Washington monument.

In somewhat of a surprise move, the IRS announced on March 30th that certain companies with significant contracts with the Department of Defense (designated as “specified national security contractors”) will be exempted from most of the detailed reporting required on Form 8975, the Country-by-Country report. For purposes of this notice, 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, as determined in accordance with U.S. generally accepted accounting principles, in the preceding reporting period is attributable to contracts with the Department of Defense or other U.S. government intelligence or security agencies.

The potential for an exemption from reporting based on national security concerns was mentioned in the preamble to the proposed regulations issued in December of 2015, and reiterated in the preamble to the final regulations issued in June of 2016, so the move is not entirely unexpected, but certainly such an exemption is very unusual, and it is not clear how the U.S. treaty partners will respond to the exemption. Essentially, the notice allows U.S. MNE groups that meet the definition to report only their U.S. operations at the group level with no constituent level information and does not require such groups to identify any of the other countries where the group has operations. 

In addition, in order for taxpayers to avoid the automatic exchange of Forms 8975 that were filed with complete information, the notice provides specific instructions to companies that might have already filed complete Forms 8975, regarding their ability to file an amended return and an amended Form 8975 for that year. The notice provides that in order to ensure originally-filed CbC reports are not automatically exchanged, specified national security contractors that are filing amended Form 8975 and Schedules A (Form 8975) to supersede an already-filed Form 8975 and Schedules A (Form 8975) should do so by April 20, 2018, if filing an amended Federal income tax return on paper, or by May 25, 2018, if filing electronically. 

These deadlines no doubt are driven by the deadline for automatic exchange of information returns filed for tax years beginning on or after January 1, 2016, which under the model bilateral exchange agreement is 18 months from the last date of the 2016 tax year, or June 30, 2018. Clearly the IRS wants to give taxpayers affected by the notice the opportunity to amend their forms to take advantage of the notice before the first exchange.

It remains to be seen if any of the U.S. treaty partners will respond to this reduced reporting, or whether other countries will in turn grant their MNEs with sensitive defense contracts a similar reduced reporting requirement. Stay tuned.