Tuesday, 5 April 2016

US Multinationals Grappling with Misaligned CbC Deadlines

The IRS regulations to implement Country-by-Country (“CbC”) reporting are expected to be finalized by June 30, 2016, making the regulations effective for all tax years beginning after that date. As a result, there will be a gap period between the U.S.’ effective date on CbC reporting (June 30, 2016) and the Organization for Economic Cooperation and Development’s (“OECD”) proposed effective date (January 1, 2016). Given that many foreign jurisdictions have already implemented CbC reporting using the OECD’s recommended effective date, U.S.-based multinationals face the reality that foreign jurisdictions may request their CbC report during the gap period, despite there being no formal requirement to file the U.S.

Under the OECD CbC framework, taxpayers are only required to file their CbC report in the jurisdiction where the Ultimate Parent Entity resides. The CbC report is then subject to automatic sharing (i.e., the exchange of the report among jurisdictions, under various international mechanisms such as the Multilateral Competent Authority Agreement (“MCAA”)). During the 2016 gap period, US-based multinationals may be cautious to hand over their CbC reports directly to foreign jurisdictions, if requested, as this would circumvent the US mechanisms for automatic exchange which requires the careful vetting of foreign tax counterparties.

To deal with this gap period, some taxpayers and practitioners have proposed that US-based multinationals might consider filing their CbC reports early with the IRS. However, IRS and Treasury officials have publicly stated that there are no plans to accommodate early voluntary filings. Another option provided for under the OECD rules is to file the CbC report with a surrogate country that is not the parent company’s home jurisdiction and have that country share the report with other affiliate countries for the first year and then file with the US going forward. Many US-based multinationals are considering filing in jurisdictions such as the UK temporarily until the US is set up to accept CbC reports.

Meanwhile, the European Union (“EU”) released a statement on March 8, 2016 to announce the creation of an automatic exchange of information agreement between EU Member States. The press release states that (emphasis added) “The parent company will provide this information [the CbC report] to the tax authorities of its country of establishment in Europe, where applicable; otherwise, EU-based subsidiaries will be obliged to request that information from their parent company.”

It is difficult to predict how this issue will play out between US-based multinationals and foreign taxing authorities, such as those in the EU. If anything, this gap period illustrates the complexity of implementing international tax reform across multiple jurisdictions.

Source: Duff&Phelps