Proposed Regulations Regarding Country-by-Country Reporting: IRS and Treasury Department Issue Proposed Country-by-Country Reporting Regulations

Sullivan & Cromwell LLP - January 4, 2016

On December 21, 2015, the Treasury Department and the Internal Revenue Service (the “IRS”) issued proposed regulations (the “Proposed Regulations”) describing a new country-by-country (“CbC”) reporting requirement based on model legislation created by the OECD/G20 Base Erosion and Profit Shifting Project (“BEPS”) Action Plan (the “BEPS Action Plan”).  The Proposed Regulations closely follow  BEPS’s model legislation by requiring that a US ultimate parent entity (determined under accounting consolidation principles) of a substantial multinational enterprise (“MNE”) group file an annual CbC report detailing the MNE group’s global operations, with the intention that such CbC reports be shared with other tax jurisdictions pursuant to information exchange agreements.
Prior to the release of the Proposed Regulations, members of Congress and business groups expressed concerns that CbC reporting would be cumbersome, costly and potentially result in sensitive business information being improperly used and/or disclosed.  In a somewhat lengthy Preamble to the Proposed Regulations (the “Preamble”), the Treasury Department and the IRS appear to respond to these concerns as well as explain why CbC reporting will better assist enforcement of US tax laws.  However, unmoved by the Preamble, certain members of Congress criticized the Proposed Regulations shortly after their release and have promised to delay the implementation of CbC reporting.
Part I of this memorandum provides background on the BEPS model legislation, Part II of this memorandum discusses the Preamble’s response to the pre-release concerns of CbC reporting and explains the provisions of the Proposed Regulations, Part III of this memorandum highlights some of the criticism of the Proposed Regulations and Part IV of this memorandum offers some concluding thoughts.