All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

US Outbound: BEAT to hit inbound taxpayers hard

Sponsored by

BEPS and tax illiteracy

The new US tax law's base erosion and anti-abuse minimum tax (BEAT) will have a substantial impact on inbound taxpayers.

The new US tax law's base erosion and anti-abuse minimum tax (BEAT) will have a substantial impact on inbound taxpayers. The BEAT provisions require an applicable taxpayer to pay a tax equal to the base erosion minimum tax amount for the tax year. The BEAT amount is the excess of 10% (5% for 2018) of the taxpayer's modified taxable income (MTI) for the tax year over an amount equal to its regular tax liability for that year reduced by certain credits. The MTI is the taxpayer's taxable income increased by its base erosion payments (BEPs).

A BEP is any amount accrued or paid by the taxpayer to a foreign person that is a related party of the taxpayer (determined by 25% affiliation) for which a deduction is allowable (with reductions for amounts subject to gross-basis withholding). The BEPs include deductions arising from depreciable or amortisable assets acquired from such a related foreign person. Exceptions apply for service payments charged at cost with no markup.

The BEPs do not include payments that reduce gross receipts (except for certain companies with respect to which section 7874 is implicated). Therefore, characterisation issues – whether a payment reduces gross receipts or is a payment that is 'deductible' from taxable income – will become very important.

Note also that the BEAT rules would seem more likely to apply to thin-margin taxpayers since a taxpayer with BEPs that reduce its taxable income by more than 50% will be affected by the rule.

In addition, the BEAT rule can produce surprises with respect to interest expense. Assume the US taxpayer has $100 of income for Section 163(j) purposes and has $20 of interest expense owed to both an unrelated bank and a foreign related person. The taxpayer's interest expense deduction is limited to $30. For BEAT purposes the disallowed interest expense is taken from the $20 of the third-party (bank) interest expense. This rule leaves the full $20 of related party interest expense subject to the BEAT calculations.



Jim Fuller

David Forst

Jim Fuller ( and David Forst (

Fenwick & West


more across site & bottom lb ros

More from across our site

The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.
Companies including Valentino and EveryMatrix say the early adoption of EU public CbCR rules could boost transparency of local and foreign MNEs, despite the short notice.
ITR invites tax firms, in-house teams, and tax professionals to make submissions for the 2023 ITR Tax Awards in Asia-Pacific, Europe Middle East & Africa, and the Americas.
Tax authorities and customs are failing multinationals by creating uncertainty with contradictory assessment and guidance, say in-house tax directors.
The CJEU said the General Court erred in law when it ruled that both companies benefitted from Italian state aid.
An OECD report reveals multinationals have continued to shift profits to low-tax jurisdictions, reinforcing the case for strong multilateral action in response.
The UK government announced plans to increase taxes on oil and gas profits, while the Irish government considers its next move on tax reform.
War and COVID have highlighted companies’ unpreparedness to deal with sudden geo-political changes, say TP specialists.
A source who has seen the draft law said it brings clarity on intangibles and other areas of TP including tax planning.
Tax consultants say companies must not ignore financial transactions in their TP policies as authorities, particularly in the UK, become more demanding.