Transcript Is Available of IRS Hearing on BEAT Regs

PUBLIC HEARING ON PROPOSED REGULATIONS
"BASE EROSION AND ANTIABUSE TAX"

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

[REG-104259-18]

Washington, D.C.

Monday, March 25, 2019

PARTICIPANTS:

For IRS:

For U.S. Department of Treasury:

Speakers:

* * * * *

PROCEEDINGS

(1:00 p.m.)

MR. MERKEL: Good afternoon. This is the Hearing regarding the Base Erosion Anti-Abuse Tax Notice of Proposed Rulemaking Reg-104259-18.

My name is Peter Merkel, I'm Branch Chief, International Branch 5.

I would like to introduce my colleagues who'll be participating on this panel. To my immediate left is Karen Walney, she's an attorney in IRS Office of Chief Counsel International. Next to Karen is Julie Wang, she's an Assistant Branch Chief in the Office of Chief Counsel, Corporate. Next to Julie is Kevin Nichols, he's the Senior Counsel at the Treasury Department, Office of International Tax Counsel.

We have four speakers scheduled on today's agenda, each speaker will be — who are requested to appear will be given 10 minutes to speak. After 10 minutes the panel may or may not ask questions of the speaker. If time is permitting, we will invite other members of the audience to speak if they wish.

Now at this time, we will invite our first speaker Evan Migdail, representing the National Foreign Trade Council.

And maybe we'll move on to our second speaker if he's not here yet. Next we have Josh Odintz, representing Baker & McKenzie. Ready whenever you are.

MR. ODINTZ: Okay. Good afternoon. My name is Joshua Odintz with Baker & McKenzie. Thank you for the opportunity to testify at this hearing. Baker & McKenzie has submitted comments on the interaction of the proposed regulations under Section 59A, and payments from the U.S. Corporation to our CFS that give rise, so far I think under Section 951 or global low-taxed income — Global Low-Taxed Intangible Income under Section 951A, or GILTI.

I'd like to focus on a base-case scenario. As stated in our comment letter, assume that the U.S. Headquarter Corporation makes payments for services to its CFC, that CFC performs services outside the country of incorporation, this gives rise to foreign-based companies, services and income under Section 954E.

This payment gives rise to income, and prior to the application of Section 59A, imposes a full level of tax on the U.S. shareholders' income from the CFC.

So, now I'd like to focus and take us to comments on the proposed regulations, taking into account this base-case scenario.

So, there are two ways that payments have been exempt and base erosion payments. The first is by statute, and we've seen exclusive reference to the services cost method. The second is by exercise of authority under Section 59A(i).

The focus of my comments is going to be on the authority Treasury has to carve out certain types of payments, and it runs the definition of base erosion payment.

So, Section 59A(i) provides broad authority for the Treasury and IRS to issue regulations that are necessary or appropriate to carry out the statute. In the proposed regulations the government has exercised its authority in three circumstances to exempt certain payments from the application of the BEAT.

The first is what's referred to as TLACs, the second is Section 988 losses; and then the third are certain payments that give rise to effectively connected income for trade or business in the United States.

Observations from how this authority was exercised, the first in the preamble notes that establishing, "Establishing whether a payment is a base erosion payment, they're solely on the status of the recipient as a foreign person is inconsistent with the statue's intent of eliminating base erosion."

Further, Treasury looks at the intent or status of the payment to discern if the payment gives rise to base erosion. However, it's unclear what criteria the government used to determine if a payment gives rise to base erosion, and the notion of base erosion itself is not defined clearly in the proposed regulation, or even the statute, other than a mechanical definition of a payment paid by a U.S. corporation to a foreign entity.

So, in the base case, CFC subpart F and GILTI income is recognized by the U.S. shareholder on the U.S. tax return. Or in the case of ECI income, the foreign corporation files for the return directly this is — our opinion is a distinction without a difference.

In the base case that I presented, the income is reported on a return and taxed to the U.S. shareholder on that return. As for base version payments that give rise to sub-part F and GILTI, those payments are not what I would think of as base erosion payments.

They're fully taxed to the U.S. shareholder under sections 951 and 951A, not exempting them, and actually moves in the opposite direction, eliminating base erosion, it encourages what results in double or additional levels of taxation.

Double taxation does not comport with the statute's intent of eliminating base erosion. However, that intent is defined double taxation is not eliminating base erosion.

And as a result these are not the types of payments that give rise to the base erosion concerns, and should be exempt from the definition of the term base erosion payment.

Accordingly, we ask that the final regulations exempt from the definition of base erosion payments, those payments that give rise to sub-part F income and GILTI. Thank you very much.

MR. MERKEL: No questions. Thank you very much, Mr. Odintz. Our next speaker will be Steven Comstock, representing American Petroleum Institute.

MR. COMSTOCK: Good morning. My name is Steven Comstock, and I'm the Director of Tax and Accounting Policy at the American Petroleum Institute, or API.

API represents every 600-member company involved in all aspects of the nation's natural gas and oil industry. Many of our members may be foreign owned but they still invest billions into the U.S. economy, and support thousands of workers.

Other members may have a multinational scope that involves structure and investments where the resources are located.

On behalf of all of our members I appreciate the opportunity to speak today regarding several issues associated with the proposed regulations on Section 59A, the Base Erosion and Anti-Abuse, or the BEAT, and follow up on comments already submitted to the Department of Treasury.

Today I will address several issues including proposed regulations which API supports, requests for further guidance, areas where additional changes should be considered, and the highlighting of a structural issue which would help improve the BEAT.

First, the API would like to commend Treasury and the IRS for its clarifying guidance on the determination of the base erosion percentage, especially as it relates to pre-TCJA NOLs, as well as the proposed regs' calculation of the BEAT add back and the application of the service cost method exception in situations where the payment includes a markup.

The decision to determine the base erosion percentage upon the year in which the NOL was incurred ensures that the percentages related to the year in which the NOL operating loss arose.

The determination to exclude pre-TCJA NOLs from the BEAT add-back is also appropriate and aligns with congressional intent, as the BEAT is only intended to apply the payments paid or incurred in taxable years beginning in 2017, and not pre-TCJA tax years.

Further, excluding the cost portion of the service cost method, qualifying the amounts from the definition of base erosion payments is appropriate and accurately represents congressional intent.

API believes that all three of these determinations were appropriate, and should appear in the same form in the final regulations. One area where API is seeking clarification is the application of the BEAT to payments made by U.S. companies to foreign affiliates to purchase a hedge position on the foreign exchange debt, but for lack of the mark-to-market election, should be excluded as a qualifying derivative payment.

Given the importance of hedging to our industry, and the materiality of the amounts involved, we urge the IRS and Treasury to issue regulatory guidance to specifically clarify that any related party hedging payments which acted to reduce gross income, whether by inclusion, as an element in calculating the cost of goods sold, or as a reduction of the taxpayers' gross receipts, are not base erosion payments.

While the conference report to the TCJA generally specifies the elements of cost of goods sold, and reductions, and gross receipts are excluded from the BEAT calculation, the amounts at issue for our industry are so material, that further clarification of these rules as applied to hedge-related payments is necessary to provide taxpayers certainty for financial reporting, and tax-filing purposes.

It is common for some large multinational groups in the industry to designate one or more members of the worldwide group as a hedging center, to manage price risks related to commodities they produce and sell, or trade on the open market.

Prevailing industry practice and the financial accounting standards generally require income, gain, loss, or expense on commodity derivatives to be accounted for as items at cost of goods sold, or gross receipts, and this treatment is, in many instance, echoed in the tax accounting treatment for such items.

And that the plain language of Section 59A(d)(1), and as echoed in the legislative history of Section 59A, these payments are not deductions that were the focus of Congress in enacting Section 59A, and are properly excluded from the treatment as base erosion payments.

Accordingly, providing for such regulatory guidance is not only within the Treasury's broad authority to issue such regulations as may be necessary and appropriate to carry out the provisions of Section 59A is also necessary and appropriate to carry out the provisions of Section 59A, it's also necessary to ensure that Section 59A is not applied to payments that were never intended to be caught within its scope.

This is especially so for taxpayers engaging in hedging activity that are not practically able to avail themselves of the qualified derivative payment exclusion provided for in Section 59A(h)(1), due to the mark-to-market method of accounting requirements.

Certainly, commodity hedging activity may be held within standalone legal entity but it's not uncommon for such activity to be undertaken by and through a legal entity with other commodity-related activities such as owning a refinery, such collocation of hedging activity with other non-trading activity is generally dictated by commercial and operational considerations for the corporate evolution of these otherwise direct lines of business.

For groups operating under such a collocated model, it may be prohibitively expensive and time consuming to arrange for such hedging activity to be separated from other businesses from a legal entity perspective.

Importantly, entities housed in such collocated models or an entity within one consolidated group are often enabled to elect mark-to-market financial accounting methods, as doing so may create significant businesses, business and financial distortions related to non-trading activities.

However, these circumstances do not change the underlying economic nature of the hedge-related payments, and that should not cause these payments to be treated as base erosion payments.

For these reasons the API urges the IRS and Treasury to issue clear, regulatory guidance confirming that commodity hedging payments which act to reduce gross income are not base erosion payments.

API is also concerned with the treatment of the acquisition of depreciable or amortizable property in an inbound Section 332 Liquidation.

The preamble to the proposed regulations indicates that noncash payments can be treated as a base erosion payments even if the noncash payment is made pursuant to a transaction that qualifies for non-recognition treatment under Sections 351, 332 and 368.

If a wholly-owned foreign corporate subsidiary liquidates into a U.S. parent corporation under Section 332 liquidation, U.S. parent corporation may receive depreciable or amortizable property in that liquidation. The preamble to the proposed regulations suggests that in the case of such a liquidation, the U.S. parent could be treated as having made a base erosion payment to the foreign corporate subsidiary in the form of stock of that subsidiary.

However, in the Section 332 liquidation, it is often the case that no payment in form of stock or otherwise is made by the parent corporation to liquidating subsidiary.

The disappearance of the stock of the liquidating subsidiary, and in Section 332 liquidation is properly characterized as a redemption or cancellation of that stock rather than a payment of the stock from the U.S. parent to the liquidating subsidiary.

Furthermore, treating stock cancelled or redeemed under Section 332 liquidation as giving rise to the base erosion payment is overly broad given the legislative history and the underlying policy of the BEAT. The BEAT was intended in part to encourage U.S. companies to bring their worldwide activities into the U.S.

For example the BEAT may encourage U.S. multinationals to liquidate foreign corporate subsidiaries into the U.S. parent and Section 332 liquidation.

To penalize taxpayers that engage in the very activities that the BEAT was designed to encourage is contrary to the purpose of the BEAT. API and its members strongly believe Treasury and the IRS should amend the proposed regulations to provide that any depreciable or amortizable property acquired by a domestic corporation from a former related party is part of the liquidation described under Section 332 does not give rise to the base erosion payment.

Let me conclude by just mentioning that API and its members realize that other countries and organizations are looking at how the TCJA applied minimum tax concepts to address perceived abuses in the current international tax rules.

We believe that our proposed changes and other steps are needed if the BEAT should serve as an example for others to use.

Although beyond the scope of the regulatory process, API and its members believe that the BEAT — that for the BEAT to function as effective minimum tax target as abusive base erosion a credit carried forward mechanism is necessary.

As enacted the BEAT introduces an incremental and permanent tax cost based on a formula that assumes the correlation between the taxpayers' annual taxable profit and deductible expenses does not always reflect commercial or market reality.

In other words, it does not include a mechanism to address situations where the taxpayers' taxable position is the result of a downturn in the market or increased cost recovery related to a significant U.S. capital investment.

If the international community adopt similar minimum tax rules that lack a carried forward, or some other types of mechanism to address situations where taxable profits and expenses are incurred in different tax years, the likely result will be double or even triple taxation.

Including the credit carried forward will allow the BEAT to function as a proper minimum tax and not penalize taxpayers for downturns in business cycles.

I'd like to thank the Panel for its time, and I encourage both the Treasury and the IRS to reach out to API and its members with any questions pertaining to our testimony today.

MR. MERKEL: Any questions? Thank you very much, Mr. Comstock.

MR. COMSTOCK: Thank you.

MR. MERKEL: Next we'll invite Candice Whitehurst and John Benoit, representing the Association of Clinical Research Organizations.

MR. BENOIT: Thank you for allowing us to testify. I'll start by introducing ACRO and describe how the Clinical Research Organization, or CRO, industry works.

The Association of CROs is made up of CROs themselves, with 130,000 employees worldwide. Candice Whitehurst and I, we work for competitor CROs, but we're standing here together as part of ACRO because the B rules are creating extrasentential issues for our industry.

CROs provide a wide range of services to the pharma, biotech, and medical device industry, the bulk of which are the clinical trials that help obtain FDA or foreign regulatory approval for a drug.

A trial is performed in stages, and is basically performed by administering an experimental therapy on patients versus a placebo or a similar therapy to test two elements. One, safety; two, effectiveness. It is so challenging to find and recruit a sick patient, and thus also their doctor, to a specific clinical trial. And in order to recruit enough patients to meet the study protocol within timelines or against some competitor drug that's coming out, you often need to cover 50 or more countries.

The ongoing trial process requires boots on the ground in those 50 countries to manage and monitor the trial according to regulatory guidelines. This manpower burden is too large for pharma companies to perform if they only have a few drugs in their pipeline because the hours are heavily weighted at the beginning and the end of the project. Therefore, they outsource to CROs, that's us, who can run many trials and keep staff chargeable throughout the year.

In the service industry CROs are considered low-margin and high-volume, with the key to winning an engagement being price and speed of trial. CROs are effectively the middle man between the pharma or biotech customers, whom we call Sponsors, and the doctors, who we call Investigators, that are actually performing the real clinical checkup work on the patients in the trial.

In addition to our own direct work for the Sponsors, we administer the contracts with, and the payments to, those Investigators, the patients, pharmacies, and other third-parties on behalf of the Sponsors to make the trial work. These indirect or passthrough costs are charged on to the Sponsors with zero markup, with the Sponsors owning the data and taking all responsibility to patients for the drug itself.

Importantly, because our Sponsors demand one point of contact, we are frequently obligated to operate under a hub-and-spoke-model whereby a given Sponsor contracts with one, maybe two CRO entitles, referred to as Primes, who in term subcontract to 50 different related-party subsidiaries for the local work performed. And those subs, in turn, are contracting locally with the third-party Investigators, and pay those passthrough costs.

Even in cases where the Sponsors allow contracting with two or more CRO legal entities for the same trial, they typically require that all billing be administered via one entity.

This leads us to the impact of V on our industry. Our comment letter addressed four main concerns; passthrough repayments, revenue showing payments, netting, and bifurcated year. I'll hand it over to Candice to address these concerns.

MS. WHITEHURST: Thanks, John. As John mentioned, CROs enter into contracts with Sponsors for clinical trial services. Generally, these contracts have two components; the direct fees and the indirect fees. We'll focus on the indirect fees first.

Indirect fees are for reimbursable costs, also referred to as passthrough costs that the CRO incurs on behalf of the Sponsor. The indirect fees completely offset the passthrough costs, resulting in no net margin. For example, Investigator payments are a significant component of these passthrough costs. Investigator payments are paid to compensate doctors and hospitals for administering the trials. CROs provide clinical project management and monitoring service but do not have the medical expertise to oversee the trial.

The contracts with the Sponsor require reimbursement of these Investigator payments at no markup, so there's zero margin. Furthermore, the CROs' foreign affiliates occur some of the passthrough costs based on the location of the clinical trial.

As mentioned earlier, the Sponsor wants to administer billing with one entity. In this example, the U.S. entity. As such the reimbursement of the passthrough costs comes in through the U.S. and then the U.S. remits to the foreign affiliates, with no markup, their shares of the indirect fees related to the passthrough costs.

The proposed regulations do not contain any specific provisions with respect to the treatment of payments made by U.S. taxpayer to reimburse a foreign-related party without a markup for these passthrough payments.

ACRO recommends that the final regulations acknowledge that passthrough payments to foreign affiliates are not base erosion payments, and provide factors and/or safe harbors that state reimbursements for third-party costs without markup are not base eroding.

ACRO's recommendation is consistent with general tax principles where an entity that is just facilitating a payment would be treated as a mere conduit. The CRO does not experience an accession to wealth when they receive indirect fees since they have an obligation to repay a third party. CROs have no claim of right to, and receive no benefit from, amounts received from the Sponsor that are required to be transmitted to foreign-related parties to cover passthrough costs.

Additionally, while we recognize the government's intent based on the language in the preamble for general tax principles to apply in determining the treatment of passthrough payments, ACRA feels this clarification is necessary given the significance of the amounts at issue to the industry.

For example, if a CRO remitted $50 million of passthrough payments to its foreign affiliates and if subject to V, would result in $5 million of tax at the 10 percent rate for which there was no margin on this $50 million payments. Further, depending on the size and operating model for the CRO, those passthrough payments may be upward of $200 million.

Now let's focus on the direct fees. Direct fees are simply fees for service that the Sponsor pays to the CRO for clinical trial management and monitoring services. In accordance with the Sponsor contract, the services may be performed by the CRO or by its foreign affiliates, depending on the location of the clinical trial.

In the CRO structure mentioned earlier, generally the U.S. entity and foreign affiliates will share in the direct fee revenue based on the location of the clinical trial.

The proposed regulations do not contain any specific rules regarding direct fees, but merely note in the preamble that general tax principles should apply in determining the beneficial owner of income. The CRO generally does not have a claim of right to direct fees received when it has a requirement to transit them out to a foreign affiliate in a valid agency or revenue sharing agreement.

Furthermore, under agency principles, in order to support a position that the U.S. entity is an agent for the foreign-related parties, the U.S. entity generally must be disclosed as an agent with respect to any services performed by a foreign-related party. If a U.S. entity is an Agent, then amounts collected from the customer for direct fees and transmitted to foreign-related parties would not be treated as income or deductions of the U.S. entity.

Similarly, under revenue-sharing principles, a U.S. entity arguably would not have income for direct fees it receives from a customer related to an arrangement to share revenue where each of the parties has the rights and obligations with respect to their performance using their assets and their employees. If the U.S. entity and the foreign-related parties have a valid revenue sharing arrangement, then amounts collected from the customer for direct fees and transmitted to foreign-related parties would not be treated as income or deductions of the U.S. entity.

Given the CRO operating model, it is critical that revenue sharing payments be received pursuant to a valid agency or revenue-sharing arrangement. A different result substantially changed the economics of the transactions. As such, many CROs are faced with the need to restructure their operations and/or contracting models to ensure their agreements are considered valid agency or revenue-sharing arrangements.

Due to the significance of the issue to the CRO industry, ACRO recommends that the final regulations acknowledge that revenue-sharing payments are not base erosion payments to the extent they are paid pursuant to a valid agency or revenue-sharing agreement, and provide factors and/or safe harbors to determine whether the agency or revenue-sharing agreement is valid.

We hope we've provided insight on what a CROs industry specific facts on structure and contracting make clear that indirect fees for passthrough costs and direct fees under revenue-sharing agreements are not eroding the U.S. tax base and should not be considered base eroding payments.

In addition to providing clarification on the final regulations on these payments, we'd like to recommend that gross payments made and received by a taxpayer be noted to the extent the payments are connected with the same business activity, product, or service as outlined in our comment letter.

Lastly, we would recommend that the proposed regulations be modified to provide that Section 15 does not apply to taxable years beginning in calendar year 2018, and align with the statutory language at a rate of 5 percent shall apply to taxable years beginning in 2018.

Thank you for your time.

MR. MERKEL: Any questions? Thank you very much. And our final speaker on the agenda is Evan Migdail, representing National Foreign Trade Council.

MR. MIGDAIL: On behalf of the National Foreign Trade Council for allowing me to testify today on the proposed BEAT regulations. We have several recommendations. The first deals with application of Code Section 15, the proposed regulations provided in the case of a taxpayer using a taxable year other than the calendar year, Code Section 15 applies to any taxable year beginning after January 1, 2018. The implications of this is the treasury intends it a blended BEAT tax rate between 5 and 10 percent rather than the statutory 5 percent will apply to taxpayers for the fiscal year that begins in calendar year 2018.

This position is contrary to the unambiguous words of the statute. Code Section 15 is drafted very narrowly, it applies only when there is a change in tax rate that is effective on a particular date or a change in tax rate that is effective for years beginning or ending on or after a certain date. Code Section 15 does not apply to the language of the new code section which implements the 5 percent one year exception.

New Code for Section 59A does not reference tax years beginning or ending after a certain date that is specified in Code Section 15. Rather it specifies that the 5 percent rate applies to tax years beginning in calendar year 2018. If Congress had intended for the 5 percent one year exceptional B tax rate to qualify as a rate change, within the meaning of Code Section 15, it would have used the same statutory language in Code Section 59A as it did in Code Section 58AB2.

Congress purposefully did not utilize the same language in Code Section 59AB1A, the 5 percent rate, as it did in Code Section 59AB2 because Congress did not intend for the 5 percent rate to qualify as a change in tax rate within the meaning of Code Section 15. The 5 percent rate was intended as a full one-year exception to the generally applicable 10 percent B tax rate.

Many taxpayers would not be subject, or only minimally subject, to be at a 5 percent rate. Congress enacted the 5 percent rate in order to make a taxpayer's first year subject to BEAT a transition year. However, under the proposed BEAT regulations, the fiscal year taxpayer may be subject to significant BEAT at a blended rate higher than 5 percent.

As a result, imposing the higher rate, the first year may randomly result in a fiscal year taxpayer being subject to BEAT for its first year based solely upon the timing of its fiscal year, rather than its economic results for the first year. So, our recommendation is that the proposed regulation I have cited is contrary to the unambiguous language of Code Section 59A.

Second part, the SCM exception, the proposed BEAT regulations provide clarification that for cases with the total amount paid for services includes a markup. The cost component is excluded from the definition of base eroding payments for services that meet requirements of the services cost method.

The proposed BEAT regulations interpret the SCM exception to apply the cost to the cost component any amount paid for services that satisfy the requirements of the regulatory services cost method with two exceptions; the Business Judgment Rule in treasury section 1.482-9B5 does not apply and a different rule is provided to ensure the maintenance of adequate books and records. Accordingly, payments for services on the excluded activities list, such as research R & E, do not qualify for the BEAT services exception. We recommend that proposed regulation 1.59A3B should in large part be affirmed in the final BEAT regulation. That said, the final BEAT regulation should also provide that the cost element of payments for R & E by U.S. person that owns the IP being developed or enhanced, do not constitute base erosion payments.

Next recommendation goes to additional services exception. Service agreements are often solved with large industrial products. Such service agreements are often managed centrally from the United States with the equipment being serviced in the U.S. and around the globe, depending on the convenience of the customer and locations of affiliated service centers. And, seemingly unintended consequence occurs when a manufacturer set contracts when it's related for an affiliate to maintain equipment it has manufactured and sold to the global customer pursuant to such service contracts.

More specifically, without clarification, the BEAT regime would impose steep additional costs on U.S. manufacturers of large industrial products. When finalized, the BEAT regulation should clarify that payments arising from servicing and maintenance of equipment developed and manufactured by U.S. taxpayers to related parties outside the United States, do not fall within the BEAT regime.

The next recommendation is that the scope of paid or accrued in the context of inbound, nonrecognition transactions, the proposed BEAT regulations provide that an amount paid or accrued includes an amount paid or accrued using any form of consideration including cash, property, stock, or an assumption of a liability.

The preamble to the proposed BEAT regulations notes that this interpretation of the phrase "paid or accrued" may have the result of causing a base erosion payment to arise as a result of a U.S. taxpayers depreciation or amortization of the carryover tax basis of an asset it acquired from a related taxpayer by way of a capital contribution under Code Section 351, tax free liquidation under Code Section 332, or under a tax reorganization under Code Section 368.

In this regard we note the treasury believes it has the authority to exempt from the definition of base erosion payment amounts that it believes do not present the same base erosion concerns as other types of deductions that arise in connections with payments to foreign-related parties, for example the proposed BEAT regulation specifically exempt from the definition of a base erosion payment, exchange losses from Code Section 988 transactions.

Further, in order to treat the amortization of the carryover basis in these situations of base erosion payment, it would be necessary to deem it a payment in certain cases. This is the case even though there is no result in change in the percentage ownership of the U.S. subsidiary by the foreign parent.

This is a very odd result. It was not clearly intended by Congress and so, in promulgating Code Section 95A, Congress clearly contemplated actual payments by U.S. taxpayers to foreign-related parties.

When finalized, the BEAT regulation should explicitly exclude nonrecognition transactions in which the U.S. taxpayer obtains only a carryover tax basis in the acquired asset from the definition of a base erosion payment, particularly where the U.S. taxpayer issues no actual consideration to the related foreign party pursuant to the nonrecognition transaction.

At a minimum, the final BEAT regulation should permit companies to engage in post-acquisition restructuring to transfer IP to the U.S. following third-party acquisitions without giving rise to a BEAT payment. To the extent the basis of IP transferred into the U.S., in a non-recognition transaction that is attributable to a third party acquisition, amortization of such basis should not constitute a base erosion tax benefit.

And then finally, on losses on reinsurance assumed into the U.S., U.S. insurance companies investing in foreign markets are typically required by local regulators to operate through a local foreign subsidiary that is subject to local regulation to ensure solvency in meeting claims, payments to local insured, to effectively manage capital and the volatility of losses. The foreign subsidiary may purchase reimbursement from its U.S. parent. The preamble to the proposed BEAT regulation notes that the proposed regulations also do not provide any specific rules for payments by a domestic reinsurance company to a foreign-related insurance company.

Reinsurance assumed by a U.S. reinsurer from a foreign affiliate is a specific situation where there are not base erosion concerns. Loss payments from U.S. companies to foreign-related parties directly fund payments to third-party claimants. Amounting timing of payments are based on unrelated events such as occurrence of a loss. Loss reimbursements under a reinsurance contract on a net basis have no tax consequences in the hands of a foreign-related party as the reimbursement is offset by a payment to a third party.

Finally, our recommendation here is claims payments made by U.S. insurance companies to a foreign-related insurance company in respect of reinsurance risks assumed into the U.S. should be excluded from the definition of base erosion payments. Those are all of our recommendations. Thank you.

MR. MERKEL: Any questions? Thank you very much.

MR. MIGDAIL: Thank you so much.

MR. MERKEL: At this time we've hear from all of the speakers who have scheduled to speak, at this time we will invite any member of the audience who would like to come up to speak to do so. Okay, if we have no further speakers, this concludes the public hearing. Thank you, again, to each of our speakers.

(Whereupon, at 1:36 p.m., the PROCEEDINGS were adjourned.)