Country by Country Reporting Regulations Finalized
On the last day of June 2016, the Internal Revenue Service (IRS) finalized the CbC Reporting rules that will apply to US multinational enterprises (MNE). The CbC Reporting is required for controlled groups that have revenue in the group in excess of $850 million, starting for calendar year 2017. The reporting will be on a new Form 8975 (yet to be released). This may also impact US entities with foreign owners where the group exceeds this threshold, as implemented in the country of the foreign owner. The threshold for UK and EU entities is €750 million.
Rollout of the OECDs Base Erosion Profit Shifting (BEPS) Project
The CbC reporting requirements is one of the directives from the BEPS project that is now being implemented by various countries, including the US. The country by country reporting is required for each jurisdiction where the ultimate parent company has a controlling interest in a “constituent entity” (CE). A CE is any separate business entity of a US MNE where it has over 50% control of the entity, e.g., a US Controlled Foreign Corporation (CFC). For most OECD countries, the CbC reporting is starting for 2016 activity. The final US regulations will be effective for 2017.
US Ultimate Parent of MNE
This is the business entity that is required to file the Form 8975; it is considered to be a US business entity that owns a foreign corporation. A business entity can be a partnership as well as a corporation. Disregarded foreign corporations that are subject to tax as a foreign corporation would be considered a foreign corporation for reporting purposes. Therefore, "checking the box" of a foreign corporation owned by a US corporation would not avoid this reporting requirement.
Information to be Reported
The new Form 8975 will require separate reporting by tax jurisdictions. If there are multiple CEs in a tax jurisdiction, the information will be aggregated. Because of the complexity and possible double counting in determining the information to be reported, the rules provide for flexibility in the methodology used to accumulate the information. There is no requirement to include a reconciliation schedule to the consolidated financial statement of the ultimate parent of the MNE with the form. However, records do need to be maintained as to the basis for the numbers reported.
Identifying information about each CE will need to be reported. This will include the legal name of the entity, its place of organization, its tax residency, tax ID numbers and its main business activity or activities.
The information to be reported on Form 8975 will include the following on a CbC basis:
- Revenues (turnover) with related parties (CEs) and revenues with others.
- Profit or loss before income tax.
- Taxes paid on a cash basis and withholding taxes on payments received from CEs.
- Accrued tax expense (excluding deferred taxes and UTP (Uncertain Tax Position) taxes.
- Stated capital
- Total accumulated earnings.
- Total number of full time equivalent (FTE) employees.
- Net book value of tangible assets; excludes cash, intangible assets and financial assets.
Conflict between US and Other Countries on Year for Initial Report
The US will start requiring reporting for 2017 while most other countries with the CbC reporting requirements are starting for 2016. This can create a conflict for US MNEs that have operations in these other countries. The IRS announced in these final regulations that they intend to allow US MNEs to file CbC information if they want. However, information on this is to be provided in separate, forthcoming guidance.
Penalties for Failure to File Form 8975
The IRS continues to be aggressive in assessing penalties for failure to file foreign reporting forms, even when this does not change the income tax liability. Other countries will assess penalties, but at a much lower rate (e.g., UK penalty is £300). The penalties are to be assessed under Sec. 6038. Therefore, it appears that penalties could be $10,000 per form, and potential loss of foreign tax credits.
James J. Miesowicz, CPA
Jim Miesowicz has significant experience in helping foreign-owned U.S. entities with a variety of inbound international issues and working with foreign nationals. He offers assistance with structuring international business operations and investments. Jim provides guidance with international inbound and outbound transactions, as well as assisting U.S. companies with establishing operations outside the U.S. Contact Jim at firstname.lastname@example.org or 248.244.3115.