International tax issues sit high on the political agenda for most countries. Among those issues, few rank higher than transfer pricing policies. Recent years have seen a trend toward Country-by-Country (CbC) reporting, with many countries adopting the OECD’s Base Erosion and Profit Shifting (BEPS) CbC reporting regime to target transfer pricing risks. The United States, indeed, adopted a CbC reporting regime consistent with Action 13 of the OECD’s Final BEPS regime, requiring U.S. multinational enterprises (MNEs) to report high-level financial information to the IRS on a country-by-country basis. In this Insight Post, we take a brief look at several structures that engender somewhat unique considerations for Country-by-Country reporting: Variable Interest Entities; Permanent Establishments; Grantor Trusts and Decedents’ Estates; and Deemed Domestic Corporations.
As background, U.S. Treasury regulations require that the ultimate parent entity of a U.S. MNE group report tax information, on a country-by-country basis, related to the group’s income and taxes paid, together with certain indicators of the location of the group’s economic activity. The IRS anticipates that CbC reports will shine light on high-level transfer pricing risks. In other words, MNEs can expect to see increased transfer pricing scrutiny in years to come.
A U.S. MNE group is essentially defined as the ultimate parent entity of a U.S. MNE group and all of the business entities that are required to consolidate their accounts with the ultimate parent entity’s accounts under U.S. GAAP (or that would be so required if publicly traded), regardless of whether any such business entities could be excluded from consolidation solely on size or materiality grounds. Thus, there are a number of “constituent entities” that flow up into the ultimate U.S. MNE group.
And what entities, exactly, make up the “constituent entities” that comprise a U.S. multinational enterprise (MNE) group? With respect to a U.S. MNE group, a constituent entity is any separate business entity of the U.S. MNE group. There are, however, some exceptions — such as foreign corporations or foreign partnerships for which information is not otherwise required to be furnished under section 6038(a) or any permanent establishment of the foreign corporation or foreign partnership. Below, we look at several structures — such as variable interest entities and deemed domestic corporations — and address their current treatment under the tax law.
Variable Interest Entities
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