Resources

Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Final regs require country-by-country reporting by large multinationals

T.D. 9773, 06/29/2016, Reg. § 1.6038-4

IRS has issued final regs that require annual country-by-country (CbC) reporting by U.S. persons that are the ultimate parent entity of a multinational enterprise (MNE) group that has annual revenue for the preceding annual accounting period of $850 million or more. This information reporting requirement is satisfied by submitting a new not-yet-released Form 8975, Country-by-Country Report, with an income tax return.

Background on CbC reporting. The Group of 20 (G20) and the Organization for Economic Cooperation and Development (OECD), in coordination with other countries, developed a model template for the collection of CbC reporting information from large MNE groups. Under CbC reporting, MNEs will be required to provide aggregate information annually, in each jurisdiction where they do business, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNE group. It will also cover information about which entities do business in a particular jurisdiction and the business activities each entity engages in. As of May 12, 2016, 39 countries have signed CbC agreements.

In December of 2015, IRS issued proposed regs that described a new requirement for certain U.S. persons that are the ultimate parent entity of an MNE group (U.S. MNE group) that had annual revenue for the preceding annual accounting period of $850 million or more (see Weekly Alert ¶  34  12/24/2015). IRS said that the proposed regs generally were consistent with the international standard.

Final regs. The final regs mandate annual CbC reporting on Form 8975 (not yet released) by U.S. persons that are the ultimate parent entity of a MNE group that has annual revenue for the preceding annual accounting period of $850 million or more. (Reg. § 1.6038-4(a)) The reporting period covered by Form 8975 is the period of the ultimate parent entity’s annual applicable financial statement that ends with or within the ultimate parent entity’s tax year, or, if the ultimate parent entity doesn’t prepare an annual applicable financial statement, then the ultimate parent entity’s tax year. (Reg. § 1.6038-4(c))

All amounts reported must generally be in U.S. dollars; if an exchange rate is used other than in accordance with U.S. generally accepted accounting principles (GAAP) for conversion to U.S. dollars, the exchange rate must be indicated. The final regs do not limit the constituent entity information to applicable financial statements of the constituent entity but, rather, provide that the source of the tax jurisdiction of residence information must be based on applicable financial statements, books and records, 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. (Reg. § 1.6038-4(e))

Form 8975 must be filed with the ultimate parent entity’s income tax return for the tax year, in or with which the reporting period ends, on or before the due date (including extensions) for filing that person’s income tax return (or as otherwise prescribed by Form 8975). (Reg. § 1.6038-4(f)) While the final regs do not require the ultimate parent entity to create and maintain records to reconcile the information reported in Form 8975 to consolidated financial statements or to tax returns, the ultimate parent must maintain records to support the information provided in Form 8975. (Reg. § 1.6038-4(g))

The ultimate parent entity of a U.S. MNE group is a U.S. business entity that:

  • (i)  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., such that the U.S. business entity is required to consolidate the accounts of the other business entities with its own accounts under U.S. GAAP, or would be so required if equity interests in the U.S. business entity were publicly traded on a U.S. securities exchange; and
  • (ii)  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 GAAP 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. (Reg. § 1.6038-4(b)(1))

A “business entity” is generally any entity recognized for federal tax purposes that isn’t properly classified as a trust under Reg. § 301.7701-4. It includes a disregarded entity with a single owner under Reg. § 301.7701-3 and a permanent establishment (PE) that prepares financial statements separate from those of its owner for financial reporting, regulatory, tax reporting, or internal management control purposes. A business entity doesn’t include grantor trusts with only individual owners, decedents’ estates, and individuals’ bankruptcy estates. (Reg. § 1.6038-4(b)(2))

Under the final regs, 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; or (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. (Reg. § 1.6038-4(b)(3))

A “U.S. business entity” is a business entity that is organized or has its tax jurisdiction of residence in the U.S. The final regs expressly provide that foreign insurance companies that elect to be treated as domestic corporations under Code Sec. 953(d) are U.S. business entities that have their tax jurisdiction of residence in the U.S. (Reg. § 1.6038-4(b)(4))

A “U.S. MNE group” consists of the ultimate parent entity of a U.S. MNE group (as defined above) and all of the business entities required to consolidate their accounts with the ultimate parent entity’s account under U.S. GAAP, or that would be so required if equity interests in the ultimate parent entity were publicly traded on a U.S. securities exchange, regardless of whether any such business entities could be excluded from consolidation solely on size or materiality grounds. (Reg. § 1.6038-4(b)(5))

With respect to a U.S. MNE group, a constituent entity is any separate business entity of the U.S. MNE group, except that the term “constituent entity” doesn’t include a foreign corporation or foreign partnership for which the ultimate parent entity isn’t required to furnish information under Code Sec. 6038(a) (determined without regard to Reg. § 1.6038-2(j) and Reg. § 1.6038-3(c)) or any PE of such foreign corporation or foreign partnership. (Reg. § 1.6038-4(b)(6))

Contents of Form 8975. The following information must be included on Form 8975 (in the form and manner prescribed) with respect to each constituent entity of the U.S. MNE group, as required:

  • (i)  The complete legal name of the constituent entity;
  • (ii)  The tax jurisdiction, if any, in which the constituent entity is resident for tax purposes;
  • (iii)  The tax jurisdiction in which the constituent entity is organized or incorporated (if different from the tax jurisdiction of residence);
  • (iv)  The tax identification number, if any, used for the constituent entity by the tax administration of the constituent entity’s tax jurisdiction of residence; and
  • (v)  The main business activity or activities of the constituent entity. (Reg. § 1.6038-4(d)(1))

The following information must be included on Form 8975 (in the form and manner prescribed) with respect to each tax jurisdiction in which one or more constituent entities of a U.S. MNE group is resident, presented as an aggregate of the information for the constituent entities resident in each tax jurisdiction:

  • (i)  Revenues generated from transactions with other constituent entities of the U.S. MNE group;
  • (ii)  Revenues not generated from transactions with other constituent entities of the U.S. MNE group;
  • (iii)  Profit or loss before income tax;
  • (iv)  Total income tax paid on a cash basis to all tax jurisdictions, including any taxes withheld on payments received by the constituent entities of the U.S. MNE group;
  • (v)  Total accrued tax expense recorded on taxable profits or losses, reflecting only the operations in the relevant annual accounting period and excluding deferred taxes or provisions for uncertain tax positions;
  • (vi)  Stated capital of all the constituent entities, except that the stated capital of a PE must be reported in the tax jurisdiction of residence of the legal entity of which it is a PE unless there is a defined capital requirement in the PE tax jurisdiction for regulatory purposes;
  • (vii)  Total accumulated earnings, except that accumulated earnings of a PE must be reported by the legal entity of which it is a PE;
  • (viii)  Total number of employees on a full-time equivalent basis in the relevant tax jurisdiction; and
  • (ix)  Net book value of tangible assets (defined as excluding cash or cash equivalents and intangibles or financial assets). (Reg. § 1.6038-4(d)(2))

For purposes of Reg. § 1.6038-4(d), “revenue” includes all amounts of revenue, including from sales of inventory and property, services, royalties, interest, and premiums. It doesn’t 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 aren’t considered revenue of the recipient-owner. Revenue also doesn’t 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. (Reg. § 1.6038-4(d)(3)(ii))

Under the final regs, the term “revenue” includes only revenue that is included in unrelated business taxable income under Code Sec. 512 for a constituent entity that is an organization exempt from taxation under Code Sec. 501(a) because it is an organization described in Code Sec. 501(c), Code Sec. 501(d), or Code Sec. 401(a), a state college or university under Code Sec. 511(a)(2)(B), a plan under Code Sec. 403(b) or Code Sec. 457(b), an individual retirement plan or annuity as defined in Code Sec. 7701(a)(37), a qualified tuition program under Code Sec. 529, a qualified ABLE program under Code Sec. 529A, or a Coverdell education savings account under Code Sec. 530. (Reg. § 1.6038-4(d)(3)(ii))

For purposes of Reg. § 1.6038-4(d)(2), U.S. MNE groups may determine the number of employees of constituent entities on a full-time equivalent basis using any reasonable approach that is consistently applied. 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 of such constituent entity. (Reg. § 1.6038-4(d)(3)(iii))

Entities with no tax jurisdiction of residence. The information listed above in Reg. § 1.6038-4(d)(2) must also be provided, in the aggregate, for any constituent entity or entities that have no tax jurisdiction of residence. And, if a constituent entity is an owner of a constituent entity that doesn’t have a jurisdiction of tax residence, then the owner’s share of the entity’s revenues and profits is aggregated with the information for the owner’s tax jurisdiction of residence. (Reg. § 1.6038-4(d)(3)(i))

A business entity that is treated as a partnership in the tax jurisdiction in which it is organized and that does not own or create a PE in that or another tax jurisdiction generally will have no tax jurisdiction. The “stateless” entity-owner reports its share of the stateless entity’s revenues and profits in the owner’s tax jurisdiction of residence, even if that jurisdiction treats the stateless entity as a separate entity for tax purposes. In the case in which a partnership creates a PE for itself or its partners, the CbC information with respect to the PE isn’t reported as stateless, but instead is reported as part of the information on the Form 8975 for the PE’s tax jurisdiction of residence. The final regs clarify that distributions from a partnership to a partner aren’t included in the partner’s revenue. In addition, the final regs provide that remittances from a PE to its constituent entity-owner aren’t included in the constituent entity owner’s revenue. (T.D. 9773, 06/29/2016)

U.S. territories and possessions. The final regs provide that a “U.S. territory ultimate parent entity” may designate a U.S. business entity that it controls (as defined in Code Sec. 6038(e)) to file on the U.S. territory ultimate parent entity’s behalf the Form 8975 that the U.S. territory ultimate parent entity would be required to file if it were a U.S. business entity. A U.S. territory ultimate parent entity is a business entity organized in a U.S. territory or possession of the U.S. 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 GAAP 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. (Reg. § 1.6038-4(j))

Effective date/voluntary filing. Consistent with the proposed regs, the final regs aren’t applicable for tax years of ultimate parent entities beginning before June 30, 2016 (the date the final regs are published). Specifically, they apply to reporting periods of ultimate parent entities of U.S. MNE groups that begin on or after the first day of a tax year of the ultimate parent entity that begins on or after June 30, 2016.

IRS intends to allow ultimate parent entities of U.S. MNE groups and U.S. business entities designated by a U.S. territory ultimate parent entity to voluntarily file CbC reports for reporting periods that begin on or after Jan. 1, 2016, but before the applicability date of the final regs, under a procedure to be provided in separate, forthcoming guidance. The Treasury Department is working to ensure that foreign jurisdictions implementing CbC reporting requirements will not require constituent entities of U.S. MNE groups to file a CbC report with the foreign jurisdiction if the U.S. MNE group files a CbC report with IRS pursuant to this procedure and the CbC report is exchanged with such foreign jurisdiction pursuant to a competent authority arrangement. (Reg. § 1.6038-4(k), T.D. 9773, 06/29/2016 )

Checkmark RIA observation: The late effective date of the regs has been a concern for U.S. MNEs. As noted in T.D. 9773, 06/29/2016, other countries have adopted CbC reporting requirements for annual accounting periods beginning on or after Jan. 1, 2016, and require reporting of CbC information by constituent entities of MNE groups with an ultimate parent entity resident in a tax jurisdiction that doesn’t have a CbC reporting requirement for the same annual accounting period. The failure to adopt timely CbC reporting requirements in the U.S. raises the possibility of increased compliance costs because U.S. MNE groups may be subject to CbC filing obligations in multiple foreign tax jurisdictions or subject to varying CbC filing rules in different foreign tax jurisdictions, such as requirements to prepare the CbC report using the local currency or language.

References: For U.S. tax treatment of foreign income in general, see FTC 2d/FIN ¶  O-1000  et seq.; United States Tax Reporter ¶  8644  et seq.; TG ¶  30350  et seq.

Tagged with →