Economic Analysis: The BEAT in a Diagram and an Easy-to-Use Spreadsheet

The base erosion and antiabuse tax is a tug of war: Pulling you into the BEAT are base erosion tax benefits and tax credits. Pulling you out is taxable income.

Figure 1 illustrates that back-and-forth. Base erosion tax benefits — including interest, royalties, and some service payments to foreign related parties — are on the vertical axis. Some tax credits — including the foreign tax credit but excluding the research credit — are on the horizontal axis. In the shaded area below the downward sloping line, the value of those two factors is low (relative to taxable income) and the BEAT does not apply.

You can automatically win the tug of war if your base erosion tax benefits (BETBs) are below 3 percent of deductions (with some adjustments). This is illustrated by the horizontal line in Figure 1. In the shaded area, when the BETBs are below 3 percent of deductions (irrespective of tax credits or anything else), the BEAT does not apply.

Also, only major leaguers can play this tug of war. You won’t qualify as an “applicable taxpayer” unless you are a U.S. corporate affiliated group with gross receipts averaging at least $500 million over the prior three years. (Not illustrated in Figure 1.)

A word of warning: The BEAT is just one part of the new web of U.S. international taxation, which has many parts that interact in important ways. For example, both the BEAT (section 59A) and the new interest limitation rules (revised section 163(j)) can limit related-party interest (and are of special interest to foreign-parented applicable taxpayers). Also, as foreign tax rates rise, foreign tax credits rise; that reduces global intangible low-taxed income (sections 951A and 250), but at the same time can increase the BEAT. That interaction is a big deal for large U.S.-headquartered corporate groups. (Prior analysis: Tax Notes, May 28, 2018, p. 1259.)

Getting a Feel for the BEAT

So far, we have mercifully glossed over the details, but that ends now with the nitty-gritty calculations for six examples in tables 1 and 2. All examples assume an applicable taxpayer with taxable income of $100, no net operating loss deductions, a 10 percent BEAT rate, and a 21 percent corporate rate. As we work through the table calculations and examples, Figure 2 shows how these examples differ. (All calculations can readily be scaled up to real-world examples by multiplying the $100, $110, and $11 in Figure 2 by a common amount (for example, 1 million).) For those who prefer a more formal approach, you can get out your codes and follow along with the supplied cross-references. (The spreadsheet used to make the calculations can be obtained by emailing martysullivan@comcast.net with the subject “BEAT Spreadsheet.” The spreadsheet allows NOL deductions.)

After determining that average gross receipts over the prior three years are at least $500 million, it is useful to next calculate the BETBs because they are needed to determine if the taxpayer exceeds the 3 percent threshold. In Example 1 — after making all adjustments — BETBs equal $50. Deductions (adjusted for purposes of section 59A) equal $467. The base erosion percentage (BE% in the table) of 10.71 percent exceeds 3 percent, so this is an applicable taxpayer.

The numerator of the base erosion percentage (plus the base erosion percentage multiplied by the NOL deduction, if any) is also central to the calculation of modified taxable income (MTI), which in turn is critical for determining the BEAT liability, designated in the statute as the base erosion minimum tax amount (BEMTA). In general:

In the formula, MTI is the excess (if any) regular taxable income (before credits) less the sum of BETBs and the product of the base erosion percentage multiplied by NOL deductions. RTL is regular tax liability. BCREDs are credits that can increase BEMTA dollar-for-dollar. The amount in parentheses cannot fall below zero.

In this example, MTI equals $150 ($100 of regular taxable income plus $50 of BETBs). RTL is $21. BCREDs are $10. So RTL less BCREDs is $11. That leaves BEAT tax liability (aka BEMTA) at $4 (that is, $11 subtracted from the product of 10 percent and $150).

Example 2 calculates what happens when you increase BETBs. In this case, relative to Example 1, they increase by $25 (from $50 to $75), and there is no change in the BEAT credits. The BEAT liability increases by one-tenth of the change: $2.50 (that is, from $4 to $6.50). In Figure 2 the vertical shift indicates the change from Example 1 to Example 2.

Example 3 calculates what happens when you increase the BEAT credits. In this case, relative to Example 1, those credits increase by $5 (from $10 to $15), and there is no change in BETBs. The BEAT liability increases dollar for dollar with the change by $5 (that is, from $4 in Example 1 to $9). In Figure 2 the horizontal shift illustrates the change from Example 1 to Example 3.

Example 4 is the same as Example 1 except taxable income is cut in half from $100 to $50. In the first three examples, in which taxable income was equal to $100, the BEAT liability equaled:

For Example 4, BEAT liability equals:

The reduction in taxable income from $100 to $50 increases the BEAT by $5.50 (from $4 in Example 1 to $9.50). That is not illustrated in Figure 2. If it were, it would be shown as a parallel shift toward the origin of the downward sloping line with the intercept through the vertical axis equal to $55 and the horizontal intercept equal to $5.50. Note that if taxable income is zero, the BEAT applies everywhere the 3 percent threshold is exceeded. So the BEAT can be hard on businesses in cyclical industries in which losses are not uncommon.

Example 5 demonstrates that the BEAT can apply even when the BETBs are small. But as the numerator of the base erosion percentage, it must be at least 3 percent of deductions for the BEAT to be in play at all. In Example 5 the BETBs are set at $14.01, that is, equal to 3 percent of $467 of deductions. If the BEAT credits equal at least $9.61 (as assumed in the table), the BEAT will apply. In Figure 5 this is depicted at the intersection of the horizontal and downward-sloping lines.

Example 6 shows that if the BETBs are large enough, the BEAT will apply even if there are no BEAT credits. In this example, the BEAT credits equal zero and BETBs equal $110. The BEAT liability is zero and is depicted in Figure 2 at the intercept of the sloping line through the vertical axis.

Table 1. Examples of BEAT Calculations

	Example 1	Example 2
Threshold question: “Applicable taxpayer?” (section 59A(e))
Is taxpayer a corporation other than a RIC, REIT, or S Corp?	Yes	Yes
Average of prior three years’ gross receipts	$550	$550
Is average greater than $500 million?	Yes	Yes
BETB = base erosion tax benefits
In general, base erosion payment (section 59A(c)(2)(A)(i) and (d)(1))	$60	$90
plus depreciation/amortization property from foreign (section 59A(c)(2)(A)(ii) and (d)(2))	$2	$3
plus net outgoing reinsurance payments (section 59A(c)(2)(A)(iii) and (d)(3))	$3	$5
plus COGS for post-11/9/17 inverters (section 59A(c)(2)(A)(iv) and(d)(4))	$4	$6
less all payments with full withholding (section 59A(c)(2)(B)(i))	$4	$6
less proportion of payments subject to partial withholding (section 59A(c)(2)(B)(ii))	$2	$3
less payments for certain services meeting requirements (section 59A(d)(5))	$10	$15
less payments that are qualified derivative payments (section 59A(h))	$3	$4.50
Equals BETB (numerator of BE percentage) (also needed for MTI)	$50	$75
Calculation of denominator of BE percentage (section 59A(c)(4)(A) and (B))
Aggregate deduction of taxpayers (does NOT generally include COGS)	$500	$500
plus any reduction in gross amount of premiums paid to related parties	$3	$5
plus COGS of post-11/9/17 inverters	$4	$6
minus any NOL deduction (section 172)	$0	$0
minus DRD for foreign dividends (section 245A)	$30	$30
minus deductions for GILTI and FDII (section 250)	$10	$10
equals denominator of BEP percentage	$467	$470.50
BE percentage = BETB/(total deductions adjusted)	10.71%	15.94%
Credits that will be added to BEAT (section 59A((b)(1)(B)(ii) and (b)(4)))
100 percent of foreign tax credit	$5	$5
20 percent of sections 42(a), 45(a), and 48 credits	$5	$5
100 percent of any other credits except research credit	$0	$0
Sum of prior 3 amount (we’ll call them “BEAT credits”) (all credits after 2025)	$10	$10
Base Erosion Minimum Tax Amount (BEMTA) = Max [0, (Beat Rate * MTI - (RTI - BEAT credits))]
BEP% * NOL =	$0	$0
Rate (= 5 percent in 2018, 10 percent in 2019-2025, 12.5 percent after; add 1 percent for groups with banks)	10%	10%
Regular taxable income (RTI)	$100	$100
MTI = RTI + BETB + BEP percentage * NOL (section 59A(c))	$150	$175
Rate * MTI	$15	$17.50
Regular tax liability (before credits) (21 percent of RTI)	$21	$21
RTI - BEAT credits “(but not below zero)”	$11	$11
Final calculation: BEMTA	$4	$6.50

Conclusion

As a base erosion measure, the BEAT is a strange bird. When foreign profit rates are high and foreign tax rates are low, you might suspect that there could be some abusive profit shifting. The BEAT is an imperfect indicator of those imperfect indicators. The BEAT can kick in when foreign profits are high relative to domestic profits (a fuzzy clue about foreign profit rates), and it can be harsher for taxpayers subject to high foreign tax rates than for those subject to low foreign rates. The BEAT must be rationalized, simplified, and clarified far beyond anything that Treasury can do in regulations. Or it should be replaced.

Notes on the Calculations

Newcomers to the BEAT can think of it as a 10 percent minimum tax on specific outbound payments by large corporations to foreign related parties. There are special (tougher) rules for groups that include banks or security dealers (section 59A(b)(3)). There are special (tougher) rules for payments by entities that invert after November 19, 2017. There are special (tougher) rules for tax years beginning after 2025 (section 59A(b)(2)). Base erosion payments generally do not include cost of goods sold.

Table 2. More Examples of BEAT Calculations

	Example 3	Example 4	Example 5	Example 6
Threshold question: “Applicable taxpayer?”
Corporation other than a RIC, REIT, or S Corp?	Yes	Yes	Yes	Yes
Average of prior three years’ gross receipts	$550	$550	$550	$550
Is average greater than $500 million?	Yes	Yes	Yes	Yes
BETB = base erosion tax benefits
In general, base erosion payment	$60	$60	$60	$60
plus depreciation/amortization property from foreign	$2	$2	$2	$2
plus net outgoing reinsurance payments	$3	$3	$3	$3
plus COGS for post-11/9/17 inverters	$4	$4	$4	$4
less all payments with full withholding	$4	$4	$4	$4
less proportion subject to partial withholding	$2	$2	$2	$2
less payments for certain services	$10	$10	$10	$10
less certain derivative payments	$3	$3	$3	$3
Equals BETB (numerator of BE percentage)	$50	$50	$14.01	$110.10
Calculation of denominator of BE percentage
Aggregate deduction of taxpayers (no COGS)	$500	$500	$500	$500
plus premiums paid to related parties	$3	$3	$3	$3
plus COGS of post-11/9/17 inverters	$4	$4	$4	$4
minus any NOL deduction (section 172)	$0	$0	$0	$0
minus DRD for foreign dividends (section 245A)	$30	$30	$30	$30
minus deductions for GILTI and FDII (section 250)	$10	$10	$10	$10
equals denominator of BEP percentage	$467	$467	$467	$467
BE percentage = BETB/(total deductions adjusted)	10.71%	10.71%	3%	23.58%
Credits that will be added to BEAT
100 percent of foreign tax credit	$7.50	$5	$5	$0
20 percent of sections 42(a), 45(a), and 48 credits	$7.50	$5	$5	$0
100 percent of any other credits except research credit	$0	$0	$0	$0
Sum of prior 3 amount (“BEAT credits”)	$15	$10	$9.61	$0
BEMTA
BEP% * NOL =	$0	$0	$0	$0
Rate (= 5 percent in 2018)	10%	10%	10%	10%
RTI	$100	$50	$100	$100
MTI = (RTI) + BETB + BEP% * NOL	$150	$100	$114.01	$210.10
Rate * MTI	$15	$10	$11.40	$21.01
Regular tax liability (before credits)	$21	$10.50	$21	$21
RTI - BEAT credits “(but not below zero)”	$6	$0.50	$11.39	$21
Final calculation: BEMTA	$9	$9.50	$0.01	$0.01

The BEAT must be calculated anew every year. A taxpayer that approaches the 3 percent threshold might try to cycle above and below that amount (by bunching the BETBs and credits over time), and thereby eliminate the BEAT in years when BETBs and BEAT credits are low. But any ambitions for tax planning must be tempered by the heavy-handed regulatory authority granted to Treasury in section 59A(i).

In addition to foreign tax credits and other credits (except the research credit), BEAT credits include 20 percent of low-income housing credits (section 42(a)), 20 percent of renewable energy production credits (section 45(a)), and 20 percent of section 46 investment credits allocable to the energy credit (section 48). The definition of gross receipts for foreign-headquartered groups is in section 59A(e)(2)(A). The amount of payments that qualify for the services cost exception (as modified by section 59A(d)(5)) is in dispute, but that could be resolved when Treasury issues regulations.

Assuming the corporate rate is 21 percent and the BEAT rate is 10 percent, and assuming the product of BE% and NOL deductions is included in the BETBs, BEAT liability (BEMTA) may be calculated alternately as either of the two following (assuming the result of RTL minus BCREDs is not negative):