On Dec. 6, the U.S. Department of the Treasury and the IRS published final and proposed regulations under IRC Section 59A. The regulations, titled the base erosion and anti-abuse tax (BEAT), are designed to discourage U.S. multinationals from moving profits offshore.
The 2017 tax overhaul brought many changes for multinational companies. One of these changes was the BEAT, an alternative tax system aimed at minimizing the ability of U.S. taxpayers to obtain deductions for certain deductible payments made to non-U.S. related parties. Under this regime, deductible payments made to non-U.S. related parties are referred to as base erosion payments. A company is subject to the BEAT for a given tax year if 1) its base erosion percentage (ratio of base erosion payments for the year to total deductible payments for the year) exceeds 3%, and 2) the company has substantial gross receipts for the tax year qualifying it as an applicable taxpayer. For purposes of the BEAT, gross receipts and the base erosion percentage are determined on an aggregate U.S. basis, which looks at all related parties that would be considered a single U.S. employer.
Companies subject to the BEAT calculate a 10% tax (the BEAT rate) on modified taxable income (MTI). MTI is taxable income increased by base erosion payments. A company is liable for the BEAT to the extent it exceeds its regular tax liability (the company’s tax liability without taking into account the BEAT) for the tax year. The BEAT rate increases to 12.5% after 2025.