How to Calculate BEAT Tax

May 14, 2024
How to Calculate BEAT Tax

The base erosion and anti-abuse tax, known as BEAT, was enacted as part of the Tax Cuts and Jobs Act of 2017 to discourage U.S. and foreign corporations from avoiding tax liability by shifting profits out of the U.S. BEAT is a minimum tax rate of 10% that applies to certain multinational corporate taxpayers 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.

For decades, international tax planning for U.S. corporations often included reducing their U.S. tax liability by shifting assets to an affiliate in another jurisdiction. Those companies would then pay an affiliate to use the assets, such as patents or other intellectual property, in the U.S. This corporate tax planning strategy would increase costs and reduce profits, therefore reducing their tax liability 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. BEAT targeted these and other similar planning structures.

[Download our BEAT Final Regulations OnPoint for a more detailed look at modifications and key takeaways from the final BEAT regulations issued by the IRS.]

What is the BEAT tax rate?

The BEAT tax rate is the percentage that a taxpayer applies to its modified taxable income for purposes of determining its tentative BEAT liability.

BEAT rates by tax year:

  • Beginning in calendar year 2018: 5%
  • Beginning after calendar year 2018 but before 2026: 10%
  • Beginning after calendar year 2025: 12.5%

Who is subject to the base erosion tax?

BEAT targets large multinational companies using a gross receipts threshold and a base erosion percentage threshold. The thresholds are somewhat blurred by an aggregation rule, which considers the gross receipts and expenditures of a taxpayer as well as the taxpayer’s aggregate group when determining the taxpayer’s gross receipts threshold and base erosion percentage.

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)
  • Not be a regulated investment company (RIC), real estate investment trust (REIT), or S corporation

How is the base erosion percentage calculated?

The base erosion percentage 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.

Base erosion payments can be deductible payments such as interest, royalties, or service payments. Under final regulations, amounts subject to tax as effectively connected income (ECI) generally are not base erosion payments even when paid or accrued to a foreign related party.

Waived deductions are not included in the denominator of the base erosion percentage calculation.

Streamline BEAT calculations with workpaper templates

Translating tax regulations into useable calculations is cumbersome, and relying on someone to manually keep your tax calculations up to date is dangerous. Bloomberg Tax Workpapers automatically updates your calculations with the latest tax laws to give you confidence and clarity on any changes.

What is the IRS BEAT regulation?

The Treasury and IRS released BEAT regulations in September 2020 under Section 59A. The 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.

[Download our BEAT Final Regulations OnPoint for a more detailed look at modifications and key takeaways from the final BEAT regulations issued by the IRS.]

Section 59A gross receipts

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 regulations provide examples of what is and is not considered reasonable.

Expert resources for international tax planning and compliance from Bloomberg Tax

With global tax law and regulation changes always on the horizon, tax professionals need effective corporate tax planning strategies. Bloomberg Tax can help inform your international tax planning, including foreign tax credits, transfer pricing and cross-border transactions, global tangible low-taxed income, and more.

Download our BEAT Final Regulations OnPoint for a more detailed look at modifications and key takeaways from the final BEAT regulations issued by the IRS.

Bloomberg Tax Workpapers can help you easily and accurately calculate BEAT so you can focus on high-level tax analysis and strategic planning. Our BEAT calculation template was created by experts to simplify challenging calculations, reduce key-person dependencies, and save you time during compliance and provision with repeatable templates that reflect the latest tax laws and regulations.

Request a demo to see how Bloomberg Tax Workpapers gives you the control you’re used to with spreadsheets, combined with automatic data transformation and timesaving tax functions, all in one solution.

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