeptical. Our situation includes branch profits tax calculations and we have operations in three states. Does it handle state filing requirements too or just federal? And how does it deal with treaty benefits if we're claiming reduced withholding rates?

Yes, the system handles Subpart F income and GILTI calculations. It asks questions about your corporate structure and ownership percentages, then helps determine what needs to be reported where. It was especially helpful for figuring out which income streams needed to be treated as effectively connected income. For state filing requirements, it absolutely covers that. It flagged that we needed to file in states where we had nexus but hadn't been filing. As for treaty benefits, that's actually one of its strengths - it analyzes your situation against the applicable tax treaty (in your case, it would check the US-Japan treaty provisions) and helps you properly document qualification for reduced rates.

Wait, how does this service actually work? Does it just call the IRS for you? I'm confused about how they're able to get through when no one else can. We've been trying for weeks to get clarification on how to report certain transactions between our foreign parent and US branch.

This sounds like complete BS. I've been in corporate tax for 15 years and there's no "secret passage" to the IRS. They're understaffed and overwhelmed - no third party service can magically fix that. I'd be very wary of any service claiming they can get you through faster than normal channels. Probably just trying to sell your info.

It doesn't call the IRS for you - it uses technology to navigate the IRS phone system and holds your place in line. When an agent is about to pick up, it calls and connects you directly. It's completely legitimate and they don't access any of your tax information. I was skeptical too until I tried it. The normal IRS international business line had me on hold for 2+ hours before disconnecting me three times in a row. With Claimyr, I got through to a specialized agent who actually understood Form 1120-F and could answer my specific questions about currency translation and headquarters expense allocation methods.

That's an interesting approach! Do you use a specific time-tracking system for this? And did you have to provide any specific format of documentation to the IRS during your audit? We have engineers in Japan who support both markets, so this might work better than gross receipts method.

We use Harvest for time tracking with custom project codes that map to different geographic markets. For the IRS, we provided quarterly summaries showing hours by project/market along with a narrative explanation of our methodology. We also maintain documentation of specific work products developed by our engineering teams that demonstrate the connection to US operations. The key is showing a clear, consistent methodology that reasonably reflects reality. During our audit, they seemed more concerned with consistency than with which specific allocation method we chose.

This is tricky territory. The Limitation on Benefits provisions are designed specifically to prevent "treaty shopping" through intermediate jurisdictions. Since Hong Kong doesn't have a tax treaty with the US, but Japan does, your structure raises flags. You'll need to look closely at the ownership test, base erosion test, and active trade or business test in the US-Japan treaty. If your Hong Kong entity is just a holding company with no substantial business activities, and the Japanese entity has genuine economic substance and business purpose, you might still qualify under the derivative benefits provision. But you should definitely get specialized international tax advice on this one.

Thanks for the insight. The Hong Kong entity is indeed primarily a holding company, while all management decisions and operational control happen in Japan. I'll look into those specific tests in the treaty. Appreciate the direction!

Speaking of Form 8833, how specific do you need to be in describing the treaty provisions you're relying on? Do you cite specific articles and paragraphs, or just generally reference the treaty? Our tax software gives very limited space for these explanations.

Always cite the specific treaty article, paragraph, and subparagraph when completing Form 8833. For instance, don't just say "US-Japan Treaty" - say "Article 7(1) of the US-Japan Income Tax Treaty" and briefly explain how it applies to your situation. If space is limited in your software, attach a supplemental statement. Being precise about which provisions you're relying on demonstrates to the IRS that you've done your homework and have a solid basis for your position. In my experience, vague treaty claims get questioned much more often than specific, well-documented ones.

This is incredibly helpful, Miguel! I hadn't even considered the branch profits tax implications - that's definitely something I need to discuss with our CPA immediately. Regarding Form 5472, we do have significant intercompany transactions (management fees, technology licensing, shared services) that I'm now worried we haven't been reporting properly. Is there a specific threshold for related party transactions that triggers the Form 5472 requirement, or is it any transaction at all? Also, your point about documenting US activities for the software licensing revenue is spot on. Our US team does handle customer implementation calls and provides ongoing technical support, even though the licenses are sold through Japan. It sounds like we definitely need to treat at least a portion of that as ECI. Do you have any guidance on reasonable allocation methods for splitting that revenue between US and Japanese activities?