What Is the Base Erosion and Anti-Abuse Tax (BEAT)?

The Base Erosion and Anti-Abuse Tax (BEAT) was introduced as part of the Tax Cuts and Jobs Act of 2017. Its purpose is to discourage large multinational corporations from stripping earnings out of the United States into lower-tax jurisdictions by targeting deductible payments made to foreign affiliates.

BEAT functions as a corporate minimum tax. A company calculates its regular tax liability and then performs a separate BEAT calculation. If the BEAT liability is higher, the company must pay the difference as an additional tax. This system ensures that corporations with significant payments to foreign related parties pay a minimum level of U.S. tax.

By adding back certain deductible payments made to foreign affiliates when calculating this alternative tax, the provision neutralizes the tax benefit of shifting profits offshore. The BEAT applies to tax years beginning after December 31, 2017.

Determining Applicability

A corporation is subject to the BEAT if it is an “applicable taxpayer,” a status determined by two tests. The first is a gross receipts test, which requires the corporation to have average annual gross receipts of at least $500 million for the three-taxable-year period ending with the preceding taxable year. Aggregation rules require a taxpayer to include the gross receipts of all members of its controlled group to meet this threshold.

Gross receipts include total sales, net of returns and allowances, and all amounts received for services. It also encompasses income from investments such as interest, dividends, rents, and royalties. Corporations with short taxable years must annualize their gross receipts for the calculation. Certain entities, such as S corporations, Regulated Investment Companies (RICs), and Real Estate Investment Trusts (REITs), are excluded from being applicable taxpayers.

The second condition is a base erosion percentage threshold, which must be 3% or higher for most corporations. This percentage is calculated by dividing the taxpayer’s “base erosion tax benefits” for the year by the aggregate amount of most of its deductions for that year. A lower 2% threshold applies to taxpayers who are members of an affiliated group that includes a bank or a registered securities dealer.

If a corporation’s base erosion percentage does not meet the applicable 3% or 2% test, it is not subject to BEAT for that year. Both the gross receipts and base erosion percentage tests must be met for the tax to apply.

Identifying Base Erosion Payments

A base erosion payment is defined by the recipient and the type of payment. First, the payment must be made to a “foreign related party,” which is a foreign person who is at least a 25% owner of the taxpayer or is considered related under other tax rules. This ensures transactions with influential foreign affiliates are captured.

Second, any amount paid or accrued to a foreign related party for which a deduction is allowable is considered a base erosion payment. This captures common cross-border transactions like payments for royalties, management fees, and interest. These payments can shift profits from the U.S. entity to an affiliate in a low-tax country.

However, there are exclusions. The most significant is for any amount that constitutes the cost of goods sold (COGS). This means payments to a foreign related party for inventory are not treated as base erosion payments, which prevents the BEAT from functioning as a tax on gross profits rather than on income. This exclusion distinguishes BEAT from other potential tax structures.

Another exclusion applies to certain payments for services that meet the services cost method exception. Additionally, payments subject to U.S. tax as “effectively connected income” (ECI) in the hands of the foreign party are not considered base erosion payments. This prevents double taxation on income already taxed in the United States.

Calculating the BEAT Liability

The calculation of the BEAT liability begins with determining “modified taxable income” (MTI). To arrive at MTI, a taxpayer starts with its regular taxable income and adds back the deductions claimed for its base erosion payments. This process reverses the tax-reducing effect of those cross-border payments.

The MTI is then multiplied by the applicable BEAT rate to find the base erosion minimum tax amount. The BEAT rate was 5% for 2018, is 10% for tax years 2019 through 2025, and increases to 12.5% for tax years after 2025.

The final step is to compare the base erosion minimum tax amount to the taxpayer’s regular tax liability. Through 2025, the BEAT liability is the amount by which the base erosion minimum tax amount exceeds the regular tax liability after being reduced by certain tax credits. For tax years after 2025, the regular tax liability will not be reduced by most credits for this comparison, which will likely increase the potential BEAT liability. If a company’s regular tax liability is higher than its base erosion minimum tax amount, no BEAT is owed.

For example, a corporation with an MTI of $100 million in 2025 would apply the 10% rate for a base erosion minimum tax of $10 million. If its regular tax liability after credits is $8 million, it would owe a BEAT of $2 million. This is paid in addition to its regular tax, for a total federal tax of $10 million.

Reporting and Filing Requirements

Corporations potentially subject to the BEAT must file Form 8991, “Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts.” This form is the primary mechanism through which a taxpayer reports its calculations and determines its final BEAT liability. The form is structured to walk the taxpayer through the entire BEAT computation.

Filing Form 8991 is a requirement for any corporation that meets the $500 million gross receipts test. This applies even if the corporation does not meet the base erosion percentage test or ultimately owe any BEAT. This ensures compliance and proper reporting to the IRS.

The completed Form 8991 must be attached to the corporation’s annual income tax return, such as Form 1120, “U.S. Corporation Income Tax Return.” The filing deadline for Form 8991 coincides with the due date of the main income tax return, including any extensions. The IRS provides the form and detailed instructions on its website.