The Tax Reporting Group

A journey of a thousand miles begins with a single step: understanding the basics of partnership tax and structures is necessary to understand and answer questions related to information reporting and withholding for investment management. This session will discuss partnership income allocation; distributions vs. allocations; filings (Schedules K-1, K-2, and K-3); general and limited partners; and fund structures and tiered partnerships.

Partnerships are common vehicles for foreign investors to get exposure to the U.S. market. Payments of passive income (FDAP) are subject to withholding and reporting when made to foreign persons, including foreign partners. Partnerships may be obligated to withhold up to 30% on payments (or allocations of income) to foreign partners and file Forms 1042-S. Special rules like the lag method allow partnerships to synchronize Form 1042-S filing with their Schedules K-1. Some partnerships may even consider becoming withholding foreign partnerships to eliminate the need to pass up partner documentation, but must agree to periodic reviews. This session will discuss these rules in detail in order to provide insight into how partnerships tackle these US information reporting obligations. 

While income that is effectively connected with a U.S. trade or business (ECI) is usually not subject to withholding, special rules apply to income earned by foreign partners through a partnership engaged in a U.S. trade or business. This session will describe the documentation collection, information reporting (Forms 8804/8805), and withholding that partnerships are obligated to perform on payments allocable to their foreign partners. We’ll also discuss special rules applicable to sales of U.S. Real Property Interests and sales of interests in partnerships by foreign partners. 

With the U.S. FATCA regime a decade old and the growth of jurisdictions applying the CRS, partnership funds and certain other entities within fund structures that are considered financial institutions must ensure they are properly collecting documentation on their partners/owners, and reporting on many of those partners/owners to multiple jurisdictions for both FATCA and CRS purposes. This effort requires significant data collection and data wrangling efforts, in addition to monitoring of local jurisdiction filing requirements. Further, classifying the entities within fund structures is critical to understanding the obligations of each of those entities.  Finally, this session will address the local jurisdiction reviews of the compliance of those the financial institution entities. 

The U.S. and other jurisdictions have increasingly flexed their muscles in identifying tax avoidance. There’s been an significant uptick in the U.S. in audits of partnership filings of Forms 1042 and 8804. Additionally, we have begun to see jurisdictions outside the U.S. make inquiries and even in some instances, institute penalties associated with FATCA and CRS reporting.  This session will discuss best practices to mitigate enforcement action by the IRS and these local jurisdictions.

With digital asset markets growing and their uses expanding, more and more partnerships are investing with the potential for generating reportable income related to their digital asset activity. This session will discuss potential reporting and withholding under U.S. and international withholding and reporting regimes, such as the newly released §6045 broker regulations in the U.S., and how such regimes can impact partnerships.