IRS Proposes Country-by-Country Reporting Rules for 2017

Dec. 21 — The IRS proposed rules requiring large companies to report information including the amount of revenue, profit or loss, capital and accumulated earnings for each country of operation, consistent with OECD recommendations designed to combat base erosion and profit shifting.

The proposed rules (REG-109822-15, RIN 1545-BM70) would apply to U.S. parent companies—those with at least $850 million in annual revenue for the preceding annual accounting period—for the taxable year beginning on or after the rules are made final, ensuring that for most companies they wouldn’t take effect before Jan. 1, 2017.

The country-by-country rules were approved by the Organization for Economic Cooperation and Development as part of its effort to curb tax avoidance. Recommendations released by the OECD on Oct. 5 would require companies with annual consolidated group revenue of 750 million euros ($819 million) or more to submit a global blueprint of their operations to the tax authority in the country where the ultimate parent company resides. That information can be made available, through treaty information exchange networks, to all countries in which the company is present (193 DTR I-2, 10/6/15).

National Security

In its proposed regulations, the Internal Revenue Service asked for feedback on whether there are national security implications of the country-by-country reporting requirement.

The agency noted that granting exceptions would require it to “coordinate with other federal agencies, such as the Department of Defense, to determine whether such an exception is warranted.”

The IRS requests “comments with respect to the procedures that a U.S. person should be required to follow in order to demonstrate a national security reason to receive an exception,” according to the proposed rules.

Who Qualifies?

The IRS also requested comments on how it should determine which entities qualify as U.S. parent organizations—and thus fall under the requirement—and, of those filers, which entities are considered part of their organization.

It notes that there may be situations in which U.S. generally accepted accounting principles, or regulations applying to companies that file with the Securities and Exchange Commission, might “permit or require consolidated financial accounting for reasons other than majority ownership and situations, if any, where U.S. GAAP or U.S. securities regulations permit separate financial accounting of majority-owned enterprises.”

Enforcement

In the introduction to the proposed regulations, the IRS said the documentation requirements will be useful in its enforcement of U.S. tax law.

It said the country-by-country reports of both U.S. and foreign entities “will help the IRS perform high-level transfer pricing risk identification and assessment,” although the information contained within them will “not itself constitute conclusive evidence that transfer pricing practices are or are not consistent with the arm’s length standard.”

The reports must be filed with the company’s annual tax return.

David Ernick, a principal with PricewaterhouseCoopers LLP in Washington, said that this gives filers less time than the one-year period initially recommended by the OECD.

“That gives a little less time to prepare, and that also might have a little bit of a substantive impact in how you put the report together,” he said, noting that all of the necessary information from financial statements may not be available at that filing deadline.

Opposition in Congress

Since the OECD recommendations on country-by-country reporting were first announced earlier this year, they have become a political flashpoint, with many Republicans questioning whether Treasury has the authority to issue the regulations without congressional approval.

One Republican in Congress has already promised to put the new regulations under a harsh magnifying glass.
“New country-by-country reporting requirements on U.S. companies must be limited and should not make it even harder for our companies to compete,” said Rep. Kevin Brady (R-Texas), chairman of the House Ways and Means Committee.

Brady promised that he and Rep. Charles Boustany Jr. (R-La.) would “closely review” the legislation.

“Congress will not allow Treasury to move forward with BEPS policies that enable foreign governments to misuse information reporting and exploit American companies,” he said.