The base erosion and anti-abuse tax (BEAT) is a new, minimum corporate income tax created under the 2017 United States (US) federal tax reform law (the Act). While the BEAT is designed as an anti-abuse rule aimed at US tax base erosion through ‘excessive’ related-party payments to non-US entities, its operation may create challenges for many common business transactions and structures. Specifically, banks with global footprints that include the United States, especially non-US based banks, could find their business operations negatively affected by the BEAT because deductible payments made to non-US related parties — especially interest, but also potentially royalties and service payments — may be subject to the BEAT.
Even though the Act reduces the US corporate income tax rate to 21 percent, the lower BEAT rate nonetheless may increase the cost of doing business in the United States for these companies. For 2018, the base BEAT rate is 5%, then 10% for tax years beginning in 2019 through 2025, then raised to 12.5% for tax years beginning after December 31, 2025. However, for US taxpayers that are members of affiliated groups that include a US bank or a US registered broker-dealer, the BEAT rates are 1% higher for each period described above — therefore 6% in 2018, then 11% for tax years beginning in 2019 to 2025, then 13.5% after 2025. This Tax Insight will use these 1%-higher rates to describe the BEAT.
The BEAT’s application to global banks with US operations could result in a significant increase in the cost of doing business in the United States. All banks with US operations should review and operationalize their computation of the multiple new components of the BEAT.
In addition to BEPs for interest and services to foreign related parties, global banks will need to capture significant amounts of information not previously required for US tax computation. This includes breaking out business unit transactions to separate allowable deductions for third-party security and derivative transactions, even though these transactions may be economically offset by a gain on a related position, since it is the deduction that matters for the BEAT calculation. The reporting requirements for qualified derivative payments also will present IT and systems challenges that will need to be met by the industry during calendar 2018. There are potential planning opportunities to consider to alleviate the impact of the BEAT, or perhaps even eliminate it under the appropriate facts and circumstances.
Partner, PwC US