What is BEAT?
Enacted as part of the Tax Cuts and Job Act (TCJA), the new “base erosion and anti-abuse tax” (BEAT) can apply to certain corporations that make “base erosion payments” paid or accrued in taxable years beginning after December 31, 2017.
What are the tax impacts?
BEAT is an additional minimum tax imposed on certain corporations (other than RICs, REITs or S corporations) that make certain “base erosion payments” to foreign related parties. This tax is in addition to any other tax imposed on “applicable taxpayers.”
Very generally, an applicable taxpayer is a corporation (other than a RIC, REIT or S corporation) that has average annual gross receipts for the three-taxable year period ending with the preceding tax year of at least $500 million and has a “base erosion percentage” of three percent or more for the tax year (two percent where a bank or securities dealer is part of the affiliated group). Certain aggregation rules apply for purposes of applying these threshold tests (see Section 59A(e)(3)).
What do companies need to know?
BEAT is a complex calculation that is computed every year and the general steps in the analysis are summarized below:
- Step 1: Is your corporation the type of corporation for which the BEAT can apply? This provision can also apply to a foreign corporation that has ECI.
- Step 2: Does your corporation make base erosion payments (as defined in Section 59A(d)) to foreign related parties (e.g., royalties, etc.)?
- Step 3: Is the $500 million gross receipts threshold mentioned above satisfied?
- Step 4: Is the base erosion percentage (as defined in Section 59A(c)(4)) threshold mentioned above satisfied?
- Step 5: If your answer is “yes” to the all of the questions raised in steps 1 - 4, calculate your company’s BEAT liability, if any.
What industries are impacted?
Some taxpayers in certain industries may be more or less impacted by BEAT and the complexities of the rules than others. For example:
Insurance sector: Not only can payments such as interest be treated as base erosion payments, but also premiums and other consideration paid or accrued to a foreign related party for any reinsurance payments that are taken into account under Sections 803(a)(1)(B) or 832(b)(4)(A) are included in the definition of base erosion payment, even though they are also subject to the federal insurance excise tax.
Energy sector: The benefit for certain credits that reduce BEAT liability is eventually eliminated for taxable years beginning after December 31, 2025 (e.g., the renewable electricity production credit determined under Section 45(a) and the investment credit determined under Section 46, but only to the extent properly allocable to the energy credit determined under Section 48).
Importers of product or services: Costs of goods sold (COGS) are generally excluded from the definition of base erosion payments (except in cases of payments made to certain expatriated or inverted groups), and so, for example, a taxpayer that imports product for manufacturing and/or resale where the cost is treated as part of COGS is likely to be less affected (assuming no other base erosion payments) versus a company that pays a foreign related party for services (subject to a limited exception under the services cost method under Section 482 (with certain modifications) where such amount constitutes the total services cost with no markup—see Section 59A(d)(5)).
How can we help?
In general, while taxpayers await further guidance from the IRS and Treasury providing specifics on BEAT, it is prudent for corporations to begin assessing whether they may be subject to the tax. In particular, taxpayers may need to take immediate action to estimate the impact for quarterly estimated payments and financial reporting purposes.
Calculating BEAT involves a multi-step process with numerous data inputs and special rules. To address these complexities, we employ a multi-disciplinary and holistic approach bringing together tax specialists in different areas to help taxpayers with BEAT (e.g., International and Transfer Pricing in specific industries), while considering other ancillary tax matters as a result of other tax reform changes.
Contact us today to assess your current business situation and see how the new tax reform might affect your business.