Country-by-Country Reporting, 42482-42491 [2016-15482]

Download as PDF 42482 § 243.8 Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations [Amended] ■ 15. In § 243.8(a), remove ‘‘$5000.00’’ and add in its place ‘‘$5,893’’. collection of information in these regulations will be reflected in the OMB Form 83–1, Paperwork Reduction Act Submission, associated with Form 8975. PART 249—OFF-RESERVATION TREATY FISHING Background 16. The authority citation for part 249 is revised to read as follows: ■ Authority: 25 U.S.C. 2, and 9; 5 U.S.C. 301; and Sec. 701, Pub. L. 114–74, 129 Stat. 599, unless otherwise noted. § 249.6 [Amended] 17. In § 249.6(b), remove ‘‘$500’’ and add in its place ‘‘$1,250’’. ■ Dated: June 24, 2016. Lawrence S. Roberts, Acting Assistant Secretary—Indian Affairs. [FR Doc. 2016–15534 Filed 6–29–16; 8:45 am] BILLING CODE 4337–15–P This document contains amendments to 26 CFR part 1. On December 23, 2015, a notice of proposed rulemaking (REG– 109822–15) relating to the furnishing of country-by-country (CbC) reports by certain United States persons (U.S. persons) was published in the Federal Register (80 FR 79795). A public hearing was requested and was held on May 13, 2016. Comments responding to the notice of proposed rulemaking were received. After consideration of the comments, the proposed regulations are adopted as amended by this Treasury decision. The public comments and revisions are discussed below. DEPARTMENT OF THE TREASURY Summary of Comments and Explanation of Revisions Internal Revenue Service 1. United States Participation in CbC Reporting 26 CFR Part 1 [TD 9773] RIN 1545–BM70 Country-by-Country Reporting Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document contains final regulations that require annual countryby-country reporting by certain United States persons that are the ultimate parent entity of a multinational enterprise group. The final regulations affect United States persons that are the ultimate parent entity of a multinational enterprise group that has annual revenue for the preceding annual accounting period of $850,000,000 or more. SUMMARY: Effective Date: These regulations are effective June 30, 2016. Applicability Date: For dates of applicability, see § 1.6038–4(k). FOR FURTHER INFORMATION CONTACT: Melinda E. Harvey, (202) 317–6934 (not a toll-free number). SUPPLEMENTARY INFORMATION: DATES: srobinson on DSK5SPTVN1PROD with RULES Paperwork Reduction Act The IRS intends that the information collection requirements in these regulations will be satisfied by submitting a new reporting form, Form 8975, Country-by-Country Report, with an income tax return. For purposes of the Paperwork Reduction Act, the reporting burden associated with the VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 Multiple comments expressed support for the implementation of CbC reporting in the United States. However, one comment recommended that the Treasury Department and the IRS decline to implement CbC reporting because, according to the comment, U.S. multinational enterprise (MNE) groups’ direct costs of compliance will exceed the United States Treasury’s revenue gains, and there will be high, unanticipated costs from inadvertent disclosures of sensitive information. This recommendation is not adopted. U.S. MNE groups will be subject to CbC filing obligations in other countries in which they do business if the United States does not implement CbC reporting. Thus, a decision by the Treasury Department and the IRS not to implement CbC reporting will result in no compliance cost savings to U.S. MNE groups. In fact, failure to adopt CbC reporting requirements in the United States may increase compliance costs because U.S. MNE groups may be subject to CbC filing obligations in multiple foreign tax jurisdictions. U.S. MNE groups might also be subject to varying CbC filing rules and requirements in different foreign tax jurisdictions, such as requirements to prepare the CbC report using the local currency or language. In addition, CbC reports filed with the IRS and exchanged pursuant to a competent authority arrangement benefit from the confidentiality requirements, data safeguards, and appropriate use restrictions in the competent authority arrangement. If a PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 foreign tax jurisdiction fails to meet the confidentiality requirements, data safeguards, and appropriate use restrictions set forth in the competent authority arrangement, the United States will pause exchanges of all reports with that tax jurisdiction. Moreover, if such tax jurisdiction has adopted CbC reporting rules that are consistent with the 2015 Final Report for Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting) of the Organisation for Economic Co-operation and Development (OECD) and Group of Twenty (G20) Base Erosion and Profit Shifting (BEPS) Project (Final BEPS Report), the tax jurisdiction will not be able to require any constituent entity of the U.S. MNE group in the tax jurisdiction to file a CbC report. The ability of the United States to pause exchange creates an additional incentive for foreign tax jurisdictions to uphold the confidentiality requirements, data safeguards, and appropriate use restrictions in the competent authority arrangement. 2. Form 8975, Country-by-Country Report At the time of publication of the proposed regulations, the country-bycountry reporting form described in the proposed regulations had not been officially numbered and was referred to in the proposed regulations as Form XXXX, Country-by-Country Report. The country-by-country reporting form remains under development but has been officially numbered. The final regulations amend the proposed regulations to reflect the official number of the form, Form 8975, Country-byCountry Report, (Form 8975 or CbCR). 3. Constituent Entities and Persons Required To File Form 8975 In the preamble to the proposed regulations, the Treasury Department and the IRS requested comments regarding whether additional guidance was needed for determining which U.S. persons must file Form 8975 or which entities are considered constituent entities of the filer. Specifically, the Treasury Department and the IRS requested comments on whether additional guidance on the definition of a U.S. MNE group was necessary to address situations where U.S. generally accepted accounting principles (GAAP) or U.S. securities regulations permit or require consolidated financial accounting for reasons other than majority ownership, as well as situations, if any, where U.S. GAAP or U.S. securities regulations permit separate financial accounting with respect to majority-owned enterprises. E:\FR\FM\30JNR1.SGM 30JNR1 Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations A. Variable Interest Entities Multiple comments addressed the inclusion of variable interest entities (VIEs) as constituent entities that are part of the U.S. MNE group. In general, a VIE may be consolidated with another entity for financial accounting purposes, even though that other entity may not control the VIE within the meaning of section 6038(e). Some comments recommended against expanding the definition of a U.S. MNE group to include VIEs and further recommended that, if those entities are nonetheless included, an exception should apply in cases in which the U.S. MNE group is unable to obtain the necessary information from a VIE. Other comments expressed concern that entities like VIEs would be part of the MNE group for purposes of foreign law relating to CbC reporting and, for consistency with such law, recommended that U.S. MNE groups be permitted to include such entities. Still other comments recommended that the definition of constituent entity should not be limited to majority-owned entities and should be expanded to include entities in which the ultimate parent entity owns, directly or indirectly, a 20-percent or greater equity interest. The final regulations do not modify the definition of constituent entity in the proposed regulations. Because the final regulations are promulgated under the authority of section 6038, the definition of control in section 6038(e) limits the foreign business entities for which U.S. persons can be required to furnish information. Thus, the information described in § 1.6038– 4(d)(1) and (2) is not required for foreign corporations or foreign partnerships for which the ultimate parent entity is not required to furnish information under section 6038(a) (determined without regard to §§ 1.6038–2(j) and 1.6038–3(c)) or any permanent establishment of such foreign corporation or foreign partnership. srobinson on DSK5SPTVN1PROD with RULES B. Permanent Establishments Under proposed § 1.6038–4(b)(2), a 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 OECD Model Tax Convention on Income and on Capital 2014 (OECD Model Tax Convention), and that prepares financial statements separate from those of its owner for financial reporting, regulatory, tax reporting, or internal VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 management control purposes. One comment recommended that the reference to the OECD Model Tax Convention be revised to account for changes to the definition of permanent establishment that will be incorporated into the OECD Model Tax Convention as a result of work under Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status) of the BEPS Project. Upon further consideration, and taking into account the comment received, the Treasury Department and the IRS have determined it would be more appropriate for the final regulations to modify the proposed regulations’ reference to a permanent establishment in the definition of business entity for greater clarity and consistency with the intended meaning of the Final BEPS Report. Accordingly, the final regulations provide that the term permanent establishment includes (i) a branch or business establishment of a constituent entity in a tax jurisdiction that is treated as a permanent establishment under an income tax convention to which that tax jurisdiction is a party, (ii) a branch or business establishment of a constituent entity that is liable to tax in the tax jurisdiction in which it is located pursuant to the domestic law of such tax jurisdiction, or (iii) a branch or business establishment of a constituent entity that is treated in the same manner for tax purposes as an entity separate from its owner by the owner’s tax jurisdiction of residence. This approach is more consistent with the Final BEPS Report and generally would avoid the need for a U.S. MNE group that has already determined under applicable law whether it has a permanent establishment or a taxable business presence in a particular jurisdiction to make another determination under the OECD Model Tax Convention solely for purposes of completing the CbCR. C. Grantor Trusts and Decedents’ Estates Proposed § 1.6038–4(b)(2) defines a business entity as a person, as defined in section 7701(a)(1), that is not an individual. Under this definition, a grantor trust with an individual owner or owners would be a business entity that could be subject to CbC reporting, notwithstanding that the individual owner or owners are generally treated as the owner of the grantor trust’s property for federal income tax purposes and would not be subject to CbC reporting if they owned the property directly. Similarly, under the proposed regulations, a decedent’s estate would be a business entity that could be subject to CbC reporting, PO 00000 Frm 00031 Fmt 4700 Sfmt 4700 42483 notwithstanding that during the decedent’s lifetime, he or she was an individual exempt from CbC reporting. Additionally, under the proposed regulations, an individual’s bankruptcy estate would be a business entity that could be subject to CbC reporting, notwithstanding that before entering bankruptcy, the individual debtor would not be subject to CbC reporting. In light of the nature of grantor trusts, decedents’ estates, and individuals’ bankruptcy estates and their close connection to individual grantors, decedents, and individual debtors, the Treasury Department and the IRS have determined that it is not appropriate to include grantor trusts with only individual owners, decedents’ estates, and individuals’ bankruptcy estates in the definition of business entity. Accordingly, the final regulations exclude decedents’ estates, individuals’ bankruptcy estates, and grantor trusts within the meaning of section 671, all the owners of which are individuals, from the definition of business entity. D. Deemed Domestic Corporations The proposed regulations define a U.S. business entity as a business entity that is organized, or has its tax jurisdiction of residence, in the United States. One comment requested that the final regulations clarify whether companies that elect to be treated as domestic corporations under section 953(d) will be treated as U.S. business entities resident in the United States. In response to this comment, the final regulations expressly provide that foreign insurance companies that elect to be treated as domestic corporations under section 953(d) are U.S. business entities that have their tax jurisdiction of residence in the United States. 4. National Security Exception The preamble to the proposed regulations requested comments on the need for a national security exception for reporting CbC information and on procedures for a taxpayer to demonstrate that such an exception is warranted. Multiple comments stated that the information provided on a CbCR does not present a national security concern. Other comments recommended that the final regulations include a national security exception but did not recommend an appropriate scope of the exception or procedures to demonstrate that an exception is warranted in a particular case. One comment recommended that no information should appear on a CbCR with respect to activities performed by a constituent entity of a U.S. MNE group under a U.S. government contract with E:\FR\FM\30JNR1.SGM 30JNR1 42484 Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations srobinson on DSK5SPTVN1PROD with RULES certain agencies. Other comments recommended a bright-line test whereby U.S. MNE groups that conduct a majority of their business with the U.S. Department of Defense or U.S. government intelligence or security agencies could claim an automatic exception from reporting any information other than identifying information, such as company names, jurisdictions of incorporation, tax identification numbers, and addresses. These comments also recommended that U.S. MNE groups that conduct a significant amount (for example, more than 25 percent) of their business with the U.S. Department of Defense or U.S. government intelligence or security agencies should be allowed, with the approval of the IRS, to claim a similar exemption from reporting. The Treasury Department and the IRS have consulted with the Department of Defense regarding the information collected on the CbCR. The Department of Defense concluded that such information reporting generally does not pose a national security concern. Accordingly, the final regulations do not provide a general exception for information that may relate to national security. Nonetheless, the Department of Defense continues to consider the national security implications of the CbCR in particular fact patterns, and future guidance may be issued to provide procedures for taxpayers to consult with the Department of Defense regarding the appropriate presentation of CbC information in such fact patterns. 5. Partnerships and Stateless Entities 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 that or another tax jurisdiction generally will have no tax jurisdiction of residence under the definition in proposed § 1.6038–4(b)(6) other than for purposes of determining the ultimate parent entity of a U.S. MNE group. Under the proposed regulations, tax jurisdiction information with respect to constituent entities that do not have a tax jurisdiction of residence, or ‘‘stateless entities,’’ would be aggregated and reported in a separate row of the CbCR. The preamble to the proposed regulations indicates that partners of a partnership that is a stateless entity would report their respective shares of the partnership’s items in their respective tax jurisdiction(s) of residence. A comment requested clarification as to whether the partnership or its partners, or both, should report the partnership’s CbC information. In VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 response, the final regulations provide that the tax jurisdiction of residence information with respect to stateless entities is provided on an aggregate basis for all stateless entities in a U.S. MNE group and that each stateless entity-owner’s share of the revenue and profit of its stateless entity is also included in the information for the tax jurisdiction of residence of the stateless entity-owner. This rule applies irrespective of whether the stateless entity-owner is liable to tax on its share of the stateless entity’s income in the owner’s tax jurisdiction of residence. In other words, the stateless entity-owner reports its share of the stateless entity’s revenues and profits in the owner’s tax jurisdiction of residence even if that jurisdiction treats the stateless entity as a separate entity for tax purposes. In the case in which a partnership creates a permanent establishment for itself or its partners, the CbC information with respect to the permanent establishment is not reported as stateless, but instead is reported as part of the information on the CbCR for the permanent establishment’s tax jurisdiction of residence. A comment requested clarification regarding whether distributions from partnerships and other fiscally transparent entities should be excluded from owners’/partners’ reported revenue. In response, the final regulations clarify that distributions from a partnership to a partner are not included in the partner’s revenue. Additionally, the final regulations provide that remittances from a permanent establishment to its constituent entity-owner are not included in the constituent entityowner’s revenue. 6. Clarification of Terms The preamble to the proposed regulations requested comments on the manner in which the proposed regulations require the reporting of information on taxes paid or accrued by U.S. MNE groups and their constituent entities on taxable income earned in the relevant accounting period. One comment requested that ‘‘total accrued tax expense’’ in proposed § 1.6038– 4(d)(2)(v) be revised to read ‘‘accrued current tax expense’’ in order to reflect only operations in the current year and not deferred taxes or provisions for uncertain tax liabilities. The proposed regulations clearly state that the relevant taxes to be reported relate only to the annual accounting period for which the CbCR is provided and exclude deferred taxes and provisions for uncertain tax liabilities. Therefore, the comment is not adopted. PO 00000 Frm 00032 Fmt 4700 Sfmt 4700 The preamble to the proposed regulations also requested comments on whether the descriptions of any of the other items in § 1.6038–4(d)(2)(i) through (ix) regarding tax jurisdiction of residence information should be further refined or whether additional guidance is needed with respect to how to determine any of these items. One comment requested that the definition for tangible assets be revised to clarify that intangibles and financial assets are excluded consistent with the Final BEPS Report. In response, the final regulations expressly provide that tangible assets do not include intangibles or financial assets. A comment noted that the term revenue excludes dividends from other constituent entities and recommended that this exclusion be extended to all forms of imputed earnings or deemed dividends. The Treasury Department and the IRS agree that imputed earnings and deemed dividends that are taken into account solely for tax purposes should be treated the same as dividends for purposes of the CbCR. Accordingly, the final regulations incorporate this recommendation. Multiple comments recommended that the wording ‘‘total income tax paid on a cash basis to all jurisdictions’’ in proposed § 1.6038–4(d)(2)(iv) should be modified to read ‘‘total income tax paid on a cash basis to each tax jurisdiction’’ to avoid misinterpretation of the ‘‘all tax jurisdictions’’ language to require taxes paid by entities that are tax residents of different tax jurisdictions to be aggregated rather than reported on a country-by-country basis as intended. The Treasury Department and the IRS interpret the language of the proposed regulation to require the total income tax paid on a cash basis to any tax jurisdiction by constituent entities that have a tax residence in a particular tax jurisdiction to be reported on an aggregated basis for that particular tax jurisdiction of residence but not the aggregation of taxes paid by constituent entities that have different tax residences. For instance, if a constituent entity pays income tax in its tax jurisdiction of residence on its earnings from operations in that country and is subject to withholding taxes on royalties received from licensees in another country, taxes paid with respect to the income and the taxes withheld with respect to the royalties should be reflected on an aggregated basis on the CbCR in the row for the constituent entity’s tax jurisdiction of residence. The Treasury Department and the IRS are concerned that the alternative language proposed in the comments could be misinterpreted to require E:\FR\FM\30JNR1.SGM 30JNR1 srobinson on DSK5SPTVN1PROD with RULES Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations amounts paid to different tax jurisdictions by constituent entities resident in a single tax jurisdiction to be reported on a disaggregated basis. Accordingly, this comment is not adopted. Multiple comments also recommended the inclusion of two additional items, deferred taxes and provisions for uncertain tax positions, in the information required to be reported on a tax jurisdiction-by-tax jurisdiction basis. This recommendation has not been adopted in the final regulations because it would impose an additional reporting burden beyond the information described in the Final BEPS Report. Multiple comments recommended that the final regulations clarify that the information listed in proposed § 1.6038– 4(d)(2)(i) through (ix) is reported in the aggregate for all constituent entities resident in each separate tax jurisdiction. Although the language in the proposed regulations does indicate that the information is to be provided with respect to each tax jurisdiction in which one or more constituent entities of the U.S. MNE group are resident and in the form and manner that Form 8975 prescribes, the final regulations provide additional language to clarify that the information is to be presented for each tax jurisdiction as an aggregate of the information for all constituent entities resident in that tax jurisdiction. Multiple comments requested that the final regulations clarify whether the information must be provided for only the constituent entities in each tax jurisdiction or whether the information must also be provided for U.S. MNE group members that are not constituent entities, for instance VIEs. The Treasury Department and the IRS have determined that additional language is unnecessary because § 1.6038–4(d)(1) of the proposed regulations expressly requires reporting of information only with respect to constituent entities of the U.S. MNE group. The final regulations provide that, for a constituent entity that is an organization exempt from taxation under section 501(a) because it is an organization described in section 501(c), 501(d), or 401(a), a state college or university described in section 511(a)(2)(B), a plan described in section 403(b) or 457(b), an individual retirement plan or annuity as defined in section 7701(a)(37), a qualified tuition program described in section 529, a qualified ABLE program described in section 529A, or a Coverdell education savings account described in section 530, the term revenue includes only revenue that is included in unrelated VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 business taxable income as defined in section 512. 7. Other Form or Information Modifications Multiple comments recommended that additional information be included on the CbCR, such as identification of constituent entities as ‘‘pass-through’’ and a legal entity identifier for each constituent entity using a standard international system for identifying individual business entities. The final regulations do not adopt these recommendations because they would impose an additional reporting burden beyond the information described in the Final BEPS Report. 8. Voluntary Filing Before the Applicability Date Other countries have adopted CbC reporting requirements for annual accounting periods beginning on or after January 1, 2016, that would require reporting of CbC information by constituent entities of MNE groups with an ultimate parent entity resident in a tax jurisdiction that does not have a CbC reporting requirement for the same annual accounting period. The proposed regulations generally require U.S. MNE groups to file a CbCR for taxable years beginning on or after the date the final regulations are published. Consequently, U.S. MNE groups that use a calendar year as their taxable year generally will not be required to file a CbCR for their taxable year beginning January 1, 2016, and constituent entities of such U.S. MNE groups may be subject to CbC reporting requirements in foreign jurisdictions. Comments expressed concern about this possibility and recommended various approaches for dealing with this issue. Most comments requested that the IRS accept and exchange CbCRs voluntarily filed for taxable years beginning on or after January 1, 2016. Consistent with the proposed regulations, the final regulations are not applicable for taxable years of ultimate parent entities beginning before June 30, 2016, the date of publication of the final regulations in the Federal Register. Specifically, the final regulations apply to reporting periods of ultimate parent entities of U.S. MNE groups that begin on or after the first day of a taxable year of the ultimate parent entity that begins on or after June 30, 2016. The Treasury Department and the IRS intend to allow ultimate parent entities of U.S. MNE groups and U.S. business entities designated by a U.S. territory ultimate parent entity to file CbCRs for reporting periods that begin on or after January 1, 2016, but before the applicability date of PO 00000 Frm 00033 Fmt 4700 Sfmt 4700 42485 the final regulations, under a procedure to be provided in separate, forthcoming guidance. The Treasury Department is working to ensure that foreign jurisdictions implementing CbC reporting requirements will not require constituent entities of U.S. MNE groups to file a CbC report with the foreign jurisdiction if the U.S. MNE group files a CbCR with the IRS pursuant to this procedure and the CbCR is exchanged with such foreign jurisdiction pursuant to a competent authority arrangement. 9. Time and Manner of Filing The proposed regulations provide that the CbCR for a taxable year must 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. Multiple comments requested that taxpayers be permitted to file a CbCR up to one year from the end of the ultimate parent entity’s taxable year or annual accounting period to facilitate the taxpayer’s ability to use statutory accounts or tax records of constituent entities to complete the CbCR. After considering the flexibility allowed for sources of information for completing the CbCR, the IRS information technology resources necessary to facilitate a filing separate from the income tax return, and the IRS’s concern that CbCRs be linked to an income tax return, the Treasury Department and the IRS have not adopted this recommendation. However, the final regulations do provide that Form 8975 may prescribe an alternative time and manner for filing. 10. Employees The proposed regulations provide that the CbCR must reflect the number of employees for each tax jurisdiction of residence of the U.S. MNE group. The proposed regulations also provide that independent contractors participating in the ordinary course of business of a constituent entity may be included in the number of full-time equivalent employees. Multiple comments asked for further clarification with respect to the determination of the number of fulltime equivalent employees and the treatment of independent contractors, including some recommending that independent contractors not be included as employees. The final regulations do not provide additional guidance with respect to the meaning of full-time equivalent employee or with respect to independent contractor situations and continue to allow for independent contractors that participate in the ordinary operating activities of a E:\FR\FM\30JNR1.SGM 30JNR1 srobinson on DSK5SPTVN1PROD with RULES 42486 Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations constituent entity to be included in the number of full-time equivalent employees. U.S. MNE groups may determine the number of employees of constituent entities on a full-time equivalent basis using any reasonable approach that is consistently applied. The Treasury Department and the IRS believe permitting this flexibility in determining the number of full-time equivalent employees of each constituent entity appropriately balances the burden of completing the CbCR with the anticipated benefits to tax administration and is consistent with the Final BEPS Report. The proposed regulations specify that employees should be reflected on the CbCR in the tax jurisdictions in which the employees performed work for the U.S. MNE group. Comments indicated that this methodology is inconsistent with the Final BEPS Report, which provides that employees of a constituent entity should be reflected in the tax jurisdiction of residence of such constituent entity, and that determining the work location of employees would be burdensome for U.S. MNE groups and would present issues regarding certain employment situations with traveling employees. The comments recommended that the final regulations follow the approach of the Final BEPS Report. In response to these comments, the final regulations do not include the phrase ‘‘in the relevant tax jurisdiction’’ from proposed § 1.6038–4(d)(2)(viii). Accordingly, under the final regulations, employees of a constituent entity are reflected in the tax jurisdiction of residence of such constituent entity. A comment requested clarification about the tax jurisdiction in which employees of partnerships should be reflected on the CbCR. As discussed in section 5 of this preamble, a partnership may be considered a stateless entity. If the partnership creates a permanent establishment for itself or its partners, then the permanent establishment itself may be a constituent entity of the U.S. MNE group. Employees of the permanent establishment-constituent entity should be reflected in the tax jurisdiction of residence of the permanent establishment. Any other employees of the partnership should be reported on the stateless jurisdiction row under the tax jurisdiction of residence information portion of the CbCR. 11. Source of Data and Reconciliation The proposed regulations provide that the amounts furnished in the CbCR should be furnished for the annual accounting period with respect to which VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 the ultimate parent entity prepares its applicable financial statements ending with or within the ultimate parent entity’s taxable year, or, if the ultimate parent entity does not prepare applicable financial statements, then the information may be based on the applicable financial statements of constituent entities for their accounting period that ends with or within the ultimate parent entity’s taxable year. Multiple comments expressed concern that the description of the period covered by the CbCR in the proposed regulations may limit the flexibility of U.S. MNE groups to choose to use consolidated financial statements or separate accounting, regulatory, or tax records prepared for the constituent entities. To mitigate this concern, the final regulations remove the restrictions imposed by the proposed regulations with respect to providing information for the applicable accounting period of the ultimate parent entity or for the applicable accounting period of each constituent entity. The final regulations provide that the reporting period covered by Form 8975 is the period of the ultimate parent entity’s annual applicable financial statement that ends with or within the ultimate parent entity’s taxable year, or, if the ultimate parent entity does not prepare an annual applicable financial statement, then the ultimate parent entity’s taxable year. The final regulations do not limit the constituent entity information to applicable financial statements of the constituent entity but, rather, provide that the source of the tax jurisdiction of residence information on the CbCR must be based on applicable financial statements, books and records, regulatory financial statements, or records used for tax reporting or internal management control purposes for an annual period of each constituent entity ending with or within the reporting period. The proposed regulations provide that the amounts provided in the CbCR should be based on applicable financial statements, books and records maintained with respect to the constituent entity, or records used for tax reporting purposes. The term ‘‘books and records’’ was intended to be broad enough to include all sources of information that the Final BEPS Report allows. In order to clarify this intent, the final regulations provide that the source of data may also include regulatory financial statements and records used for internal management control purposes. The proposed regulations state that it is not necessary to have or maintain records that reconcile the amounts PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 provided on the CbCR to the consolidated financial statements of the U.S. MNE group or to the tax returns filed in any particular tax jurisdiction or to make adjustments for differences in accounting principles applied from tax jurisdiction to tax jurisdiction. Multiple comments recommended that reconciliation to tax accounts be required and that ultimate parent entities maintain records of the reconciliation, while other comments supported the approach in the proposed regulations, which does not require reconciliation. The Treasury Department and the IRS considered these comments, and, consistent with the proposed regulations, the final regulations do not require the ultimate parent entity to create and maintain records to reconcile the information reported in the CbCR to consolidated financial statements or to tax returns. This approach provides flexibility for U.S. MNE groups to use the available data for each constituent entity without imposing the potential burden of a need to reconcile information on the CbCR with accounts that may not even be finalized when the CbCR is compiled, and it is consistent with the Final BEPS Report. The affirmative statement in the final regulations that an ultimate parent entity is not required to create and maintain information to support a reconciliation does not, however, affect the requirement to maintain records to support the information provided in the CbCR. 12. Expanding Scope and Surrogate Parent Entity Filing The proposed regulations generally require a U.S. business entity that is an ultimate parent entity of a U.S. MNE group to file a CbCR with respect to business entities that are or would be consolidated with the ultimate parent entity. A CbCR is not required for an MNE group that does not have a U.S. business entity as its ultimate parent entity. Multiple comments requested that reporting be required for any U.S. entity that exercises the ‘‘mind and management function’’ of an MNE group, the foreign parent entity of which is tax resident in a jurisdiction that does not require a report similar to the CbCR, despite the fact that the foreign entities of such MNE group are not controlled foreign corporations. This recommendation, which is not adopted, is beyond the scope of the Final BEPS Report and could not be implemented under the authority provided in section 6038 to collect information on foreign business entities owned by U.S. persons. E:\FR\FM\30JNR1.SGM 30JNR1 Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations srobinson on DSK5SPTVN1PROD with RULES One comment recommended that the final regulations allow a foreignparented MNE group with a U.S. business entity to designate that U.S. business entity as a surrogate parent entity and allow that entity to file a CbCR with the IRS for purposes of satisfying the MNE group’s country-bycountry reporting obligations in other tax jurisdictions. In light of the IRS resources that would be required to adopt this recommendation, the final regulations do not permit surrogate parent entity filing in the United States by foreign corporations as a general matter. However, the final regulations provide that a U.S. territory ultimate parent entity may designate a U.S. business entity that it controls (as defined in section 6038(e)) to file on the U.S. territory ultimate parent entity’s behalf the CbCR that the U.S. territory ultimate parent entity would be required to file if it were a U.S. business entity. A U.S. territory ultimate parent entity is a business entity organized in a U.S. territory or possession of the United States that controls (as defined in section 6038(e)) a U.S. business entity and that is not owned directly or indirectly by another business entity that consolidates the accounts of the U.S. territory ultimate parent entity with its accounts under GAAP 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. 13. Tax Jurisdiction of Residence and Fiscal Autonomy The proposed regulations provide rules for determining the tax jurisdiction of residence of a constituent entity. Under those rules, 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. The proposed regulations further provide that ‘‘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.’’ Multiple comments requested that the final regulations clarify that this language in the proposed regulations is not intended to exclude the possibility of a country with a purely territorial tax regime being a tax jurisdiction of residence. The Treasury Department and the IRS did not intend for the proposed regulations VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 to be interpreted to treat all entities in tax jurisdictions with territorial tax regimes as stateless entities. The language in question was intended to indicate that a business entity will not have a tax jurisdiction of residence in a jurisdiction solely by reason of being liable to tax in the jurisdiction on fixed, determinable, annual or periodical income from sources or capital situated in the jurisdiction. For greater clarity, the final regulations provide that ‘‘[a] business entity will not be considered a resident in a tax jurisdiction if the business entity is only liable to tax in such tax jurisdiction by reason of a tax imposed by reference to gross amounts of income without any reduction for expenses, provided such tax applies only with respect to income from sources in such tax jurisdiction or capital situated in such tax jurisdiction.’’ The proposed regulations provide that a tax jurisdiction is a country or a jurisdiction that is not a country but that has fiscal autonomy. Multiple comments requested that the final regulations address the meaning of fiscal autonomy. In light of the need for consistency of CbC reporting requirements across tax jurisdictions, the Treasury Department and the IRS do not believe it would be helpful to provide a general definition of fiscal autonomy in the final regulations absent international consensus on the meaning of the term. However, the final regulations clarify that a U.S. territory or possession of the United States, defined as American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands, is considered to have fiscal autonomy for purposes of CbC reporting. Under the proposed regulations, if a business entity is resident in more than one tax jurisdiction and there is no applicable income tax treaty, 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. One comment noted that the ‘‘effective place of management’’ test under the OECD Model Tax Convention can be uncertain and ‘‘subject to second guessing.’’ The comment recommended that an alternative, bright-line tiebreaker rule be considered to address such situations. The determination of tax jurisdiction of residence in the proposed regulations is based on the Final BEPS Report, and the final regulations do not create a new tiebreaker rule but add that, in addition to the OECD Model Tax Convention, Form 8975 may provide guidance. PO 00000 Frm 00035 Fmt 4700 Sfmt 4700 42487 Although certain entities may not have a tax jurisdiction of residence, the Treasury Department and the IRS have determined that an entity regarded as a corporation should not be considered stateless merely because it is organized or managed in a jurisdiction that does not impose an income tax on corporations. Accordingly, the final regulations provide that in the case of a tax jurisdiction that does not impose an income tax on corporations, a corporation that is organized or managed in that tax jurisdiction will be treated as resident in that tax jurisdiction, unless such corporation is treated as resident in another tax jurisdiction under another provision of the final regulations. 14. Reporting Threshold The revenue threshold at or above which a U.S. MNE group is required to file the CbCR (reporting threshold) is expressed in United States dollars (USD) in proposed § 1.6038–4(h). Foreign jurisdictions that are enacting CbC reporting requirements based on the Final BEPS Report may express the reporting threshold in a foreign currency. Multiple commenters expressed concern that U.S. MNE groups may be required to file a CbC report in a foreign country, even if the USD reporting threshold in § 1.6038– 4(h) is not exceeded, because the U.S. MNE group’s revenues exceed the local law reporting threshold as expressed in the foreign currency. The comments recommended various approaches to address the possibility of a reporting threshold in the final regulations that is inconsistent with local law reporting thresholds. The reporting threshold of $850,000,000 in the proposed regulation was determined by reference to the USD equivalent of Ö750,000,000 on January 1, 2015, as provided in the Final BEPS Report. The Treasury Department and the IRS anticipate that other countries will acknowledge that it would be inconsistent with the Final BEPS Report for a country to require local filing by a constituent entity of a U.S. MNE group that has revenue of less than $850,000,000. Multiple comments requested that the reporting threshold be reduced to the USD equivalent of Ö40,000,000 in order to subject a greater number of U.S. MNE groups to CbC reporting requirements. Because the reporting threshold in the proposed regulations is based on the Final BEPS Report, it is consistent with the agreed international standard with respect to CbC reporting. The Treasury Department and IRS weighed the potential benefit of obtaining CbC information on a larger number of U.S. E:\FR\FM\30JNR1.SGM 30JNR1 42488 Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations srobinson on DSK5SPTVN1PROD with RULES MNE groups against the additional administrative burden that would be imposed on the IRS and the burden that would be imposed on U.S. MNE groups that would not otherwise be required to file the CbCR. Based on these considerations, the final regulations maintain the reporting threshold in the proposed regulations. 15. Confidentiality and Use of the CbCR Multiple comments expressed concerns regarding the confidentiality of the CbCR. Some comments recommended public disclosure of CbCRs. These comments requested that the CbCR be treated as a Treasury report, referencing as an example the Treasury Department’s Financial Crimes Enforcement Network Report of Foreign Bank and Financial Assets, rather than tax return information, so that the CbCR would not be subject to the confidentiality protections under section 6103. Other comments supported the decision to treat CbCR as return information. The Treasury Department and the IRS have determined that the information provided on the CbCR is return information subject to the confidentiality protections of section 6103. This approach is consistent with the purpose of CbC reporting as well as the confidentiality standards reflected in the Final BEPS Report. CbC reporting was designed and established as part of an international effort to standardize transfer pricing documentation. This standardized documentation is intended to provide an efficient and effective means for tax administrations to conduct high-level transfer pricing risk assessment. Accordingly, the Treasury Department and the IRS are collecting the CbCR under the authority of sections 6001, 6011, 6012, 6031, and 6038 to assist in the better enforcement of income tax laws. The CbCR is a return, and the information furnished to the Treasury Department and the IRS on the CbCR is return information subject to the confidentiality protections provided under section 6103. In addition, the Final BEPS Report provides that tax administrations should take all reasonable steps to ensure that there is no public disclosure of confidential information in CbC reports and that they be used for tax risk assessment purposes. The preamble of the proposed regulations indicates that the information reported on the CbCR will be used for high-level transfer pricing risk identification and assessment, and that transfer pricing adjustments will not be made solely on the basis of a CbCR, but that the CbCR may be the VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 basis for further inquiries into transfer pricing practices or other tax matters which may lead to adjustments. Some comments supported the limitations on use of the CbCR information, while other comments expressed concern that a prohibition on disclosure of the CbCR for non-tax law purposes is too restrictive. Consistent with the proposed regulations, the final regulations do not contain specific limitations on the use of CbCR information. However, consistent with the Final BEPS Report, the Treasury Department and the IRS intend to limit the use of the CbCR information and intend to incorporate this limitation into the competent authority arrangements pursuant to which CbCRs are exchanged. One comment recommended that CbCR information not be provided to state or local jurisdictions and that a statement to that effect be provided in the final regulations. Under section 6103(d), return information may be provided to state agencies, but only for the purposes of, and only to the extent necessary in, the administration of such state’s tax laws. The Treasury Department and the IRS believe the circumstances under which this standard would be met for the CbCR are rare, but the final regulations do not preclude the disclosure of CbCRs to state agencies, subject to the restrictions of section 6103 that apply to other returns and return information. 16. Exchange of Information With Foreign Jurisdictions The United States intends to enter into competent authority arrangements for the automatic exchange of CbCRs with jurisdictions with which the United States has an income tax treaty or tax information exchange agreement. Multiple comments expressed concern that review of the confidentiality safeguards and framework of the other jurisdictions would prevent the Treasury Department and IRS from concluding such arrangements on a timely basis. Comments also requested that the Treasury Department and IRS publish a list of jurisdictions with which the United States exchanges CbCRs. The Treasury Department is committed to entering into bilateral competent authority arrangements with respect to CbCRs in a timely manner, taking into consideration the need for appropriate review of systems and confidentiality safeguards in the other jurisdictions. The Treasury Department and the IRS anticipate that information about the existence of competent authority arrangements for CbCRs will be made publicly available, but the manner in which such information PO 00000 Frm 00036 Fmt 4700 Sfmt 4700 would be made publicly available has not yet been determined. A comment recommended that the final regulations provide a mechanism for reporting suspected violations of the limitations on the use of information by foreign jurisdictions. While the final regulations do not provide procedures for reporting suspected violations, the Treasury Department and the IRS are aware of the concern and intend to establish a procedure to report suspected violations of confidentiality and other misuses of CbCR information. A comment requested that information transmitted under the competent authority arrangements include the ‘‘Additional Information’’ table in the model CbC report template provided in the Final BEPS Report. It is expected that such information will be collected on Form 8975 and transmitted; however, there may be limits to the amount of information that can be transmitted in any field. Such constraints, if any, will be noted in the Instructions to Form 8975. 17. Penalties One comment requested that penalties with respect to the CbCR be waived for reports filed for the 2016 tax year and that the Treasury Department should advocate that other countries also waive penalties for the 2016 tax year. The final regulations apply to reporting periods of ultimate parent entities that begin on or after the first day of a taxable year of the ultimate parent entity that begins on or after publication of the final regulations in the Federal Register. U.S. MNE groups whose ultimate parent entity’s taxable year begins before the applicability date will not have a CbCR filing requirement for their tax year beginning in 2016. The final regulations do not provide a specific waiver of penalties for U.S. MNE groups whose ultimate parent entity’s taxable year begins on or after the applicability date. The penalty rules under section 6038 generally apply, including reasonable cause relief for failure to file. Special Analyses Certain IRS regulations, including these, 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. It is hereby certified that this regulation will not have a significant economic impact on a substantial E:\FR\FM\30JNR1.SGM 30JNR1 Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations 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 business trusts that have foreign operations with respect to a taxable year when the combined annual revenue of the business entities owned by the U.S. person meets or exceeds $850,000,000 for the previous reporting period. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal author of these regulations is Melinda E. Harvey of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES 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. 6001, 6011, 6012, 6031, and 6038. * * * * * Par. 2. Section 1.6038–4 is added to read as follows: ■ srobinson on DSK5SPTVN1PROD with RULES § 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 (h) of this section, every ultimate parent entity of a U.S. multinational enterprise (MNE) group must make an annual return on Form 8975, Country-by-Country Report, setting forth the information described in paragraph (d) of this section, and any other information required by Form 8975, with respect to the reporting VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 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 generally is any entity recognized for federal tax purposes that is not properly classified as a trust under § 301.7701–4 of this chapter. However, any grantor trust within the meaning of section 671, all or a portion of which is owned by a person other an individual, is a business entity for purposes of this section. Additionally, the term business entity includes any entity with a single owner that may be disregarded as an entity separate from its owner under § 301.7701–3 of this chapter and a permanent establishment, as defined in paragraph (b)(3) of this section, that prepares financial statements separate from those of its owner for financial reporting, regulatory, tax reporting, or internal management control purposes. A business entity does not include a decedent’s estate or a bankruptcy estate described in section 1398. (3) Permanent establishment. For purposes of this section, the term permanent establishment includes: (i) A branch or business establishment of a constituent entity in a tax jurisdiction that is treated as a permanent establishment under an income tax convention to which that tax jurisdiction is a party; (ii) A branch or business establishment of a constituent entity that is liable to tax in the tax jurisdiction in which it is located PO 00000 Frm 00037 Fmt 4700 Sfmt 4700 42489 pursuant to the domestic law of such tax jurisdiction; or (iii) A branch or business establishment of a constituent entity that is treated in the same manner for tax purposes as an entity separate from its owner by the owner’s tax jurisdiction of residence. (4) 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. For purposes of this section, foreign insurance companies that elect to be treated as domestic corporations under section 953(d) are U.S. business entities that have their tax jurisdiction of residence in the United States. (5) 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. (6) 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) (determined without regard to §§ 1.6038–2(j) and 1.6038–3(c)) or any permanent establishment of such foreign corporation or foreign partnership. (7) Tax jurisdiction. For purposes of this section, a tax jurisdiction is a country or a jurisdiction that is not a country but that has fiscal autonomy. For purposes of this section, a U.S. territory or possession of the United States is considered to have fiscal autonomy. (8) Tax jurisdiction of residence. 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. A business entity will not be considered a resident in a tax jurisdiction if the business entity is liable to tax in such tax jurisdiction only by reason of a tax imposed by reference to gross amounts of income without any reduction for expenses, provided such E:\FR\FM\30JNR1.SGM 30JNR1 srobinson on DSK5SPTVN1PROD with RULES 42490 Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations tax applies only 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 Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital 2014, or as provided by Form 8975. A corporation that is organized or managed in a tax jurisdiction that does not impose an income tax on corporations will be treated as resident in that tax jurisdiction, unless such corporation is treated as resident in another tax jurisdiction under another provision of this section. 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. (9) 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. (10) U.S. territory or possession of the United States. The term U.S. territory or possession of the United States means American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands. (11) U.S. territory ultimate parent entity. A U.S. territory ultimate parent entity is a business entity organized in a U.S. territory or possession of the United States that controls (as defined in section 6038(e)) a U.S. business entity VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 and that is not owned directly or indirectly by another business entity that consolidates the accounts of the U.S. territory ultimate parent entity with its 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. (c) Reporting period. The reporting period covered by Form 8975 is the period of the ultimate parent entity’s applicable financial statement prepared for the 12-month period (or a 52–53 week period described in section 441(f)) that ends with or within the ultimate parent entity’s taxable year. If the ultimate parent entity does not prepare an annual applicable financial statement, then the reporting period covered by Form 8975 is the 12-month period (or a 52–53 week period described in section 441(f)) that ends on the last day of the ultimate parent entity’s taxable year. (d) Contents of return—(1) Constituent entity information. The return on Form 8975 must contain so much of the following information with respect to each constituent entity of the U.S. MNE group, and in such form or manner, as Form 8975 prescribes: (i) The complete legal name of the constituent entity; (ii) The tax jurisdiction, if any, in which the constituent entity is resident for tax purposes; (iii) The tax jurisdiction in which the constituent entity is organized or incorporated (if different from the tax jurisdiction of residence); (iv) 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 (v) The main business activity or activities of the constituent entity. (2) Tax jurisdiction of residence information. The return on Form 8975 must 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, presented as an aggregate of the information for the constituent entities resident in each tax jurisdiction, and in such form or manner, as Form 8975 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; PO 00000 Frm 00038 Fmt 4700 Sfmt 4700 (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 period and excluding deferred taxes or provisions for uncertain tax liabilities; (vi) Stated capital, except that the stated capital of a permanent establishment must be reported in the tax jurisdiction of residence of 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; and (ix) Net book value of tangible assets, which, for purposes of this section, does not include cash or cash equivalents, intangibles, or financial assets. (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. In addition, if a constituent entity is an owner of a constituent entity that does not have a jurisdiction of tax residence, then the owner’s share of such entity’s revenues and profits will be aggregated with the information for the owner’s 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. Distributions and remittances from partnerships and other fiscally transparent entities and permanent establishments that are constituent entities are not considered revenue of the recipient-owner. The term revenue also does not include imputed earnings or deemed dividends received from other constituent entities that are taken into account solely for tax purposes and that otherwise would be included as revenue by a constituent entity. With respect to a constituent entity that is an organization exempt from taxation under section 501(a) E:\FR\FM\30JNR1.SGM 30JNR1 srobinson on DSK5SPTVN1PROD with RULES Federal Register / Vol. 81, No. 126 / Thursday, June 30, 2016 / Rules and Regulations because it is an organization described in section 501(c), 501(d), or 401(a), a state college or university described in section 511(a)(2)(B), a plan described in section 403(b) or 457(b), an individual retirement plan or annuity as defined in section 7701(a)(37), a qualified tuition program described in section 529, a qualified ABLE program described in section 529A, or a Coverdell education savings account described in section 530, the term revenue includes only revenue that is reflected in unrelated business taxable income as defined in section 512. (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) 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 VerDate Sep<11>2014 20:00 Jun 29, 2016 Jkt 238001 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, regulatory financial statements, or records used for tax reporting or internal management control purposes for an annual period of each constituent entity ending with or within the period described in paragraph (c) of this section. (f) Time and manner for filing. Returns on Form 8975 required under paragraph (a) of this section for a reporting period must be filed with the ultimate parent entity’s income tax return for the taxable year, in or with which the reporting period ends, on or before the due date (including extensions) for filing that person’s income tax return or as otherwise prescribed by Form 8975. (g) Maintenance of records. The U.S. person filing Form 8975 as an ultimate parent entity of a U.S. MNE group must maintain records to support the information provided on Form 8975. However, the U.S. person is not required to create and maintain records that reconcile the amounts provided on Form 8975 with the tax returns of any tax jurisdiction or applicable financial statements. (h) Exceptions to furnishing information. An ultimate parent entity of a U.S. MNE group is not required to report information under this section for the reporting period described in paragraph (c) of this section if the annual revenue of the U.S. MNE group for the immediately preceding reporting period was less than $850,000,000. (i) [Reserved] (j) U.S. territories and possessions of the United States. A U.S. territory ultimate parent entity may designate a U.S. business entity that it controls (as defined in section 6038(e)) to file Form 8975 on the U.S. territory ultimate parent entity’s behalf with respect to such U.S. territory ultimate parent entity and the business entities that would be required to consolidate their PO 00000 Frm 00039 Fmt 4700 Sfmt 4700 42491 accounts with such U.S. territory ultimate parent entity under U.S. generally accepted accounting principles, or would be so required if equity interests in the U.S. territory ultimate parent entity were publicly traded on a U.S. securities exchange. (k) Applicability dates. The rules of this section apply to reporting periods of ultimate parent entities of U.S. MNE groups that begin on or after the first day of a taxable year of the ultimate parent entity that begins on or after June 30, 2016. John Dalrymple, Deputy Commissioner for Services and Enforcement. Approved: June 20, 2016. Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2016–15482 Filed 6–29–16; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF JUSTICE 28 CFR Parts 20, 22, 36, 68, 71, 76, and 85 [Docket No. OAG 148; AG Order No. 3690– 2016] Civil Monetary Penalties Inflation Adjustment Department of Justice. Interim final rule with request for comments. AGENCY: ACTION: In accordance with the provisions of the Bipartisan Budget Act of 2015, the Department of Justice is adjusting for inflation civil monetary penalties assessed or enforced by components of the Department. DATES: Effective date: This rule is effective August 1, 2016. Public comments: Written comments must be postmarked and electronic comments must be submitted on or before August 29, 2016. Commenters should be aware that the electronic Federal Docket Management System (FDMS) will accept comments submitted prior to Midnight Eastern Time on the last day of the comment period. SUMMARY: To ensure proper handling of comments, please reference ‘‘Docket No. OAG 148’’ on all electronic and written correspondence. The Department encourages all comments be submitted electronically through http:// www.regulations.gov using the electronic comment form provided on that site. An electronic copy of this document is also available at http:// ADDRESSES: E:\FR\FM\30JNR1.SGM 30JNR1

Agencies

[Federal Register Volume 81, Number 126 (Thursday, June 30, 2016)]
[Rules and Regulations]
[Pages 42482-42491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15482]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9773]
RIN 1545-BM70


Country-by-Country Reporting

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that require annual 
country-by-country reporting by certain United States persons that are 
the ultimate parent entity of a multinational enterprise group. The 
final regulations affect United States persons that are the ultimate 
parent entity of a multinational enterprise group that has annual 
revenue for the preceding annual accounting period of $850,000,000 or 
more.

DATES: Effective Date: These regulations are effective June 30, 2016.
    Applicability Date: For dates of applicability, see Sec.  1.6038-
4(k).

FOR FURTHER INFORMATION CONTACT: Melinda E. Harvey, (202) 317-6934 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The IRS intends that the information collection requirements in 
these regulations will be satisfied by submitting a new reporting form, 
Form 8975, Country-by-Country Report, with an income tax return. For 
purposes of the Paperwork Reduction Act, the reporting burden 
associated with the collection of information in these regulations will 
be reflected in the OMB Form 83-1, Paperwork Reduction Act Submission, 
associated with Form 8975.

Background

    This document contains amendments to 26 CFR part 1. On December 23, 
2015, a notice of proposed rulemaking (REG-109822-15) relating to the 
furnishing of country-by-country (CbC) reports by certain United States 
persons (U.S. persons) was published in the Federal Register (80 FR 
79795). A public hearing was requested and was held on May 13, 2016. 
Comments responding to the notice of proposed rulemaking were received. 
After consideration of the comments, the proposed regulations are 
adopted as amended by this Treasury decision. The public comments and 
revisions are discussed below.

Summary of Comments and Explanation of Revisions

1. United States Participation in CbC Reporting

    Multiple comments expressed support for the implementation of CbC 
reporting in the United States. However, one comment recommended that 
the Treasury Department and the IRS decline to implement CbC reporting 
because, according to the comment, U.S. multinational enterprise (MNE) 
groups' direct costs of compliance will exceed the United States 
Treasury's revenue gains, and there will be high, unanticipated costs 
from inadvertent disclosures of sensitive information. This 
recommendation is not adopted. U.S. MNE groups will be subject to CbC 
filing obligations in other countries in which they do business if the 
United States does not implement CbC reporting. Thus, a decision by the 
Treasury Department and the IRS not to implement CbC reporting will 
result in no compliance cost savings to U.S. MNE groups. In fact, 
failure to adopt CbC reporting requirements in the United States may 
increase compliance costs because U.S. MNE groups may be subject to CbC 
filing obligations in multiple foreign tax jurisdictions. U.S. MNE 
groups might also be subject to varying CbC filing rules and 
requirements in different foreign tax jurisdictions, such as 
requirements to prepare the CbC report using the local currency or 
language.
    In addition, CbC reports filed with the IRS and exchanged pursuant 
to a competent authority arrangement benefit from the confidentiality 
requirements, data safeguards, and appropriate use restrictions in the 
competent authority arrangement. If a foreign tax jurisdiction fails to 
meet the confidentiality requirements, data safeguards, and appropriate 
use restrictions set forth in the competent authority arrangement, the 
United States will pause exchanges of all reports with that tax 
jurisdiction. Moreover, if such tax jurisdiction has adopted CbC 
reporting rules that are consistent with the 2015 Final Report for 
Action 13 (Transfer Pricing Documentation and Country-by-Country 
Reporting) of the Organisation for Economic Co-operation and 
Development (OECD) and Group of Twenty (G20) Base Erosion and Profit 
Shifting (BEPS) Project (Final BEPS Report), the tax jurisdiction will 
not be able to require any constituent entity of the U.S. MNE group in 
the tax jurisdiction to file a CbC report. The ability of the United 
States to pause exchange creates an additional incentive for foreign 
tax jurisdictions to uphold the confidentiality requirements, data 
safeguards, and appropriate use restrictions in the competent authority 
arrangement.

2. Form 8975, Country-by-Country Report

    At the time of publication of the proposed regulations, the 
country-by-country reporting form described in the proposed regulations 
had not been officially numbered and was referred to in the proposed 
regulations as Form XXXX, Country-by-Country Report. The country-by-
country reporting form remains under development but has been 
officially numbered. The final regulations amend the proposed 
regulations to reflect the official number of the form, Form 8975, 
Country-by-Country Report, (Form 8975 or CbCR).

3. Constituent Entities and Persons Required To File Form 8975

    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comments regarding whether additional 
guidance was needed for determining which U.S. persons must file Form 
8975 or which entities are considered constituent entities of the 
filer. Specifically, the Treasury Department and the IRS requested 
comments on whether additional guidance on the definition of a U.S. MNE 
group was necessary to address situations where U.S. generally accepted 
accounting principles (GAAP) or U.S. securities regulations permit or 
require consolidated financial accounting for reasons other than 
majority ownership, as well as situations, if any, where U.S. GAAP or 
U.S. securities regulations permit separate financial accounting with 
respect to majority-owned enterprises.

[[Page 42483]]

A. Variable Interest Entities
    Multiple comments addressed the inclusion of variable interest 
entities (VIEs) as constituent entities that are part of the U.S. MNE 
group. In general, a VIE may be consolidated with another entity for 
financial accounting purposes, even though that other entity may not 
control the VIE within the meaning of section 6038(e). Some comments 
recommended against expanding the definition of a U.S. MNE group to 
include VIEs and further recommended that, if those entities are 
nonetheless included, an exception should apply in cases in which the 
U.S. MNE group is unable to obtain the necessary information from a 
VIE. Other comments expressed concern that entities like VIEs would be 
part of the MNE group for purposes of foreign law relating to CbC 
reporting and, for consistency with such law, recommended that U.S. MNE 
groups be permitted to include such entities. Still other comments 
recommended that the definition of constituent entity should not be 
limited to majority-owned entities and should be expanded to include 
entities in which the ultimate parent entity owns, directly or 
indirectly, a 20-percent or greater equity interest.
    The final regulations do not modify the definition of constituent 
entity in the proposed regulations. Because the final regulations are 
promulgated under the authority of section 6038, the definition of 
control in section 6038(e) limits the foreign business entities for 
which U.S. persons can be required to furnish information. Thus, the 
information described in Sec.  1.6038-4(d)(1) and (2) is not required 
for foreign corporations or foreign partnerships for which the ultimate 
parent entity is not required to furnish information under section 
6038(a) (determined without regard to Sec. Sec.  1.6038-2(j) and 
1.6038-3(c)) or any permanent establishment of such foreign corporation 
or foreign partnership.
B. Permanent Establishments
    Under proposed Sec.  1.6038-4(b)(2), a 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 OECD Model Tax Convention on Income and on Capital 2014 (OECD Model 
Tax Convention), and that prepares financial statements separate from 
those of its owner for financial reporting, regulatory, tax reporting, 
or internal management control purposes. One comment recommended that 
the reference to the OECD Model Tax Convention be revised to account 
for changes to the definition of permanent establishment that will be 
incorporated into the OECD Model Tax Convention as a result of work 
under Action 7 (Preventing the Artificial Avoidance of Permanent 
Establishment Status) of the BEPS Project.
    Upon further consideration, and taking into account the comment 
received, the Treasury Department and the IRS have determined it would 
be more appropriate for the final regulations to modify the proposed 
regulations' reference to a permanent establishment in the definition 
of business entity for greater clarity and consistency with the 
intended meaning of the Final BEPS Report. Accordingly, the final 
regulations provide that the term permanent establishment includes (i) 
a branch or business establishment of a constituent entity in a tax 
jurisdiction that is treated as a permanent establishment under an 
income tax convention to which that tax jurisdiction is a party, (ii) a 
branch or business establishment of a constituent entity that is liable 
to tax in the tax jurisdiction in which it is located pursuant to the 
domestic law of such tax jurisdiction, or (iii) a branch or business 
establishment of a constituent entity that is treated in the same 
manner for tax purposes as an entity separate from its owner by the 
owner's tax jurisdiction of residence. This approach is more consistent 
with the Final BEPS Report and generally would avoid the need for a 
U.S. MNE group that has already determined under applicable law whether 
it has a permanent establishment or a taxable business presence in a 
particular jurisdiction to make another determination under the OECD 
Model Tax Convention solely for purposes of completing the CbCR.
C. Grantor Trusts and Decedents' Estates
    Proposed Sec.  1.6038-4(b)(2) defines a business entity as a 
person, as defined in section 7701(a)(1), that is not an individual. 
Under this definition, a grantor trust with an individual owner or 
owners would be a business entity that could be subject to CbC 
reporting, notwithstanding that the individual owner or owners are 
generally treated as the owner of the grantor trust's property for 
federal income tax purposes and would not be subject to CbC reporting 
if they owned the property directly. Similarly, under the proposed 
regulations, a decedent's estate would be a business entity that could 
be subject to CbC reporting, notwithstanding that during the decedent's 
lifetime, he or she was an individual exempt from CbC reporting. 
Additionally, under the proposed regulations, an individual's 
bankruptcy estate would be a business entity that could be subject to 
CbC reporting, notwithstanding that before entering bankruptcy, the 
individual debtor would not be subject to CbC reporting. In light of 
the nature of grantor trusts, decedents' estates, and individuals' 
bankruptcy estates and their close connection to individual grantors, 
decedents, and individual debtors, the Treasury Department and the IRS 
have determined that it is not appropriate to include grantor trusts 
with only individual owners, decedents' estates, and individuals' 
bankruptcy estates in the definition of business entity. Accordingly, 
the final regulations exclude decedents' estates, individuals' 
bankruptcy estates, and grantor trusts within the meaning of section 
671, all the owners of which are individuals, from the definition of 
business entity.
D. Deemed Domestic Corporations
    The proposed regulations define a U.S. business entity as a 
business entity that is organized, or has its tax jurisdiction of 
residence, in the United States. One comment requested that the final 
regulations clarify whether companies that elect to be treated as 
domestic corporations under section 953(d) will be treated as U.S. 
business entities resident in the United States. In response to this 
comment, the final regulations expressly provide that foreign insurance 
companies that elect to be treated as domestic corporations under 
section 953(d) are U.S. business entities that have their tax 
jurisdiction of residence in the United States.

4. National Security Exception

    The preamble to the proposed regulations requested comments on the 
need for a national security exception for reporting CbC information 
and on procedures for a taxpayer to demonstrate that such an exception 
is warranted. Multiple comments stated that the information provided on 
a CbCR does not present a national security concern. Other comments 
recommended that the final regulations include a national security 
exception but did not recommend an appropriate scope of the exception 
or procedures to demonstrate that an exception is warranted in a 
particular case. One comment recommended that no information should 
appear on a CbCR with respect to activities performed by a constituent 
entity of a U.S. MNE group under a U.S. government contract with

[[Page 42484]]

certain agencies. Other comments recommended a bright-line test whereby 
U.S. MNE groups that conduct a majority of their business with the U.S. 
Department of Defense or U.S. government intelligence or security 
agencies could claim an automatic exception from reporting any 
information other than identifying information, such as company names, 
jurisdictions of incorporation, tax identification numbers, and 
addresses. These comments also recommended that U.S. MNE groups that 
conduct a significant amount (for example, more than 25 percent) of 
their business with the U.S. Department of Defense or U.S. government 
intelligence or security agencies should be allowed, with the approval 
of the IRS, to claim a similar exemption from reporting.
    The Treasury Department and the IRS have consulted with the 
Department of Defense regarding the information collected on the CbCR. 
The Department of Defense concluded that such information reporting 
generally does not pose a national security concern. Accordingly, the 
final regulations do not provide a general exception for information 
that may relate to national security. Nonetheless, the Department of 
Defense continues to consider the national security implications of the 
CbCR in particular fact patterns, and future guidance may be issued to 
provide procedures for taxpayers to consult with the Department of 
Defense regarding the appropriate presentation of CbC information in 
such fact patterns.

5. Partnerships and Stateless Entities

    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 that or 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. Under the proposed 
regulations, tax jurisdiction information with respect to constituent 
entities that do not have a tax jurisdiction of residence, or 
``stateless entities,'' would be aggregated and reported in a separate 
row of the CbCR. The preamble to the proposed regulations indicates 
that partners of a partnership that is a stateless entity would report 
their respective shares of the partnership's items in their respective 
tax jurisdiction(s) of residence.
    A comment requested clarification as to whether the partnership or 
its partners, or both, should report the partnership's CbC information. 
In response, the final regulations provide that the tax jurisdiction of 
residence information with respect to stateless entities is provided on 
an aggregate basis for all stateless entities in a U.S. MNE group and 
that each stateless entity-owner's share of the revenue and profit of 
its stateless entity is also included in the information for the tax 
jurisdiction of residence of the stateless entity-owner. This rule 
applies irrespective of whether the stateless entity-owner is liable to 
tax on its share of the stateless entity's income in the owner's tax 
jurisdiction of residence. In other words, the stateless entity-owner 
reports its share of the stateless entity's revenues and profits in the 
owner's tax jurisdiction of residence even if that jurisdiction treats 
the stateless entity as a separate entity for tax purposes. In the case 
in which a partnership creates a permanent establishment for itself or 
its partners, the CbC information with respect to the permanent 
establishment is not reported as stateless, but instead is reported as 
part of the information on the CbCR for the permanent establishment's 
tax jurisdiction of residence.
    A comment requested clarification regarding whether distributions 
from partnerships and other fiscally transparent entities should be 
excluded from owners'/partners' reported revenue. In response, the 
final regulations clarify that distributions from a partnership to a 
partner are not included in the partner's revenue. Additionally, the 
final regulations provide that remittances from a permanent 
establishment to its constituent entity-owner are not included in the 
constituent entity-owner's revenue.

6. Clarification of Terms

    The preamble to the proposed regulations requested comments on the 
manner in which the proposed regulations require the reporting of 
information on taxes paid or accrued by U.S. MNE groups and their 
constituent entities on taxable income earned in the relevant 
accounting period. One comment requested that ``total accrued tax 
expense'' in proposed Sec.  1.6038-4(d)(2)(v) be revised to read 
``accrued current tax expense'' in order to reflect only operations in 
the current year and not deferred taxes or provisions for uncertain tax 
liabilities. The proposed regulations clearly state that the relevant 
taxes to be reported relate only to the annual accounting period for 
which the CbCR is provided and exclude deferred taxes and provisions 
for uncertain tax liabilities. Therefore, the comment is not adopted.
    The preamble to the proposed regulations also requested comments on 
whether the descriptions of any of the other items in Sec.  1.6038-
4(d)(2)(i) through (ix) regarding tax jurisdiction of residence 
information should be further refined or whether additional guidance is 
needed with respect to how to determine any of these items. One comment 
requested that the definition for tangible assets be revised to clarify 
that intangibles and financial assets are excluded consistent with the 
Final BEPS Report. In response, the final regulations expressly provide 
that tangible assets do not include intangibles or financial assets.
    A comment noted that the term revenue excludes dividends from other 
constituent entities and recommended that this exclusion be extended to 
all forms of imputed earnings or deemed dividends. The Treasury 
Department and the IRS agree that imputed earnings and deemed dividends 
that are taken into account solely for tax purposes should be treated 
the same as dividends for purposes of the CbCR. Accordingly, the final 
regulations incorporate this recommendation.
    Multiple comments recommended that the wording ``total income tax 
paid on a cash basis to all jurisdictions'' in proposed Sec.  1.6038-
4(d)(2)(iv) should be modified to read ``total income tax paid on a 
cash basis to each tax jurisdiction'' to avoid misinterpretation of the 
``all tax jurisdictions'' language to require taxes paid by entities 
that are tax residents of different tax jurisdictions to be aggregated 
rather than reported on a country-by-country basis as intended. The 
Treasury Department and the IRS interpret the language of the proposed 
regulation to require the total income tax paid on a cash basis to any 
tax jurisdiction by constituent entities that have a tax residence in a 
particular tax jurisdiction to be reported on an aggregated basis for 
that particular tax jurisdiction of residence but not the aggregation 
of taxes paid by constituent entities that have different tax 
residences. For instance, if a constituent entity pays income tax in 
its tax jurisdiction of residence on its earnings from operations in 
that country and is subject to withholding taxes on royalties received 
from licensees in another country, taxes paid with respect to the 
income and the taxes withheld with respect to the royalties should be 
reflected on an aggregated basis on the CbCR in the row for the 
constituent entity's tax jurisdiction of residence. The Treasury 
Department and the IRS are concerned that the alternative language 
proposed in the comments could be misinterpreted to require

[[Page 42485]]

amounts paid to different tax jurisdictions by constituent entities 
resident in a single tax jurisdiction to be reported on a disaggregated 
basis. Accordingly, this comment is not adopted.
    Multiple comments also recommended the inclusion of two additional 
items, deferred taxes and provisions for uncertain tax positions, in 
the information required to be reported on a tax jurisdiction-by-tax 
jurisdiction basis. This recommendation has not been adopted in the 
final regulations because it would impose an additional reporting 
burden beyond the information described in the Final BEPS Report.
    Multiple comments recommended that the final regulations clarify 
that the information listed in proposed Sec.  1.6038-4(d)(2)(i) through 
(ix) is reported in the aggregate for all constituent entities resident 
in each separate tax jurisdiction. Although the language in the 
proposed regulations does indicate that the information is to be 
provided with respect to each tax jurisdiction in which one or more 
constituent entities of the U.S. MNE group are resident and in the form 
and manner that Form 8975 prescribes, the final regulations provide 
additional language to clarify that the information is to be presented 
for each tax jurisdiction as an aggregate of the information for all 
constituent entities resident in that tax jurisdiction. Multiple 
comments requested that the final regulations clarify whether the 
information must be provided for only the constituent entities in each 
tax jurisdiction or whether the information must also be provided for 
U.S. MNE group members that are not constituent entities, for instance 
VIEs. The Treasury Department and the IRS have determined that 
additional language is unnecessary because Sec.  1.6038-4(d)(1) of the 
proposed regulations expressly requires reporting of information only 
with respect to constituent entities of the U.S. MNE group.
    The final regulations provide that, for a constituent entity that 
is an organization exempt from taxation under section 501(a) because it 
is an organization described in section 501(c), 501(d), or 401(a), a 
state college or university described in section 511(a)(2)(B), a plan 
described in section 403(b) or 457(b), an individual retirement plan or 
annuity as defined in section 7701(a)(37), a qualified tuition program 
described in section 529, a qualified ABLE program described in section 
529A, or a Coverdell education savings account described in section 
530, the term revenue includes only revenue that is included in 
unrelated business taxable income as defined in section 512.

7. Other Form or Information Modifications

    Multiple comments recommended that additional information be 
included on the CbCR, such as identification of constituent entities as 
``pass-through'' and a legal entity identifier for each constituent 
entity using a standard international system for identifying individual 
business entities. The final regulations do not adopt these 
recommendations because they would impose an additional reporting 
burden beyond the information described in the Final BEPS Report.

8. Voluntary Filing Before the Applicability Date

    Other countries have adopted CbC reporting requirements for annual 
accounting periods beginning on or after January 1, 2016, that would 
require reporting of CbC information by constituent entities of MNE 
groups with an ultimate parent entity resident in a tax jurisdiction 
that does not have a CbC reporting requirement for the same annual 
accounting period. The proposed regulations generally require U.S. MNE 
groups to file a CbCR for taxable years beginning on or after the date 
the final regulations are published. Consequently, U.S. MNE groups that 
use a calendar year as their taxable year generally will not be 
required to file a CbCR for their taxable year beginning January 1, 
2016, and constituent entities of such U.S. MNE groups may be subject 
to CbC reporting requirements in foreign jurisdictions. Comments 
expressed concern about this possibility and recommended various 
approaches for dealing with this issue. Most comments requested that 
the IRS accept and exchange CbCRs voluntarily filed for taxable years 
beginning on or after January 1, 2016.
    Consistent with the proposed regulations, the final regulations are 
not applicable for taxable years of ultimate parent entities beginning 
before June 30, 2016, the date of publication of the final regulations 
in the Federal Register. Specifically, the final regulations apply to 
reporting periods of ultimate parent entities of U.S. MNE groups that 
begin on or after the first day of a taxable year of the ultimate 
parent entity that begins on or after June 30, 2016. The Treasury 
Department and the IRS intend to allow ultimate parent entities of U.S. 
MNE groups and U.S. business entities designated by a U.S. territory 
ultimate parent entity to file CbCRs for reporting periods that begin 
on or after January 1, 2016, but before the applicability date of the 
final regulations, under a procedure to be provided in separate, 
forthcoming guidance. The Treasury Department is working to ensure that 
foreign jurisdictions implementing CbC reporting requirements will not 
require constituent entities of U.S. MNE groups to file a CbC report 
with the foreign jurisdiction if the U.S. MNE group files a CbCR with 
the IRS pursuant to this procedure and the CbCR is exchanged with such 
foreign jurisdiction pursuant to a competent authority arrangement.

9. Time and Manner of Filing

    The proposed regulations provide that the CbCR for a taxable year 
must 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. Multiple comments requested 
that taxpayers be permitted to file a CbCR up to one year from the end 
of the ultimate parent entity's taxable year or annual accounting 
period to facilitate the taxpayer's ability to use statutory accounts 
or tax records of constituent entities to complete the CbCR. After 
considering the flexibility allowed for sources of information for 
completing the CbCR, the IRS information technology resources necessary 
to facilitate a filing separate from the income tax return, and the 
IRS's concern that CbCRs be linked to an income tax return, the 
Treasury Department and the IRS have not adopted this recommendation. 
However, the final regulations do provide that Form 8975 may prescribe 
an alternative time and manner for filing.

10. Employees

    The proposed regulations provide that the CbCR must reflect the 
number of employees for each tax jurisdiction of residence of the U.S. 
MNE group. The proposed regulations also provide that independent 
contractors participating in the ordinary course of business of a 
constituent entity may be included in the number of full-time 
equivalent employees. Multiple comments asked for further clarification 
with respect to the determination of the number of full-time equivalent 
employees and the treatment of independent contractors, including some 
recommending that independent contractors not be included as employees. 
The final regulations do not provide additional guidance with respect 
to the meaning of full-time equivalent employee or with respect to 
independent contractor situations and continue to allow for independent 
contractors that participate in the ordinary operating activities of a

[[Page 42486]]

constituent entity to be included in the number of full-time equivalent 
employees. U.S. MNE groups may determine the number of employees of 
constituent entities on a full-time equivalent basis using any 
reasonable approach that is consistently applied. The Treasury 
Department and the IRS believe permitting this flexibility in 
determining the number of full-time equivalent employees of each 
constituent entity appropriately balances the burden of completing the 
CbCR with the anticipated benefits to tax administration and is 
consistent with the Final BEPS Report.
    The proposed regulations specify that employees should be reflected 
on the CbCR in the tax jurisdictions in which the employees performed 
work for the U.S. MNE group. Comments indicated that this methodology 
is inconsistent with the Final BEPS Report, which provides that 
employees of a constituent entity should be reflected in the tax 
jurisdiction of residence of such constituent entity, and that 
determining the work location of employees would be burdensome for U.S. 
MNE groups and would present issues regarding certain employment 
situations with traveling employees. The comments recommended that the 
final regulations follow the approach of the Final BEPS Report. In 
response to these comments, the final regulations do not include the 
phrase ``in the relevant tax jurisdiction'' from proposed Sec.  1.6038-
4(d)(2)(viii). Accordingly, under the final regulations, employees of a 
constituent entity are reflected in the tax jurisdiction of residence 
of such constituent entity.
    A comment requested clarification about the tax jurisdiction in 
which employees of partnerships should be reflected on the CbCR. As 
discussed in section 5 of this preamble, a partnership may be 
considered a stateless entity. If the partnership creates a permanent 
establishment for itself or its partners, then the permanent 
establishment itself may be a constituent entity of the U.S. MNE group. 
Employees of the permanent establishment-constituent entity should be 
reflected in the tax jurisdiction of residence of the permanent 
establishment. Any other employees of the partnership should be 
reported on the stateless jurisdiction row under the tax jurisdiction 
of residence information portion of the CbCR.

11. Source of Data and Reconciliation

    The proposed regulations provide that the amounts furnished in the 
CbCR should 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, or, if the ultimate parent entity does not prepare applicable 
financial statements, then the information may be based on the 
applicable financial statements of constituent entities for their 
accounting period that ends with or within the ultimate parent entity's 
taxable year. Multiple comments expressed concern that the description 
of the period covered by the CbCR in the proposed regulations may limit 
the flexibility of U.S. MNE groups to choose to use consolidated 
financial statements or separate accounting, regulatory, or tax records 
prepared for the constituent entities. To mitigate this concern, the 
final regulations remove the restrictions imposed by the proposed 
regulations with respect to providing information for the applicable 
accounting period of the ultimate parent entity or for the applicable 
accounting period of each constituent entity. The final regulations 
provide that the reporting period covered by Form 8975 is the period of 
the ultimate parent entity's annual applicable financial statement that 
ends with or within the ultimate parent entity's taxable year, or, if 
the ultimate parent entity does not prepare an annual applicable 
financial statement, then the ultimate parent entity's taxable year. 
The final regulations do not limit the constituent entity information 
to applicable financial statements of the constituent entity but, 
rather, provide that the source of the tax jurisdiction of residence 
information on the CbCR must be based on applicable financial 
statements, books and records, regulatory financial statements, or 
records used for tax reporting or internal management control purposes 
for an annual period of each constituent entity ending with or within 
the reporting period.
    The proposed regulations provide that the amounts provided in the 
CbCR should be based on applicable financial statements, books and 
records maintained with respect to the constituent entity, or records 
used for tax reporting purposes. The term ``books and records'' was 
intended to be broad enough to include all sources of information that 
the Final BEPS Report allows. In order to clarify this intent, the 
final regulations provide that the source of data may also include 
regulatory financial statements and records used for internal 
management control purposes.
    The proposed regulations state that it is not necessary to have or 
maintain records that reconcile the amounts provided on the CbCR to the 
consolidated financial statements of the U.S. MNE group or to the tax 
returns filed in any particular tax jurisdiction or to make adjustments 
for differences in accounting principles applied from tax jurisdiction 
to tax jurisdiction. Multiple comments recommended that reconciliation 
to tax accounts be required and that ultimate parent entities maintain 
records of the reconciliation, while other comments supported the 
approach in the proposed regulations, which does not require 
reconciliation. The Treasury Department and the IRS considered these 
comments, and, consistent with the proposed regulations, the final 
regulations do not require the ultimate parent entity to create and 
maintain records to reconcile the information reported in the CbCR to 
consolidated financial statements or to tax returns. This approach 
provides flexibility for U.S. MNE groups to use the available data for 
each constituent entity without imposing the potential burden of a need 
to reconcile information on the CbCR with accounts that may not even be 
finalized when the CbCR is compiled, and it is consistent with the 
Final BEPS Report. The affirmative statement in the final regulations 
that an ultimate parent entity is not required to create and maintain 
information to support a reconciliation does not, however, affect the 
requirement to maintain records to support the information provided in 
the CbCR.

12. Expanding Scope and Surrogate Parent Entity Filing

    The proposed regulations generally require a U.S. business entity 
that is an ultimate parent entity of a U.S. MNE group to file a CbCR 
with respect to business entities that are or would be consolidated 
with the ultimate parent entity. A CbCR is not required for an MNE 
group that does not have a U.S. business entity as its ultimate parent 
entity. Multiple comments requested that reporting be required for any 
U.S. entity that exercises the ``mind and management function'' of an 
MNE group, the foreign parent entity of which is tax resident in a 
jurisdiction that does not require a report similar to the CbCR, 
despite the fact that the foreign entities of such MNE group are not 
controlled foreign corporations. This recommendation, which is not 
adopted, is beyond the scope of the Final BEPS Report and could not be 
implemented under the authority provided in section 6038 to collect 
information on foreign business entities owned by U.S. persons.

[[Page 42487]]

    One comment recommended that the final regulations allow a foreign-
parented MNE group with a U.S. business entity to designate that U.S. 
business entity as a surrogate parent entity and allow that entity to 
file a CbCR with the IRS for purposes of satisfying the MNE group's 
country-by-country reporting obligations in other tax jurisdictions. In 
light of the IRS resources that would be required to adopt this 
recommendation, the final regulations do not permit surrogate parent 
entity filing in the United States by foreign corporations as a general 
matter. However, the final regulations provide that a U.S. territory 
ultimate parent entity may designate a U.S. business entity that it 
controls (as defined in section 6038(e)) to file on the U.S. territory 
ultimate parent entity's behalf the CbCR that the U.S. territory 
ultimate parent entity would be required to file if it were a U.S. 
business entity. A U.S. territory ultimate parent entity is a business 
entity organized in a U.S. territory or possession of the United States 
that controls (as defined in section 6038(e)) a U.S. business entity 
and that is not owned directly or indirectly by another business entity 
that consolidates the accounts of the U.S. territory ultimate parent 
entity with its accounts under GAAP 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.

13. Tax Jurisdiction of Residence and Fiscal Autonomy

    The proposed regulations provide rules for determining the tax 
jurisdiction of residence of a constituent entity. Under those rules, 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. The proposed regulations further provide 
that ``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.'' Multiple 
comments requested that the final regulations clarify that this 
language in the proposed regulations is not intended to exclude the 
possibility of a country with a purely territorial tax regime being a 
tax jurisdiction of residence. The Treasury Department and the IRS did 
not intend for the proposed regulations to be interpreted to treat all 
entities in tax jurisdictions with territorial tax regimes as stateless 
entities. The language in question was intended to indicate that a 
business entity will not have a tax jurisdiction of residence in a 
jurisdiction solely by reason of being liable to tax in the 
jurisdiction on fixed, determinable, annual or periodical income from 
sources or capital situated in the jurisdiction. For greater clarity, 
the final regulations provide that ``[a] business entity will not be 
considered a resident in a tax jurisdiction if the business entity is 
only liable to tax in such tax jurisdiction by reason of a tax imposed 
by reference to gross amounts of income without any reduction for 
expenses, provided such tax applies only with respect to income from 
sources in such tax jurisdiction or capital situated in such tax 
jurisdiction.''
    The proposed regulations provide that a tax jurisdiction is a 
country or a jurisdiction that is not a country but that has fiscal 
autonomy. Multiple comments requested that the final regulations 
address the meaning of fiscal autonomy. In light of the need for 
consistency of CbC reporting requirements across tax jurisdictions, the 
Treasury Department and the IRS do not believe it would be helpful to 
provide a general definition of fiscal autonomy in the final 
regulations absent international consensus on the meaning of the term. 
However, the final regulations clarify that a U.S. territory or 
possession of the United States, defined as American Samoa, Guam, the 
Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands, is 
considered to have fiscal autonomy for purposes of CbC reporting.
    Under the proposed regulations, if a business entity is resident in 
more than one tax jurisdiction and there is no applicable income tax 
treaty, 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. One comment noted that the ``effective place of 
management'' test under the OECD Model Tax Convention can be uncertain 
and ``subject to second guessing.'' The comment recommended that an 
alternative, bright-line tie-breaker rule be considered to address such 
situations. The determination of tax jurisdiction of residence in the 
proposed regulations is based on the Final BEPS Report, and the final 
regulations do not create a new tie-breaker rule but add that, in 
addition to the OECD Model Tax Convention, Form 8975 may provide 
guidance.
    Although certain entities may not have a tax jurisdiction of 
residence, the Treasury Department and the IRS have determined that an 
entity regarded as a corporation should not be considered stateless 
merely because it is organized or managed in a jurisdiction that does 
not impose an income tax on corporations. Accordingly, the final 
regulations provide that in the case of a tax jurisdiction that does 
not impose an income tax on corporations, a corporation that is 
organized or managed in that tax jurisdiction will be treated as 
resident in that tax jurisdiction, unless such corporation is treated 
as resident in another tax jurisdiction under another provision of the 
final regulations.

14. Reporting Threshold

    The revenue threshold at or above which a U.S. MNE group is 
required to file the CbCR (reporting threshold) is expressed in United 
States dollars (USD) in proposed Sec.  1.6038-4(h). Foreign 
jurisdictions that are enacting CbC reporting requirements based on the 
Final BEPS Report may express the reporting threshold in a foreign 
currency. Multiple commenters expressed concern that U.S. MNE groups 
may be required to file a CbC report in a foreign country, even if the 
USD reporting threshold in Sec.  1.6038-4(h) is not exceeded, because 
the U.S. MNE group's revenues exceed the local law reporting threshold 
as expressed in the foreign currency. The comments recommended various 
approaches to address the possibility of a reporting threshold in the 
final regulations that is inconsistent with local law reporting 
thresholds. The reporting threshold of $850,000,000 in the proposed 
regulation was determined by reference to the USD equivalent of 
[euro]750,000,000 on January 1, 2015, as provided in the Final BEPS 
Report. The Treasury Department and the IRS anticipate that other 
countries will acknowledge that it would be inconsistent with the Final 
BEPS Report for a country to require local filing by a constituent 
entity of a U.S. MNE group that has revenue of less than $850,000,000.
    Multiple comments requested that the reporting threshold be reduced 
to the USD equivalent of [euro]40,000,000 in order to subject a greater 
number of U.S. MNE groups to CbC reporting requirements. Because the 
reporting threshold in the proposed regulations is based on the Final 
BEPS Report, it is consistent with the agreed international standard 
with respect to CbC reporting. The Treasury Department and IRS weighed 
the potential benefit of obtaining CbC information on a larger number 
of U.S.

[[Page 42488]]

MNE groups against the additional administrative burden that would be 
imposed on the IRS and the burden that would be imposed on U.S. MNE 
groups that would not otherwise be required to file the CbCR. Based on 
these considerations, the final regulations maintain the reporting 
threshold in the proposed regulations.

15. Confidentiality and Use of the CbCR

    Multiple comments expressed concerns regarding the confidentiality 
of the CbCR. Some comments recommended public disclosure of CbCRs. 
These comments requested that the CbCR be treated as a Treasury report, 
referencing as an example the Treasury Department's Financial Crimes 
Enforcement Network Report of Foreign Bank and Financial Assets, rather 
than tax return information, so that the CbCR would not be subject to 
the confidentiality protections under section 6103. Other comments 
supported the decision to treat CbCR as return information.
    The Treasury Department and the IRS have determined that the 
information provided on the CbCR is return information subject to the 
confidentiality protections of section 6103. This approach is 
consistent with the purpose of CbC reporting as well as the 
confidentiality standards reflected in the Final BEPS Report. CbC 
reporting was designed and established as part of an international 
effort to standardize transfer pricing documentation. This standardized 
documentation is intended to provide an efficient and effective means 
for tax administrations to conduct high-level transfer pricing risk 
assessment. Accordingly, the Treasury Department and the IRS are 
collecting the CbCR under the authority of sections 6001, 6011, 6012, 
6031, and 6038 to assist in the better enforcement of income tax laws. 
The CbCR is a return, and the information furnished to the Treasury 
Department and the IRS on the CbCR is return information subject to the 
confidentiality protections provided under section 6103. In addition, 
the Final BEPS Report provides that tax administrations should take all 
reasonable steps to ensure that there is no public disclosure of 
confidential information in CbC reports and that they be used for tax 
risk assessment purposes.
    The preamble of the proposed regulations indicates that the 
information reported on the CbCR will be used for high-level transfer 
pricing risk identification and assessment, and that transfer pricing 
adjustments will not be made solely on the basis of a CbCR, but that 
the CbCR may be the basis for further inquiries into transfer pricing 
practices or other tax matters which may lead to adjustments. Some 
comments supported the limitations on use of the CbCR information, 
while other comments expressed concern that a prohibition on disclosure 
of the CbCR for non-tax law purposes is too restrictive. Consistent 
with the proposed regulations, the final regulations do not contain 
specific limitations on the use of CbCR information. However, 
consistent with the Final BEPS Report, the Treasury Department and the 
IRS intend to limit the use of the CbCR information and intend to 
incorporate this limitation into the competent authority arrangements 
pursuant to which CbCRs are exchanged.
    One comment recommended that CbCR information not be provided to 
state or local jurisdictions and that a statement to that effect be 
provided in the final regulations. Under section 6103(d), return 
information may be provided to state agencies, but only for the 
purposes of, and only to the extent necessary in, the administration of 
such state's tax laws. The Treasury Department and the IRS believe the 
circumstances under which this standard would be met for the CbCR are 
rare, but the final regulations do not preclude the disclosure of CbCRs 
to state agencies, subject to the restrictions of section 6103 that 
apply to other returns and return information.

16. Exchange of Information With Foreign Jurisdictions

    The United States intends to enter into competent authority 
arrangements for the automatic exchange of CbCRs with jurisdictions 
with which the United States has an income tax treaty or tax 
information exchange agreement. Multiple comments expressed concern 
that review of the confidentiality safeguards and framework of the 
other jurisdictions would prevent the Treasury Department and IRS from 
concluding such arrangements on a timely basis. Comments also requested 
that the Treasury Department and IRS publish a list of jurisdictions 
with which the United States exchanges CbCRs. The Treasury Department 
is committed to entering into bilateral competent authority 
arrangements with respect to CbCRs in a timely manner, taking into 
consideration the need for appropriate review of systems and 
confidentiality safeguards in the other jurisdictions. The Treasury 
Department and the IRS anticipate that information about the existence 
of competent authority arrangements for CbCRs will be made publicly 
available, but the manner in which such information would be made 
publicly available has not yet been determined.
    A comment recommended that the final regulations provide a 
mechanism for reporting suspected violations of the limitations on the 
use of information by foreign jurisdictions. While the final 
regulations do not provide procedures for reporting suspected 
violations, the Treasury Department and the IRS are aware of the 
concern and intend to establish a procedure to report suspected 
violations of confidentiality and other misuses of CbCR information.
    A comment requested that information transmitted under the 
competent authority arrangements include the ``Additional Information'' 
table in the model CbC report template provided in the Final BEPS 
Report. It is expected that such information will be collected on Form 
8975 and transmitted; however, there may be limits to the amount of 
information that can be transmitted in any field. Such constraints, if 
any, will be noted in the Instructions to Form 8975.

17. Penalties

    One comment requested that penalties with respect to the CbCR be 
waived for reports filed for the 2016 tax year and that the Treasury 
Department should advocate that other countries also waive penalties 
for the 2016 tax year. The final regulations apply to reporting periods 
of ultimate parent entities that begin on or after the first day of a 
taxable year of the ultimate parent entity that begins on or after 
publication of the final regulations in the Federal Register. U.S. MNE 
groups whose ultimate parent entity's taxable year begins before the 
applicability date will not have a CbCR filing requirement for their 
tax year beginning in 2016. The final regulations do not provide a 
specific waiver of penalties for U.S. MNE groups whose ultimate parent 
entity's taxable year begins on or after the applicability date. The 
penalty rules under section 6038 generally apply, including reasonable 
cause relief for failure to file.

 Special Analyses

    Certain IRS regulations, including these, 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.
    It is hereby certified that this regulation will not have a 
significant economic impact on a substantial

[[Page 42489]]

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 business trusts that have foreign 
operations with respect to a taxable year when the combined annual 
revenue of the business entities owned by the U.S. person meets or 
exceeds $850,000,000 for the previous reporting period. Pursuant to 
section 7805(f) of the Internal Revenue Code, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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. 6001, 6011, 6012, 
6031, and 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 (h) of 
this section, every ultimate parent entity of a U.S. multinational 
enterprise (MNE) group must make an annual return on Form 8975, 
Country-by-Country Report, setting forth the information described in 
paragraph (d) of this section, and any other information required by 
Form 8975, with respect to the reporting 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 generally is any entity recognized for federal tax purposes that 
is not properly classified as a trust under Sec.  301.7701-4 of this 
chapter. However, any grantor trust within the meaning of section 671, 
all or a portion of which is owned by a person other an individual, is 
a business entity for purposes of this section. Additionally, the term 
business entity includes any entity with a single owner that may be 
disregarded as an entity separate from its owner under Sec.  301.7701-3 
of this chapter and a permanent establishment, as defined in paragraph 
(b)(3) of this section, that prepares financial statements separate 
from those of its owner for financial reporting, regulatory, tax 
reporting, or internal management control purposes. A business entity 
does not include a decedent's estate or a bankruptcy estate described 
in section 1398.
    (3) Permanent establishment. For purposes of this section, the term 
permanent establishment includes:
    (i) A branch or business establishment of a constituent entity in a 
tax jurisdiction that is treated as a permanent establishment under an 
income tax convention to which that tax jurisdiction is a party;
    (ii) A branch or business establishment of a constituent entity 
that is liable to tax in the tax jurisdiction in which it is located 
pursuant to the domestic law of such tax jurisdiction; or
    (iii) A branch or business establishment of a constituent entity 
that is treated in the same manner for tax purposes as an entity 
separate from its owner by the owner's tax jurisdiction of residence.
    (4) 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. For purposes of this section, foreign insurance 
companies that elect to be treated as domestic corporations under 
section 953(d) are U.S. business entities that have their tax 
jurisdiction of residence in the United States.
    (5) 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.
    (6) 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) (determined without regard to Sec. Sec.  1.6038-2(j) and 
1.6038-3(c)) or any permanent establishment of such foreign corporation 
or foreign partnership.
    (7) Tax jurisdiction. For purposes of this section, a tax 
jurisdiction is a country or a jurisdiction that is not a country but 
that has fiscal autonomy. For purposes of this section, a U.S. 
territory or possession of the United States is considered to have 
fiscal autonomy.
    (8) Tax jurisdiction of residence. 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. A business entity will not be considered a resident in a tax 
jurisdiction if the business entity is liable to tax in such tax 
jurisdiction only by reason of a tax imposed by reference to gross 
amounts of income without any reduction for expenses, provided such

[[Page 42490]]

tax applies only 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 
Organisation for Economic Co-operation and Development Model Tax 
Convention on Income and on Capital 2014, or as provided by Form 8975. 
A corporation that is organized or managed in a tax jurisdiction that 
does not impose an income tax on corporations will be treated as 
resident in that tax jurisdiction, unless such corporation is treated 
as resident in another tax jurisdiction under another provision of this 
section. 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.
    (9) 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.
    (10) U.S. territory or possession of the United States. The term 
U.S. territory or possession of the United States means American Samoa, 
Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin 
Islands.
    (11) U.S. territory ultimate parent entity. A U.S. territory 
ultimate parent entity is a business entity organized in a U.S. 
territory or possession of the United States that controls (as defined 
in section 6038(e)) a U.S. business entity and that is not owned 
directly or indirectly by another business entity that consolidates the 
accounts of the U.S. territory ultimate parent entity with its 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.
    (c) Reporting period. The reporting period covered by Form 8975 is 
the period of the ultimate parent entity's applicable financial 
statement prepared for the 12-month period (or a 52-53 week period 
described in section 441(f)) that ends with or within the ultimate 
parent entity's taxable year. If the ultimate parent entity does not 
prepare an annual applicable financial statement, then the reporting 
period covered by Form 8975 is the 12-month period (or a 52-53 week 
period described in section 441(f)) that ends on the last day of the 
ultimate parent entity's taxable year.
    (d) Contents of return--(1) Constituent entity information. The 
return on Form 8975 must contain so much of the following information 
with respect to each constituent entity of the U.S. MNE group, and in 
such form or manner, as Form 8975 prescribes:
    (i) The complete legal name of the constituent entity;
    (ii) The tax jurisdiction, if any, in which the constituent entity 
is resident for tax purposes;
    (iii) The tax jurisdiction in which the constituent entity is 
organized or incorporated (if different from the tax jurisdiction of 
residence);
    (iv) 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
    (v) The main business activity or activities of the constituent 
entity.
    (2) Tax jurisdiction of residence information. The return on Form 
8975 must 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, presented as an aggregate of the 
information for the constituent entities resident in each tax 
jurisdiction, and in such form or manner, as Form 8975 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 period and 
excluding deferred taxes or provisions for uncertain tax liabilities;
    (vi) Stated capital, except that the stated capital of a permanent 
establishment must be reported in the tax jurisdiction of residence of 
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; 
and
    (ix) Net book value of tangible assets, which, for purposes of this 
section, does not include cash or cash equivalents, intangibles, or 
financial assets.
    (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. In 
addition, if a constituent entity is an owner of a constituent entity 
that does not have a jurisdiction of tax residence, then the owner's 
share of such entity's revenues and profits will be aggregated with the 
information for the owner's 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. Distributions and remittances from 
partnerships and other fiscally transparent entities and permanent 
establishments that are constituent entities are not considered revenue 
of the recipient-owner. The term revenue also does not include imputed 
earnings or deemed dividends received from other constituent entities 
that are taken into account solely for tax purposes and that otherwise 
would be included as revenue by a constituent entity. With respect to a 
constituent entity that is an organization exempt from taxation under 
section 501(a)

[[Page 42491]]

because it is an organization described in section 501(c), 501(d), or 
401(a), a state college or university described in section 
511(a)(2)(B), a plan described in section 403(b) or 457(b), an 
individual retirement plan or annuity as defined in section 
7701(a)(37), a qualified tuition program described in section 529, a 
qualified ABLE program described in section 529A, or a Coverdell 
education savings account described in section 530, the term revenue 
includes only revenue that is reflected in unrelated business taxable 
income as defined in section 512.
    (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) 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, 
regulatory financial statements, or records used for tax reporting or 
internal management control purposes for an annual period of each 
constituent entity ending with or within the period described in 
paragraph (c) of this section.
    (f) Time and manner for filing. Returns on Form 8975 required under 
paragraph (a) of this section for a reporting period must be filed with 
the ultimate parent entity's income tax return for the taxable year, in 
or with which the reporting period ends, on or before the due date 
(including extensions) for filing that person's income tax return or as 
otherwise prescribed by Form 8975.
    (g) Maintenance of records. The U.S. person filing Form 8975 as an 
ultimate parent entity of a U.S. MNE group must maintain records to 
support the information provided on Form 8975. However, the U.S. person 
is not required to create and maintain records that reconcile the 
amounts provided on Form 8975 with the tax returns of any tax 
jurisdiction or applicable financial statements.
    (h) Exceptions to furnishing information. An ultimate parent entity 
of a U.S. MNE group is not required to report information under this 
section for the reporting period described in paragraph (c) of this 
section if the annual revenue of the U.S. MNE group for the immediately 
preceding reporting period was less than $850,000,000.
    (i) [Reserved]
    (j) U.S. territories and possessions of the United States. A U.S. 
territory ultimate parent entity may designate a U.S. business entity 
that it controls (as defined in section 6038(e)) to file Form 8975 on 
the U.S. territory ultimate parent entity's behalf with respect to such 
U.S. territory ultimate parent entity and the business entities that 
would be required to consolidate their accounts with such U.S. 
territory ultimate parent entity under U.S. generally accepted 
accounting principles, or would be so required if equity interests in 
the U.S. territory ultimate parent entity were publicly traded on a 
U.S. securities exchange.
    (k) Applicability dates. The rules of this section apply to 
reporting periods of ultimate parent entities of U.S. MNE groups that 
begin on or after the first day of a taxable year of the ultimate 
parent entity that begins on or after June 30, 2016.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: June 20, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-15482 Filed 6-29-16; 8:45 am]
 BILLING CODE 4830-01-P