IRS Issues Proposed Regulations Implementing CbC Reporting
December 2015On December 22, 2015, The Treasury and the IRS issued proposed regulations under section 6038 to implement the country-by-country (“CbC”) reporting template described in Action 13: Transfer Pricing Documentation and Reporting of the Base Erosion and Profit Shifting Project of the G20 and OECD (the “Action 13 Final Report”). At this time, the IRS has not issued a form to collect the information required by the proposed regulations.
In general, the proposed regulations are consistent with the recommendations of the Action 13 Final Report. However, the proposed regulations would be effective for taxable years beginning on or after the date the proposed regulations are published in final form. Thus, for calendar U.S. taxpayers, CbC reporting would not begin until the 2017 calendar year, at the earliest. Consistent with the Action 13 Final Report, other countries are requiring CbC reporting beginning with the 2016 tax year.
During 2014 and 2015, as part of the BEPS consultation process, G20 and OECD countries agreed on a model template for the collection of certain country-by-country information from large multinational groups. The final model template requires much less information than earlier versions of the template that were circulated as a result, at least in part, of comments provided by U.S. taxpayers and the U.S. Treasury.
Under CbC reporting, the parent of the multinational group collects the country-by-country information for purposes of completing the template. This template is filed with the tax authorities of the country of residence of the parent company. The information in the template is intended to be shared with other jurisdictions, under income tax treaties and tax information exchange agreements, for the purpose of allowing those jurisdictions, as well as United States, to assess the risk that the group’s transfer pricing is not arm’s-length. The information in the template may not be the sole basis for a transfer pricing adjustment, however. Tax authorities also must keep the information provided confidential. If a country fails to follow these limitations, the United States may cease to share data with that country. At least one IRS official has made a public statement to that effect.
Overview of the regulations
Under the proposed regulations, reporting is required by the “ultimate parent entity of a U.S. multinational enterprise (MNE) group.” The term is defined as a U.S. business entity that, directly or indirectly, owns a sufficient interest in one or more other business entities that are organized or tax resident outside the United States such that the U.S. business entity is required to consolidate the accounts of the other business entity (or entities) with its own accounts under U.S. GAAP (or would be so required if the U.S. business entity were publicly traded). This reporting is intended to apply only to large MNE groups. Reporting is not required if the annual revenue of the U.S. MNE group for the immediately preceding annual accounting period was less than $850 million.
The information required by proposed regulations conforms to the Action 13 Final Report. For each jurisdiction, the ultimate parent entity of the U.S. MNE group must provide: (i) revenues generated from transactions with other related entities of the U.S. MNE group, (ii) revenues not generated from transactions with other related entities of the U.S. MNE group, (iii) profit or loss before income tax, (iv) income tax paid on a cash basis to all tax jurisdictions, including any taxes withheld on payments received, (v) accrued tax expense, (vi) stated capital, (vii) accumulate earnings, (viii) number of employees on a full-time equivalent basis, and (ix) net book value of tangible assets (other than cash or cash equivalents).
This information must be filed with the timely file tax return of the ultimate parent of the U.S. MNE group. The proposed regulations also provide that the ultimate parent also must maintain records to support the information provided.
The preamble to the proposed regulations is relatively lengthy. It points out that the information collected under the proposed regulations may benefit the U.S. fisc (as well as foreign taxing jurisdictions). It also points out that even though the contents of the CbC template were agreed among G20 and OECD countries, the proposed regulations have been tailored to be consistent with the reporting requirements under sections 6001, 6011, 6012, 6031 and 6038. The preamble, therefore, responds to a Congressional concern that the Treasury’s authority to implement CbC reporting was “questionable.”
There is also a concern, among U.S. multinationals and some in Congress, that CbC reporting will facilitate transfer pricing adjustments that will increase the foreign income tax liability of U.S. multinationals. As the United States provides a foreign tax credit, under its internal law and by income tax treaty, these additional foreign income taxes may ultimately result in a reduction in U.S. tax revenue. At this time, it appears that Congress is willing to live with that possibility.
 Available at: https://www.federalregister.gov/articles/2015/12/23/2015-32145/country-by-country-reporting/. Prop Reg. § 1.6038-4(b)(1). Prop Reg. § 1.6038-4(h). Sen. Orrin Hatch and Rep. Paul Ryan questioned the IRS’s authority to implement CbC reporting in a letter to Sec. Lew dated June 9, 2015. Their letter states: “[w]e believe the authority to request, collect and share this information with foreign governments is questionable.” The letter make two major requests: First, Treasury should provide “a legal memorandum detailing [the Treasury’s] authority for requesting and collecting this CbC information from certain U.S. multinationals and master file information from U.S. subsidiaries of foreign multinationals.” The letter also requests “a document: (i) identifying how the CBC reporting and other transfer pricing documentation obtained by the IRS on foreign multinationals operating United States will be utilized, and (ii) providing the justification for agreeing that sensitive master file information on U.S. multinationals can be collected directly by foreign governments.”
Tax Insights Blog