BEAT Overview
The base erosion and anti-abuse tax (BEAT) is a minimum tax (5% in 2018, 10% in 2019 to 2025 and 12.5% after 2025) imposed on applicable taxpayers that make certain base erosion payments to foreign related parties. This tax is in addition to a corporation's regular income tax liability.
Corporations that average at least $500 million of U.S. gross receipts in the past three years are subject to BEAT. The $500 million of U.S. gross receipts threshold includes receipts from related corporations including those in parent-subsidiary and brother-sister controlled groups. There is a safe harbor for corporations that have a base erosion percentage of less than 3% (2% for banks and financial institutions).
Base erosion payments are broadly defined and include interest, royalties, management fees and other certain tax-deductible amounts paid or accrued to related foreign persons. By definition, payments that are properly reflected in cost of goods sold on the U.S. income tax return do not constitute a base erosion payment. The regulations set forth several exceptions to the broad base erosion payment definition. One such exception applies to QDPs.
Qualified derivative payments
The section 59A regulations define a QDP as any payment made by a taxpayer to a foreign related party pursuant to a derivative with respect to which the taxpayer:
- Recognizes gain or loss as if the derivative were sold for its fair market value (FMV) on the last business day of the taxable year (and any additional times as required by the Internal Revenue Code or the taxpayer's method of accounting);
- Treats any gain or loss so recognized as ordinary; and
- Treats the character of all items of income, deduction, gain or loss with respect to a payment pursuant to the derivative as ordinary.
While a payment may meet the definition of a QDP, a payment will not be considered a QDP unless the taxpayer complies with specific reporting requirements.
Reporting requirements
A payment will not qualify as a QDP unless the taxpayer reports the necessary information as outlined in Reg. section 1.6038A-2(b)(7)(ix). This includes reporting the aggregate amount of QDPs for the taxable year on Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts, and making a representation that all payments satisfy the requirements of Reg. section 1.59A-6(b)(2).
If a taxpayer fails to meet these reporting requirements, the payments in question will not be eligible for the QDP exception and will be considered base erosion payments unless another exception applies. This misclassification can lead to the taxpayer being subject to the BEAT and increasing their tax liability. Additionally, the IRS may impose penalties for underpayment of taxes due to inaccurate reporting, which can include a percentage of the underpayment, interest on the unpaid amount, and in some cases, criminal charges if the inaccuracies are found to be fraudulent.
Final reminders
During the transition period before the applicability of Reg. section 1.6038A-2(b)(7)(ix), taxpayers are treated as satisfying the QDP reporting requirements if they report the aggregate amount of QDPs on Form 8991, Schedule A, in good faith.
The provisions described in this alert are subject to change in any finally enacted regulation package. Nonetheless, taxpayers should contact their advisors to better understand how Notice 2024-43 may affect their tax obligations.
