New U.S. base erosion and anti-abuse tax
If your corporation pays U.S. taxes and has at least US$500m in gross receipts, you will need to get up to speed on the new base erosion and anti-abuse tax (BEAT).
BEAT applies to both U.S. and non-U.S. corporations with:
- BEAT was introduced in the Tax Cuts and Jobs Act. It essentially functions as an alternative minimum tax (AMT), which was eliminated by the reform law.
- Average annual gross receipts of at least US$500m over the previous three years.
- A base erosion percentage of at least 3% (2% for financial group members).
In cases of controlled groups, the gross receipts of all members are aggregated to determine whether the US$500m threshold is met. For non-U.S. corporations, only the gross receipts effectively connected with the conduct of a U.S.trade or business are measured.
Base erosion payments, percentages and tax benefits
Base erosion payments generally include payments made by the taxpayer to a foreign related party when that payment results in base erosion tax benefits, such as deductions. Significantly, base erosion payments generally exclude payments for cost of goods sold.
A corporation’s base erosion percentage is determined by dividing the amount of deductions related to base erosion payments by the amount of its total deductions.
For purposes of this calculation, a corporation’s total deductions do not include net operating loss carry-forwards or carry-backs or those related to foreign dividends received, global intangible lowtaxed income (GILTI), foreign derived intangible income (FDII), and certain qualified derivative payments.
Notably, the tax reform legislation also includes an anti-abuse provision that disallows deductions for any “disqualified related party amount” paid pursuant to a “hybrid transaction” or to a “hybrid entity”. The disallowance applies to interest or royalty payments paid to a related party if either:
- the payment is not included in the recipient’s income under the tax laws of its jurisdiction, or
- the recipient is allowed a deduction with respect to the payment under the tax laws of its jurisdiction.
With this provision in place, certain deductions that would otherwise have been recaptured under BEAT will not be treated as base erosion tax benefits.
BEAT makes tax credits unfavorable
If your corporation is subject to BEAT, tax credits can be detrimental because your BEAT liability increases as your regular tax liability (determined after taking certain available tax credits into account) decreases. For taxable years beginning after 31 December 2017, but before 1 January 2026, your corporation’s regular tax liability is reduced by the excess of your allowable income tax credits over your allowable research credits and a portion of your general business credits. For taxable years beginning after 1 January 2026, your regular tax liability is reduced by all allowable credits.
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