The IRS released final regulations that require certain large, US-based multinational enterprise groups (MNEs) to report country-by-country (CbC) information. This information helps the IRS perform high-level identification and assessment of companies’ transfer-pricing risk.
Starting with tax years beginning on or after July 1, 2016, US-based MNEs with global revenue of at least $850 million in the prior year will have to submit a new form—Form 8975, Country-by-Country Report—with their tax returns. Because some foreign jurisdictions adopted the CbC reporting requirements for periods starting six months earlier (on or after January 1, 2016), the IRS intends to allow early filing of Form 8975. This will streamline the process for US-based MNEs that file similar reports in foreign jurisdictions.
Although Form 8975 is still under development, the information it requires is consistent with Action 13 of the base erosion and profit shifting (BEPS) project, conducted by the G20 countries and the Organisation for Economic Co-operation and Development (OECD). The final regulations generally adopt the proposed regulations issued in December 2015, but the IRS did make certain revisions—explained in detail in the preamble—to address public comments.
Absent any other solution, countries that adopted the CbC reporting requirements for periods earlier than the United States (including Australia, France, and the Netherlands) would require a US-based MNE’s subsidiary (or even permanent establishment) to file a CbC report on behalf of the MNE group if it’s a tax resident of that country. The OECD released guidance to address this issue on June 29.
The OECD guidance lists six conditions that must be met for voluntary Form 8975 filings (by US-based MNEs that are parents to those international companies) to satisfy the 2016 CbC reporting requirements in early-adopter countries. The OECD guidance refers to these voluntary filings as “parent surrogate filings.”
Three of those conditions are the responsibility of the tax administrations and out of a US-based MNE’s control. The following three conditions, however, need to be met by the MNE:
- The ultimate parent company of the MNE group must notify its tax jurisdiction by the last day of its 2016 fiscal year that it intends to voluntarily file the CbC information for the 2016 fiscal year.
- Any foreign constituent entity (subsidiary or permanent establishment) of the MNE group must notify its tax jurisdiction by the last day of the group’s 2016 fiscal year that it isn’t the group’s “ultimate parent entity” nor the “surrogate parent entity.” It must provide the name and tax residence of the ultimate parent company. (Note that this could mean notification to multiple foreign tax jurisdictions.)
- The ultimate parent company must voluntarily file the CbC information for the 2016 fiscal year with its tax jurisdiction within 12 months of its 2016 fiscal year-end.
IRS Guidance Forthcoming
In the preamble to its final regulations, the IRS promised to provide guidance on voluntary filing of Form 8975. This would alleviate the requirement for US-based MNEs with 2016 tax years beginning before June 30, 2016, to file 2016 CbC reports in those early-adopter countries.
A footnote in the OECD guidance states that tax administrations may choose not to require the first two notifications above. Until the IRS issues guidance on these voluntary filings, US-based MNEs will need to carefully monitor updates to both US and foreign CbC reporting rules to avoid inadvertently missing a CbC reporting requirement or related notification.
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We’ll continue to monitor developments related to the CbC reporting requirements and the BEPS project.
For more information on your CbC reporting requirements or insight on steps your organization should take to prepare for these filings, contact your Moss Adams professional.