The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9773)—Reg. section 1.6038-4—requiring annual country-by-country (CbC) reporting by certain U.S. persons that are the ultimate parent entity of a multinational enterprise group that has annual revenue for the preceding annual accounting period of $850 million or more.
The final regulations [PDF 251 KB] are effective 30 June 2016 (the date of publication of the regulations in the Federal Register).
Today’s release finalizes regulations that were proposed in proposed form in December 2015. The final regulations were issued following a public hearing and receipt of comments. After consideration of the comments, the proposed regulations are adopted as amended by today’s Treasury decision.
The preamble to the final regulations examines comments received in response to the proposed regulations and explains why certain comments were—or were not—adopted. For instance, comments that CbC reporting would result in high compliance costs for multinational enterprises (MNEs) and would result in the disclosure of sensitive information were rejected.
Today's final regulations amend the proposed regulations to reflect the official number of the required form—Form 8975, Country-by-Country Report.
Entities. With regards to entities required to file CbC reports, the final regulations do not modify the definition of constituent entity in the proposed regulations, making it clear that reporting is not required for foreign corporations or foreign partnership for which the ultimate parent entity is not required furnish information under section 6038(a).
The final regulations do, however, modify the reference to a permanent establishment in the definition of business entity for greater clarity and consistency with the intended meaning of the BEPS final report. Accordingly, the final regulations provide that the term permanent establishment includes:
The final regulations also exclude from the definition of “business entity,” decedents’ estates, individuals’ bankruptcy estates, and grantor trusts within the meaning of section 671, when all the owners are individuals.
In response to a comment, the final regulations expressly provide that foreign insurance companies that elect to be treated as domestic corporations under section 953(d) are U.S. business entities that have their tax jurisdiction of residence in the United States.
National security. After consulting with the U.S. Defense Department, the IRS and Treasury declined to provide a general exception for information that may relate to national security. The preamble indicates, however, that the Defense Department continues to consider the national security implications of the CbC reporting in particular fact patterns, and future guidance may be issued to provide procedures for taxpayers to consult with the Defense Department regarding the appropriate presentation of CbC information in such fact patterns.
Partnerships, stateless entities. A comment requested clarification as to whether a partnership or its partners, or both, are to report the partnership’s CbC information. In response, the final regulations provide that the tax jurisdiction of residence information with respect to stateless entities is provided on an aggregate basis for all stateless entities in a U.S. MNE group and that each stateless entity-owner’s share of the revenue and profit of its stateless entity is also 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.
As explained in the preamble, the stateless entity-owner reports its share of the stateless entity’s revenues and profits in the owner’s tax jurisdiction of residence even if that jurisdiction treats the stateless entity as a separate entity for tax purposes (i.e., as a reverse hybrid). In a situation when a partnership creates a permanent establishment for itself or its partners, the CbC information with respect to the permanent establishment is not reported as stateless, but instead is reported as part of the information on the CbC report for the permanent establishment’s tax jurisdiction of residence.
Definitions. 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 specially exclude intangibles or financial assets from the term “tangible assets,” putting the definition in line with the OECD CbC rules.
As noted in the preamble, other countries have adopted CbC reporting requirements for annual accounting periods beginning on or after January 1, 2016, that would require reporting of CbC information by constituent entities of MNE groups with an ultimate parent entity resident in a tax jurisdiction that does not have a CbC reporting requirement for the same annual accounting period. While the final regulations are not applicable for tax years of ultimate parent entities beginning before June 30, 2016 (i.e., the date of publication of the final regulations in the Federal Register), the IRS and Treasury intend to allow ultimate parent entities of U.S. MNE groups and U.S. business entities designated by a U.S. 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, 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 preamble indicates that penalty rules under section 6038 apply to Form 8975, including reasonable cause relief for failure to file.
In a related development today, the OECD announced the release of guidance on the implementation of CbC reporting. The OECD guidance sets out: (1) transitional filing options for MNEs that voluntarily file in the “parent jurisdiction;” (2) guidance on the application of CbC reporting to investment funds; (3) guidance on the application of CbC reporting to partnerships; and (4) the impact of exchange rate fluctuations on the €750 million filing threshold for MNE groups. Read TaxNewsFlash-BEPS
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