On June 29 the IRS issued final regulations that require country-by-country (CbC) reporting by certain multinational enterprises (MNEs) that are headquartered in the United States. These regulations adopt, with a few changes, the proposed regulations issued on December 23, 2015, taking into account certain comments received and a public hearing on May 13th
. These final regulations apply to reporting periods of the ultimate parent entity of a U.S. MNE group that begin on or after June 30, 2016. As discussed below, the final regulations also allow voluntary reporting for tax periods beginning on or after January 1, 2016 and before June 30, 2016.
These regulations are based on the Organization for Economic Co-operation and Development’s (OECD) final package of measures to address base erosion and profit shifting activities (the BEPS project). The BEPS project aims to develop proposals to close gaps in international tax rules that allow corporate profits to escape taxation. The OECD identified 15 key areas (action items) to be addressed. Action 13 addresses country-by-country reporting, including transfer pricing documentation, which will give countries a global picture of MNEs. Under Action 13, member countries were encouraged to implement CbC reporting for years beginning January 1, 2016 and thereafter. The U.S. has implemented Action 13 through the issuance of these regulations.
A U.S. based MNE will now be required to file a CbC report with the IRS. In order to be subject to reporting, the MNE group must include at least one business entity organized in, or a tax resident of, a jurisdiction outside the United States and the group must have revenues of $850 million or more for its preceding annual accounting period. The IRS is drafting the new Form 8975, Country-by-Country Report, to report the required information. The report will disclose gross revenues (intercompany and third party), net profits, taxes paid, net book value of tangible assets, number of employees, and other information on an aggregate basis in each country in which the MNE has one or more tax resident entities. The final regulations provide that tax jurisdiction information with respect to entities that do not have a tax jurisdiction or residence will be aggregated and reported in a separate “stateless entities” row of the CbC report. A stateless entity includes an entity treated as a partnership in a foreign jurisdiction that has no permanent establishment and therefore no tax jurisdiction of residence. The final regulations clarify that the revenue and profit of a stateless entity is also included in the information for the tax jurisdiction of the residence of the stateless entity’s owner (such as a partner). The IRS indicated that this double counting is intentional.
The preamble to the final regulations states that the IRS has determined that CbC reports constitute tax return information and are thus subject to the confidentiality protections of IRC Section 6103. This is consistent with the final BEPS report, which requires tax administrations to take all reasonable steps to prevent public disclosure of CbC reports. Note that these protections could be overridden to the extent that other jurisdictions adopt CbC reporting with mandatory public disclosure provisions.
The proposed regulations indicated CbC reporting would not be required or allowed for periods beginning prior to the issuance of final regulations. However, several OECD member countries have already implemented CbC reporting for the 2016 calendar year, in accordance with the recommendations of the final BEPS report. The BEPS report provides that if the headquarters of an MNE is in a jurisdiction that has not implemented CbC reporting, that other countries could require surrogate CbC reporting under their own rules. Many commenters expressed concern about the reporting periods before the U.S. rules were proposed to take effect (the “gap period”). The solution provided by the IRS in the final regulations was for U.S. MNEs to file a report with the IRS for the gap period, so that other countries which had already implemented CbC reporting could not step in and claim the U.S. MNE had not fulfilled its reporting obligation. The procedures for reporting CbC information during this gap period will be provided in separate, forthcoming guidance from the IRS. On the same day these final regulations were released, the OECD issued “Guidance on the Implementation of Country-by-Country Reporting,” recommending that other countries accept reports filed voluntarily in the U.S. and other countries for years beginning on or after January 1, 2016.
Under BEPS Action 13, the CbC reports should be filed by the end of the year following the reporting period. However, the proposed and final regulations issued by the IRS require the report to be filed by the due date of the corporate income tax return of the MNE parent, including extensions. The preamble to the final regulations indicates that the failure to file penalty rules under IRC Section 6038 will apply to Form 8975, including reasonable cause relief for failure to file.
The preamble to the final regulations indicates that the CbC report is to be used as a “high-level” risk assessment tool and that transfer pricing adjustments will not be made solely on the basis of the information contained in the CbC report. The U.S. intends to incorporate such limitations on the use of the information into Competent Authority Agreements negotiated with its treaty and tax information exchange partners. The regulations do not provide any guidance as to how these CbC reports should be used in conducting a risk assessment.
Form 8975 represents the next step toward global tax transparency as the U.S. prepares to simultaneously exchange these CbC reports with treaty and tax information exchange partners with which it enters into Competent Authority Agreements. A significant amount of work still remains for the IRS to complete these agreements necessary for the exchange of CbC reports on a confidential basis with foreign jurisdictions.
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