Multinational Companies Must Now Comply With Country-by-Country Reporting
There is an international movement afoot calling for countries to adopt standards for collecting and sharing information on income, activities, and taxes paid by multinational companies conducting business within their borders. This is known as country-by-country (CbC) reporting, and the United States Treasury and IRS have gotten on board. Final regulations for CbC reporting were issued early in 2016 and are effective for tax years beginning on or after June 30, 2016.
This means that a U.S. entity that is the ultimate parent entity of a multinational enterprise group (MNE) with revenue for the preceding annual accounting period of $850 million or more must file a CbC report with the IRS using Form 8975. The form must be filed with the ultimate parent entity’s income tax return on or before the due date, including extensions. Form 8975 and the accompanying instructions are still under development.
Failure to comply with CbC disclosure requirements may result in penalties under Section 6038. Penalties can be as high as $10,000 for each annual accounting period in which reports aren’t filed.
Country-by-country reporting collects multinational company data
CbC reporting regulations are ultimately about transparency and exposing international tax sleights of hand. The Organization for Economic Cooperation and Development (OECD) issued final recommendations for combating aggressive tax planning and increasing tax disclosure in its Base Erosion and Profit Shifting (BEPS) 2015 Final Report. The report encourages OECD member countries to adopt standards for amassing and disclosing data about multinational companies’ revenues, profits, taxes, borrowings, and other essential figures.
Form 8975 disclosure requirements
The breadth of disclosure required by these regulations is quite vast. Once the regulations are finalized, it is expected that impacted U.S. parent companies will be required to disclose the following items with respect to their constituent (i.e., generally greater than 50 percent-owned) entities:
- Complete legal name of the constituent entity
- Tax jurisdiction, if any, in which the 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, if any, used for the constituent entity by the tax administration of the constituent entity's tax jurisdiction of residence
- Main business activity or activities of the constituent entity
In addition, U.S. parent companies likely will need to disclose the following items on an aggregate basis for each tax jurisdiction in which one or more constituent entities has a tax residence:
- Revenues generated from transactions with other constituent entities
- Revenues not generated from transactions with other constituent entities
- 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, reflecting only operations in the relevant annual period and excluding deferred taxes or provisions for uncertain tax liabilities
- Stated capital, except that the stated capital of a permanent establishment must be reported in the tax jurisdiction of residence of the legal entity of which it is a permanent establishment unless there is a defined capital requirement in the permanent establishment tax jurisdiction for regulatory purposes
- Total accumulated earnings, except that accumulated earnings of a permanent establishment must be reported by the legal entity of which it is a permanent establishment
- Total number of employees on a full-time equivalent basis
- Net book value of tangible assets, which does not include cash or cash equivalents, intangibles, or financial assets
How we can help
If you are affected by these regulations, you should evaluate and update your company’s internal financial reporting processes to comply with Form 8975 disclosure requirements. Much of the information collected by the IRS will not be available in routine, separate company general ledger balance sheet and income statement reports generated by most accounting systems. You may need to develop a customized CbC reporting template.
You should also consider how your disclosures will be interpreted by the IRS. The data provided may expose weaknesses in your company’s transfer pricing policies and the like, which could be mitigated in advance of the initial Form 8975 filing. CLA’s global tax and compliance professionals can assist you with developing the necessary information system enhancements to comply with these CbC reporting regulations, designing audit work programs to test the ongoing integrity of your data collection processes, and analyzing metrics to evaluate areas at risk of tax audit.