United States: IRS Proposes Regulations Under The Base Erosion And Anti-Abuse Tax

The Tax Cuts and Jobs Act replaced the U.S. federal corporate alternative minimum tax with the base erosion and anti-abuse tax (BEAT), which targets deductible payments made after 2017 by certain large corporations to foreign related parties.1 This week, the IRS issued proposed regulations to provide guidance on application of the BEAT provisions.

In order to be subject to the BEAT, a corporation's average annual gross receipts for the previous three years must be at least US$500 million and the ratio of the corporation's "base erosion payments" to its total deductions for the taxable year (the base erosion percentage) must be at least 3%.2 The BEAT does not apply to RICs, REITs or S corporations.

A base erosion payment is a payment to a foreign related party if the payment is deductible or is used to acquire depreciable or amortizable property. Base erosion payments do not include payments for services that are generally eligible for the "services cost method" under section 482 or certain payments with respect to derivatives that are marked to market. In addition, costs of goods sold (COGS) are not base erosion payments, thereby giving taxpayers an incentive to restructure payments as COGS that would otherwise be treated as base erosion payments.3

If the BEAT applies, the amount of the BEAT is the excess of 10%4 of the corporation's "modified taxable income" over its federal income tax liability computed without regard to the BEAT, reduced by certain tax credits.5 Modified taxable income for this purpose is the corporation's taxable income with the base erosion payments added back. In addition, the base erosion percentage of the corporation's net operating loss carryovers (NOLCs) is added back. Accordingly, income used to pay interest to a related foreign party will be subject to tax of at least 10% if the payor corporation is subject to the BEAT.

Among the more notable provisions in the proposed regulations are the following:

Base Erosion Payments. The proposed regulations detail covered payments as determined by using U.S. federal income tax principles. The proposed regulations provide that the acquisition of depreciable property in a non-recognition transaction can result in a covered payment, whereas a distribution of depreciable property from a foreign related party under section 301 will not (because there is no consideration paid).

Effectively Connected Income. The proposed regulations provide that a foreign corporation's interest payments can be base erosion payments if they reduce effectively connected income (ECI). Conversely, payments to a foreign related party are not base erosion payments if those payments constitute ECI to the recipient and are taxable under an applicable tax treaty.

The proposed regulations recognize that payments may be made between a foreign corporation's permanent establishment in the United States (as determined under a tax treaty) and a home office of that foreign corporation. Rules are provided for allocating and attributing expenses to these internal transactions for the purposes of the BEAT.

Service Cost Method Exception. Payments that are eligible for the service cost method under section 482 are not base erosion payments. The proposed regulations permit exclusion of the cost component of the payments even if a profit margin is charged and impose recordkeeping requirements.

Timing Issues. The proposed regulations clarify that deductions that relate to payments in years before the effective date of the Tax Cuts and Jobs Act are not taken into account under the BEAT. For example, if a corporation purchased depreciable property from a foreign related party in 2015, depreciation deductions with respect to that property taken after January 1, 2018, are not base erosion payments. Similarly, NOLCs that arose before January 1, 2018, are not subject to the BEAT.6

Coordination with Section 163(j). The statute provides that payments for business interest that are disallowed under section 163(j) are not base erosion payments for the purposes of the BEAT, but disallowed interest is treated as coming from unrelated parties first, which maximizes the amount of interest subject to the BEAT. The proposed regulations provide further coordinating rules.

Partnerships. The proposed regulations generally use an aggregate approach to partnerships, treating payments both to and from a partnership with corporate partners as having been received or made by the partners. These rules have a "small ownership interest" exception for partnership interests representing less than 10% of capital and profits of the partnership and with a fair market value of less than US$25 million.

Consolidated Returns. Members of an affiliated group that file a consolidated return are treated as a single taxpayer for the purposes of the BEAT.

Withholding Taxes. The proposed regulations provide that a base erosion payment is treated as having a base erosion tax benefit of zero if the full 30% withholding tax is paid under section 1441 or 1442 with respect to the payment. If the payment is eligible for a reduced rate of withholding under a tax treaty, the payment is treated as a base erosion tax benefit in proportion to the reduction in withholding tax.

Tax Credits. The BEAT is reduced by the R&D tax credit until the end of 2025, but, as noted above, not by foreign tax credits.

Anti-Abuse Rule. Certain transactions with a principal purpose of avoiding the BEAT will be disregarded or deemed to result in a base erosion payment. These transactions include (i) transactions involving intermediates acting as a conduit; (ii) transactions entered into in order to increase the amount of deductions in the denominator of the base erosion percentage; and (iii) transactions among related parties entered into in order to avoid application of the BEAT to banks and registered securities dealers.

Effective Date

The proposed regulations are generally proposed to apply to taxable years beginning after December 31, 2017. Until the proposed regulations are made final, a taxpayer may rely on them as long as the taxpayer and its related parties apply the rules consistently.


1. Section 59A. For the purposes of the BEAT, a related party is (i) any person that owns at least 25% of the vote or value of the taxpayer corporation's stock (a 25-Percent Owner); (ii) any person related to the taxpayer or a 25-Percent Owner under sections 267(b) or 707(b)(1); and (iii) any other person related to the taxpayer under section 482. The stock ownership attribution rules of section 318 apply, with certain modifications. References to "sections" are to sections of the Internal Revenue Code of 1986, as amended.

2. For banks and registered securities dealers, this threshold is reduced to 2%.

3. An exception applies to inverted companies.

4. The BEAT rate is only 5% in 2018, increasing to 10% at the beginning of 2019 and further increasing to 12.5% at the beginning of 2026.

5. The BEAT is not reduced for foreign tax credits.

6. The proposed regulations are more favourable to taxpayers than prior guidance on this issue in Notice 2018-28, which was partially revoked by the proposed regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions