Let’s set up a time to discuss your current situation, tax needs, and how GTM can help your tax department. Is there an opportunity to forgo the 280C election and amortize R&D expenses to minimize the BEAT implications? The IRS declined to further clarify when netting is permitted “under the Code and regulations,” including whether netting is permitted for notional principal contracts and for cost sharing transaction payments under Reg. Save my name, email, and website in this browser for the next time I comment. The BEAT tax is 5 percent in 2018, 10 percent for tax years 2019 through 2025 and 12.5 percent for tax year 2026 and thereafter. The Act also creates a base erosion minimum tax (informally referred to as the base erosion anti-abuse tax or “BEAT”), generally designed to curtail excessive base erosion payments, namely, deductible payments to foreign affiliates. We’re always looking for talented tax professionals to grow with us. We consider two cases of a simple example involving a U.S. corporation which makes base erosion payments to its wholly-owned Indian CFC for R&D services: In the first case, the U.S. corporation is in a taxable income position, and its regular U.S. tax liability is eliminated after taking into account FTCs. [1], One effective way to reduce the amount of base erosion tax payments is to consider whether outbound royalty payments should be embedded in costs of goods sold (COGS). The proposed regulations do provide an exception for income actually taxed as effectively connected income in those cases.38 On the other hand, the proposed regulations provide no relief for base erosion payments that are included in Subpart F or global intangible low-taxed income (GILTI), unlike the anti-hybrid regulations.39, Taxpayers may be able to minimize their BEAT exposure in several ways. Don’t look now, but there’s a new minimum tax for U.S. corporations The BEAT Basics. §1.59A-3(c)(4)(ii)(B). Treas. Feel free to contact us directly at BAbbey@gtmtax.com and AWai@gtmtax.com with any questions. Taxpayers should also keep in mind the 60-month limitation on subsequent CTB elections and Sec. Are you currently in BEAT? The BEAT is designed to prevent these U.S. corporations from using deductible payments to reduce (or “base erode”) their corporate tax liability. [6] For this post, we want to emphasize that, in certain circumstances, waiving deductions to avoid application of the BEAT may not be beneficial overall. The BEAT specifically targets payments such as interest, royalties, and high-margin service payments to foreign related parties that could be used to shift profits outside of the United States. Internal resources may not be enough to cover all your tax needs. The first category consists of specified covered services identified in Revenue Procedure 2007–13, generally consisting of tax, accounting, human resources, and other general administrative services.19 The second category consists of low-margin covered services, which are controlled services transactions that have a median comparable markup on total services costs that is seven percent or less.20, One ambiguity in the BEAT statute is whether the inclusion of a cost markup on an outbound services payment taints the entire payment for purposes of applying the SCM exception. I.R.C. Deduct – A deduction is a claim to reduce your taxable income. Time will tell if the U.S. Treasury Department and the IRS will provide a more comprehensive set of final BEAT regulations. Post-TCJA tax planning generally requires modeling these interactions to ensure the benefits and burdens of each are balanced optimally. The following post is a reminder of some common Base Erosion and Anti-Abuse Tax (“BEAT”) planning options, as well as some considerations that came out of the proposed BEAT regulations issued in December 2019. When the U.S. group member pays a service fee to other group members which provided the service in each local country, the payments may be considered base erosion payments. Taxpayers subject to BEAT are required to pay a tax equal to the excess of 10 percent of the taxpayer’s “modified taxable income,” less the taxpayer’s regular tax liability and certain specified tax credits. Taxpayers could eliminate or reduce certain base erosion payments by transacting with third parties rather than with foreign related parties, although these cannot be intermediaries for related parties. The BEAT statute broadly defines base erosion payments as amounts paid or accrued to a foreign related person and with respect to which a deduction is allowable.27 The proposed BEAT regulations treat the use of noncash consideration, including stock or the assumption of a liability, as an amount “paid or accrued” for BEAT purposes.28 Thus, the actual or deemed exchange of stock in a tax-free acquisition of depreciable property can result in base erosion payments. [1] Sec. This website uses cookies so that we can provide you with the best user experience possible. SHARE. The credits that reduce regular tax for BEAT purposes are research credits and the lesser of eighty percent of 1) low-income credits, renewable electricity credits, and investment credits, and 2) BEAT without regard to the credit adjustment. The BEAT benefit to a qualifying taxpayer is clear: If a taxpayer has intercompany services which are charged at cost consistent with the services cost method, the taxpayer does not have to include those services in its BEAT calculation, and avoids the 10% minimum tax associated with the 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. Reg. Here are some tips for keeping all the balls in the air. GTM’s co-sourcing solution is the strategic and cost-effective alternative for your tax department. The BEAT statute grants the Treasury Secretary authority to issue regulations to prevent the avoidance of the BEAT through the use of unrelated persons, conduit transactions, or other intermediaries.31 The proposed BEAT regulations provide three anti-abuse rules that permit the Service to disregard a transaction (or series of transactions), plan, or arrangement that has the principal purpose of avoiding the BEAT.32 The first anti-abuse rule allows the Service to disregard transactions where intermediaries act as a conduit for the taxpayer to avoid a base erosion payment.33 The second anti-abuse rule allows the Service to disregard transactions entered into by the taxpayer to increase the deductions taken into account for purposes of the denominator of the base erosion percentage computation.34 The third anti-abuse rule allows the Service to disregard transactions entered into among related parties to avoid the rules applicable to certain banks and registered securities dealers.35, The BEAT applies only if the taxpayer has 1) annual gross receipts of at least $500 million for the three-year period ending with the preceding taxable year and 2) a base erosion percentage of three percent or higher.36 In addition, payments that are subject to full or partial withholding under Code Section 1441 are not treated as base erosion payments to the extent of such withholding.37 Also, practitioners have been concerned that payments to related parties that are effectively connected with a U.S. trade or business would be treated as base erosion payments, potentially causing double tax. Excluded activities under Treas. Looking to make a difference and grow professionally? Can supplement overall tax reform planning for the 2019 tax year - In light of new tax provisions from the TCJA, IRC Section 263A compliance is important; in particular, taxpayers should confirm that costs are capitalized to the extent required. 59(e) elections. So whether you want to do it yourself or reduce what you pay your accountant - not to mention the government - this is how you'll keep more money in your pocket, where it belongs. Required fields are marked *, XHTML: You can use these tags
. Interested? SHARE. To find the latest information on this topic, read Treasury Issues Proposed Regulations on BEAT, a Provision Enacted as Part of the TCJA. Sections 59A(d)(1) and (2). Base erosion payments also include certain reinsurance premium paid or accrued to a related foreign person and any amount paid or accrued to a related inverted entity. —The BEAT provision is designed to be an “incremental tax,” and accordingly an entity can never pay less than its statutory tax rate of 21% under the new law. In the second case, the taxpayer is in a loss position for regular tax purposes. Some of these uncertainties are addressed in proposed Treasury regulations that were released on December 13, 2018.14 While these proposed BEAT regulations have not been finalized, the U.S. Treasury Department intends the final version of these regulations to apply retroactively to taxable years beginning after December 31, 2017.15 In addition, the U.S. Treasury Department provides that taxpayers may rely on the proposed BEAT regulations so long as they consistently apply the proposed rules for all taxable years before the finalization date.16 A selection of BEAT issues that are important to multinational companies and their determination of BEAT liability that have been addressed by the proposed BEAT regulations are discussed below. [3], Looking forward, taxpayers should also consider whether they may be able to eliminate certain outbound payments to related parties. Planning to have a lower taxable income with the right RRSP/TFSA mix and tax-efficient investments saves you much more tax if your income will be in these clawback ranges. If you disable this cookie, we will not be able to save your preferences. Section 59A(e)(1). Section 1.59A at 73. Section 59A(c)(4). Treas. Dedicated tax resources to manage tax department functions and operations. I.R.C. 163(j)(10) optionally increases the allowable interest deduction from 30% to 50% of ATI and permits taxpayers to use their 2019 ATI for their 2020 163(j) limitation. See I.R.C. Reg. [3] A similar idea is to capitalize other BEAT payments where possible, like R&D payments through Sec. Recent Democratic International Tax Proposals: Move Quickly to Model Impacts, Webinar: Updates & Key Considerations: IRC Section 162(m) and Section 250, Webinar: Back to the Future – Significant Changes Expected to the 2020 Form 5471 (Again), Updates to Corporate Tax Section 864(f): Worldwide Interest Expense Apportionment, We Hardly Knew Thee, §163(j): Final and “New” Proposed Regulations, A Value-Driven Approach to Transfer Pricing, OIT Compliance Readiness Series (Trailer), Global Tax Management Recognized Among Top 3 Best Places to Work in Pennsylvania 2020. Sections 1.267A-3(b)(3) and (4). We will continue to provide international tax planning updates as we navigate this ever-changing business landscape. Treas. If the 3% threshold is exceeded, base erosion payments should be reduced, or, if possible, eliminated, to minimize the BEAT liability. Section 1.59A-4(b)(2)(ii). 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