IRS Issues Guidance for Early Country-by-Country Reporting

Recently, the IRS issued guidance for multinational enterprises (MNEs) with at least $850 million in annual revenue based in the United States that may have constituent entities subject to country-by-country (CbC) reporting requirements in foreign jurisdictions because of the effective date of CbC reporting in the United States.  CbC reporting aims to eliminate tax avoidance by multinational companies by requiring MNEs to report certain indicators of the MNE’s economic activity in each country and allowing the tax authorities to share that information with one another.

In the U.S., MNEs make the CbC report on Form 8975, “Country-by-Country” report.  The report contains revenue, profit or loss, capital, and accumulated earnings data for each country of operation.  Last year, the IRS issued final regulations requiring these reports for reporting periods that begin on or after the first day of the first taxable year of the ultimate parent entity beginning after June 30, 2016.  (See prior coverage.)  However, several countries have implemented CbC reporting on constituent entities for periods beginning on or after January 1, 2016.  As a result, constituent entities of a U.S. MNE may be subject to local CbC filing in their jurisdictions for reporting periods before the effective date of the final regulations unless the ultimate parent files Form 8975 for the earlier period or reports CbC information to another jurisdiction that accepts a surrogate filing for the U.S. MNE.

Revenue Procedure 2017-23 provides that the ultimate parent of a U.S. MNE may choose to voluntarily file Form 8975 and the accompanying Schedule A for reporting periods beginning after January 1, 2016 and before June 30, 2016.  Beginning on September 1, 2017, a parent entity may file Form 8975 for an early reporting period that ends with or during the parent entity’s tax year by attaching it to its tax return for such year.  If the ultimate parent has already filed its tax return for such year, it must file an amended return and attach Form 8975 within 12 months of the end of such tax year to file the CbC report for the early reporting period.

The IRS encourages entities that file their tax returns electronically to also file Form 8975 electronically.  Form 8975 must be filed through the IRS Modernized e-File system in XML format.  Paper forms will be made available before the September 1, 2017, deadline for filers who cannot file the form in XML format.

Need for Increased Understanding of Multinational Corporate Structures Leads to Electronic Country-by-Country Reporting

In order to increase understanding of the ways in which multinational corporations structure their operations, the Organization for Economic Co-Operation and Development (OECD) will require jurisdictions to exchange such information in a standardized format beginning in 2018.  Specifically, multinational corporations must report revenue, profit or loss, capital and accumulated earnings, and number of employees for each country in which they operate.  Each jurisdiction’s tax administration uses these reports to identify the bases of economic activity for each of these companies, with the goal being to limit tax base erosion and profit shifting.  The tax administrations then exchange the reports, a process that the OECD hopes to streamline through use of this standardized format.

The new reporting template, named the “CbC XML Schema,” applies to corporations with annual consolidated revenue of at least €750 million (US$842 million) in the immediately preceding fiscal year.  The template will apply to all countries that have adopted the multilateral competent authority agreement (MCAA) on the exchange of country-by-country reports, which currently includes thirty-two countries.  Notably, the United States has not signed the agreement, but it intends to implement country-by-country reporting through bilateral agreements.  Although the primary purpose of the reports will be inter-jurisdictional, corporations may also rely on the report for domestic reporting purposes, so long as the report is mandated domestically.