Transfer Pricing Times: U.S. Issues Regulations On BEAT

Author:Ms Jill Weise, Ted Keen and Douglas Fone
Profession:Duff and Phelps

In this edition: The IRS and the Treasury Department issued proposed regulations on the Base Erosion and Anti-Abuse Tax under section 59A of the Internal Revenue code; the U.S. Department of the Treasury and the IRS released the proposed regulations that provide guidance related to foreign tax credits; the European Commission has been engaged in the investigation of tax rulings agreed between Member States and Multinational Enterprises; HMRC disclosed a new voluntary facility named the Profit Diversion Compliance Facility; the Italian government adopted unilateral action against technology behemoths through the approval of a new digital revenue tax; and Japan's ruling party released their 2019 tax reform proposal for Cabinet's approval.

U.S. Issues Regulations on BEAT Release of Proposed Foreign Tax Credit Rules European Commission Opens Investigation into Nike's Tax Dealings in the Netherlands HMRC Announces Voluntary Disclosure Facility in Respect of Diverted Profits Italy Adopts New Web Tax Japan's 2019 Tax Reform Proposal Updates Transfer Pricing Rules for Intangibles Australia Publishes Assessment Framework for Inbound Distributors U.S. Issues Regulations on BEAT

On December 13, 2018, the Internal Revenue Service (the "IRS") and the Treasury Department issued proposed regulations (the "Proposed Regulations") on the Base Erosion and Anti-Abuse Tax ("BEAT") under section 59A of the Internal Revenue code. Any comments and requests for hearings related to the proposed regulations need to be filed within 60 days their issuance. As background, BEAT was enacted in 2017 as part of the Tax Cuts and Jobs Act (TCJA). In order for BEAT to be applicable, U.S. taxpayers must meet two requirements. First, they must have a three-year average of gross receipts greater than $500 million dollars. Second, the U.S. taxpayer's deductions for intercompany payments for services, interest, certain property / assets and royalties must be greater than three percent of its total deductions allowed. Certain alternative thresholds are named for banks and special entities. Additionally, the BEAT provisions do not apply to regulated investment companies, REITs or S-Corps.

If a U.S. taxpayer meets the two thresholds provided, they will be assessed an additional tax to the extent that otherwise applicable income tax is less than 10 percent of modified taxable income (which is taxable income excluding deductions for BEAT payments). The tax under the BEAT provision is equal to 10 percent of the taxpayer's "modified taxable income" (5 percent for 2018; 12.5 percent after 2025), less applicable tax credits. Based on the Proposed Regulations issued in December 2018, some key clarifications from a transfer pricing perspective include:

The amount of any base erosion payment is generally determined on a gross basis and would not permit the netting of amounts owed between the taxpayer and foreign related party. If a taxpayer's payments would have qualified for the service cost method exception but actual charges were made with a mark-up, only the amount paid in excess of the total cost of services (i.e., the mark-up component) would be disqualified from the exception and would therefore give rise to base erosion payments. Intercompany transactions are excluded for purposes of the base erosion percentage and gross receipts test. Payment or accrual by the taxpayer to a foreign related party may be a base erosion payment, regardless of whether the payment is in cash or non-cash consideration (e.g., property, stock or the assumption of a liability). Companies seeking to better identify and classify intercompany expenses in order to minimize the potential effects of BEAT can find...

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