The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
June 2 — The U.S. will meet its self-imposed June 30 deadline to finalize its rules on country-by-country reporting, a Treasury official said.
Robert Stack, deputy assistant secretary for international tax affairs at the Treasury Department, said June 2 that it is unusual for the IRS and Treasury to make a fixed deadline, “but that was part of our negotiating with other countries to get a way to smooth the path.”
Stack said Treasury is trying to avoid “this hiccup of people having to file in other countries in 2016, even though our regulations will be effective for taxable years after they are finalized.”
Once finalized, the regulations will be effective for companies with tax years beginning July 1, Stack told a Federal Bar Association insurance tax seminar in Washington.
Stack said other countries, particularly European countries, will require the country-by-country report for taxable years as of Jan. 1, 2016, so Treasury has been working with the IRS to accept voluntary filings going back to that date.
“That fact will not be referenced in the regs to be finalized at the end of this month, and that is because we are still working on some of the ways that we are going to manage the voluntary filing going forward,” Stack said.
However, “the problem on the other side is you need countries that will then accept the voluntary filing as if it was required for purposes of satisfying their laws,” Stack said.
Stack announced March 3 that the U.S. expects to finalize its rules on country-by-country reporting by June 30, adding that he hopes other countries will be flexible about the effective date of their own rules (24 Transfer Pricing Report 1290, 3/3/16).
The IRS Dec. 18 issued proposed regulations requiring large companies to report information, including the amount of revenue, profit or loss, capital and accumulated earnings for each country of operation, consistent with the Organization for Economic Cooperation and Development's recommendations designed to combat base erosion and profit shifting (24 Transfer Pricing Report 1076, 1/7/16).
Stack said the OECD is working on putting together one package that “will announce both countries that will accept voluntary filing and countries that will take it as satisfying the requirements of their laws so that companies do not have to do a local filing.”
The idea is “one smooth template that you could use, starting with Jan. 1, 2016, years,” Stack said. “My fingers are crossed because I am waiting for other countries to come along and sign up.”
Stack said the final regulations will include some changes to the proposed version.
First, the final regulations will clarify that U.S. possessions are considered to have fiscal autonomy and must be separately reported, Stack said. “It is a kind of unique U.S. issue and we had to plug that gap.”
Second, the final regulations will clarify that a company with headquarters in a U.S. territory, or possession, can file the country-by-country report with the IRS.
Third, the final regulations will clarify that partnerships will be considered stateless entities and that the income of partnerships is to be reported where the partnership is organized and in the partners' jurisdictions. “Some of you will think that that looks like double counting. It does.”
Stack said that presumably “the people that get this information will be able to figure it out.” For example, a law firm might have no income in its state of incorporation “because the income all comes out to the partners. We thought it was the better thing to go along with the OECD approach so we didn't create a difference that could cause bigger problems down the road.”
Stack said the final regulations, consistent with the OECD's approach, will also take into account that employees are to be reported in the jurisdiction of the employer and not in the jurisdiction in which they may work.
“Companies made the point that it is very tricky to go out on any given day and figure out where employees are working,” Stack said.
The final regulations will clarify that tangible assets don't include intangible or financial assets. And the final regulations will also clarify that a pure territorial country can be a residence tax jurisdiction.
Stack said the U.S. will negotiate competent authority agreements that will provide for the exchange of the country-by-country reporting template with other tax administrations. “These are not supposed to be heavily negotiated documents.”
Stack said the U.S. needs a treaty, or a tax information exchange agreement, as well as a competent authority agreement to exchange the reporting template.
The competent authority agreement sets out the nuts and bolts of the exchange of information, Stack said—that is, “when it will happen” and “how it will happen. Those are pro forma documents.”
“The IRS feels comfortable that they can do that in time to meet the filing deadlines for the first exchanges,” Stack said. “If you are doing it for 2016, you will have given information to the IRS in 2017. And the IRS will have an obligation to give the information to other countries at some point in 2018.”
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