Kuurt Wulfekuhler, Partner at EP


The BEAT is effectively an alternative minimum tax on U.S. taxpayers that make payments to foreign related parties. Here is how it works: the base erosion minimum tax is the excess (if any) of an amount equal to a certain percentage of the modified taxable income of the taxpayer over the taxpayer’s regular tax liability. Modified taxable income is taxable income determined without regard to any base erosion tax benefit, or deduction which is allowed with respect to any base erosion payment, which is any amount paid or accrued by a taxpayer to a foreign person which is a related party of the taxpayer and with respect to which a deduction is allowable. In other words, any base erosion payment is added back to taxable income to determine modified taxable income.


Payments for cost of goods sold are not considered base erosion payments. Although not explicitly stated in the Act, the Conference Report filed in the House of Representatives explains that payments for cost of goods sold represent reductions to income instead of deductions. However, the Act includes within the definition of base erosion payment certain payments to expatriated (or inverted) entities. Namely, a base erosion payment includes any reduction of the gross receipts of the taxpayer resulting from payments to a surrogate foreign corporation which is a related party of the taxpayer, but only if such person first became a surrogate foreign corporation after November 9, 2017, or foreign person which is a member of the same expanded affiliated group as the surrogate foreign corporation.


The Act provides certain exceptions. One, payments to related parties for services are not considered base erosion payments if (1) such services meet the requirements for eligibility for use of the services cost method under section 482 (determined without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure), and (2) such amount constitutes the total services cost with no markup component. Two, any qualified derivative payment is not considered a base erosion payment. A qualified derivative payment means any payment made by a taxpayer pursuant to a derivative with respect to which the taxpayer (1) recognizes gain or loss as if such derivative were sold for its fair market value on the last business day of the taxable year, (2) treats any gain or loss so recognized as ordinary, and (3) treats the character of all items of income, deduction, gain, or loss with respect to a payment pursuant to the derivative as ordinary.


The percentage of modified taxable income used for determining the base erosion minimum tax increases over time. It is:

  • 5 percent for taxable years beginning after December 31, 2017;
  • 10 percent for taxable years beginning after December 31, 2018.
  • 12.5 percent for taxable years beginning after December 31, 2025.


Apart from not inverting, here are some things taxpayers may wish to consider to mitigate the potential effects of the base erosion minimum tax:

  1. Include in cost of goods sold any deductions that properly belong in cost of goods sold;
  2. Use the services cost method for related-party service charges, where possible; and
  3. Evaluate whether third parties could be used instead of related parties for certain types of

Include Payments in Cost of Goods Sold

Any payments that properly relate to cost of goods sold should be included in cost of goods sold. For example, if a U.S. taxpayer purchases tangible property from a foreign related party for resale to third parties and also pays that related party, or other member of the group, a royalty for distribution rights, use of trademarks or logos, etc., those royalty payments should be rolled up into the transfer price of the tangible property. That is, transfer prices for tangible property should include any embedded intangible property, as would be observed in arm’s length dealings. U.S. taxpayers will want to review their foreign related-party payments carefully to evaluate which payments could be included in cost of goods sold and, therefore, not be considered base erosion payments.

Use the Services Cost Method

Because service charges using the services cost method are exempted from base erosion payments, taxpayers will want to use that method where possible. The Act even provides that the method can be used, in this context, without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure. In other words, even if certain services otherwise require a markup, it may be possible to charge at cost for purposes of the base erosion minimum tax. When regulations are released, they might very well exempt services cost in any cost-based method as a base erosion payment (that is, only include the markup) but, for now, the statute only explicitly excludes charges made under the services cost method. Application of the method also means complying with the bookkeeping and election requirements of the services cost method.

Evaluate Use of Third Parties

Regrettably, some taxpayers may need to consider using third parties where they previously relied on related parties for certain types of transactions such as debt financing. Even where related-party loans meet the arm’s-length requirement for interest rates and the section 385 requirements for treatment as indebtedness, the base erosion minimum tax could still result in a higher effective tax rate. Third-party financing costs, on the other hand, are not considered base erosion payments. Multinational enterprises (“MNEs”) that borrow from third parties and then on-lend to U.S. related parties will want to consider having loans made directly to the U.S. members of the group. MNEs that do not have external debt may wish to consider having U.S. members of the group borrow directly from third parties instead of related parties. Limitations on the deduction of interest expense under the Act still apply.

U.S. taxpayers facing particularly harmful effects from the base erosion tax may also need to consider restructuring other types of related-party transactions as well as broader changes to their supply chains.


The BEAT is an alternative minimum tax on U.S. taxpayers that make payments to foreign related parties and which can have a large impact on those taxpayers’ effective rates. Even taxpayers that make legitimate arm’s-length payments to related parties will get caught in it. The first step to managing the tax is understanding one’s base erosion payments and whether they result in a base erosion minimum tax. If they do, one will want to consider (1) whether they can be included instead in cost of goods sold, (2) whether services charges could be made at cost under the services cost method (even if it results in double taxation on the markup, which is a small share of the overall charge), and (3) whether third parties could be substituted for related parties for certain transactions.


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    No doubt, the BEAT will disrupt the activities and supply chains of some taxpayers but the steps described herein might help mitigate some of the effects of the new tax and potential disruptions.

    I am responsible for the views expressed herein and they are not necessarily those of my colleagues at Economics Partners, LLC.


    Kurt Wulfekuhler - PartnerAUTHORED BY KURT WULFEKUHLER

    Mr. Wulfekuhler has advised a wide array of companies on transfer pricing since 1997. His clients include leading multinational firms in the pharmaceutical, medical-device, technology, and financial-services industries. He provides a full range of transfer pricing services for his clients from planning to documentation to audit support. Mr. Wulfekuhler joined Economics Partners as part of the alliance with Peters Advisors LLC.