IRS clarifies BEAT exception for routine service payments

Chief Counsel Advice (CCA) 202529008 clarifies that taxpayers may exclude certain payments for routine services from the Base Erosion and Anti-Abuse Tax (BEAT), even if they do not apply the services cost method (SCM) to price the services. The IRS concluded in CCA 202529008 that the BEAT exception under section 59A(d)(5) applies to the portion of a payment that does not exceed total services costs, provided the services are eligible for SCM treatment under Reg. section 1.482-9(b) without regard to the business judgment rule. However, the portion of a payment that exceeds total services costs (i.e., the markup component) may be considered a base erosion payment.

The IRS also clarified that transfer pricing documentation prepared under section 6662(e) may not satisfy the BEAT recordkeeping requirements.

The guidance offers welcome flexibility for multinational enterprises (MNEs) and serves as a reminder that BEAT compliance requires more than just transfer pricing documentation.

Recent IRS guidance sheds light on how the SCM interacts with BEAT, particularly when taxpayers use a different method to determine arm’s-length pricing for the services under the transfer pricing rules. In CCA 202529008, the IRS confirmed that the SCM exception under BEAT may still apply even if the SCM is not used for transfer pricing and the price for the services is determined with a markup component. This guidance is especially relevant for MNEs with routine intercompany service arrangements and clarifies eligibility and documentation requirements.

SCM

SCM was introduced by the IRS in 2007 to simplify transfer pricing for low-margin, routine services between related parties. Under Reg. section 1.482-9(b)(1), taxpayers can elect to charge for qualifying services at cost—without a markup—and still meet the arm’s-length standard.

To qualify, the services must be either:

• Specified covered services listed in Rev. Proc. 2007-13—commonly referred to as the ‘white list.’ These include payroll, information technology support, accounting, recruiting, meeting planning and general administrative functions.
• Low-margin covered services, meaning services with a median comparable markup of 7% or less, supported by benchmarking.

Certain services are categorically excluded from SCM eligibility—these are known as the ‘black list.’ They include:

• Manufacturing and production
• Natural resource extraction
• Construction
• Sales and distribution
• Research and development and engineering
• Financial services and insurance

In addition to avoiding the black list, the section 482 regulations require that the services pass the business judgment rule, which excludes services that contribute significantly to a company’s competitive advantage, core capabilities or fundamental risks of success or failure. For example, management services performed by a chief executive officer and sales agent generally cannot be priced at cost under the SCM.

Finally, taxpayers must maintain adequate transfer pricing documentation to support the costs and allocations.

How the SCM interacts with BEAT

BEAT was enacted in 2017 to discourage profit-shifting by large MNEs. It imposes a minimum tax—currently 10%—on U.S. corporations with average annual gross receipts of at least $500 million and significant deductible payments to foreign related parties. Under the One Big Beautiful Bill Act (OBBBA), the BEAT rate increases to 10.5% for tax years beginning after Dec. 31, 2025.

Service payments to foreign affiliates which are not taxed to the foreign affiliate as income that is effectively connected to a U.S. trade or business are generally treated as base erosion payments unless an exception applies.

Section 59A(d)(5) provides an exception for payments that would qualify for the SCM under the section 482 regulations without regard to the business judgment rule. The section 59A(d)(5) SCM broadens the scope of services eligible for the exception by including services that fail the business judgment rule and are required to be priced with a markup under the section 482 regulations.

IRS confirms SCM exception under BEAT does not require use for transfer pricing

In CCA 202529008, the IRS confirmed that the BEAT exception applies to the portion of the payment that does not exceed total services costs—even if the taxpayer uses a different method to determine the arm’s-length price of the services. If the service is SCM-eligible and the payment does not include a markup, the full amount of the payment is generally excluded from BEAT. If an arm’s-length markup is charged, but the services would qualify for the SCM without regard to the business judgment rule, only the cost portion is excluded; the markup remains subject to BEAT.

The IRS in CCA 202529008 reviewed a scenario where a taxpayer paid a foreign affiliate for services, used a transfer pricing method other than SCM, and excluded the cost portion from BEAT. The taxpayer claimed a deduction for the full amount but treated only the markup as a base erosion payment. The IRS agreed with the taxpayer’s approach and emphasized that the phrase ‘eligibility for use of the services cost method under section 482’ in section 59A(d)(5)(A) doesn’t require that a taxpayer actually apply the SCM. A payment can qualify for the SCM BEAT exception as long as the services meet the SCM criteria other than the business judgment rule. Legislative history backs this up. Congress considered—but ultimately rejected—language that would have required taxpayers to ‘elect to use’ the SCM. In CCA 202529008, the IRS concluded that the BEAT SCM exception essentially operates independently from the transfer pricing method used.

Documentation requirements

The IRS also clarified in CCA 202529008 that when a taxpayer applies a transfer pricing method other than the SCM, the transfer pricing documentation prepared under section 6662(e) may not be sufficient to meet the BEAT recordkeeping requirements.

To claim the BEAT SCM exception, taxpayers must maintain documentation that shows:

• Total services costs incurred by the provider
• A description of the services performed
• Identification of the service provider and recipient
• Any markup charged
• The cost allocation and apportionment methodology used

Taxpayers relying on the comparable profits method—particularly when using a profit level indicator other than operating profit to total services cost—may not separately identify or apportion total services costs in their transfer pricing documentation. Without that level of detail, the documentation may fall short of the BEAT’s more stringent recordkeeping standards, even if it otherwise satisfies section 6662(e).

Next steps

Taxpayers should take the following steps in light of CCA 202529008:

• Review service payments to identify those that meet the BEAT SCM criteria, even if they are priced under a different method.
• Update documentation to ensure BEAT-specific records are in place, including cost breakdowns and allocation methods.
• Prepare for an audit by building a stand-alone BEAT file—don’t rely solely on section 6662(e) documentation.