What Is Schedule M Form 5471

This schedule is different from many of the Form 5471 Schedules that are required for the different categories of filers or taxpayers. 

This schedule is not an income tax return to report foreign tax, but rather an information return of U.S. persons designed to measure Controlled Foreign Corporation (“CFC”) intercompany payments. This Schedule requires the majority U.S. owner to provide information on transactions between the Controlled Foreign Corporation and its shareholders or other related persons. So this needs to be filed irrespective of income generated that foreign tax was paid on and or tax credit application. 

Who Must Complete Schedule M

Any U.S. citizen, corporation, partnership, trust, or estate who has at least 10% ownership in a foreign corporation, needs to file Form 5471.

Form 5471 and its accompanying schedules must be completed and filed by the following categories of persons or taxpayers:

Category 1 Filer

Officers, directors, or ten percent (or greater) shareholders in a CFC who are US persons. Category 1 includes U.S. shareholders of Section 965 “specified foreign corporation” at any tax year of the foreign corporation, and where that taxpayer-owned that stock on the last day of that year.

A category 1 filer does not need to complete form 5471 M. However they do need to file form 5471 schedule J. 

Category 2 Filer

U.S. persons who are in relation to the foreign corporation a director or officer, where since the last time Form 5471 was filed by a taxpayer, a US shareholder or person has acquired at least 10% or acquired an additional 10% or more in the foreign company.

Category 2 filers do not need to file form 5471 schedule M.

Category 3 Filer

U.S person who 

    • Has acquired a cumulative 10% or greater ownership in the outstanding stock of the foreign corporation;
    • Since the last filing the US person has acquired an additional 10% or more or ownership in such stock;
    • Owns 10% or greater of the value of the outstanding stock of the foreign corporation when it is reorganized, or 
    • Disposes his stock in the foreign corporation to reduce the value of the person’s ownership to less than 10%, or who becomes a U.S. person while owning 10% or more in value of the outstanding stock of the foreign corporation.
Category 4 Filer

Category 4 filers are U.S. persons who had “control” of a foreign corporation for an uninterrupted period of at least 30 days during the foreign corporation’s accounting period. 

Control is defined as more than 50% of voting power or value, with Section 958 of the Internal Revenue Code attribution rules applying. 

The M schedule to 5471 must be completed by Category 4 filers to report the transactions that occurred during the CFC’s accounting period ending with or within the U.S. person’s tax year to the Internal Rev Services.

Category 4 filers also need to complete 5471 schedule J. 

Category 5 Filer

U.S. persons who are 10% or more shareholders in a corporation that was a CFC for an uninterrupted period of 30 days during its annual accounting period and who owned stock in the CFC on the last day of its annual accounting period.

They don’t need to file the M schedule for the current year and therefore form 5471 instructions for the M schedule can be ignored. They do however need to file schedule J of the 5471 and take note of the respective instructions. 

What Category of Filer Must File Attach a Schedule M to their IRS Form 5471

Category 4 filers, as explained above, are the only one out of the 5 categories that need to complete Schedule M.

Transactions of Foreign Corporations

There are various types of different transactions that are included and reportable to the Internal revenue service on this Schedule in the current year. We recommend you refer to the instructions on Form 5471 for further details, especially in respect of a tax credit for purposes of your income tax return. 

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Transactions that Must be Disclosed on Schedule M

This Schedule requires the CFC shareholder or related party to disclose a number of different transactions to the IRS. Anyone completing this Schedule should understand that the IRS will utilize certain information disclosed on this informational return to ensure that the CFC shareholders and related parties report and pay tax on their actual share of income arising from so-called controlled transactions. The IRS, therefore, adopts the regulations under the IRC to adopt an arm’s length standard for evaluating the appropriateness of each transaction under the transfer pricing rules. 

Reporting Transactions on Schedule M

Every U.S. (Category 4 filer) must file this Schedule to report the transactions that occurred during the foreign corporation’s annual accounting period ending with or within the U.S. person’s tax year to the IRS. If a U.S. corporation has stock ownership in a foreign corporation and is a member of a consolidated group, list the common parent as the U.S. person filing this Schedule with the IRS. 

Examples:

  • Distributions by way of Dividends received (exclude hybrid dividends, deemed distributions under subpart F income, and distributions of previously taxed income. 
  • Distributions of Hybrid dividends 
  • Distributions of Dividends paid (exclude hybrid dividends paid)
  • Disposition of its stock in trade
  • Premiums received for insurance or reinsurance

Columns of Schedule M

This Schedule contains six columns.

The preparer of this Schedule should enter the totals in part I for each type of translation listed under column (a) that occurred during the prior year’s annual accounting period being disclosed on the Form 5471 by the CFC and the persons listed in columns (b) through (f). 

All amounts must be stated in U.S. dollars translated from functional currency (functional currency refers to the main currency used by a business or unit of a business) at the average exchange rate for the foreign corporation.
Columns (b) through (f) are broken down as follows:

(b) U.S. person filing this return

If the CFC entered into a transaction or transactions with the U.S. person filing the Form 5471, the transactions must be listed under this column.

(c) Any domestic corporation or partnership controlled by a U.S. person filing this return

If the CFC entered into a transaction or transactions with a domestic corporation or partnership controlled by a U.S. person, the transactions must be listed under this column.

(d) Any other foreign corporation or partnership controlled by a U.S. person filing this return

If the CFC entered into a transaction or transactions with a foreign corporation or partnership controlled by a U.S. person, the transactions must be listed under this column.

(e) A U.S. shareholder with 10% or more of a CFC (other than the U.S. person filing Form 5471)

If the CFC entered into a transaction or transactions with a 10% or more U.S. shareholders of a CFC (domestic corporation for example) with an individual who is a 10% shareholder, but not a U.S. person, the transactions must be reported under this column.

(f) The 10%-or-more U.S. shareholder of any corporation controlled the foreign corporation

If the CFC entered into a transaction or transactions with a 10% or more U.S. shareholder of a CFC, the transactions must be reported under this column.  

Methods for Estimating an Arm’s Length Charge for Transfers of Tangible Property

Comparable Uncontrolled Price Method

The first method is characterized as the “comparable uncontrolled price method,” referred to as the “CUP” method. The basic approach is to examine comparable sales where the parties are unrelated. 

Resale Method

The second is the “resale price method.” In terms of this method, the price for the controlled transaction is equal to the resale price to an uncontrolled buyer less an “appropriate gross profit.” The appropriate gross profit is determined by multiplying the applicable resale price by the “gross profit margin” (expressed as a percentage of total revenue (rev) derived from sales) earned in comparable uncontrolled transactions. 

Cost Plus Method

The third method is the “cost-plus method.” In terms of this method, the transfer price is generally equal to the cost of production plus an amount determined by the application of a “gross profit markup” to that cost.

The Comparable Profits Method

The fourth is the “comparable profits method” (“CPM”). This method determines an arm’s length result based on profit level indicators derived from similarly situated uncontrolled taxpayers. 

Profit Split Method

The fifth is the “profit split method.” This method evaluates whether the allocation of the combined operating profit attributable to a controlled transaction is arm’s length by reference to the relative value of each controlled taxpayer’s contribution to that combined profit.  

The Unspecified Method

The sixth is the “unspecified method,” described in Treasury Regulation Section 1.482-3(e)(1). The method selected is to be applied in accordance with Treasury Regulation Section 1.482-1 and should take into account the general principle that all of the “realistic alternatives” should be considered when valuing these transactions.

Comparable Uncontrolled Transaction Method

The comparable uncontrolled method (“CUT”) is similar to the CUP method used for transfers of tangible property. Therefore, under the CUT method, the arm’s length charge for the transfer of an intangible is the amount charged for comparable intangibles in transactions between uncontrolled parties, adjusted for any material differences that exist between the controlled and uncontrolled transactions. 

Comparable Profits Method

The same comparable profits methods used to determine arm’s length prices for transfers of tangible property can be used to determine arm’s length sales prices or royalty/rent rates for transfers of intangible property. 

Schedule M Reporting Requirements

This schedule requires the Controlled Foreign Corporation shareholder or related party to disclose a number of different transactions to the IRS. 

Additional Schedule M Form 5471 Instructions Tips

  • Every U.S. person described in Category 4 must file Schedule M to report the transactions that occurred during the foreign corporation’s annual accounting period ending with or within the U.S. person’s tax year.
  • If a U.S. corporation that owns stock in a foreign corporation is a member of a consolidated group, list the common parent as the U.S. person filing Schedule M. It is important to note that you translate the amounts from functional currency to U.S. dollars, by using the average exchange rate for the foreign corporation’s tax year. See IRC section 989(b).
  • Report the exchange rate in the entry space provided at the top of Schedule M using the “divide-by convention” specified under Reporting exchange rates on Form 5471, earlier.

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Frequently Asked Questions:

  1. What is Schedule M on Form 5471?
    1. Schedule M is designed to measure Controlled Foreign Corporation (“CFC”) intercompany payments. Schedule M requires the majority U.S. owner to provide information on transactions between the Controlled Foreign Corporation and its shareholders or other related persons.
  2. What is reported on Form 5471?
    1. Reporting requirements may be as simple as what percentage of stock the taxpayer owns and company information, to reporting the corporation’s entire income from financial statements and balance sheets and the application of global intangible low-taxed income.
    2. That’s why we recommend speaking to specialists at Asena Advisors to guide you. 
  3. Who must file Schedule Q Form 5471?
    1. Schedule(s) Q (Form 5471) are required to be filed only by Category 4, 5a, and 5b taxpayer filers. Read above for more in-depth information.
  4. What is the purpose of a 5471?
    1. The purpose of it isn’t for a taxpayer to file tax information, but rather so the IRS has a record of which U.S. citizens and residents have ownership in foreign corporations. The IRS wants to prevent people from hiding overseas assets and being aware of who owns what and in which countries helps it do that.
  5. What are some of the Schedules in Form 5471
    1. The Form 5471 schedules have various parts referred and need to ensure you know who needs to fill in part i or part ii for example. The schedules are:
      1. Form 5471 Schedule A – Stock of the Foreign Corporation 
      2. Form 5471 Schedule B – U.S. Shareholders of Foreign Corporations
      3. Form 5471 Schedule C – Income Statement
      4. Form 5471 Schedule E – Income Accrued, War Profits, and Excess Profits Taxes Paid or Accrued
      5. Form 5471 Schedule F – Balance Sheet
      6. Form 5471 Schedule G – Other information
      7. Form 5471 Schedule H – Current earnings and profits
      8. Form 5471 Schedule I – Summary of Shareholder’s Income from
      9. Foreign Corporation
      10. Form 5471 Schedule J – Accumulated earnings and profits of Controlled Foreign Corporations
      11. Form 5471 Schedule M – Transactions between controlled foreign corporation and shareholders or other related persons
      12. Form 5471 Schedule O – Organization or reorganization of a foreign corporation, and acquisitions and dispositions of its stock (Part I to be completed by U.S. officers and directors, Part II to be completed by U.S. shareholders)
      13. Form 5471 Schedule P – Used to report previously tax earnings and profits (PTEP) of the U.S. shareholder of a controlled foreign currency (“CFC”) in the CFC’s functional currency. The term PTEP refers to the earnings and profits (“E&P”) of a foreign corporation. In most cases, special ordering rules under Section 959 of the Internal Rev Code apply in determining how E&P is reported on Schedule P. 
      14. Form 5471 Schedule Q – Used to report a CFC’s income, deductions, taxes, and assets by CFC income groups. A CFC shareholder required to complete Schedule Q will be required to disclose subpart F income in functional currency by each relevant country.
      15. Form 5471 Schedule R – Used to report basic information pertaining to distributions from foreign corporations. According to the instructions for Schedule R, the information reported on the schedule is required by Sections 245A, 959, and 986(c) of the Internal Rev Code.
For more information on 5471 Schedule M, please contact one of our specialists at Asena Advisors. We make sure that your specific needs are catered for.

Shaun Eastman

Peter Harper