Monday, August 29, 2016

U.S. Treasury Seeks Comments on Form 8975 - CbC Reporting Form

On May 5, 2016 we posted Possible CbC Optional Reporting for 2016 Under Consideration by US Treasury where we discussed that the Treasury and IRS were working towards a solution that would allow optional CbC reporting for 2016 and that more work would be needed to ensure that allowing optional filing for 2016 in the US would be effective in obviating the need for local filing. The Treasury and IRS also requested that US MNCs to engage in the global debate to ensure optional CbC reporting will be enough to protect US MNCs from becoming subject to secondary reporting requirements. 

The OECD recommended that the information required for the master and local files be filed by the MNEs directly with the local tax administrations. On the other hand, the CbC report would be filed in the jurisdiction of the tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of information, pursuant to government-to-government mechanisms such as the multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties, or tax information exchange agreements (TIEAs).
As noted above, the final BEPS Action 13 report recommends that data collection for CbC reporting purposes begin in 2016 for reporting/filing in 2017. Under the secondary mechanism, U.S. Multi-National Enterprisess may be required to file CbC reports directly with other countries in 2017, as a result of the one year gap between when the proposed regs are expected to be finalized and the CbC reporting requirements that are already in place in other countries for 2016.

The IRS had issued final regs. on June 29, 2016 that require annual country-by-country (CbC) reporting by U.S. persons that are the ultimate parent entity of a multinational enterprise (MNE) group that has annual revenue for the preceding annual accounting period of $850 million or more. This information reporting requirement is satisfied by submitting the just released Form 8975, Country-by-Country Report, with an income tax return. TD 9773, 06/29/2016, Reg. § 1.6038-4

On June 29, the same day that IRS issued final Country-by-Country (CbC) reporting regs, the Organization for Economic Cooperation and Development (OECD) published guidance on the implementation of CbC reporting under Action 13 of the G20/OECD base erosion and profit shifting project. The guidance addresses issues arising due to the U.S.'s comparatively delayed implementation date for CbC reporting and specifically provides a voluntary, transitional filing optional called “parent surrogate filing.” OECD, “Guidance on the Implementation of Country-by-Country Reporting: BEPS Action 13” (June 29, 2016). 
Now on August 22, 2016, Treasury published a notice in the Federal Register seeking comments on IRS Form 8975 (Country-by-Country Report), which ultimate parent entities of U.S. multinational enterprise (MNE) groups will use for country-by-country (CbC) reporting purposes. Written comments are due by September 21, 2016.
The notice says that "businesses or other for-profits"
are to be affected by the new CbC
reporting requirement, which Treasury estimates
will take 4,680 Hours to comply with each year!

The Regulation § 1.6038-4(d)(1) says that the following information must be included on Form 8975 with respect to each constituent entity of the U.S. MNE group, as required:
  • The complete legal name of the constituent entity.
  • The tax jurisdiction, if any, in which the constituent entity is resident for tax purposes.
  • The tax jurisdiction in which the constituent entity is organized or incorporated (if different from the tax jurisdiction of residence).
  • The tax identification number, if any, used for the constituent entity by the tax administration of the constituent entity's tax jurisdiction of residence.
  • The main business activity or activities of the constituent entity.
In addition, Form 8975 must contain the following information for each tax jurisdiction in which one or more constituent entities of a U.S. MNE group is resident, presented as an aggregate of the information for the constituent entities resident in each tax jurisdiction (Reg. § 1.6038-4(d)(2)) :
  • Revenues generated from transactions with other constituent entities.
  • Revenues not generated from transactions with other constituent entities.
  • 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 constituent entities.
  • 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 PE must be reported in the tax jurisdiction of residence of the legal entity of which it is a PE unless there is a defined capital requirement in the PE tax jurisdiction for regulatory purposes.
  • Total accumulated earnings, except that accumulated earnings of a PE must be reported by the legal entity of which it is a PE.
  • Total number of employees on a full-time equivalent basis-see Reg. 1.6038-4(d)(3)(iii) for the treatment of independent contractors and other details.
  • Net book value of tangible assets, which does not include cash or cash equivalents, intangibles, or financial assets.
The reporting period covered by IRS Form 8975 is the period of the ultimate parent entity's applicable financial statement prepared for the 12-month period (or a 52-53 week period described in Section 441(f)) that ends with or within the ultimate parent entity's tax year.

If the ultimate parent entity does not prepare an annual applicable financial statement, the reporting period covered by Form 8975 is the 12-month period (or a 52-53 week period described in Section 441(f)) that ends on the last day of the ultimate parent entity's tax year. (Reg. 1.6038-4(c)).
Whatever the reason for the strides, US Multi-National Entities may soon have an optional method for satisfying their CbC reporting requirements for 2016.
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