United States

Base erosion and anti-abuse tax: Gross receipts calculation


The Tax Cuts and Jobs Act (TCJA) brought significant changes to the international tax provisions of the Internal Revenue Code. One such significant change was the introduction of the base erosion and anti-abuse tax (BEAT).

In an effort to prevent companies from reducing their U.S. tax liability by stripping earnings from the U.S., the TCJA established a minimum tax on payments to foreign related parties. BEAT only applies to corporations that have average annual gross receipts of at least $500 million for the three-tax year period ending with the preceding tax year, and a base erosion percentage of at least 3 percent. Taxpayers subject to BEAT are required to pay a tax equal to the excess of 10 percent of the taxpayer’s “modified taxable income,” less the taxpayer’s regular tax liability and certain specified tax credits. BEAT is generally 5 percent for 2018, 10 percent through 2025 and 12.5 percent thereafter.

BEAT will have a significant impact for life sciences companies making payments to related foreign parties for services, intellectual property and other deductible payments. Payments related to cost of goods sold or amount paid for services which meet the requirements of the services cost method are excluded from BEAT.

In order to assess what impact BEAT has on your business, the minimum $500 million gross receipts threshold must be exceeded. When determining how to define gross receipts for purposes of the base erosion minimum tax, there is guidance in IRC section 59A(e)(2)(B) to suggest that similar rules of IRC section 448(c)(3) shall apply in determining gross receipts for purposes of BEAT.

Specifically, under IRC section 448(c)(3):

  1. Gross receipts for any taxable year shall be reduced by returns and allowances made during such year,
  2. Gross receipts for any taxable year of less than 12 months are annualized, and
  3. Receipts of predecessor entities are considered.

The fact that taxpayers can reduce gross receipts by returns and allowances should come as welcome news given the significant impact these amounts could have in determining gross receipts.

The treasury department is not expected to issue further guidance or regulations on BEAT until the latter part of 2018. Until such time, it would appear reasonable that taxpayers could use the definition of gross receipts under IRC section 448(c)(3) for purposes in determining whether they exceed the $500 million gross receipts threshold.

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