Executive summary

In Notice 2018-31 (the Notice), the United States (US) Internal Revenue Service (IRS) has set forth modified reporting requirements for Form 8975, Country-by-Country Report (CbC report), for US multinational enterprise (MNE) groups that derive more than 50% of their annual revenues from the Department of Defense or other US governmental intelligence or security agencies. The US Treasury and IRS intend to amend the CbC reporting regulations under Internal Revenue Code¹ Section 6038 to incorporate the modified reporting requirements described in the Notice, and those amendments would apply to CbC reports and amended CbC reports filed after 30 March 2018.

Detailed discussion

Background

In general, CbC reporting requirements apply to ultimate parent entities of US MNE groups that have annual revenue for the preceding reporting period of US$850 million or more in the preceding accounting period. In December 2015, the IRS issued proposed regulations under Section 6038 on CbC reporting.² The preamble to the proposed regulations requested comments regarding the need for a national security exception to the CbC reporting requirements. The IRS issued final CbC reporting regulations in June 2016,³ without a national security exception, noting that the Department of Defense would continue to examine the issue.

Modified requirements

Based on consultation with the Department of Defense, Treasury and the IRS have determined that modified CbC reporting requirements should apply to a US MNE that is a "specified national security contractor." A US MNE is a specified national security contractor if more than 50% of its annual revenue (determined in accordance with US Generally Accepted Accounting Principles) in the preceding reporting period is attributable to contracts with the Department of Defense or other US government intelligence or security agencies.

The IRS intends to amend Reg. Section 1.6038-4 to modify the manner of reporting on Form 8975 for specified national security contractors. Specifically, such contractors may provide Form 8975 and accompanying Schedule A in in the following manner:

1. Complete Form 8975 with a statement at the beginning of Part II, Additional Information, that the US MNE group is a specified national security contractor as defined in the Notice
2. Complete one Schedule A (Form 8975) for the Tax Jurisdiction of the United States, with aggregated financial and employee information for the entire US MNE group in Part I, Tax Jurisdiction Information, and only the ultimate parent entity's information in Part II, Constituent Entity Information
3. Complete one Schedule A (Form 8975) for the Tax Jurisdiction "Stateless," with zeroes in Part I, Tax Jurisdiction Information, and only the ultimate parent entity's information in Part II, Constituent Entity Information

Under the modified requirements, a specified national security contractor does not need to provide any Schedule A (Form 8975) or additional information other than that previously specified.

The IRS intends to amend Reg. Section 1.6038-4 to incorporate these modifications. Until the amendments are issued, the Notice states that US MNE groups may rely on its guidance. The amendments to the regulations described in the Notice apply to CbC reports and amended CbC reports filed after 30 March 2018.

A specified national security contractor that has already filed Form 8975 and Schedules A for a prior reporting period may file an amended federal income tax return attaching the amended Form 8975 and Schedules A, and marking the checkbox indicating amended report on the Form 8975. In addition to filing an amended return, the Notice instructs paper filers to mail a copy of page one of their amended Form 8975 to Ogden (as provided in the instructions for Form 8975, under the heading "Where to File"). To ensure originally-filed CbC reports are not automatically exchanged, specified national security contractors that are filing amended Form 8975 and Schedules A should do so by 20 April 2018, if filing an amended federal income tax return on paper, or by 25 May 2018, if filing electronically.

Implications

US MNE groups should take action to determine whether they qualify as specified national security contractors, as that term is defined in the Notice, and are therefore eligible to comply with the modified reporting requirements set forth in the Notice. If a Form 8975 has been filed for a prior reporting period, those US MNE groups eligible for the modified reporting requirements set forth in the Notice should follow the instructions in the Notice to file amended CbC reports and meet the upcoming deadlines of 20 April 2018, if filing on paper, or 25 May 2018, if filing electronically. Based on the modified reporting requirements set forth in the Notice, no constituent entity information for jurisdictions other than the US and "Stateless" would be reported, so the US would not exchange those CbC reports.

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ENDNOTES

¹ All "Section" references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

² See EY Global Tax Alert, US Treasury and IRS issue proposed regulations on country-by-country reporting, dated 24 December 2015.

³ See EY Global Tax Alert, Final US country-by-country reporting regulations analyzed in-depth, dated 6 July 2016.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC

• Arlene Fitzpatrick
  arlene.fitzpatrick@ey.com
• Thomas Vidano
  thomas.vidano@ey.com

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ATTACHMENT

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