The IRS has issued final and proposed regulations implementing the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A. The BEAT is a minimum tax that certain large corporations must pay on certain payments made to foreign related parties, and was added by the Tax Cuts and Jobs Act ( P.L. 115-97).
The final regulations adopt proposed rules ( REG-104259-18) published on December 21, 2018 (2018 proposed regulations), with certain modifications. The proposed regulations ( REG-112607-19) (2019 proposed regulations) provide rules under Code Secs. 59A and 6031 regarding certain aspects of the BEAT.
The 2018 proposed regulations provided guidance related to the mechanics of determining a taxpayer’s BEAT liability, and addressed application of the BEAT to partnerships, banks, registered security dealers, and consolidated groups. The final BEAT regulations retain the basic approach and structure of the 2018 proposed regulations, with certain revisions.
The final regulations continue to be exclude from the denominator of the base erosion percentage Code Sec. 988 losses with respect to transactions with foreign related parties that are excluded from the numerator of the percentage. The final regulations also retain the add-back method for computing modified taxable income and the computation of base erosion minimum tax amount (BEMTA) on a taxpayer-by-taxpayer basis.
Among some of the more significant changes to the proposed rules, the final regulations:
- adopt the “with-or-within” method to determine the gross receipts and the base erosion percentage of an aggregate group;
- disregard transactions between parties if both parties were members of the aggregate group at the time of the transaction;
- exclude the base erosion tax benefits and deductions attributable to the tax year of a member of an aggregate group that begins before January 1, 2018;
- clarify that payments resulting in a reduction to determine gross income are not treated as base erosion payments;
- require that the determination of whether a payment or accrual is a base erosion payment be made under general U.S. federal income tax law;
- clarify the definition of a “base erosion payment,” and generally exclude amounts transferred to, or exchanged with, a foreign related party in certain corporate nonrecognition transactions from that definition;
- clarify the rules for determining the portion of U.S. branch interest paid to foreign related parties;
- provide rules for the treatment of an interest expense determined under a U.S. tax treaty;
include additional detail on the documentation required to satisfy the service cost method (SCM) exception;
- modify the total loss-absorbing capacity (TLAC) exception;
- provide that the additional one percent add-on to the BEAT rate will not apply to a taxpayer that is part of an affiliated group with de minimis banking and securities dealer activities;
- provide that Code Sec. 15 applies only to the change in tax rate set forth in Code Sec. 59A(b)(2) and should not apply to the change in tax rate included in Code Sec. 59A(b)(1)(A) for tax years beginning in calendar year 2018;
- change the Qualified Derivative Payments (QDP) exception;
- clarify the rules regarding how partnerships and their partners are treated for purposes of the BEAT; and
- clarify the anti-abuse rule and certain rules applicable to insurance companies and consolidated groups.
The final regulations (other than the reporting requirements for QDPs) apply to tax years ending on or after December 17, 2018. However, taxpayers may apply these final regulations in their entirety for tax years ending before December 17, 2018. Taxpayers may also apply provisions matching Reg. §§1.59A-1 through 1.59A-9 in their entirety for all tax years ending on or before December 6, 2019. Taxpayers choosing to apply the proposed regulations must apply them consistently and cannot selectively choose which particular provisions to apply.
The related Code Sec. 6038A regulations apply to tax years beginning Monday, June 7, 2021. The related consolidated return regulations generally apply to tax years for which the original consolidated return is due (without extensions) after December 6, 2019.
2019 Proposed Regulations
The 2019 proposed regulations provide rules regarding relating to (1) how a taxpayer determines its aggregate group for purposes of determining gross receipts and the base erosion percentage; (2) an election to waive deductions; and (3) application of the BEAT to partnerships.
The 2019 proposed regulations generally apply to tax years beginning on or after the date that the final regulations are filed with the Federal Register. Certain rules, however, have specific applicability dates. In addition, taxpayers may rely on the rules in the proposed regulations in their entirety for tax years beginning after December 31, 2017, and before the final regulations are applicable.
Arlene Fitzpatrick, a Principal in the National Tax Department of Ernst & Young LLP, told Wolters Kluwer that “there are changes and new proposed rules in the package of final and proposed regulations that are helpful, though not all changes requested through the comment process were made. For example, the rules in the final regulations to exclude, in certain circumstances, from the definition of a base erosion payment amounts transferred to, or exchanged with, a foreign related party pursuant to a specified nonrecognition transaction are welcome. Furthermore, clarifying that a built-in loss recognized on a sale or transfer of property to a foreign related party is not in itself a deduction that causes the payment to be treated as a base erosion payment is helpful. The final regulations however, retain the internal dealings rule whereby a notional payment for purposes of attribution of profits under certain tax treaties may be taken into account for purposes of determining BEAT. Thus, although deductions from internal dealings would not be allowed under the Code or regulations, and only relevant under certain treaties (the regulations do not specify the treaties), the regulations provide such amounts are relevant for purposes of determining BEAT.”