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US Tariffs and Form 5472: What Indian Exporters and Business Owners Must Know in 2025

Created By : Kaushal Sharma
 
 
In August 2025, India’s export community is facing an economic squeeze like never before. US President Donald Trump has escalated tariffs on Indian imports to 50%, citing India’s energy ties with Russia — a move set to take full effect by August 27. Meanwhile, Indian exporters operating through US-based entities must ensure they remain compliant with IRS regulations, particularly when it comes to Form 5472, which demands timely reporting of related-party transactions or risk severe penalties. 
 
This blog explores the current tariff regime and its implications, breaks down Form 5472 requirements, POEM considerations, and provides actionable guidance to help Indian exporters navigate the heightened risks of 2025.
 

Understanding US Tariffs on Indian Goods in 2025

Escalation to 50%

  • On August 6, 2025, Trump issued an executive order adding a 25% penalty tariff on top of the existing 25%, raising the total tariff to 50%, effective from August 27, 2025 – with exemptions for goods already in transit. 

Escalation Impacts

  • Effective tariff rate surge: According to Fitch Ratings, the effective US tariff rate on Indian goods rose to 20.7% in 2025, up from a mere 2.4% in 2024. 
  • Market reaction: Equity benchmarks like Nifty 50 and BSE Sensex showed subdued activity amidst uncertainties, with shaken investor confidence. 
  • Sectoral vulnerabilities: Key export verticals including textiles, gems and jewelry, electronics, machinery and auto components, are particularly exposed. 
  • Macroeconomic consequences: Moody’s has warned that these punitive levies could hurt India’s manufacturing ambitions and slower its economic growth. 

What Is IRS Form 5472?

 
Form 5472 is used to report transactions between a US corporation (or a foreign-owned US disregarded entity) and its foreign-related parties under IRC sections 6038A and 6038C.  It acts as a compliance tool for the IRS to monitor cross-border financial activity.

Who Must File:

  • Any US corporation with ≥ 25% foreign ownership (direct or indirect).
  • A foreign-owned US disregarded entity, such as a single-member LLC, engaged in trade/business in the US. 

Filing Requirements:

  • Must be filed with Form 1120 by the corporate tax return’s due date – typically April 15 for calendar-year filers. Extensions (via Form 7004) can push this to October. 
  • Foreign-owned US disregarded entities must attach a pro forma Form 1120 along with Form 5472. (Electronic filing for such entities may be restricted; many must file via mail or fax)

Penalties for Non-Compliance:

  • Initial penalty: There is a $25,000 penalty per form for non-compliance.
  • Subsequent penalties: An additional penalty of $25,000 for each 30-day period after 90 days after IRS notice – no maximum cap.
  • Other risks: Incomplete or inaccurate reporting may lead to criminal sanctions under IRC sections 7203, 7206 and 7207.

The Connection: Tariffs Meet Form 5472

For Indian exporters using a US-incorporated entity (e.g., LLC) to facilitate imports into the US:
 
  • The LLC imports goods, subject to tariffs (now as high as 50%).
  • Simultaneously, financial transactions such as payments for goods, royalties, service fees, loans, etc. occur between the US LLC and the Indian parent.
  • These related-party transactions must be accurately documented and disclosed via Form 5472.
  • Failing in either domain (misapplied tariffs or non-reporting on IRS forms) can result in double jeopardy: unexpected customs charges plus IRS penalties.

2025 Compliance Updates for Indian Exporters

Tariff Timeline:

  • Phased implementation:
    • Initial increases took effect in early 2025.
    • Additional 25% surcharge applies from August 27, with partial exemptions for goods already in transit.

Form 5472 Updates:

  • No structural changes or threshold updates.
  • Filing deadlines and non-compliance penalty structures remain the same.
 
Thus, exporters must stay up-to-date with the latest tariff classifications and customs declarations, maintain proper related party documentation, and be compliant with the annual filing of form 5472.
 

Common Mistakes and How to Avoid Them

  1. Late filing of Form 5472: Triggers an initial $25,000 penalty with successive monthly escalations.
  2. Incorrect tariff classification: Leads to customs hold-ups or unforeseen duties.
  3. Inadequate documentation: Inadequacy in intercompany transactions – missing/unclear invoices, contracts or payment records – increase IRS exposure.
  4. Disregarding extension deadlines: In case of foreign-owned disregarded entities this may require paper filings.
 

Step-by-Step Compliance Checklist

  1. Determine Reporting Entity Status:
    You must confirm the US operation entity in both cases, be it a reporting corporation (≥ 25% foreign-owned) or a foreign-owned disregarded entity.
     
  2. Assess Tariff Classification and Duties:
    Identify correct HS codes and assess duties, including the 50% surcharge effective from August 27, 2025.
     
  3. Document Related-Party Transactions:
    Gather invoices, intercompany agreements, service invoices, loan documentation, royalty schedules, etc.
     
  4. File Form 5472 with Form 1120 or Pro Forma Return:
    Must file the calendar-year entities by April 15 (or October 15 with extension). Ensure a proper submission method (e-file vs mail/fax).
     
  5. Review and Monitor:
    An internal compliance vigilante may help prevent any lapses and provide audit readiness. 

Risk Mitigation and Strategic Response

  • Document Transfer Pricing: Ensure intercompany pricing is at arm’s length to withstand IRS scrutiny.
  • Explore Market Diversification: Given the tariff surge, it is important to diversify export destinations to mitigate dependence on the US.
  • Engage Early with Advisors: To prevent any kind of penalties, ensure early guidance from US tax and customs professionals.

POEM Considerations for Indian Businesses with US Subsidiaries

Alongside tariff and IRS compliance, Indian exporters must also evaluate the Place of Effective Management (POEM) rules under the Indian Income Tax Act. POEM determines the country in which a company is effectively managed and thus treated as a tax resident. The “substance over form” principle applies - tax residency is based on where key management decisions are made — not just the place of incorporation.
For a foreign company to be presumed outside India’s tax net, it must qualify as an Active Business Outside India (ABOI), meeting the below criteria:
 
  • Passive income < 50% of total income
  • Less than 50% of total assets, employees and payroll expenses situated in India
  • Majority of board meetings held outside India

Why This Matters Now:

With US tariffs on Indian goods rising to 50%, many exporters may shift manufacturing or supply chain functions abroad. If strategic and operational control of the US subsidiary continues to be exercised from India, the POEM could shift to India, making the US subsidiary taxable on global income in India.
 

Best Practices to Safeguard POEM:

Maintaining a clear separation between the Indian parent and US subsidiary is essential to avoid dual taxation risks while responding to tariff challenges.
 
  • Hold board meetings and make key decisions outside India.
  • Base senior management in the US, empowered to make independent operational calls.
  • Avoid day-to-day operational control from India over the US entity.

AKM Global’s Expertise: Your Partner in Compliance

Collaborating with AKM Global gives you:
 
  • Expert guidance on customs duty, including HS classification and tariff mitigation strategies.
  • End-to-end Form 5472 preparation and annual filing.
  • Audit defense in case of IRS notices, penalty assessments or customs inquiries.
  • Cross-border strategy development – balancing tax efficiency and trade compliance.
  • 2025 has brought Indian exporters targeting the US to a critical juncture. A steep 50% tariff hike now coincides with stringent IRS Form 5472 enforcement. Any misstep here could result in high contributions to customs and severe IRS penalties.

Take action now:

  • Re-assess your US import strategy and tariff implications.
  • Organize and file your Form 5472 accurately and promptly.
  • Seek immediate professional cross-border tax and customs advice – write to us at info@akmglobal.in for any assistance related to cross-border tax compliance.

FAQs

Q: Who should file Form 5472 in 2025?

 
Ans: Any US corporation with ≥ 25% foreign ownership or a foreign-owned US disregarded entity engaged in trade/business with related party transactions.
 

Q: Can Indian exporters avoid US tariffs?

 
Ans: No exemptions currently exist; punitive measures are broad based. Tariffs must be baked into landed cost.
 

Q: What penalties apply for late or missing Form 5472?

 
Ans: A base penalty of $25,000 per form with $25,000 extra for each 30-day period post 90 days after IRS notice. No cap.
 

Q: Does export volume matter for Form 5472?

 
Ans: No. Any related-party transaction, regardless of value, requires filing.
 
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