Country-by-country reporting: Is your organization prepared?
Co-hosted with Bloomberg BNA
RECORDED WEBCAST |
Globally active companies have a lot to consider with new regulations being regularly enacted in response to the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action Plan. One of the most immediate changes relates to the need for country-by-country reporting (CbCR). It is anticipated that the IRS will finalize proposed regulations by the end of June. The regulations would require the filing of a new CbCR tax form by any U.S. taxpayer that is a parent of a multinational enterprise (MNE) group with $850 million or more in global group revenues and would be effective for fiscal years beginning on or after July 1, 2016. Additionally, organizations may be subject to earlier tax filing deadlines outside the United States.
During this 60-minute webcast, RSM specialists from our transfer pricing and international tax practices will explore what new CbCR regulations could mean for businesses in the United States and abroad.
Program attendees can expect to learn:
- The background of CbCR
- The CbCR requirements and their potential impact on U.S. multinationals, including practical solutions to challenges businesses have already encountered
- The extent of reputational and confidentiality risks posed by the potential publication or leaking of the data
- U.S. and non-U.S. technology considerations that can help companies prepare for and comply with this new global tax requirement
Following are answers to questions submitted during the "Country-by-country reporting: Is your organization prepared?" live webcast:
Q: Can the company change the data source in year two or three? Is a penalty expected if there is a change?
A: A consistent approach is required for reporting the number of employees under section 1.6038–4(d)(3)(iii):
(iii) Number of employees. For purposes of this section, the number of employees on a full-time equivalent basis may be reported as of the end of the accounting period, on the basis of average employment levels for the annual accounting period, or on any other reasonable basis consistently applied across tax jurisdictions and from year to year. Independent contractors participating in the ordinary operating activities of a constituent entity may be reported as employees of such constituent entity. Reasonable rounding or approximation of the number of employees is permissible, provided that such rounding or approximation does not materially distort the relative distribution of employees across the various tax jurisdictions. Consistent approaches should be applied from year to year and across entities.
As to the question when applied to sources of financial amounts, the proposed regulations preamble included the following statement (bolded text added):
“It is expected that Form XXXX, Country-by-Country Report, will include a section to provide additional information, including a brief description of the sources of data used in preparing the form, and, if a change is made in the source of data used from year to year, an explanation of the reasons for the change and its consequences. Permission to change the accounting principles, to make new or different adjustments for differences in accounting principles, or to change the source of data used in preparing Form XXXX, Country-by-Country Report, is not required.”
However, the final regulation preamble contains no such language and the final regulation section 1.6038–4(e)(2) only states the following:
(2) Sources of financial amounts. All amounts furnished under paragraph (d)(2) of this section, other than paragraph (d)(2)(viii) of this section, should be based on applicable financial statements, books and records maintained with respect to the constituent entity, regulatory financial statements, or records used for tax reporting or internal management control purposes for an annual period of each constituent entity ending with or within the period described in paragraph (c) of this section.
As for any penalties, the final regulations are silent as to penalties for not using consistent data sources. Instead, the preamble to final regulations states:
“The penalty rules under section 6038 generally apply, including reasonable cause relief for failure to file.”
Q: If a U.S. entity is a subsidiary of an ultimate parent in a foreign jurisdiction, will any U.S. entity be required to file the Form 8975?
A: No, the ultimate parent in the foreign jurisdiction is responsible and required to file the form in its foreign jurisdiction. The form will likely have a different name or number in the foreign jurisdiction, but will have the same content as Form 8975 since it is based on the OECD’s CbCR template (e.g., tables one, two and three). Once the ultimate parent in the foreign jurisdiction files the form/tax return with the local tax authorities, the foreign tax authorities will automatically provide the form to the IRS via the exchange of information we mentioned in the webcast.
Note, there may be some exceptions and circumstances when the U.S. entity may have to file the form as a substitute (or surrogate) on behalf of its ultimate foreign parent.
Q: If a U.S. parent led group has WW revenues of $800 million and is below the U.S. threshold, but because of existing fluxes in currency rates since the €750 million European Union (EU) threshold was established, the WW revenue exceeds the EU threshold, does the US company have to file CbC reports in all EU countries where it has foreign subsidiaries?
A: The reporting MNE is the ultimate parent of the MNE group. In this case, a U.S. parent led group files (or does not file) a CbC report according to the parent jurisdiction’s (i.e., United States) CbC reporting requirements. If no report is required to be filed in the United States because the MNE group has revenues of less than $850 million, then there are no reporting requirements in any other countries either. Moreover, on a related matter, the OECD guidance issued in June confirmed that where the €750 million threshold was applied correctly at inception as of January 2015, there is no need to adjust for currency fluctuations.
Q: For the €750 million size, are separate, but commonly-owned companies grouped together, or does it track to tax filings?
A: The term ‘group’ for purposes of the definition of a MNE required to do CbC reporting, means a collection of enterprises related through ownership or control such that it is either required to prepare consolidated financial statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange. Thus, financial accounting figures are used for this purpose.