IRS has released final regs implementing the base-erosion and anti-abuse tax (BEAT) and providing reporting requirements related to the BEAT. The final regs retain the basic structure and approach of the proposed regs, with certain revisions.
Background
Code Sec. 59A, as added by the Tax Cuts and Jobs Act (TCJA, PL 115-97), imposes a tax equal to the “base erosion minimum amount” on certain “applicable taxpayers”.
The gross receipts test limits the application of the BEAT to taxpayers with at least $500 million in average annual gross receipts for the previous three years (Code Sec. 59A(e)(1)(B)), and the base erosion percentage test limits it to taxpayers with “base erosion payments” that account for 3% of their deductions (2% if the affiliate group includes a bank). (Code Sec. 59A(e)(1)(C))
Under Code Sec. 59A(e)(3), taxpayers treated as a single employer under Code Sec. 52(a) are aggregated for purposes of determining whether these tests are met. The tax is the excess of an applicable percentage of the modified taxable income of the taxpayer over its regular tax liability reduced by certain allowable credits. The taxpayer’s modified taxable income is its taxable income without the benefit of specified deductible payments.
The TCJA also added reporting obligations regarding the BEAT for 25% foreign-owned corporations and foreign corporations engaged in a U.S. business. Code Sec. 6038A imposes reporting and recordkeeping requirements on domestic corporations that are 25% foreign-owned. Code Sec. 6038C imposes the same reporting and recordkeeping requirements on certain foreign corporations engaged in a U.S. trade or business. These corporations are collectively known as “reporting corporations.”
Reporting corporations are required to file an annual return on Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Code Sec. 6038A and Code Sec. 6038C), with respect to each related party with which the reporting corporation has had any “reportable transactions.” (Reg § 1.6038A-2)
Reporting corporations are also subject to specific requirements under Code Sec. 6038A and Code Sec. 6038C to maintain and make available the permanent books of account or records as required by Code Sec. 6001 that are sufficient to establish the accuracy of the federal income tax return of the corporation, including information, documents, or records to the extent they may be relevant to determine the correct U.S. tax treatment of transactions with related parties. (Reg § 1.6038A-3)
For tax years beginning after Dec. 31, 2017, the TCJA added Code Sec. 6038A(b)(2), which authorizes regs requiring information from a reporting corporation that is also a Code Sec. 59A “applicable taxpayer.” In general, applicable taxpayers are corporations, excluding regulated investment companies, real estate investment trusts, and S corporations, that satisfy a “gross receipts test” and a “base erosion percentage test.” (Code Sec. 59A(e)(1))
2018 proposed regs
In December 2018, IRS proposed regs (2018 proposed regs) implementing the BEAT and related reporting provisions for reporting corporations under Code Sec. 6038A and Code Sec. 6038C. See Proposed BEAT regs: anti-abuse, NOL and credit carryover limitations and reporting rules (12/17/2018).
Final regs
The final regs retain the basic approach and structure of the proposed regs, with certain revisions. However, the final regs do not include rules on predecessors or short tax years for purposes of the BEAT aggregate group rules. Instead, rules relating to those situations have been re-proposed in Preamble to Prop Reg REG-112607-19 (2019 prop regs). See Base erosion tax prop regs address aggregate groups, other topics.
Until rules applying to predecessors and short tax years are finalized, taxpayers must take a reasonable approach consistent with Code Sec. 59A(e)(2)(B) to determine gross receipts and base erosion benefits in these situations.
Among other revisions, the final regs make the following changes to the proposed regs:
- Determination of gross receipts and the base erosion percentage of a taxpayer’s aggregate group will be made based on the taxpayer’s tax year and the tax year of each member of its aggregate group that ends “with or within” the applicable taxpayer’s tax year. (Reg §1.59A-2(c)(3))
- The final regs clarify that a transaction between parties is disregarded for purposes of Code Sec. 59A when determining the gross receipts and base erosion percentage of an aggregate group if both parties were members of the aggregate group at the time of the transaction, without regard to whether the parties were members of the aggregate group on the last day of the taxpayer’s tax year. (Reg §1.59A-2(c)(1))
- The base erosion tax benefits and deductions attributable to the tax year of a member of the aggregate group that begins before January 1, 2018 are excluded from the BEAT calculation. This rule avoids requiring members of an aggregate group to calculate their hypothetical base erosion tax benefits for a year in which the base erosion benefit rules do not apply. (Reg. §1.59A-2(c)(8))
- Reg §1.59A-3(b) has been modified to clarify that payments resulting in a reduction to gross income, including cost of goods sold, are not treated as base erosion payments within the meaning of Code Sec. 59A(d)(1) or Code Sec. 59A(d)(2). (Reg §1.59A-3(b)(2)(viii))
- The determination of whether a payment or accrual is a base erosion payment is made under general U.S. federal income tax law. (Reg §1.59A-3(b)(2)(i))
- The definition of a base erosion payment in Reg §1.59A-3(b)(1)(i) and Reg §1.59A-3(b)(2)(ix) provides that a loss realized from the form of consideration provided to the foreign related party is not itself a base erosion payment. This treatment aligns the definition of base erosion payment with the economics of the payment made by the applicable taxpayer to the foreign related party. Thus, the term “base erosion payment” does not include the amount of built-in-loss because that built-in-loss is unrelated to the payment made to the foreign related party. This rule applies regardless of whether the loss realized from the form of consideration provided to the foreign related party is itself consideration for an underlying base erosion payment. To the extent that a transfer of built-in-loss property results in a deductible payment to a foreign related party that is a base erosion payment, the final regs clarify that the amount of the base erosion payment is limited to the fair market value of that property.
- Amounts transferred to, or exchanged with, a foreign related party in a corporate nonrecognition transaction are excluded from the definition of base erosion payment. IRS has determined that this limited exclusion of corporate nonrecognition transactions is consistent with the underlying anti-abase erosion purpose of the BEAT, tends to reduce disincentives for taxpayers to move intangible property and other income-producing property into the U.S. in corporate non-recognition transactions, and is consistent with the general treatment of corporate nonrecognition transactions under other sections of the Code.
- The final regulations also clarify the treatment of distribution transactions, such as distributions described in Code Sec. 301, and redemption transactions, such as redemptions described in Code Sec. 302. A pure distribution (a distribution with respect to stock for which there is no consideration) made by a corporation to a shareholder with respect to its stock is not an amount paid or accrued by the shareholder to the corporation. However, a stock redemption in exchange for property is an amount paid or accrued by the shareholder to the corporation (or by the acquiring corporation to the transferor in a Code Sec. 304 transaction).
- The amount of U.S. branch interest expense treated as paid to a foreign related party is the sum of:
- The directly allocated interest expense that is paid or accrued to a foreign related party,
- The interest expense on U.S.-booked liabilities that is paid or accrued to a foreign related party, and
- The interest expense on U.S.-connected liabilities in excess of interest expense on U.S.-booked liabilities multiplied by the ratio of average foreign related-party interest over average total interest (excluding from this ratio interest expense on U.S. booked liabilities and interest expense directly allocated). (Reg §1.59A-3(b)(4)(i)(A))
Applicability dates
These final regs (other than the reporting requirements for qualified derivative payments (QDPs) in Reg §1.6038A-2(b)(7), Reg §1.1502-2, and Reg §1.1502-59A) apply to tax years ending on or after Dec. 17, 2018. However, taxpayers may apply these final regs in their entirety for tax years ending before Dec. 17, 2018. Taxpayers may also apply provisions matching Reg §1.59A-1 through Reg §1.59A-9 in their entirety for all tax years ending on or before Dec. 6, 2019. Taxpayers choosing to apply the proposed regs must apply them consistently and cannot selectively choose which particular provisions to apply. (Reg §1.59A-10, Reg §1.1502-2(d), Reg §1.1502-59A(h), and Reg §1.6038A-2(g).
Checkpoint will provide additional information about the regs in a future Federal Tax Update.
To continue your research on base erosion and anti-abuse tax, see FTC 2d/FIN ¶ D-1250 et seq, United States Tax Reporter ¶ 59A4.
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