Proposed Regulations Outline Country-by-Country Reporting Requirements

To conform U.S. procedures with the Organisation for Economic Co-operation and Development’s base erosion and profit shifting (BEPS) project to prevent multinational companies from shifting profits to low- or no-tax jurisdictions, the IRS issued proposed rules governing country-by-country reporting by any U.S. person that is the “ultimate parent entity” of a multinational enterprise (MNE) group (REG-109822-15). The rules would require the ultimate parent entity of an MNE group with revenue of $850 million or more in the preceding accounting period to file an as-yet-unreleased form, to be called Country-by-Country Report, starting with tax years beginning after the regulations are published as final.

An ultimate parent entity of a U.S. MNE group is defined as a U.S. business entity that controls a group of business entities, at least one of which is organized or 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.

A business entity would be considered resident in a tax jurisdiction if, under the jurisdiction’s laws, the business entity is liable to tax based on place of management, place of organization, or other similar rules, but not just because it is liable to tax on income or capital located there. The proposed regulations also prescribe how to determine the tax jurisdiction of residence of a business entity that is resident in more than one tax jurisdiction or that is a permanent establishment.

The rules require reporting the MNE group’s income and taxes paid, together with certain indicators of the location of economic activity within the MNE group, for each constituent entity. A constituent entity is defined as any separate business entity of the U.S. MNE group, except for a foreign corporation or partnership whose parent is not required to report under Sec. 6038(a), which requires U.S. persons who control foreign business entities to file information returns.

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 country-by-country report. However, a country-by-country report may be used as the basis for making further inquiries into transfer-pricing practices or other tax matters in the course of an examination of a member of an MNE group.

The types of information that will be reported on the IRS form are consistent with the OECD’s model template for country-by-country reporting adopted under its BEPS project, with some modifications to reflect differing U.S. reporting requirements. A sample template is provided in the preamble to the proposed regulations.

The preamble 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.

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.