BEAT Is the New AMT for US and Non-US Corporations
If your domestic or international corporation pays U.S. taxes and has at least $500 million in gross receipts, you’ll need to get up to speed on the new base erosion and anti-abuse tax (BEAT) provision introduced in the Tax Cuts and Jobs Act. It essentially functions as an alternative minimum tax (AMT), which was eliminated by the reform law. Here’s how to determine if your corporation is liable for BEAT and how to calculate it.
Defining the minimum thresholds for BEAT and who pays it
BEAT is a newly established tax on U.S. and non-U.S. corporations with:
- Average annual gross receipts of at least $500 million over the prior three-year period, and
- A base erosion percentage [defined below] of at least 3 percent (2 percent for financial group members).
In cases of controlled groups, the gross receipts of all members are aggregated in determining whether the $500 million threshold is met. For non-U.S. corporations, only those gross receipts which are effectively connected with the conduct of a U.S. trade or business are measured.
Base erosion payments, percentages, and tax benefits
Base erosion payments generally include payments made by the taxpayer to a foreign related party when that payment results in base erosion tax benefits, such as deductions. Most significantly, base erosion payments generally exclude payments for cost of goods sold. In most instances, a related party includes a person who owns, directly or indirectly (using specified attribution rules), at least 25 percent of the voting power or value of the corporation.
A corporation’s base erosion percentage is determined by dividing the amount of deductions related to base erosion payments by the amount of its total deductions. For purposes of this calculation, a corporation’s total deductions do not include net operating loss carryforwards or carrybacks or those related to foreign dividends received, global intangible low-taxed income (GILTI), foreign derived intangible income (FDII), and certain qualified derivative payments.
Notably, the tax reform legislation also includes an anti-abuse provision that disallows deductions for any “disqualified related party amount” paid pursuant to a “hybrid transaction” or to a “hybrid entity.” The disallowance applies to interest or royalty payments paid to a related party if either:
- The payment is not included in the recipient’s income under the tax laws of its jurisdiction, or
- The recipient is allowed a deduction with respect to the payment under the tax laws of its jurisdiction.
With this provision in place, certain deductions that would otherwise have been recaptured under BEAT will not be treated as base erosion tax benefits.
Calculating BEAT liability
If your corporation meets the minimum thresholds for both the amount of gross receipts and base erosion percentage, your BEAT liability is calculated in three steps.
- Calculate “modified taxable income”
Your corporation’s modified taxable income is equal to your taxable income, calculated without taking any of your base erosion tax benefits into account.
- Calculate “regular tax liability”
Next, figure your regular tax liability based on your regular taxable income (i.e., taxable income before the base erosion tax benefits are added back). To determine your BEAT liability, reduce your regular tax liability by certain allowable tax credits (discussed further below).
- Calculate “base erosion minimum tax amount”
Your corporation’s base erosion minimum tax amount is determined by first multiplying your modified taxable income by the base erosion tax rate. For taxable years beginning in 2018, the base erosion tax rate is 5 percent. For taxable years beginning after December 31, 2018, and before January 1, 2026, the base erosion tax rate will be 10 percent. The base erosion tax rate increases to 12.5 percent for taxable years beginning after January 1, 2026.
Then subtract from that amount your regular tax liability as calculated in step 2. The excess is the base erosion minimum tax amount. Note that credits are not available to reduce the base erosion minimum tax liability.
BEAT makes tax credits unfavorable
If your corporation is subject to BEAT, tax credits can be detrimental because your BEAT liability increases as your regular tax liability (determined after taking certain available tax credits into account) decreases. For taxable years beginning after December 31, 2017, but before January 1, 2026, your corporation’s regular tax liability is reduced by the excess of your allowable income tax credits over your allowable research credits and a portion of your general business credits. For taxable years beginning after January 1, 2026, your regular tax liability is reduced by all allowable credits.
How we can help
BEAT operates similarly to the repealed corporate AMT, but it’s slightly more complex, and its newness will take some getting used to. CLA’s international tax professionals can help you understand and apply the provisions in your corporate tax planning and preparation.