The U.S. Treasury and the Internal Revenue Service have issued proposed regulations on the base erosion and anti-abuse tax established under the Tax Cuts and Jobs Act.
The tax reform law made a number of changes to the way the United States taxes international activity, and that includes the establishment of the BEAT as a minimum tax on larger corporate entities under Section 59A of the Internal Revenue Code. Where it applies, the base erosion minimum tax is added to a taxpayer’s regular tax liability, primarily affecting corporate taxpayers with gross receipts of more than $500 million over a three-year period that make deductible payments to related parties in other countries.
The proposed regulations, which are open for public review and comment before they are finalized, provide detailed guidance regarding which taxpayers will be subject to the BEAT and what kinds of payments will be subject to the tax. The proposed guidance also addresses the method for calculating the tax amount, the required base erosion and anti-abuse tax that results from the calculation, and reporting requirements. The IRS earlier issued proposed guidance on the global intangible low-taxed income, or GILTI, another provision under tax reform to alter the U.S. approach to international tax.
In an alert on the BEAT guidance, KPMG says there are a number of areas in the guidance that merit particular attention. That includes, for example, guidance the firm finds unclear about how Section 15 applies to the BEAT, language on modified taxable income calculation, and the treatment of net operating losses for the BEAT purposes. Also worth exploring, says the firm, is language on amounts paid or accrued, an exception for the services cost method, an aggregation rule, and treatments of qualified derivative payments and allocation of expenses, among others.
KPMG makes a number of observations about the guidance, and it is advising companies to take a fresh look at payments among related parties across different jurisdictions to understand how they may or may not be subject to the BEAT. “Taxpayers should also ensure that they consistently take into account the effect that positions taken with respect to the BEAT will have for general income tax purposes,” the firm says.
When the proposal was published in the Federal Register in late December, the IRS and U.S. Treasury indicated they would accept comments through Feb. 19, 2019. Given the ongoing partial shutdown of the federal government, it is not clear when the IRS might proceed to final guidance.