Bloomberg Tax: Prop. GILTI Regs: ‘Tested Income’
Taxation of Foreign Branches after Tax Reform
Section 163(j) Interest Expense Limitation
Expansion of Subpart F under the Tax Reform Act
The New Deduction for Foreign-Derived Intangible Income
Bloomberg BNA Daily Tax Report: Tax Reform & Taxation of Income of CFCs
The New Base Erosion Minimum Tax
GILTI Rules Particularly Onerous for Non-C Corporation CFC Shareholders
Illinois Captive Insurance Regulatory and Tax Reform
Cryptocurrencies & State Tax: Transactions with Virtual Currency
Oregon Bars Use of Three Factor Apportionment Formula
New York’s Response to Federal Tax Reform: Charitable Contributions Credit
New York’s Response to Federal Tax Reform: Optional Payroll Tax
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Businesses that are not C corporations, as well as individual taxpayers that are CFC shareholders, are ineligible for the 50% deduction and may be ineligible for FTCs against liability for GILTI (unless they make an election under section 962 or interpose a domestic corporation) resulting in much higher effective tax rate on GILTI.
The additional tax imposed by BEAT is determined by adding back to adjusted taxable income all Base Erosion Payments for the year to arrive at “modified taxable income.” The BEAT is the excess of 10% of the modified taxable income over the taxpayer’s regular tax liability for the year (net of FTCs and general business credits allowed with the exception of R&D credits).
As a general rule, base erosion payments include payments for services. There is a limited exception that applies if the service payments meet the requirements for eligibility for SCM method, determined without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure, and such amount constitutes total services cost with no mark-up. Controversy around whether this means entire cost plus amount is base erosion payment or only “plus” amount.
Common for US-based multinationals to reimburse foreign affiliates on a cost-plus basis for payments made to foreign vendors. Can avoid the base erosion payment for services by having direct service contracts between US parent and foreign unrelated vendors. Note that with respect to restructuring payment streams, Treasury has broad authority to issue regulations to prevent the avoidance of BEAT, including through the use of unrelated foreign persons.
Base erosion payments do not include cost of goods sold (except in situations involving expatriated entity) so US resale company is less likely to be affected by BEAT than a US company that pays for services. Consider having base erosion payments like royalties for right to use trademark included in cost of goods sold to reduce base erosion payments.
If a US corporate taxpayer has $2B of modified taxable income (10% of which would be $200M) and has $30M of FTCs which reduce the taxpayer’s $210M regular tax liability to $180M, the BEAT would be imposed on $20M ($200M - $180M), which effectively has the result of denying a credit for 2/3 (or $20M) of the FTCs.