Publish Date

Sep 04, 2020

Taxpayers Can Beat the BEAT with New Final Deduction Waiver Guidance

Special Tax Alert

On Tuesday, the Treasury and IRS released final regulations dealing with certain aspects of the base erosion and anti-abuse tax (BEAT) that had been addressed in proposed regulations published back in December of 2019.

The BEAT is imposed by section 59A, which was added to the Code as part of TCJA. While TCJA removed the alternative minimum tax for corporations, it added the BEAT, which operates as a minimum tax for certain corporations (other than RICs, REITs, and S corporations) that are sufficiently large (based on a gross receipts test) and whose base erosion percentage (which measures the amount of deductible payments, such as interest, royalties, and certain service payments, made to foreign related parties in whose hands those payments are not subject to U.S. tax) is three percent or higher.

The determinations whether a corporation is sufficiently large and whether it has made a sufficiently large amount of base eroding payments take into account the gross receipts and deductions of the taxpayer and all other members of the taxpayer’s “aggregate group.”

The new final regulations adopt, with some revisions, the December 2019 proposed regulations. Those revisions are focused primarily around:

  • The taxpayer’s right to waive deductions;
  • Adjustments to deal with various complications that can arise in computing aggregate group gross receipts and deductions; and
  • Application of the BEAT to situations involving partnerships.

Taxpayer Right to Waive Deductions

Perhaps the most controversial aspect of the 2019 proposed regulations was their explicit allowance of a taxpayer’s waiver of deductions. By waiving otherwise base-eroding deductions, a taxpayer can avoid crossing the threshold which would subject them to the BEAT. Without a deduction waiver, the application of the BEAT would involve the distinct possibility of a so-called cliff effect, under which as little as $1 in incremental base erosion benefit could trigger a tax of many millions of dollars. However, it was unclear whether the regulations intended to allow the waiver only in circumstances in which it would impact the applicability of the BEAT or in all situations (e.g., could a CFC waive a deduction to avoid generating a  tested loss, so that its U.S. shareholders can utilize its QBAI in their calculation of GILTI)…