The U.S. IRS issued the proposed regulations for the Base Erosion and Anti-Abuse Tax (BEAT) as introduced by the Tax Cuts and Jobs Act. Until the regulations are finalized, taxpayers may rely on the proposed regulations for taxable years beginning after 31 December 2017.
The Tax Cuts and Jobs Act (TCJA), a legislation passed in December 2017, made major changes to the tax law for 2018 and future years, including revamping the U.S. international tax system. BEAT is one of among other changes made by the TCJA. The BEAT applies to certain taxpayers as from the 2018 tax year, in addition to the taxpayer’s regular tax liability. It will primarily affect corporate taxpayers whose gross receipts average more than USD 500 million over a three-year period and that make deductible payments to foreign related parties.
The proposed regulations provide detailed guidance regarding which taxpayers will be subject to the BEAT, the determination of base erosion payments, and the calculation of the base erosion minimum tax amount.
The BEAT applies only to “applicable taxpayers.” An applicable taxpayer is a corporation (other than a RIC, a REIT or an S corporation) that (together with its “aggregate group,” if applicable) satisfies the gross receipts test and the Base Erosion Percentage test. The proposed regulations clarify that a foreign corporation is not treated as part of an aggregate group, except to the extent that the foreign corporation has effectively connected income (“ECI”). This limitation is intended to ensure that payments made by a U.S. corporation (or a foreign corporation with respect to its ECI) to a related foreign corporation (but not subject to tax in the hands of the foreign corporation) are not excluded from the Base Erosion Percentage test.
The Regulations define Base Erosion Payment as a payment or accrual by the taxpayer to a “foreign related party” that is described in the following categories:
Relating to the categorization of base erosion payment, the proposed regulation clarifies that a payment or accrual by a taxpayer to a foreign related party may be a Base Erosion Payment regardless of whether the payment is in cash or in any form of non-cash consideration.
Moreover, with respect to the calculation of the base erosion minimum tax amount, the proposed regulations provide that the BEAT is determined at the consolidated group level, rather than determined separately for each member of a consolidated group. Thus, items from intercompany transactions are not taken into account for purposes of making any BEAT calculation or determination.
By providing some much-needed guidance on the application of BEAT, the Proposed Regulations is expected to address the outstanding questions under the BEAT.