On December 2, 2019, the IRS and Treasury Department published two new regulation packages -- one on foreign tax credits (“FTC”) and the other on the base erosion and anti-abuse tax (“BEAT”). In this edition of Tax Advisor Weekly, we focus specifically on the BEAT regulation package; please refer to last week's edition on the key takeaways from the FTC regulation package.
As a reminder, the BEAT operates as a 10% minimum tax on large U.S. corporations making deductible payments to non-U.S. related parties. Like the FTC regulations, last week’s BEAT regulations clarified and finalized much of the 2018 proposed regulations, while adding a few new proposed rules. Highlights include:
- Relief around non-recognition transactions – notably, by excluding amounts transferred to, or exchanged with, a foreign-related party in a transaction described in Sec. 332, 351, and 368 (“corporate nonrecognition transactions”) from the definition of a base erosion payment.
- Expansion of anti-abuse rules to prevent BEAT avoidance through the use of non-recognition transactions.
- Modification of rules around aggregate group computations, including clarification around cases where group members have different taxable years.
- Confirmation that the base erosion percentage does not include any base erosion tax benefits incurred prior to application of the BEAT rules.
- Confirmation that passthrough or other payments to a related party “middle man” for ultimate performance of services by an unrelated party are not exempt from treatment as BEAT payments.
- Clarification that a loss on the sale to foreign related party is generally not a BEAT payment.
- Clarification that pure distributions (i.e. under Sec. 301) may not be BEAT payments versus certain redemptions (i.e. under Sec. 317(b)) or exchanges of stock (i.e. under Secs. 304 or 331) that could be BEAT payments.
- Expanded details around treatment of partnership contributions and transfers of partnership interests (including issuances).
- Proposed election to forego deductions to avoid BEAT classification.
In addition to the above, the BEAT regulations largely quell any hopes for a cost of services exception, expansion of the services cost method exception, or carve-outs for base erosion payments that give rise to Subpart F or Global Intangible Low Taxed Income (“GILTI”). Furthermore, nothing in last week’s regulations address concerns over the application of the BEAT to pre-TCJA NOLs.
Applicability Dates – The final regulations generally apply to taxable years ending on or after December 17, 2018. However, taxpayers may apply these final regulations in their entirety for taxable years ending before December 17, 2018.
Alvarez & Marsal Taxand Says
As the IRS and Treasury rejected the preponderance of taxpayer favorable comments, taxpayers subject to this provision should soon revisit prior BEAT tax positions. The BEAT tax rate increase from 5% to 10% in the 2019 tax year has pushed taxpayers to perform this re-evaluation. We are working with clients to strategize on how to take advantage of the mitigation opportunities that currently exist. Expect additional insights to come in the following months.