The US Internal Revenue Service (IRS) and the Treasury Department have released their final regulations on two major international tax provisions, the Foreign Tax Credit and the Base Erosion and Anti-abuse Tax (BEAT).
The BEAT regulations, released earlier this month, provide clarity on what constitutes a base erosion payment as well as reporting requirements related to the tax. The BEAT aims to provide a backstop to prevent multinational enterprises from eroding the US tax base by overly reducing their US tax liability.
When applicable, this tax comes in addition to the taxpayer's regular tax liability. The BEAT provision mainly affects corporate taxpayers with annual gross receipts averaging more than $500m over a three-year period that make deductible payments to foreign related parties.
Today’s guidance continues to modernize our tax system"
"The new BEAT regulations provide some helpful relief, such as for inbound liquidations and reorganizations, as well as several welcome clarifications," stated David G. Noren, a partner at the law firm McDermott Will & Emery in Washington, D C.
The IRS notes that the final regulations "retain the basic approach and structure of the proposed regulations, with certain revisions".
"Today's guidance continues to modernize our tax system, ensure a thoughtful and deliberate transition from a worldwide towards a territorial system, protect the US tax base, and provide taxpayers with the clarity they need to plan and grow their businesses," said Treasury Secretary Steven T. Mnuchin in a statement.
According to the final regulations, the Department of the Treasury and the IRS estimate that between 3,500 and 4,500 taxpayers may be applicable taxpayers under the BEAT.
With respect to foreign tax credit rules, the Tax Cuts and Jobs Act (TCJA) changed several provisions, including repeal of section 902, which allowed deemed-paid credits in connection with dividend distributions based on foreign subsidiaries' cumulative pools of earnings and foreign taxes. The TCJA also added two separate limitation categories for foreign branch income and amounts includible under the Global Intangible Low-Taxed Income (GILTI) provisions.