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IRS Issues Final Country-by-Country Reporting Regulations for Large Multinationals

Contributor: Elizabeth Mullen, Partner, Tax & Business
Andrew DeSimone, Senior, Tax & Business Services

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The Internal Revenue Service ("IRS") released finalized regulations on Wednesday, June 29, that require certain companies to annually report information relating to income and taxes on a Country-by-Country ("CbC") basis.

The finalized regulations apply to businesses that are U.S. parents of multinational enterprise ("MNE") groups with an annual revenue of at least $850 million for the preceding annual accounting period for the taxable year beginning on or after June 30 2016. The final regulations aligns U.S. corporate tax policy with the global guidelines proposed by the Organization for Economic Cooperation and Development ("OECD") in its Base Erosion and Profit Shifting ("BEPS") project.

The finalized regulations require the ultimate parent entity of an MNE group to file Form 8975, which the IRS has yet to release. An ultimate parent entity of a U.S. MNE group is defined as a U.S. entity that controls a group of business entities, at least one of which is organized or a 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. The Form 8975 must be filed with the company's federal income tax return.

The final regulations put into place a commitment made last year by the U.S. to adopt CbC reporting, along with the OECD. U.S. MNEs will report their financial information to the IRS and in turn the federal government will make the information available to tax authorities in other countries where the MNE has subsidiaries, if the countries meet confidentiality requirements and data safeguards. This move is part of the IRS and OECD's initiative to discourage MNEs from inappropriately moving profits to low-tax countries.

Although these regulations currently apply to large MNEs, it is anticipated that transfer pricing documentation requirements will shift to the CbC model for MNEs with revenues less than $850 million, in the not too distant future. Robust and consistent tax documentation is a requirement to defend transfer pricing in place and to avoid significant penalties. The increase in transparency and the greater need for global consistency resulting from CbC reporting will require some businesses to increase the resources devoted to transfer pricing compliance.

Should you have questions related to this Tax Flash, contact your Marcum tax advisor.

 
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