To amend the Internal Revenue Code of 1986 to provide that certain payments to foreign related parties subject to sufficient foreign tax are not treated as base erosion payments.
This bill would modify the base erosion and anti-abuse tax (BEAT) rules by adding a targeted safe harbor. It exempts certain payments to foreign related parties from being treated as base erosion payments if the payment and the foreign recipient are subject to a sufficiently high foreign income tax (an effective tax rate of at least 15%). The determination of the 15% rate is allowed to be based on the foreign jurisdiction’s applicable financial statements, with a prescribed set of adjustments. The bill also provides for regulations to implement the safe harbor and to prevent tax avoidance, and it would apply to taxable years beginning after enactment. In short, if a U.S. company pays a related foreign party and that party (and the related income) faces at least a 15% foreign tax rate, those payments would not count toward BEAT, potentially reducing BEAT liability for some multinational groups.
Key Points
- 1New BEAT safe harbor: An amount paid to a foreign related party will not be treated as a base erosion payment if the foreign recipient and the payment itself are each subject to an effective foreign income tax rate of at least 15%.
- 2Dual-rate requirement: The 15% threshold applies both to the foreign recipient of the payment and to the income associated with the payment, as determined for foreign tax purposes.
- 3How the rate is determined: The effective foreign tax rate can be established using applicable financial statements, with specified adjustments (e.g., adjustments for excluded dividends, net tax expense, intragroup transfers, currency gains/losses, penalties, privacy-related items, and other secretary-specified items).
- 4Definitions and scope: The bill defines “foreign income taxes” to include income, war profits, and excess profits taxes paid or accrued to a foreign country or possession; it refers to “foreign related parties” and BEAT concepts consistent with existing law.
- 5Regulations and anti-abuse rules: The Secretary would issue procedures to determine the effective rate and implement anti-abuse rules, including rules that could recharacterize a transaction or series of transactions among related parties to prevent avoidance.
- 6Effective date: The changes apply to taxable years beginning after the date of enactment.