Base Erosion and Anti-Abuse Tax (BEAT)

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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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.

Aggregate groups 

• 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.