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Treasury Issues Proposed BEAT Regulations and Final Form 8991
As part of tax reform signed into law on Dec. 22, 2017, a new tax, the base erosion and anti-abuse tax (BEAT), was implemented on international corporate taxpayers. The BEAT is intended to provide a new minimum tax for international taxpayers who make payments to overseas affiliates.
The BEAT only applies to corporate taxpayers with over $500 million in revenues on average for the last three years, who also meet certain thresholds for deductions paid to foreign affiliates. In general, the BEAT tax liability is calculated by starting with taxable income, adding back base erosion tax benefits, as well as the BEAT percentage of net operating loss deductions to arrive at modified taxable income. This modified taxable income is then multiplied by the BEAT rate to arrive at tentative BEAT tax liability. BEAT tax rates are as follows:
Among other things, for taxpayers who are subject to the BEAT, tax credits may lose some or all of their effectiveness. This table summarizes the efficacy of tax credits to reduce a taxpayer’s tax liability for those taxpayers who are subject to the BEAT:
To illustrate how the BEAT may affect the value of tax credits, see below for a sample calculation for a bank taxpayer with a low-income housing tax credit investment in 2019.
On Dec. 13, 2018, the Internal Revenue Service and Department of the Treasury issued proposed regulations for the BEAT under IRC §59A. The proposed regulations offer insights into the following issues:
- Which taxpayers are subject to BEAT
- Which payments constitute BEAT deductions
- The calculation of modified taxable income
- Certain exceptions to BEAT
Of particular interest to the tax credit community because of the ubiquitous use of partnerships in tax credit structures, partnerships are addressed under the BEAT using aggregate theory. This means that corporations who are partners in a partnership must look through to the partner’s share of activity reported by the partnership in calculating the corporate partner’s BEAT. Certain exceptions exist for small partnerships comprising less than 10 percent ownership and a fair market value of less than $25 million.
Taxpayers may rely on the proposed regulations until they are finalized, as long as the taxpayer and all related parties consistently apply the proposed regulations for all taxable years ending prior to the finalization date.
Separately, the IRS recently released final form 8991 and the instructions to form 8991. The form is helpfully organized into four parts and two schedules, spread across five pages. Aside from a few exceptions for regulated investment companies, REITs and S corporations, every corporation with gross receipts of at least $500 million in one of the last three years is required to file the form with its annual tax return. The form walks a taxpayer through the calculation necessary to evaluate whether the taxpayer is subject to the BEAT, and then through the calculation of the BEAT owed by the taxpayer.
Although Treasury may have largely finished with BEAT guidance for the time being, it is far from certain that it will remain unchanged in the long term, given its unpopularity with many corporations with extensive foreign operations and affiliates. House Ways and Means Committee Chairman Richard Neal, D-Mass., has pledged to examine the BEAT in hearings on tax reform early this year, and Congress may revise the provision. Stay tuned.