On Dec. 21, 2015, the IRS issued proposed regulations that would require the annual filing of country-by-country information reports in accordance with the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit sharing (BEPS) recommendations. The OECD and the G-20 countries released 15 action items in October 2015 to address certain tax strategies and structures used by multinational companies. Action 13 of the 15 recommends a three-tiered approach to transfer pricing documentation:
- Maintain a “master file” that contains information at a high level about the global business.
- Maintain a “local file” that contains transactional information specific to the particular country.
- Maintain a “country-by-country report” that contains certain information including the number of employees, stated capital, retained earnings, and tangible capital for each jurisdiction within which the multinational is doing business. Each entity in the group that does business in the country and the nature of the business also must be disclosed on a jurisdictional basis.
The OECD has recommended that the new requirements be reported for fiscal years beginning on or after Jan. 1, 2016, and be applicable to all multinationals with global consolidated revenue of 750 million euros (approximately $850 million) or more. The master and local files should be filed with the local tax authorities. The country-by-country report, however, should be filed with the tax authority where the parent is a tax resident and will be shared between jurisdictions under exchange-of-information agreements. As the OECD has no legislative authority, it is up to each country to enact the specific legislation to adopt the OECD recommendations.
The proposed regulations would provide that a U.S. parent of a multinational group would have to make an annual return on a form to be developed and used for the country-by-country report. The regulations do not address the information to be included in the master file or local files. The proposed regulations would require the information to be reported for each tax jurisdiction on an aggregate basis for all entities resident in the jurisdiction. The information to be provided would include:
- Revenues with related parties
- Revenues from unrelated parties
- Profit or loss before tax
- Taxes paid, including withholding taxes
- Total accrued taxes
- Stated capital of all entities
- Accumulated earnings
- Number of full-time equivalent employees per jurisdiction
- Net book value of tangible assets
The information to be provided under the proposed regulations would have to be based on certified financial statements, books and records, or records maintained for tax reporting purposes. It would not be necessary for a reporting enterprise to reconcile the information reported in a jurisdiction to the consolidated financial statements or tax returns of the particular tax jurisdiction. Reporting entities would, however, be required to maintain records to support the information filed. The OECD has provided a template for countries to follow in drafting the country-by-country reporting requirements. The U.S. Department of Treasury has indicated that while it wishes to minimize any variations from the template, there may be additional information or areas of clarification that might be included when the form is developed.
The effective date for U.S. multinationals to report the information required will be for tax years that begin after the date the regulations are published as final in the Federal Register. However, U.S. multinationals still may be required to file a country-by-country report with other countries.