Silicon Valley Tax Execs Criticize Proposed BEAT Regs

February 19, 2019

CC:PA:LPD:PR (REG–104259–18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Comments on proposed § 59A BEAT regulations in REG–104259–18

Dear Sirs or Madams,

The Silicon Valley Tax Directors Group (“SVTDG”) hereby submits these comments on the above-referenced proposed regulations issued under § 59A of the Internal Revenue Code of 1986, as amended, in REG–104259–18, 83 Fed. Reg. 65956 (December 21, 2018) (the “Proposed Regs”). SVTDG members are listed in the Appendix to this letter.

Sincerely,

Robert F. Johnson
Co-Chair, Silicon Valley Tax Directors Group
Capitola, CA

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I. INTRODUCTION AND SUMMARY

A. Background on the Silicon Valley Tax Directors Group

The SVTDG represents U.S. high technology companies with a significant presence in Silicon Valley, that are dependent on R&D and worldwide sales to remain competitive. The SVTDG promotes sound, long-term tax policies that allow the U.S. high tech technology industry to continue to be innovative and successful in the global marketplace.

B. Summary of recommendations — changes that should be made to the Proposed Regs

We recommend that Treasury and the IRS make certain specific changes to, and reconsider certain aspects, of the Proposed Regs. Here we summarize our main recommendations.

[A] The exception in Prop. § 1.59A-3(b)(3)(i) for certain amounts paid or accrued under the services cost method in § 1.482-9(b) appropriately tracks § 59A(d)(5), but we recommend the regulatory SCM carve-out be expanded

The carve-out from base erosion payments in § 59A(d)(1) is accurately captured in Prop. §1.59A-3(b)(3)(i), which provides an exception from characterization as “base erosion payments” for certain amounts paid or accrued by a taxpayer to a foreign related party that meet the requirements of a “modified” services cost method under § 1.482-9(b), but only to the extent of the total services costs of the pertinent services — i.e., any mark-up component in excess of the total services cost of services eligible for the SCM remains a base erosion payment. We commend Treasury and the IRS for the thoughtful reading of § 59A(d)(5) underlying their rationale for the proposed subparagraph. We recommend, however, that Treasury and the IRS expand the regulatory SCM carve-out to allow “excluded activities” listed in § 1.482-9(b)(4) to potentially qualify, provided they meet the requirements of “covered services” in § 1.482-9(b)(3).

[B] The rule in Prop. § 1.59A-3(b)(4)(v) deeming base erosion payments in the context of a U.S. PE exceeds the authority of Treasury and the IRS

Clause 1.59A-3(b)(4)(v)(B) provides that if, under an income tax treaty, a foreign corporation determines profits attributable to a U.S. PE based on assets used, risks assumed, and functions performed by such PE, then “any deduction attributable to any amount paid or accrued (or treated as paid or accrued)” by the PE either to the foreign corporation home office or to another branch of the foreign corporation — a so-called “internal dealing” — is a base erosion payment to the extent it meets the general requirements for a base erosion payment. We believe the rule in Prop. § 1.59A-3(b)(4)(v) exceeds the authority of Treasury and the IRS under § 59A, because it's contrary to § 59A(d)(1). We accordingly recommend it be withdrawn.

[C] The treatment of non-recognition transactions in Prop. § 1.59A-3(b)(2)(i) doesn't harmonize with the policy objectives of the BEAT regime

Prop. § 1.59A-3(b)(2)(i) provides that payment of non-cash consideration may be a base erosion payment even if the payment was incurred or accrued in connection with a nonrecognition transaction under §§ 351, 332, or 368. This rule doesn't reconcile with an important policy goal of Public Law 115-97 (the “TCJA”) — namely, to incentivize the on-shoring of high-value, income-producing assets. By penalizing non-recognition transactions that result in the importation of valuable, income producing property, the Proposed Regs discourage transactions that have significant potential to increase the U.S. tax base. In that sense, Prop. §1.59A-3(b)(2)(i) undermines a fundamental objective of the TCJA. This rule will also impose substantial costs on post-acquisition integration of foreign targets by U.S. companies, which will tend to quell the market for such acquisitions (perversely, not what Congress intended in enacting § 59A). In addition, we question whether Treasury has authority — absent a clear direction from Congress — to issue a regulation that in effective overrides the statutorily-prescribed non-recognition treatment of transaction under §§ 351, 332, and 368.

[D] Prop. §§ 1.59A-2(d)(2) and 1.59A-2(e)(3)(vii) (relating to the computation of gross receipts and base erosion percentages in aggregate groups whose members have different year ends) should be simplified

For large aggregate groups whose members have several different taxable year ends, the methodology adopted in the Proposed Regs is unduly burdensome and unnecessarily complex. Not only does it require separate gross receipts and base erosion percentage computations for each member of the aggregate group, it requires each member to prepare separate entity financial results on the basis of several different taxable year ends. To minimize administrative burden and simplify record-keeping requirements, we recommend that Treasury and the IRS abandon this approach in favor of a rule that allows for the computation of gross receipts and base erosion percentages based on pre-existing financial information. For example, the rule could make use of gross receipts and base erosion percentages for the taxable years of each foreign group member ending with or within the taxable year for the relevant U.S. return. This is akin to the rule in former Prop. § 1.163(j)-5(c)(1)(i), which allowed taxpayers to aggregate relevant items of each member whose tax year ended with or within the tax year of the member making the computations.

[E] The ECI exception should be extended to cover payments subject to current taxation under subpart F or GILTI

The ECI exception of Prop. § 1.59A-3(b)(3)(iii) is appropriate and entirely consistent with the objectives of the BEAT regime (i.e., to disincentivize outbound intercompany payments that erode the U.S. tax base). This exception should be extended to cover payments leading to tax under subpart F or GILTI. Much like outbound payments that constitute ECI in the hands of the recipient, payments giving rise to U.S. shareholder gross income inclusions under the subpart F or GILTI regimes aren't eroding the U.S. tax base, and therefore should fall outside the scope of BEAT.

[F] Treasury should harmonize the treatment § 988 gains and losses

If foreign currency gains are treated as income for purposes of the Prop. § 1.59A-2(d) gross receipts test, then § 988 losses should be considered a deduction for purposes of computing the denominator of the base erosion percentage. Otherwise, taxpayers are in effective penalized for foreign currency gains (because the gain increases gross receipts) and for currency losses (because the exclusion from the numerator increases the base erosion percentage). This result seems particularly untenable where the § 988 gain or loss at issue isn't even associated with a related party transaction.

[G] AMT refunds shouldn't be subtracted from the taxpayer's “regular tax liability” when computing the base erosion minimum tax amount

When computing a taxpayer's base erosion minimum tax amount, credits are generally subtracted from the taxpayer's “regular tax liability,” which in turn increases the BEAT payment due. To prevent “an inappropriate understatement of a taxpayer's adjusted regular tax liability,” the Proposed Regs indicate that credits for overpayment of taxes and for taxes withheld at source are not subtracted from the taxpayer's regular tax liability. In our view, a similar rule should apply to AMT refunds. We recommend Treasury and the IRS consider modifying Prop. §1.59A-5(b)(3) to explicitly identify an AMT refund as an amount that doesn't reduce “regular tax liability.”

[H] Treasury and the IRS should revise Prop. § 1.59A-5(b)(1) so that rate-change effective dates are consistent with the plain language of the statute

Because § 59A(b)(1) references taxable years beginning in 2018 — as opposed to taxable years “beginning after,” “ending after,” or “beginning on or after” 2018 — § 15(c) doesn't apply to the 5 percent to 10 percent rate change. The effective rate is 5 percent for taxable years beginning in 2018 and 10 percent thereafter—no blending of rates is required. The rate change from 10 percent to 12½ percent, under § 59A(b)(2)(A) (in the case of any taxable year beginning after December 31, 2025) does, however, fall within the scope of § 15(c). Statutorily-prescribed effective dates aren't subject to regulatory revision. Therefore, we recommend that Treasury and the IRS modify Prop. § 1.59A-5(b)(1) to ensure that rate change effective dates are consistent with the plain language of the statute.

II. SVTDG CONCERNS WITH, AND RECOMMENDATIONS FOR CHANGES TO, THE PROPOSED REGS

A. The exception in Prop. § 1.59A-3(b)(3)(i) for certain amounts paid or accrued under the services cost method in § 1.482-9(b) appropriately tracks § 59A(d)(5), but we recommend the regulatory SCM carve-out be expanded

Paragraph 59A(d)(5) provides —

(5) EXCEPTION FOR CERTAIN AMOUNTS WITH RESPECT TO SERVICES. — Paragraph (1) shall not apply to any amount paid or accrued by a taxpayer for services if —

(A) such services are services which meet the requirements for eligibility for use of the services cost method under section 482 (determined without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure), and

(B) such amount constitutes the total services cost with no markup component.

The carve-out from base erosion payments in § 59A(d)(1) is, we think, in part accurately captured in Prop. § 1.59A-3(b)(3)(i). This proposed subparagraph provides an exception from characterization as “base erosion payments” for certain amounts paid or accrued by a taxpayer to a foreign related party that meet the requirements of Prop. § 1.59A-3(b)(3)(i)(B), but only to the extent of the total services costs of the pertinent services — i.e., any mark-up component in excess of the total services cost of services eligible for the SCM remains a base erosion payment.

The Preamble to the Proposed Regs explains why Treasury and the IRS chose the approach reflected in Prop. § 1.59A-3(b)(3)(i), rather than an all-or-nothing approach preventing any part of a payment from qualifying for the carve-out if the payment includes any markup component:

The Treasury Department and the IRS have determined that this interpretation is more consistent with the text of [§ 59A(d)(5)]. Rather than require an all-or-nothing approach to service payments, section 59A(d)(5) provides an exception for “any amount” that meets the specified test. This language suggests that a service payment may be disaggregated into its component amounts, just as the general definition of base erosion payment applies to the deductible amount of a foreign related party payment even if the entire payment is not deductible. See [§ 59A(d)(1)]. The most logical interpretation is that a payment for a service that satisfies subparagraph (A) is excepted up to the qualifying amount under subparagraph (B), but amounts that do not qualify (i.e., the markup component) are not excepted. This interpretation is reinforced by the fact that [§ 59A(d)(5)(A)] makes the SCM exception available to taxpayers that cannot apply the services cost method described in § 1.482-9(b) (which permits pricing a services transaction at cost for section 482 purposes) because the taxpayer cannot satisfy the business judgment rule in § 1.482-9(b)(5). Because a taxpayer in that situation cannot ordinarily charge cost, without a mark-up, for transfer pricing purposes, failing to adopt this approach would render the parenthetical reference in [§ 59A(d)(5)(A)] a nullity. The interpretation the proposed regulations adopt gives effect to the reference to the business judgment rule in [§ 59A(d)(5)].¹

We generally agree with the outlined rationale, and commend Treasury and the IRS for their thoughtful reading of § 59A(d)(5).

We ask, however, that Treasury and the IRS consider broadening the regulatory SCM carve-out from base erosion payments so it more fully accords with the purpose of § 59A. Paragraph 59A(d)(5) excludes from base erosion payments any amounts paid for services eligible for the SCM under § 1.482-9(b) “determined without regard to” the business judgment rule in § 1.482-9(b)(5). The “excluded activities” listed in § 1.482-9(b)(4) — ineligible to be priced under the SCM — were excluded because they tend to involve high-margin transactions for which total services costs constitute an inappropriate reference point for determining profitability.² Such activities can, we believe, also be viewed as activities of a nature generally fundamental to a business — i.e., there's significant overlap between activities excluded under §§ 1.482-9(b)(5) (business judgment rule) and -9(b)(4) (excluded activities). We accordingly recommend Treasury and the IRS expand the regulatory SCM carve-out to allow “excluded activities” listed in § 1.482-9(b)(4) to potentially qualify, provided they meet the requirements of “covered services” in § 1.482-9(b)(3). Paragraph 1.482-9(b)(3) acts as a gatekeeper, weeding out both high-margin transactions and transactions for which total services costs don't constitute a first-order approximation for determining profitability. Under the SCM carve-out from base erosion payments, any mark-up component in any case remains a base erosion payment.³

Payments for R&D services (an “excluded activity” under § 1.482-9(b)(4)(vi)) broaden the U.S. tax base through U.S. ownership and exploitation of newly created intangible property. Rights in such intangibles spring upon creation to the U.S. principal — there's no exchange involving such rights. If Treasury and the IRS choose not to expand the regulatory SCM carve-out to allow the full list of excluded activities in § 1.482-9(b)(4) to qualify, we recommend they nonetheless carve-out research, development, or experimentation services under § 1.482-9(b)(4)(vi).

B. The rule in Prop. § 1.59A-3(b)(4)(v) deeming base erosion payments in the context of a U.S. PE exceeds the authority of Treasury and the IRS

Clause 1.59A-3(b)(4)(v)(B) provides that if, under an income tax treaty, a foreign corporation determined profits attributable to a U.S. PE based on assets used, risks assumed, and functions performed by such PE, then “any deduction attributable to any amount paid or accrued (or treated as paid or accrued)” by the PE either to the foreign corporation home office or to another branch of the foreign corporation — a so-called “internal dealing” — is a base erosion payment to the extent it meets the general requirements for a base erosion payment in Prop. § 1.59A-3(b)(1). Clause 1.59A-3(b)(4)(v)(A) has a parallel but more complex rule applicable in certain situations if a foreign corporation elects to determine its taxable income using “business profits” provisions of an income tax treaty for determining ECI.

We believe the rule in Prop. § 1.59A-3(b)(4)(v) exceeds the authority of Treasury and the IRS under § 59A.

Paragraph 59A(d)(1) defines a base erosion payment generally as any amount “paid or accrued” by the taxpayer to “a foreign person [that] is a related party of the taxpayer,” if a deduction is allowable with respect to such amount. An “internal dealing” doesn't involve an actual payment — it's a construct whose existence is inferred solely for determining an arm's length attribution of profit to a PE.⁴ Clause 1.59A-3(b)(4)(v)(A) refers to “any amount paid or accrued (or treated as paid or accrued) by the [PE] . . .” (emphasis added) but a base erosion payment only arises under § 59A(d)(1) if any amount is actually “paid or accrued.” In creating the TCJA, Congress wrote tax statutes using the parenthetical “(or treated as paid or accrued)” if it intended that deemed amounts paid or accrued also — i.e., in addition to actual amounts paid or accrued — be included in a provision.⁵ But Congress didn't use that language in § 59A(d)(1), and this means Congress didn't intend deemed amounts paid or accrued to give rise to base erosion payments.⁶

Paragraph 59A(d)(1) also requires a base erosion payment be made to a foreign person that's a related party to the taxpayer. The requirement that the recipient of a base erosion payment be an actual related foreign person isn't met by a payment arising from an internal dealing because such payment is, of course, purely internal — within the same entity: the foreign corporation with a sufficiently extant U.S. taxable presence.

Because the rule in Prop. § 1.59A-3(b)(4)(v) is contrary to § 59A(d)(1), we recommend it should be withdrawn.

C. The treatment of non-recognition transactions in Prop. § 1.59A-3(b)(2)(i) doesn't harmonize with the policy objectives of the BEAT regime.

The term “base erosion payment” is defined in § 59A(d)(1) as, “any amount paid or accrued by the taxpayer to a foreign person [that] is a related party of the taxpayer and with respect to which a deduction is allowable. . . .” Amounts paid or accrued by a taxpayer in connection with the acquisition of depreciable or amortizable property from a related foreign person constitute base erosion payments,⁷ because the acquired property could give rise to depreciation or amortization deductions in the U.S.

The Proposed Regs indicate that a payment or accrual may be a base erosion payment regardless of whether it was made in cash, stock, or property or via assumption of liability (the “Non-Cash Consideration Rule”). In addition, Prop. § 1.59A-3(b)(2)(i) provides that the payment of such non-cash consideration may be a base erosion payment even if the payment was incurred or accrued in connection with a nonrecognition transaction under §§ 351, 332, or 368 (the “Non-Recognition Transaction Rule”).⁸ As the Preamble explains, the Non-Recognition Transaction Rule applies even if the transferor of the assets doesn't recognize gain or loss, the acquiring domestic corporation takes a carryover basis in the transferred assets, and/or the transfer of the assets into the U.S. actually increases the U.S. income tax base.⁹

In contrast to the treatment of property issued in connection with §§ 351, 332, and 368 transactions, the Preamble indicates that depreciable or amortizable property distributed to a U.S. corporation by a foreign subsidiary in a § 301 distribution won't be viewed as giving rise to base erosion tax benefits.¹⁰ The Preamble distinguishes § 301 distributions because “there is no consideration provided by the taxpayer to the foreign related party in exchange for the property.”¹¹ We believe this distinction is arbitrary and produces a number of results difficult to reconcile. For instance, if a § 301 distribution doesn't give rise to base erosion tax benefits because the U.S. corporation provided no consideration, what is the result when no additional shares are issued to a sole shareholder in connection with a contribution of property under § 351? If a deemed exchange of shares (under the “meaningless gesture doctrine” and Rev. Rul. 64-155, 1964-1 C.B. 138) constitutes a payment in the context of § 351, why isn't a deemed § 311(b)(1) exchange viewed as generating a payment in the context of a § 301 distribution of appreciated property? And what about deemed transactions that occur as a result of inbound check-the-box elections; transactions in connection with which no consideration is actually paid and income producing assets are brought in to the U.S. tax net?

It's difficult to reconcile Prop. § 1.59A-3(b)(2)(i) with the overarching policy goals of the TCJA, one of which was to encourage the on-shoring of high-value, income-producing assets.¹² By penalizing inbound transfers of valuable, income producing property, the Non-Recognition Transaction Rule discourages internal restructuring transactions that have significant potential to increase the U.S. tax base. In that sense, Prop. § 1.59A-3(b)(2)(i) undermines a fundamental objective of the TCJA. In addition, a goal of enacting § 59A was curbing tax-driven incentives for foreign takeovers of U.S. firms, by countering tax provisions making foreign ownership of assets or businesses preferable to U.S. ownership.¹³ The rule in Prop. § 1.59A-3(b)(2)(i) will have the perverse effect of chilling the market for U.S. takeovers of foreign firms by imposing substantial tax costs on post-acquisition integration of foreign acquisitions by U.S. companies.

We also question whether Treasury has authority to issue a regulation that in effective overrides the statutorily prescribed non-recognition treatment of §§ 351, 332, and 368 transactions without an express indication from Congress that it may do so. If Congress intended to override these longstanding and fundamental nonrecognition provisions, it would have so indicated.¹⁴

We recommend Treasury and the IRS reconsider the Non-Recognition Transaction Rule of Prop. § 1.59A-3(b)(2)(i) in light of (1) the overarching policy objectives of the TCJA, and (2) the scope of their authority under § 59A(i). We encourage Treasury and the IRS to develop a more narrowly tailored rule that would only apply to transactions in which depreciable and amortizable assets are imported but aren't expected to increase the U.S. tax base (as opposed to the current rule which will have a dampening effect on desirable transactions that further the policy objectives of the Act). This might be achieved through an anti-avoidance rule targeting abusive transactions, rather than a broad rule that sweeps in non-abusive transactions with sound business purpose that have a net positive impact on the U.S. tax base.

In explaining the rule in Prop. § 1.59A-3(b)(2)(i), the preamble states that “[t]here may be situations where a taxpayer incurs a non-cash payment or accrual to a foreign related party in a transaction that meets one of the definitions of a base erosion payment, and that transaction may also qualify under certain nonrecognition provisions of the Code.”¹⁵ If Treasury and the IRS maintain the rule, we ask that they clarify that any relevant “transaction” must occur on or after the effective date of § 59A. That is, because § 59A applies to base erosion payments paid or accrued in taxable years beginning after December 31, 2017,¹⁶ we ask for clarification that the rule only apply to transactions undertaken in taxable years beginning after 12-31-2017.

D. Prop. §§ 1.59A-2(d)(2) and 1.59A-2(e)(3)(vii) (relating to the computation of gross receipts and base erosion percentages in aggregate groups whose members have different year ends) should be simplified.

Under Prop. § 1.59A-2(c), a taxpayer that is a member of an aggregate group must determine its gross receipts and base erosion percentage on the basis of aggregate group data. Because each taxpayer within the group must determine these amounts on the basis of its own year end,¹⁷ many computations could be required for any given aggregate group and members with different taxable years will likely end up with different base erosion percentages.

The Preamble indicates that the Proposed Regs, “provide certainty for taxpayers and avoid the complexity of a rule that identifies a single taxable year for an aggregate group for purposes of section 59A that may differ from a particular member of the aggregate group's taxable year.”¹⁸ Although the approach arguably provides certainty, it's at the expense of administrative feasibility. For large aggregate groups comprising members with several different taxable year ends, the approach adopted in the Proposed Regs is unduly burdensome and unnecessarily complex. Not only does it require separate gross receipts and base erosion percentage computations for each member of the aggregate group, it requires each member to prepare separate entity financial results on the basis of the taxable year end of every taxpayer in the aggregate group. Most taxpayers don't formally close their books on a monthly basis, so this requirement imposes a significant record-keeping burden.

We recommend Treasury and the IRS consider alternatives to the cumbersome computational methodology in the Proposed Regs. One alternative would be to adopt the approach of the proposed regulations under former § 163(j). In connection with the computation of certain income, expense, and carryover items of an “affiliated group,” former Prop. § 1.163(j)-5(c)(1)(i) allowed taxpayers to aggregate relevant items of each member whose tax year ended with or within the tax year of the member making the computations. Unlike the Proposed Regs — which require taxpayers to recompute financial statements on the basis of multiple year-ends — former Prop. § 1.163(j)-5(c)(1)(i) allowed taxpayers to use pre-existing financial information to make their computations.

To minimize administrative burden and simplify record-keeping requirements, we recommend that Treasury and the IRS abandon their approach in favor of a rule that allows for the computation gross receipts and base erosion percentages based on pre-existing financial information.

E. The ECI exception should be extended to cover payments subject to current taxation under subpart F or GILTI.

The Committee on Ways and Means explained that § 59A was enacted to “address the mismatch created by the reduction to U.S. taxable income via outbound, related-party payments and the recognition of foreign income that is attributable to those payments and never subject to U.S. tax.”¹⁹ Under § 59A(d))1, an amount paid or accrued by a taxpayer will generally be treated as a base erosion payment if: (1) the recipient is a foreign person related to the taxpayer, and (2) a deduction is allowable with respect to the amount paid or accrued. The Proposed Regs contain a helpful exception for payments/accruals that are subject to U.S. tax on a net basis in the hands of the recipient (i.e., as income that is effectively connected with a U.S. trade or business, or “ECI”).²⁰ This exception also applies to payments taken into account in determining net taxable income under an applicable U.S. income tax treaty.

We agree that the ECI exception is appropriate and entirely consistent with BEAT as a mechanism to address intercompany payments that escape U.S. taxation. If an outbound related party payment is subject to tax in the U.S. as ECI of the foreign recipient, there's no reduction of the U.S. tax base, and therefore no need to factor that payment in to the taxpayer's base erosion percentage.

A sensible extension of this exception would be to exempt payments to foreign related parties insofar as those payments are subject to current U.S. tax under the GILTI and/or subpart F regimes. To the extent such payments are subject to tax under subpart F or GILTI, they aren't eroding the U.S. tax base. The payment isn't escaping U.S. taxation and therefore isn't eroding the U.S. tax base. Failure to extend the exception could result in double taxation of these amounts. To avoid this inappropriate result, we recommend that Treasury and the IRS broaden the scope of the ECI exception to cover payments subject to U.S. tax under GILTI or subpart F.

F. Treasury should harmonize the treatment of § 988 gains and losses.

Under the Proposed Regs, exchange losses from § 988 transactions aren't considered base erosion payments, regardless of whether those losses were incurred in connection with a foreign related party and/or base eroding transaction.²¹ As the Preamble indicates, § 988 exchange losses “do not present the same base erosion concerns as other types of losses that arise in connection with payments to a foreign related party.”²² As a result, deductions associated with § 988 losses are excluded from the numerator of the base erosion percentage (which tracks base erosion tax benefits). We support the approach adopted in the Proposed Regs and agree that §988 losses shouldn't be considered base erosion payments. These losses are caused by currency fluctuation and are outside of the taxpayer's control.

In contrast, we have concerns about the treatment of § 988 gains and losses in the calculation of (1) “gross receipts,” and (2) the denominator of the base erosion percentage. The Proposed Regs provide that § 988 losses are excluded from the denominator of the base erosion percentage (which tracks total deductions).²³ On the other hand, § 988 gains are considered gross receipts for purposes of Prop. § 1.59A-2(d). Neither the Proposed Regs nor the Preamble explain or justify the disparate treatment as between exchange gains and exchange losses.

If foreign currency gains are treated as income for purposes of Prop. § 1.59A-2(d) gross receipts test, then § 988 losses should be considered a deduction for purposes of computing the denominator of the base erosion percentage. Otherwise, taxpayers are in effective penalized for foreign currency gains (because the gain increases gross receipts) and for currency losses (because the exclusion from the numerator increases the base erosion percentage). This result seems particularly unjustifiable if the § 988 gain or loss at issue isn't associated with a related party transaction.

We believe Treasury should harmonize the treatment of § 988 gain or losses, or — at the very least — allow taxpayers to include § 988 losses resulting from unrelated party transactions in the denominator of their base erosion percentage.

G. AMT refunds shouldn't be subtracted from the taxpayer's “regular tax liability” when computing the base erosion minimum tax amount.

Prop. § 1.59A-5 provides guidance on computation of the base erosion minimum tax amount (“BEMTA”). BEMTA is the excess of:

• the applicable BEAT rate for the taxable year multiplied by the taxpayer's modified taxable income (“MTI”) for the taxable year, over

• the taxpayer's regular tax liability for that year, reduced by certain credits.

For purposes of calculating BEMTA, credits are generally subtracted from the taxpayer's regular tax liability amount (which has the effect of increasing BEAT liability). However, “[t]o prevent an inappropriate understatement of a taxpayer's adjusted regular tax liability, the proposed regulations provide that credits for overpayment of taxes and for taxes withheld at source aren't subtracted from the taxpayer's regular tax liability because these credits relate to federal income tax paid for the current or previous year.”²⁴

In our view, a similar rule should apply to Alternative Minimum Tax (“AMT”) refunds. Treasury and the IRS should consider modifying Prop. § 1.59A-5(b)(3) to explicitly identify an AMT refund as an amount that doesn't reduce “regular tax liability.”

H. Treasury and the IRS should revise Prop. § 1.59A-5(b)(1) so that rate change effective dates are consistent with the plain language of the statute.

Paragraph 59A(b)(1) is clear and unambiguous. The applicable BEAT rate is 10 percent (or 5 percent for taxable years beginning in calendar year 2018). The rate jumps to 12½ percent for taxable years beginning after December 31, 2025. Notwithstanding the clear language of the statute, the Proposed Regs introduce modifications that adversely affect fiscal year taxpayers.

Prop. § 1.59A-5(c)(3) provides in relevant part that “[f]or a taxpayer using a taxable year other than the calendar year, section 15 applies to any taxable year beginning after January 1, 2018.” Under § 15(a), taxpayers are required to use a blended tax rate, “[i]f any rate of tax imposed by this chapter changes, and if the taxable year includes the effective date of the change (unless that date is the first day of the taxable year).” Paragraph 15(c)(1) provides that if the rate change applies to taxable years “beginning after” or “ending after” a certain date, the following day is considered the effective date of the change, while § 15(c)(2) provides that if the rate change applies to taxable years “beginning on or after” a certain date, that certain date is considered the effective date of the change.

Because § 59A(b)(1) references taxable years beginning in 2018 — as opposed to taxable years “beginning after,” “ending after,” or “beginning on or after” 2018 — § 15(c) doesn't apply. Instead, the effective rate is 5 percent for taxable years beginning in 2018 and 10 percent thereafter — no blending of rates is required. In contrast, the change from 10 percent to 12½ percent “in the case of any taxable year beginning after December 31, 2025,” does fall within the scope of § 15(c)(1). As a result, January 1, 2026 is the effective date of the 12½ percent change, and in the case of a fiscal year taxpayer, a blended rate would apply.

Congress could have said that the 5 percent (or 10 percent) rate would apply in any taxable year beginning after December 31, 2017 (or 2018), but it didn't. Statutorily-prescribed effective dates aren't subject to regulatory revision.²⁵ Therefore, we recommend that Treasury and the IRS revise § 1.59A-5(b)(1) so that rate change effective dates are consistent with the plain language of the statute.

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Appendix — SVTDG Membership

Accenture

Activision Blizzard

Acxiom

Adobe

Agilent

Airbnb

Amazon

AMD

Ancestry.com

Apple

Applied Materials

Aptiv

Arista

Atlassian

Autodesk

Bio-Rad Laboratories

BMC Software

Broadcom Limited

CA Technologies

Cadence

CDK Global

Chegg, Inc.

Cisco Systems, Inc.

Dell Inc.

DocuSign

Dolby Laboratories, Inc.

Dropbox Inc.

eBay

Electronic Arts

Expedia, Inc.

Facebook

FireEye

Fitbit, Inc.

Flex

Fortinet

Genentech

Genesys

Genomic Health

Gilead Sciences, Inc.

GitHub

GLOBALFOUNDRIES

GlobalLogic

Google Inc.

GoPro

Grail, Inc.

Guidewire

Hewlett-Packard Enterprise

HP Inc.

Indeed.com

Informatica

Ingram Micro, Inc.

Integrated Device Technology

Intel

Intuit Inc.

Intuitive Surgical

Keysight Technologies

KLA-Tencor Corporation

Lam Research

Marvell

Maxim Integrated

MaxLinear

Mentor Graphics

Microsoft

NetApp, Inc.

Netflix

NVIDIA

Oath, A Verizon Company

Oracle Corporation

Palo Alto Networks

PayPal

Pivotal Software, Inc.

Pure Storage

Qualcomm

Red Hat Inc.

Ripple Labs, Inc.

Rubrik

salesforce.com

Sanmina-SCI Corporation

Seagate Technology

ServiceNow

Snap, Inc.

Stripe

SurveyMonkey

Symantec Corporation

Synopsys, Inc.

The Cooper Companies

The Walt Disney Company

TiVo Corporation

Trimble, Inc.

Twitter

Uber Technologies

Velodyne LiDAR

Veritas

Visa

VMware

Western Digital

Workday, Inc.

Xilinx, Inc.

Yelp