Publish Date

Apr 20, 2018

Base Erosion and Anti-Abuse Tax for Services Companies: Cost of Services are Out, Services Cost Method is In

A&M Tax Advisor Weekly

Cost of Services are Out, Services Cost Method is In

For companies in the services industry, the Base Erosion and Anti-Abuse Tax (“BEAT”) may feel like a dominating force that’s impossible to overcome. Even though the BEAT applies broadly to large U.S. corporations, companies that provide services to their customers, when compared to companies in the manufacturing or retail space, find themselves at a distinct disadvantage under the BEAT. In this edition of Tax Advisor Weekly, we explain the BEAT, why companies in the services industry are at a distinct disadvantage under the BEAT, and a method that may be used overcome that disadvantage.

What is the BEAT?

The BEAT is a new minimum tax targeted at U.S. multinationals that make base eroding payments (i.e. certain deductible payments to related foreign parties). In determining the minimum tax, base eroding payments are added back to the company’s taxable income. This new modified taxable income amount is then hit with a 5 percent rate (or 10 percent for taxable years beginning after December 31, 2018) to determine the modified tax liability. If the resulting “modified tax liability” is higher than the taxpayer’s actual tax liability, the difference is the BEAT and must be paid in addition to the “regular” U.S. Federal income tax.

Who is subject to the BEAT?

Importantly, not every U.S. corporation is subject to these rules. A U.S. corporation must pass two thresholds before the BEAT is applicable. If the taxpayer does not meet the criteria of either test, the BEAT does not apply. First, the U.S. corporation must have average annual gross receipts in excess of $500 million over the past 3 years. Second, the U.S. corporation’s deductible payments made to related parties (i.e. base eroding payments) must exceed 3 percent of the U.S. corporation’s aggregate allowable deductions in the current taxable year.