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Treasury Finalizes Regulations for Country-by-Country Reporting

June 29, 2016

Is your business the U.S. parent of a multinational group? There are recently released reporting requirements that you should be aware of.

The IRS has finalize regulations that will require the U.S. parent of a multinational group (“US MNE”) to file a Country-by-Country (“CbC”) report with its income tax return (including extensions). The threshold for this reporting requirement is for those US MNEs with annual revenues of the entire consolidated group of at least $850 million.

When does reporting begin?

Those US MNEs that meet this threshold will need to file this CbC report starting with the taxable year that begins on or after June 30, 2016. This means that those taxpayers with a fiscal year starting before July 1, 2016 will not file for tax year 2016 and will have a “gap year” in filing requirements.

What kind of information must be reported?

Under Treasury Regulation §1.6038-4 the IRS will require Form 8975 to be prepared by the US MNE. On this Form 8975, the US MNE parent will provide summary data for each jurisdiction in which the multinational is considered either a resident or non-resident. This summary data includes: revenue, income, taxes, and other indicators of economic activity in each jurisdiction. This information is reported on an annual basis each year, and the form is filed with the parent taxpayer’s annual tax return filing.

There are two parts to the data that will be provided on this as of yet to be named tax form:

1. First, each entity in the MNE must be separately identified and provide the following information:

  • The tax jurisdiction the entity is a resident of;
  • Where it is organized;
  • A tax identification number (if applicable); and
  • The main business activity or activities it provides.

2. Second, the following must be disclosed for each jurisdiction:

  • Revenue generated from transactions with other entities within the US MNE;
  • Revenues not generated from these intercompany transactions;
  • Profit or loss before income tax;
  • Total income tax paid on a cash basis to all tax jurisdictions;
  • Total accrued tax expense recorded on taxable profits and losses;
  • Stated capital of all entities in the US MNE;
  • Total accumulated earnings;
  • Total number of full-time employees; and
  • Net book value of tangible assets other than cash or cash equivalents.

What are the penalties?

Since the new regulations will fall under Section 6038 of the Internal Revenue Code, the penalties associated with this code will apply for failure to file this CbC report if the taxpayer meets the threshold requirements for filing. Therefore, failure to file will likely come with a $10,000 penalty per form and will likely leave the statute open on the tax return itself.

Information might not be easily accessible...Consult your tax advisor!

The form itself it quite detailed, as it requires multiple layers of information for each entity in a US MNE. Much of this information is not a usual requirement for a tax return and the company may not have this information easily accessible. Taxpayers should consult with their tax advisors on whether they meet the threshold filing requirements and begin to put policies in place now on how they will gather all the necessary information the form requires from each entity.

KLR’s Global Tax Service Team is happy to help with any questions.

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