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IRS Issues Final Country-by-Country Reporting Rule

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Jul 22nd 2016
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The final IRS and US Treasury Department rule is in effect requiring US parent companies of multinational public and private entities to provide financial information on a country-by-country basis.

The rule applies to those parent companies with an annual revenue for the preceding annual accounting period of $850 million or more.

Companies will comply with the new regulations by submitting Form 8975, Country-by-Country Report, with an income tax return. For purposes of the Paperwork Reduction Act, the reporting of information in the rule will be reflected in the Office of Management and Budget Form 83-1, Paperwork Reduction Act Submission, associated with Form 8975. The final rule allows that Form 8975 may prescribe an alternative time and manner for filing.

The information then will be provided to tax officials in countries where the multinational company has operations.

The final rule applies to reporting periods of multinationals’ parent companies that began on or after the first day of a taxable year that began on or after June 30.

The rule has been in the making for more than a year. It’s part of the Base Erosion and Profit Shifting project by the Organization of Economic Cooperation and Development, a consortium of the United States and other countries, to control multinational companies’ efforts to move profits to low-tax countries and avoid taxes.

According to the final posting of the rule in the Federal Register, the Treasury Department and the IRS made several concessions and explanations to comments posted to proposed regulations.

Here’s a sampling:

  • Failure to adopt the country-by-country reporting requirements in the United States could increase compliance costs because US multinationals could face country-by-country filing requirements in multiple foreign tax jurisdictions. US multinationals also could face varying rules in those jurisdictions, such as having to prepare reports in the local currency or language.
  • US multinationals would face filing obligations in other countries where they do business if the United States hadn’t implemented the rule. So, a decision not to implement the rule wouldn’t bring compliance-cost savings to US multinationals.
  • Country-by-country reports filed with the IRS and exchanged with other countries according to a “competent authority arrangement” benefit from confidentiality requirements, data safeguards, and appropriate use restrictions. If another country fails to meet those requirements, the United States will halt exchanges of reports.
  • The final rule doesn’t provide additional guidance as to the meaning of full-time-equivalent employee or independent contractor situations. The rule does allow for independent contractors who work in the “ordinary operating activities of a constituent entity” to be included as a full-time-equivalent employee. US multinational groups may calculate the number of employees of their member entities on a full-time-equivalent basis “using any reasonable approach that is consistently applied.” The IRS and Treasury believe this flexibility balances the burden of completing Form 8975 with the expected benefits to tax administration.
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