The OECD in October released its final recommendations under its project to combat tax base erosion and profit shifting, which included a plan for having companies file reports in their home jurisdictions detailing their business activities such as taxes accrued, profits and number of employees.
The IRS has now proposed rules requiring large companies to report information for each country of operation including the amount of revenue, profit or loss, capital and accumulated earnings, consistent with OECD recommendations designed to combat base erosion and profit shifting. The rules (REG-109822-15) would apply to U.S. parent companies 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 won't take effect before Jan. 1, 2017.
The proposed regulations affect U.S. persons that are the parent of a MultiNational Enterprise (MNE) group, with annual revenue for the preceding annual accounting period of $850 million or more.
The ultimate parent of a U.S. MNE group is a U.S. business that controls a group of businesses, at least one of which is organized or is a tax resident outside of the United States, that are required to consolidate their accounts for financial reporting purposes under U.S. generally accepted accounting principles (GAAP), or that would be required to consolidate their accounts if equity interests in the U.S. business were publicly traded on a U.S. securities exchange.
Under the proposals, a business is generally considered a tax resident when the business is liable for tax based on place of management, place of organization or another similar criterion. A business will not be considered a tax resident if it is liable for tax solely on income from sources or capital situated within the jurisdiction. The proposed regulations also provide rules for determining the tax jurisdiction of residence of a business that is resident in more than one tax jurisdiction or that is a permanent establishment.
The regulations require the parent to report for each constituent entity, the entity’s resident tax jurisdiction, the tax jurisdiction in which the entity is organized or incorporated (if different from the resident tax jurisdiction), the main business activity or activities of the entity and each entity’s tax identification number.
The information included in the reports will be exchanged with other jurisdictions to give tax administrators a clearer idea of risks posed by companies' transfer pricing practices and other strategies.
The regulations require the parent to report the following information for each tax jurisdiction in which a constituent entity is resident:
- Revenues generated from transactions with other constituent entities of the U.S. MNE group;
- Revenues not generated from transactions with other constituent entities of the U.S. MNE group;
- Profit (or loss) before income tax;
- Income tax paid on a cash basis to all tax jurisdictions, including any taxes withheld on payments received;
- Accrued tax expense recorded on taxable profits (or losses), reflecting only the operations in the relevant annual accounting period and excluding deferred taxes or provisions for uncertain tax positions;
- Stated capital;
- Accumulated earnings;
- Number of employees on a full-time equivalent basis in the relevant tax jurisdiction; and
- Net book value of tangible assets other than cash or cash equivalents.
The information for each tax jurisdiction must be presented as an aggregate from all of the constituent entities that are resident in the same tax jurisdiction. In addition, the required information must be reported, in the aggregate, for any constituent entity or entities that have no resident tax jurisdiction.
The proposed regulations also contain provisions to implement the exchange of information with foreign jurisdictions without running afoul of taxpayer confidentiality rules in the tax code.
The OECD has said that it wants multinational companies to file the reports beginning with their 2016 tax years. The group has also recommended that companies be required to file a so-called master file providing a blueprint of their financial activities and a local file on transfer pricing transactions, but government officials have said the U.S. may not adopt those provisions.
The BEPS project is seen by some as a way for OECD countries to tax a larger share of U.S. multinationals' income.
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The Internal Revenue Service withdrew proposed regulations Thursday giving nonprofits the option to report the names and Social Security numbers of donors giving $250 or more, instead of providing contributors with written acknowledgements of gifts, citing strong opposition over privacy concerns. See Law360 for more.
