The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
June 8 — The IRS is looking at giving taxpayers more time to amend their country-by-country reports filed in the first year of the new requirement, an official said.
The agency may allow an extra three-month period—between Sept. 15 and Dec. 31, 2017—for companies that file under a voluntary option currently under consideration by the Internal Revenue Service and Treasury Department for tax years beginning on or after Jan. 1, 2016.
“Right now, it looks like that's doable,” said Sharon Porter, director of treaty and transfer pricing operations for the IRS Large Business and International Division. “We're looking at that, trying to be cognizant that companies could use that extra three months.”
Porter spoke at a transfer pricing conference co-sponsored by Bloomberg BNA and Baker & McKenzie LLP on June 8.
The need for an extra three-month allowance arises from the complicated implementation of the new reporting standard from the Organization for Economic Cooperation and Development, which Treasury officials have been trying to smooth over for months. The U.S. reporting requirements will go into effect for tax years beginning after June 30, 2016—six months later than in many other countries, and later than the date set by the OECD guidelines.
The implementation gap raised the possibility that U.S. taxpayers would be required to file reports directly to foreign jurisdictions for 2016, or use a complicated “surrogate” system in another country. Responding to concerns over privacy and administrative headaches, Treasury officials announced in April it would allow voluntary filings for all of 2016—although it isn't yet clear whether other countries will accept them (25 Transfer Pricing Report 7, 5/12/16).
Because such voluntary reports may not be considered a tax return, taxpayers may not have had the opportunity to amend them after they were filed. Porter said they were hoping to allow taxpayers until the end of the year to make changes to the reports, based on information that may not have been available by September.
After 2016, the reports will be amendable as normal corporate tax returns, Porter said.
Others at the conference praised the idea.
“I think for us the extra three months—being a first-year requirement—would be hugely helpful,” said John Hickey, director of global transfer pricing for Johnson & Johnson.
They also, however, expressed frustration with the overall process, as Treasury officials work to set up the voluntary filing system and ensure that they will be accepted by foreign jurisdictions.
“Obviously companies are trying to plan for this,” said Philip Carmichael, an economist at Baker & McKenzie Consulting LLC in New York. “They're spending a lot of time and effort right now trying to figure out how they're going to file with this uncertainty. It's just creating a lot of stress.”
The country-by-country reports, part of the OECD's effort to stem tax base erosion, require companies to submit a blueprint of their global operations, with factors such as number of employees, facilities, income earned and taxes paid.
After getting pushback from taxpayers, the U.S. is moving towards dropping language that would require entities to look to the geographic location of employees when determining head count figures for the country-by-country reports, according to Brian Jenn, an attorney-adviser with the Treasury's Office of International Tax Counsel, who also spoke at the conference.
The OECD language only looks to the location of a worker's employer, which critics claimed could lead to inconsistent reporting and possible conflicts .
“The regulations were potentially inconsistent with the way employees were reported under the OECD guidance,” Jenn said. “We're moving forward with the final regulations on the basis of the OECD guidance and the approach that was taken there.”
Porter also said the IRS was working with other OECD countries to ensure there was clarity about all of the information categories in the required reports.
“One of the things we're doing in the large business network part of the OECD is having those discussions about what do those boxes actually mean,” Porter said. “So that we can share what's we're expecting to see in those boxes, those definitions, and—where possible—making sure that we share that definition across all of the tax jurisdictions.”
Porter said the IRS was revving up its information technology systems to analyze the influx of new reports, which she said could be very useful for sorting through tax returns and identifying trends.
The agency took a hard look at the lessons learned from the Foreign Account Tax Compliance Act “to make sure that we've thought through how we want to get the information in, making sure that our systems are ready to secure it and making sure it's protected,” Porter said.
She said the IRS was putting in constraints for how IRS employees can use the information, similar to what is currently in place for information from uncertain tax positions filed by taxpayers.
The information can be used to “de-select” tax returns where the risk of noncompliance is small, and to examine foreign companies operating in the U.S., Porter said.
“It's going to allow us to get insight into companies that are operating in the U.S., that maybe we don't have a filing on already,” Porter said. “If it's a foreign-parented entity that has an operation in the U.S., we might not have visibility into whether there is a compliance risk or not.”
The rules are expected to be finalized by June 30.
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