IRS issues final regulations on country-by-country reporting
New reporting regulations could impose significant new burdens
TAX ALERT |
The IRS has issued final regulations requiring annual country-by-country reporting (CbCR) by U.S. taxpayers that are the ultimate parent of a multinational enterprise (MNE) group. The final regulations affect U.S. parent companies of an MNE with $850 million or more in global group revenues for the preceding year. The final regulations are effective for tax years beginning on or after June 30, 2016. Taxpayers must use new IRS Form 8975, Country-by-Country Report, to comply. However, the IRS has not to date released Form 8975 but are expected to soon.
The final regulations will require taxpayers to separately report certain items on Form 8975 including:
- Revenues generated from transactions with other related entities
- Revenues not generated from transactions with related entities
- Profit or loss before income tax
- Total income tax paid on a cash basis to all tax jurisdictions (and taxes withheld)
- Total accrued tax expense
- Stated capital
- Total accumulated earnings
- Total number of employees
- Net book value of tangible assets
Taxpayers must report these items with respect to each tax jurisdiction in which one or more members of a U.S. MNE group is resident, presented as an aggregate for each category.
In contrast to the proposed CbCR regulations published on Dec. 21, 2015, the final regulations provide, among other clarifications, additional guidance and definitions including:
- Which U.S. persons must file Form 8975 or which entities are considered ‘constituent entities’ of the MNE group filer such as branches or business entities under the definition of permanent establishment
- No general exception for information that may relate to national security
- Revenue corresponding to partnership distributions as well as revenue reporting for stateless entities
- Imputed earnings and deemed dividends should be treated the same as dividends
- No need for ‘pass-through’ identifiers for constituent entities in Form 8975
- The number of employees of a constituent entity that should be reflected in the tax jurisdiction of residence of that particular constituent entity
The final regulations do not provide a specific waiver of penalties for U.S. MNE groups whose ultimate parent entity's taxable year begins on or after the applicability date. The penalty rules under section 6038 generally apply, including reasonable cause relief for failure to file.
Coordination with reporting in non-U.S. jurisdictions
The final regulations are consistent with similar rules issued by other countries around the world as they attempt to implement the principles contained in Action 13 of the report on base erosion and profit shifting issued by the Organisation for Economic Co-operation and Development (OECD). While the final regulations apply to tax years beginning on or after June 30, 2016, U.S. MNEs may be required to file similar reports in countries that have already implemented CbCR for periods beginning on or after Jan. 1, 2016, which could be quite burdensome. However, the Preamble to the final regulations states that forthcoming guidance will allow taxpayers to file a CbCR filing with the IRS for periods that begin on or after Jan. 1, 2016, but before the effective date of the final regulations. The Preamble further states that the IRS will work to ensure that foreign governments will not require local CbCR if U.S. MNEs make such filings with the IRS.
Action 13 sets forth revised standards for Transfer Pricing Documentation and Country-by-Country Reporting, and provides a template (incorporated in new Form 8975 in the United States) that countries can use to collect information regarding income, taxes paid and certain measures of economic activity within the MNE group. The categories of information required to be reported on the form were developed in coordination with other member countries of the Group of Twenty (G20) and the OECD. Thus, Form 8975 reflects an agreed upon international standard across tax jurisdictions.
Confidentiality and exchange of information
The United States intends to enter into competent authority arrangements for the automatic exchange of CbCRs with jurisdictions with which the United States has an income tax treaty or tax information exchange agreement. The Treasury Department and the IRS anticipate that information about the existence of competent authority arrangements relating to CbCR will be made publicly available, but the manner in which such information would be made publicly available has not yet been determined. Further, while the final regulations do not provide procedures for reporting improper disclosure of CbCR information by foreign jurisdictions, the Treasury Department and the IRS are aware of the concern and intend to establish a procedure to report suspected violations of confidentiality and other misuses of CbCR information.
In accordance with the OECD’s guidance, the Treasury and the IRS have determined that the information required under the final regulations will assist in better enforcement of federal income tax laws by providing the IRS with greater transparency regarding the operations and tax positions taken by U.S. MNE groups. In particular, it is expected that CbCR filings by both U.S. MNE groups and foreign MNE groups will help the IRS and tax authorities in other jurisdictions perform high-level transfer pricing risk identification and assessment. The information in a CbCR filing will not itself constitute conclusive evidence that transfer pricing practices are or are not at arm’s-length. However, a CbCR filing may be used as the basis for making further inquiries into the transfer pricing practices or other tax matters in the course of an examination of a member of an MNE group.
The final regulations may require taxpayers to significantly change their information reporting processes. Accordingly, affected taxpayers should carefully assess the financial and administrative impact the final regulations may have on their compliance function immediately.