BEAT

BEAT applies to corporations (other than S corporations, regulated investment companies, and real estate investment trusts) with average annual gross receipts of at least $500 million over the prior three years and a base erosion percentage of at least 3 percent (2 percent for certain banking and securities dealers). The base erosion percentage measures the ratio of base erosion payments — deductible payments to related foreign parties — to total deductions.

The mechanics work as follows. A corporation calculates its regular US income tax liability. It then recalculates that liability after adding back its base erosion payments to the tax base. The BEAT liability is the excess of 10 percent (for most years) of the modified tax base over the regular tax liability, reduced by certain credits. The effect is a floor on the tax benefit a US corporation can obtain from deductible payments to foreign affiliates.

Base erosion payments include royalties paid to foreign parent companies for intellectual property licenses, service fees paid to foreign group members, reinsurance premiums, and interest payments on related-party debt. Payments for cost of goods sold are generally excluded, which limits BEAT's reach on manufacturing supply chains that buy inventory from foreign affiliates.

BEAT interacts with the GILTI regime and the foreign tax credit in complex ways. Because BEAT adds back the deductions before computing the alternative minimum tax base, companies with significant royalty streams routed through low-tax holding companies are often the most affected. Tax advisors to affected multinationals regularly model the BEAT impact when structuring intercompany arrangements, particularly intellectual property holding structures.