The Treasury Department and the Internal Revenue Service updated the base erosion and anti-avoidance tax (BEAT) at the end of 2019, with the modified regulations aimed at resolving several areas of uncertainty in a manner favorable to taxpayers.
What is the BEAT? BEAT is a new tax created by the Tax Cuts and Jobs Act which “limits the ability of multinational corporations to shift profits from the United States by making deductible payments to their affiliates in low-tax countries,” according to the Tax Policy Center.
When was it introduced? Dec. 13, 2018.
Who does it target? The tax mainly targets large U.S. corporations with gross receipts averaged over the prior three years of more than $500 million and which make more than 3% of its total deductible payments to foreign affiliates. Those deductible payments can be for interest, royalties, and service payments to related foreign parties.
How does it work? It’s an add-on. Start with the regular U.S. corporate tax rate, 21%, then recalculate after adding back deductibles. If the regular tax is lower than BEAT, the corp must pay the regular tax plus the amount by which the BEAT exceeds it.
What is the rate? It was 5% in 2018 and will be 10% from 2019 through 2025 and 12.5% in 2026 and beyond.
What changed? According to legal consultants Baker McKenzie:
- An aggregate group is defined as “corporations that are members of the same controlled group of corporations as defined in Code Sec. 1563(a).”
- Base erosion payments do not include payments made in a contract where a domestic corporation makes a deductible payment to a foreign related party which in turn makes a corresponding payment to a related foreign party.
- Transfers between co-owners of trading positions are not treated as deductible payments.
- Any loss a taxpayer realizes due to the form of consideration it provides to a foreign related party is not itself a base erosion payment.
- Base erosion payments are determined on a gross basis and do not permit netting unless netting is otherwise permitted by the code or regs.
- Amounts which are transferred to or exchanged with a foreign related part in a transaction under a specified nonrecognition transaction are excluded.
- The amount of allowed business interest expense is treated first as an expense paid to a related party.
- Taxpayers may rely on the proposed regulations from 2018 in their entirety for all taxable years ending on or before Dec. 6, 2019.
The 2019 act also included proposed regulations relating to: forgoing deductions, the impact of forgoing deductions on the Foreign Tax Credit, the impact on Code Sec. 482, the ability to forgo expenses to offset the 3% threshold, planning, and effective dates.
Notably, the Treasury department did not address the impact of BEAT on cross-border tax disputes in the regulations.
Overall, noted Baker McKenzie, “The Final Regulations and the Proposed Regulations are substantially more taxpayer favorable than the 2018 Proposed Regulations and they do an excellent job of implementing the BEAT. Treasury and the IRS are to be congratulated on a fine work product.”