T401 - Country by Country Reporting in the United States ...my16.teionline.org/wp-content/uploads/2015/12/T401-Country-by-Country... · transaction described in the associated materi

TEI Midyear Conference

From the Sublime to the Mundane: The U.S. Proposed Country by Country Reporting Rules

Gary Weaver, ModeratorKim Majure, PanelistBrian Trauman, Panelist

March 15, 2016

1© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The following information is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Notices


Agenda

Quick Background

What Are Clients Doing Now?

Practical Issues Clients Are Facing


Quick Background


OECD BEPS Project – Action 13

The OECD Base Erosion and Profit Sharing Project (“BEPS”) addresses perceived abuses by multinational corporations by articulating 15 “Actions” to address tax arbitrage.

BEPS Action 13 seeks to enhance transparency by requiring enhanced transfer pricing documentation (master file and local file) and “country-by-country” (“CbyC”) reporting.

Action 13 Final Report issued October 5, 2015 provided CbyC reporting model template and several pages of instructions.

■ Objective: Prioritization of Audit Issues■ Approach: Provides summary data by jurisdiction

including revenue, income, taxes, and indicators of economic activity

Country-by-Country(CbyC) Report


U.S. CbyC Implementation – Proposed Regulations

IRS Proposed Regulations were issued on December 23, 2015• The proposed regulations were issued pursuant to IRC sections 6001, 6011,

6012, 6031, 6038, and 7805

• Comments requested on a number of issues by March 22, 2016 (i.e., with a 90-day comment period)

Form XXXX:• Currently under development/not officially numbered

• Based on OECD model template for CbyC reporting (published 10/05/15)

• Note, Form XXXX appears to have reversed the order of tables:

• Form XXXX Table 1 (constituent entities) OECD Table 2

• Form XXXX Table 2 (overview of jurisdictions) OECD Table 1


Name of the MNE group:Fiscal year concerned:

Main business activity(ies)

Tax jurisdiction

Constituent entities resident in the tax jurisdiction

Tax jurisdiction of organization or incorporation if different from tax jurisdiction of residence R

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Form XXXX Table 1 (OECD Template, Table 2)


Name of the MNE group:Fiscal year concerned:

Currency used:

Revenues

Tax jurisdiction

Unrelated Party

Related Party Total

Profit (Loss) Before Income Tax

Income Tax Paid (on cash basis)

Income Tax Accrued – Current Year

Stated Capital

Accumulated Earnings

Number of Employees

Tangible Assets other than Cash and Cash Equivalents

Country A

Country B

Not resident in any tax jurisdiction

Form XXXX Tables 2 and 3 (OECD Template, Tables 1 and 3)

Name of the MNE Group:

Fiscal Year Concerned:

Please include any further brief information or explanation you consider necessary or that would facilitate the understanding ofthe compulsory information provided in the Country-by-Country Report.


Snapshot -- US Proposed Regulations vs. OECD Model Template

■ Under both, the ultimate parent of multinational enterprise (“MNE”) group will be required to file the CbyC Report in its residence jurisdiction

■ First reporting period■ Prop regs: taxable years beginning on or after the publication

date of final regulations (for calendar year parents, likely January 1, 2017)

■ OECD: MNE’s fiscal year beginning on or after January 1, 2016

■ First filing deadlines■ Prop Regs: with the parent’s income tax return due date, including

extensions (for calendar year parents, September 15, 2018)■ OECD: as early as December 31, 2017, for 2016 CbyC reports

■ Annual reporting threshold requirement■ Prop regs: reporting required for MNE groups with annual

consolidated group revenue of at least $850 million■ OECD: reporting required for MNE groups with annual

consolidated group revenue of at least €750 million

Source: OECD, Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting


Practical Issues Clients Are Facing


Practical Issues Clients Are Facing under the Proposed Regulations

1. Timing and Scope of First CbyC Report Filings

a. 2016 reporting implications for U.S. MNE Groups

b. Practical approaches for the 2016 year

2. Surrogacy Provisions

a. Factors for choosing a surrogate

b. Absence of proposed surrogacy provisions

3. “Statelessness” for Constituent Entities

4. Statehood for Constituent Entities

5. Treatment of Flow-Through Constituent Entities

6. Reporting Employees and Other “Flexible” Situations


Here’s what the proposed rules say:Prop. Reg. § 1.6038-4(j). Effective/applicability dates. The rules of this section apply to taxable years of ultimate parent entities of U.S. MNE groups that begin on or after the date of publication of…final regulations…and that include annual accounting periods determined under section 6038(e)(4) of all foreign constituent entities and taxable years of all domestic constituent entities beginning on or after the date of…final regulations.

Prop. Reg. § 1.6038-4(c). Period covered by return. The information required…must be furnished for the annual accounting period with respect to which the ultimate parent entity prepares its applicable financial statements ending with or within the ultimate parent entity’s taxable year for which the [CbyC report] is filed. However, if the ultimate parent entity does not prepare applicable financial statements that consolidate the accounts of all constituent entities, the ultimate parent entity may provide the information required…based on applicable financial statements of constituent entities for their accounting period or periods that end with or within the ultimate parent entity’s taxable year.

U.S. Effective Date for First CbyC Report


Timing and Scope of First CbyC Report

If the first taxable year for a calendar year U.S. parent entity is 2017, could the MNE group nonetheless be subject to a filing requirement effective in the residence jurisdiction of a foreign constituent entity? Potential options:

■ Comply with foreign filing requirements for 2016 reporting year?■ Appoint a surrogate filing jurisdiction to fulfill foreign requirements?■ Option for a voluntary 2016 CbyC report filing in the United States?

Example: USP is a calendar year taxpayer. One of its foreign subs has an 6/30 year end for book and foreign tax purposes. If final regs are published 9/1/16:

1/1/16 9/1/16 1/1/17 9/15/1812/31/17

Final U.S. regulations published

First taxable year beginning on or after U.S. final reg date

Due date for first U.S. CbyC report filing (concurrent with federal income tax return, including extensions)

Due date for first CbyC reports per OECD Model Instructions

First reportable period per OECD Model Instructions


Here’s what the proposed rules say:

Prop. Reg. § 1.6038-4(a). Requirement of Return: Except as provided in Paragraph (j) of this section, every United States person (US person) that is an ultimate parent entity of a U.S. multinational enterprise … must make an annual return on Form XXXX….

Practical issues :

1. What are the material factors that any MNE Group should be considering if faced with the need to choose a surrogate filing jurisdiction?■ Timing of foreign 2016 vs US 2017 filings■ Information exchange networks■ Tolerance for US-style instructions

2. There is no provision for the IRS accepting return as a surrogate country for MNEs with a parent resident in countries without CbyC reporting requirements. Will final regulations include surrogacy rules?

3. What are the chances that I would have to file a CbyC report in another country even if the US provides a 2016 opt in?

Picking a Surrogate Jurisdiction



Issue 3: “Statelessness”

Prop. Reg. § 1.6038-4(b)(6). Tax jurisdiction of residence. … [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…

Prop. Reg. § 1.6038-4(d)(3). Special rules — (i) Constituent entity with no tax jurisdiction of residence. The [required information] also must be provided, in the aggregate, for any constituent entity or entities that have no tax jurisdiction of residence.


Practical issues concerning clients:

1. What scenarios give rise to a “stateless” constituent entities?

a) Constituent entities that are not liable to tax at the entity level (e.g., partnerships and grantor trusts)

b) Constituent entities subject to territorial tax systems

Compare these two scenarios –

Example 1: Country A tax resident (“ACo”) invests in Country B, which imposes withholding tax on Country B-source interest payments to ACo. Country B withholding tax is imposed solely with respect to Country B source income, and does not result in ACo being treated as a Country B tax resident. The interest payments and withholding tax (if any) are reflected on the MNE Group’s CbyC report as Country A revenues and taxes.

Example 2: Same facts as above. Country A is a territorial tax jurisdiction. Therefore, ACo’s Country B source income is not subject to tax in Country A. In the case, ACo appears to be “Stateless” and ACo’s revenues and withholding taxes are reported accordingly.




2. How far does the stateless rule go for territorial taxpayers, with respect to their locally sourced (taxable) income?

Example: A Hong Kong limited company (“HK1”) earns three types of income – non-Hong Kong source sales income (not subject to Hong Kong profits tax), Hong Kong source sales income (subject to Hong Kong profits tax) and Hong Kong source bank account interest (also subject to Hong Kong profits tax).

HK 1

Type of Income Earned Potential Residence Implications

Non-HK source sales income “Stateless” because HK1 is subject only to tax on HK source income

HK source sales income “HK” because the income is earned through a HK PE of HK1

HK source bank account interest Probably HK (under a very loose PE construction)




Issue 4: Statehood

Prop. Reg. § 1.6038-4(b)(6). Tax jurisdiction of residence. For purposes of this section, a tax jurisdiction is a country or a jurisdiction that is not a country but that has fiscal autonomy…


1. Is it likely that the final regulations would provide additional guidance on “fiscal autonomy”?

2. In the absence of guidance, are there any potential practical indicators of fiscal autonomy?



Preamble: “It is expected that the partners will report their share of the partnership’s items in the partners’ respective tax jurisdictions of residence in order to determine the aggregate amounts reported on Form XXXX, regardless of whether the partnership has elected to be treated as an association for U.S. federal tax purposes (emphasis added).”

– Note, comments are requested regarding treatment of reverse hybrids, so the presentation of this information may change under the final regulations


1. Are other countries taking an aggregate approach to pass-throughs and, if not, could this cause issues down the road?

2. Are your data systems capable of allocating items to partners?

3. How difficult would it be as a practical matter to “remap” partnership items if the final regulations take an entity approach?

Issue 5: Treatment of Flow-Through Constituent Entities


HK1

Non-HK source income China

Example: Let’s assume a Chinese pass-thru entity (checked as a reverse hybrid for US tax purposes) has two Hong Kong owners.

HK2


• The Chinese entity is set up as a pass-through and is not a liable to tax as a tax resident in any jurisdiction.

• The Chinese entity is checked as a reverse hybrid, so it is treated as a corporation for US tax purposes.

• Both Hong Kong entities are subject to territorial taxation, and their non-Hong Kong source income is untaxed by Hong Kong or any other jurisdiction.

Juris’n 3P Revs

IntercoRevs

PBT Taxes EEs Tangible Assets

Stateless +++ +++ 0 0 0

Taking only this structure into account, a back of the envelope CbyC dry run could look like this:


Entity Juris’n 3P Revs

IntercoRevs


Stateless +++ +++ 0 0 0

Stateless +++ +++ 0 0 0

Stateless (allocateto HK1 and HK2)

China

HK1

HK2

Stated separately, the constituent entities’ CbyC data for this structure is as follows:



US1

Income NE

Example: Let’s compare. Here we have the same basic structure, but different countries.

US2


• The Dutch entity is set up as a pass-through in the Netherlands and is not liable to tax as a tax resident in any jurisdiction.

• Because the Dutch entity is a reverse hybrid, its income is deferred from US taxation.

Juris’n 3P Revs

IntercoRevs


US +++ +++ 0 0 0

Stateless

Taking only this structure into account, a back of the envelope CbyC dry run could look like this:


Stated separately, the constituent entities’ CbyC data for this structure is as follows:


Entity Juris’n 3P Revs

IntercoRevs


US +++ +++ 0* 0* 0*

US +++ +++ 0* 0* 0*

StatelessCV

US1

US2

*When folded into a US MNE Group’s big picture CbyC report, these numbers will likely be combined with positive numbers.



Prop. Reg. § 1.6038-4(d)(3)(iii). Number of Employees: For the purpose of this section, the number of employees on a full-time equivalent basis may be reported as of the end of the accounting period…or on any other reasonable basis consistently applied across tax jurisdictions and from year-to-year. Independent contractors… may be reported as employees…

Preamble. …The number of full-time employees in a tax jurisdiction of residence by reference to the employees that the perform their activities … within such tax jurisdiction of residence. U.S. MNE groups should use a reasonable basis to determine the tax jurisdiction of residence for which to report employees that perform activities for the U.S. MNE group in more than one tax jurisdiction or in a tax jurisdiction in which none of the constituent entities of the U.S. MNE group is resident. For example, a reasonable basis may be to report a travelling employee as part of the home office jurisdiction, as part of the tax jurisdiction in which the travelling employee spends the majority of his or her time, or as a fraction of one full-time employee in multiple tax jurisdictions based on the employee’s time spent working in those jurisdictions.

Issue 6: Reporting Employees…



1. When could it be a benefit / detriment to an MNE Group to take advantage of the flexibility granted by the preamble, and determine where employees are performing activities?

– Locating employees out of “statelessness”

– Transfer pricing risk vs. potential PE exposure

2. Are there examples of when reporting independent contractors could be beneficial or detrimental?

Issue 6: Reporting Employees…



1. The preamble signals that some cases (at least for employees) could merit a flexible approach to reporting. Other potential areas of flexibility?

– Breaking jurisdiction data out into sub-jurisdiction lines (i.e., reporting in more detail than required)? Seems like this would do no harm

– Using different sources of data for different countries (i.e., UK using US GAAP, France using statutory)? More aggressive interpretation, and we wouldn’t recommend it

– Not reporting chunks of income at all (e.g., “national security reason” exception)? IRS has requested comments; should address on Table 3

Issue 6: …and Other “Flexible” Situations


Agenda

What Are Clients Doing Now?


What Are Companies Doing to Prepare?

Short-Term Action Steps

● Identify potential data sources for required CbyC reported items, and internal resources that can help explain scope, logic, inputs, etc.

● Perform initial data and legal entity/jurisdiction mapping■ What items can be pulled electronically?■ What items must be manipulated manually?■ What items are subject to significant interpretation or discretion?

● Perform “dry run” CbyC report (possibly multiple dry runs)

● Identify BEPS risks highlighted by your dry run reporting package■ What are the risks for proposed adjustments?■ Which risks are livable and which are unacceptable exposures for the MNE

Group?■ How can you mitigate the unacceptable risks?


Review Chart of Accounts• Identify relevant accounts that are in line with C-by-C definitions• Create Appendix for the selected accounts

Obtain Financial and Non-Financial Data • P&L, Balance Sheet, etc. based spreadsheets • Headcount, legal entity inventory including taxable branches

Conduct Necessary Interviews Interview Tax, Legal, Technology and Accounting to identify and understand data sources and systems

Aggregate Data by Country• Note instances (e.g., partnerships) where legal entity or jurisidiction

mapping could evolve

Adjusted Data Based on Supplemental Information• For example, redo organization charts to illustrate entity/jurisdiction

mapping as opposed to legal entity-based illustration

What Are Companies Doing to Prepare? (Mapping Example)

Questions? Don’t hesitate to ask:

Kimberly MajureKPMG [email protected]

Brian TraumanKPMG [email protected]

Documents

T401 - Country by Country Reporting in the United States ...my16.teionline.org/wp-content/uploads/2015/12/T401-Country-by-Country... · transaction described in the associated materi