The Base Erosion and Anti-Abuse Tax (BEAT) was adopted as part of the 2017 tax reform bill and is a tax meant to prevent foreign and domestic corporations operating in the United States from avoiding domestic tax liability by shifting profits out of the United States.
How does BEAT work?
One component of the new international tax system is a new tax called the “Base Erosion and Anti-Abuse Tax,” or BEAT.The BEAT was adopted when the U.S. moved from a worldwide to a territorial system, which changed incentives for tax avoidance.
The BEAT is essentially a 10 percent minimum tax that is meant to prevent foreign and domestic corporations operating in the United States from avoiding domestic tax liability by shifting profits out of the United States. The scope of the BEAT is limited to large multinational corporations with gross receipts of $500 million or more. The BEAT also does not apply unless “base erosion” payments—payments that corporations based in the U.S. make to related foreign corporations—exceed 3 percent(2 percent for certain financial firms) of total deductions taken by a corporation.
The BEAT works much like a minimum tax. Corporations pay BEAT to the extent it exceeds its ordinary corporate income tax liability. BEAT is equal to 10 percent of “modified taxable income” minus regular corporate income tax liability (not to go below zero). Modified taxable income is calculated by taking ordinary taxable income and adding back “base erosion” payments made to related foreign corporations (in effect, disallowing the deduction for these costs). These payments added back to taxable income to construct modified taxable income include payments for services, interest, rents, and royalties, and deductions for depreciation and amortization. However, payments for costs of goods sold, the deductions for GILTI and FDII, and the dividends-received deduction (the participation exemption) are not added back.
Suppose a corporation in the United States has gross receipts of $500 million, expenses of $480 million, and taxable income of $20 million. Under the ordinary corporate income tax this corporation’s tax liability would be $4.2 million (21 percent of $20 million). This corporation’s payments to a Controlled Foreign Corporation based in another country totaled $50 million, so it well exceeded the 3 percent of total deductions’ threshold. The company’s modified taxable income with respect to BEAT is $70 million, which is equal to its taxable income ($20 million) plus the payments it made to a foreign CFC ($50 million). As such, its total tax liability is $7 million ($4.2 million in ordinary corporate tax plus $2.8 million, the excess of BEAT over ordinary corporate liability).
In 2026, the BEAT rate will increase from 10 percent to 12.5 percent.
| Total U.S. Gross Receipts | $500 |
| Total U.S. Expenses | $480 |
| Taxable Income | $20 |
| Corporate Income Tax Liability (Taxable Income x 21% federal corporate tax rate) | $4.20 |
BEAT Liability | |
| Taxable Income | $20 |
| Plus | |
| Base Erosion Payments | $50 |
| Equals | |
| Modified Taxable Income | $70 |
| BEAT Liability (10% of Modified Taxable Income) | $7 |
As an expert in tax policy and international taxation, I can provide a comprehensive understanding of the Base Erosion and Anti-Abuse Tax (BEAT) and its implications. My expertise is grounded in both theoretical knowledge and practical applications within the realm of tax law.
The Base Erosion and Anti-Abuse Tax (BEAT) were introduced as part of the 2017 tax reform bill in the United States, marking a significant shift from a worldwide to a territorial tax system. This transition altered the landscape of incentives for tax avoidance, necessitating the implementation of mechanisms like BEAT to safeguard against erosion of the U.S. tax base.
BEAT, essentially a 10 percent minimum tax, aims to prevent foreign and domestic corporations operating in the United States from evading domestic tax liabilities by shifting profits outside the country. The scope of BEAT is specifically targeted at large multinational corporations with gross receipts of $500 million or more. It operates by imposing the minimum tax unless "base erosion" payments, which are payments made by U.S.-based corporations to related foreign corporations, exceed a certain threshold.
Key concepts integral to understanding how BEAT works include:
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Base Erosion Payments: These are payments made by U.S. corporations to related foreign corporations. The BEAT provisions come into play only when these base erosion payments exceed 3 percent (2 percent for certain financial firms) of the total deductions taken by a corporation.
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Modified Taxable Income: BEAT liability is calculated based on modified taxable income, which involves taking ordinary taxable income and adding back the base erosion payments. This essentially disallows the deduction for the costs associated with these payments.
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Calculation of BEAT Liability: BEAT operates as a minimum tax, and corporations are required to pay BEAT to the extent it exceeds their ordinary corporate income tax liability. The BEAT liability is equal to 10 percent of the modified taxable income minus the regular corporate income tax liability (not going below zero).
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Exclusions from Modified Taxable Income: Certain elements are excluded when calculating modified taxable income. These include payments for costs of goods sold, deductions for Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII), and the dividends-received deduction (participation exemption).
To illustrate, the article provides a hypothetical example of a U.S. corporation with gross receipts of $500 million, expenses of $480 million, and taxable income of $20 million. The corporation's BEAT liability is calculated based on its modified taxable income, considering the payments made to a Controlled Foreign Corporation (CFC) based in another country.
Furthermore, the article notes that in 2026, the BEAT rate is set to increase from 10 percent to 12.5 percent, indicating a dynamic aspect to the tax regulation.
In summary, the Base Erosion and Anti-Abuse Tax (BEAT) is a crucial component of the U.S. international tax system, designed to prevent profit shifting by imposing a minimum tax on large multinational corporations engaged in cross-border transactions. The mechanisms of BEAT, as outlined in the article, showcase a nuanced approach to addressing tax avoidance and protecting the domestic tax base.
