On June 29, 2016, the IRS released the final Treasury regulations (TD 9773) that require annual country-by-country (CbC) reporting by any US business considered the ultimate parent entity of a multinational enterprise (MNE) group, if annual groupwide revenue meets or exceeds US $850 million in the prior reporting period.
These regulations are effective for tax years beginning on or after July 1, 2016 (generally effective for 2017 calendar-year taxpayers). A new Form 8975, Country-by Country Report, has been designated for this purpose and will be finalized in the near future for issuance and release. The filing deadline for the new form will be the taxpayer’s tax return deadline (including extensions). Voluntary filing for years beginning before June 30 will be allowed (to enable compliance with CbC reporting requirements already implemented in other countries) under a procedure to be released separately. US businesses that meet the above threshold and are required to meet local country reporting requirements for 2016 should consider voluntary filing.
This new US tax compliance requirement is a supplement to existing transfer pricing documentation requirements and is designed to be consistent with the CbC requirements published by the Organisation for Economic Co-operation and Development (OECD) and endorsed by G20 members. The final regulations are essentially the same as the proposed regulations issued in December 2015 with certain definitional clarifications added. According to IRS, the new regulations “will help the IRS perform high-level transfer pricing risk identification and assessment.”
Notably, the IRS may share CbC reports with any foreign tax jurisdiction with which it has a tax information exchange agreement (TIEA), and the new reporting requirements may assist foreign tax authorities with transfer pricing reviews of US-based MNEs. However, the information provided in CbC reports will be treated as tax information subject to the confidentiality protections of section 6103, i.e., not made available to the public.
Who must file
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 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. Most business entities apart from sole proprietorships, regardless of form or fiscal transparency, are subject to the reporting requirements. The 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.
Content of the CbC report
The CbC report requires US MNEs to document and disclose intercompany transactions in a new manner with additional information regarding its foreign affiliates. Form 8975 requires reporting for each “constituent entity” of the MNE group—basically, any entity for which information is required to be filed under section 6038(a) and also requires the reporting MNE to aggregate financial information by tax jurisdiction. Any MNE group with multiple foreign or US entities must separately state income, expense, and other items so as to permit the IRS to identify and review foreign operations on a country-by-country basis.
Specifically, for each constituent entity, the CbC report requires:
- The complete legal name;
- The tax jurisdiction in which the entity must file a tax or information return;
- The tax jurisdiction of incorporation or organization (if different);
- The main business activity or activities; and
- The tax ID number(s) issued in the local jurisdiction.
For each tax jurisdiction in which a constituent entity is resident, 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 non-constituent entities, including third parties;
- Profit or loss before income tax;
- Total income tax paid to all tax jurisdictions, including any withholding tax;
- Total accrued current tax expense for the relevant annual period;
- Stated capital;
- Accumulated earnings;
- Number of full-time equivalent employees (calculated on “any reasonable basis”); and
- Net book value of tangible, non-cash assets.
Any reader of a properly completed CbC report can easily identify where an MNE earns income and incurs expenses. Moreover, the CbC report also facilitates the identification of intercompany transactions.
The preamble to the 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. The US Treasury has already entered into TIEAs with all major US trading partners, and the Treasury explains that it expects the US Competent Authority to enter into further agreements providing for automatic exchange of CbC report information.
That said, MNEs should expect the CbC report will be subject to scrutiny outside the US.
US businesses operating globally with annual revenues of US $850 million should contact their tax advisor to ensure they are prepared for the new compliance requirements. US businesses operating globally may also be subject to other foreign transfer pricing compliance requirements under local CbC rules. Additionally, MNEs should expect the CbC report will be subject to scrutiny outside the US. Accordingly, the transparency provided by CbC reports will give foreign taxing jurisdictions the information needed to initiate additional tax audits.
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.