Companies Seek BEAT Election on Aggregate Group Basis

February 15, 2019

Internal Revenue Service
Attn: CC:PA:LPD:PR (REG-104390-18)
Courier's Desk
1111 Constitution Avenue, N.W.
Washington, DC 20224

Mr. Steven T. Mnuchin
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Mr. David J. Kautter
Assistant Secretary for Tax Policy
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Mr. L.G. “Chip” Harter
Deputy Assistant Secretary
(International Tax)
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Mr. William M. Paul
Acting Chief Counsel and Deputy Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Dear Sir or Madam:

We appreciate the opportunity to comment and respectfully submit this letter on behalf of Zurich American Insurance Company, CRH Americas, Inc., American Air Liquide, Inc., and Robert Bosch North America Corporation.

Effective January 1, 2018, the Tax Cuts and Jobs Act of 2017 established the Base Erosion and Anti-Abuse Tax (“BEAT”) in section 59A¹ of the Code. A key purpose of the BEAT is to impose a minimum tax on related groups of US corporations (and US branches of foreign corporations) that take a disproportionately high amount of US tax deductions on payments to a foreign related party in relation to the overall economic features of the group.

On December 21, 2018, the US Department of the Treasury (the “Treasury”) issued proposed regulations under section 59A.² The preamble that accompanies the proposed regulations (the “Preamble”) provides that “the computation of modified taxable income and the computation of the base erosion minimum tax amount . . . are made on a taxpayer-by-taxpayer basis” and that “the aggregate group concept is used solely for determining whether a taxpayer is an applicable taxpayer and the base erosion percentage of any NOL deduction.”³

The language in the Preamble includes several policy concerns for restricting the application of the aggregation rules under section 59A(e). One stated concern is that “taxpayers could calculate the [base erosion minimum tax amount] differently depending on their differing views of the base on which the BEAT should be calculated (i.e., aggregate group, consolidated group, individual company), leading to inequitable results across otherwise similar taxpayers.”⁴ Additionally, the Preamble articulates that the separate taxpayer approach is “expected to be less costly for taxpayers to calculate [the base erosion minimum tax amount] . . .”⁵ Because the statutory framework of section 59A applies in addition to the regular tax liability of a taxpayer, the Preamble argues that calculation of BEAT liability at an aggregate group level “would require taxpayers to first aggregate regular taxable liabilities of the different taxpayers, calculate [the base erosion minimum tax amount] on an aggregated basis, and then reallocate any BEAT liability among the separate taxpayers.”⁶ In contrast, the Preamble notes, computation of the tax on a separate taxpayer basis “simplifies these calculations.”⁷

This letter is intended to respond to each of these concerns and to articulate why, for the reasons described in greater detail below, the aggregate group approach produces equitable results and leads to a reasoned interpretation that is consistent with the Congressional intent stated in the legislative history.

This letter requests that Treasury exercise its authority under sections 59A(i) and 7805 to promulgate final regulations under section 59A that would permit taxpayers to join in an election to have section 59A be applied on an aggregate group basis. More specifically, we respectfully request that Treasury revisit the opportunity to permit taxpayers that are members of an aggregate group to join in an election to have the BEAT liability determined on an aggregate group basis. Such an election could require that several conditions be met. For example, the election could be conditioned on all members of the aggregate group having the same taxable year-end in order to join the election. It could also require each joining member (e.g., the parent of a consolidated group or a separate taxpayer within the aggregate group) to consent to such an election; require each member to agree to furnish all information necessary to compute the aggregate BEAT liability; and require each member to extend the statute of limitations, with respect to each member's BEAT liability, until all audits affecting the determination of the aggregate group's BEAT liability have closed.

Such an approach could be easily and simply implemented to both compute the aggregate BEAT liability and to provide proper documentation upon audit. Further, the aggregate group approach is supported by a reasonable interpretation of the statute and would promote equitable treatment among taxpayers by avoiding certain inequitable results produced by the separate taxpayer approach.

I. The aggregate group approach is supported by a reasonable interpretation of the statute.

Section 59A(a) imposes on each applicable taxpayer a tax equal to the base erosion minimum tax amount (the “BEMTA”) for the taxable year. For purposes of determining the applicability of the BEAT, section 59A(e)(1) provides generally that the term “applicable taxpayer” includes a corporation (other than a regulated investment company, a real estate investment trust or an S-corporation), with (1) $500,000,000 or more in average annual gross receipts over the prior 3 taxable years (“average annual gross receipt”), and (2) with a base erosion percentage (as determined under section 59A(c)(4)) of 3% or higher (or 2% for an affiliated group which includes a bank or registered securities dealer, as described in section 59A(b)(3)(B)) (“BEP”).

The aggregation rules of section 59A(e)(3) provide generally that all persons treated as a single employer under section 52(a) are treated as one person, except that in applying section 1563 for purposes of section 52, the exception for foreign corporations under section 1563(b)(2)(C) is disregarded.

Section 59A(e)(3) further provides that the aggregation rules apply for purposes of determining the BEP (determined under section 59A(c)(4)). The “base erosion percentage” is generally defined to mean the aggregate amount of the taxpayer's base erosion tax benefits for the taxable year divided by the sum of the aggregate amount of certain deductions allowable to the taxpayer for that year.

As suggested in the Preamble, the language of the statute may be read to support a broad reading that would construe the “applicable taxpayer” definition (determined by applying the aggregation rules) to apply for purposes of computing the BEMTA under section 59A(b) (including the computation of modified taxable income (“MTI”) under section 59A(c)).

For example, page 530 of the Joint Explanatory Statement of the Committee of Conference (“Joint Explanatory Statement”) expresses the legislative intent behind the aggregation rules as follows:

All persons treated as a single employer under section 52(a) are treated as one person for purposes of this provision, except that in applying section 1563 for purposes of section 52, the exception for foreign corporations under section 1563(b)(2)(C) is disregarded (called the “aggregation rules”). (Emphasis added.)

Additionally, with regard to the section 59A(c)(1) reference to the “taxpayer” rather than to the “applicable taxpayer,” the legislative history suggests that the use of this wording in the statute does not intend to “turn off” the aggregation rules for purposes of applying section 59A(c). In particular, the full import of Congress' intent is made clear on page 528 of the Joint Explanatory Statement, which provides:

To determine its modified taxable income, the applicable taxpayer computes its taxable income for the year without regard to any base erosion tax benefit of a base erosion payment or base erosion percentage of any allowable net operating loss deduction. (Emphasis added.)

The language of the statute may also support an aggregate group approach because the flush language under section 59(e) states that the definition of “applicable taxpayer” applies for all purposes of section 59A, and the aggregation rule itself is an embedded part of the “applicable taxpayer” definition stating that it applies for purposes of section 59A(e)(1) and (c)(4). Determining the BEAT liability on an aggregate group basis would effectively and efficiently implement the statutory provision.

II. An election to apply the BEAT on an aggregate group basis would promote equitable treatment amongst taxpayers.

The Preamble states that taxpayers could calculate the BEMTA differently depending on their differing views of the base upon which the BEAT should be calculated, which may “[lead] to inequitable results across otherwise similar taxpayers.”⁸ Inequitable results across otherwise similar taxpayers are common in many tax provisions, including the BEAT, whether or not the computation of the BEAT liability is permitted to be determined on an aggregate group basis or on a separate taxpayer basis. Certain portions of the BEAT computations may lead to different results between otherwise similar taxpayers due to legal or factual differences or different positions taken by such taxpayers. Further, when computing the BEAT on a separate taxpayer basis, consolidated groups are permitted to offset income and deduction items between members of the group, which may provide a different result than could be achieved by a standalone taxpayer under the rules already included in the proposed regulations.

The BEP and annual gross receipts test are computed by applying the aggregation rule that looks at the aggregate group as one economic unit. Another inequity may arise by not allowing the computation of the BEAT liability on an aggregate basis. For example, in many cases a single consolidated group or separate-filing taxpayer within the aggregate group will have a disproportionately large amount of NOLs while other taxpayers in the aggregate group have little or no NOL utilization. The BEP computed on an aggregate basis is used not only to determine whether the aggregate group is an applicable taxpayer but also when computing MTI and adding-back the BEP of the NOLs. A separate-filing taxpayer within the aggregate group with the large NOL deduction may have little to no base erosion payments, but would still have to compute its MTI by adding back its NOLs multiplied by the BEP of the aggregate group. While a separate taxpayer approach would result in a much higher overall BEAT liability based on the NOL usage of the single taxpayer, an aggregate approach would more clearly reflect the economics of the group as a whole, recognizes that some businesses will naturally have higher losses than others, and should not produce extreme results.⁹

It should be noted that a self-help solution of including all US corporations and branches under a single consolidated group is not available to all. At times, a common parent (whether US or foreign) must have separate US consolidated groups, corporations or branches due to business, regulatory, corporate-organizational and other aspects (such as management, profits and losses or considerations). In other cases, tax rules prevent a consolidation. For example, branches may not join in a consolidation and life insurance and non-life insurance companies may be prevented from joining in a consolidated return in certain circumstances. These restrictions make physical integration impossible and do not allow similarly situated taxpayers to be treated the same. Further, the aggregate group approach more accurately reflects the economics of the group by treating it as a single economic unit and provides a more equitable result. Regardless of whether the entities are formally treated as an aggregate, they represent a single economic unit where they have a common parent, overall common management, share services and are generally treated as a single employer.

III. The aggregate group approach can be implemented with administrative ease for both taxpayers and the government

The use of an election rather than a mandatory requirement to apply the BEAT on an aggregate group basis would achieve an equitable result without burdening taxpayers that would otherwise prefer not to use the aggregate group approach.

The information needed to compute the BEAT liability on an aggregate group basis can be gathered from existing tax forms with little to no modification. Form 8991 and Schedule A therein includes information used in computing the BEAT liability on a separate taxpayer basis that could be easily adapted to compute the BEAT on an aggregate group basis. Form 8991 and Schedule A therein can be slightly revised to include aggregate group level information related to taxable income, base erosion tax benefits and NOLs, utilizing information that must already be reported on a consolidated tax return or separate tax return for each group member.

In particular, Part I of Form 8991 provides for the determination of the aggregate “applicable taxpayer” group for purposes of determining the average annual gross receipts and the BEP. Part I must be completed using the aggregate base erosion tax benefits and aggregate amount of deductions computed in Schedule A (Base Erosion Payments and Base Erosion Tax Benefits) to Form 8991. Schedule A, in turn, contains a table to collate the information required to compute the BEP of the aggregate group (i.e., the aggregate base erosion payments and base erosion tax benefits). The information included in Schedule A is separate from the information required to be included in Part II of Form 8991.Form 8991, Part II provides for the computation of MTI on a separate taxpayer basis by collecting information related to taxable income (line 3a), base erosion tax benefits (line 3b), and the BEP of the NOL deduction allowed under section 172 (line 3c).

The aggregate group approach to computing MTI could be applied easily with little change to the current Form 8991 by slightly revising Schedule A to include aggregate group level information related to taxable income, base erosion tax benefits and NOLs. Each of these items is already reported on the tax return of a consolidated group or a separate taxpayer and could be imported to Schedule A for ease of use in the aggregate computation. Then, the information included in Schedule A can be utilized in connection with both Part I and Part II of Form 8991 (i.e., to determine both the “applicable taxpayer” and the BEMTA of the aggregate group).

Further, the current version of Form 8991 already requires an attachment listing each member of the aggregate group for purposes of computing the average annual gross receipts and the BEP on an aggregate basis. Although the Preamble expresses concern for the potential complexity involved in reallocating the aggregate BEAT liability among the separate taxpayers within an aggregate group, such allocation can be achieved by adding two lines to Part II to compute (1) the proportionate share of the separate taxpayer/consolidated group in the BEAT liability and (2) the BEMTA of that separate taxpayer/consolidated group. Because the taxable income and MTI of both the separate taxpayer/consolidated group and the aggregate group will be reported as part of Form 8991, this allocation will be easy to compute.

Finally, it should be noted that the election to apply the BEAT on an aggregate group basis could be conditioned on the requirement that each taxpayer joining the election have the same taxable year-end (e.g., December 31).¹⁰ This requirement would be simple to administer and should not lead to any additional complexity or unforeseen consequences of computing the BEAT on an aggregate group basis with different taxable years.

For audit and information availability purposes, the information required to calculate MTI can be taken from a consolidated group or a separate taxpayer's tax return or from Form 8991 (e.g., taxable income, NOLs, base erosion payments, etc.). Once this information is gathered and an aggregate MTI and BEAT liability are calculated (as suggested above as part of Form 8991), each separate taxpayer/consolidated group that is part of the aggregate group could then file Form 8991 indicating the companies included in the aggregate group calculation. Each member of the group could then be required to maintain a copy of the BEAT computation for the aggregate group with all the supporting data used across the taxpayers included.

Because the gathering of information and related calculations are already required (e.g., for purposes of computing the BEP of the aggregate group), instituting these requirements should result in little additional administrative burden for taxpayers. While it could be argued that additional effort will result from the need to maintain supporting data from all taxpayers included in the aggregate group, in practice this would require little more than the entities sharing their supporting information and calculations, which they are already required to prepare and maintain.

To enforce the BEAT, if an election is made, the statute of limitations could be extended and remain open for all taxpayers within the aggregate group, with respect to each taxpayer's BEAT liability, until all audits affecting the determination of the aggregate group's BEAT liability have closed. This ensures access to all needed information in the event a taxpayer that is a member of an aggregate group is audited and the BEAT liability is in scope of the audit.

A proposed mechanism for making the election is for each separate taxpayer and/or the parent of a consolidated group joining in the aggregate group calculation to file an election statement (which may be included in Form 8991) by the due date of filing its tax return (including extension of time to file the return). Such an election could be made on an annual basis, for a given period of time, or be revocable only with the consent of the Secretary. An additional schedule could be included, as discussed above, to identify all other members of the aggregate group as provided in the proposed regulations and as required to be furnished as part of Form 8991.¹¹ In making the election, the taxpayer could be required to consent to the extended statute of limitations, as discussed above, and to maintain records and documentation supporting the BEAT calculation, including data provided by other members of the aggregate group.

IV. Conclusion

In summary, we respectfully request that Treasury revisit the opportunity to permit taxpayers that are members of an aggregate group to join in an election to have the BEAT liability determined on an aggregate group basis. Such an election could be conditioned on the following requirements:

• All members of the aggregate group with the same taxable year-end join the election;

• Each joining member (e.g., the parent of a consolidated group or a separate taxpayer within the aggregate group) consent to such an election; and

• Each joining member agree to furnish all information necessary to compute the aggregate BEAT liability and to extend the statute of limitations, with respect to each member's BEAT liability, until all audits affecting the determination of the aggregate group's BEAT liability have closed.

We appreciate the opportunity to provide comments on the Proposed Regulations. If you would like to discuss this letter further, please contact Chris Ocasal at chris.ocasal@ey.com or (202) 327-6868 (primary contact), or Revital Gallen at revital.gallen@ey.com or (949) 437-0302 (secondary contact).

Respectfully submitted,

Zurich American Insurance Company,
CRH Americas, Inc.,
American Air Liquide, Inc.,
Robert Bosch North America Corporation