Base-erosion and anti-abuse tax rules are finalized

By Dave Strausfeld, J.D.

Editor: Sally P. Schreiber, J.D.

On Sept. 1, the IRS finalized regulations that provide additional guidance on the base-erosion and anti-abuse tax (BEAT) (T.D. 9910).

The BEAT final regulations keep the basic approach and structure of the proposed regulations (REG-112607-19) that were issued in December 2019, with certain revisions. Like the proposed regulations, the final regulations permit an election to waive certain deductions to avoid a potential cliff effect that had worried some taxpayers.

The BEAT is designed to deter large multinational enterprises from reducing their tax liability through certain payments made to foreign related parties and certain tax credits. To be subject to the BEAT, which functions essentially as a minimum tax, businesses must have average annual gross receipts of at least $500 million as well as a so-called base-erosion percentage above a specified threshold.

A previous set of final regulations (T.D. 9885) was issued in December 2019 implementing BEAT, which was created in Sec. 59A by the law known as the Tax Cuts and Jobs Act, P.L. 115-97.

Final regulations

The new final regulations address the following topics, among others:

  • The determination of a taxpayer's aggregate group for purposes of determining gross receipts and the base-erosion percentage;
  • The election to waive deductions for purposes of the BEAT;
  • The application of the BEAT to partnerships; and
  • The anti-abuse rule provided in Regs. Sec. 1.59A-9(b)(4) with respect to certain basis step-up transactions.

The final regulations' preamble states that the IRS is considering whether future guidance may be appropriate regarding the interaction of the qualified derivative payment (QDP) exception, the BEAT netting rule in Regs. Sec. 1.59A-2(e)(3)(iv) (with respect to positions for which a taxpayer applies a mark-to-market method of accounting for U.S. federal income tax purposes), and the QDP reporting requirements in Regs. Sec. 1.59A-6 and Regs. Sec. 1.6038A-2(b)(7)(ix).

These final regulations apply to tax years beginning on or after the day the regulations are published in the Federal Register (which as of this writing had not occurred), with certain exceptions. Taxpayers may apply the final regulations retroactively in their entirety for tax years beginning after Dec. 31, 2017, provided that, once applied, taxpayers continue to apply these regulations in their entirety for all subsequent tax years.

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