Base Erosion and Anti-Abuse Tax (BEAT)
January 4, 2022
The base erosion and anti-abuse tax, known as BEAT, was enacted in 2017 to discourage U.S. and foreign corporations from avoiding tax liability by shifting profits out of the U.S. BEAT works as a minimum tax of 10% that applies to certain multinational companies that make “base erosion payments” to foreign related parties. Sometimes referred to as a new alternative minimum tax, BEAT increases tax liability for U.S. corporations and U.S. branches of non-U.S. corporations.
What is BEAT?
The base erosion and anti-abuse tax (BEAT) is essentially a minimum tax that applies to certain multinational corporate taxpayers. It was enacted as part of The Tax Cuts and Jobs Act of 2017.
To be subject to the BEAT, a corporate taxpayer must:
- Have average annual gross receipts of at least $500 million for the prior three tax years.
- Have a base erosion percentage for the taxable year of 3% or more, 2% for some industries. The threshold is generally calculated by dividing the aggregate amount of the taxpayer’s “base erosion tax benefits,” or deductions attributable to “base erosion payments,” by the total amount of the taxpayer’s deductions for the year.
- Not be a regulated investment company (RIC), real estate investment trust (REIT), or S corporation.
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Why did BEAT come about?
For decades, U.S. companies have reduced their U.S. tax liability by shifting profits to an affiliate in another jurisdiction. Companies would pay an affiliate to use patents or other intellectual property in the U.S. This practice would increase costs and reduce profits – and taxes – in the process. The U.S. previously tried to limit this practice by regulating transfer prices between companies, but the IRS found this hard to enforce.
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How does BEAT work and how is it calculated?
Base erosion payments can be deductible payments such as interest, royalties, or service payments.
BEAT is not an alternative to income tax; it’s an additional tax. The BEAT rate for 2018 was 5%, rose to 10% in 2019, and is set to increase to 12.5% starting in 2026.
The House also recently passed H.R. 5376, which would further increase BEAT to 18% by tax year 2025 according to the following schedule:
- 10% in taxable years beginning after December 31, 2021, and before January 1, 2023
- 5% in taxable years beginning after December 31, 2022, and before January 1, 2024
- 15% in any taxable year beginning after December 31, 2023 and before January 1, 2025
- 18% in any taxable year beginning after December 31, 2024.
What modifications are in the 2020 final regulations?
The Treasury and IRS released final regulations in Sept 2020 under Section 59A. The 2020 Final Regulations finalized the proposed regulations that came out at the end of 2019. Though the new rules kept the same approach and structure, there were some modifications.
BEAT targets large multinational companies, using the gross receipts threshold and base erosion percentage threshold. The thresholds are somewhat blurred by an aggregation rule, which takes into account the gross receipts and expenditures of a taxpayer and the taxpayer’s aggregate group when determining the taxpayer’s gross receipts threshold and base erosion percentage. The 2020 Final Regulations clarify how to determine a taxpayer’s aggregate group and how the BEAT applies to partnerships. It also includes an election to waive allowed deductions.
- Corporations use annualization and other reasonable methods when calculating gross receipts and base erosion percentage for aggregate groups when there is a short taxable year. To annualize gross receipts, multiply by 365 and divide the result by the number of days in the short taxable year.
- Final regulations adopt an end-of-day rule in lieu of the time-of-transaction rule for determining when a deemed taxable year-end occurs once an aggregate group member joins or leaves the group.
- If an aggregate group member’s taxable year doesn’t fall with or within the taxpayer’s short taxable year, then use a “reasonable” approach to determine gross receipts and base erosion percentage of the aggregate group for the short taxable year. The final regulations provide examples of what is and is not considered reasonable.
Partnership related rules
- A corporate partner may make a BEAT waiver election, but not a partnership.
- Clarifies when a partner may waive a deduction attributable to a BBA audit adjustment.
- Under proposed regulations, amounts subject to tax as ECI generally are not base erosion payments even when paid or accrued to a foreign related party with no rule addressing partnership transactions.
- Final regulations expand the ECI exception to apply to certain partnership transactions.
Election to waive deductions
- The IRS declined to include the ability for taxpayers to decrease number of waived deductions.
- Waived deductions are not included in the denominator of the base erosion percentage calculation.
- The IRS declined to provide relief for 2018 amended returns regarding bonus depreciation claims and amounts capitalized for research and experimentation.
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