The BEAT (Base Erosion and Anti-Abuse Tax) was enacted in 2017 to discourage U.S. and foreign companies from evading their tax obligations by shifting their profits out of the United States BEAT works as a minimum tax of 10% that applies to specific multinational companies that make "base erosion payments" to related foreign parties. Sometimes referred to as the New Alternative Minimum Tax, the BEAT increases the tax liability of U.S. corporations and U.S. subsidiaries of non-US corporations.
What is BEAT?
The BEAT is a minimum tax levied on certain multinational corporations that pay taxes. It was passed as part of the TCJA of 2017.
To be subject to the BEAT, the corporate taxpayer must:
Have average annual gross revenues of at least $500 million over the past three fiscal years.
Have a base fiscal year attrition rate of 3% or more, 2% for some industries. The threshold is calculated by dividing the total amount of the taxpayer's BEAT tax benefits or deductions attributable to the taxpayer's "base erosion payments" by the amount of the taxpayer's deductions for the year.
Not be a real estate investment trust (REIT), regulated investment company (RIC), or S Corporation.
Why did BEAT come about?
For decades, American corporations have reduced their tax liability in the United States by shifting their profits to an affiliate in another jurisdiction. Companies would pay a franchisee to use patents or other intellectual property in the United States. This practice would surge costs and reduce profits and taxes in the process. The United States has already tried to limit this practice by regulating transfer prices between companies, but the IRS has found this difficult to enforce.
How is BEAT calculated and works?
Base erosion payments, such as interest, royalties, and utility payments, can be deductible.
BEAT is not a replacement for income tax; it is a supplement. The BEAT rate for 2018 was 5%. It increased to 10% in 2019 and will increase to 12.5% in 2026.
The House recently passed H.R. 5376, which would further increase the BEAT to 18% through the fiscal year 2025, according to the following schedule:
10% for tax years beginning after December 31, 2021, and before January 1, 2023
5% for tax years beginning after December 31, 2022, and before January 1, 2024
15% for any tax year beginning after December 31, 2023, and before January 1, 2025
18% for any tax year beginning after December 31, 2024.
What are the changes in the 2020 final rules?
The Treasury and IRS issued the final rule in September 2020 under Section 59A. The 2020 Final Rules finalized the proposed rules published in late 2019. While the new rules retain the same purpose and structure, some changes have been made.
BEAT targets large multinational corporations using the Gross Revenue Cap and Base Erosion Percentage Cap. The thresholds are somewhat confounded by an aggregation rule, which considers a taxpayer's gross income and expenses and the overall group of taxpayers to determine the taxpayer's gross income threshold and tax erosion rate. The 2020 final rules clarify determining a contributor's aggregate group and how BEAT applies to partnerships.
Aggregate Groups
Companies use annualization and other reasonable methods to calculate gross revenue and base erosion percentage for aggregated groups when the fiscal year is short. To annualize the gross income, multiply by 365 and divide by the number of days in a taxable year.
Final regulations adopt an end-of-day rule, rather than a trade time rule, to determine when a fiscal year-end occurs when an aggregate group member joins or leaves the group.
If the aggregate group member's tax year does not coincide with or within the taxpayer's short tax year, then use a "reasonable" approach to determine the aggregate group's gross receipts and base erosion basis for the short tax year. The final rule gives examples of what is and is not considered reasonable.
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