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

US Inbound: Understanding the new BEAT regulations

Sponsored by fenwick.jpg
Final regulations and proposed regulations implementing BEAT provisions have been published.

Jim Fuller and David Forst of Fenwick & West explain the most significant provisions from the new regulations on base erosion and anti-abuse tax.

Treasury and the Internal Revenue Service (IRS) issued final regulations implementing the base erosion and anti-abuse tax (BEAT). They also issued a series of important proposed regulations.

Many commenters discussed the administrative burdens of Prop. Treas. Reg. § 1.59A-2(e)(3)(vii) regarding affiliated groups in which the companies have different year ends. The final regulations, therefore, adopted a ‘with-or-within year end’ method to determine the gross receipts and the base erosion percentage of an aggregate group (Treas. Reg. § 1.59A-2(c)(3)).

Comments requested that final regulations provide an exception from the term ‘base erosion payment’ for revenue sharing payments or arrangements, including allocations with respect to global dealing operations. Specifically, some comments recommended that the final regulations provide that a payment is not a base erosion payment in a situation in which the domestic corporation records revenue from transactions with third party customers, and in turn the domestic corporation makes payments to a foreign related party. Treasury and the IRS declined to make changes to help in situations such as these, which can be all too common.




The final regulations, however, do generally exclude amounts transferred to, or exchanged with, a foreign related party in a transaction described in §§ 332, 351, and 368 (corporate nonrecognition transaction) from the definition of a base erosion payment. This was an area in which Treasury and the IRS received criticism concerning their approach in the proposed regulations and would have turned many routine tax-free transactions into base erosion concerns. However, BEAT can still apply to these transactions to the extent they are taxable, for example, when ‘boot’ is received.



However, they also addressed these transactions with a new anti-abuse rule. Treas. Reg. § 1.59A-9(b)(4). The anti-abuse rule provides that a transaction with a principal purpose of increasing basis in property acquired in a non-recognition transaction will not qualify for the non-recognition transaction exception. If the basis step-up transaction is within six months before the non-recognition transaction, it will be deemed to have the tainted principal purpose.



The final regulations retain the important services cost method (SCM) exception, and the rule is unchanged from the proposed regulations.

The final regulations do not provide a regulatory exception to the definition of a base erosion payment for a payment that may give rise to subpart F, global intangible low-taxed income (GILTI), or passive foreign investment company (PFIC) inclusions. Thus, if the payment to a controlled foreign corporation (CFC) gives rise to GILTI, for example, it can still be treated as a base erosion payment.



The BEAT regulations also contain general anti-abuse rules. The final regulations clarify the ‘principal purpose’ standard by adding new examples that illustrate the differences between transactions that Treasury and the IRS find to be abusive or non-abusive.



New proposed regulations provide an election (and certain procedural safeguards) by which a taxpayer may permanently forego a deduction for all U.S. federal tax purposes, with the result that the foregone deduction will not be treated as a base erosion tax benefit. This could be very helpful in avoiding the ‘cliff’ effect of the BEAT rules. The election can be made when the tax return is filed or during, or because of, a later IRS examination. This is very useful since a taxpayer could elect to forego deductions on audit if the effect of audit adjustment is to send the taxpayer over the BEAT ‘cliff’. 





Jim Fuller

T: +1 650.988.8499

E: jfuller@fenwick.com



David Forst

T: +1 650.988.8498

E: dforst@fenwick.com

More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree