In a previous column we identified a number of issues
associated with the BEAT that operates under certain
circumstances to reduce or deny the benefit of certain
deductible payments made by a US taxpayer to a related foreign
person. Since the writing of that column, the New York State
Bar Association (NYSBA) issued a report on the BEAT and made a
number of observations and recommendations. We highlight a few
here.
The NYSBA has suggested that the Treasury should consider
not treating payments as base eroding payments if they are made
pursuant to certain transactions that are effectively conduit
transactions. An example situation would be where a US person
acts as a 'waystation' for transactions between two foreign
related parties in a shared services context. Of course,
existing anti-conduct principles could be applied even in the
absence of any regulatory action, but it certainly would be
helpful for regulations to confirm that conduit arrangements
that are not fundamentally base eroding do not raise BEAT
concerns.
The BEAT rules do not include the cost of goods sold (COGS)
as base eroding payments, and Congress expressed a clear intent
that COGS should not be treated as base eroding payments.
Certain commentators, including the NYSBA, have observed that
under certain circumstances COGS may include the value of
intellectual property connected with the sale. The NYSBA stated
that it does not recommend that the Treasury writes regulations
limiting the scope of the COGS exception to payments that
include the value of intellectual property. The report noted
that Congressional intent was clear that COGS should not be
treated as base eroding payments. Indeed, any such regulation
would be contrary to Congressional intent.
The NYSBA recommended that the services cost method (SCM)
exclusion be construed to mean that the actual cost element of
SCM services be excludable from base erosion payments,
irrespective of whether a markup on such services is charged
(for example, because the foreign country's transfer pricing
law requires a markup). This is a fair reading of the statute
and Congressional intent, since in our view the exclusion
focuses on the nature of the services performed and not the
precise amount charged.
The NYSBA points to a possible statutory ambiguity regarding
whether the base erosion percentage of any net operating loss
(NOL) is determined with respect to the year of its origination
or the year of its utilisation. The NYSBA said it believes that
the correct grammatical read of the statute is that modified
taxable income for the year is calculated without the relevant
amount of NOL deduction allowed for the same year (therefore
irrespective of the year in which the base erosion percentage
of such NOL is determined). This reading also funds support
from the context of the statute.
The NYSBA also recommended that the Treasury carve out an
exception for payments made by a US shareholder to its
controlled foreign corporation (CFC) when the payment is
Subpart F income to the CFC.
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Jim
Fuller |
David
Forst |
Jim Fuller (jpfuller@fenwick.com)
and David Forst (dforst@fenwick.com)
Fenwick & West
Website: www.fenwick.com