On Dec. 21, the Internal Revenue Service (IRS) issued long-promised proposed regulations (REG-109822-15) that would require annual country-by-country (CbC) reporting by US businesses considered the “ultimate parent entity of a multinational enterprise (MNE) group” and where groupwide revenue exceeds US$850 million. The proposed regulations would supplement, not replace, existing transfer pricing documentation requirements and are designed to be consistent with the CbC requirements recently published by the Organisation for Economic Co-operation and Development (OECD) and endorsed by G20 members. According to the IRS, the new regulations will help it “perform high-level transfer pricing risk identification and assessment.” Because the IRS may share CbC reports with any foreign tax jurisdiction with which it has a tax information exchange agreement (TIEA), the new reporting requirements may also assist foreign tax authorities in transfer pricing reviews of US-based MNEs.
Who must file
Under the proposed regulations, an ultimate parent entity of an MNE group required to file an annual CbC report is any US business entity that controls a group of business entities, one or more of which is organized or is a tax resident outside the US, that is required to consolidate its accounts for financial reporting purposes under US generally accepted accounting principles (GAAP) or that would be required to consolidate their accounts if equity interests in the US business entity were publicly traded on a US securities exchange. All business entities apart from sole proprietorships, regardless of form or fiscal transparency, must file a CbC report. The proposed regulations also provide rules for determining the tax jurisdiction of residence of a business entity that is resident in more than one tax jurisdiction or is a permanent establishment.
The proposed regulations exclude ultimate parents of US MNEs from the filing requirement if groupwide revenue was less than US$850 million in the immediately preceding accounting period.
Content of the CbC report
The CbC report may require US MNEs to document intercompany transactions in new ways and require new communications with foreign affiliates. The template reporting document requires reporting for each “constituent entity” of the MNE group (basically any entity for which a Form 5471 is required). But it also requires the reporting MNE to aggregate financial information by tax jurisdiction. Any MNE with multiple foreign or US entities must separately state income, expense, and other items so as to permit the IRS to identify and describe foreign operations on a country-by-country basis.
More specifically, for each constituent entity, the CbC report requires information on:
- The tax jurisdiction in which the entity must file a tax or information return;
- Tax jurisdiction of incorporation or organization (if different);
- The main business activity or activities; and
- Tax identification numbers in the local jurisdiction.
For each tax jurisdiction, the CbC report requires aggregated information on:
- Revenue derived in transactions with other constituent entities, i.e., transactions with affiliates that could be subject to transfer pricing scrutiny;
- Revenue derived in transactions with nonconstituent entities, including third parties;
- Profit or loss before income tax;
- Income tax paid to all tax jurisdictions, including any withholding tax;
- Accrued tax expense;
- Stated capital;
- Accumulated earnings;
- Number of full-time equivalent (FTE) employees (calculated on “any reasonable basis”); and
- Net book value of noncash assets.
Obviously, any reader of a CbC report that includes all of the information above can quickly identify where an MNE earns income and pays expenses, regardless of tax motivations. Moreover, the CbC report is also an easy way for any tax jurisdiction to identify where intercompany transactions do or do not occur.
The preamble to the proposed CbC regulations emphasizes the confidentiality of the CbC report. The IRS also stresses it will not enter into a TIEA with any foreign tax jurisdiction until it is confident the jurisdiction will protect and not misuse taxpayer information.
Even so, MNEs possibly subject to the new CbC reporting requirements should expect the CbC report will be subject to scrutiny outside the US. The US Treasury has already entered into TIEAs with all major US trading partners, and the Treasury explains it expects the US competent authority to enter into further agreements providing for automatic exchange of CBC report information.
The proposed regulations are applicable to the first tax year beginning on or after the date the regulations are finalized. The proposed regulations are expected to be finalized in 2016, which would make them effective for calendar-year taxpayers beginning Jan. 1, 2017. Comments and hearing requests are due by March 22, 2016.
While expected, the CbC reporting regulations are controversial. Some in Congress have already voiced objections. It remains to be seen whether the Treasury will finalize the regulations as proposed or they will be scaled back or otherwise changed to account for privacy and other concern.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.