Moving to the BEAT: Don't look now, but there's a new minimum tax for U.S. corporations.

• Author: Kaywood, Sam K.
• Position: Part 3 - Base erosion and anti-avoidance tax - Special Section on the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act of 2017 brought about the most sweeping U.S. international tax reforms in the past 30 years. (1) One of those reforms was the base erosion and anti-abuse tax, which is also known as the BEAT. (2) The BEAT is intended to prevent large U.S. corporations from using deductible payments made to foreign related parties to base-erode their U.S. corporate tax liability. The BEAT specifically targets payments such as interest, royalties, and high-margin service payments to foreign related parties that could be used to shift profits outside of the United States. In this article, we examine the statutory framework of the BEAT as well as how the Internal Revenue Service proposes to address some of the ambiguities contained in the BEAT statute.

The BEAT Basics

The BEAT is a minimum tax, calculated as ten percent (five percent for 2018) (3) multiplied by the taxpayer's modified taxable income. (4) If that result is greater than the taxpayer's regular tax minus the credit adjustment, then that excess must be paid in as BEAT. (5) The credit adjustment is all credits other than research credits, plus a portion of certain other credits. (6) For example, foreign tax credits would reduce the regular tax liability, which could increase the amount of BEAT owed, whereas research and low-income credits are neutral. In formulaic terms, the BEAT is calculated as follows:

BEAT Liability = (BEAT Tax Rate X Modified Taxable Income) - (Taxpayer's Regular Tax Liability - Credit Adjustment) The taxpayer is subject to BEAT liability only if the first part of the equation is greater than the second part.

Modified taxable income equals taxable income plus "base erosion tax benefits." (7) Base erosion tax benefits are the deductions allowed by the Internal Revenue Code for the taxable year with respect to the base erosion payments. (8) Base erosion payments are amounts paid or accrued to a foreign related person (9) and with respect to which a deduction is allowable either immediately or eventually in the form of depreciation. (10) For example, an amount paid to a foreign related person to purchase depreciable equipment is a "base erosion payment," while the eventual depreciation on that equipment is a "base erosion tax benefit" for the taxable year in which the depreciation is allowed.

Modified taxable income is also increased for the "base erosion percentage" of any net operating losses (NOLs) from prior taxable years beginning in 2018 or after. (11) The base erosion percentage is calculated for the taxable year in which the NOL arose and is the aggregate amount of the taxpayers base erosion tax benefits divided by the sum of the aggregate amount of deductions plus certain reinsurance and inversion-related base erosion tax benefits. (12) This means that taxpayers must keep track of base erosion payments in taxable years that give rise to NOLs even if no BEAT is owed for that year. There is no haircut for NOLs arising in pre-2018 taxable years, since the base erosion percentage for those years is zero. (13)

Select BEAT Issues

The statutory language of the BEAT contains ambiguities and inconsistencies that have led to significant uncertainty for taxpayers in determining their BEAT liability. Some of these uncertainties are addressed in proposed Treasury regulations that were released on December 13, 2018. (14) While these proposed BEAT regulations have not been finalized, the U.S. Treasury Department intends the final version of these regulations to apply retroactively to taxable years beginning after December 31, 2017. (15) In addition, the U.S. Treasury Department provides that taxpayers may rely on the proposed BEAT regulations so long as they consistently apply the proposed rules for all taxable years before the finalization date. (16) A selection of BEAT issues that are important to multinational companies and their determination of BEAT liability that have been addressed by the proposed BEAT regulations are discussed below.

Services Cost Method Exception

Base erosion payments would not include payments for...