TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, February 22, 2018

WSJ: New BEAT Tax Could Eliminate Benefit From Lower Corporate Tax Rate For Some Foreign Firms

WSJ 2Wall Street Journal, BEAT UP? U.S. Tax Provision May Sting Foreign Firms:

Executives around the world have embraced the overhaul’s big reduction in the federal corporate-tax rate—from 35% to 21%. Less-well-known provisions in the new code, however, could hurt some companies based outside the U.S. and doing business in the country.

One of the biggest potential threats is the base-erosion and anti-abuse tax. Dubbed BEAT, the levy could damp—or even completely offset—any gains that foreign multinationals such as SAP might otherwise expect from the reduction in the U.S. tax rate.

Here is how BEAT is designed to work: If a company generates more than $500 million in annual revenue in the U.S., and its American units make above a specified level of tax-deductible payments to related companies overseas, those units must pay a minimum tax on their U.S. profit after adding back in certain types of deductions. The minimum rate is 5% in 2018, but rises to 10% in 2019 and 12.5% in 2026.

Drafters of the tax law say the provision was meant to discourage companies from inappropriately channeling profit generated in the U.S. to lower-tax regimes.

While U.S.-based multinationals are also concerned about the provision, tax experts say among the harder hit could be non-U.S. companies in the technology, banking and pharmaceutical sectors. Companies in those businesses often pay themselves interest for intracompany loans or for the rights to sell their software or drugs in the U.S., cutting down on their taxable profit in the U.S., according to these experts.

Executives and tax experts are awaiting further guidance on the measure from U.S. Treasury authorities. Depending on how the law is interpreted, it could encourage big foreign companies to reshape their supply chains, entirely outsource some functions or manufacture more finished products outside the U.S. to minimize their taxes, tax experts say.

“It’s bad news for foreign-based multinationals,” said Edward Kleinbard, a former U.S. tax official who is now a tax professor at the University of Southern California’s Gould School of Law . “The bottom line is that this will be very expensive for some firms, and will incentivize them to undergo costly restructurings,” Mr. Kleinbard said....

In the long run, BEAT might make it less attractive for some international companies to have a physical presence in the U.S., if that presence would mean large tax payments under BEAT, said Stef van Weeghel, global tax policy leader at PricewaterhouseCoopers. “There are a number of quite significant questions that international companies have to think about,” Mr. van Weeghel said.

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