The base erosion and anti-abuse tax, known as BEAT, was enacted as part of the Tax Cuts and Jobs Act of 2017. BEAT is effectively a minimum tax rate of that applies to certain multinational corporate taxpayers that make significant deductible payments to foreign related parties. Sometimes referred to as a new alternative minimum tax, when it applies, 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 U.S. tax liability in the process. The U.S. previously tried to limit this practice by regulating transfer prices between companies, but this was hard to enforce. BEAT targeted these and other similar planning structures.
[For concise summaries of tax law changes and side-by-side comparisons with the law prior to enactment, download our One Big Beautiful Bill Act Roadmap.]
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 2026: 10.5%
How did the One Big Beautiful Bill Act (OBBBA) impact BEAT?
Enacted in 2025, the One Big Beautiful Bill Act was a sweeping tax and spending bill that achieved many of the policy goals of President Trump and the Republican party.
It made 10.5% the new permanent BEAT core rate beginning in 2026. It also retains the current 1% increase for banks and certain financial entities. The law also makes permanent the 2025 treatment of most credits when calculating any BEAT due.
The changes to BEAT are applicable to taxable years beginning after Dec. 31, 2025.
[To understand all the tax changes and implications from the OBBBA, download our One Big Beautiful Bill Act Roadmap.]
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.
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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.
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