On Dec. 2, the IRS issued detailed guidance on the Sec. 59A base-erosion and anti-abuse tax (BEAT), which was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. The regulations (T.D. 9885) finalize proposed regulations from December 2018 (REG-104259-18) and detail which taxpayers are subject to Sec. 59A and how base-erosion payments are determined. They also provide a method for calculating the base-erosion minimum amount and the BEAT resulting from that calculation. Finally, they describe reporting and recordkeeping requirements for taxpayers subject to the BEAT.
The final regulations affect corporations with substantial gross receipts that make payments to foreign related parties and corporations required to report under Secs. 6038A and 6038C. The IRS also issued additional proposed regulations in response to comments it received on the earlier proposed regulations (REG-112607-19).
Sec. 59A imposes on each applicable taxpayer a tax equal to the base-erosion minimum tax amount for the tax year; this tax is in addition to the taxpayer's regular tax liability. Sec. 6038A imposes reporting and recordkeeping requirements on domestic corporations that are 25% foreign-owned, and Sec. 6038C imposes the same reporting and recordkeeping requirements on certain foreign corporations engaged in a U.S. trade or business (collectively, reporting corporations).
The final regulations adopt the proposed regulations with a few clarifications in response to comments.
The final regulations address the following topics:
- Who applicable taxpayers are for BEAT purposes, including the determination of the aggregate group for applying the gross receipts test and the base-erosion percentage test (the proposed regulations also modify and clarify these rules in response to comments);
- The rules for the gross receipts test and base-erosion percentage test, the rules regarding taxpayers in an aggregate group with different tax years, and the treatment of mark-to-market deductions (the proposed regulations also modify these definitions);
- The definition of base-erosion payments, including the operating rules for specific types of base-erosion payments and exceptions from the base-erosion payment definition;
- The definition of base-erosion tax benefits, including an election in the proposed regulations to waive certain tax deductions;
- The computation of modified taxable income and the base-erosion minimum tax amount;
- The application of the BEAT to partnerships, which are also addressed in the new proposed regulations;
- Rules relating to banks and dealers and rules for insurance companies;
- Anti-abuse and recharacterization rules;
- The general application of the BEAT to consolidated groups, including the coordination of the consolidated group rules for the Secs. 59A(c)(3) and 163(j) limits on business interest expense and the computation of consolidated tax liability;
- Amendments to Regs. Sec. 1.383-1 to address limitations on a loss corporation's items under Secs. 382 and 383 in the context of the BEAT; and
- The reporting and recordkeeping requirements for the BEAT under Sec. 6038A.
The final regulations were effective Dec. 6, the date they were published as final in the Federal Register.
The simultaneously issued proposed regulations would address how a taxpayer determines its aggregate group for purposes of determining gross receipts and the base-erosion percentage. The proposed regulations also provide an election to waive deductions. Finally, the proposed regulations address how the BEAT applies to partnerships.