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A new Base Erosion Anti-abuse Tax (BEAT) regime has been enacted in the United States of America (US) as part of the recently enacted package of tax reform measures.
In this article, Sharon Burke explores the impact of the BEAT measures on Irish businesses with US operations.
The reduction of the US Federal corporate income tax (CIT) rate from 35% to 21% means that, for many groups with US operations, the headline rate of US CIT (when state corporate income taxes are also taken into account) is likely to be circa. 25% to 27%. This appears to offer the potential for a significant reduction in the effective rate of US tax as compared with the effective rate in prior periods. But this is not the full picture.
US tax reform measures enacted in December 2017 as part of the Tax Cuts and Jobs Act (TCJA) introduced a new alternative minimum tax known as BEAT. For tax years beginning after 2017, US taxpayers have to pay federal corporate income tax (CIT) in the higher amount of a tax liability calculated based on standard CIT rules, applying the new 21% rate, or a tax liability as calculated under the new BEAT regime. The tax liability calculated under the BEAT regime applies a lower rate of 10% from 2019 to 2025 (a 5% rate applies for 2018 tax periods) but it is based on a measure of taxable income which denies tax deductions for certain base eroding payments.
For US taxpayers who fall within the scope of BEAT, the BEAT liability can be higher than the liability calculated under the standard CIT rules at a rate of 21% if a high percentage of their deductible costs in arriving at the BEAT measure of profits comprises payments to non-US affiliates. Businesses likely to be affected include those who provide services with low margins to US customers and buy in services from non-US affiliates.
The BEAT provisions only apply to certain large taxpayers. A taxpayer will only be in scope where it is a member of a group which has average US gross receipts (measured on a global group basis) for the past three years in excess of US$500 million. The global group includes US companies and US branches who are under common control of greater than 50%.
In simple terms, base eroding payments are defined payments that are made by US taxpayers to non-US related parties who include persons with a 25% common ownership relationship. The defined payments are not deductible in computing the measure of BEAT taxable profits.
This is a common fact pattern for many Irish headquartered groups with subsidiaries operating in the US. Group members based in the US group often purchase goods and services and pay royalties and interest to non-US group members.
If a group exceeds the threshold test for US gross receipts and is potentially within the scope of BEAT, it does not apply in any year where the taxpayer pays a de minimis amount of base eroding payments. The de minimis threshold is 3% (a lower 2% ratio can apply to banks and broker-dealers). This is the ratio of defined base eroding payments expressed as a percentage of the total amount of tax deductible expenditures for the period (including tax depreciation expenses). This de minimis relief could well apply to groups which have a large tax deductible cost base in the US but a relatively small amount of base eroding payments are made to non-US affiliates.