January 7, 2016

IRS Releases Proposed Country-by-Country Reporting Regulations

Contributors Elizabeth Mullen, Tax & Business Services partner, and
Andrew DeSimone, Tax & Business Services senior

IRS Releases Proposed Country-by-Country Reporting Regulations Tax & Business

The Internal Revenue Service (“IRS”) released proposed regulations on December 21 that would require certain companies to annually report information relating to income and taxes on a country-by-country (CbC) basis. The proposed regulations would 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 the rules are made final, ensuring that for most companies they would not take effect before January 1, 2017.

The proposed regulations would require the ultimate parent entity of an MNE group to file an as-yet-unreleased form, to be called “CbC Report.” 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 is 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 CbC report must be filed with the company’s annual tax return.

The IRS has stated that it will not use the information in the report to replace a transfer pricing determination based on a best-method analysis, and transfer pricing adjustments will not be based solely on a CbC report. However, a CbC report may be used as the basis for making further examinations into transfer pricing practices or other tax matters in the course of an investigation of a member of a MNE group.

The type of information that will be reported on the IRS form is similar to the Organization for Economic Cooperation and Development’s (“OECD”) model template for CbC reporting adopted under its BEPS project, with some variations to reflect differing U.S. reporting requirements. The proposed regulations require the parent to report the following information for each tax jurisdiction in which an entity is resident:

  • Revenues generated from transactions with other constituent entities of the U.S. MNE group;
  • Revenues not generated from transactions with other constituent entities of the U.S. MNE group;
  • Profit (or loss) before income tax;
  • Income tax paid on a cash basis to all tax jurisdictions, including any taxes withheld on payments received;
  • Accrued tax expense recorded on taxable profits (or losses), reflecting only the operations in the relevant annual accounting period and excluding deferred taxes or provisions for uncertain tax positions;
  • Stated capital;
  • Accumulated earnings;
  • Number of employees on a full-time equivalent basis in the relevant tax jurisdiction; and
  • Net book value of tangible assets other than cash or cash equivalents.

A sample template is provided in the preamble to the proposed regulations.

The preamble also explains that, because the information to be reported on the new form is return information subject to the confidentiality rules of Sec. 6103, the information provided will be exchanged only under information exchange agreements with other jurisdictions that require the other jurisdictions to maintain confidentiality. If the IRS later determines that another jurisdiction is not maintaining those privacy standards, it will suspend the information exchange with that jurisdiction until it is satisfied the problem has been fixed.

If you have any questions, do not hesitate to contact your Marcum professional.

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