In Time for the New Year: Treasury Issues Proposed Regulations for CbC Reporting
Author: Elizabeth Hazzard
“They’re here! On time and everything,” is what my mother often exclaims when visitors arrive for family and holiday celebrations. The same can be said for the U.S. Treasury Department releasing the proposed regulations for the Country by Country (CbC) Reporting Template. Treasury delivered on its promise to issue the proposed regulations before the end of 2015.
The CbC template arises from an initiative of the Organisation for Economic Co-operation and Development (OECD) and the G-20 to conquer perceived base erosion and profit shifting (BEPS) by multinational enterprises (MNE). The OECD identifies BEPS as “tax planning strategies that exploit [the] gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.” Action Item 13 of the BEPS project introduced CbC reporting by creating a template to gather certain information by tax jurisdiction for MNEs with consolidated revenues in excess of €750 million. The template was created as part of the BEPS initiative to offer tax authorities a high-level overview of whether an MNE’s profit and taxes paid are commensurate with its activity in their country relative to other countries where the MNE has a presence. OECD and G-20 member countries are expected to use legislation to provide guidance and mandate filing of the CbC template.
Summary of the Proposed U.S. Treasury Regulations
The proposed Treasury Regulations will be applicable to MNEs where the ultimate parent entity resides in the U.S. According to the regulations, the ultimate parent entity of a U.S. MNE “owns directly or indirectly a sufficient interest in one or more” international business entities so that it “is required to consolidate the accounts of the other business entities with its own accounts under U.S. [GAAP] principles.” In addition, the U.S. MNE group must have $850 million in consolidated revenue for the previous tax year before it needs to begin using the template. The IRS may share or exchange the CbC template with foreign tax authorities in which a U.S. MNE group operates and a tax treaty is in effect between the U.S. and that country. The preamble of the proposed regulations mentions a possible exception for certain MNEs for the reporting obligation if there’s a perceived national security issue associated with sharing the CbC template with other countries.
The information to be provided by the U.S. MNE parent company and accompanied by its U.S. tax return (including extensions) should come from financial statements, local country books and records or records used for tax reporting purposes. All amounts reported should be in U.S. dollars. The template requests the following information:
- Tax jurisdiction in which each constituent entity is resident for tax purposes
- Tax jurisdiction in which the constituent entity is organized or incorporated (if different from the tax jurisdiction of residence)
- Tax identification number used for the constituent entity
- Main business activities of each constituent entity
- Revenue generated from transactions with other constituent entities, i.e., related-party transactions
- Revenue not generated from transactions with other constituent entities, i.e., third-party transactions
- Profit or loss before income tax
- Total income tax paid on a cash basis to all tax jurisdictions and any taxes withheld on payments received by the constituent entities
- Total accrued tax expense recorded on taxable profits or losses only for operations in the relevant annual accounting period and excluding deferred taxes or provisions for uncertain tax liabilities
- Stated capital of all the constituent entities
- Total accumulated earnings
- Total number of employees on a full-time equivalent basis
- Net book value of tangible assets other than cash or cash equivalents
The requested information reflects the model of the template finalized by the OECD and G-20 countries on October 5, 2015. These proposed regulations will become effective for the ultimate parent entity of U.S. MNEs for tax years beginning on or after the date the regulations are finalized. Since these are proposed regulations, Treasury has requested comments from the public.
If you’d like to further discuss how these proposed regulations may affect your company, contact a BKD transfer pricing specialist.