Navigating the new schedules k-2 and k-3

1 Navigating THE. NEW schedules . K-2 AND K-3. November 30, 2021. BDO USA, LLP, a Delaw are limited liability partnership, is the member of BDO International Limited, a UK company limited by guar antee, and forms part of the international BDO network of independent member firms. With You Today NEAL WEBER BEN VESELY BRET CARR. Tax Managing Director, Principal, Tax Partner Partnership Taxation International Tax Services BDO USA, LLP. BDO USA, LLP BDO USA, LLP. 2 Navigating THE NEW schedules K-2 AND K-3. schedules K-2 and K-3: Overview On June 3 and 4, 2021, the IRS released final versions of two new international-related schedules that are being added to passthrough entity returns: schedule K-2: Partners' Distributive Share Items International (19 Pages). schedule K-3: Partner's Share of Income, Deductions, Credits, etc.

2 International (20 Pages). Similar schedules have been released for S corporation returns The new schedules K-2 and K-3. 04. ( form 1120-S) and form 8865 (Return of Persons With will be required to be filed with Process Considerations Respect to Certain Foreign Partnerships) 2021 partnership/S corporation . 05. schedules K-2 and K-3 replace former line 16 of form 1065. schedule K and schedule K-1 (Foreign Transactions).They also . returns and 2021 schedules K-1. Instructions dated August 25, 2021. replace, supplement, and clarify reporting of certain amounts were posted to on formerly reported on schedule K, line 20c (Other items and September 22nd amounts), and schedule K-1, Part III, line 20 (Other information). 3 Navigating THE NEW schedules K-2 AND K-3.

3 Why New schedules K-2 and K-3? Standardized format aligns the information provided by partnerships to the international tax forms used by partners 01. Consistent information should allow partners to . 02. more easily prepare their tax returns Current Insight Better and more consistent data should allow the IRS to more efficiently verify taxpayer 04. compliance Process Considerations NOTICE 2021-39: penalty relief to filers who 05. fall short of the new requirements in tax years that begin in 2021, so long as they make a good- faith effort to comply. 4 Navigating THE NEW schedules K-2 AND K-3. schedules K-2 and K-3: Who Must File Any partnership required to file form 1065 and that has items relevant to the determination of the tax or certain withholding tax or reporting obligations of its partners under the international provisions of the Internal Revenue Code must complete the relevant parts of schedules K-2 and K-3.

4 The partnership need not complete the schedule K-2 and K-3 if the partnership does not have items of international tax relevance (typically, international activities or foreign partners). Penalties may apply for filing form 1065 without all required information or for furnishing schedules K-3 to partners without all required information. 5 Navigating THE NEW schedules K-2 AND K-3 5. schedules K-2 and K-3: Overview Examples of items of international relevance to be reported on schedules K-2 and K-3 (as opposed to on schedules K and K-1): Items of Items of Non- International International Foreign tax credit-related information including special Relevance Relevance apportionment factors related to, , R&E expenses, interest 01. expense, FDII deductions, etc.

5 Share of partner-level international items Sch K-2. Foreign partner's 02.. 19 XII parts Current Insight income and/or effectively pages (each with 1. page Sch K. connected income including distributive share of deemed sale subparts). items on transfer of partnership interest Information related to Investments in PFICs 04 Process Considerations Sch K-3. 05. Investments in CFCs, GILTI and Subpart F income inclusions Foreign derived intangible income 20. pages XIII parts (each with 1. page Sch K-1. III parts Base erosion and anti-abuse tax ( BEAT ) information subparts). 6 Navigating THE NEW schedules K-2 AND K-3. schedule K-2 & K-3 Overview of Parts (from schedule K-3). Part I Other Current Year International Information Part II Foreign Tax Credit Limitation Part III Other Information for Preparation of form 1116 or 1118.

6 Part IV Section 250 Foreign Derived Intangible Income ( FDII ) Information Part V Distributions from Foreign Corporations to Partnership Part VI Information on 951(a)(1) and 951A Inclusions (GILTI and Subpart F). Part VII Information to Complete form 8621 (PFIC Information). Part VIII Interest in Foreign Corporation Income (Section 960). Part IX Information for Base Erosion and Anti-Abuse Tax (BEAT). Part X Character and Source of Income and Deductions (ECI and Non-ECI). Part XI Section 871(m) Covered Partnerships Part XII Reserved Part XIII Foreign Partner's Distributive Share of Deemed Sale Items on Transfer of Partnership Interest (Section 864(c)(8)). 7 Navigating THE NEW schedules K-2 AND K-3 5. Check boxes to identify and report items Part I: Partnership's Other Current.

7 Not reported elsewhere on schedule K-2 or schedule K-3. Year International Information Includes checkbox for partner gain on personal property sales, partner loan Part I Other Current Year International Information transactions (upstream and downstream), hybrid interest and royalty deductions and Gain on personal property sale dual consolidated losses, as well as other Foreign oil and gas taxes international items. High-taxed income income from passive Splitter arrangements category is reported by tax rate groups Foreign tax translation ( , none, withholding tax greater than 0% and less than 15%, withholding tax that High-taxed income is 15% or more). Section 267A disallowed deduction Partner loan transactions Treas. Reg. rules generally allow for matching form 8858 information of interest expense and interest income form 5471 information for foreign tax credit purposes.

8 Notification of other attached forms ( , Other forms form 8858, form 5471). Partner loan transactions Other international transactions ( , effectively connected section 163(j) items Dual consolidated loss for foreign partners) and other forms ( , Other international items (attach description and statement) form 5713, 8833, 8621, 8865, 8990). 8 Navigating THE NEW schedules K-2 AND K-3. Partnership's income or loss by source Part II: Foreign Tax Credit Limitation . and separate category of income to enable partners to calculate foreign tax credits on Forms 1116 or 1118. Who Must File: Partnerships with direct or indirect partners that are eligible to claim a foreign tax credit (for this purposes, it does not matter whether the partnership had any foreign tax paid or accrued).

9 If no sufficient information about a direct or indirect partners is available, must presume that Part II is required. Detailed gross income item reporting by country (in items A, B and C) and by foreign tax credit basket. The use of Various or OC in lieu of a foreign country is specifically not allowed. Section 1 consists of 24 lines for various categories of gross income; Section 2. includes approximately 25 line items for deductions associated with different categories of gross income. 9 Navigating THE NEW schedules K-2 AND K-3 42. Part III: Other Information Section 1 R&E Expense Apportionment Factors (Treas. Reg. ( form 1116 or 1118) ). Section 2 Interest Expense Apportionment Factors (Treas. Reg. , , and ). Section 3 Foreign-Derived Intangible Income (FDII) Deduction Apportionment Factors Section 4 Foreign taxes by tax type, basket, date paid, exchange rate used, foreign tax redeterminations Section 5 Other Tax Information (negative and positive 743.)

10 Adjustments). 10 Navigating THE NEW schedules K-2 AND K-3 42. Certain partners will use this information Part IV: Information on Partners' . to claim and figure a Section 250. deductions on form 8993. All partnerships Section 250 Deduction (FDII) with direct or indirect corporate partners (other than REITs, RICs, and S. Corporations) must complete part IV. A. partnership that does not have sufficient information about its partners must presume that it has a direct or indirect corporate partner, and complete Part IV. accordingly. Even if the partnership does not generate any foreign-derived deduction eligible income ( FDDEI ), it should report qualified business asset investment ( QBAI ) and deduction eligible income ( DEI ) to its partners as those components may reduce a direct or indirect corporate partner's overall FDII.