How should the information of a U.S. limited partnership (LP) or limited liability company (LLC) that has not elected to be treated as a corporation for federal tax purposes and is the ultimate parent entity of a U.S. MNE group be reported on Form 8975 and Schedule A (Form 8975)?
A U.S. LP or LLC is a U.S. business entity because it is organized in the United States, and therefore, may be the ultimate parent entity (UPE) of a U.S. MNE group. However, a U.S. LP or LLC UPE that has not elected to be treated as a corporation for federal tax purposes will be considered a stateless entity for all other purposes of the CbC report. Therefore, the financial data of the U.S. LP or LLC UPE should be aggregated with the information of other stateless constituent entities of the U.S. MNE group and reported on a Schedule A (IRS Form 8975) for stateless entities. The Additional Information sections on the IRS Form 8975 and/or Schedule A (IRS Form 8975) for stateless entities may be used to provide any additional information regarding the U.S. LP or LLC.
Under the CbC reporting framework provided by the OECD, under what circumstances would the foreign subsidiaries of a U.S. MNE group be subject to a local filing requirement in a foreign tax jurisdiction?
Based on the OECD model legislation for CbC reporting, a U.S. MNE group’s foreign subsidiaries cannot be subject to a local filing requirement in a foreign tax jurisdiction, unless the U.S. has a legal instrument allowing for the automatic exchange of information with the foreign jurisdiction, but has not entered into a competent authority arrangement (CAA) to provide for the automatic exchange of CbC reports by the end of 12 months following the end of the U.S. MNE group’s reporting fiscal year or unless there has been a “systemic failure” by the U.S. A systemic failure occurs when there is a CAA in place, but a jurisdiction (in this case, the U.S.) has suspended automatic exchange for reasons other than those that are in accordance with the terms of the CAA or otherwise persistently fails to automatically exchange CbC reports.
In addition, the foreign jurisdiction cannot require local filing if it does not meet the standards of confidentiality, consistency, and appropriate use, as described in the OECD guidance. If a U.S. MNE group determines that it is not required to file a Form 8975 because it does not meet the reporting threshold under Treasury Regulations §1.6038-4 (TD 9773), a foreign jurisdiction cannot require that a local subsidiary of the U.S. MNE group file a CbC report merely because the U.S. MNE group exceeds the revenue threshold in the foreign jurisdiction.
If there is more than one constituent entity in a jurisdiction, should the financial information in Part 1 of Schedule A (Form 8975) be reported as an aggregate of the constituent entity information or consist of consolidated data that eliminates intra-jurisdiction transactions between constituent entities in that jurisdiction? The OECD Guidance on the Implementation of Country-by-Country Reporting indicates that, in certain circumstances, jurisdictions may allow MNE groups to provide consolidated data in CbC Reports.
Treas. Reg. § 1.6038-4 requires U.S. MNE groups to provide aggregated data on the CbC Report. However, revenue does not include payments received from other constituent entities in the MNE group that are treated as dividends in the payor’s tax jurisdiction of residence. Additionally, distributions and remittances from constituent entities in the MNE group that are partnerships, other fiscally transparent entities, or permanent establishments are not considered revenue of the recipient-owner.
Treas. Reg. § 301.7701-3(c) allows a business entity that is an eligible entity to be classified for federal tax purposes other than its default classification (partnership, disregarded entity, or corporation) under Treas. Reg. § 301.7701-3(b) by making an election (“check-the-box election”). Does a check-the-box election have any effect when reporting constituent entities on the CbC Report?
With respect to foreign eligible entities, a check-the-box (CTB) election does not affect the tax jurisdiction of residence of the foreign entity; therefore, the election has no impact on the reporting of foreign entities on the CbC Report. With respect to domestic eligible entities, a disregarded entity or partnership that, as a result of a CTB election, is classified as a corporation for federal tax purposes will have the U.S. as its tax jurisdiction of residence.
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