Proposed Regulations on Country-by-Country Reporting Raises Concerns for ABA

On March 23, 2016, the American Bar Association (ABA) Section of Taxation commented on proposed Treasury regulations requiring country-by-country (CbC) reporting by U.S. persons that are the ultimate parent entity of a multinational enterprise (MNE) group with annual revenue of $850 million or more in the preceding accounting year.  Issued in December 2015, Proposed Regulation § 1.6038-4 would require these U.S. persons to file annual reports containing information on a CbC basis of a MNE group’s income, taxes paid, and certain indicators of the location of economic activity.

The United States, through bilateral agreements with other tax jurisdictions, may exchange U.S. CbC reports with those tax jurisdictions in which the U.S. MNE group operates. Every information exchange agreement to which the United States is a party requires both parties to treat the information as confidential, implement data safeguards, and use the information only for tax administration purposes. The United States will stop automatic exchange with tax jurisdictions violating those requirements until the violations are cured.

Aimed at combating tax base erosion and international profit shifting, the proposed regulation will give the IRS greater transparency into the operations and tax positions taken by U.S. MNE groups. While the information in a CbC report will not itself constitute conclusive evidence of federal income tax or transfer pricing violations, they may form the basis for the IRS’s further inquiries into transfer pricing practices or other tax matters.

Members of the ABA Taxation Section, while generally supportive of the proposed regulations, urged the IRS to implement changes and provide clarification. Section members expressed concern that the delay of the U.S. effective date to mid-2016 “will cause hardships for U.S. companies because they will be required to submit CbC reports directly to foreign tax authorities for fiscal year 2016 with the concomitant problems of multiple filings and potentially weaker data confidentiality protections.” Further, a mid-year effective date would cause reporting issues for calendar year-end U.S. MNEs with foreign constituents having a 2016 accounting year that begins before the publication date of the final regulations and carries over into 2017.

Regarding the timing and manner of filing reports, section members urged the IRS to allow MNEs (a) to file within a 12-month period after the end of the accounting period to which the report relates, rather than impose an accelerated deadline; and (b) to use mix-source data to generate their CbC reports. Section members also asked the IRS to issue tie-breaker rules for residency determinations, clarify the meaning of “tax jurisdiction of residence” for purposes of determining territorial income, and clarify how partnerships are treated under the $850 million threshold.