The OECD has long been concerned with the concept of base erosion and profit shifting (BEPS), and believes that the OECD and G-20 countries should take a coordinated approach to developing an action plan that could successfully deter base erosion and profit shifting behaviors by multinationals. The study shows that because current international tax standards have not kept pace with changes in global business practices, sophisticated multinationals may be able to significantly reduce their effective tax rates while their smaller counterparts who often only operate domestically, pay tax at a higher effective rate.
The Base Erosion and Profit Shifting (BEPS) Action Plan adopted by the OECD and G20 countries in 2013 was intended to enhance transparency for tax administrations by providing them with adequate information to assess high-level transfer pricing and other BEPS-related risks. The agreed approach was to require multinationals to file high level Country-by-Country reports containing this information. The implementing agreement for CbC reporting was the Multilateral Competent Authority Agreement on the Exchange of CbC Reports (the “CbC MCAA”).
Although the U.S. has not signed the CbC MCAA Agreement, the U.S. does generally follow the intent of this Agreement. Consistent with this approach, the IRS issued final regulations relating to CbC Reporting on July 18, 2016, which are effective as of June 30, 2016. Under these regulations the ultimate parent of a U.S. multinational enterprise (MNE) is required to file an information return on Form 8975. Form 8975 requires the ultimate parent entity of a U.S. MNE group to report information, on a country-by-country basis, related to the group’s income and taxes paid, together with certain indicators of the location of the group’s economic activity.
The IRS defines the ultimate parent of a U.S. MNE as a U.S. business entity that owns a sufficient interest in a business entity organized outside the U.S. that the non-U.S. entity should be consolidated with the U.S. business entity under U.S. GAAP principles.
The reporting period is the ultimate parent’s financial statement prepared for the 12 month period that ends with or within the ultimate parent’s taxable year. For U.S. purposes, reporting applies to tax years that begin on or after June 30, 2016, although voluntary reporting for years beginning after 2015 but before the effective date of the final regulations is permitted.
However, the IRS understands some jurisdictions have adopted CbC reporting requirements for annual accounting periods beginning on or after January 1, 2016. This would require a U.S. MNE’s subsidiary resident in the jurisdiction to report CbC information for this period even if the U.S. did not require reporting for that period. As a result, local affiliates of a U.S. MNE group might be subject to local CbC filing for early reporting periods, unless the ultimate parent entity files a Form 8975 or reports CbC information to another jurisdiction, for such early reporting period.
The IRS indicated in the preamble to the CbC reporting regulations that it would provide a procedure for ultimate parent entities of U.S. MNE groups to file Form 8975 for such early reporting periods. To accomplish this, Rev Proc 2017-23, Sec. 3.01, provides that beginning on Sept. 1, 2017, Form 8975 may be filed for an early reporting period with the income tax return or other return as provided in the Instructions to Form 8975 for the tax year of the ultimate parent entity of the U.S. MNE group with or within which the early reporting period ends.
In order to file Form 8975 for an early reporting period, an ultimate parent entity that files (or has filed) an income tax return for a tax year that includes an early reporting period without a Form 8975 attached must follow the procedures for filing an amended income tax return and attach Form 8975 to the amended return within twelve months of the close of the tax year that includes the early reporting period. Filing an amended income tax return solely to attach Form 8975 in accordance with Rev Proc 2017-23 will have no effect on the statute of limitations for the income tax return.
Rev Proc 2017-23 applies to reporting periods of ultimate parent entities of U.S. MNE groups that begin on or after January 1, 2016, but before June 30, 2016.
This Revenue Procedure is important in that it provides guidance to U.S. MNEs with reporting subsidiaries in a jurisdiction that requires early CbC reporting. More importantly, it provides that U.S. MNEs that have to file amended returns to comply with these foreign jurisdiction reporting requirements will not extend the statute of limitations on a previously filed return.