Frequently asked questions on country-by-country reporting
INSIGHT ARTICLE |
The IRS has issued final regulations requiring annual country-by-country reporting (CbCR) by some U.S. taxpayers that are the ultimate parent of a multinational enterprise (MNE) group. These regulations are based on model legislation from the Organisation for Economic Co-operation and Development (OECD) and are part of the project addressing base erosion and profit shifting (BEPS). We’ve outlined some of the frequently asked questions around CbCR* and how it can be managed by internationally active companies in this document.
1. When is CbCR effective?
The U.S. regulations require CbCR for fiscal years that begin on or after June 30, 2016. Therefore, a calendar year MNE must begin reporting in the United States for 2017. However, other countries that have passed CbCR legislation require reporting for 2016. The preamble to the final U.S. regulations states that Treasury intends to allow voluntary filing for reporting periods that begin on or after Jan. 1, 2016 but before the applicability date of the regulations. Forthcoming guidance will provide procedures for the voluntary filing.
2. When is the report due?
The OECD recommendations call for a due date not later than one year following the close of the MNE’s fiscal year. This due date has been adopted by most countries with CbCR legislation. The U.S. regulations require the CbC report to be filed with the U.S. MNE’s income tax return for the year, thus filing is required no later than eight and a half months after year-end. This will be Sept. 15, 2018 for calendar year taxpayers while fiscal year taxpayers will be subject to earlier filings.
3. How is it filed?
The OECD has developed a model template to aid countries in collecting the required information. The IRS developed a form that is based on the OECD model template, Country-by-Country Report, Form 8975.
4. Are there penalties associated with late filing or failure to file?
The OECD did not include penalty recommendations in its report. The U.S. regulations do not include any new penalties for failure to file a CbC report, though general reporting-related penalties may apply. Other countries will impose penalties based on specific or general penalty provisions. Penalties may be civil and criminal, depending on a country’s law.
5. Will this information be shared with other countries?
Yes. The CbC report is filed with the ultimate parent entity and shared between jurisdictions through automatic exchange of information, pursuant to government-to-government mechanisms such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties, or Tax Information Exchange Agreements (TIEAs). As of June 30, 2016, 44 countries have signed the Multilateral Competent Authority Agreement for the automatic exchange of CbC reports. In March 2016, an agreement was reached enabling automatic exchange of CbC reports between EU member states.
6. Will this information be made available to the public?
The OECD is supportive of confidentiality and has proposed confidentiality protections. The United States remains committed to confidentiality, stating that all automatic information sharing by the United States would be suspended should confidentiality be breached.
The European Commission has indicated that it is considering whether public reporting of some of the information contained within the reports should be mandatory.
7. What measures are in place to maintain the confidentiality of this information once it is provided and shared among jurisdictions?
The OECD’s proposed confidentiality protections include a framework for government exchanges of information contained within the CbC reports. The framework recommends enforceable legal protections similar to information exchange provisions within tax treaties, tax information exchange agreements, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, or the Global Forum on Transparency and Exchange of Information for Tax Purposes.
8. How will tax authorities use this information?
The information provided in the CbC reports is intended to give governments a better understanding of whether companies may be engaged in practices designed to artificially shift substantial amounts of profits to low-tax jurisdictions where there is little or no substance to support such profits. It is intended as a high-level transfer pricing risk assessment tool, but is not meant to replace a detailed transfer pricing analysis or provide conclusive evidence that a company’s transfer pricing policies are appropriate or inappropriate.
9. What are the risks to MNEs associated with CbCR?
Both the OECD guidelines and the U.S. regulations leave a number of aspects of the report to the reporting MNE’s discretion, such as the source of the data and the basis on which to report employees. Further, some of the definitions are ambiguous and some of the requirements are inconsistent, particularly with respect to permanent establishments. These issues make it likely that countries will interpret the reporting requirements and the information contained within the report differently. If an assessment is made solely based on this information, the taxpayer may be faced with double taxation or engaged in a lengthy and costly competent authority process.
10. Which entity or entities within the group must file?
Under the U.S. regulations, a U.S. business entity that is the ultimate parent entity of a U.S. MNE group with revenues of $850 million or more of consolidated group revenue, for the preceding annual accounting period, will be required to file the U.S. CbC report. Other countries that have adopted CbCR legislation generally follow the OECD’s recommendations requiring reporting when group revenues exceed €750 million.
11. What is a constituent entity?
A constituent entity is a separate business unit of the MNE group that is included in the consolidated group for financial reporting purposes. This includes a permanent establishment if a separate income statement is prepared for regulatory, financial, internal management or tax purposes. Under the U.S. regulations, a constituent entity includes a disregarded entity but does not include foreign corporations or partnerships of the U.S. MNE for which informational reporting is not required due to lack of control or any permanent establishment of such foreign corporation or foreign partnership.
12. What local notifications must be made by each constituent entity regarding CbCR and when are these due?
Each constituent entity must notify its jurisdiction of tax residence if it will file as the ultimate parent or surrogate parent, and if not, which entity of the MNE will file as the ultimate or surrogate parent. If there is more than one entity in a jurisdiction, notice must be given as to which entity is the filing entity in that jurisdiction. Notice must be received in each constituent entity’s jurisdiction by the end of the year for which the report is being filed.
13. Is reporting required if the ultimate parent country does not require CbCR?
Yes, if a MNE has operations in a country or countries that have implemented CbCR and exceeds the applicable revenue thresholds.
14. How is a surrogate parent entity defined and what requirements must be met?
Designating a surrogate parent allows MNEs to avoid multiple local filings when the ultimate parent country doesn’t require CbCR. The surrogate parent must be a tax resident in a country that requires CbCR and exchanges information.
15. What factors should we consider when selecting a surrogate parent entity?
It is important to understand the reporting MNE’s global footprint and which countries will require CbCR, which allow surrogate parent filing and the specific local country requirements for surrogate parent filing. Consideration should be given to which tier in the organization may be the surrogate parent, the reputation of the foreign jurisdiction and whether there are appropriate information exchange procedures in place.
16. Does every country’s CbCR legislation allow for surrogate filing?
No, not every country allows surrogate parent filing. Local legislation should be reviewed to determine if surrogate filing is acceptable or if local filing must be done.
17. If surrogate filing is not allowed and a constituent entity must file a local report, do the local rules for CbCR govern?
Yes, local rules regarding timing, currency, reporting standards, content and definitions for CbCR must be adopted.
18. How is the transition managed when reporting in the ultimate parent country is eventually required?
Careful consideration will need to be given to the transition from surrogate filing to ultimate parent company filing given there could be country-specific differences between the two filing requirements. Planning for the ultimate parent company filing should be considered during any transitional period data gathering and filing in order to enhance efficiency.
19. Is there a mechanism to deal with the gap year caused by the fact that the OECD has recommended start dates of fiscal years beginning on or after Jan. 1, 2016 and some countries have met this recommendation, but the U.S. regulations require CbCR for fiscal years that begin on or after June 30, 2016?
Yes. The United States is planning to allow for a voluntary filing mechanism to accommodate voluntary filing for ultimate parent entities resident in the United States, to file early. By voluntarily doing ultimate parent surrogate filing, this deactivates the need for local parent surrogate filing in another jurisdiction.
20. What period does the CbC report cover? How are constituent entities within the group with different year-ends reported?
a. The CbC report covers the fiscal period of the reporting MNE. The OECD guidelines state that constituent entities should be reported based on (i) the fiscal period that ends on the same day as the reporting MNE or that ends within the 12-month period preceding such date or (ii) based on the fiscal year-end of the reporting MNE. For example, assume a reporting MNE with a Sept. 30 year-end and a constituent entity with a Dec. 31 year-end. The 2017 CbC report is based on the reporting MNE’s year-end of Sept. 30, 2017. Constituent entity information must be included for its year-end of Dec. 31, 2016 or based on the reporting MNE’s year-end of Sept. 30, 2017.
b. The U.S. regulations require information to be furnished for the 12-month period with respect to which the ultimate parent entity prepares its applicable financial statements ending with or within the ultimate parent entity's taxable year for which the CbC report is filed. However, if the ultimate parent entity does not prepare applicable financial statements, the reporting period is the 12-month period that ends on the last day of the ultimate parent entity’s taxable year.
21. How are branches or permanent establishments reported?
Branches and permanent establishments should be reported under the tax jurisdiction where they are located with a note indicating the associated legal entity.
22. How are hybrid entities treated?
The U.S. regulations disregard the U.S. tax classification generated by U.S. check-the-box regulations in a reverse hybrid situation, requiring reporting by the partners of a reverse hybrid in the partner’s tax jurisdiction. Based on the definition in the U.S. regulations of tax jurisdiction of residence, traditional hybrid entities are reported in the jurisdiction in which they are organized and subject to income tax.
23. What sources may be used to obtain information?
Data may be obtained from consolidated reporting packages, statutory financial statements, regulatory financial statements or internal management accounts.
24. What accounting principles must be used (local GAAP, IFRS)?
Companies have flexibility in determining the source of the information as well as reporting standards used as long as it remains consistent from year to year.
25. Does the information need to reconcile with consolidated financial statements or statutory reporting? Do you recommend reconciliation with consolidated financial statements or statutory reporting as a best practice?
Reconciliations are generally not required under current guidance; however, reconciliations are recommended to ensure accuracy of information reported as well as to provide a trail for future audits. A best practice would be to reconcile audited financial statements, statutory reporting and local tax returns to the CbC report.
26. Does the information need to come from the same source every year and across jurisdictions (e.g., statutory financials, consolidation packages, internal management accounts)?
Yes, the reporting MNE has discretion as to the source of the data, but the OECD guidelines require consistency from year to year and across jurisdictions. The U.S. regulations do not contain a consistency requirement.
27. Do I need a transfer pricing analysis in order to complete CbCR? Do I need to update my current transfer pricing documentation?
A transfer pricing analysis is not required in order to complete the CbC report. However, some countries may independently require a master file and local file to be prepared. Any MNE that has significant or high-risk intercompany cross-border transactions should consider completing or updating transfer pricing documentation.
28. What currency must be used (functional, local)?
Amounts should be reported in the functional currency of the reporting MNE. The U.S. regulations state that U.S. reporting must occur in U.S. dollars and an exchange rate that is not in accordance with U.S. GAAP must be disclosed.
29. Is the reporting required on an entity basis or a tax jurisdiction basis?
Reporting is required based on a tax jurisdiction basis.
30. What is included in revenues?
Both the OECD guidelines and the U.S. regulations include sales of inventory and properties, services, royalties, interest, premiums and other amounts derived from transactions with related or unrelated parties. This does not include dividends in certain situations.
31. Does income tax paid include withholding taxes?
Yes, both the OECD guidelines and U.S. regulations include withholding taxes paid by other entities with respect to payment to each entity.
32. Does income tax accrued include deferred taxes and provisions for uncertain tax liabilities?
No, the OECD and U.S. regulations include only current amounts.
33. How is stated capital of permanent establishments reported?
Generally, under the OECD guidelines and U.S. regulations, the stated capital of a permanent establishment should be reported by the legal entity of which it is a permanent establishment.
34. How are the accumulated earnings of permanent establishments reported?
Generally, under the OECD guidance and U.S. regulations, the accumulated earnings of a permanent establishment should be reported by the legal entity of which it is a permanent establishment.
35. How is employee defined?
The OECD guidelines and U.S. regulations state that employees on a full-time equivalent basis should be reported. Independent contractors that participate in the operating activities of an entity may also be included. Reasonable rounding or estimates are permissible as long as it does not materially affect the number of employees reported across jurisdictions.
36. As of what date is the number of employees reported?
Under the OECD guidelines and U.S. regulations, the number of employees may be reported as of year-end, on an average yearly employment level basis, or any other reasonable basis. Reporting must be consistent across tax jurisdictions and from year to year.
37. Are tangible assets reported on a net or gross basis?
Tangible assets are reported based on the net book values under the OECD guidelines and U.S. regulations.
38. What is included in the definition of tangible assets?
The OECD guidance and U.S. regulations require reporting of all tangible assets other than cash and cash equivalents, intangible assets and financial assets.
39. How are tangible assets of permanent establishments reported?
Generally, under the OECD guidelines, the assets of a permanent establishment should be reported by reference to the tax jurisdiction where the permanent establishment is located.
40. What type of additional information is required in Table III?
This space allows companies to include any information that may assist in the understanding of information provided elsewhere in the CbC report. For example, a brief note indicating the data sources used should be included in Table III.
41. What best practices do you suggest for collection and aggregation of data?
When determining the source of information to be reported, consideration should be given to the timing of when the data sources are available relative to the due dates of the CbC report. MNEs should also give thought to practices adopted by their industry or competitors to avoid “unfair” comparisons. Existing data sources should be leveraged, if possible. For example, much of the information may be available from sources supporting Forms 5471, 8858 and 8865, the tax account roll forward, and human resources.
42. What action is required now and before the end of 2016?
U.S. MNEs that are subject to CbCR for 2016 must provide notifications in each tax jurisdiction in which a constituent entity is resident to inform the authorities of their filing positions. They should also review the CbCR template, notify their foreign subsidiaries of the information required, and identify potential issues with obtaining information in order to find solutions well ahead of the reporting deadline in 2017.
* Based on OECD model legislation and U.S. Treas. Reg. §1.6038-4