Law360 Quotes Elizabeth Stevens on BEAT Policies to Look Out For Later This Year
A U.S. Department of Treasury official recently said that guidance for the federal tax overhaul’s complex international provisions will be out by the fall, but in the meantime, Law360 looks ahead at how the government could answer some particularly knotty questions about these measures.
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Pass-Through Costs and BEAT
Another TCJA measure, the base erosion and anti-abuse tax, or BEAT, limits deductions on payments by a U.S. corporate entity to related parties abroad, to ensure it doesn’t reduce its U.S. taxable income to less than 10 percent. But specialists have pointed to the broad nature of the provision and the places for potential carve-outs.
For instance, a foreign company could incur a cost to a third party for services that benefit the entire corporate group, such as for developing an information technology system or providing marketing services. It’s very common for that foreign company to allocate that cost on a pass-through basis to its affiliates, including those in the U.S., according to Elizabeth Stevens of Caplin & Drysdale, Chtd.
Going strictly on the face of the statute, the U.S. affiliate’s payment to its parent for that cost would appear to be a base erosion payment, she said. However, Stevens noted that Treasury may have regulatory authority to carve out a payment like that because it is ultimately going to a third party.
“They could probably require that the taxpayer demonstrate that this payment is actually a pass-through to a third party and they could construct some limiting criterion around that,” she said, adding that “still, it seems like that would be ripe for a carve-out.”
Deductible Payments and BEAT
Another issue with BEAT stems from the requirements that trigger the tax in the first place. For BEAT to apply, U.S. multinationals must earn over $500 million and have a base erosion percentage of 3 percent, which is calculated by dividing the taxpayer’s deductions for base erosion payments by its total deductions, with some exceptions.
Stevens said the statute could be read to say that if a U.S. consolidated group has a lot of domestic companies, then deductible payments among those companies should go into the denominator of the BEAT equation, which would tend to make the denominator much bigger.
Even though those payments are balanced out on consolidation — because deductions have corresponding income inclusions — they’re still deductions on a company-by-company basis, Stevens noted.
As for potential regulations, Stevens thinks the taxpayer-friendly approach would be to say that deductible payments between members of a U.S. group would go into the denominator of the base erosion percentage.
“Because that will tend to make the denominator bigger, which will make the overall percentage smaller, which makes it less likely that the taxpayer will trip and fall into the BEAT,” she said.
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Excerpt taken from the article “6 Possible TJCA Policies To Look Out For: Midyear Report” by Natalie Olivo for Law360.