International tax reform has added a new corporate minimum tax on US companies operating abroad. Taxpayers making certain deductible payments to related foreign parties should be on the lookout for the new Base Erosion Anti-Abuse Tax (BEAT). The BEAT, designed to target businesses making “base erosion payments,” became effective Jan. 1, 2018 as part of the historic Tax Cuts and Jobs Act (TCJA). The tax is designed to act as a base erosion minimum tax, limiting the past practice of lowering US tax by making substantial payments to foreign related parties.
Corporations with average annual gross receipts of $500 million for the three tax years prior to the current tax year and a base erosion percentage of 3 percent or greater are subject to the BEAT. This does not include any corporation that is a RIC, REIT, or an S Corporation.
“Base erosion payments” are payments made by a taxpayer to a related foreign party that are either deductible under Chapter 1 of the IRC or for the purchase of depreciable property. This however does not include payments for the cost of goods sold.
The tax is calculated by subtracting the taxpayer’s regular tax liability—reduced by credits (with the exception of R&D Credits and 80 percent of section 38 credits)—from the taxpayer’s (newly defined) modified taxable income. The BEAT tax rate is 5 percent for tax years beginning in 2018, and then increases to 10 percent in 2019 and 12.5 percent for all taxable years after 2025. Modified taxable income is defined as the taxpayer’s taxable income, minus all of the base erosion tax benefits derived from base erosion payments and any NOL deduction creating a base erosion percentage.
The BEAT is seen as primarily a tax on inbound taxpayers (those owned by foreign entities), as historically, these companies have been able to make sizable deductible related party payments out of the US. This has resulted in very little US tax paid by foreign companies operating in the US. The BEAT attempts to address this result. It is important to keep in mind that the BEAT could hit US headquartered companies doing business abroad as well. This impact is not as readily apparent, but the interaction with the new GILTI provisions could find some US companies doing business overseas facing the BEAT.
Needless to say the international tax landscape has changed in leaps and bounds as a result of the TCJA. In addition to the BEAT, corporations doing business internationally and paying US taxes must also pay the deemed repatriation under IRC § 965, the new global intangible low-taxed income (GILTI) tax, and contend with the shift to a territorial system. Taxpayers need to stay on top of these changes and the significant impacts that they will have on their tax burdens. However, there are still many questions to be answered regarding both the BEAT and other tax reform changes. Should you have any questions regarding how you will be effected by the tax reform, the new international tax provisions, or any other complex tax issue please contact Steven Miller, alliantgroup, LP’s National Director of Tax, at Steven.Miller@alliantgroup.com.