Modifications to CBC Reporting For Specified National Security Contractors
Summary
On March 30, 2018, the Internal Revenue Agency (IRS) released Notice 2018-31 (the Notice) which simplifies the country-by-country reporting requirements for U.S. multinationals (MNEs) groups considered “specified national security contractors.” The Notice defines specified national security contractors as those U.S. MNEs that derive more than 50 percent of their annual revenues from contracts with the Department of Defense or other U.S. government intelligence or security agencies.
The IRS intends to amend §1.6038-4 to incorporate the guidance described in the Notice. Until then, a specified national security contractor that has already filed Form 8975 and Schedules A for prior reporting periods may file an amended Federal income tax return. Specified national security contractors that are filing amended Form 8975 and Schedules A to supersede an already-filed Form 8975 and Schedules A should have done so by April 20, 2018, if filing an amended Federal income tax return on paper, or should do so by May 25, 2018, if filing electronically.
Details
Background
On June 30, 2016, the Department of the Treasury and the IRS published final regulations (T.D. 9773) (the “CbC regulations”) that require certain U.S. business entities that are the ultimate parent entity of a U.S. multinational enterprise (MNE) group to file Form 8975 annually with the IRS.
Under the CbC regulations, certain ultimate parents of U.S. MNEs with annual revenues of USD $850 million or more for the preceding year must generally file Form 8975 as part of their tax return.
Form 8975 are used to annually report certain information with respect to the U.S. MNE group on a country-by-country basis. Form 8975, along with its Schedule A, requires disclosure of the U.S. MNE group’s constituent entities, indicating each entity’s tax jurisdiction (if any), country of organization and main business activity, and provide financial and employee information for each tax jurisdiction in which the U.S. MNE does business. The financial information is reported under Schedule A and includes revenues, profits, income taxes paid and accrued, stated capital, accumulated earnings, and tangible assets other than cash. Generally, a Schedule A is required for each jurisdiction where there is a constituting entity.
Following consultations with the Department of Defense, the U.S. Treasury Department and the IRS determined that reporting requirements for U.S. MNE groups that are “specified national security contractors” must be made in the interest of national security. A U.S. MNE group is a “specified national security contractor” if more than 50 percent of the U.S. MNE group’s annual revenue, in the preceding reporting period is attributable to contracts with the Department of Defense or other U.S. government intelligence or security agencies. These taxpayers may provide Form 8975 and Schedule A as follows:
- Complete Form 8975 with a statement at the beginning of Part II, Additional Information, that the U.S. MNE group is a specified national security contractor.
- Complete one Schedule A for the Tax Jurisdiction of the United States with aggregated financial and employee information for the entire U.S. MNE group in Part I, Tax Jurisdiction Information, and only the ultimate parent entity’s information in Part II, Constituent Entity Information.
- Complete one Schedule A 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.
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. To ensure originally-filed CbC reports are not automatically exchanged with other jurisdictions, specified national security contractors should amend their filings by April 20, 2018, if filing an amended federal income tax return on paper, or by May 25, 2018, if filing electronically.
BDO Insights
The modification to the filing requirements significantly simplifies the CBC reporting process for specified national security contractors. These taxpayers are encouraged to take prompt action to prevent the disclosure of their financial data through automatic exchange agreements.
However, the modified requirements do not fully comply with the OECD Guidelines on CbC reporting adopted by more than 50 jurisdictions. Hence, specified national security contractors must be aware that additional reporting requirements of non-U.S. jurisdictions may apply to their constituent entities.
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