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.

IRS Releases Final Regulations Imposing Country-by-Country Reporting

As part of its effort to combat tax base erosion and international profit shifting, the IRS finalized regulations requiring country-by-country (CbC) reporting by U.S. persons that are the ultimate parent entity of a multinational enterprise (MNE) group with revenue of $850 million or more in the preceding accounting year. The final regulations, set forth in Treasury Regulation § 1.6038-4, 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 preamble to the final regulations notes that comments expressed general support for implementing CbC reporting in the United States. The new reporting requirements are imposed on all parent entities with taxable years beginning on or after June 30, 2016. The final regulations will require reporting on new Form 8975, the “Country by Country Report,” which the IRS is currently developing.

In a prior post, we addressed ABA comments on the proposed regulations, and the final regulations address several of those comments.

  • The ABA noted the hardships that would arise from a mid-2016 effective date due to the need to submit reports to foreign tax authorities for 2016 and problems for calendar year-end U.S. MNEs with an accounting year that begins before the publication date of the final regulations and extends into 2017. In the preamble to the final regulations, the IRS notes that it will work to avoid duplicate reporting in 2016 and will release separate, forthcoming guidance to address accounting years beginning before the final regulations’ publication date and extending into 2017.
  • The ABA noted a need for clarification of the “tax jurisdiction of residency” for purposes of determining territorial income, so the final regulations state that a country with a purely territorial tax regime can be a tax jurisdiction of residence and clarify the meaning of “fiscal autonomy” for purposes of determining whether a non-country jurisdiction is a tax jurisdiction.
  • The ABA requested clarification on the treatment of partnerships under the $850,000 reporting threshold, and the final regulations provide that distributions from a partnership to a partner are not included in the partner’s revenue.
  • The ABA requested tie-breaker rules for residency determinations, and the proposed regulations declined to issue such a rule but noted that Form 8975 may provide guidance.
  • The ABA requested greater flexibility with respect to the time and manner of filing CbC reports, but the IRS rejected this request (though the preamble to the final regulations states that Form 8975 may prescribe an alternative time and manner for filing).

We will provide an update upon the release of Form 8975 that discusses the form itself and any important additions it makes to the final regulations.