On June 29, 2016, the Internal Revenue Service and the Treasury Department released much-anticipated final regulations (TD 9773) on country-by-country (CbC) reporting (the Final Regulations). The Final Regulations "apply to reporting periods of ultimate parent entities of US multinational enterprise (MNE) groups that begin on or after the first day of the tax year of the ultimate parent entity that begins on or after" June 30, 2016.

The preamble to the Final Regulations also announced the intention of the IRS and Treasury to allow voluntary CbC reporting, under guidance to be published separately, for reporting periods that begin on or after January 1, 2016, and before the applicable date of the regulations.

CbC reporting requirement

The Final Regulations require CbC reporting by the ultimate parent entity of a US MNE group with annual revenue of $850 million or more for the immediately preceding reporting period. The required reporting must contain information, on a country-by-country basis, related to the US MNE group's income and taxes paid, together with certain indicators of the location of economic activity within the US MNE group. In general, the regulations are modeled on the Organisation of Economic Co-operation and Development (OECD) recommendations for CbC reporting under Action 13 of the OECD and G20 Base Erosion and Profit Shifting (BEPS) project.

New CbC reporting form, Form 8975 (which is still under development), must be filed with the ultimate parent entity's timely filed income tax return for the tax year, in or with which the reporting period ends, on or before the due date (including extensions) for filing such returns. In general, the reporting period is defined as the period of the ultimate parent entity's applicable financial statement prepared for the 12-month period ending with or within the ultimate parent entity's tax year.

Voluntary reporting before applicability of Final Regulations

Some countries have implemented CbC reporting for years beginning January 1, 2016. Because of the mismatch in applicability dates, there was a concern that constituent entities of US MNE groups may be subject to reporting requirements in foreign jurisdictions under a secondary reporting mechanism. To address this issue, the preamble to the Final Regulations states that Treasury and the IRS intend to allow ultimate parent entities of US MNE groups to file CbC reports for reporting periods that begin on or after January 1, 2016, but before the applicable date of the Final Regulations, under a procedure to be provided in separate, forthcoming guidance.

In addition, the Preamble states that the Treasury Department is working to ensure that foreign jurisdictions implementing CbC reporting requirements will not require constituent entities of US MNE groups to file a CbC report with the foreign jurisdiction if the US MNE group files a CbC report with the IRS under this procedure and the CbC report is exchanged with that foreign jurisdiction under a competent authority arrangement.

On June 29, 2016, the OECD released additional guidance aimed at the consistent implementation of CbC reporting under Action 13. The OECD guidance refers to voluntary filing by the ultimate parent entity that some countries are contemplating, including the US, for periods commencing after January 1, 2016, and refers to this voluntary filing as "parent surrogate filing." The OECD guidance recommends that, where surrogate filing (including parent surrogate filing) is available, no local filing obligation would be required.

Changes in Final Regulations

The Final Regulations adopt, with some changes, rules issued in proposed form (REG-109822-15) on December 21, 2015 (the Proposed Regulations). For a discussion of the Proposed Regulations, see Tax Alert 2015-2442.

The Preamble notes that the changes in the Final Regulations respond to comments received on the Proposed Regulation, and include changes that would:

— Modify the definition of "business entity" to exclude decedents' estates and individuals' bankruptcy estates and Section 671 grantor trusts whose owners are individuals

— Modify the definition of "permanent establishment"

— Expressly provide that foreign insurance companies electing to be treated as domestic corporations under Section 953(d) are US business entities that have their tax jurisdiction of residence in the US

Consistent with the Proposed Regulations, the Final Regulations provide that a business entity that is treated as a partnership in the tax jurisdiction in which it is organized and that does not own or create a permanent establishment in that or another tax jurisdiction generally will have no tax jurisdiction of residence, except for purposes of determining the ultimate parent entity of a US MNE group. In response to requests for clarification of the reporting requirements for partnerships, the Final Regulations provide that the tax jurisdiction of residence information for stateless entities, which may include partnerships, is provided on an aggregate basis for all stateless entities in a US MNE group. In addition, each stateless entity-owner's share of the revenue and profit is also included in the information for the tax jurisdiction of residence of the stateless entity-owner. The Preamble clarifies that this rule applies irrespective of whether the stateless entity-owner is liable to tax on its share of the stateless entity's income in the owner's tax jurisdiction of residence. Thus, in these circumstances, the revenue and profit of the stateless entity would be reported on two different lines on the CbC report.

Among other provisions, the Final Regulations:

— Exclude certain amounts from the term "revenue," including payments received from other constituent entities that are treated as dividends in the payor's tax jurisdiction of residence, and distributions from fiscally transparent entities and PEs that are constituent entities and that are not considered revenue of the recipient-owner. The term revenue also does not include certain imputed earnings or deemed dividends received from other constituent entities

— Provide that, for a constituent entity that is exempt from tax under certain sections of the Internal Revenue Code, the term revenue includes only revenue that is reflected in unrelated business taxable income as defined in Section 512

— Provide that employees of a constituent entity are reflected on the CbC report in the tax jurisdiction of that constituent entity

— Allow a US territory ultimate parent entity to designate a US business entity that it controls (as defined in Section 6038(e)) to file on the US territory ultimate parent entity's behalf a CbC report in the US, provided certain conditions are met

A detailed Alert addressing the Final Regulations is forthcoming.

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