Base Erosion and Anti‑Abuse Tax (BEAT)
- Graziano Stefanelli
- 5 days ago
- 3 min read
Section 59A subjects large multinationals to a minimum levy when deductible payments to foreign affiliates erode the U.S. tax base, forcing recalculations of modified taxable income, credit offset limits, and deferred‑tax provisioning.
Thresholds define who falls within the BEAT regime.
A corporation (other than an S‑corp, RIC, or REIT) becomes a BEAT taxpayer when its three‑year average gross receipts exceed $500 million and its base‑erosion percentage—total base‑erosion payments divided by total deductions—meets or exceeds 3 percent (2 percent for banks and registered securities dealers).
Base‑erosion payments include interest, royalties, service fees lacking the services‑cost method markup exemption, certain property purchases that generate depreciation, and reinsurance premiums paid to foreign related parties. Cost of goods sold escapes the definition, preserving routine inventory procurement.
Modified taxable income rebuilds deductions to expose erosion.
The starting point is regular taxable income; add back base‑erosion payments and the § 172 net‑operating‑loss deduction, then subtract a portion of R&D and § 45Q credits (all others generally disallowed).
A corporation compares its regular tax liability to the BEAT liability computed as a percentage of modified taxable income. If the BEAT figure is higher, pay the excess.
Statutory rates
5 percent for tax year 2018
10 percent for 2019‑2025
12.5 percent from 2026 onward
Banks and registered dealers add one percentage point.
Illustrative computation—2025 calendar‑year taxpayer.
Gross receipts (three‑year avg.) $7 billion
Base‑erosion payments $350 million
Other deductions $4.05 billion
Base‑erosion percentage $350 m ÷ ($350 m + $4.05 b) = 7.96 % → BEAT applies
Regular tax
Taxable income after all deductions $600 million
Regular tax @ 21 % = $126 million
Modified taxable income
$600 m + $350 m + $50 m (§ 172 NOL) = $1 billion
BEAT liability
10 % × $1 b = $100 million
BEAT payable
$100 m – $126 m = $— (no incremental tax because regular exceeds BEAT)
If regular tax were lower—say $90 million—the corporation would owe an extra $10 million.
Journal entry — recording incremental BEAT
Dr Income Tax Expense $10 000 000
Cr BEAT Payable $10 000 000
Deferred‑tax accounting treats the incremental BEAT as a period cost; no future benefit arises because modified taxable income disallows carryforwards.
Payment‑type planning can reduce exposure.
Electing the services‑cost method for low‑value‑added shared‑services fees, converting intragroup debt to equity, or capitalising royalties into cost‑sharing buy‑ins shifts payments outside the base‑erosion definition.
Re‑routing interest to U.S.‑bank branches, invoicing third‑party suppliers directly, or merging foreign procurement entities into domestic affiliates can further drop the base‑erosion percentage below the 3 percent trigger.
Credit limitations reshape cash‑tax forecasting.
R&D and clean‑energy credits survive but offset only regular‑tax liability, not BEAT. Excess credits carry forward yet often expire unused if BEAT applies consistently.
Treasury regulations require tracing each credit to an activity and jurisdiction, demanding granular project accounting so finance teams can model credit attrition versus BEAT savings.
Compliance centres on Form 8991 and extensive schedules.
The form reconciles regular taxable income to modified taxable income, lists every base‑erosion payment category, and documents credit offsets. Penalties reach $25 000 for failure to file an accurate form, plus understatement penalties if BEAT ultimately applies.
ERP systems should tag each related‑party payment with counterparty identifiers and tax‑sensitised accounts to automate both threshold tests and the form population.
Interaction with Pillar Two and the corporate alternative minimum tax.
From 2026 the BEAT rate rises to 12.5 percent, roughly matching the 15 percent Pillar Two top‑up, yet each applies on different bases. The new § 59(k) CAMT overlays a book‑income minimum, further complicating credit modelling and deferred‑tax recognition.
Finance departments need layered scenario models tracking which minimum tax—BEAT, CAMT, or Pillar Two—dominates for each forecast period and how foreign‑tax credits cascade.
Continuous monitoring of related‑party payments, strategic restructuring of service and financing flows, and early modelling of credit attrition remain the decisive levers for keeping BEAT exposure under control.
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