Final US country-by-country regulationsIs your company ready to report?

Recently released final US country-by-country (CbC) regulations mean that, for the first time, many US-based multinational enterprises (MNEs) will soon have to provide tax authorities with a breakdown of their allocation of profits on a global basis, the amount of taxes paid on those profits and certain other economic indicators.

The final regulations follow through on the United States’ commitment to implement CbC reporting and generally follow the recommendations of the Organisation for Economic Co-operation and Development (OECD). CbC reporting has been a significant element of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative. Several countries in addition to the United States have adopted CbC reporting, including Australia, Japan and the UK, with many more expected to follow.

The increased disclosure and documentation required under CbC reporting necessitate a shift in mindset. Being able to successfully collect, analyze and organize the requested data will require coordination between various segments of the organization such as the tax, information technology, finance and human resource departments. New processes and resources may be needed, and accountability will be critical. Here are some key questions and answers about the regulations to help companies understand the new requirements.1

1 For a detailed discussion of the regulations, see EY’s July 6, 2016, Global Tax Alert “Final US country-by-country reporting regulations analyzed in-depth,” http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--Final-US-country-by-country-reporting-regulations-analyzed-in-depth (accessed July 29, 2016). Also see EY’s July 14, 2016, Thought Center webcast on the final CbC regulations, replay available at http://www.ey.com/GL/en/Issues/webcast_2016-07-14-1700_bordercrossings-final-us-cbc-reporting-regulations (accessed July 29, 2016).

2 | Final US country-by-country regulations

Q. WhoneedstofileaCbCreport?

A. Every ultimate parent entity of a US MNE group with annual revenue of US$850 million or more in the immediately preceding reporting period is required to file a CbC report.

Q. Whatmustbereported?

A. The CbC report requires information on a country basis related to the MNE group’s revenue and taxes paid, together with certain indicators of the location of economic activity within the US MNE group. A new form (Form 8975) is being developed to report this information and is expected to contain three sections to report the following:

1. Constituententityinformation – including legal name, tax jurisdiction of residence (if any), tax jurisdiction where the entity is organized or incorporated (if different from the tax jurisdiction residence), tax identification number (if any) and main business activity.

2. Financialandemployeeinformationbytaxjurisdiction – including revenues, profit or loss before income tax, total income tax paid, total accrued tax expenses, stated capital, total accumulated earnings, total number of full-time-equivalent employees of each constituent entity and net book value of tangible assets.

3. Additionalinformation – including any further information needed to facilitate understanding of the reported information, such as data sources used to prepare the report and the reasons for any changes made to these data sources.

Q. Whendothereportingrequirementsstart?

A. In general, US MNEs are required to report for tax years beginning on or after June 30, 2016. The reporting period for CbC purposes is the period of the ultimate parent entity’s applicable financial statement prepared for the 12-month period that ends with or within their tax year, or if applicable financial statements are not prepared, the 12-month period ending on the last day of their tax year.

The regulations also indicate that the Internal Revenue Service (IRS) and Treasury intend to allow voluntary reporting. The issue of voluntary filing arose because the OECD targeted periods beginning on January 1, 2016, for CbC reporting, but the United States established a later effective date. This created a situation in which a US MNE parent might not be required to file a report in the United States for the 2016 tax year, but its foreign subsidiaries might be required to report in other tax jurisdictions for that year, thereby introducing the possibility of having to undertake so-called secondary reporting.

To address this issue, the IRS and Treasury intend to allow entities to voluntarily file in the United States for reporting periods that begin on or after January 1, 2016, but before the final regulations apply, under a procedure to be explained in forthcoming guidance.

Treasury also worked to prevent foreign jurisdictions from requiring the filing of a CbC report with the foreign jurisdiction if the US MNE has filed a voluntary CbC report with the IRS and that report has been exchanged with the foreign jurisdiction under a competent authority agreement. In this regard, the OECD released additional guidance June 29, 2016, aimed at the consistent implementation of CbC reporting. The guidance refers to the voluntary filing of the CbC report that some countries, like the United States, are contemplating for periods commencing after January 1, 2016, as “parent surrogate filing.” The OECD guidance recommends that where surrogate filing (including parent surrogate filing) is available, and certain other conditions are met, no local filing obligation would be required.

Is your company ready to report? | 3

Q. HowdotheUSCbCregulationsaffecttransferpricingdocumentation?

A. While the IRS and Treasury have not indicated an intention to change their approach to transfer pricing documentation, many other jurisdictions are adopting the OECD’s three-part framework, and tax administrations are starting to consider these elements more holistically. For this reason, companies should also consider coordinating preparing the CbC report with preparing the “master file” and “local file” transfer pricing documentation described under OECD recommendations (Action 13 under the BEPS initiative). Coordinating the CbC reporting process and transfer pricing documentation may require investing in and centralizing an MNE’s transfer pricing processes.

Q.WhatshouldMNEsdonext?

A. The increased transparency triggered by CbC reporting could significantly affect global companies that must complete the new reports and prepare for potential questions from multiple tax authorities while still protecting the confidentiality of their business data.

This new reporting environment will require greater collaboration among various business functions across the organization. Companies will need to develop a CbC reporting process to define, collect, analyze and file the required information. Creating a draft CbC template and comparing current global documentation practices to what will soon be required are good first steps to identify any potential information gaps. Companies may also want to consider how their CbC narrative will fit with their overall communications around tax.

For taxpayers with tax years starting between January 1, 2016, and the applicable date for US CbC reporting, now is also the time to consider transition period filing options, whether secondary reporting or voluntary filing with the IRS.

For more information, contact any of the following EY professionals

ArleneFitzpatrick International Tax Services arlene.fitzpatrick@ey.com

BenjaminOrenstein International Tax Services benjamin.orenstein@ey.com

Heather Gorman International Tax Services heather.gorman@ey.com

KarenKirwan International Tax Services, Transfer Pricing karen.kirwan@ey.com

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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