The IRS released draft instructions for Form 8975, Country-by-Country Report, on which US-parented multinational enterprises (US MNEs) are to report country-by-country (CbC) information to the IRS.
Under model legislation, prepared as part of Action 13 (Transfer Pricing and CbC Reporting) of the Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project, MNEs with annual consolidated revenue over $850 million would have to report a variety of information on a CbC basis. CbC reporting is intended to help the tax authorities perform high-level transfer pricing risk identification and assessment. Generally, this information will be collected from the ultimate parent entity in the jurisdiction in which the parent resides for tax purposes (the “primary mechanism”). However, if the residence jurisdiction of the ultimate parent entity does not collect this information, other constituent entities of an MNE may be required to file the CbC report (covering the operations of the entire MNE group) directly with the tax authority in its local jurisdiction (the “secondary mechanism”).
The IRS has adopted CbC reporting rules, Reg. §1.6038-4(k), so that US-based MNEs may take advantage of the primary mechanism—where confidentiality protections of the Internal Revenue Code and US tax treaties generally should protect information included in the CbC reports—and not have to rely on the secondary mechanism for reporting—where local laws may not provide comparable confidentiality protections.
The OECD model legislation and guidance does not provide an exception to reporting requirements for exempt organizations. Regulations promulgated by the IRS, and the draft instructions to Form 8975, provide that for tax-exempt organizations “revenue,” for the purposes of determining whether the $850 million threshold has been met, includes only revenue that is included in unrelated business taxable income (UBTI). Therefore, tax-exempt US MNEs with less than $850 million in annual gross unrelated business income (UBI) generally should be excluded from the US reporting requirements.
However, the draft instructions raise questions about how tax-exempt US MNEs with total revenue over $850 million (but gross UBI under $850 million) should comply with secondary reporting requirements in the various jurisdictions in which their constituent entities reside. If such US MNEs are unable to file a CbC report in the US, they could be required to file CbC reports in several other jurisdictions and could lose the confidentiality protections provided under US law.