The IRS has issued final regulations that require annual country-by-country (CbC) reporting by certain United States persons that are the ultimate parent entity of a multinational enterprise (MNE) group. The final regulations affect U.S. persons that are the ultimate parent entity of a multinational enterprise group that has annual revenue for the preceding annual accounting period of $850,000,000 or more. The final regulations adopt, as amended, proposed regulations published on December 23, 2015 (NPRM REG-109822-15).
Among the amendments and clarifications of the proposed rules reflected in the final regulations are the following:
• -The official number of the CbC reporting form is Form 8975, Country-by-Country Report (Form 8975 or CbCR).
• -Consistent with the G20 Final BEPS (Base Erosion and Profit Shifting) Report, the term “permanent establishment” in the definition of business entity includes: (1) a branch or business establishment of a constituent entity in a tax jurisdiction that is treated as a permanent establishment under an income tax convention to which that tax jurisdiction is a party, (2) a branch or business establishment of a constituent entity that is liable to tax in the tax jurisdiction in which it is located pursuant to the domestic law of that tax jurisdiction, or (3) a branch or business establishment of a constituent entity that is treated in the same manner for tax purposes as an entity separate from its owner by the owner’s tax jurisdiction of residence.
• -Decedents’ estates, individuals’ bankruptcy estates, and grantor trusts within the meaning of Code Sec. 671, all the owners of which are individuals, are excluded from the definition of business entity.
• -Foreign insurance companies that elect to be treated as domestic corporations under Code Sec. 953(d) are U.S. business entities that have their tax jurisdiction of residence in the United States.
• -There is no general exception for information that may relate to national security.
• -The tax jurisdiction of residence information with respect to stateless entities is provided on an aggregate basis for all stateless entities in a U.S. MNE group, and each stateless entity-owner’s share of the revenue and profit of its stateless entity is also included in the information for the tax jurisdiction of residence of the stateless entity-owner.
• -Distributions from a partnership to a partner are not included in the partner’s revenue.
• -Remittances from a permanent establishment to its constituent entity-owner are not included in the constituent entity owner’s revenue.
• -Tangible assets do not include intangibles or financial assets.
• -Employees of a constituent entity are reflected in the tax jurisdiction of residence of that constituent entity.
• -The reporting period covered by Form 8975 is the period of the ultimate parent entity’s annual applicable financial statement that ends with or within the ultimate parent entity’s tax year, or, if the ultimate parent entity does not prepare an annual applicable financial statement, then the ultimate parent entity’s tax year. Also, the source of the tax jurisdiction of residence information on the CbCR must be based on applicable financial statements, books and records, regulatory financial statements, or records used for tax reporting or internal management control purposes for an annual period of each constituent entity ending with or within the reporting period.
• -A U.S. territory ultimate parent entity may designate a U.S. business entity that it controls (as defined in Code Sec. 6038(e)) to file on the U.S. territory ultimate parent entity’s behalf the CbCR that the U.S. territory ultimate parent entity would be required to file if it were a U.S. business entity.
• -A business entity will not have a tax jurisdiction of residence in a jurisdiction solely by reason of being liable to tax in the jurisdiction on fixed, determinable, annual or periodical income from sources or capital situated in the jurisdiction.
• -A U.S. territory or possession of the United States, defined as American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands, is considered to have fiscal autonomy for purposes of CbC reporting.
• -In the case of a tax jurisdiction that does not impose an income tax on corporations, a corporation that is organized or managed in that tax jurisdiction will be treated as resident in that tax jurisdiction, unless the corporation is treated as resident in another tax jurisdiction under another provision of the final regulations.
• -The information provided on the CbCR is return information subject to the confidentiality protections of Code Sec. 6103.
The final regulations apply to reporting periods of ultimate parent entities of U.S. MNE groups that begin on or after the first day of a tax year of the ultimate parent entity that begins on or after June 30, 2016.