The Organisation for Economic Co-operation and Development (OECD) and the US Internal Revenue Service (IRS) separately issued guidance on Wednesday regarding the new requirement for multinational companies to report income and taxes paid on a country-by-country basis.
Under the IRS’s final regulations, the ultimate parent entity of a US multinational enterprise group (MNE group) with revenue of $850 million or more in the preceding accounting period must file Form 8975, Country-by-Country Report (T.D. 9773). (The form is still under development.)
The rules finalise proposed regulations issued by the IRS last December with a few changes in response to comments (REG-109822-15). They are intended to conform US reporting requirements with the rules of the 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 G20 countries have committed to the adoption of country-by-country reporting requirements for multinational companies.
In the IRS regulations, an “ultimate parent entity” of a US MNE group is defined as a US business entity that controls a group of business entities (constituent entities), at least one of which is organised or tax resident outside of the US, that are required to consolidate their accounts for financial reporting purposes under US GAAP, or that would be required to consolidate their accounts if equity interests in the US business entity were publicly traded on a US 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 Internal Revenue Code Sec. 953(d) to be treated as domestic corporations will be treated as US business entities that have their tax jurisdiction of residence in the US. 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 US MNE groups and would be especially difficult for travelling employees.
Because the proposed rules were to apply to tax years beginning after they were finalised, the filing requirements apply to tax years beginning on or after June 30th 2016, even though the OECD country-by-country reporting rules apply beginning January 1st 2016. To make it easier to comply with the OECD rules, the IRS intends to issue separate guidance permitting voluntary early adoption of the US country-by-country reporting rules.
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 US) that have not adopted country-by-country reporting effective for January 1st 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.