Proposed IRS Country-by-Country Reporting Regulations: What Do They Mean for You?
Genesis of CbC Reporting and How it will Affect U.S. Multinational Enterprises
Country-by-country (CbC) reporting is essentially exactly what it sounds like: a report that shows every country where a multinational enterprise (MNE) operates and allocates income, earnings and pays taxes.
The CbC report regulations proposed by the Internal Revenue Service are a direct result of guidance issued by the Organization of Economic Development (OECD) and its base erosion and profit shifting (BEPS) initiatives.
The new CbC report will be a requirement for all U.S. MNEs with sales greater than $850 million. The CbC report, once submitted with the tax return, will be automatically shared with tax administrations around the world in each of the countries where the MNE does business. This automatic information exchange is unprecedented and is intended to provide global tax administrations the information needed to conduct efficient, risk-based tax audits. The unintended consequence may be increased compliance costs and an influx of transfer pricing controversy.
U.S. MNEs with more than $850 million in global sales will be required to file the CbC report along with its tax return once the proposed U.S. Treasury regulations are finalized. The anticipated effective date ias June 30, 2016, which would mean reports would need to be submitted with the tax returns filed for tax years beginning on or after July 1, 2016.
The implementation of CbC reporting will likely hit a few bumps along the road as global tax administrations adopt these guidelines at different times and under differing circumstances. For example, while the U.S. waits to finalize its regulations, Australia has already issued guidance that not only requires Australian MNEs to file the CbC report, but also requires foreign MNEs with operations in Australia to file a surrogate CbC report if the parent MNE’s country of tax residence does not require such filing. In short, there’s no place to hide from CbC reporting.
With increased global transparency, MNEs should be mindful of any perceived tax avoidance through the use of tax hybrid structures, tax haven holding companies, or aggressive transfer pricing strategies.
Information is king—and the CbC report is no exception. Global tax administrations will fervently review these reports in an effort to gain an advantage in the complex world of global taxation and transfer pricing. At risk is more than tax compliance, tax audit risk, or increased scrutiny; reputational risk is also at stake. While confidentiality is the cornerstone of the CbC reporting mechanism, the inevitable leak of sensitive taxpayer information will likely hit the headlines sooner than later. Cases in point: the Luxemburg leaks and the Panama papers.
With each country adopting CbC reporting and the recommendations from OECD’s BEPS initiative, the timing, level of adoption, and veracity of the rules will differ in each country. The myriad of possibilities will challenge global MNEs to stay abreast of the changes. Special attention should be given to the early adopters as these countries will likely pave the way for later countries.