Tax Reform Series 47 – Base Erosion and Anti-Abuse Tax

Plain Language of Change:

  • The Act provides for a base erosion and anti-abuse tax (BEAT) which imposes a new alternative minimum tax at a rate of 10 percent for certain large multinational corporations

  • The BEAT applies to domestic corporations that are not taxed on a flow-through basis and are part of a group with at least $500 million of annual domestic gross receipts (including effectively connected amounts earned by foreign affiliates) over a three-year averaging period, and which have a “base erosion percentage” of 3 percent or higher for the tax year (or 2 percent for certain banks and securities dealers)

  • BEAT applies to foreign corporations engaged in a U.S. trade or business for purposes of determining their effectively connected income tax liability

  • It does not apply to S corporations, RICs or REITs.

  • The BEAT generally imposes an AMT-like tax on certain amounts paid by U.S. taxpayers to certain related foreign recipients to the extent the amounts are deductible by the U.S. taxpayers

  • The BEAT tax does not apply if the foreign recipient elects to be subject to U.S. income tax on the amounts received

  • In calculating the U.S. income tax liability imposed under such an election, deemed expenses are allowed as a deduction

  • A foreign tax credit of 80 percent of applicable foreign credits are allowed against the U.S. tax liability imposed by this provision if an election is made

  • The base erosion minimum tax amount is the excess of 10 percent of the modified taxable income of the taxpayer (5 percent for 2018), for the taxable year over an amount equal to the regular tax liability of the taxpayer for the taxable year reduced by the excess (if any) of the credits allowed against such regular tax liability over the sum of: (1) the credit allowed for the taxable year which is properly allocable to the research credit plus (2) the portion of the applicable credits not in excess of 80 percent of the lesser of the amount of such credits or the base erosion minimum tax amount (determined without regard to this clause (2))

  • For taxable years beginning after December 31, 2025, two changes are made (1) the 10 percent provided for above is changed to 12.5 percent, and (2) the regular tax liability is reduced by the aggregate amount of the credits allowed (and no other adjustment is made).

Detailed Analysis of Base Erosion and Anti-Abuse Tax

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