Posted by Carmen Garcia

What Companies Need to Know About Base Erosion and Anti-abuse Tax

What Companies Need to Know About Base Erosion and Anti-abuse Tax

The base erosion and anti-abuse tax apply to some corporations that make "base erosion payments." Formed as part of the Tax Cuts and Job Act (TCJA), BEAT accrued in taxable years and started after December 31, 2017.

Tax Impacts of Base Erosion and Anti-abuse Tax

Base Erosion and Anti-abuse Tax is a form of extra minimum tax levied on some firms (except for S corporations, REITs and RICs) that make "base erosion payments" to clients offshore. This is an extra tax, alongside other tax levied on applicable taxpayers.

We define an applicable taxpayer generally as a corporation, (with the exception of S corporations, REITs and RICs) whose average annual gross receipts for three years that can be taxed, which stops at the previous tax year with at least 500 million dollars. The company must also have a three percent or more base erosion percentage for the tax year. Should a bank or security dealer be part of the affiliated group, it will be two percent.  There are some aggregation rules which guard the application of these threshold tests. 

How These Affects Companies 

Base erosion and anti-abuse tax is a pretty complex calculation which is computed yearly. Here are the steps that guard the analysis:

Step 1: Determine if your firm is the type that the base erosion and anti-abuse tax applies to. It also applies to foreign corporations with ECI

Step 2: Determine if your firm has base erosion payment made to foreign individuals like royalties as defined in section 59A

Step 3: Does your average annual gross receipts for three years that can be taxed amounts to $500 million as expressed above?

Step 4: Does your firm satisfy the base erosion percentage threshold of 3% mentioned above? As applicable to section 59A(c)

Step 5: if all the steps above apply to your corporation, and you answered yes, it is your best interest to estimate your firm's BEAT liability should there be any. 

What industries are impacted?

The extent to which the base erosion and anti-abuse tax affect various firms differs. While some firms could be majorly impacted, others might be less affected.  The rule might also be less complicated in some cases. Here are some examples:

Insurance Sector: there are many payments that can be treated as base erosion payments. Payments such as interests, premiums, and other fees can be treated as BEAT payments. As long as the payment is made to external parties for reinsurance payments, it is included in the classification of base erosion payments. It does not matter that the federal insurance excise tax applies to these payments.

Energy sector: there are some benefits for certain credits that reduce the liability of BEAT. These benefits are eliminated for taxable years starting from January 1, 2026. The affected sector is the renewable electricity production credit as applicable under section 45(a). It also affects the investment credit sector, as explained in section 46. It is, however, bounded by the extent to which it is appropriately allocated to energy credit. This is determined in section 48

Importers of Goods and Services: the definition of base erosion payments does not apply to the costs of goods sold. This, however, does not apply to payments made to some inverted or expatriated groups. With this in mind, a business that imports goods to resell or manufacture might not be affected as long as the cost is treated as Costs of goods sold (COGS) provided there are no other base erosion payments. When compared to a firm whose services are done by another foreign party, a limited exception applies to the service cost method, as defined in section 482. There are modifications, however, in which the amount makes up the entire service cost without any markup.

Carmen Garcia
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