Thursday, December 13, 2018
IRS issues proposed regulations on key new international provision, the base erosion and anti-abuse tax
The Internal Revenue Service issued 193 pages of proposed regulations today on the IRC section 59A base erosion and anti-abuse tax ("BEAT"). New Internal Revenue Code (IRC) section 59A imposes a tax equal to the base erosion minimum tax amount for certain taxpayers beginning in tax year 2018. When applicable, this tax is in addition to the taxpayer’s regular tax liability. This new provision will primarily affect corporate taxpayers with gross receipts averaging more than $500 million over a three-year period who make deductible payments to foreign related parties.
The Base Erosion and Anti-Avoidance Tax targets companies that potentially reduce their U.S. federal income tax liability through cross-border payments to their foreign affiliates.1 Under BEAT, an applicable taxpayer is required to pay a tax equal to the base erosion minimum tax amount for the taxable year on base erosion payments that are deductible payments made by certain corporations to their non-U.S. affiliates.
An “applicable taxpayer” is a corporation other than a regulated investment company (“RIC”), a real estate investment trust (“REIT”), or an S corporation, which has average annual gross receipts for a three taxable-year period of at least $500 million dollars, and the base erosion percentage is three percent (or two percent in the case of a bank or security dealer).2
The base erosion minimum tax amount is, for 2019 through 2025, the excess of 10 percent of the modified taxable income of the applicable taxpayer for the taxable year over an amount equal to the regular tax liability of the taxpayer for the taxable year reduced by the excess of allowable tax credits.3 The tax credits allowed are (a) the credit allowed under I.R.C. section 38 for the research credit, plus (b) the portion of the applicable I.R.C. section 38 credits not in excess of 80 percent of the lesser of the amount of such credits or the base erosion minimum tax amount.
“Base erosion payment” means (a) any amount paid or accrued by a taxpayer to a related foreign person and with respect to which a deduction is allowable; (b) any amount paid or accrued by the taxpayer to a related foreign person in connection with the acquisition by the taxpayer from such person of depreciable or amortizable property; (c) certain reinsurance premiums paid to a related party; and (d) certain payments to expatriated entities that are “surrogate foreign corporations” or their related foreign persons.4 Base erosion payments do not include “qualified derivative payments”, payments with respect to certain services, or payments for cost of goods sold.
The base erosion percentage is determined for any taxable year by dividing the deductions taken by the applicable taxpayer with respect to its “base erosion payments” by the overall amount of deductions taken by the corporation (including deductions taken with respect to “base erosion payments,” but excluding net operating loss carrybacks and carryforwards, deductions for dividends attributable to foreign earnings, deductions in connection with GILTI and FDII, deductions for payments for certain services and deductions for “qualified derivative payments”.5 If the base erosion percentage is at least three percent (or two percent in the case of a bank or security dealer), then the taxpayer may be subject to BEAT.
The base erosion minimum tax amount is equal to the excess of (a) the product of the applicable base erosion tax rate and an applicable taxpayer’s modified taxable income, over (b) the applicable taxpayer’s regular tax liability reduced by certain credits. Credits cannot be applied against the base erosion minimum tax amount.6 BEAT is a five percent rate in 2018, a 10 percent rate from 2019 until 2025, and a 12.5 percent rate for all years thereafter. Banks or a registered securities dealer endure a one percent higher BEAT rate than regular applicable taxpayers.7
The proposed regulations provide detailed guidance regarding which taxpayers will be subject to section 59A, the determination of what is a base erosion payment, the method for calculating the base erosion minimum tax amount, and the required base erosion and anti-abuse tax resulting from that calculation. The proposed regulations include an explanation of the new provisions as follows:
- Part II describes the rules in proposed §1.59A-2 for determining whether a taxpayer is an applicable taxpayer on which the BEAT may be imposed.
- Part III describes the rules in proposed §1.59A-3(b) for determining the amount of base erosion payments.
- Part IV describes the rules in proposed §1.59A-3(c) for determining base erosion tax benefits arising from base erosion payments.
- Part V describes the rules in proposed §1.59A-4 for determining the amount of modified taxable income, which is computed in part by reference to a taxpayer’s base erosion tax benefits and base erosion percentage of any net operating loss deduction.
- Part VI describes the rules in proposed §1.59A-5 for computing the base erosion minimum tax amount, which is computed by reference to modified taxable income.
- Part VII describes general rules in proposed §1.59A-7 for applying the proposed regulations to partnerships.
- Part VIII describes certain rules in the proposed regulations that are specific to banks and registered securities dealers.
- Part IX describes certain rules in the proposed regulations that are specific to insurance companies.
- Part X describes the anti-abuse rules in proposed §1.59A-9.
- Parts XI-XIII address rules in proposed §1.1502-59A regarding the general application of the BEAT to consolidated groups.
- Part XIV addresses proposed amendments to §1.383-1 to address limitations on a loss corporation’s items under section 382 and 383 in the context of the BEAT. P
- art XV describes reporting and record keeping requirements.
1 IRC § 59A.
2 IRC § 59A(e).
3 IRC § 59A(b).
4 IRC § 59A(d).
5 IRC § 59A(c)(4).
6 IRC § 59A(b).
7 IRC § 59A(b)(3).