The Tax Times: Possible CbC Optional Reporting for 2016 Under Consideration by US Treasury

Speaking at a April 28,2016 transfer pricing symposium held by the University of San Diego School of Law, Robert Stack, US Treasury Deputy Assistant Secretary (International Tax Affairs) addressed the “gap-year” issue arising from the implementation of CbC reporting in some jurisdictions for tax years beginning on or after 1 January 2016, before US rules have taken effect.

In this context, he stated that the Treasury and IRS are working towards a solution that would allow optional CbC reporting for 2016. Stack noted, however, that more work would be needed to ensure that allowing optional filing for 2016 in the US would be effective in obviating the need for local filing. With that in mind, Stack encouraged US MNCs to engage in the global debate to ensure optional CbC reporting will be enough to protect US MNCs from becoming subject to secondary reporting requirements.

The OECD recommended that the information required for the master and local files be filed by the MNEs directly with the local tax administrations. On the other hand, the CbC report would be filed in the jurisdiction of the tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of information, pursuant to government-to-government mechanisms such as the multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties, or tax information exchange agreements (TIEAs).

In addition, the OECD recommended that these new transfer pricing documentation requirements be implemented for fiscal years beginning on or after Jan. 1, 2016, subject to a review of these requirements in 2020. It has acknowledged that some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law.

As noted above, the final BEPS Action 13 report recommends that data collection for CbC reporting purposes begin in 2016 for reporting/filing in 2017. Under the secondary mechanism, U.S. Multi-National Enterprisess may be required to file CbC reports directly with other countries in 2017, as a result of the one year gap between when the proposed regs are expected to be finalized and the CbC reporting requirements that are already in place in other countries for 2016.

This announcement by the Treasury and the IRS maybe in response to Comments submitted by the Tax Executives Institute on proposed U.S. CbC reporting regs (REG-109822-15). where in a letter to IRS, the Tax Executives Institute (TEI), an organization of tax professionals, has emphasized the need for the final U.S. country-by-country (CbC) reporting rules to be consistent with the Organization for Economic Co-operation and Development's (OECD's) final report under Action 13 of the base erosion and profit shifting (BEPS) project.

This may also be in response to many Multi-National Entitiese xpressing concerns about being subject to the so-called “secondary mechanism” (a method whereby a tax administration obtains an enterprise's CbC report from its local subsidiary, as opposed to the primary mechanism that uses the network of bilateral and multilateral tax treaties) for the 2016 taxable year, given the delayed effective date of the proposed U.S. CbC reporting rules.

On December 21, 2015 the Treasury and IRS issued Prop Reg § 1.6038-4 requiring the filing of annual CbC reports by U.S. persons that are the ultimate parent entity of a MNE group with annual revenue for the preceding annual accounting period of $850 million or more which we discussed in our IRS Issues Proposed Country-by-Country Reporting Rules! blog post.

Although the proposed regs generally follow the OECD's recommendations, they contain a number of differences. For instance, contrary to the final BEPS Action 13 report, Prop Reg § 1.6038-4(j)provides that these rules 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.

Whatever the reason for the strides, US Multi-National Entities may soon have an optional method for satisfying their CbC reporting requirements for 2016.

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