On 22 December 2017, the Tax Cuts and Jobs Act (TCJA) codified IRC § 59A (Base Erosion and Anti-Abuse Tax, BEAT). This applied a tax on multinational corporations shifting profits abroad through related party transactions which create US deductible payments to low-tax countries.

On 1 September 2020, the IRS issued IRC § 59A Final Regulations (BEAT Regs), which provided clarity, flexibility and guidance on the application of BEAT.

Corresponding Rule for Aggregate Groups

Taxpayers subject to IRC § 59A must analyse their BEAT exposure by consolidating gross receipts from their aggregate group (AG) members (i.e. entities that are held more than 50% in vote or value by the taxpayer), base erosion tax benefits and deductions (BEAT items) with or within the taxpayer’s taxable year when applying the gross receipts and base erosion percentage test (BEAT Test). BEAT Regs apply the corresponding rule, which requires members with short years (i.e. a member for less than 12 months) to annualise their BEAT Items for the BEAT Test, with certain exceptions, explain the experts.

Reasonable Approach

The IRS defines a reasonable approach as one that prevents the over and undercounting of the BEAT items of each member of an AG, which would alter the BEAT Test conclusions for a taxpayer’s short tax years. The BEAT Regs provide examples and calculations of how to include a member’s BEAT Items when its taxable year does not end with or within the short year of the AG.

BEAT Waiver Election

The BEAT Regs provide procedures on how taxpayers may make a “partial” or “full” BEAT Waiver Election (“BWE”) to forgo deductions (e.g. Net Operating Losses, NOLs, bonus depreciation, etc.) in calculating the base erosion percentage. Without the BWE, members of an AG may unknowingly cause a taxpayer to be subject to BEAT by passing the 3% base erosion percentage threshold. Corporate partners, rather than the partnership, will have the right to make a BWE.

Basis Step-up and Anti-Abuse Rules

The BEAT Regs provide an exception to base erosion payments for certain related party inbound corporate nonrecognition transactions (e.g. IRC § 368 reorganisations) with a step-up basis, unless the principal purpose of the transaction was to increase the adjusted basis of property acquired. Exceptions apply for IRC § 338(g) elections.

For further information please contact Marcum LLP*, Florida, USA

* Marcum LLP is the exclusive associated partner of ECOVIS International for accounting, tax and audit in the United States of America.