Country-by-Country Reporting, 79795-79803 [2015-32145]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 80, Number 246 (Wednesday, December 23, 2015)]
[Proposed Rules]
[Pages 79795-79803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32145]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-109822-15]
RIN 1545-BM70


Country-by-Country Reporting

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that would require 
annual country-by-country reporting by United States persons (U.S. 
persons) that are the ultimate parent entity of a multinational 
enterprise (MNE) group. These proposed regulations affect U.S. persons 
that are the ultimate parent entity of an MNE group that has annual 
revenue for the preceding annual accounting period of $850,000,000 or 
more. This document invites comments from the public on all aspects of 
the proposed rules and provides the opportunity for the public to 
request a public hearing.

DATES: Written or electronic comments and requests for a public hearing 
must be received by March 22, 2016.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-109822-15), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
109822-15), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS REG-
109822-15).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Melinda E. Harvey, (202) 317-6934; concerning submissions of comments 
or requests for a public hearing, Oluwafunmilayo (Funmi) Taylor, (202) 
317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

[[Page 79796]]

Background

1. Objectives of Proposed Regulatory Action

    Pursuant to the authority granted under sections 6001, 6011, 6012, 
6031, 6038, and 7805, these proposed regulations describe a new 
requirement for certain U.S. persons that are the ultimate parent 
entity of an MNE group (U.S. MNE group) earning substantial annual 
revenue to file an annual report (U.S. CbC report) containing 
information on a country-by-country basis related to the MNE group's 
income and taxes paid, together with certain indicators of the location 
of economic activity within the MNE group. Because the reporting form 
is currently under development by the IRS and yet to be officially 
numbered, it is referred to in this preamble and the proposed 
regulations as Form XXXX, Country-by-Country Report. The categories of 
information required to be reported on the U.S. CbC report were 
developed in coordination with other member countries of the Group of 
Twenty (G20) and the Organisation for Economic Co-operation and 
Development (OECD). As discussed later in this preamble, the Treasury 
Department and the IRS have determined that the information required 
under these proposed regulations will assist in better enforcement of 
U.S. tax laws.
    The G20 and OECD members, in coordination with other countries, 
developed a model template for the collection of country-by-country 
information from large MNE groups. The model template is intended to 
promote consistent and effective implementation of country-by-country 
reporting across tax jurisdictions (including countries and 
jurisdictions that are not countries but that have fiscal autonomy). 
The Treasury Department and the IRS anticipate that other tax 
jurisdictions will adopt information reporting requirements based on 
the model template that will mandate the filing of a country-by-country 
report (foreign CbC report) by MNE groups with an ultimate parent 
entity that is not a U.S. person (foreign MNE groups) that have 
substantial revenues. In developing these proposed regulations, the 
Treasury Department and the IRS determined that it is appropriate to 
use the model template as a guide because the model template was 
developed taking into account extensive consultations with 
stakeholders, including in particular U.S. MNE groups, in order to 
appropriately balance the benefits to tax administrations of collecting 
the information about an MNE group's global operations against the 
compliance costs and burdens imposed on MNE groups. These consultations 
significantly affected both the scope of the information included in 
the model template as well as the flexibility afforded to MNE groups in 
determining how to compile that information in light of their different 
system capabilities. In addition, the model template reflects an agreed 
international standard for reporting by MNE groups that will promote 
consistency of reporting obligations across tax jurisdictions and 
reduce the risk that other countries will depart from the agreed 
standard by imposing inconsistent and overlapping reporting obligations 
on U.S. MNE groups. In this respect, the Treasury Department and the 
IRS note that clear and widely adopted documentation rules for MNE 
groups also help to reduce compliance costs. While the proposed 
regulations generally are consistent with the international standard, 
the proposed regulations also are tailored to be consistent with the 
preexisting information reporting requirements applicable to U.S. 
persons under sections 6001, 6011, 6012, 6031, and 6038.
    The Treasury Department and the IRS have determined that the 
information required under these proposed regulations will assist in 
better enforcement of the federal income tax laws by providing the IRS 
with greater transparency regarding the operations and tax positions 
taken by U.S. MNE groups. In addition to this direct benefit expected 
from collecting U.S. CbC reports, as discussed in Part 2 of this 
preamble, pursuant to income tax conventions and other conventions and 
bilateral agreements relating to the exchange of tax information 
(collectively, information exchange agreements), a U.S. CbC report 
filed with the IRS may be exchanged by the United States with other tax 
jurisdictions in which the U.S. MNE group operates that have agreed to 
provide the IRS with foreign CbC reports filed in their jurisdiction by 
foreign MNE groups that have operations in the United States. Foreign 
CbC reports will provide the IRS with information that will assist the 
IRS in performing risk assessment of foreign MNE groups operating in 
the United States.
    In particular, it is expected that CbC reports filed by both U.S. 
MNE groups and foreign MNE groups (collectively CbC reports) will help 
the IRS perform high-level transfer pricing risk identification and 
assessment. The information in a CbC report will not itself constitute 
conclusive evidence that transfer pricing practices are or are not 
consistent with the arm's length standard. Accordingly, the information 
in a CbC report will not be used as a substitute for an appropriate 
transfer pricing determination based on a best method analysis 
(including a full comparability analysis of factors such as functions 
performed, resources employed, and risks assumed) as required by the 
arm's length standard set forth in the regulations under section 482, 
and transfer pricing adjustments will not be based solely on a CbC 
report. However, a CbC report may be used as the basis for making 
further inquiries into transfer pricing practices or other tax matters 
in the course of an examination of a member of an MNE group, and 
adjustments may be based on additional information developed through 
those inquiries in accordance with applicable law.

2. Exchange of Information, Confidentiality, and Improper Use of 
Information

    Information reported pursuant to these proposed regulations is 
return information under section 6103. Section 6103 imposes strict 
confidentiality rules with respect to all return information. Moreover, 
section 6103(k)(4) allows the IRS to exchange return information with a 
competent authority of a tax jurisdiction only to the extent provided 
in, and subject to the terms and conditions of, an information exchange 
agreement. It is expected that the U.S. competent authority will enter 
into competent authority arrangements for the automatic exchange of CbC 
reports under the authority of information exchange agreements to which 
the United States is a party.
    Consistent with established international standards, all of the 
information exchange agreements to which the United States is a party 
require the information exchanged to be treated as confidential by both 
parties, and disclosure and use of the information must be in 
accordance with the terms of the relevant information exchange 
agreement. Information exchange agreements generally prohibit the 
parties from using any information received for any purpose other than 
for the administration of taxes (e.g., assessment or collection of, or 
enforcement or prosecution in respect of, the taxes covered by the 
information exchange agreement). Accordingly, under the terms of 
information exchange agreements, neither tax jurisdiction is permitted 
to disclose the information received under the information exchange 
agreement or use such information for any non-tax

[[Page 79797]]

purpose. Under the contemplated competent authority arrangements for 
the exchange of CbC reports, the competent authorities of the United 
States and other tax jurisdictions intend to further limit the 
permissible uses of exchanged CbC reports to assessing high-level 
transfer pricing and other tax risks and, where appropriate, for 
economic and statistical analysis.
    Prior to entering into an information exchange agreement with 
another tax jurisdiction, the Treasury Department and the IRS closely 
review the tax jurisdiction's legal framework for maintaining 
confidentiality of taxpayer information and its track record of 
complying with that legal framework. In order to conclude an 
information exchange agreement with another tax jurisdiction, the 
Treasury Department and the IRS must be satisfied that the tax 
jurisdiction has the necessary legal safeguards in place to protect 
exchanged information, such protections are enforced, and adequate 
penalties apply to any breach of that confidentiality. Moreover, even 
when these conditions have been met and an information exchange 
agreement is in effect, the U.S. competent authority will not enter 
into a reciprocal automatic exchange of information relationship with a 
tax jurisdiction unless it has reviewed the tax jurisdiction's policies 
and procedures regarding confidentiality protections and has determined 
that such an exchange relationship is appropriate.
    If the United States determines that a tax jurisdiction is not in 
compliance with confidentiality requirements, data safeguards, and the 
appropriate use standards provided for under the information exchange 
agreement or the competent authority arrangement, the United States 
will pause automatic exchange of CbC reports with that tax jurisdiction 
until such time as the United States is satisfied that the tax 
jurisdiction is meeting its obligations under the applicable 
information exchange or competent authority agreement or arrangement.

Explanation of Provisions

1. U.S. Persons Required To File Form XXXX, Country-by-Country Report

    The proposed regulations generally require a U.S. business entity 
that is the ultimate parent entity of a U.S. MNE group to file Form 
XXXX, Country-by-Country Report. However, proposed Sec.  1.6038-4(j) 
provides an exception from filing by a U.S. MNE group for an annual 
accounting period if the U.S. MNE group had revenues of less than 
$850,000,000 for the preceding annual accounting period. Generally, an 
ultimate parent entity of a U.S. MNE group is a U.S. business entity 
that controls a group of business entities, at least one of which is 
organized or tax resident outside of the United States, that are 
required to consolidate their accounts for financial reporting purposes 
under U.S. generally accepted accounting principles (GAAP), or that 
would be required to consolidate their accounts if equity interests in 
the U.S. business entity were publicly traded on a U.S. securities 
exchange. For purposes of the proposed regulations, the term business 
entity means a person as defined in section 7701(a) that is not an 
individual, as well as a permanent establishment that prepares 
financial statements separate from those of its owner for financial 
reporting, regulatory, tax reporting, or internal management control 
purposes.
    Under proposed Sec.  1.6038-4(b)(6), a business entity generally is 
considered resident in a tax jurisdiction if, under the laws of that 
tax jurisdiction, the business entity is liable to tax therein based on 
place of management, place of organization, or another similar 
criterion. However, a business entity will not be considered resident 
in a tax jurisdiction if it is liable to tax in such jurisdiction 
solely with respect to income from sources in such jurisdiction, or 
capital situated in such jurisdiction. The proposed regulations also 
provide rules for determining the tax jurisdiction of residence of a 
business entity that is resident in more than one tax jurisdiction or 
that is a permanent establishment.
    Proposed Sec.  1.6038-4(b)(4) defines a U.S. MNE group as a group 
of business entities, including the U.S. business entity that is the 
ultimate parent entity, that are required to consolidate their accounts 
under U.S. GAAP, or would be required to consolidate their accounts if 
equity interests in the ultimate parent entity were publicly traded on 
a U.S. securities exchange. Generally, under U.S. GAAP, if an entity 
owns a majority voting interest in another legal entity, the majority 
owner must combine the financial statements of the majority-owned 
entity with its own financial statements in consolidated financial 
statements. Financial Accounting Standards Board, Accounting Standards 
Codification 810-10-15, ``Consolidation--Overall--Scope and Scope 
Exceptions.'' A U.S. MNE group does not include business entities that 
are accounted for under the equity method (because those entities do 
not consolidate their accounts with the equity owner), notwithstanding 
that the equity owner's proportionate share of the business income of 
such entities is included in the equity owner's consolidated financial 
statements. The ultimate parent entity of a U.S. MNE group that is 
required to file Form XXXX, Country-by-Country Report, may be required 
to consolidate under U.S. GAAP one or more affiliated groups as defined 
in section 1504(a) that file a consolidated income tax return even 
though the ultimate parent entity is not an includible corporation as 
defined under section 1504(b) with respect to any of such consolidated 
groups. In such cases, the ultimate parent entity would report country-
by-country information with respect to all such affiliated group 
entities (and any other business entities in the U.S. MNE group) on 
Form XXXX, Country-by-Country Report, and the parent corporations of 
the respective consolidated groups would not file a Form XXXX, Country-
by-Country Report.
    The Treasury Department and the IRS request comments on whether 
additional guidance is needed for determining which U.S. persons must 
file Form XXXX, Country-by-Country Report, or which entities are 
considered constituent entities of the filer. Specifically, the 
Treasury Department and the IRS request comments on whether additional 
guidance on the definition of U.S. MNE group is necessary to address 
situations where U.S. GAAP or regulations governing securities publicly 
traded on a U.S. securities exchange (U.S. securities regulations) 
permit or require consolidated financial accounting for reasons other 
than majority ownership and situations, if any, where U.S. GAAP or U.S. 
securities regulations permit separate financial accounting of 
majority-owned enterprises. Additionally, consideration has been given 
to the possible need for an exception to filing some or all of the 
information required on Form XXXX, Country-by-Country Report, for 
national security reasons. Requests by a U.S. person otherwise subject 
to the requirements to file Form XXXX, Country-by-Country Report, for 
an exception would require the Treasury Department and affected U.S. 
persons to coordinate with other federal agencies, such as the 
Department of Defense, to determine whether such an exception is 
warranted. The Treasury Department and the IRS request comments with 
respect to the procedures that a U.S. person should be required to 
follow in order to demonstrate a national security reason to receive an 
exception from filing some or all of the information

[[Page 79798]]

otherwise required by Form XXXX, Country-by-Country Report.
    Generally, a constituent entity will have a tax jurisdiction of 
residence as determined under proposed Sec.  1.6038-4(b)(6). However, a 
business entity that is treated as a partnership in the tax 
jurisdiction in which it is organized and that does not own or create a 
permanent establishment in another tax jurisdiction generally will have 
no tax jurisdiction of residence under the definition in proposed Sec.  
1.6038-4(b)(6) (other than for purposes of determining the ultimate 
parent entity of a U.S. MNE group). In these cases, it is expected that 
the partners will report their share of the partnership's items in the 
partners' respective tax jurisdictions of residence in order to 
determine the aggregate amounts reported on Form XXXX, Country-by-
Country Report, regardless of whether the partnership has elected to be 
treated as an association for U.S. federal tax purposes. The Treasury 
Department and the IRS continue to consider whether a different rule is 
needed in the case of entities that are not treated as fiscally 
transparent in the owner or owners' tax jurisdiction(s) of residence 
but are treated as fiscally transparent in the entity's country of 
organization. The Treasury Department and the IRS request comments on 
the treatment of such entities in the CbC Report. In the case of a 
permanent establishment owned or created by a business entity that is 
treated as a partnership in the tax jurisdiction in which it is 
organized, the tax jurisdiction of residence of the permanent 
establishment for purposes of Form XXXX, Country-by-Country Report, is 
the location of the permanent establishment regardless of whether the 
permanent establishment is treated as a permanent establishment of the 
partnership or of the partners of the partnership by the tax 
jurisdiction in which the permanent establishment is located.

2. Information Required on Form XXXX, Country-by-Country Report

A. Constituent Entity Information
    Proposed Sec.  1.6038-4(d)(1) describes the information that Form 
XXXX, Country-by-Country Report, may require with respect to each 
constituent entity of the U.S. MNE group. Generally, each business 
entity of a U.S. MNE group is considered a separate constituent entity 
of that U.S. MNE group; however, the term constituent entity does not 
include a foreign corporation or foreign partnership for which the 
ultimate parent entity is not required to furnish information under 
section 6038(a), determined without regard to Sec.  1.6038-2(j) and 
Sec.  1.6038-3(c) (exceptions to information reporting for certain 
constructive owners and when more than one person otherwise would be 
required to submit the same information), or any permanent 
establishment of such foreign corporation or foreign partnership. For 
example, if none of the constituent entities owned by the ultimate 
parent entity directly, indirectly, or constructively owns enough stock 
in a foreign corporation to be considered a United States shareholder 
of a controlled foreign corporation, the foreign corporation is not a 
constituent entity. However, if the ultimate parent entity of a U.S. 
MNE group constructively owns more than 50 percent of the voting stock 
of a foreign corporation because a wholly-owned domestic subsidiary 
directly owns such stock and the domestic subsidiary reports 
information with respect to the foreign corporation pursuant to section 
6038(a), the foreign corporation is a constituent entity of the U.S. 
MNE group notwithstanding that under Sec.  1.6038-2(j)(2) the ultimate 
parent entity itself is not required to report information under 
section 6038(a). The IRS requests comments on whether additional 
guidance is needed regarding which business entities of a U.S. MNE 
group are considered constituent entities, particularly with respect to 
the exclusion of foreign corporations and partnerships for which an 
ultimate parent entity would not be required to furnish information 
under section 6038(a) without regard to Sec. Sec.  1.6038-2(j) and 
1.6038-3(c).
    The information required with respect to each constituent entity 
includes identification of the tax jurisdiction, if any, in which the 
constituent entity is resident for tax purposes, the tax jurisdiction 
in which the constituent entity is organized or incorporated (if 
different from the tax jurisdiction of residence), and the main 
business activity or activities of the constituent entity. The tax 
identification number of each constituent entity used by the tax 
administration in its jurisdiction of tax residence also will be 
reported on Form XXXX, Country-by-Country Report.
B. Financial and Employee Information
    Proposed Sec.  1.6038-4(d)(2) requires certain information to be 
reported for each tax jurisdiction in which one or more constituent 
entities of the MNE group is resident. The information for each tax 
jurisdiction must be presented on Form XXXX, Country-by-Country Report, 
as an aggregate of the requested information from all of the 
constituent entities that are resident in the tax jurisdiction. In 
addition, proposed Sec.  1.6038-4(d)(3)(i) provides that the 
information must be reported, in the aggregate, for any constituent 
entity or entities of a U.S. MNE group that have no tax jurisdiction of 
residence.
    Specifically, the information required to be reported for each tax 
jurisdiction includes: (i) Revenues generated from transactions with 
other constituent entities of the U.S. MNE group; (ii) revenues not 
generated from transactions with other constituent entities of the U.S. 
MNE group; (iii) profit (or loss) before income tax; (iv) income tax 
paid on a cash basis to all tax jurisdictions, including any taxes 
withheld on payments received; (v) accrued tax expense recorded on 
taxable profits (or losses), reflecting only the operations in the 
relevant annual accounting period and excluding deferred taxes or 
provisions for uncertain tax positions; (vi) stated capital; (vii) 
accumulated earnings; (viii) number of employees on a full-time 
equivalent basis in the relevant tax jurisdiction; and (ix) net book 
value of tangible assets other than cash or cash equivalents.
    The Treasury Department and the IRS have sought to minimize 
deviations from the model template that was developed by G20 and OECD 
member countries based on extensive consultations with stakeholders. 
Nonetheless, the Treasury Department and the IRS understand that there 
may be areas where further clarification or refinement is warranted to 
take into account the purpose of these proposed regulations to collect 
relevant information for high-level risk assessment while minimizing 
the burdens imposed. For example, the report seeks information on the 
taxes paid or accrued by MNE groups and their constituent entities on 
taxable income earned in the relevant accounting period. The Treasury 
Department and the IRS specifically solicit comments on the manner in 
which the proposed regulations request that information. The Treasury 
Department and the IRS also request comments on whether any of the 
other items should be further refined or whether additional guidance is 
needed with respect to how to determine any of the items in proposed 
Sec.  1.6038-4(d)(2)(i)-(ix).
    Proposed Sec.  1.6038-4(d)(3)(iii) provides that the number of 
employees on a full-time equivalent basis may be determined as of the 
end of the accounting period, on the basis of average employment levels 
for the annual accounting period, or on any

[[Page 79799]]

other reasonable basis, and that independent contractors that 
participate in the ordinary operating activities of a constituent 
entity may be considered employees of such constituent entity for this 
purpose. The number of full-time equivalent employees in a tax 
jurisdiction of residence should be determined by reference to the 
employees that perform their activities for the U.S. MNE group within 
such tax jurisdiction of residence. U.S. MNE groups should use a 
reasonable basis to determine the tax jurisdiction of residence for 
which to report employees that perform activities for the U.S. MNE 
group in more than one tax jurisdiction or in a tax jurisdiction in 
which none of the constituent entities of the U.S. MNE group is 
resident. For example, a reasonable basis may be to report a travelling 
employee as part of the home office jurisdiction, as part of the tax 
jurisdiction in which the travelling employee spends the majority of 
his or her time, or as a fraction of one full-time equivalent employee 
in multiple tax jurisdictions based on the employee's time spent 
working in those jurisdictions. The Treasury Department and the IRS 
request comments on whether guidance is needed regarding the treatment 
of other employment situations. The number of employees that a U.S. MNE 
group has in a particular tax jurisdiction should be determined on a 
consistent basis across entities, tax jurisdictions in which the U.S. 
MNE operates, and from year to year. It is not expected that the basis 
on which a U.S. MNE group determines the number of employees in a tax 
jurisdiction of residence will change from year to year. However, it is 
expected that Form XXXX, Country-by-Country Report, will provide a 
section for additional information that the ultimate parent entity of 
the U.S. MNE group will use to explain, among other things, any new 
approach adopted to determine the number of employees and why it was 
necessary or appropriate.
    Proposed Sec.  1.6038-4(e)(2) provides that the financial 
information reported on Form XXXX, Country-by-Country Report, may be 
based on certified financial statements, books and records maintained 
with respect to each constituent entity, or records used for tax 
reporting purposes. It is not necessary to reconcile the revenue, 
profit, and tax reported in the aggregate or with respect to a specific 
tax jurisdiction on Form XXXX, Country-by-Country Report, to the 
consolidated financial statements of the U.S. MNE group or to the tax 
returns filed in any particular tax jurisdiction. Additionally, there 
is no need to make adjustments for differences in accounting principles 
applied from tax jurisdiction to tax jurisdiction. It is expected that 
Form XXXX, Country-by-Country Report, will include a section to provide 
additional information, including a brief description of the sources of 
data used in preparing the form, and, if a change is made in the source 
of data used from year to year, an explanation of the reasons for the 
change and its consequences. Permission to change the accounting 
principles, to make new or different adjustments for differences in 
accounting principles, or to change the source of data used in 
preparing Form XXXX, Country-by-Country Report, is not required.
C. Template for Form XXXX, Country-by-Country Report
    The template on which Form XXXX, Country-by-Country Report, will be 
based is provided below.

[[Page 79800]]

[GRAPHIC] [TIFF OMITTED] TP23DE15.005

3. Manner of Filing and Maintenance of Records for Form XXXX, Country-
by-Country Report

    Proposed Sec.  1.6038-4(f) requires that Form XXXX, Country-by-
Country Report, be filed with the ultimate parent entity's timely-filed 
income tax return (with extensions). The proposed regulations do not 
require any U.S. business entity to provide notification that it is a 
constituent entity of a U.S. MNE group that is required to file a Form 
XXXX, Country-by-Country Report.
    While a U.S. business entity is not required to reconcile 
information reported on Form XXXX, Country-by-Country Report, with its 
financial statements or income tax returns, proposed Sec.  1.6038-4(g) 
provides that a U.S. person required to file as an ultimate parent 
entity of a U.S. MNE group must maintain records to support the 
information provided on Form XXXX, Country-by-Country Report.

Proposed Effective/Applicability Date

    These regulations are proposed to be applicable to taxable years of 
ultimate parent entities of US MNE groups that begin on or after the 
date of publication of the Treasury decision adopting these rules as 
final regulations in the Federal Register and that include annual 
accounting periods determined under section 6038(e)(4) of all foreign 
constituent entities and taxable years of all domestic constituent 
entities

[[Page 79801]]

beginning on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It also has been determined that section 553(b) and (d) 
of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply 
to these regulations.
    The IRS intends that the information collection requirements in 
these proposed regulations will be satisfied by submitting a new 
reporting form with an income tax return. The new reporting form has 
not yet been numbered and is referred to as Form XXXX, Country-by-
Country Report, in this Preamble and the proposed regulations. For 
purposes of the Paperwork Reduction Act, the reporting burden 
associated with the collection of information in these proposed 
regulations will be reflected in the OMB Form 83-1, Paperwork Reduction 
Act Submission, associated with Form XXXX, Country-by-Country Report.
    It is hereby certified that this regulation will not have a 
significant economic impact on a substantial number of small entities 
within the meaning of section 601(6) of the Regulatory Flexibility Act 
(5 U.S.C. chapter 6). Accordingly, a regulatory flexibility analysis is 
not required. This certification is based on the fact that these 
regulations will only affect U.S. corporations, partnerships, and 
trusts that have foreign operations when the combined annual revenue of 
the business entities owned by the U.S. person meets or exceeds 
$850,000,000. Pursuant to section 7805(f), these regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ``Addresses'' 
heading. The Treasury Department and the IRS request comments on 
aspects of the proposed rules for which additional guidance is desired. 
All comments will be available at www.regulations.gov or upon request. 
A public hearing will be scheduled if requested in writing by any 
person that timely submits written comments. If a public hearing is 
scheduled, then notice of the date, time, and place for the public 
hearing will be published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Melinda E. 
Harvey of the Office of Associate Chief Counsel (International). 
However, other personnel from the IRS and the Department of the 
Treasury participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding the 
following entry in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *

    Section 1.6038-4 also issued under 26 U.S.C. 6038.

* * * * *
0
Par. 2. Section 1.6038-4 is added to read as follows:


Sec.  1.6038-4  Information returns required of certain United States 
persons with respect to such person's U.S. multinational enterprise 
group.

    (a) Requirement of return. Except as provided in paragraph (j) of 
this section, every United States person (U.S. person) that is an 
ultimate parent entity of a U.S. multinational enterprise (MNE) group 
as defined in paragraph (b)(1) of this section must make an annual 
return on Form XXXX, Country-by-Country Report, setting forth the 
information described in this section and any other information 
required by Form XXXX, Country-by-Country Report, with respect to each 
annual accounting period described in paragraph (c) of this section.
    (b) Definitions--(1) Ultimate parent entity of a U.S. MNE group. An 
ultimate parent entity of a U.S. MNE group is a U.S. business entity 
that:
    (i) Owns directly or indirectly a sufficient interest in one or 
more other business entities, at least one of which is organized or tax 
resident in a tax jurisdiction other than the United States, such that 
the U.S. business entity is required to consolidate the accounts of the 
other business entities with its own accounts under U.S. generally 
accepted accounting principles, or would be so required if equity 
interests in the U.S. business entity were publicly traded on a U.S. 
securities exchange; and
    (ii) Is not owned directly or indirectly by another business entity 
that consolidates the accounts of such U.S. business entity with its 
own accounts under generally accepted accounting principles in the 
other business entity's tax jurisdiction of residence, or would be so 
required if equity interests in the other business entity were traded 
on a public securities exchange in its tax jurisdiction of residence.
    (2) Business entity. For purposes of this section, a business 
entity is a person as defined in section 7701(a)(1) that is not an 
individual, and includes any entity that has a single owner and that is 
disregarded as a separate entity from its owner under Sec.  301.7701-3 
of this chapter. Also for purposes of this section, the term business 
entity includes a business establishment in a jurisdiction that is 
treated as a permanent establishment under an income tax convention to 
which that jurisdiction is a party or that would be treated as a 
permanent establishment under the Organisation for Economic Co-
operation and Development (OECD) Model Tax Convention on Income and on 
Capital 2014 and that prepares financial statements separate from those 
of its owner for financial reporting, regulatory, tax reporting, or 
internal management control purposes.
    (3) U.S. business entity. A U.S. business entity is a business 
entity that is organized or has its tax jurisdiction of residence in 
the United States.
    (4) U.S. MNE group. A U.S. MNE group comprises the ultimate parent 
entity of a U.S. MNE group as defined in paragraph (b)(1) of this 
section and all of the business entities required to consolidate their 
accounts with the ultimate parent entity's accounts under U.S. 
generally accepted accounting principles, or that would be so required 
if equity interests in the ultimate parent entity were publicly traded 
on a U.S. securities exchange, regardless of whether any such business 
entities could be excluded from consolidation solely on size or 
materiality grounds.
    (5) Constituent entity. With respect to a U.S. MNE group, a 
constituent entity is any separate business entity of such U.S. MNE 
group, except that the term constituent entity does not include a 
foreign corporation or foreign partnership for which the ultimate 
parent entity is not required to furnish information under section 
6038(a)

[[Page 79802]]

(determined without regard to Sec.  1.6038-2(j) and Sec.  1.6038-3(c)) 
or any permanent establishment of such foreign corporation or foreign 
partnership.
    (6) Tax jurisdiction of residence. For purposes of this section, a 
tax jurisdiction is a country or a jurisdiction that is not a country 
but that has fiscal autonomy. A business entity is considered a 
resident in a tax jurisdiction if, under the laws of that tax 
jurisdiction, the business entity is liable to tax therein based on 
place of management, place of organization, or another similar 
criterion. However, a business entity will not be considered a resident 
in a tax jurisdiction if such business entity is liable to tax in such 
tax jurisdiction solely with respect to income from sources in such tax 
jurisdiction, or capital situated in such tax jurisdiction. If a 
business entity is resident in more than one tax jurisdiction, then the 
applicable income tax convention rules, if any, should be applied to 
determine the business entity's tax jurisdiction of residence. If a 
business entity is resident in more than one tax jurisdiction and no 
applicable income tax convention exists between those tax 
jurisdictions, or if the applicable income tax convention provides that 
the determination of residence is based on a determination by the 
competent authorities of the relevant tax jurisdictions and no such 
determination has been made, the business entity's tax jurisdiction of 
residence is the tax jurisdiction of the business entity's place of 
effective management determined in accordance with Article 4 of the 
OECD Model Tax Convention on Income and on Capital 2014. The tax 
jurisdiction of residence of a permanent establishment is the 
jurisdiction in which the permanent establishment is located. If a 
business entity does not have a tax jurisdiction of residence, then 
solely for purposes of paragraph (b)(1) of this section, the tax 
jurisdiction of residence is the business entity's country of 
organization.
    (7) Applicable financial statements. An applicable financial 
statement is a certified audited financial statement that is 
accompanied by a report of an independent certified public accountant 
or similarly qualified independent professional that is used for 
purposes of reporting to shareholders, partners, or similar persons; 
for purposes of reporting to creditors in connection with securing or 
maintaining financing; or for any other substantial non-tax purpose.
    (c) Period covered by return. The information required under 
paragraph (d) of this section with respect to a U.S. MNE group must be 
furnished for the annual accounting period with respect to which the 
ultimate parent entity prepares its applicable financial statements 
ending with or within the ultimate parent entity's taxable year for 
which the Form XXXX, Country-by-Country Report, is filed. However, if 
the ultimate parent entity does not prepare applicable financial 
statements that consolidate the accounts of all constituent entities, 
the ultimate parent entity may provide the information required under 
paragraph (d) of this section based on applicable financial statements 
of constituent entities for their accounting period or periods that end 
with or within the ultimate parent entity's taxable year.
    (d) Contents of return--(1) Constituent entity information. The 
return on Form XXXX, Country-by-Country Report, must contain so much of 
the following information with respect to each constituent entity, and 
in such form or manner, as the form prescribes:
    (i) The tax jurisdiction, if any, in which the constituent entity 
is resident for tax purposes;
    (ii) The tax jurisdiction in which the constituent entity is 
organized or incorporated (if different from the tax jurisdiction of 
residence);
    (iii) The tax identification number, if any, used for the 
constituent entity by the tax administration of the constituent 
entity's tax jurisdiction of residence; and
    (iv) The main business activity or activities of the constituent 
entity.
    (2) Tax jurisdiction of residence information. The return on Form 
XXXX, Country-by-Country Report, will contain so much of the following 
information with respect to each tax jurisdiction in which one or more 
constituent entities of a U.S. MNE group is resident, and in such form 
or manner, as the form prescribes:
    (i) Revenues generated from transactions with other constituent 
entities;
    (ii) Revenues not generated from transactions with other 
constituent entities;
    (iii) Profit or loss before income tax;
    (iv) Total income tax paid on a cash basis to all tax 
jurisdictions, and any taxes withheld on payments received by the 
constituent entities;
    (v) Total accrued tax expense recorded on taxable profits or 
losses, reflecting only operations in the relevant annual accounting 
period and excluding deferred taxes or provisions for uncertain tax 
liabilities;
    (vi) Stated capital of all the constituent entities, except that 
the stated capital of a permanent establishment must be reported by the 
legal entity of which it is a permanent establishment unless there is a 
defined capital requirement in the permanent establishment tax 
jurisdiction for regulatory purposes;
    (vii) Total accumulated earnings, except that accumulated earnings 
of a permanent establishment must be reported by the legal entity of 
which it is a permanent establishment;
    (viii) Total number of employees on a full-time equivalent basis in 
the relevant tax jurisdiction; and
    (ix) Net book value of tangible assets other than cash or cash 
equivalents.
    (3) Special rules--(i) Constituent entity with no tax jurisdiction 
of residence. The information listed in paragraph (d)(2) of this 
section also must be provided, in the aggregate, for any constituent 
entity or entities that have no tax jurisdiction of residence.
    (ii) Definition of revenue. For purposes of this section, the term 
revenue includes all amounts of revenue, including revenue from sales 
of inventory and property, services, royalties, interest, and premiums. 
The term revenue does not include payments received from other 
constituent entities that are treated as dividends in the payor's tax 
jurisdiction of residence.
    (iii) Number of employees. For purposes of this section, the number 
of employees on a full-time equivalent basis may be reported as of the 
end of the accounting period, on the basis of average employment levels 
for the annual accounting period, or on any other reasonable basis 
consistently applied across tax jurisdictions and from year to year. 
Independent contractors participating in the ordinary operating 
activities of a constituent entity may be reported as employees of such 
constituent entity. Reasonable rounding or approximation of the number 
of employees is permissible, provided that such rounding or 
approximation does not materially distort the relative distribution of 
employees across the various tax jurisdictions. Consistent approaches 
should be applied from year to year and across entities.
    (iv) Income tax paid and accrued tax expense of permanent 
establishment. In the case of a constituent entity that is a permanent 
establishment, the amount of income tax paid and the amount of accrued 
tax expense referred to in paragraphs (d)(2)(iv) and (v) of this 
section should not include the income tax paid or tax expense accrued 
by the business entity of which the permanent establishment would be a 
part but for the second sentence of paragraph (b)(2)

[[Page 79803]]

of this section in that business entity's tax jurisdiction of residence 
on the income derived by the permanent establishment.
    (v) Certain transportation income. If a constituent entity of a 
U.S. MNE group derives income from international transportation or 
transportation in inland waterways that is covered by income tax 
convention provisions that are specific to such income and under which 
the taxing rights on such income are allocated exclusively to one tax 
jurisdiction, then the U.S. MNE group should report the information 
required under paragraph (d)(2) of this section with respect to such 
income for the tax jurisdiction to which the relevant income tax 
convention provisions allocate these taxing rights.
    (e) Reporting of financial amounts.--(1) Reporting in U.S. dollars 
required. All amounts furnished under paragraph (d)(2) of this section, 
other than paragraph (d)(2)(viii) of this section, must be expressed in 
U.S. dollars. If an exchange rate is used other than in accordance with 
U.S. generally accepted accounting principles for conversion to U.S. 
dollars, the exchange rate must be indicated.
    (2) Sources of financial amounts. All amounts furnished under 
paragraph (d)(2) of this section, other than paragraph (d)(2)(viii) of 
this section, should be based on applicable financial statements, books 
and records maintained with respect to the constituent entity, or 
records used for tax reporting purposes.
    (f) Time and manner for filing. Returns on Form XXXX, Country-by-
Country Report, required under paragraph (a) of this section for a 
taxable year will be filed with the ultimate parent entity's income tax 
return for the taxable year on or before the due date (including 
extensions) for filing that person's income tax return.
    (g) Maintenance of records. The U.S. person filing Form XXXX, 
Country-by-Country Report, as an ultimate parent entity of a U.S. MNE 
group must maintain records to support the information provided on Form 
XXXX, Country-by-Country Report. However, the U.S. person is not 
required to have or maintain records that reconcile the amounts 
provided on Form XXXX, Country-by-Country Report, with the tax returns 
of any tax jurisdiction or applicable financial statements.
    (h) Exceptions to furnishing information. A U.S. person that is an 
ultimate parent entity of a U.S. MNE group is not required to report 
information under this section for an annual accounting period 
described in paragraph (c) of this section if the annual revenue of the 
U.S. MNE group for the immediately preceding annual accounting period 
was less than $850,000,000.
    (j) Effective/applicability dates. The rules of this section apply 
to taxable years of ultimate parent entities of U.S. MNE groups that 
begin on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register and 
that include annual accounting periods determined under section 
6038(e)(4) of all foreign constituent entities and taxable years of all 
domestic constituent entities beginning on or after the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-32145 Filed 12-21-15; 4:15 pm]
 BILLING CODE 4830-01-P