TEI Submits Comments to the Treasury and IRS Regarding Proposed BEAT Regulations.

PositionTax Executives Institute, base erosion and antiabuse tax

On February 19, 2019, TEI submitted comments to the Treasury and IRS regarding proposed regulations providing guidance under section 59A regarding the base erosion and anti-abuse tax. TEI's comments were prepared under the aegis of the Institute's Tax Reform Task Force and U.S. International Tax Committee. Benjamin Shreck, TEI Tax Counsel, coordinated the preparation of TEI's submission.

On December 21, 2018, the Internal Revenue Service (the Service) and the U.S. Department of the Treasury (the Treasury) published proposed regulations (the Proposed Regulations) (1) under new section 59A, (2) which imposes a tax on the base-erosion minimum tax amount (as defined) of certain taxpayers. (3) Section 59A was enacted as part of Public Law 115-97, (4) colloquially known as the "Tax Cuts & Jobs Act" (the Act). The Treasury and Service (collectively, the Government) requested public comments regarding the Proposed Regulations no later than February 19, 2019. On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to respond to the Government's request for comments.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 57 chapters in North and South America, Europe, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our more than 7,000 individual members represent over 2,800 of the leading companies around the world.

TEI members are responsible for administering the tax affairs of their companies and must contend daily with provisions of the tax law relating to the operation of business enterprises, including the new BEAT regime, along with many other aspects of the Act. We believe that the diversity and professional experience of our members enables TEI to bring a balanced and practical perspective to the issues raised by the Proposed Regulations, and we are eager to assist the Government in its important effort to effectively and efficiently implement the Act.

Executive Summary

TEI commends the Government for issuing proposed guidance under section 59A in such a timely manner. The BEAT is a new regime under the Code, and thus early details regarding how Treasury and the Service will implement section 59A are helpful to taxpayers who fall within the BEAT s scope. In particular, TEI commends the Government for clarifying that the definition of a base erosion payment only applies to the mark-up component of payments made to foreign affiliates for low-margin services and not to the entire payment. TEI also welcomes the regulatory exception to the definition of a BEAT payment for payments that are treated as effectively connected income in the hands of the payee, as such payments are not truly "base eroding." TEI also commends the Service and Treasury for concluding that the base erosion percentage applied to net operating losses (NOLs) should be based on the year in which a NOL arose (as opposed to the year in which the NOL is utilized) as this is the only way to ensure the base erosion percentage rule achieves a rational result. Furthermore, treating the BEAT add-back for pre-Act NOLs into a post-Act year as zero is consistent with the statute and legislative history. TEI recommends the Government affirm all of these points in the final BEAT regulations.

Immediately below is a summary of TEI's comments regarding how the Proposed Regulations could be modified to ease the compliance and administrative burden imposed on taxpayers and the Service alike, as well as our recommendations to better fit the final BEAT regulations within the BEAT regime's purpose and scope. Our detailed recommendations follow this Executive Summary.

  1. The Government should provide additional clarity regarding the types of services that qualify for the services cost method exception to the definition of a BEAT payment, as detailed in Section 1. below.

  2. Payments that are subpart F income in the hands of the payee should be excluded from the definition of a BEAT payment.

  3. Final regulations should not apply the BEAT to nonrecognition transactions, as discussed in Section 4. below.

  4. Payments that result in a recognized loss for the payor should not be encompassed by the definition of a BEAT payment.

  5. The exception for affiliated groups with de minimis banks or broker-dealers should be modified as discussed in Section 5. below. In addition, Treasury and the Service should include a transitory ownership exception where a bank or securities dealer is a member of an affiliated group during a brief period of the taxable year.

  6. Proposed Treasury regulation section 1.59A-5(c)(3) should be revised to provide that section 15 does not apply to any taxable year that begins in 2018 and thus no "blended" BEAT rate is appropriate for such a year.

  7. Taxpayers with multiple consolidated groups should be permitted to elect to be treated as a single aggregate person for the determination of the base erosion minimum tax amount and for the determination of the base erosion percentage.

  8. The final regulations should explicitly confirm that depreciation deductions allocated to a taxpayer by a partnership that are attributable to property contributed to the partnership by a foreign related partner are not treated as base erosion tax benefits if such property was contributed to the partnership prior to the effective date of the BEAT.

  9. The BEAT anti-abuse rule should be clarified as set forth in Section 9. below.

  10. Taxpayers should be permitted to elect to use net operating losses against their BEAT liability under a "recomputation" approach, as discussed in Section 10. below.

    TEI Comments

  11. Exception for BEAT Payments Under the Services Cost Method

    Section 59A(d)(5) provides that a "base erosion payment" shall not include any amount paid or accrued for services if "such services are services which meet the requirements for eligibility for use of the services cost method under section 482" and "such amount constitutes the total services cost with no markup component." Despite this language, a question remained as to whether this provision applied to amounts paid that include a markup under the arm's length principle or similar transfer pricing rules required by payee jurisdictions. The Proposed Regulations permit bifurcation of the cost of low-margin services from the related mark-up and apply the BEAT only to the markup portion of such payment. TEI commends the Government for this clarification and the related documentation flexibility as it relieves taxpayers of a significant tracking burden.

    In addition to the above, TEI recommends the Government provide additional clarity regarding the services qualifying for this exception, which allows a deduction for costs (with no markup component) for services that would be eligible for the services cost method (SCM) under section 482 without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure. Disregarding the requirements of the general "business judgment rule" (described at Treasury regulation section 1.482-9(b) (5)), should also allow taxpayers to claim the costs of otherwise qualifying services that are on the so-called "blacklist" at Treasury regulation section 1.482-9(b)(4). The list of excluded services are specific examples of the "business judgment rule," and the exclusion of both from the SCM relies on the same policy rationale. Thus, the final BEAT regulations should provide that services qualify for the exception under section 59A(d)(5) unless they do not qualify for the SCM under Treasury regulation section 1.482-9(b)(3) (i.e., services that are neither specified covered services nor low margin covered services). This result is well within the Governments authority given that the statute itself references a standard set forth in Treasury regulations. In addition, this would further place low-margin services on a consistent footing with the BEAT'S...

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