Also known as: base erosion and anti-abuse tax · base-erosion anti-abuse tax · BEAT
Written by attorneys · grounded in primary & secondary sources — see below
A minimum tax imposed on large U.S. corporations to curb the erosion of the U.S. tax base through deductible payments made to foreign affiliates. The tax applies to corporations with average annual gross receipts of at least five hundred million dollars over the prior three years when such payments exceed three percent of total deductions. Rates begin at five percent for 2018 and rise to ten percent for 2019 through 2025.
Baxter Dynamics, a U.S. consulting firm with over six hundred million dollars in average annual receipts, pays substantial management fees to its foreign parent. Because the fees constitute more than three percent of its deductions, the firm must compute its regular tax liability and then pay the higher base erosion anti-abuse tax amount. The additional tax liability reduces the net benefit of the outbound payments.
Bright Path Foods, a domestic food producer meeting the gross-receipts threshold, makes royalty and interest payments to a foreign affiliate that exceed the three-percent threshold. After determining its regular tax, the company compares that amount to the base erosion anti-abuse tax and pays the larger sum. The calculation prevents full deduction of the affiliate payments from reducing U.S. tax below the minimum rate.
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The tax applies only to U.S. corporations with average annual gross receipts of at least five hundred million dollars for the three preceding taxable years that also make outbound payments to foreign affiliates exceeding three percent of total deductions.
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An applicable corporation calculates tentative minimum tax under the corporate AMT and then adds any base erosion anti-abuse tax liability when determining whether additional tax is due. Any corporate AMT paid creates a carryforward credit that can offset future regular tax plus BEAT liability.
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The tax counters earnings-stripping techniques in which U.S. subsidiaries make deductible payments such as interest or royalties to foreign parents, thereby reducing the U.S. taxable base while the foreign recipient often faces little or no U.S. withholding tax under treaties.
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