On December 2, 2019, the U.S. Department of the Treasury and the IRS issued final regulations (“Final Regulations”) and additional proposed regulations (“Proposed Regulations”) on the Base Erosion and Anti-Abuse Tax or “BEAT” under Section 59A. BEAT was first introduced in late 2017, as part of the Tax Cuts and Jobs Act (TCJA). BEAT requires certain U.S. taxpayers to pay a minimum tax associated with deductible payments to foreign related parties beginning in tax year 2018.
The Final Regulations largely adopted the proposed regulations released on December 13, 2018 with additional clarifications. This article focuses on key outcomes of the Final Regulations that are most relevant to transfer pricing:
The Final Regulations retain the requirement that the amount of a base erosion payment be generally determined on a gross basis and generally do not permit the netting of amounts owned between a U.S. taxpayer and a foreign related party unless netting is permitted by the code or regulations or by certain rules specific to transactions that are marked-to-market. No further clarification was provided on cost sharing payments that are accounted for on a net basis because it is beyond the scope of the Final Regulations as indicated in the Preamble notes.
Comments requested additional guidance relating to arrangements in which a U.S. taxpayer serves as a “middle-man” for a payment to a foreign related party or makes a “so-called” pass-through payment to a foreign related party as part of revenue sharing arrangements including dealing operations and profit splits. The Final Regulations do not adopt a general exception “…because proper characterization depends on the underlying facts and the relationships between the parties.” Further, 1.59A-3(b)(2)(i) added “the determination of the amount paid or accrued, and the identity of the payor and recipient of any amount paid or accrued, is made under general U.S. federal income tax law.”
The Final Regulations remain largely unchanged in providing an exception for transactions that qualify for the Services Cost Method (SCM). However, taxpayers should note that documentation is mandatory if companies take advantage of such exceptions. Documentation required for the SCM exception follows similar requirements to what is expected for transfer pricing support purposes. U.S. taxpayers may not have previously needed to identify such eligible services provided by foreign related parties, and now the BEAT implications may make this analysis a critical exercise.
Treasury’s announcement of the publishing of the Final Regulations is available here. The Final Regulations are effective as of December 6, 2019.
In addition to the Final Regulations, new proposed regulations were issued which provide modifications to the provision relating to how a taxpayer determines its aggregate group for purposes of determining gross receipts and the base-erosion percentage. Further, the Proposed Regulations include clarifications regarding the application of the BEAT to partners and partnerships in addition to providing an election to waive deductions. Public comments are due by February 4, 2019 for the Proposed Regulations.