The Internal Revenue Service released
The BEAT regime focuses on large U.S. corporations that make deductible payments to related foreign parties as a strategy for tax avoidance. As the regulations were being finalized, corporate tax professionals asked for more guidance and leeway in areas such as gross receipts, the base erosion percentage, aggregate groups and rules relating to short taxable years.
The final regulations offer more detailed guidance about how to figure some BEAT calculations for groups of related taxpayers. The final regs also include rules allowing taxpayers to waive deductions for purposes of the BEAT, and extra guidance on partnerships and anti-abuse rules.
“Due to concerns that the anti-abuse rule can create a ‘cliff effect’ whereby a minimal amount of pre-transaction basis step-up could disqualify an entire transaction that would have otherwise qualified for the specified non-recognition transaction exception, the final regulations now provide that when the anti-abuse rule applies, its effect is to turn off the application of the specified non-recognition transaction exception only to the extent of the basis step-up amount,” said Fernando Lopez, director of international tax for Prager Metis CPAs. “In addition, the final regulations clarify that a transaction, plan or arrangement with a principal purpose of increasing the adjusted basis of property must also have a connection to the acquisition of the property by the taxpayer in a specified non-recognition transaction. This change was made out of concern that some taxpayers interpreted the prior version of the rule to potentially apply to certain basis step-up transactions (for example, a qualified stock purchase for which an election is made under section 338(g)), even if that basis step-up transaction had no factual connection with a later specified non-recognition transaction.”
The final BEAT regulations are generally taxpayer favorable and allow taxpayers to elect a BEAT waiver provision, according to Adnan Islam, partner and co-practice leader at Friedman LLP’s international tax group in Los Angeles. “Consistent with prior proposed regulations, taxpayers may not decrease the amount of deductions waived by filing an amended income tax return, because if granted, it would not address the cliff effect of applicable taxpayer status.”
For short taxable years, he noted, the government was concerned that when a member doesn’t have a taxable year that ends with or within a short taxable year of a taxpayer, some taxpayers may take the view that excluding the gross receipts, base erosion tax benefits and deductions of the member from the taxpayer’s aggregate group is a reasonable approach. “These exclusions are not a reasonable approach for the government per the final regulations and there are regulatory examples of methods that may or may not constitute a reasonable approach,” he added.
Harold Adrion, an advisor to EisnerAmper’s international tax group, noted that the final regs allow for a taxpayer to elect for a BEAT waiver provision. “By providing the mechanism for the waiver, the regs address uncertainty about whether taxpayers simply could not claim a deduction on a tax return to avoid the BEAT,” he added. “Regarding extra guidance on partnerships and anti-abuse rules, the IRS has appeared to back off statements in the proposed regulations that anti-abuse regulations would be drafted.”
The Treasury and the IRS rejected some of the suggestions they received in response to the proposed regulations. “The final regs rejected a comment that advised the IRS and Treasury to include a waived deduction in the denominator of the base erosion percentage, thereby saying that a waived deduction is not allowable when determining taxable income,” said Henric Adey, a director and transfer pricing practice national leader at EisnerAmper.
