Country by Country Reporting: Unnecessary Compliance Burden for Exempts?

A coalition of 134 developing nations (Group 77), in partnership with China, recently appealed to the United Nations to create a new tax body to create tax proposals tailored to the specific needs of the developing world. Group 77’s announcement specifically addresses the Organisation for Economic Cooperation and Development (OECD)’s base erosion and profit shifting project (BEPS), which intends to prevent large corporations from exploiting gaps in international tax rules and help global tax authorities assess transfer pricing risk. The OECD—whose member countries are largely G-20 nations—has been under criticism in recent years for creating global tax standards without considering the impact to developing nations.

The most widely adopted international reporting recommendation under BEPS Action 13 Report, Transfer Pricing Documentation and Country-by-Country Reporting, could prove burdensome not only for businesses based in developing nations, but also for non-governmental organizations (NGOs)—such as exempt organizations and not-for-profits. Although BEPS was developed to keep multibillion dollar corporations’ international tax strategies in check, the OECD’s guidance does not specify exemptions for nonprofit organizations. Under the country-by-country reporting requirement, all organizations, including NGOs, with annual revenues exceeding $850 million are required to submit information related to the multinational entities’ income and taxes paid, on a country-by-country basis. In a similar vein to Group 77’s protests, subjecting NGOs to the requirement despite their tax-exempt status appears to be an oversight rather than an intentional action by the OECD.

IRS Guidance: What Nonprofits in the U.S. Need to Know
For U.S.-based exempt organizations, the Internal Revenue Service (IRS) has offered differing guidance. On June 29, 2016, the IRS and the Treasury Department issued final regulations, T.D. 9773, on country-by-country reporting and introduced Form 8975 for organizations to submit the required information. In a departure from the OECD’s recommendations, the final regulations include a provision excluding exempt organizations with revenue from unrelated business income (UBI) activities below $850 million. The IRS specifies that this provision applies to 501(c) and 501(d) organizations, a state college or university under section 511(a)(2)(B) and 401(a), 403(b) or 457(b) retirement plans.

The distinction between all revenue and just UBI revenue is a game-changer. Set at that ceiling, larger nonprofits—on the scale of the Red Cross, or tax-exempt universities with multinational campuses—would likely be subject to the requirements. Nonprofits that exceed that revenue threshold are likely larger organizations with more resources at their disposal. While these larger organizations may not lack resources, they may need to put in place process to gather the required information and report it in the new format. New regulations always carry a heavy initial compliance burden as organizations adjust to the changes.

Problem Solved? Not Quite.
Although granted exemption from the reporting requirements in the U.S., nonprofits with international operations can’t breathe a sigh of relief quite yet. The guidance from the OECD is international in nature, and other countries have not yet taken steps to make specific considerations for nonprofit organizations. As of this January, 57 nations have signed the Multilateral Competent Authority Agreement for Country-by-Country reporting. The standard global recommendation from the OECD still stands, which means NGOs, including U.S. exempt organizations, with international operations may be required to file country-by-country reports if their annual revenue exceeds $850 million, rather than their UBI revenue, in the countries where they operate. 

The compliance burden for incorporating that level of reporting is likely to prove quite challenging for nonprofit organizations that have recently expanded abroad, or that conduct philanthropic activities overseas. The extensive reporting requirements seems to come with very little gain for global tax authorities from an informational standpoint. While the IRS’ guidance makes it clear that the U.S. has taken steps to correct this discrepancy, other countries have yet to follow suit.  

For more information on international tax issues for nonprofits or guidance on country-by-country reporting, please contact Jeff Schragg at