Final rules govern U.S. country-by-country reporting

The IRS issued final regulations on Wednesday implementing new country-by-country reporting requirements, under which the ultimate parent entity of a multinational enterprise group (MNE group) with revenue of $850 million or more in the preceding annual accounting period must file Form 8975, Country-by-Country Report (T.D. 9773). (The form is still under development.)

The rules finalize proposed regulations issued last December with a few changes in response to comments (REG-109822-15). They are intended to conform U.S. reporting requirements with the rules of the Organisation for Economic Co-operation and Development’s (OECD’s) Action Plan on Base Erosion and Profit Shifting (BEPS), which are designed to prevent multinational companies from shifting profits to low- or no-tax jurisdictions. All OECD and G-20 countries have committed to the adoption of country-by-country reporting requirements for multinational companies.

In the regulations, an “ultimate parent entity” of a U.S. MNE group is defined as a U.S. business entity that controls a group of business entities (constituent entities), at least one of which is organized or tax resident outside of the United States, that are required to consolidate their accounts for financial reporting purposes under U.S. GAAP, or that would be required to consolidate their accounts if equity interests in the U.S. business entity were publicly traded on a U.S. securities exchange. Although a number of commenters suggested expanding the definition of constituent entities to include variable-interest entities with lower ownership thresholds, the IRS did not adopt the suggestion.

The regulations require an MNE group to report on a country-by-country basis income and taxes paid, together with certain indicators of the location of economic activity within the MNE group, for each constituent entity.

One significant and taxpayer-friendly change from the proposed regulations is the elimination of the reporting requirements for certain entities owned by individual taxpayers. Under the proposed rules, grantor trusts, decedents’ estates, and bankruptcy estates were subject to the reporting rules even if they were owned by individuals. The final rules eliminate this requirement.

The final regulations also make a number of clarifying changes from the proposed rules. For example, the final regulations clarify that foreign insurance companies that elect under Sec. 953(d) to be treated as domestic corporations will be treated as U.S. business entities that have their tax jurisdiction of residence in the United States. The rules also clarify how partnerships and “stateless entities” are treated and amend the definition of a permanent establishment to be more consistent with the OECD rules. (Stateless entities are entities that have no tax jurisdiction of residence.)

Another clarification had to do with the definitions of employees and independent contractors, specifically in which tax jurisdiction they were located. According to the preamble, the treatment in the proposed rules is inconsistent with the way the OECD BEPS project determines the location of employees. Employees of a constituent entity are included in the tax jurisdiction of residence of that entity because determining where employees work is burdensome for U.S. MNE groups and would be especially difficult for traveling employees.

Because the proposed rules were to apply to tax years beginning after they were finalized, the filing requirements apply to tax years beginning on or after June 30, 2016, even though the OECD country-by-country reporting rules apply beginning Jan. 1, 2016. To make it easier to comply with the OECD rules, the IRS intends to issue separate guidance permitting voluntary early adoption of the U.S. country-by-country reporting rules.

OECD guidance

Wednesday also saw the release of guidance on the implementation of country-by-country reporting by the OECD. It is designed to assist member countries in adopting country-by-country reporting rules.

The OECD guidance addresses transitional filing options for MNE groups that operate in some jurisdictions (such as the United States) that have not adopted country-by-country reporting effective for Jan. 1, 2016; the application of country-by-country reporting to investment funds and partnerships; and how currency fluctuations will affect the €750 million ($825 million) filing threshold (the country-by-country reporting rules would apply to MNE groups that have global annual revenues of more than €750 million).

The OECD also promises to provide information on country-specific aspects of implementing country-by-country reporting (including effective dates), on local filing and surrogate filing procedures, and on identifying the agreements for exchange of country-by-country reports that are in effect.

—Sally P. Schreiber (schreiber@aicpa.org) is a JofA senior editor, and Alistair M. Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.