Country-by-Country (CbC) Report in the Transfer Pricing Risk Analysis

The Internal Revenue Service Large Business and International Division has recently published a Practice Unit related to country-by-country (CbC) reporting in the transfer pricing area. Their specific focus is recognizing that globalization has resulted in business models based on matrix management organizations and integrated supply chains that centralize several functions at a regional or global level. These developments have opened opportunities for multinational groups to greatly minimize their tax liability. Many governments are faced with less revenue and a higher cost to ensure compliance. Weaknesses in the coherence of existing tax rules created opportunities for base erosion and profit shifting (BEPS), and actions were required by governments around the world to ensure that profits are taxed where economic activities take place and value is created. In response, over 100 countries and jurisdictions are collaborating to implement BEPS measures under the guidance of the Organization for Economic Co-operation and Development (OECD).

The OECD Action Plan on BEPS was introduced on July 19, 2013, with a goal of completion within two years. Final reports on the 15 action areas of the BEPS Project were published in October 2015. Action 13 introduced a standardized three-tiered approach to transfer pricing documentation for multinational enterprises consisting of a Master File, a Local File, and an obligation on certain MNE groups to annually file a Country-by-Country Report (CbC Report). This standardized approach to transfer pricing documentation will enhance transparency for tax administration.

The CbC Report is intended to be used by tax administrations only for the purpose of assessment of high-level transfer pricing risks and other BEPS related risks, but not as the basis for computing tax liabilities. The United States is not currently requiring the preparation of or filing of the Master and Local Files since substantially similar information is required under IRC 6662(e) transfer pricing documentation. However, it is requiring the preparation of a CbC Report. On June 30, 2016, the U.S. Treasury and IRS published final Treas. Reg.1.6038-4 on CbC reporting. These regulations require that certain U.S. holding companies of the global group with annual revenues for the preceding reporting period of $850,000,000 or more to file annually with the IRS a Form 8975, Country-by-Country Report, and accompanying Schedules A (Form 8975), Tax Jurisdiction and Constituent Entity Information, collectively the “U.S. CbC Report.”

While Form 8975 is currently required for large global multinational entities, the concepts and potential risk exposure apply to all sizes of global business organizations. The Global Business Services team at McGuire Sponsel can assist accessing the potential risks and develop game plan in this complex area of global taxation.

If you have any questions about our team or any global business issue, do not hesitate to reach out.