US Outbound: Final country-by-country reporting regulations issued
The US Treasury Department and Internal Revenue Service (IRS) released final regulations on June 29, requiring annual country-by-country reporting (CbCR) by certain US taxpayers that are the ultimate parent entity of a multinational enterprise group with an annual revenue for the preceding annual accounting period of $850 million or more.
Published in the Federal Register, final regulations (T.D. 9773), Reg. section 1.6038-4, are effective as of June 30 2016.
These regulations intend to conform US income tax reporting rules to recommendations adopted by the OECD in October 2015 under Action 13 of its BEPS package.
The final regulations amend the rules proposed in December 2015 to reflect the official number of the required form – Form 8975, Country-by-Country Report.
With regards to entities required to file CbC reports, the final regulations maintain the definition of constituent entity proposed in the December draft regulations, making it clear that reporting is not required for foreign corporations or foreign partnerships for which the ultimate parent entity is not required to furnish information under section 6038(a).
However, the final regulations do modify the reference to a permanent establishment in the definition of business entity for greater clarity and consistency with the intended meaning of the OECD BEPS final report.
Partnerships and stateless entities
The final regulations state that the tax jurisdiction of residence information with respect to stateless entities is provided on an aggregate basis for all stateless entities in a US MNE group. In addition, each stateless entity-owner's share of the revenue and profit of its stateless entity should also be included in the information for the tax jurisdiction of residence of the stateless entity-owner. This rule applies whether or not the stateless entity-owner is liable to tax on its share of the stateless entity's income in the owner's tax jurisdiction of residence.
The final regulations also clarify the term revenue, making it clear that that distributions from a partnership to a partner are not included in the partner's revenue. Likewise, the final regulations provide that remittances from a permanent establishment to its constituent entity-owner are not included in the constituent entity owner's revenue. Imputed earnings and deemed dividends that are taken into account solely for tax purposes are also generally excluded from the term "revenue".
The final regulations specifically exclude intangibles or financial assets from the term "tangible assets", putting the definition in line with the OECD CbCR rules.
Effective date and filing requirements
Other countries have adopted CbCR requirements for annual accounting periods beginning on or after January 1 2016, which would require information to be submitted by constituent entities of MNE groups with an ultimate parent entity resident in a tax jurisdiction that does not have a CbCR requirement for the same annual accounting period.
While the US final regulations are not applicable for tax years of ultimate parent entities beginning before June 30 2016, the IRS and Treasury intend to allow ultimate parent entities of US MNE groups and US business entities designated by a US territory ultimate parent entity to file CbC reports for reporting periods that begin on or after January 1 2016, but before the applicability date of the final regulations. This is possible under a procedure to be provided in separate, forthcoming guidance.
In general, Form 8975 must be filed with the ultimate parent entity's income tax return for the tax year in or with which the reporting period ends. Furthermore, the regulation's preamble indicates that penalty rules under section 6038 apply to Form 8975, including reasonable cause relief for failure to file.
Businesses should consult with their tax advisers to ensure compliance with the reporting requirements.
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