US tax officials discuss coming country-by-country reporting guidance, treaties, other initiatives

by Julie Martin

The US intends to issue tax guidance on country-by-country reporting for multinationals that addresses reporting for LLCs in US groups and for tiered partnerships, IRS and Treasury officials said at the 29th Annual Institute on Current Issues in International Taxation, held December 15-16 in Washington.

Officials also discussed just-released final regs on outbound transfers of goodwill, US tax treaty negotiations, and pending EU State aid cases involving tax rulings at the conference, which was sponsored by the IRS and George Washington University Law School.

Mae Lew, Special Counsel at IRS Office of Chief Counsel, International, said that the IRS has just published on its website draft Form 8975 and Schedule A to be used for country-by-country reporting. While the draft form has a different format from the OECD template, the content is the same, Lew said. She added that the IRS intends to provide instructions for the form.

Elena Virgadamo, Attorney Advisor at the US Department of the Treasury (Office of Tax Policy) said the US does not intend to issue guidance defining any of terms on the form because such definitions should be agreed to by all countries. Companies should adopt a reasonable position when filling out the form which is consistent across years and entities, Virgadamo said.

LLCs in US groups

Michael Plowgian, a principal with KPMG Washington National Tax, noted that the country-by-country reporting regulations treat fiscally transparent entities as stateless except to the extent that they create a permanent establishment somewhere. That would seem to indicate that US disregarded entities which are constituent entities under the regs would create stateless income even if everything is fully included in the US group, Plowgian said.

Virgadamo said that this result was not intended and will be clarified in future guidance. “If you have a US LLC that’s wholly owned within the US by a US constituent entity the  . . .  revenue and profits would be on the US line, not the stateless line, and it would be a US constituent entity,” Virgadamo said.

Tiered stateless entities

Plowgian also said taxpayers are unsure about reporting requirements for tiered fiscally transparent entities. For example, assume that a US parent owns two entities, CV1 and CV2, which are fiscally transparent and thus stateless, which in turn together own 100 percent of CV3, which is also stateless. Assume also that the only revenue of the group, $100, is attributed to CV3, he said.

Plowgian said that the rules require revenue to be reported as stateless in the hands of the stateless entity and duplicated in the owner of the stateless entity. He asked whether, in his example, CV1 and CV2 should report their shares of the stateless income, so the amount is duplicated in the stateless income line, or whether it is intended that the revenue “rolls up” to the US parent and would be reflected there.

Virgadamo said the IRS and Treasury will clarify that, in this situation, there should be no double counting in the stateless line. Assuming CV1 and CV2 don’t generate income themselves, there would be $100 of stateless revenue and $100 at the US level, she said.

Parent-surrogate filing

Lew told the group that the US will be issuing more guidance by January on parent-surrogate filing, which is a voluntary scheme that allows US MNEs to temporarily file country-by-country reports with the US for exchange with other counties rather than with all countries where they do business. Such filing would be allowed for tax periods that begin during the “gap year,” namely, on or after January 1, 2016, but before the effective date of the US regulations.

Plowgian and Mark Harris, Senior Tax Counsel at The Coca-Cola Company, said that the US is not fully prepared for parent-surrogate filing.

Plowgian noted that while OECD guidance requires countries to enter into competent authority agreements as a prerequisite to parent-surrogate filing, no such competent authority agreements have yet been signed by the US.

Harris added that at least two countries — Bulgaria and Luxembourg — still require notification by year-end regarding which entity in the group is the reporting entity, despite recent OECD guidelines recommending that the deadline for such notifications be extended. Harris added that though Luxembourg has apparently just written rules to extend the filing deadline, the guidance has not yet been made public.

Virgadamo stressed that the US and OECD are committed to finding solutions to these issues. Every OECD country has agreed that the gap year issue is solved by parent-surrogate filing, she said. Countries that have not updated their laws regarding notification deadlines may eventually allow retroactive updates to the notice requirements or relax associated penalties, she said.

Lew added that the US is developing a model competent authority agreement for parent-surrogate filing, which will be similar to the OECD model. She said the government is focused on getting the model cleared and delivered to other countries.

Virgadamo confirmed that countries that do not have qualified competent authority agreements (QCAA) with the US, such a tax treaty or tax information exchange agreement, can not obtain country-by-country reports from the US nor can they require secondary filings from an MNE under the OECD scheme.

Sharon Porter, Director, Treaty and Transfer Pricing Operations at the IRS, added that the US will not sign QCAAs with counties that fail to adequately safeguard the tax information.

State aid concerns

During a separate session, Robert B. Stack, Deputy Assistant Secretary International, Office of Tax Policy, US Department of Treasury, asserted that the EU Commission has done irreparable harm to multilateral tax cooperation efforts through its challenge to the validity of tax rulings issued by EU States under the State aid rules.

“I really think [it] risks making the OECD Committee on Fiscal Affairs and the inclusive framework increasingly irrelevant in the tax debate if . . .  European Commission [officials] are going to take over European enforcement of tax and leave aside the member States and the multilateral work we have done,” Stack said.

Stack added that he was particularly disturbed by the silence of EU countries on the issue of the State aid investigations, especially since these countries seek to work with the US on global tax matters.

Stack predicted that the Commission will hold back a little on new State aid investigations while they test their “novel theories” in the courts.

“In the meantime it has certainly created a kind of in terrorem effect in Europe for various structures and rulings, and [EU Commission officials] are probably aware of that, and that may be the victory they were seeking,” Stack said.

Tax treaty update

Quyen Huynh, Associate International Tax Counsel at the Department of Treasury, updated the conference on recent US tax treaty developments.

Huynh said the US is finalizing a renewed comprehensive tax treaty with Norway. Treasury is now working on getting the treaty signed, she said.

The US has had three rounds of negotiations for a new tax treaty with Luxembourg. The US is seeking the renegotiation because the limitation on benefits (LOB) article in the treaty is old and there are a lot of interest payments through Luxembourg, she said.

The US is also trying to renegotiate the US-Ireland treaty because that treaty’s LOB provision is outdated, Huynh said. The US has met with Ireland twice, and hopes to have a third round of negotiations in 2017.

The US also hopes to start tax treaty negotiations with the Netherlands in 2017, Huynh said.

Huynh said the US met with Argentina officials the week of December 12 regarding the negotiation of a treaty. This would be the first US-Argentina tax treaty. Negotiations are expected to continue in 2017, she said.

Huynh said the US has also been in discussions with Columbia regarding a new tax treaty. “We are hoping that we are maybe one round away from initialing a treaty with them,” she said.

She added that a tax treaty Vietnam was signed by the US, but it has not yet been transmitted to the Senate for its approval. Treasury is working on that process, she said.

Amanda P. Varma, a partner with Steptoe & Johnson LLP, discussed the OECD’s has recent release of a report on the multilateral instrument to implement the tax treaty work in the base erosion profit shifting (BEPS) plan. Varma asked whether the US will sign the document.

Huynh said it is up to the next administration to make that decision. She added, though, some of the provisions in multilateral instrument, such as the principal purpose test, are not acceptable to the US, and other provisions, such as the LOB provision, are already in US treaties.

Final section 367 regs

Rachel D. Kleinberg, a partner, Davis Polk & Wardwell LLP, discussed final regs under section 367, released December 16, which eliminate the favorable tax treatment of outbound transfers of foreign goodwill and going concern value.

The final regulations basically adopt the proposed regulations, issued September 2015, Kleinberg said.

Kleinberg said that in the past, a US person that owned a foreign branch could incorporate the branch and argue that the gain attributable to the branch’s foreign goodwill was not taxable under section 367 under one of two theories. That is no longer the case; in an outbound asset transfer, now only tangible and financial assets can generally be transferred on a tax‐free basis, Kleinberg said,

Brenda L. Zent, Special Advisor on International Taxation, Office of International Tax Counsel, U.S. Department of Treasury, said that the government has had increasing concerns over the years about taxpayers attributing large portions of property to foreign goodwill. After a careful look at the legislative scheme and history, Treasury decided it had the authority to change the rules, she said.

Stack added that all of comments submitted by stakeholders on the proposed regulations were taken very seriously by the government.

“These rules are not really aimed at the incorporation of a mom and pop store offshore that kind of misused the goodwill exception. There are other things going on out there and so we simply went back, marched through our authority, and wrote this rule,” he said.

Stack added that he was very proud of the government’s work on the preamble to the final regulations. “It is a transparent explanation of where our authority is, how we thought it through, and how we got to where we got,” he said.