The US regulations provide that Country-by-Country (“CbC”) Reporting for US HQ MNEs must be filed with the ultimate parent entity’s income tax return for the taxable year beginning on or after June 30, 2016. In contrast, pursuant to the OECD guidance, CbC reporting is to become effective for fiscal years starting on or after January 1, 2016 and the obligation for filing CbC reports is the end of the 12-month period following the end of the relevant fiscal year. US MNE groups that use a calendar year as their taxable year will not be required to file a CbC Reports for their taxable year beginning January 1, 2016 in the US, however constituent entities of the group may be subject to CbC reporting requirements in foreign jurisdictions for the 2016 fiscal year with the relevant national tax administration by December 31, 2017 (the so called gap year).
The Treasury Department and the IRS have indicated the allowance of US MNE parent groups to voluntarily file CbC Reports for ‘reporting periods that begin on or after January 1, 2016, but before the applicability date of the final regulations, under a procedure to be provided in separate, forthcoming guidance.’ Given there has been no further guidance released (at the time of this publication), and notification requirements for constituent entities of the group subject to CbC reporting requirements in foreign jurisdictions may be due on December 31, 2016, US MNE groups will be faced with a tough choice: (a) elect for voluntary filing for the gap year with the hope that the necessary mechanisms are in place to facilitate the exchange through the US by December 31, 2017; or (b) play safe and opt for local filing
The issue of whether the US CbC voluntary filing will fulfill tax year 2016 obligations is dependent on three assumptions:
- Will the local jurisdiction accept CbC Reports that have been voluntarily filed with the MNE parent country (i.e. US);
- Is there a qualifying international agreement (i.e. a tax treaty or TIEA) between the US and the foreign jurisdiction permitting the conclusion of bilateral competent authority agreements (CAAs);
- and Confirmation that the US and the local country would have concluded a CbC exchange CAA on the basis of the existing international agreement by December 31, 2017.
Whether other jurisdictions will accept US voluntary filing prima facie cannot be answered with any measure of certainty yet. While the OECD did endorse voluntary filing as a solution to the gap year, there is as yet no clear guidance from other country that they will accept it.
Even then, voluntary filing may not satisfy all jurisdictions since there are countries with whom the US simply does not have an existing tax treaty or TIEA and it may not be reasonable to expect that one will be signed in addition to CbC CAA by December 31, 2017. In addition, some of the US existing international agreements, in particular TIEAs, are not qualifying agreements for the purposes of concluding CbC exchange CAAs. This is because they do not provide, whether explicitly or implicitly, for the automatic exchange of tax information. Finally, unlike other countries, the US cannot require local filing by the US entities of foreign MNEs. This, in-turn, has questioned the bargaining position of the US in the context of negotiating competent authority agreements. It is arguable there is little incentive for a foreign country to agree to a CAA with the US, when it knows that it can require local affiliates of US companies to file locally, while in-turn, the US is precluded from requiring the same from the US affiliates of its MNEs.
The question then is can calendar year MNEs wait until end of 2017 to see how the requirements listed above develop before making the decision whether to adopt voluntary filing. The answer is unfortunately no in that the decision on the reporting entity role must be made by end of the fiscal year in most jurisdictions that have implemented the OECD’s notification requirement. This is because in addition to the requirement to file CbC reports, MNEs are also required to lodge notifications with their tax authorities and/or the tax authorities of the countries where they have a Constituent Entity or a surrogate parent. These notification requirements are separate from the CbC filing requirement itself and follow a separate deadline. In most cases, the notifications are due by the last day of the relevant MNE’s reporting FY. Thus assuming the standard requirement for reporting to start with FYs commencing on or after 1 January 2016, and assuming an FY corresponding to the calendar year, these notifications are due by 31 December 2016
In the event notifications are filed assuming the required conditions for voluntary filing will be in place by 2017, but the US and the foreign jurisdiction do not reach a conclusive agreement on a CAA by that deadline, the consequences at this stage, could be several. For example, Luxembourg law prescribes a fine amounting to EUR 250,000 for failure to comply with the notification requirements which could include filing incorrect notifications. Also, where voluntary filing proves eventually inoperable because of the failure to reach a CAA before the end of 2017, there is at this stage no assurance that an MNE may freely switch to local filing after having first notified voluntary filing to the local government and thereby running the risk of incurring penalties and other consequences of non compliance with CbC report filing requirements.
In conclusion a conservative approach is for a US MNE to file notifications based on agreements that are in place as of December 31, 2016 which for the most part would mean local filing for the 2016 fiscal year. This can be changed in subsequent years to ultimate parent filing once the required international agreements are in place.