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US IRS issues final base erosion tax regulations

Tuesday, 10 December, 2019

The US Internal Revenue Service (IRS) has published its final and proposed regulations on the base erosion and anti-abuse tax (BEAT). The BEAT regulations, released on December 2, give clarity on what constitutes a base erosion payment as well as reporting requirements related to the tax.

The changes to the BEAT regulations come as part of the Tax Cuts and Jobs Act 2017 (TCJA), under s.59A, with the aim of preventing the erosion of the US tax base through taxpayers reducing their tax liability in the country.

The IRS notes that the final regulations “retain the basic approach and structure of the proposed regulations, with certain revisions,” and it has also issued further proposed regulations.

The detailed final BEAT regulations primarily apply to taxpayers with annual gross receipts averaging more than USD500 million over a three-year period, if those taxpayers are making deductible payments to foreign related parties. These regulations set out guidance on:

  • which taxpayers are subject to s.59a;
  • what constitutes a base erosion payment;
  • how to calculate the base erosion minimum tax amount;
  • the tax required to be paid based on that calculation; and
  • the reporting requirements related to this tax.

According to the final regulations, the Department of the Treasury (DOT) and the IRS estimate that between 3,500 and 4,500 taxpayers may be applicable taxpayers under the BEAT.

The DOT and IRS say that “the information collection requirements…will be satisfied by the taxpayer maintaining permanent books and records that are adequate to verify the amount charged for the services and the total services costs incurred by the renderer, including a description of the services in question, identification of the renderer and the recipient of the services, calculation of the amount of profit mark-up (if any) paid for the services, and sufficient documentation to allow verification of the methods used to allocate and apportion the costs to the services.”

The IRS has also issued final regulations incorporating provisions of the TCJA into the foreign tax credit rules. The amendments repeal s.902 of the TCJA, regarding deemed-paid credits; add limitation categories for foreign branch income and amounts includible under the global intangible low-taxed income provisions; disregard certain expenses and disallow the fair market value method for calculating taxable income; introduce a participation exemption for dividends; and impose current US taxation on foreign earnings instead of deferring it.