CbC Reporting Rules Finalized

Overview of Final U.S. Country-by-Country Reporting Regulations

On June 29, 2016, the Treasury Department released finalized regulations relating to country-by-country (CbC) reporting for U.S. multinational enterprises (U.S. MNE) with more than $850 million in annual consolidated revenue. The finalized regulations confirm new filing obligations for U.S. MNEs as well as the mechanism for the automatic exchange of CbC information with other tax jurisdictions through tax information exchange agreements or Competent Authority Program. 

Timing

U.S. MNE groups with tax year beginning on or after July 1, 2016 will have a CbC filing requirement for that tax year. For example, a taxpayer whose fiscal year starts on January 1, 2017 will have to file a CbC report with their US Federal Income Tax Return for tax year 2017.

Filing and Voluntary “Gap Year” Filing

The CbC report is to be filed with the U.S. MNE’s Federal Income Tax Return on the newly created Form 8975. Many foreign jurisdictions have adopted CbC reporting requirements for accounting periods beginning on or after January 1, 2016. However, the U.S. CbC rules apply to companies whose accounting period starts on July 1, 2016 or after. This difference has created a “gap year” where a foreign subsidiary may be required to file a CbC report with their local tax authority (outside of the U.S.).  According to the new rules, the IRS will accept voluntarily filed early submissions of CbC reports for 2016. The CbC report would, in turn, be confidentially transmitted to foreign jurisdictions through an exchange program or Competent Authority Program. Information in the CbC report is considered equivalent to information on the tax return and is protected accordingly.  If the Treasury Department determines a foreign government is not upholding confidentiality standards, it will pause the CbC exchange program with that government. 

Contents

The information required by the CbC report will include the following: the U.S. MNE’s foreign affiliates’ resident tax jurisdiction, main business activity and revenues generated from intercompany transactions. The report will also require, among other things, total income tax paid to all jurisdictions, total number of employees within the tax jurisdiction and net book value of tangible assets. The final regulations provide clarity on how Revenue is to be reported for CbC purposes. The regulations include sales, royalties, interest and premiums in their definition of Revenue but specifically exclude dividends or distributions from affiliated entities, imputed earnings and deemed dividends.

The regulations provide further guidance as to what creates a permanent establishment (PE) for purposes of CbC reporting. The new rules provide greater clarity as to when a branch or a business in a foreign country should be included in the CbC report. The guidance includes explanations of how the PE is generated relative to the foreign country’s domestic law and its tax obligations. The regulations define what constitutes a “stateless entity” for CbC reporting purposes. Generally, these are entities that have no tax jurisdiction of residence. The rules explain how stateless entities’ information is to be aggregated and reported on the U.S. CbC report. 

Penalties

The final regulations do not provide a specific waiver of penalties for U.S. MNEs whose ultimate parent entity’s taxable year begins on or after the applicability date. The penalty rules under section 6038 of the Internal Revenue Code generally apply.

Next Steps

U.S. MNEs with $850 million or more in global sales should prepare a CbC report based on the final regulations. U.S. MNEs should consider a “CbC readiness assessment” to ensure the necessary information can be accurately captured through existing technology/information systems and to help facilitate a timely response by the filing requirement deadline. Moreover, U.S. MNEs should be mindful that operating subsidiaries in other tax jurisdictions may be required to file a surrogate CbC report or be required to meet certain local country filing requirements outside of the U.S. 

Transitioning to the new reporting regime may be a complex and sometimes confusing process for U.S. MNEs; the results of a CbC test run will not only provide a readiness test, but also provide a risk assessment with respect to certain related party transactions that may appear to lack business purpose or economic substance.