By: Daniel Won// SingerLewak
This is the third in a series of weekly alerts about the what, why, who, and when of the new international tax provisions, along with action items that we believe should be considered. This alert provides a summary of key provisions aimed at preventing erosion of the US tax base; such base erosion would occur, for example, if deductions were allowed against the payor’s US taxable income, but the overseas payment recipient is not required to declare any US taxable income.
In previous alerts, we discussed topics such as the transitional repatriation tax and the GILTI tax. In the coming weeks, we will provide more bite-sized information and action items or dive deeper into specific areas.
1. Base Erosion and Anti-Abuse Tax [“BEAT”]. This tax applies to the excess of 10% [higher for affiliated groups] of modified taxable income over an amount equal to the regular tax liability, which results in a 10% “minimum” tax before special tax credit adjustments. It aims to apply a minimum tax liability on deductible payments or accruals to foreign related parties, thereby countering erosion to the US tax base. Impacted are corporations with average annual gross receipts of at least $500 million, for tax years that begin after 12/31/2017.
· Action item – summarize all amounts to related foreign parties and study whether these result in tainted base erosion for purposes of this minimum tax calculation.
2. Related Party Hybrid Payments. Interest or royalty amounts to foreign related parties may be disqualified from tax deduction if the parties account for the transaction inconsistently. Such inconsistency can result if one of the parties is a hybrid entity, being fiscally transparent in one country but not the other. This rule applies to hybrid transactions for tax years beginning after 12/31/2017.
· Action item – prepare an integrated spreadsheet to analyze the company hybrid entity structure and scrutinize payments between such entities and the tax effects in their respective jurisdictions.
We have developed tools to help our clients analyze these and other action items. If you have questions about how you or your business may be impacted, please contact us.