On June 30, 2016, the U.S. Department of the Treasury issued final regulations governing the filing of Form 8975, “Country-by-Country Report” (CBC report). The regulations affect all U.S. business entities that are the ultimate parent entity of a multinational enterprise (MNE) group with global consolidated revenue of at least $850 million for the preceding annual accounting period. The final regulations are effective for tax years that start on or after June 30, 2016. Businesses will be required to file the CBC report with their annual tax return on Form 8975, which has yet to be released.
The final regulations closely mirror the suggested rules contained in the Base Erosion and Profit Shifting Action 13: “Transfer Pricing Documentation and Country-by-Country Reporting,” published by the Organization for Economic Cooperation and Development (OECD) and Group of 20 nations in October 2015. Since Action 13 was published, more than 20 nations – mostly OECD member countries – are requiring multinational companies to file the CBC report for tax years starting on Jan. 1, 2016.
The regulations provide that the following information will need to be reported on Form 8975:
- The complete legal name of each entity in the MNE group
- The tax jurisdiction, if any, in which the entity is resident for tax purposes
- The tax jurisdiction in which the entity is organized or incorporated (if different from the tax jurisdiction of residence)
- The tax identification number, if any, used for the entity by the tax administration of the constituent entity’s tax jurisdiction of residence
- The main business activity or activities of each entity
For each entity in the group, Form 8975 must contain the following information with respect to each tax jurisdiction in which one or more entities of a U.S. group is a resident, presented as an aggregate of the information for the entities that reside in each tax jurisdiction:
- Revenues generated from transactions with other entities in an MNE group
- Revenues not generated from transactions within an MNE group
- Profit or loss before income tax
- Total income tax paid on a cash basis to all tax jurisdictions and any taxes withheld on payments received by the member’s group
- Total accrued tax expense recorded on taxable profits or losses, reflecting only operations in the relevant annual period and excluding deferred taxes or provisions for uncertain tax liabilities
- Stated capital, except that the stated capital of a permanent establishment must be reported in the tax jurisdiction of residence of the legal entity of which it is a permanent establishment unless there is a defined capital requirement in the permanent establishment tax jurisdiction for regulatory purposes
- Total accumulated earnings, except that accumulated earnings of a permanent establishment must be reported by the legal entity of which it is a permanent establishment
- Total number of full-time-equivalent employees
- Net book value of tangible assets, which does not include cash or cash equivalents, intangibles, or financial assets
As a result of the delayed implementation in the U.S., many companies expressed concern that they will have to file individual 2016 CBC reports in each country that will require the reports, creating an increased worldwide tax reporting burden for many U.S. multinationals in 2016. U.S. multinationals that fail to file a required CBC report for 2016 face fines in the hundreds of thousands of dollars. Recognizing this potential difficulty, Treasury announced that it will accept voluntary CBC report filings for the 2016 tax year, which may then be shared with other jurisdictions through bilateral competent authority agreements. The Treasury has committed to enter into bilateral competent authority agreements in a timely manner.
The final regulations clarified a few other issues brought up in comments received during the prior six months.
- Treasury has clarified that employees of a constituent entity should be reported in the same tax jurisdiction of residence of the constituent entity.
- Treasury has concluded that the collection of CBC reports does not constitute a national security threat, and as such the final regulations do not contain any exceptions to the filing of the CBC report for national security reasons.
- The final CBC regulations clarify the types of business entities included in a permanent establishment for purposes of reporting certain information on the CBC report. The new rules are intended to align the language with the definition of permanent establishment contained in the OECD Model Tax Convention contained in Action 7: “Preventing the Artificial Avoidance of Permanent Establishment Status.”
- The final CBC regulations clarify that certain foreign insurance companies that elect Section 953(d) should be treated as residents of the U.S. for reporting purposes. The regulations also clarify how certain partnerships and stateless entities are treated for CBC reporting purposes.