BP Seeks Guidance on Application of BEAT Rules to Some Hedges

From: Guido, Robert
Date: July 5, 2018 at 11:49:49 PM GMT+2
To: Nichols, Kevin
Subject: RE: BP plc Meeting Request on BEAT

Hi Kevin,

I doubled back with our team and below is a brief explanation of the issue we are interested in speaking to you about as well as a set of examples that illustrate it. To the best of our knowledge, we are unique in the oil and gas industry in our facts and circumstances, but believe taxpayers in other industries may be similarly situated and thus share our concerns.

After your review, we'd be happy to field any questions you might have or provide more detail. A conference call could do the trick, but an in-person meeting might be necessary or preferable to the extent the technical details need to be hashed out in more granularity. Let me know what you prefer, and thanks again for your consideration.

Regards,

Rob

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Application of BEAT Rules to Related Party Hedging Payments

We are seeking guidance to ensure hedging transactions between related parties are not treated as "BEAT-able" payments. For some worldwide groups employing a centralized hedging model, hedging transactions are under taken between affiliates in order to access international commodities markets in an efficient manner and in compliance with non-tax regulatory rules. Gains and losses from these intercompany hedges are reflected in the cost of the underlying commodity to which the derivative is tied and therefore included in COGS for US tax purposes. As such, we believe (and relevant case law and industry accounting practices bely) these hedges should be exempt from BEAT as part of the COGS exemption, and are seeking guidance to reflect such in the BEAT regulations.

General Facts

Company A, a US taxpayer, is a wholly owned affiliate of a group that includes Company B. Company A is not on a mark- to-market method of tax accounting within the meaning of section 59A(h)(2)(A)(i).

Company B is incorporated in Country X and is not considered a Surrogate Foreign Corporation as defined in section 59A(d)(4)(C)(i). Company B holds a seat an on organized exchange located in Country X and executes futures contracts on such exchange to price risk manage its own inventory of physical commodities. Company B also acts as a hedging center with respect to all positions executed on Country X exchange. Because of the efficiencies created by having a centralized risk manager for the Country X exchange and due to Country X exchange rules, group policy prohibits members other than Company B from executing any positions on the Country X exchange.

Example 1

In the ordinary course, Company A purchases and sells physical commodities from and to third parties and related parties {including Company B). Under Company A's existing method of tax accounting, and in accordance with Company A's financial accounting treatment, income, gain, loss or expense attributable to such purchase and sales of physical commodity are includable as elements of gross receipts used to calculate gross income. Thus, cash payments made by Company A to Company B pursuant to the purchase of physical commodity inventory do not constitute a "base erosion tax benefit" under section 59A(c)(2)(A)(iv) and are thus not added back in calculating the "modified taxable income" of Company A.

Example 2

In addition to the general facts above, assume that pursuant to a group hedging program that mandates management of price risk exposure within carefully monitored risk limits, Company A regularly enters into commodity futures and options as hedging transactions. Additionally, in order to access futures and options exposures exclusively available through the Country X exchange, Company A may execute intercompany commodity swaps with Company B. Under the terms of the intercompany swap Company A will both receive and remit periodic payments to Company B mirroring the cash margin posted by Company B for the futures and options contracts executed on Country X Exchange on behalf of Company A. Under Company A's existing method of tax accounting for such hedging transactions (and in accordance with Company A's financial accounting treatment), items of income, gain, loss or expense associated with the intercompany commodity swap are includable as elements of gross receipts used to calculate gross income. Thus, the periodic cash payments made by Company A to Company B pursuant to the intercompany swaps do not constitute a "base erosion tax benefit" under section 59A(c)(2)(A)(iv) and are not added back in calculating the "modified taxable income" of Company A.

Example 3

In addition to the general facts above and the facts of Example 2, assume that Company A has properly adopted a mark- to-market method of accounting within the meaning of section 59A(h)(2)(A)(i) and that the intercompany commodity swap described in Example 2 qualifies as a "derivative" under section 59A(h)(4). Pursuant to such mark-to-market method of accounting, Company A satisfies all of the requirements of section 59(h)(2)(A)(i)-(iii). In addition, Company A complies with the reporting requirements of section 59(h)(2)(B). No circumstances are present to indicate that the rules of section 59A(h)(3) apply to the intercompany commodity swap. Thus, the periodic cash payments made by Company A to Company B pursuant to the intercompany swaps are treated as "qualified derivative payments" under section 59A(h)(1) and are accordingly not treated as a "base erosion payment" (as defined in section 59(d)).

From: Kevin.Nichols@treasury.gov
Sent: Monday, July 2, 2018 10:06 AM
To: Guido, Robert
Subject: RE: BP plc Meeting Request on BEAT

Thanks for understanding. Kevin

Kevin C. Nichols
Office of International Tax Counsel
U.S. Department of the Treasury
202-622-9461

From: Guido, Robert
Sent: Monday, July 2, 201810:05 AM
To: Nichols, Kevin

Subject: RE: BP plc Meeting Request on BEAT

I understand completely. We will get you a white paper ASAP and go from there. Thanks for your consideration.

Rob

From: Kevin.Nichols@treasury.gov <Kevin.Nichols@treasury.gov>
Sent: Monday, July 2, 2018 10:01 AM
To: Guido, Robert
Subject: RE: BP plc Meeting Request on BEAT

Sorry for the delay in getting back to. We are spread very thin in working on the multiple necessary TCJA international regulations. We can schedule a meeting, but it would be more productive if we could first review the technical white paper submission that you referred to below. If you send that in, I will ensure that it gets to the team and then we can coordinate on next steps and see if a meeting or conference call makes more sense. Sorry for the difficulty — we are just juggling multiple demands at this very busy time. Best regards, Kevin

Kevin C. Nichols
Office of International Tax Counsel
U.S. Department of the Treasury
202-622-9461

From: Guido, Robert
Sent: Monday, July 2, 2018 9:55 AM
To: Nichols, Kevin <kevin.Nichols@treasury.gov>

Subject: BP plc Meeting Request on BEAT

Hi Kevin,

Checking in on the below request. Do you have some time for us to come in on the 17^th ?

Rob

Robert Guido
Head of US Tax Policy | BP
1101 New York Avenue NW, Suite 700 | Washington, DC 20005
Phone: (202) 246-8346 | Email: robert.guido@bp.com

From: Guido, Robert
Sent: Thursday, June 21, 2018 4:03 PM
Subject: BP plc Meeting Request on BEAT

Hi Kevin,

I hope this email finds you well. We've met on a few occasions via API, USCIB or other forums. I head up US tax policy for BP here in Washington.

I wanted to check and see if you have 30 minutes on Tuesday, July 17th or Wednesday the 18th for our BP Tax team to come in and discuss an issue with respect to BEAT that we are working through. This is an issue we are not working within the API process but on our own as we believe BP is distinctly impacted where our peers are not. The issue is how commodity-related hedges (which may not meet the qualified derivative exception's mark-to-market requirement provided in the statute) are treated for purposes of the BEAT, A slightly more detailed summary of the issue is below; of course, we will certainly provide a technical white paper for your review in advance of the meeting.

Please let me know if you are available on the dates above. We'd appreciate any time you may be able to provide.

Regards,

Rob

Robert Guido
Head of US Tax Policy | BP
1101 New York Avenue NW, Suite 700 | Washington, DC 20005
Phone: (202) 246-83461 | Email: robert.guido@bp.com

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Application of BEAT Rules to Related Party Hedging Payments

BP operates a network of global trading whereby BP Group entities buy and sell derivatives on regulated exchanges (NYMEX and ICE) in order to hedge price fluctuations for products produced or marketed by the Group (crude, refined product, environmental products and other commodities). These trades are fulfilled on exchanges via related party transactions between BP's US and non-US trading entities depending upon the commodities market and location where the commodity is bought, sold or traded. Gains and losses resulting from these hedges are generally included in the final sale price of the underlying commodity and reflected in cost of goods sold (COGS) for US tax purposes. IRS case law and best accounting practice in the industry support this position. For purposes of the BEAT, items included in COGS are exempt. As a result, gains and losses from derivatives tied to commodity sales should likewise be excluded from the BEAT.