The Department of the Treasury and the Internal Revenue Service recently released proposed regulations for the Base Erosion and Anti-abuse Tax (BEAT), which was added to the Internal Revenue Code as part of the Tax Act 2017. The proposed regulations provide helpful guidance on a range of important topics and generally go a long way towards a reasonable implementation of a very challenging statute.
A domestic corporation's royalty income derived in connection with business conducted outside the United States is generally eligible for the reduced 13.125% effective tax rate on foreign derived intangible income. To qualify, the licensee must be a foreign person and the intangible property must be used outside the United States for the ultimate benefit of an unrelated foreign person. The reduced tax rate is also available for certain royalties derived from licensing intangible property to related foreign persons.
A minimum tax has been imposed on domestic corporations with substantial amounts of deductible payments made to related foreign persons, referred to as the 'base erosion and anti-abuse tax' (BEAT). BEAT is particularly onerous if a controlled foreign corporation's income is subject to foreign taxation because, while foreign income taxes can be used as a credit to reduce regular tax liability, no foreign tax credit is permitted to offset the BEAT.