Friday, September 8, 2017
The OECD's Inclusive Framework on BEPS has released two sets of guidance to give greater certainty to tax administrations and MNE Groups alike on the implementation and operation of Country-by-Country (CbC) Reporting (BEPS Action 13).
Existing guidance on the implementation of CbC Reporting has been updated and now addresses the following issues: 1) the definition of revenues; 2) the treatment of MNE groups with a short accounting period; and 3) the treatment of the amount of income tax accrued and income tax paid. The complete set of interpretative guidance related to CbC Reporting issued so far is presented in the document released today. This will continue to be updated with any further guidance that may be agreed.
Guidance has also been released on the appropriate use of the information contained in CbC Reports. This includes guidance on the meaning of "appropriate use", the consequences of non-compliance with the appropriate use condition and approaches that may be used by tax administrations to ensure the appropriate use of CbCR information.
On June 8, 2015, the OECD published the Country-by-Country Reporting Implementation Package (CbC Implementation Package). The CbC Implementation Package establishes four key aspects:
- the timing of preparation and filing of the CbC Report,
- the scope of MNEs subject to CbC Reporting,
- the conditions underpinning the obtaining and use of the CbC Report, and
- the framework for government-to-government mechanisms to exchange CbC Reports.
In accordance with the February 2015 Guidance, the Country-by-Country Reporting Implementation Package consists of: (1) model legislation which could be used by countries to require the ultimate parent entity of an MNE group to file the CbC Report in its jurisdiction of residence including backup filing requirements and (2) three model Competent Authority Agreements that could be used to facilitate implementation of the exchange of CbC Reports, based on the Multilateral Convention on Administrative Assistance in Tax Matters; bilateral tax conventions; and Tax Information Exchange Agreements (TIEAs).
The OECD has drawn from the Multilateral Convention on Administrative Assistance in Tax Matters and the Multilateral Competent Authority Agreement for the implementation of the Common Reporting Standard (CRS) (relevant for exchange of financial information concerning individuals) and created the Multilateral Competent Authority Agreement on the Exchange of CbC Reports (the “CbC MCAA”). The CbC MCAA mechanism for authorization between countries may be either the exchange of information article of the double tax treaties or of Tax Information Exchange Agreements. As of June 22, 2017, the CbCR MCAA has attracted 64 countries signatories. The U.S. is not a signatory. The U.S. will instead exchange country-by-country reports via its existing tax treaty network. As of August 20, 2017, the countries that the U.S. will undertake CbCR with are: Australia, Belgium, Brazil, Canada, Denmark, Estonia, Guernsey, Iceland, Ireland, Ilse of Man, Jamaica, Latvia, Malta, Netherlands, New Zealand, Norway, Republic of Korea, Slovakia, and South Africa.
The CbC MCAA establishes protocols and procedures for Competent Authorities of jurisdictions to automatically exchange CbC Reports prepared by the reporting entity of an MNE Group and filed on an annual basis with the tax authorities of the jurisdiction of tax residence of that entity and with the tax authorities of all jurisdictions in which the MNE Group operates. The OECD reported that it will develop an XML Schema and a related User Guide for the electronic exchange of CbC Reports, following the path established by the CRS.
The OECD BEPS country-by-country reporting initiative is receiving, in particular among developing countries, wide spread interest and adoption for 2016 by many countries. While the IRS currently relies on Forms 5471 and 5472, and the Schedule UTP where applicable, from fiscal year 2016, adhering to the OECD’s schedule, the IRS will also require country-by-country reporting. The Treasury Department’s 2015–16 Priority Guidance Plan highlighted that Treasury examined regulations under Sections 6011 and 6038 to incorporate country-by-country reporting of income, earnings, taxes paid, and certain economic activity for transfer pricing risk assessment. Senator Orrin Hatch has raised the issue as to whether Congress has given Treasury the statutory authority to initiate this reporting requirement.
On December 23, 2015, the U.S. Treasury issued proposed regulation REG-109822-15. On June 29, 2016, consistent with the proposed regulations and the OECD’s Action 13 Final Report, the Treasury released the final regulations requiring that annual country by country reporting by certain U.S. persons that are the ultimate parent entity of a multinational enterprise group. The final regulations (TD 9773) affect a U.S. person that is the ultimate parent entity of a multinational enterprise group with annual revenue for the preceding annual accounting period of at least $850 million.
The regulations are effective from June 30, 2016 although the regulations allow a U.S. person to voluntary file a CbCR that includes the time period from January 1, 2016 in order to avoid a CbCR compliance reporting gap because of foreign tax administrations’ adoption of the OECD applicable date. The final regulations amend the proposed regulations to reflect the official number of the form, Form 8975, Country-by-Country Report, (Form 8975 or CbCR).
On January 11, 2017, Treasury published the draft Form 8975 and its accompanying Schedule A for financial information, and a final version in June 2017. The 2017 final instructions were also released June of 2017. The IRS has established a CbCR Guidance website.
Some countries have adopted country-by-country (CbC) reporting requirements for annual accounting periods beginning on or after January 1, 2016, that would require a constituent entity resident in the jurisdiction to report CbC information if the constituent entity is part of an MNE group with an ultimate parent entity resident in a jurisdiction that does not have a CbC reporting requirement for the same annual accounting period (local CbC filing). Consequently, constituent entities of a U.S. MNE group may be subject to local CbC filing for early reporting periods unless the ultimate parent entity files a Form 8975 or reports CbC information to another jurisdiction that accepts surrogate filing for such early reporting period. Rev. Proc. 2017–23 describes the process for filing Form 8975, Country-by-Country Report, and accompanying Schedules A, Tax Jurisdiction and Constituent Entity Information (collectively, Form 8975), by ultimate parent entities of U.S. multinational enterprise (MNE) groups for reporting periods beginning on or after January 1, 2016.
Beginning on September 1, 2017, Form 8975 may be filed for an early reporting period with the income tax return or other return as provided in the Instructions to Form 8975 for the taxable year of the ultimate parent entity of the U.S. MNE group with or within which the early reporting period ends. An ultimate parent entity that files its return electronically must file the Form 8975 through the IRS Modernized e-File system in Extensible Markup Language (XML) format, not as a binary attachment (such as a PDF file). As of April 17, 2017, the IRS provided specific electronic filing information and XMS markup language files for Form 8975 to the software industry so that developers are able to make Form 8975 available in their software ahead of the September 1, 2017 implementation date. For filers of Form 8975 that are not eligible to use Modernized e-File to file their income tax return, a paper version of Form 8975 is available.