Five New CAAs on Exchange of CbC Reports Pushes Total to 27

The IRS has concluded competent authority arrangements (“CAAs”) for the exchange of country-by-country (“CbC”) reports with the Czech Republic, Finland, Greece, Italy, and Sweden.  The new arrangements bring the number of CAAs for the exchange of CbC reports to 27.  The CAAs for the exchange of CbC reports generally require the competent authorities of the foreign country and the United States to exchange annually, on an automatic basis, CbC reports received from each reporting entity that is a tax resident in its jurisdiction, provided that one or more constituent entities of the reporting entity’s group is a tax resident in the other jurisdiction, or is subject to tax with respect to the business carried out through a permanent establishment in the other jurisdiction.

In the United States, CbC reporting is required for U.S. persons that are the ultimate parent entity of a multinational enterprise (“MNE”) with revenue of $850 million or more in the preceding accounting year, for reporting years beginning on or after June 30, 2016, under the IRS’s final regulations issued last summer (see prior coverage).  Reporting entities must file a new Form 8975 (“Country by Country Report”) and Schedule A to Form 8975 (“Tax Jurisdiction and Constituent Entity Information”).  In Revenue Procedure 2017-23, the IRS announced that U.S. MNEs may voluntarily file Form 8975 with the IRS for taxable years beginning on or after January 1, 2016, and before June 30, 2016.  U.S. MNEs that do not voluntarily file with the IRS may be subject to CbC reporting in foreign jurisdictions in which they have constituent entities.

As we have previously reported, a CAA generally must be in force with a foreign jurisdiction for CbC reports filed with the IRS by a U.S. MNE to satisfy the CbC reporting requirements under foreign law.  Although the new agreements are welcome, the pace at which the IRS has concluded CAA negotiations with foreign jurisdictions continues to raise concerns that U.S. MNEs may be subject to foreign filing requirements, as many foreign jurisdictions that have adopted CbC reporting requirements under the OECD’s Base Erosion and Profit Shifting Action 13 have done so with respect to reporting years beginning on or after January 1, 2016.  The United States’ decision to pursue bilateral CAAs with each foreign jurisdiction rather than sign a multilateral CAA has made the implementation process longer than that in other jurisdictions.  The U.S. CAAs are substantially similar to the multilateral CAA, but numerous foreign jurisdictions have not yet signed a bilateral CAA with the IRS, including China, France, Germany, Mexico, and Japan, although a number of these jurisdictions are in negotiations with the United States.

The IRS maintains a status table of foreign jurisdictions on its CbC Reporting web site.  The table identifies foreign countries with which the U.S. is in negotiations for a CAA and that have satisfied the United States’ data safeguards and infrastructure review.  Although the foreign jurisdictions listed have consented to being listed, the web site warns that taxpayers cannot rely on the table for assurances that the CAAs will be adopted by the end of 2017.  Although U.S. voluntary reporting for early reporting periods began on September 1, U.S. MNEs should monitor continuing developments to determine whether delays in the U.S. CAA process may necessitate the filing of CbC reports in foreign jurisdictions in addition to the United States.

New CAAs on Exchange of CbC Reports Pushes Total to 20

The IRS has concluded competent authority arrangements (“CAAs”) for the exchange of country-by-country (“CbC”) reports with Australia and the United Kingdom.  The CAA with Australia was signed in Australia on July 14 and by the United States on August 1.  The CAA with the United Kingdom was signed on August 16.  The new arrangements bring the number of CAAs for the exchange of CbC reports to 20. The CAAs for the exchange of CbC reports generally require the competent authorities of the foreign country and the United States to exchange annually, on an automatic basis, CbC reports received from each reporting entity that is a tax resident in its jurisdiction, provided that one or more constituent entities of the reporting entity’s group is a tax resident in the other jurisdiction, or is subject to tax with respect to the business carried out through a permanent establishment in the other jurisdiction.

In the United States, CbC reporting is required for U.S. persons that are the ultimate parent entity of a multinational enterprise (“MNE”) with revenue of $850 million or more in the preceding accounting year, for reporting years beginning on or after June 30, 2016, under the IRS’s final regulations issued last summer (see prior coverage).  Reporting entities must file a new Form 8975 (“Country by Country Report”) and Schedule A to Form 8975 (“Tax Jurisdiction and Constituent Entity Information”).  In Revenue Procedure 2017-23, the IRS announced that U.S. MNEs may voluntarily file Form 8975 with the IRS for taxable years beginning on or after January 1, 2016, and before June 30, 2016.  U.S. MNEs that do not voluntarily file with the IRS may be subject to CbC reporting in foreign jurisdictions in which they have constituent entities.

A CAA generally must be in force with a foreign jurisdiction for CbC reports filed with the IRS by a U.S. MNE to satisfy the CbC reporting requirements under foreign law.  This has raised concerns about the pace at which the IRS has concluded CAA negotiations with foreign jurisdictions.  Many foreign jurisdictions that have adopted CbC reporting requirements under the OECD’s Base Erosion and Profit Shifting Action 13 have done so with respect to reporting years beginning on or after January 1, 2016.  Most of those countries have signed a multilateral CAA, but the United States has chosen instead to pursue bilateral CAAs with each foreign jurisdiction—likely due to U.S. concerns regarding the use of the information contained in the CbC reports and potential public disclosure of the information.  The U.S. CAAs are substantially similar to the multilateral CAA, but numerous foreign jurisdictions have not yet signed a bilateral CAA with the IRS, including China, France, Germany, Mexico, and Japan.

The IRS maintains a status table of foreign jurisdictions on its CbC Reporting page.  With voluntary reporting for early reporting periods set to begin on September 1, U.S. MNEs should monitor continuing developments to determine whether delays in the U.S. CAA process may necessitate the filing of CbC reports in foreign jurisdictions.

IRS Releases Five CbC Reporting Agreements

The IRS has released the first set of competent authority arrangements (CAAs) for the automatic exchange of country-by-country (CbC) reports, with Iceland, Norway, the Netherlands, New Zealand, and South Africa.  These CAAs are implemented under Action 13 of the Organization for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project, requiring jurisdictions to exchange standardized CbC reports beginning in 2018.  Specifically, under the OECD’s Guidance (see prior coverage regarding recent updates), multinational enterprise (MNE) groups with $750 million Euros or a near equivalent amount in domestic currency must report revenue, profit or loss, capital and accumulated earnings, and number of employees for each country in which they operate.  These CbC reports will assist each jurisdiction’s tax authorities to identify the bases of economic activity for each of these companies, in order to combat tax base erosion and profit shifting.

The CAAs are substantially similar, and each requires the competent authorities of the foreign country and the United States to exchange annually, on an automatic basis, CbC reports received from each reporting entity that is a tax resident in its jurisdiction, provided that one or more constituent entities of the reporting entity’s group is a tax resident in the other jurisdiction, or is subject to tax with respect to the business carried out through a permanent establishment in the other jurisdiction.  Each competent authority is to notify the other competent authority when it has reason to believe that CbC reporting is incorrect or incomplete or the reporting entity did not comply with its CbC reporting obligations under domestic law.

The CAAs provide an aggressive implementation schedule.  Generally, a CbC report is intended to be first exchanged with respect to fiscal years of MNEs commencing on or after January 1, 2016 (or January 1, 2017 in the case of Iceland).  This CbC report is intended to be exchanged as soon as possible and no later than 18 months after the last day of the MNE’s fiscal year to which the report relates.  For fiscal years of MNEs commencing on or after January 1, 2017 (or January 1, 2018 in the case of Iceland), the CbC reports are intended to be exchanged as soon as possible and no later than 15 months after the last day of the fiscal year.

In the United States, CbC reporting is required for U.S. persons that are the ultimate parent entity of a MNE with revenue of $850 million or more in the preceding accounting year, for taxable years beginning on or after June 30, 2016, under the IRS’s final regulations issued last summer (see prior coverage).  Reporting entities must file a new Form 8975, the “Country by Country Report,” which the IRS is currently developing.

We will provide updates upon the release of additional CAAs, the Form 8975, and OECD guidance on CbC reporting.

OECD Issues Array of Guidance on Country-by-Country Reporting and Automatic Exchange of Tax Information

In an effort to help jurisdictions implement consistent domestic rules that align with recent guidance issued by the Organization for Economic Co-operation and Development (OECD), the OECD issued a series of guidance to further explain its country-by-country (CbC) reporting, most importantly by clarifying certain terms and defining the accounting standards that apply under the regime.  Each of these efforts relate to Action 13 of the OECD’s Base Erosion and Profit Shifting (BEPS) project, which applies to tax information reporting of multinational enterprise (MNE) groups.  CbC reporting aims to eliminate tax avoidance by multinational companies by requiring MNE groups to report certain indicators of the MNE group’s economic activity in each country and allowing the tax authorities to share that information with one another.  For additional background on CbC reporting, please see our prior coverage.

The most substantial piece of the OECD’s new guidance is an update to the OECD’s “Guidance on the Implementation of Country-by-Country Reporting–BEPS Action 13.”  The update clarifies: (1) the definition of the term “revenues”; (2) the accounting principles and standards for determining the existence of and membership in a “group”; (3) the definition of “total consolidated group revenue”; (4); the treatment of major shareholdings; and (5) the definition of the term “related parties.”  Specifically with respect to accounting standards, if equity interests of the ultimate parent entity of the group are traded on a public securities exchange, domestic jurisdictions should require that the MNE group be determined using the consolidation rules of the accounting standards already used by the group.  However, if equity interests of the ultimate parent entity of the group are not traded on a public securities exchange, domestic jurisdictions may allow the group to choose to use either (i) local generally accepted accounting principles (GAAP) of the ultimate parent entity’s jurisdiction or (ii) international financial reporting standards (IFRS).

To further define its Common Reporting Standard (CRS) for exchanging tax information, the OECD also issued twelve new frequently asked questions on the application of the standard.

Finally, the OECD issued a second edition of its Standard for Automatic Exchange of Financial Account Information in Tax Matters, which contains an expanded XML Schema (see prior coverage for additional information), used to electronically report MNE group information in a standardized 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.

NGOs Argue For Public CbC Reporting and Clearer Definition of Employee

At an IRS hearing (transcript) on May 13, NGOs that advocate for tax transparency and financial fairness argued that the Treasury and the IRS should publish country-by-country (CbC) reports.  In December 2015, the Treasury and the IRS issued proposed regulations  (see previous coverage) requiring CbC reporting by a U.S. parent entity of a multinational enterprise (MNE) group with annual revenue of $850 million or more.  These reports contain information on a CbC basis of a MNE group’s income and taxes paid, and certain indicators of economic activity (e.g., the number of employees, the size of investments in the subsidiaries, the profits and losses), to help the tax authorities combat tax base erosion and profit shifting.

The reports would be protected from disclosure and could be only used by the IRS, other U.S. governmental agencies in specific circumstances, and competent authorities of treaty partners who also adhere to strict confidentiality rules.  However, representatives from several NGOs requested the CbC reports be made public.  The groups argued that base erosion and profit shifting are problems too complex and burdensome for U.S. tax authorities to handle on their own, and that publishing the reports would “crowd source” the work.  These NGOs suggested that even if the Treasury and the IRS do not publish CbC reports, they should at least (a) deem the CbC reports Treasury reports that other federal law enforcement and senior policy makers can use and not tax returns subject to the confidentiality rules under Section 6103 or (b) provide aggregate data on CbC reporting if the reports are considered tax returns.

Heather Lowe, representing Global Financial Integrity, pointed out that the proposed regulations treat employees and independent contractors ambiguously.  The proposed regulations would require a reporting entity to count the number of full-time equivalent (FTE) employees, which are determined by reference to “employees that perform their activities for the U.S. MNE group within [the] tax jurisdiction of residence.”  For this purpose, a reporting entity “may” count as employees “independent contractors that participate in the ordinary operating activities of a constituent entity.”  But the proposed regulations do not further define “independent contractors” and “ordinary operating activities.”   Lowe suggested that employees should include (a) people for whom the subsidiary pays payroll, Social Security, and other employment taxes, and (b) people for whom those taxes would be paid were they employed by the parent entity in the U.S.

Some NGOs also argued for expanding the scope of CbC reports to include information on deferred taxes and uncertain tax positions—two potential indicators of profit shifting and tax avoidance.  Currently, the IRS requires corporations with $10 million or more in assets to report uncertain tax, but the proposed regulations do not require CbC reporting of this information.