On June 29, 2016, the U.S. Internal Revenue Service (IRS) and Treasury issued final country-by-country (CbC) regulations that will apply to U.S. persons that are the ultimate parent entities of a multinational enterprise (MNE) group that has annual revenue for the preceding annual accounting period of $850,000,000 or more. See OECD BEPS Action 13 recommendations. The regulations apply to reporting periods that begin on or after the first day of a taxable year that begins on or after June 30, 2016.
The regulations are effective as of June 30, 2016, the date they were published in the Federal Register. U.S. MNE groups whose ultimate parent entity's taxable year begins before this date will not have a CbC filing requirement for their tax year beginning in 2016. Taxpayers will include CbC reporting information in a new form, Form 8975, Country-by-Country Report, to be filed with their income tax return for the taxable year on or before the due date (including extensions) for filing the return.
On December 23, 2015, the Federal Register published proposed CbC regulations. A public hearing was held on May 13, 2016. Comments responding to the proposed regulations were acknowledged. After consideration of the comments, the proposed regulations have been adopted and amended by the final regulations.
Form 8975, Country-by-Country Report
Par. 2. Section 1.6038-4 is added to read as follows: § 1.6038-4 Information returns required of certain United States persons with respect to such person's U.S. multinational enterprise group.
This new section provides the information requirements that ultimate parent entities of U.S. MNEs must include annually on Form 8975. Form 8975 must contain the following information with respect to each constituent entity of the U.S. MNE group:
- The complete legal name of the constituent entity.
- The tax jurisdiction, if any, in which the constituent entity is resident for tax purposes.
- The tax jurisdiction in which the constituent entity is organized or incorporated (if different from the tax jurisdiction of residence).
- The tax identification number, if any, used for the constituent entity by the tax administration of the constituent entity's tax jurisdiction of residence.
- The main business activity or activities of the constituent entity.
With respect to a U.S. MNE group, a constituent entity is any separate business entity of the group, but does not include a foreign corporation or foreign partnership for which the ultimate parent entity is not required to furnish information under section 6038(a) and 1.6038-3(c)) or any PE of the foreign corporation or foreign partnership. The final regulations include rules about partnerships that create a PE for itself or its partners.
Form 8975 must include the following information, in aggregate, with respect to each tax jurisdiction in which one or more constituent entities of a U.S. MNE group is resident. (The information also must be provided, in the aggregate, for any constituent entity or entities that have no tax jurisdiction of residence. In addition, if a constituent entity is an owner of a constituent entity that does not have a jurisdiction of tax residence, then the owner's share of such entity's revenues and profits will be aggregated with the information for the owner's tax jurisdiction of residence.)
- Revenues generated from transactions with other constituent entities.
- Revenues not generated from transactions with other constituent entities.
- Profit or loss before income tax.
- Total income tax paid on a cash basis to all tax jurisdictions, and any taxes withheld on payments received by the constituent entities.
- Total accrued tax expense recorded on taxable profits or losses, reflecting only operations in the relevant annual period and excluding deferred taxes or provisions for uncertain tax liabilities.
- Stated capital, except that the stated capital of a permanent establishment (PE) must be reported in the tax jurisdiction of residence of the legal entity, unless there is a defined capital requirement in the PE tax jurisdiction for regulatory purposes.
- Total accumulated earnings, except that accumulated earnings of a PE must be reported by the legal entity.
- Total number of employees on a full-time equivalent basis.
- Net book value of tangible assets, which does not include cash or cash equivalents, intangibles, or financial assets.
Revenue includes amounts from sales of inventory and property, services, royalties, interest, and premiums. It does not include payments received from other constituent entities that are treated as dividends in the payor's tax jurisdiction of residence. Distributions and remittances from partnerships and other fiscally transparent entities and PEs that are constituent entities are not considered revenue for the recipient-owner. Revenue also does not include imputed earnings or deemed dividends received from other constituent entities that are taken into account solely for tax purposes and that otherwise would be included as revenue by a constituent entity.
The number of employees on a full-time equivalent basis may be reported as of the end of the accounting period, on the basis of average employment levels for the annual accounting period, or on any other reasonable basis consistently applied across tax jurisdictions and from year to year. Independent contractors participating in the ordinary operating activities of a constituent entity may be reported as employees.
All amounts on Form 8975 must be in U.S. dollars. All amounts should be based on applicable financial statements, books and records maintained with respect to the constituent entity, regulatory financial statements, or records used for tax reporting or internal management control purposes for an annual period of each constituent entity ending with or within the reporting period.
Ultimate parent entity of a U.S. MNE Group
An ultimate parent entity of a U.S. MNE group is a U.S. business entity that satisfies each of the following:
- Owns directly or indirectly a sufficient interest in one or more other business entities, at least one of which is organized or tax resident in a tax jurisdiction other than the U.S., and the U.S. business entity is required to consolidate the accounts of the other business entities with its own accounts under U.S. generally accepted accounting principles, or would be so required if equity interests in the U.S. business entity were publicly traded on a U.S. securities exchange.
- Is not owned directly or indirectly by another business entity that consolidates the accounts of such U.S. business entity with its own accounts under generally accepted accounting principles in the other business entity's tax jurisdiction of residence, or would be so required if equity interests in the other business entity were traded on a public securities exchange in its tax jurisdiction of residence.
A business entity generally is:
- Any entity recognized for federal tax purposes and not classified as a trust.
- Any entity with a single owner that is disregarded as separate from its owner.
- A PE that prepares financial statements separate from its owner for financial reporting, regulatory, tax reporting, or internal management control purposes. A PE includes (i) a branch or business establishment of a constituent entity in a tax jurisdiction that is treated as a PE under an income tax convention to which that tax jurisdiction is a party; (ii) a branch or business establishment of a constituent entity that is liable to tax in the tax jurisdiction in which it is located pursuant to the domestic law of such tax jurisdiction; and (iii) a branch or business establishment of a constituent entity that is treated in the same manner for tax purposes as an entity separate from its owner by the owner's tax jurisdiction of residence.
A business entity is a resident in a tax jurisdiction if, under the laws of that tax jurisdiction, the business entity is liable to tax based on place of management, organization, or similar criteria. A business entity will not be considered a resident in a tax jurisdiction if it is liable to tax only by reason of a tax imposed on gross amounts of income, without any reduction for expenses, with respect to income from sources or capital situated in that tax jurisdiction. The final regulations provide rules where a business entity is resident in more than one tax jurisdiction, including when no applicable income tax convention exists. A U.S. business entity is a business entity that is organized or has its tax jurisdiction of residence in the U.S. Foreign insurance companies that elect to be treated as domestic corporations under section 953(d) are U.S. business entities that have their tax jurisdiction of residence in the U.S.
U.S. territories and possessions
A tax jurisdiction is a country or a jurisdiction that is not a country but that has fiscal autonomy. The final regulations say that a U.S. territory or possession is considered to have fiscal autonomy, and includes American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.
A U.S. territory ultimate parent entity is a business entity organized in a U.S. territory or possession that controls a U.S. business entity and that is not owned directly or indirectly by another business entity that consolidates the accounts of the U.S. territory ultimate parent entity with its accounts under generally accepted accounting principles in the other business entity's tax jurisdiction of residence, or would be so required if equity interests in the other business entity were traded on a public securities exchange in its tax jurisdiction of residence. A U.S. territory ultimate parent entity may designate a U.S. business entity that it controls to file Form 8975 on the U.S. territory ultimate parent entity's behalf.
The reporting period covered by Form 8975 is the period of the ultimate parent entity's applicable financial statement prepared for the 12-month period or a 52-53 week period that ends with or within the ultimate parent entity's taxable year. If the ultimate parent entity does not prepare an annual applicable financial statement, then the reporting period covered by Form 8975 is the 12-month period or a 52-53 week period described that ends on the last day of the ultimate parent entity's taxable year. (An applicable financial statement is a certified audited financial statement that is accompanied by a report of an independent certified public accountant or similarly qualified independent professional that is used for purposes of reporting to shareholders, partners, or similar persons; for purposes of reporting to creditors in connection with securing or maintaining financing; or for any other substantial non-tax purpose.)
The U.S. person filing Form 8975 is not required to create and maintain records that reconcile the amounts provided on the form with the tax returns of any tax jurisdiction or applicable financial statements. 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.
The Treasury Department and the IRS have determined that the information provided on the CbC report is return information subject to the confidentiality protections of section 6103. The Treasury Department and the IRS are collecting the information in the report under the authority of sections 6001, 6011, 6012, 6031, and 6038 to assist in the better enforcement of income tax laws. The U.S. intends to enter into competent authority arrangements for the automatic exchange of CbC reports with jurisdictions with which it has an income tax treaty or tax information exchange agreement.
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