REG-104259-18 Base Erosion and Anti-Abuse Tax (BEAT)

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 1 of 41

LEGAL STATUS

LEGAL STATUS

Base Erosion and Anti-Abuse Tax
A Proposed Rule by the Internal Revenue Service on 12/21/2018

DOCUMENT DETAILS

Printed version:
PDF (https://www.govinfo.gov/content/pkg/FR-2018-12-21/pdf/2018-27391.pdf)
Publication Date:
12/21/2018 (/documents/2018/12/21)
Agencies:
Internal Revenue Service (https://www.federalregister.gov/agencies/internal-revenue-service)
Dates:
Written or electronic comments and requests for a public hearing must be received by February 19, 2019.
Document Type:
Proposed Rule
Document Citation:
83 FR 65956
Page:
65956-65997 (42 pages)
CFR:
26 CFR 1
RIN:
1545-BO56
Document Number:
2018-27391

DOCUMENT DETAILS

DOCUMENT STATISTICS

Page views:
453
as of 12/21/2018 at 12:15 pm EST

DOCUMENT STATISTICS
PUBLISHED DOCUMENT

Start Printed
Page 65956

AGENCY:
Internal Revenue Service (IRS), Treasury.

ACTION:
Notice of proposed rulemaking.

SUMMARY:
This document contains proposed regulations that provide guidance regarding the tax on base erosion
payments of taxpayers with substantial gross receipts and reporting requirements thereunder. The proposed
regulations would affect corporations with substantial gross receipts that make payments to foreign related
parties. The proposed regulations under section 6038A would affect any reporting corporations within the
meaning of section 6038A or 6038C.

DATES:
Written or electronic comments and requests for a public hearing must be received by February 19, 2019.

ADDRESSES:
Send submissions to CC:PA:LPD:PR (REG-104259-18), room 5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-104259-18), Courier's desk, Internal
Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224, or sent electronically, via the
Federal eRulemaking Portal at www.regulations.gov (http://www.regulations.gov) (IRS REG-104259-18).

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 2 of 41

FOR FURTHER INFORMATION CONTACT:
Concerning §§ 1.59A-1 through 1.59A-10 of the proposed regulations, Sheila Ramaswamy or Karen Walny
at (202) 317-6938; concerning the services cost method exception, L. Ulysses Chatman at (202) 317-6939;
concerning §§ 1.383-1, 1.1502-2, 1.1502-4, 1.1502-43, 1.1502-47, 1.1502-59A, 1.1502-100, and 1.6655-5 of
the proposed regulations, Julie Wang at (202) 317-6975 or John P. Stemwedel at (202) 317-5024;
concerning §§ 1.6038A-1, 1.6038A-2, and 1.6038A-4 of the proposed regulations, Brad McCormack or
Anand Desai at (202) 317-6939; concerning submissions of comments and requests for a public hearing,
Regina Johnson at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 (/select-citation/2018/12/21/26-CFR-1)
under sections 59A, 383, 1502, 6038A, 6038C, and 6655 of the Internal Revenue Code (the “Code”). The
Tax Cuts and Jobs Act, Public Law 115-97 (https://www.govinfo.gov/link/plaw/115/public/97?link-type=html)
(2017) (the “Act”), which was enacted on December 22, 2017, added section 59A to the Code. Section 59A
imposes on each applicable taxpayer a tax equal to the base erosion minimum tax amount for the taxable
year (the “base erosion and anti-abuse tax” or “BEAT”).
The Act also added reporting obligations regarding this tax for 25-percent foreign-owned corporations
subject to section 6038A and foreign corporations subject to section 6038C and addressed other issues for
which information reporting under those sections is important to tax administration.

Explanation of Provisions
I. Overview
These proposed regulations provide guidance under section 59A regarding the determination of the tax on
base erosion payments for certain taxpayers with substantial gross receipts. In general, the proposed
regulations provide rules for determining whether a taxpayer is an applicable taxpayer on which the BEAT
may be imposed and rules for computing the taxpayer's BEAT liability.
Part II of this Explanation of Provisions section describes the rules in proposed § 1.59A-2 for determining
whether a taxpayer is an applicable taxpayer on which the BEAT may be imposed. Part III of this Explanation
of Provisions section describes the rules in proposed § 1.59A-3(b) for determining the amount of base
erosion payments. Part IV of this Explanation of Provisions section describes the rules in proposed § 1.59A-3
(c) for determining base erosion tax benefits arising from base erosion payments. Part V of this Explanation
of Provisions section describes the rules in proposed § 1.59A-4 for determining the amount of modified
taxable income, which is computed in part by reference to a taxpayer's base erosion tax benefits and base
erosion percentage of any net operating loss deduction. Part VI of this Explanation of Provisions section
describes the rules in proposed § 1.59A-5 for computing the base erosion minimum tax amount, which is
computed by reference to modified taxable income. Part VII of this Explanation of Provisions section
describes general rules in proposed § 1.59A-7 for applying the proposed regulations to partnerships. Part
VIII of this Explanation of Provisions section describes certain rules in the proposed regulations that are
specific to banks and registered securities dealers. Part IX of this Explanation of Provisions section
describes certain rules in the proposed regulations that are specific to insurance companies. Part X of this
Explanation of Provisions section describes the anti-abuse rules in proposed § 1.59A-9.
Parts XI-XIII of this Explanation of Provisions section address rules in proposed § 1.1502-59A regarding the
general application of the BEAT to consolidated groups. Part XIV of this Explanation of Provisions section
addresses proposed amendments to § 1.383-1 to address limitations on a loss corporation's items under
section 382 and 383 in the context of the BEAT. Part XV of this Explanation of Provisions section describes
reporting and record keeping requirements.

II. Applicable Taxpayer
The BEAT applies only to a taxpayer that is an applicable taxpayer. Proposed § 1.59A-2 provides rules for
determining if a taxpayer is an applicable taxpayer.
Generally, an applicable taxpayer is a corporation (other than (1) a regulated investment company (“RIC”),
(2) a real estate investment trust (“REIT”), or (3) an S corporation) that satisfies the gross receipts test and
the base erosion percentage test. Section 59A and the proposed regulations provide that the taxpayer and
certain other corporations that are related to the taxpayer are treated as one person for purposes of
determining whether a taxpayer satisfies these tests.
Part II.A of this Explanation of Provisions section describes the proposed rules for determining the aggregate
group for applying the gross receipts test and the base erosion percentage test. Part II.B of this Explanation
of Provisions section describes the proposed rules for applying the gross receipts test. Part II.C of this
Explanation of Provisions section describes the proposed rules for applying the base erosion percentage
test. Part II.D of this Explanation of Provisions section describes the proposed rules for applying these tests
on an aggregate group basis when members of the aggregate group have different taxable years. Part II.E of
this Explanation of Provisions section describes proposed rules for computing the base erosion percentage
for a taxpayer with deductions taken into account under a mark-to-market method of accounting.

Start Printed
Page 65957

A. Determining the Aggregate Group for Purposes of Applying the Gross
Receipts Test and the Base Erosion Percentage Test
Section 59A(e)(3) aggregates corporations (“aggregate group”) on the basis of persons treated as a single
employer under section 52(a), which treats members of the “same controlled group of corporations” (as
defined in section 1563(a) with certain modifications) as one person. Although a section 1563(a) controlled
group can include both foreign and domestic corporations, the proposed regulations treat foreign
corporations as outside of the controlled group for purposes of applying the aggregation rules, except to the
extent that the foreign corporation has effectively connected income. This limitation on the extent to which
foreign corporations are included in the aggregate group ensures that payments made by a domestic
corporation, or a foreign corporation with respect to its effectively connected income, to a foreign related
corporation are not inappropriately excluded from the base erosion percentage test. Accordingly, the
proposed regulations provide that a taxpayer must apply the gross receipts test and the base erosion
percentage test using the aggregate group consisting of members of the same controlled group of
corporations for purposes of section 52(a) that are (i) domestic corporations and (ii) foreign corporations, but
only with regard to gross receipts taken into account in determining income which is effectively connected
with the conduct of a trade or business in the United States and subject to tax under section 882(a). The
proposed regulations limit the aggregate group to corporations that benefit from deductions, and accordingly
may have base erosion tax benefits, while excluding foreign corporations that are not subject to U.S. income
tax (except on a gross basis under section 881, with respect to income that is not effectively connected with
a trade or business in the United States) and do not benefit from deductions. In the case of a foreign

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 3 of 41

corporation that determines its net taxable income under an applicable income tax treaty of the United
States, the foreign corporation is a member of the aggregate group with regard to gross receipts taken into
account in determining its net taxable income.
The proposed regulations generally provide that payments between members of the aggregate group are not
included in the gross receipts of the aggregate group, consistent with the single entity concept in section 59A
(e)(3). Similarly, the proposed regulations generally provide that payments between members of the
aggregate group are also not taken into account for purposes of the numerator or the denominator in the
base erosion percentage calculation.
Payments between the aggregate group and any foreign corporation that is not within the aggregate group
with respect to the payment are taken into account in applying both the gross receipts test and the base
erosion percentage test. However, because a foreign corporation is considered within the aggregate group to
the extent it is subject to net income tax in the United States, payments to a foreign corporation from within
the aggregate group that are subject to net income tax in the United States are eliminated and not taken into
account in applying the gross receipts test and the base erosion percentage test. Thus, it may be the case
that a payment by a domestic corporation to a foreign corporation is not taken into account in determining
applicable taxpayer status because the payee is subject to net income tax in the United States on that
payment, while another payment by the same domestic corporation to the same foreign corporation is taken
into account in determining applicable taxpayer status because the payee is not subject to net income tax in
the United States on that payment. The Treasury Department and the IRS welcome comments on the
proposed regulations addressing the aggregate group for purposes of the gross receipts test and the base
erosion percentage test.

B. Gross Receipts Test
A taxpayer satisfies the gross receipts test if the taxpayer, or the aggregate group of which the taxpayer is a
member, has $500 million or more of average annual gross receipts during the three prior taxable years. In
the case of a foreign corporation, the gross receipts test only takes into account gross receipts that are taken
into account in determining income that is subject to net income tax as income effectively connected with the
conduct of a trade or business within the United States, or taken into account in determining net taxable
income under an applicable U.S. income tax treaty.
In the case of an aggregate group, the proposed regulations measure gross receipts of a taxpayer by
reference to the taxpayer's aggregate group determined as of the end of the taxpayer's taxable year for
which BEAT liability is being computed, and takes into account gross receipts of those aggregate group
members during the three-year period preceding that taxable year.
The proposed regulations further clarify how a taxpayer computes gross receipts, including providing rules
for corporations that have been in existence for fewer than three years or have short years. These proposed
rules are generally consistent with rules set forth in section 448(c). See section 59A(e)(2)(B) (providing that
rules similar to the rules of section 448(c)(3)(B) through (D) apply in determining gross receipts for purposes
of section 59A). The proposed regulations also clarify how gross receipts are determined if members of the
aggregate group have different taxable years, as discussed in Part II.D of this Explanation of Provisions
section.
In addition, the proposed regulations clarify how gross receipts are determined for corporations subject to tax
under subchapter L (including a foreign corporation subject to tax under section 842(a)).
If a member of an aggregate group owns an interest in a partnership, the proposed regulations provide that
the group includes its share of the gross receipts of the partnership in its gross receipts computation. The
aggregate group's share of the gross receipts of the partnership is proportionate to its distributive share of
items of gross income from the partnership. See Part VII of this Explanation of Provisions section for a more
detailed description of the application of section 59A to partnerships.

C. Base Erosion Percentage Test
The base erosion percentage test is satisfied with respect to a taxpayer if the taxpayer (or if the taxpayer is a
member of an aggregate group, the aggregate group of which the taxpayer is a member) has a base erosion
percentage of three percent or more. Generally, a lower threshold of two percent applies if the taxpayer, or a
member of the taxpayer's aggregate group, is a member of an affiliated group (as defined in section 1504(a)
(1)) that includes a domestic bank or registered securities dealer. The proposed regulations provide that the
lower two percent threshold does not apply, however, in the case of an aggregate group or consolidated
group that has de minimis bank or registered securities dealer activities. See Part VIII of this Explanation of
Provisions section for a more detailed description of these rules.
The proposed regulations provide that the base erosion percentage for a taxable year is computed by
dividing (1) the aggregate amount of base erosion tax benefits (the “numerator”) by (2) the sum of the
aggregate amount of deductions plus certain other base erosion tax benefits (the “denominator”). As
described in Part II.A of this Explanation of Provisions section, in the case of a taxpayer that is a member of
an aggregate group, the base erosion percentage is measured by reference to the deductions or certain
reductions in gross income of the taxpayer and members of the taxpayer's aggregate group as of the end of
the taxpayer's taxable year. Base erosion tax benefits are generally the deductions or reductions in gross
income that result from base erosion payments. Part III of this Explanation of Provisions section describes
the proposed rules for determining the amount of base erosion payments, and Part IV of this Explanation of
Provisions section describes the proposed rules for determining the base erosion payments that give rise to
base erosion tax benefits.

Start Printed
Page 65958

The numerator of the base erosion percentage excludes deductions for (i) amounts paid or accrued to
foreign related parties for services qualifying for the exception in proposed § 1.59A-3(b)(3)(i) (the “services
cost method (“SCM”) exception”), (ii) payments covered by the qualified derivatives payments (“QDP”)
exception in proposed § 1.59A-3(b)(3)(ii), and (iii) amounts excluded pursuant to the total loss-absorbing
capacity (“TLAC”) exception in proposed § 1.59A-3(b)(3)(v). See Parts III.B.1, III.B.2, and III.B.5 of this
Explanation of Provisions section, for discussions of the SCM exception, QDP exception, and TLAC
exception, respectively. Generally, these deductions are also excluded from the denominator of the base
erosion percentage.
An applicable taxpayer may make a payment to a foreign related party that is not a member of the aggregate
group, if, for example, the recipient of the payment is a 25-percent owner as described in proposed § 
1.59A-1(b)(17) who does not own more than 50 percent of the applicable taxpayer, and that payment may
qualify for the ECI exception described in proposed § 1.59A-3(b)(3)(iii). If so, and if that payment also
qualifies for either the SCM exception described in proposed § 1.59A-3(b)(3)(i), the QDP exception
described in proposed § 1.59A-3(b)(3)(ii), or the TLAC exception described in proposed § 1.59A-3(b)(3)(v),
the payment will be included in the denominator for purposes of the base erosion percentage. For example,
if an applicable taxpayer makes a deductible payment to a foreign related person who is a 25-percent owner
and that payment is both a QDP and subject to federal income taxation as income that is, or is treated as,
effectively connected with the conduct of a trade or business in the United States under an applicable
provision of the Internal Revenue Code or regulations, that deductible payment is included in the
denominator of the base erosion percentage. However, if the applicable taxpayer makes a deductible
payment to a foreign related person and that payment is a QDP, but not otherwise subject to federal income
taxation, that deductible payment is excluded from the denominator of the base erosion percentage.
The proposed regulations also exclude any section 988 losses from the numerator and the denominator in
determining the base erosion percentage. See Part III.B.4 of this Explanation of Provisions section,
describing the exception for section 988 losses from the definition of base erosion payments.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 4 of 41

The numerator of the base erosion percentage only takes into account base erosion tax benefits, which
generally are base erosion payments for which a deduction is allowed under the Code for a taxable year.
See Part IV of this Explanation of Provisions section. Similarly, the proposed regulations ensure that the
denominator of the base erosion percentage only takes into account deductions allowed under the Code by
providing that the denominator of the base erosion percentage does not include deductions that are not
allowed in determining taxable income for the taxable year.
Finally, because a deduction allowed under section 965(c) to a United States shareholder of a deferred
foreign income corporation is not one of the categories of deductions specifically excluded from the
denominator under section 59A(c)(4)(B), that deduction is included in the denominator.
In general, as discussed in more detail in Part IV.A of this Explanation of Provisions section, if tax is imposed
by section 871 or 881 and that tax has been deducted and withheld under section 1441 or 1442 on a base
erosion payment, the base erosion payment is not treated as a base erosion tax benefit for purposes of
calculating a taxpayer's modified taxable income. If an income tax treaty reduces the amount of withholding
imposed on the base erosion payment, the base erosion payment is treated as a base erosion tax benefit to
the extent of the reduction in withholding under rules similar to those in section 163(j)(5)(B) as in effect
before the Act.
The proposed regulations apply the same rule concerning withholding taxes for purposes of the base erosion
percentage computation. Accordingly, a base erosion tax benefit is not included in the numerator when the
payment was subject to tax under section 871 or 881 and that tax has been deducted and withheld under
section 1441 or 1442. In addition, the proposed regulations provide that for any base erosion payment
subject to a reduced rate of withholding tax under an income tax treaty, the associated amount of base
erosion tax benefits eliminated from the numerator of the base erosion percentage calculation is determined
using rules similar to those in section 163(j)(5)(B) as in effect before the Act.
The base erosion percentage also takes into account the two categories of base erosion tax benefits that
result from reductions in gross income rather than deductions allowed under the Code (that is, (1) certain
premium or other consideration paid to a foreign related party for reinsurance, and (2) amounts paid or
accrued by the taxpayer to certain surrogate foreign corporations that result in a reduction in gross receipts
to the taxpayer). Section 59A(c)(4)(A)(ii)(II) provides that those base erosion tax benefits that result from
reductions in gross income are included in the both the numerator and the denominator in the same amount.
Other payments that reduce gross income but that are not base erosion payments are not included in the
denominator of the base erosion percentage.

D. Taxpayers in an Aggregate Group with Different Taxable Years
Section 59A determines the status of a corporation as an applicable taxpayer on the basis of the aggregate
group rules by taking into account the gross receipts and base erosion payments of each member of the
aggregate group. However, each member must compute the aggregate group amount of gross receipts and
base erosion payments based on its own taxable year and based on those corporations that are members of
the aggregate group at the end of such taxable year. Therefore, members with different taxable years may
have different base erosion percentages.
However, each corporation that is an applicable taxpayer computes its modified taxable income and base
erosion minimum tax amount on a separate taxpayer basis. In the case of a group of affiliated corporations
filing a consolidated tax return, the consolidated group is treated as a single taxpayer for purposes of section
59A, and its modified taxable income and base erosion minimum tax amount are determined on a
consolidated group basis.
The proposed regulations provide rules for determining whether the gross receipts test and base erosion
percentage test are satisfied with respect to a specific taxpayer when other members of its aggregate group
have different taxable years. See proposed § 1.59A-2(e)(3)(vii). In general, the proposed regulations provide
that each taxpayer determines its gross receipts and base erosion percentage by reference to its own
taxable year, taking into account the results of other members of its aggregate group during that taxable
year. In other words, for purposes of determining the gross receipts, base erosion tax benefits, and
deductions of the aggregate group, the taxpayer must include those amounts that occur during the course of
the taxpayer's own taxable year, not another member of the aggregate group's taxable year, if different. The
proposed regulations adopt this approach to provide certainty for taxpayers and avoid the complexity of a
rule that identifies a single taxable year for an aggregate group for purposes of section 59A that may differ
from a particular member of the aggregate group's taxable year. As a result of this rule, two related
taxpayers with different taxable years will compute their applicable gross receipts and base erosion
percentage by reference to different periods, even though in each case the calculations are done on an
aggregate group basis that takes into account other members of the controlled group. Taxpayers may use a
reasonable method to determine the gross receipts and base erosion percentage information for the time
period of the member of the aggregate group with a different taxable year. For an illustration of this rule, see
proposed § 1.59A-2(f)(2) (Example 2).

Start Printed
Page 65959

The proposed regulations also provide that when determining the base erosion percentage for a taxpayer
that is a member of an aggregate group with other members that have a different taxable year, the effective
date in section 14401(e) of the Act, as it applies to the taxpayer making the return, controls whether that
taxpayer takes into account transactions of other members of its aggregate group. (Section 14401(e) of the
Act provides that section 59A applies only to base erosion payments paid or accrued in taxable years
beginning after December 31, 2017.)
Thus, if one corporation (US1) that has a calendar year is a member of an aggregate group with another
corporation (US2) that has a taxable year ending November 30, when US1 computes its base erosion
percentage for its calendar year ending December 31, 2018, the base erosion payments made by US2
during the period from January 1, 2018, through December 31, 2018, are taken into account with respect to
US1 for its computations even though US2's base erosion payments in its taxable year ending November 30,
2018, are not base erosion payments with respect to US2 because of section 14401(e) of the Act.
Correspondingly, US2's taxable year beginning December 1, 2017, and ending November 30, 2018, is not
subject to section 59A because US2's base erosion payments occur in a year beginning before January 1,
2018, and base erosion payments made by US1 during the period from December 1, 2017 through
November 30, 2018, do not change that result. For a general discussion of the Act's effective date for section
59A, see Part III.C of this Explanation of Provisions section.

E. Mark-to-Market Deductions
As discussed in Part II.C of this Explanation of Provisions section, the taxpayer (or in the case of a taxpayer
that is a member of an aggregate group, the aggregate group) must determine the amount of base erosion
tax benefits in the numerator and the total amount of certain deductions, including base erosion tax benefits,
in the denominator to determine the base erosion percentage for the year. The proposed regulations provide
rules for determining the amount of base erosion tax benefits in the case of transactions that are marked to
market. These proposed rules also apply for determining the total amount of the deductions that are included
in the denominator of the base erosion percentage computation.
Specifically, to ensure that only a single deduction is claimed with respect to each transaction, the proposed
regulations combine all income, deduction, gain, or loss on each transaction for the year to determine the
amount of the deduction that is used for purposes of the base erosion percentage test. This rule does not
modify the net amount allowed as a deduction pursuant to the Code and regulations. This rule is intended to
prevent distortions in deductions from being included in the denominator of the base erosion percentage,
including as a result of the use of an accounting method that values a position more frequently than annually.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 5 of 41

III. Base Erosion Payments
The proposed regulations define a base erosion payment as a payment or accrual by the taxpayer to a
foreign related party (as defined in § 1.59A-1(b)(12)) that is described in one of four categories: (1) A
payment with respect to which a deduction is allowable; (2) a payment made in connection with the
acquisition of depreciable or amortizable property; (3) premiums or other consideration paid or accrued for
reinsurance that is taken into account under section 803(a)(1)(B) or 832(b)(4)(A); or (4) a payment resulting
in a reduction of the gross receipts of the taxpayer that is with respect to certain surrogate foreign
corporations or related foreign persons.
A payment or accrual that is not within one of the categories may be a base erosion payment described in
one of the other categories. For example, a deductible payment related to reinsurance that does not meet
the requirements for the third category of base erosion payments may still be a base erosion payment under
the first category because the payment is deductible. Nonetheless, to the extent all or a portion of a payment
or accrual is described in more than one of these categories, the amount is only taken into account once as
a base erosion payment.
Except as otherwise provided in the proposed regulations, the determination of whether a payment or
accrual by the taxpayer to a foreign related party is described in one of these four categories is made under
general U.S. federal income tax law. For example, the proposed regulations do not explicitly address
whether a royalty payment is classified as deductible under section 162 or as a cost includible in inventory
under sections 471 and 263A resulting in a reduction in gross income under section 61.
In general, the treatment of a payment as deductible, or as other than deductible, such as an amount that
reduces gross income or is excluded from gross income because it is beneficially owned by another person,
generally will have federal income tax consequences that will affect the application of section 59A and will
also have consequences for other provisions of the Code. In light of existing tax law dealing with identifying
who is the beneficial owner of income, who owns an asset, and the related tax consequences (including
under principal-agent principles, reimbursement doctrine, case law conduit principles, assignment of income
or other principles of generally applicable tax law), the proposed regulations do not establish any specific
rules for purposes of section 59A for determining whether a payment is treated as a deductible payment or,
when viewed as part of a series of transactions, should be characterized in a different manner.
Part III.A of this Explanation of Provisions section discusses the operating rules for certain specific types
of base erosion payments and Part III.B of this Explanation of Provisions section describes certain
exceptions to the definition of base erosion payments.

Start Printed
Page 65960

A. Certain Specific Types of Base Erosion Payments
This Part III.A of this Explanation of Provisions describes proposed operating rules for determining whether
there is a payment or accrual that can give rise to a base erosion payment. This part also discusses
proposed rules coordinating the definition of base erosion payment with rules that allocate deductions for
purposes of determining a foreign corporation's effectively connected income.

1. Payments or Accruals That Consist of Non-Cash Consideration
The proposed regulations clarify that a payment or accrual by a taxpayer to a foreign related party may be a
base erosion payment regardless of whether the payment is in cash or in any form of non-cash
consideration. See proposed § 1.59A-3(b)(2)(i). There may be situations where a taxpayer incurs a non-cash
payment or accrual to a foreign related party in a transaction that meets one of the definitions of a base
erosion payment, and that transaction may also qualify under certain nonrecognition provisions of the Code.
Examples of these transactions include a domestic corporation's acquisition of depreciable assets from a
foreign related party in an exchange described in section 351, a liquidation described in section 332, and a
reorganization described in section 368.
The proposed regulations do not include any specific exceptions for these types of transactions even though
(a) the transferor of the assets acquired by the domestic corporation may not recognize gain or loss, (b) the
acquiring domestic corporation may take a carryover basis in the depreciable or amortizable assets, and (c)
the importation of depreciable or amortizable assets into the United States in these transactions may
increase the regular income tax base as compared to the non-importation of those assets. The Treasury
Department and the IRS have determined that neither the nonrecognition of gain or loss to the transferor nor
the absence of a step-up in basis to the transferee establishes a basis to create a separate exclusion from
the definition of a base erosion payment. The statutory definition of this type of base erosion payment that
results from the acquisition of depreciable or amortizable assets in exchange for a payment or accrual to a
foreign related party is based on the amount of imported basis in the asset. That amount of basis is imported
regardless of whether the transaction is a recognition transaction or a transaction subject to rules in
subchapter C or elsewhere in the Code.
In contrast, for transactions in which a taxpayer that owns stock in a foreign related party receives
depreciable property from the foreign related party as an in-kind distribution subject to section 301, there is
no base erosion payment because there is no consideration provided by the taxpayer to the foreign related
party in exchange for the property. Thus, there is no payment or accrual.
In addition, because section 59A(d)(1) defines the first category of base erosion payment as “any amount
paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer and with respect
to which a deduction is allowable under this chapter,” a base erosion payment also includes a payment to a
foreign related party resulting in a recognized loss; for example, a loss recognized on the transfer of property
to a foreign related party. The Treasury Department and the IRS welcome comments about the treatment of
payments or accruals that consist of non-cash consideration. See Part III.B.4 of this Explanation of
Provisions section for a specific exception from the base erosion payment definition for exchange loss from a
section 988 transaction.

2. Interest Expense Allocable to a Foreign Corporation's Effectively Connected Income
Section 59A applies to foreign corporations that have income that is subject to net income taxation as
effectively connected with the conduct of a trade or business in the United States, taking into account any
applicable income tax treaty of the United States. These proposed regulations generally provide that a
foreign corporation that has interest expense allocable under section 882(c) to income that is effectively
connected with the conduct of a trade or business within the United States will have a base erosion payment
to the extent the interest expense results from a payment or accrual to a foreign related party. The amount of
interest that will be treated as a base erosion payment depends on the method used under § 1.882-5.
If a foreign corporation uses the method described in § 1.882-5(b) through (d), interest on direct allocations
and on U.S.-booked liabilities that is paid or accrued to a foreign related party will be a base erosion
payment. If U.S.-booked liabilities exceed U.S.-connected liabilities, a foreign corporation computing its
interest expense under this method must apply the scaling ratio to all of its interest expense on a pro-rata
basis to determine the amount that is a base erosion payment. Interest on excess U.S.-connected liabilities
also may be a base erosion payment if the foreign corporation has liabilities with a foreign related party.
If a foreign corporation determines its interest expense under the separate currency pools method described
in § 1.882-5(e), the amount of interest expense that is a base erosion payment is equal to the sum of (1) the
interest expense on direct allocations paid or accrued to a foreign related party and (2) the interest expense
in each currency pool multiplied by the ratio of average foreign related party liabilities over average total
liabilities for that pool. The base erosion payment exceptions discussed in Part III.B of this Explanation of
Provisions section may apply and may lower the amount of interest expense that is a base erosion payment.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 6 of 41

The Treasury Department and the IRS recognize that § 1.882-5 provides certain simplifying elections for
determining the interest deduction of a foreign corporation. In particular, § 1.882-5(c) generally provides that
the amount of U.S.-connected liabilities equals the total value of U.S. assets multiplied by the taxpayer's
worldwide leverage ratio. However, § 1.882-5(c)(4) allows a taxpayer to elect to use a fixed ratio instead of
its actual worldwide leverage ratio. Similarly, § 1.882-5(d)(5)(ii)(A) provides a general rule that the deduction
for interest on excess U.S.-connected liabilities is determined by reference to the average rate of interest on
U.S.-dollar liabilities that are not U.S.-booked liabilities. However, § 1.882-5(d)(5)(ii)(B) allows certain
taxpayers to elect to determine the deduction by reference to the 30-day London Interbank Offering Rate.
The Treasury Department and the IRS request comments about similar simplifying elections for determining
the portion of U.S.-connected liabilities that are paid to a foreign related party.

3. Other Deductions Allowed With Respect to Effectively Connected Income
Like excess interest expense, the proposed regulations provide that the amount of a foreign corporation's
other deductions properly allocated and apportioned to effectively connected gross income under § 1.882-4
are base erosion payments to the extent that those deductions are paid or accrued to a foreign related
party. Section 1.882-4(a)(1) generally provides that a foreign corporation engaged in a trade or business
within the United States is allowed the deductions which are properly allocated and apportioned to the
foreign corporation's gross income which is effectively connected its conduct of a trade or business within
the United States. The proposed regulations follow the approach under § 1.882-4. Accordingly, the
regulations identify base erosion payments by tracing each item of deduction, and determining whether the
deduction arises from a payment to a foreign related party.

Start Printed
Page 65961

If a foreign corporation engaged in a trade or business within the United States acquires property of a
character subject to the allowance for depreciation (or amortization in lieu of depreciation) from a foreign
related party, the amount paid or accrued by the taxpayer to the foreign related party is a base erosion
payment to the extent the property is used, or held for use, in the conduct of a trade or business within the
United States.

4. Income Tax Treaties
Certain U.S. income tax treaties provide alternative approaches for the allocation or attribution of business
profits of an enterprise of one contracting state to its permanent establishment in the other contracting state
on the basis of assets used, risks assumed, and functions performed by the permanent establishment. The
use of a treaty-based expense allocation or attribution method does not, in and of itself, create legal
obligations between the U.S. permanent establishment and the rest of the enterprise. These proposed
regulations recognize that as a result of a treaty-based expense allocation or attribution method, amounts
equivalent to deductible payments may be allowed in computing the business profits of an enterprise with
respect to transactions between the permanent establishment and the home office or other branches of the
foreign corporation (“internal dealings”). The deductions from internal dealings would not be allowed under
the Code and regulations, which generally allow deductions only for allocable and apportioned costs incurred
by the enterprise as a whole. The proposed regulations require that these deductions from internal dealings
allowed in computing the business profits of the permanent establishment be treated in a manner consistent
with their treatment under the treaty-based position and be included as base erosion payments.
The proposed regulations include rules to recognize the distinction between the allocations of expenses that
are addressed in Parts III.A.2 and 3 of this Explanation of Provisions section, and internal dealings. In the
first instance, the allocation and apportionment of expenses of the enterprise to the branch or permanent
establishment is not itself a base erosion payment because the allocation represents a division of the
expenses of the enterprise, rather than a payment between the branch or permanent establishment and the
rest of the enterprise. In the second instance, internal dealings are not mere divisions of enterprise
expenses, but rather are priced on the basis of assets used, risks assumed, and functions performed by the
permanent establishment in a manner consistent with the arm's length principle. The approach in the
proposed regulations creates parity between deductions for actual regarded payments between two separate
corporations (which are subject to section 482), and internal dealings (which are generally priced in a
manner consistent with the applicable treaty and, if applicable, the OECD Transfer Pricing Guidelines). The
rules in the proposed regulations applicable to foreign corporations using this approach apply only to
deductions attributable to internal dealings, and not to payments to entities outside of the enterprise, which
are subject to the general base erosion payment rules as provided in proposed § 1.59A-3(b)(4)(v)(A).

5. Certain Payments to Domestic Passthrough Entities With Foreign Owners or to Another
Aggregate Group Member
The proposed regulations also provide rules for certain payments to a domestic trust, REIT or RIC, and for
certain payments to a related domestic corporation that is not part of a consolidated group. Proposed § 
1.59A-3(b)(2)(v) provides a rule that applies when a domestic trust, REIT or RIC receives a payment that
otherwise would be a base erosion payment. Proposed § 1.59A-3(b)(2)(vi) applies when a taxpayer transfers
certain property to a member of an aggregate group that includes the taxpayer, to ensure that any deduction
for depreciation (or amortization in lieu of deprecation) by the transferee taxpayer remains a base erosion tax
benefit to the same extent as the amount that would have been a base erosion tax benefit in the hands of the
transferor.

B. Exceptions From the Base Erosion Payment Definition
1. Exception for Certain Amounts With Respect to Services
The SCM exception described in section 59A(d)(5) provides that section 59A(d)(1) (which sets forth the
general definition of a base erosion payment) does not apply to any amount paid or accrued by a taxpayer
for services if (A) the services are eligible for 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 (B) the amount constitutes the total services cost with no markup
component. The Treasury Department and the IRS interpret “services cost method” to refer to the services
cost method described in § 1.482-9(b), interpret the requirement regarding “fundamental risks of business
success or failure” to refer to the test in § 1.482-9(b)(5) commonly called the business judgment rule, and
interpret “total services cost” to refer to the definition of “total services costs” in § 1.482-9(j).
Section 59A(d)(5) is ambiguous as to whether the SCM exception applies when an amount paid or accrued
for services exceeds the total services cost, but the payment otherwise meets the other requirements for the
SCM exception set forth in section 59A(d)(5). Under one interpretation of section 59A(d)(5), the SCM
exception does not apply to any portion of a payment that includes any mark-up component. Under another
interpretation of section 59A(d)(5), the SCM exception is available if there is a markup, but only to the extent
of the total services costs. Under the former interpretation, any amount of markup would disqualify a
payment, in some cases resulting in dramatically different tax effects based on a small difference in charged
costs. In addition, if any markup were required, for example because of a foreign tax law or non-tax reason,
a payment would not qualify for the SCM exception. Under the latter approach, the services cost would
continue to qualify for the SCM exception provided the other requirements of the SCM exception are met.
The latter approach to the SCM exception is more expansive because it does not limit qualification to
payments made exactly at cost.
The proposed regulations provide that the SCM exception is available if there is a markup (and if other
requirements are satisfied), but that the portion of any payment that exceeds the total cost of services is not
eligible for the SCM exception and is a base erosion payment. The Treasury Department and the IRS
have determined that this interpretation is more consistent with the text of section 59A(d)(5). Rather than
require an all-or-nothing approach to service payments, section 59A(d)(5) provides an exception for “any
amount” that meets the specified test. This language suggests that a service payment may be disaggregated
into its component amounts, just as the general definition of base erosion payment applies to the deductible

Start Printed
Page 65962

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 7 of 41

amount of a foreign related party payment even if the entire payment is not deductible. See section 59A(d)
(1). The most logical interpretation is that a payment for a service that satisfies subparagraph (A) is excepted
up to the qualifying amount under subparagraph (B), but amounts that do not qualify (i.e., the markup
component) are not excepted. This interpretation is reinforced by the fact that section 59A(d)(5)(A) makes
the SCM exception available to taxpayers that cannot apply the services cost method described in § 1.482-9
(b) (which permits pricing a services transaction at cost for section 482 purposes) because the taxpayer
cannot satisfy the business judgment rule in § 1.482-9(b)(5). Because a taxpayer in that situation cannot
ordinarily charge cost, without a mark-up, for transfer pricing purposes, failing to adopt this approach would
render the parenthetical reference in section 59A(d)(5)(A) a nullity. The interpretation the proposed
regulations adopt gives effect to the reference to the business judgment rule in section 59A(d)(5). The
Treasury Department and the IRS welcome comments on whether the regulations should instead adopt the
interpretation of section 59A(d)(5) whereby the SCM exception is unavailable to a payment that includes any
mark-up component.
To be eligible for the SCM exception, the proposed regulations require that all of the requirements of § 
1.482-9(b) must be satisfied, except as modified by the proposed regulations. Therefore, a taxpayer's
determination that a service qualifies for the SCM exception is subject to review under the requirements of § 
1.482-9(b)(3) and (b)(4), and its determination of the amount of total services cost and allocation and
apportionment of costs to a particular service is subject to review under the rules of § 1.482-9(j) and § 
1.482-9(k), respectively.
Although the proposed regulations do not require a taxpayer to maintain separate accounts to bifurcate the
cost and markup components of its services charges to qualify for the SCM exception, the proposed
regulations do require that taxpayers maintain books and records adequate to permit verification of, among
other things, the amount paid for services, the total services cost incurred by the renderer, and the allocation
and apportionment of costs to services in accordance with § 1.482-9(k). Because payments for certain
services that are not eligible for the SCM due to the business judgment rule or for which taxpayers select
another transfer pricing method may still be eligible for the SCM exception to the extent of total services cost,
the record-keeping requirements in the proposed regulations differ from the requirements in § 1.482-9(b)(6).
See § 1.59A-3(b)(3)(i)(B)(2). Unlike § 1.482-9(b)(6), the proposed regulations do not require that taxpayers
“include a statement evidencing [their] intention to apply the services cost method to evaluate the arm's
length charge for such services,” but the proposed regulations do require that taxpayers include a calculation
of the amount of profit mark-up (if any) paid for the services. For purposes of qualifying for the SCM
exception under section 59A(d)(5), taxpayers are required to comply with the books and records
requirements under these proposed regulations but not § 1.482-9(b)(6).
The proposed regulations also clarify that the parenthetical reference in section 59A(d)(5) to the business
judgment rule prerequisite for applicability of the services cost method—“(determined without regard to the
requirement that the services not contribute significantly to fundamental risks of business success or
failure)”—disregards the entire requirement set forth in § 1.482-9(b)(5) solely for purposes of section 59A(d)
(5).

2. Qualified Derivative Payments
Section 59A(h) provides that a qualified derivative payment (QDP) is not a base erosion payment. Proposed
§ 1.59A-6 defines a QDP as any payment made by a taxpayer to a foreign related party pursuant to a
derivative for which the taxpayer recognizes gain or loss on the derivative on a mark-to-market basis (treats
the derivative as sold on the last business day of the taxable year), the gain or loss is ordinary, and any gain,
loss, income or deduction on a payment made pursuant to the derivative is also treated as ordinary.
The QDP exception applies only if the taxpayer satisfies reporting requirements in proposed § 1.6038A-2(b)
(7)(ix). If a taxpayer satisfies the reporting requirements for some QDPs, but not all, then only the payments
for which the taxpayer fails to satisfy the reporting requirements will be ineligible for the QDP exception.
Section 1.6038A-2(b)(7)(ix) will first apply to taxable years beginning after final regulations are published,
which provides taxpayers additional time to meet those reporting requirements. The proposed regulations
provide that before final regulations are published, taxpayers satisfy the reporting requirements for QDPs by
reporting the aggregate amount of QDPs for the taxable year on Form 8991, Tax on Base Erosion Payments
of Taxpayers With Substantial Gross Receipts.
Section 59A(h)(3) provides two exceptions to the QDP exception. Specifically, the QDP exception does not
apply (1) to a payment that would be treated as a base erosion payment if it were not made pursuant to a
derivative or (2) with respect to a contract that has derivative and nonderivative components, to a payment
that is properly allocable to the nonderivative component. The proposed regulations do not specifically
address or modify these statutory provisions. For the avoidance of doubt, the Treasury Department and the
IRS observe that these rules in section 59A(h)(3) are self-executing; thus, taxpayers must apply these two
rules to determine whether any of their payments pursuant to derivatives fail to qualify for the QDP
exception. The Treasury Department and the IRS request comments on whether regulations should further
clarify the statutory provisions in section 59A(h)(3).
Proposed § 1.59A-6(d) defines a derivative as any contract, the value of which, or any payment with respect
to which, is determined by reference to any stock, evidence of indebtedness, actively traded commodity,
currency, or any rate, price, amount, index, formula or algorithm. However, direct ownership of any of these
items is not ownership of a derivative. The proposed regulations clarify that for purposes of section 59A(h)
(4), a derivative does not include an insurance contract, a securities lending transaction, a sale-repurchase
transaction, or any substantially similar transaction.
For federal tax purposes, a sale-repurchase transaction satisfying certain conditions is treated as a secured
loan. Sections 59A(h)(3) and 59A(h)(4) explicitly exclude from qualified derivatives payment status any
payment that would be treated as a base erosion payment if it were not made pursuant to a derivative, such
as a payment of interest on a debt instrument. Accordingly, for purposes of section 59A(h), the proposed
regulations provide that sale-repurchase transactions are not treated as derivatives. Because salerepurchase transactions and securities lending transactions are economically similar to each other, the
Treasury Department and the IRS have determined that these transactions should be treated similarly for
purposes of section 59A(h)(4), and therefore payments on those transactions are not treated as QDPs. The
Treasury Department and the IRS request comments on whether securities lending transactions and salerepurchase transactions have been properly excluded from the definition of a derivative, including whether
certain transactions lack a significant financing component such that those transactions should be treated as
derivatives for purposes of section 59A(h). The Treasury Department and the IRS also request comments
regarding whether any additional transactions or financial instruments should be explicitly excluded from the
definition of a derivative.

Start Printed
Page 65963

3. Exception to Base Erosion Payment Status for Payments the Recipient of Which is Subject to
U.S. Tax
In general, for a payment or accrual to be treated as a base erosion payment, the recipient must be a foreign
person (within the meaning of section 6038A(c)(3)) that is a related party with respect to the taxpayer, and a
deduction must be allowable with respect to the payment or accrual. See section 59A(f). Section 6038A(c)(3)
defines “foreign person” as any person that is not a United States person within the meaning of section 7701
(a)(30), but for this purpose the term “United States person” does not include any individual who is a citizen
of any U.S. territory (but not otherwise a citizen of the United States) and who is not a resident of the United
States. See proposed § 1.59A-1(b)(10). The Treasury Department and the IRS have determined that it is
appropriate in defining a base erosion payment to consider the U.S. tax treatment of the foreign recipient. In
particular, the Treasury Department and the IRS have determined that a payment to a foreign person should
not be taxed as a base erosion payment to the extent that payments to the foreign related party are
effectively connected income. Those amounts are subject to tax under sections 871(b) and 882(a) on a net
basis in substantially the same manner as amounts paid to a United States citizen or resident or a domestic
corporation. Accordingly, the proposed regulations include an exception from the definition of base erosion

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 8 of 41

payment for amounts that are subject to tax as income effectively connected with the conduct of a U.S. trade
or business. In the case of a foreign recipient that determines its net taxable income under an applicable
income tax treaty, the exception from the definition of base erosion payment applies to payments taken into
account in determining net taxable income under the treaty.

4. Exchange Loss From a Section 988 Transaction
Proposed § 1.59A-3(b)(3)(iv) provides that exchange losses from section 988 transactions described in § 
1.988-1(a)(1) are not base erosion payments. The Treasury Department and the IRS have determined that
these losses do not present the same base erosion concerns as other types of losses that arise in
connection with payments to a foreign related party. Accordingly, under these proposed regulations, section
988 losses are excluded from the numerator.
The proposed regulations also provide that section 988 losses are excluded from the denominator of the
base erosion percentage. Specifically, proposed § 1.59A-2(e)(3)(ii)(D) provides that an exchange loss from a
section 988 transaction (including with respect to persons other than foreign related parties) is not included
in the denominator when calculating the base erosion percentage. Exchange gain from a section 988
transaction, however, is included as a gross receipt for purposes of the gross receipts test under proposed § 
1.59A-2(d).
The Treasury Department and the IRS request comments on the treatment of section 988 losses in the
context of section 59A, including whether the rule relating to section 988 losses in the denominator of the
base erosion percentage calculation should be limited to transactions with a foreign related party.

5. Exception for Interest on Certain Instruments Issued by Globally Systemically Important
Banking Organizations
The Federal Reserve requires that certain global systemically important banking organizations (GSIBs) issue
TLAC securities as part of a global framework for bank capital that has sought to minimize the risk of
insolvency. In particular, the Board of Governors of the Federal Reserve (the Board) has issued regulations
that prescribe the amount and form of external TLAC securities that domestic GSIBs must issue and internal
TLAC securities that certain foreign GSIBs must issue. In the case of internal TLAC securities, the Board
regulations require the domestic intermediate holding company of a foreign GSIB to issue a specified
minimum amount of TLAC to its foreign parent. Section 59A(i) provides that the Secretary shall prescribe
such regulations or other guidance as may be necessary or appropriate to carry out the provisions of section
59A, including regulations addressing specifically enumerated situations. The Treasury Department and the
IRS have determined that because of the special status of TLAC as part of a global system to address bank
solvency and the precise limits that Board regulations place on the terms of TLAC securities and structure of
intragroup TLAC funding, it is necessary and appropriate to include an exception to base erosion payment
status for interest paid or accrued on TLAC securities required by the Federal Reserve.
Specifically, the proposed regulations include a TLAC exception that applies only to the extent of the amount
of TLAC securities required by the Federal Reserve under subpart P of 12 CFR part 252 (/selectcitation/2018/12/21/12-CFR-252). As a result, the exception is scaled back if the adjusted issue price of the
average amount of TLAC securities issued and outstanding exceeds the average amount of TLAC long-term
debt required by the Federal Reserve for the taxable year. The TLAC exception applies only to securities
required by the Federal Reserve, and as a result generally does not apply to securities issued by a foreign
corporation engaged in a U.S. trade or business because the applicable Federal Reserve requirement
applies only to domestic institutions. However, the Treasury Department and the IRS acknowledge that
foreign regulators may impose similar requirements on the financial institutions they regulate. The Treasury
Department and the IRS request comments regarding a similar exception for foreign corporations that are
required by law to issue a similar type of loss-absorbing instrument, including the appropriate scope of an
exception that would provide parity between the treatment of domestic corporations and foreign corporations
engaged in a U.S. trade or business.

C. Base Erosion Payments Occurring Before the Effective Date and Pre2018 Disallowed Business Interest
Section 14401(e) of the Act provides that section 59A applies only to base erosion payments paid or accrued
in taxable years beginning after December 31, 2017. The statutory definition of a base erosion tax benefit is
based upon the definition of a base erosion payment. Accordingly, the proposed regulations confirm the
exclusion of a deduction described in section 59A(c)(2)(A)(i) (deduction allowed under Chapter 1 for the
taxable year with respect to any base erosion payment) or section 59A(c)(2)(A)(ii) (deduction allowed under
Chapter 1 for the taxable year for depreciation or amortization with respect to any property acquired with
such payment) that is allowed in a taxable year beginning after December 31, 2017, if it relates to a base
erosion payment that occurred in a taxable year beginning before January 1, 2018.

Start Printed
Page 65964

For example, if in 2015, a calendar year taxpayer makes a payment or accrual to a foreign related party to
acquire depreciable property, the 2015 payment is excluded from the definition of a base erosion payment
because of section 14401(e) of the Act. As a result, the taxpayer's depreciation deduction allowed in 2018
with respect to this property is not a base erosion tax benefit.
Similarly, if in 2016, a taxpayer with a calendar year had paid or accrued interest on an obligation to a foreign
related party, but the interest was not deductible in 2016 due to the application of section 267(a), the 2016
accrual of the interest amount is excluded from the definition of a base erosion payment because of section
14401(e) of the Act. As a result, if the interest amount becomes deductible in 2018, the taxpayer's deduction
allowed in 2018 with respect to this item is not a base erosion tax benefit.
In the case of business interest expense that is not allowed as a deduction under section 163(j)(1), the
proposed regulations provide a rule that clarifies that the effective date rules apply in a similar manner as
with other base erosion payments that initially arose before the effective date in section 14401(e) of the Act.
Section 163(j), as modified by the Act, provides that the deduction for business interest expense is limited to
the sum of business interest income, 30 percent of adjusted taxable income (“ATI”), and the amount of any
floor plan financing interest. Section 163(j)(2) further provides that any disallowed business interest is carried
forward to the succeeding year, and that the carryforward amount is treated as “paid or accrued” in the
succeeding taxable year.
In Notice 2018-28, 2018-16 I.R.B. 492, Section 3, the Treasury Department and the IRS stated that business
interest carried forward from a taxable year beginning before January 1, 2018, will be treated in the same
manner as interest paid or accrued in a taxable year beginning after December 31, 2017, for purposes of
section 59A. Under this approach, business interest expense that was initially paid or accrued in a taxable
year beginning before January 1, 2018, could nonetheless be a base erosion payment in a taxable year
beginning after December 31, 2017, because section 163(j)(2) deems a recurring “payment or accrual” for
such item in each carryforward year. Comments requested that the Treasury Department and the IRS
reconsider the position taken in Notice 2018-28, on the basis that the determination of whether a payment is
a base erosion payment should be made as of the date of the actual payment of interest rather than the date
that a deduction is allowed under section 163(j).
The Treasury Department and the IRS agree and have determined that the approach described in Notice
2018-28 is not consistent with the general effective date provision in Section 14401(e) of the Act because the
language in section 163(j)(2) deeming a recurring “payment or accrual” is primarily to implement the
carryforward mechanism in section 163(j), rather than to treat interest that is carried forward to a subsequent
taxable year as paid or accrued for all tax purposes in that subsequent taxable year. Accordingly, the
proposed regulations do not follow the approach described in Notice 2018-28. Instead, the proposed
regulations provide that any disallowed disqualified interest under section 163(j) that resulted from a
payment or accrual to a foreign related party and that is carried forward from a taxable year beginning before
January 1, 2018, is not a base erosion payment. The proposed regulations also clarify that any disallowed

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 9 of 41

business interest carryforward under section 163(j) that resulted from a payment or accrual to a foreign
related party is treated as a base erosion payment in the year that the interest was paid or accrued even
though the interest may be deemed to be paid or accrued again in the year in which it is actually deducted.
The rule in the proposed regulations generally is consistent with excluding interest paid or accrued before
January 1, 2018 (generally under financing arranged prior to the Act) from treatment as a base erosion
payment. The Treasury Department and the IRS welcome comments with respect to the treatment of
disallowed disqualified interest under section 163(j) from a taxable year beginning before January 1, 2018.
See Part IV.B of this Explanation of Provisions section for proposed rules determining the amount of
business interest expense for which a deduction is allowed when section 163(j) applies to limit interest
deductions.

IV. Base Erosion Tax Benefits
The amount of base erosion tax benefits is an input in (i) the computation of the base erosion percentage
test (discussed in Part II.C of this Explanation of Provisions section) and (ii) the determination of modified
taxable income (discussed in Part V of this Explanation of Provisions section). Generally, a base erosion tax
benefit is the amount of any deduction relating to a base erosion payment that is allowed under the Code for
the taxable year. Base erosion tax benefits are defined in proposed § 1.59A-3(c).

A. Withholding Tax on Payments
As discussed in Part II.C of this Explanation of Provisions section, if tax is imposed by section 871 or 881
and the tax is deducted and withheld under section 1441 or 1442 without reduction by an applicable income
tax treaty on a base erosion payment, the base erosion payment is treated as having a base erosion tax
benefit of zero for purposes of calculating a taxpayer's modified taxable income. If an income tax treaty
reduces the amount of withholding imposed on the base erosion payment, the base erosion payment is
treated as a base erosion tax benefit to the extent of the reduction in withholding under rules similar to those
in section 163(j)(5)(B) as in effect before the Act.

B. Rules for Classifying Interest for Which a Deduction Is Allowed When
Section 163(j) Limits Deductions
Section 59A(c)(3) provides a stacking rule in cases in which section 163(j) applies to a taxpayer, under which
the reduction in the amount of deductible interest is treated as allocable first to interest paid or accrued to
persons who are not related parties with respect to the taxpayer and then to related parties. The statute does
not provide a rule for determining which portion of the interest treated as paid to related parties (and thus
potentially treated as a base erosion payment) is treated as paid to a foreign related person as opposed to a
domestic related person. Proposed § 1.59A-3(c)(4) provides rules coordinating section 163(j) with the
determination of the amount of base erosion tax benefits. This rule provides, consistent with section 59A(c)
(3), that where section 163(j) applies to limit the amount of a taxpayer's business interest expense that is
deductible in the taxable year, a taxpayer is required to treat all disallowed business interest first as interest
paid or accrued to persons who are not related parties, and then as interest paid or accrued to related
parties for purposes of section 59A. More specifically, the proposed regulations provide that when a
corporation has business interest expense paid or accrued to both unrelated parties and related parties, the
amount of allowed business interest expense is treated first as the business interest expense paid to related
parties, proportionately between foreign and domestic related parties, and then as business interest expense
paid to unrelated parties. Conversely, the amount of a disallowed business interest expense carryforward is
treated first as business interest expense paid to unrelated parties, and then as business interest expense
paid to related parties, proportionately between foreign and domestic related party business interest
expense.

Start Printed
Page 65965

Because section 163(j) and the proposed regulations thereunder provide an ordering rule that allocates
business interest expense deductions first to business interest expense incurred in the current year and then
to business interest expense carryforwards from prior years (starting with the earliest year) in order to
separately track the attributes on a year-by-year layered approach for subchapter C purposes, these
proposed regulations follow that convention. Accordingly, the proposed regulations also follow a year-byyear convention in the allocation of business interest expense and carryovers among the related and
unrelated party classifications. See also the discussion of singular tax attributes in Part V.A of this
Explanation of Provisions section. The proposed regulations adopt a similar approach for business interest
expense and excess business interest of a partnership that is allocated to a corporate partner by separately
tracking and ordering items allocated from a partnership.

V. Modified Taxable Income
For any taxable year, section 59A imposes a tax on each applicable taxpayer equal to the base erosion
minimum tax amount for that year. Section 59A(b)(1) provides that the base erosion minimum tax amount is
determined based on an applicable taxpayer's modified taxable income for the taxable year. Part V.A of this
Explanation of Provisions section discusses how an applicable taxpayer computes its modified taxable
income. Part V.B of this Explanation of Provisions section describes how modified taxable income is
calculated if an applicable taxpayer has an overall taxable loss for a taxable year. Finally, Part V.C of this
Explanation of Provisions section describes the base erosion percentage that is used when the base erosion
percentage of a net operating loss deduction (“NOL deduction”) is added back to taxable income for
purposes of the modified taxable income calculation.

A. Method of Computation
Section 59A(c)(1) provides that the term modified taxable income means the taxable income of the taxpayer
computed under Chapter 1 for the taxable year, determined without regard to base erosion tax benefits and
the base erosion percentage of any NOL deduction under section 172 for the taxable year. The proposed
regulations clarify that the computation of modified taxable income and the computation of the base erosion
minimum tax amount (which is discussed in Part VI of this Explanation of Provisions section) are made on a
taxpayer-by-taxpayer basis. That is, under the proposed regulations, the aggregate group concept is used
solely for determining whether a taxpayer is an applicable taxpayer and the base erosion percentage of any
NOL deduction. This approach is consistent with section 59A(a)'s imposition of a tax equal to the base
erosion minimum tax amount, which is in addition to the regular tax liability of a taxpayer.
The proposed regulations also provide that the computation of modified taxable income is done on an addback basis. The computation starts with taxable income (or taxable loss) of the taxpayer as computed for
regular tax purposes, and adds to that amount (a) the gross amount of base erosion tax benefits for the
taxable year and (b) the base erosion percentage of any NOL deduction under section 172 for the taxable
year.
The proposed regulations do not provide for the recomputation of income under an approach similar to the
alternative minimum tax, which the Act repealed for corporations. See section 12001(a) of the Act. Under a
recomputation approach, attributes that are limited based on taxable income would be subject to different
annual limitations, and those attributes would have to be re-computed for purposes of section 59A. Applying
this approach in a manner that reflects the results of the BEAT-basis recomputation to subsequent years
would lead to parallel attributes that are maintained separately in a manner similar to the pre-Act corporate
alternative minimum tax. For example, the amount of the net operating loss used to reduce modified taxable
income would differ from the amount used in computing regular tax liability, and the carryforward of unused
net operating loss that is used to compute regular tax liability would not reflect the net operating loss amount

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 10 of 41

used to reduce modified taxable income (absent a separate BEAT-basis carryover). The annual limitation
under section 163(j)(1), which generally limits a corporation's annual deduction for business interest
expense, would present similar issues under a recomputation approach. Consequently, the add-back
approach also provides simplification relative to the recomputation approach because the add-back
approach eliminates the need to engage in the more complex tracking of separate attributes on a BEAT
basis in a manner similar to the repealed corporate AMT. The Treasury Department and the IRS welcome
comments on the add-back approach provided in the proposed regulations, and the practical effects of an
alternative recomputation-based approach.

B. Conventions for Computing Modified Taxable Income—Current Year
Losses and Excess Net Operating Loss Carryovers
If a taxpayer has an excess of deductions allowed by Chapter 1 over gross income, computed without regard
to the NOL deduction, the taxpayer has negative taxable income for the taxable year. Generally, the
proposed regulations provide that a negative amount is the starting point for computing modified taxable
income when there is no NOL deduction from net operating loss carryovers and carrybacks.
The proposed regulations further provide a rule applicable to situations in which there is a NOL deduction
from a net operating loss carryover or carryback to the taxable year and that NOL deduction exceeds the
amount of positive taxable income before that deduction (because, for example, the loss arose in a year
beginning before January 1, 2018). The proposed regulations provide that the excess amount of NOL
deduction does not reduce taxable income below zero for determining the starting point for computing
modified taxable income. The Treasury Department and the IRS have determined that this rule is necessary
because section 172(a) could be read to provide that, for example, if a taxpayer has a net operating loss of
$100x that arose in a taxable year beginning before January 1, 2018, that is carried forward, and in a
subsequent year the taxpayer has taxable income of $5x before taking into account the $100x net operating
loss carryover deduction, the taxpayer may nonetheless have a $100x NOL deduction in that year or a
$95x taxable loss (even though $95x of the net operating loss would remain as a carryforward to future
years, as well). Because the proposed regulations recognize the notion of a taxable loss when deductions
other than the NOL deduction exceed gross income (as discussed earlier in this Part V), this rule clarifies
that the taxpayer's starting point for computing modified taxable income in this situation is zero, rather than
negative $95x.

Start Printed
Page 65966

The proposed regulations further clarify that the NOL deduction taken into account for purposes of adding
the base erosion percentage of the NOL deduction to taxable income under section 59A(c)(1)(B) is
determined in the same manner. Accordingly, in the example above, the base erosion percentage of the
NOL deduction added to taxable income is computed based on the $5x NOL deduction that reduces regular
taxable income to zero, rather than the entire $100x of net operating loss carryforward, $95x of which is not
absorbed in the current taxable year.
Finally, the proposed regulations provide that an applicable taxpayer's taxable income is determined
according to section 63(a) without regard to the rule in section 860E(a)(1). That rule generally provides that a
holder of a residual interest in a real estate mortgage investment conduit (“REMIC”) may not have taxable
income less than its excess inclusion amount. As a result of section 860E(a)(1), a holder of a REMIC
residual interest may have taxable income for purposes of computing its regular tax liability even though it
has a current year loss. The proposed regulations provide that the limitation in section 860E(a)(1) is
disregarded for purposes of calculating modified taxable income under section 59A. The rule described in
this paragraph is relevant, for example, in situations when the taxpayer would have negative taxable income
attributable to a current year loss, as described in this Part V.B, or no taxable income as a result of a net
operating loss. Because section 860E(a)(1) ensures that the excess inclusion is subject to tax under section
11, the Treasury Department and the IRS have determined that it is not appropriate to apply the rule in
section 860E(a)(1) for the purpose of calculating modified taxable income under section 59A.

C. Conventions for Computing Modified Taxable Income—Determining
the Base Erosion Percentage of NOL Deductions
Section 59A(c)(1)(B) provides that modified taxable income includes the base erosion percentage of any
NOL deduction allowed under section 172 for the taxable year. In this context, the relevant base erosion
percentage could be either the base erosion percentage in the year that the net operating loss arose, or
alternatively, the base erosion percentage in the year in which the taxpayer takes the NOL deduction.
Proposed § 1.59A-4(b)(2)(ii) applies the base erosion percentage of the year in which the loss arose, or
vintage year, because the base erosion percentage of the vintage year reflects the portion of base eroding
payments that are reflected in the net operating loss carryover. In addition, because the vintage-year base
erosion percentage is a fixed percentage, taxpayers will have greater certainty as to the amount of the future
add-back to modified taxable income (as compared to using the utilization-year base erosion percentage).
Based on this approach, the proposed regulations also provide that in the case of net operating losses that
arose in taxable years beginning before January 1, 2018, and that are deducted as carryovers in taxable
years beginning after December 31, 2017, the base erosion percentage is zero because section 59A applies
only to base erosion payments that are paid or accrued in taxable years beginning after December 31, 2017.
See section 14401(e) of the Act. As a result, there is no add-back to modified taxable income for the use of
those net operating loss carryovers. The Treasury Department and the IRS welcome comments on the
vintage-year approach as well as the alternative utilization-year approach.
The proposed regulations also clarify that in computing the add-back for NOL deductions for purposes of the
modified taxable income calculation, the relevant base erosion percentage is the base erosion percentage
for the aggregate group that is used to determine whether the taxpayer is an applicable taxpayer, rather than
a separate computation of base erosion percentage computed solely by reference to the single taxpayer.

VI. Base Erosion Minimum Tax Amount
An applicable taxpayer computes its base erosion minimum tax amount (“BEMTA”) for the taxable year to
determine its liability under section 59A(a). Proposed § 1.59A-5 describes the calculation of the BEMTA.
Generally, the taxpayer's BEMTA equals the excess of (1) the applicable tax rate for the taxable year (“BEAT
rate”) multiplied by the taxpayer's modified taxable income for the taxable year over (2) the taxpayer's
adjusted regular tax liability for that year. See Part VIII of this Explanation of Provisions section for a
discussion of the higher BEAT rate for certain banks and registered securities dealers.
In determining the taxpayer's adjusted regular tax liability for the taxable year, credits (including the foreign
tax credit) are generally subtracted from the regular tax liability amount. To prevent an inappropriate
understatement of a taxpayer's adjusted regular tax liability, the proposed regulations provide that credits for
overpayment of taxes and for taxes withheld at source are not subtracted from the taxpayer's regular tax
liability because these credits relate to federal income tax paid for the current or previous year.
For taxable years beginning before January 1, 2026, under section 59A(b)(1)(B), the credits allowed against
regular tax liability (which reduce the amount of regular tax liability for purposes of calculating BEMTA) are
not reduced by the research credit determined under section 41(a) or by a portion of applicable section 38
credits. For taxable years beginning after December 31, 2025, this special treatment of the research credit
and applicable section 38 credits no longer applies. As a result, an applicable taxpayer may have a greater
BEMTA than would be the case in taxable years beginning before January 1, 2026. In general, foreign tax
credits are taken into account in computing a taxpayer's regular tax liability before other credits. See section
26(a). As a result, a taxpayer with foreign tax credits that reduce its regular tax liability to, or close to, zero
may not use its section 41(a) credits or its applicable section 38 credits in computing its regular tax liability.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 11 of 41

In these situations, those credits will not be taken into account in computing the taxpayer's BEMTA even in a
pre-2026 year. Instead, those credits will reduce (or, put differently, will prevent an increase in) the BEMTA
in the year when those credits are used for regular tax purposes (provided that the taxable year begins
before January 1, 2026).

VII. Application of Section 59A to Partnerships
A partnership is not an “applicable taxpayer” as defined in Section 59A; only corporations can be applicable
taxpayers. In general, however, a partnership also is not subject to the income tax imposed by Chapter 1 of
Subtitle A of the Code. Instead, partners are liable for income tax only in their separate capacities. Each
taxpayer that is a partner in a partnership takes into account separately the partner's distributive share of the
partner's income or loss in determining its taxable income. Accordingly, an item of income is subject to
federal income taxation based on the status of the partners, and not the partnership as an entity. Similarly,
a partnership does not itself benefit from a deduction. Instead, the tax benefit from a deduction is taken by
the taxpayer that is allocated the deduction under section 704. Section 702(b) provides that the character of
any item be taken into account as if such item were realized directly from the source from which realized by
the partnership, or incurred in the same manner as incurred by the partnership. Section 702(b)
acknowledges that differences in partner tax characteristics (for example, whether the partner is a
corporation or an individual, or domestic or foreign) may result in differences in the tax consequences of
items the partnership allocates to its partners.

Start Printed
Page 65967

The proposed regulations generally apply an aggregate approach in conjunction with the gross receipts test
for evaluating whether a corporation is an applicable taxpayer and in addressing the treatment of payments
made by a partnership or received by a partnership for purposes of section 59A. The proposed regulations
generally provide that partnerships are treated as an aggregate of the partners in determining whether
payments to or payments from a partnership are base erosion payments consistent with the approach
described in subchapter K as well as the authority provided in section 59A(i)(1) to prescribe such regulations
that are necessary or appropriate to carry out the provisions of section 59A, including through the use of
intermediaries or by characterizing payments otherwise subject to section 59A as payments not subject to
59A. Thus, when determining whether a corporate partner that is an applicable taxpayer has made a base
erosion payment, amounts paid or accrued by a partnership are treated as paid by each partner to the extent
an item of expense is allocated to the partner under section 704. Similarly, any amounts received by or
accrued to a partnership are treated as received by each partner to the extent the item of income or gain is
allocated to each partner under section 704. The rules and exceptions for base erosion payments and base
erosion tax benefits then apply accordingly on an aggregate basis.
The Treasury Department and the IRS have determined that a rule that applies the aggregate principle
consistently is necessary to align the treatment of economically similar transactions. The proposed rule
prevents an applicable taxpayer from (a) paying a domestic partnership that is owned by foreign related
parties, rather than paying those foreign partners directly, to circumvent the BEAT and (b) causing a
partnership in which an applicable taxpayer is a partner to make a payment to a foreign related party, rather
than paying that foreign related party directly. The rule applies consistently when a payment is to a foreign
partnership that is owned, for example, by domestic corporations. This rule also addresses situations in
which a partnership with an applicable taxpayer partner makes a payment to a foreign related party. Partners
with certain small ownership interests are excluded from this aggregate approach for purposes of
determining base erosion tax benefits from the partnership. This small ownership interests exclusion
generally applies to partnership interests that represent less than ten percent of the capital and profits of the
partnership and less than ten percent of each item of income, gain, loss, deduction, and credit; and that have
a fair market value of less than $25 million. See proposed § 1.59A-7(b)(4). The Treasury Department and the
IRS determined that a threshold of ten percent appropriately balanced the administrative burdens of
determining whether deductions allocated to a partner with a small ownership interest in a partnership are
base erosion payments with the Treasury Department and IRS's interest in maintaining a consistent
aggregate approach to partnerships in applying to the BEAT. In determining the appropriate threshold for a
small ownership interest, the Treasury Department and the IRS considered the treatment of small ownership
interests in partnerships in analogous situations in other Treasury regulations. The Treasury Department and
the IRS welcome comments on the aggregate approach to partnerships as well as the exception for small
ownership interests, including the specific thresholds for the exception.
The proposed regulations do not provide for special treatment of base erosion tax benefits attributable to a
partnership or to partnership nonrecognition transactions. Instead, the aggregate principle generally applies
to these situations. For example, if a partnership acquires property from a foreign related party of a taxpayer
that is a partner in the partnership, deductions for depreciation of the property allocated to the taxpayer
generally are base erosion tax benefits. Similarly, if a foreign related party and a taxpayer form a partnership,
and the foreign related party contributes depreciable property, deductions for depreciation of the property
generally are base erosion tax benefits, in part, because the partnership is treated as acquiring the property
in exchange for an interest in the partnership under section 721. This approach is consistent with the
approach taken with respect to subchapter C transactions, as described in Part III.A.1 of this Explanation of
Provisions section.
The proposed regulations provide that with respect to any person that owns an interest in a partnership, the
related party determination under section 59A(g) applies at the partner level.

VIII. Rules Relating to Banks and Dealers for Purposes of
Computing the Base Erosion Percentage and Determining
the BEAT Rate for Computing BEMTA
Section 59A modifies two general rules in the case of certain banks or registered securities dealers. First,
section 59A(e)(1)(C) lowers the base erosion percentage threshold for certain banks and registered
securities dealers from three percent or more to two percent or more. See Part II.C of this Explanation of
Provisions section for additional discussion of this rule. Second, section 59A(b)(3) provides that the BEAT
rate is one percentage point higher for those banks or registered securities dealers.
The proposed regulations do not modify the statutory definition of the term “bank” for these purposes from its
reference to section 581, which defines a bank by reference to a bank or trust company incorporated and
doing business under the laws of United States (including laws related to the District of Columbia) or of any
state. Thus, a foreign corporation licensed to conduct a banking business in the United States and subject to
taxation with respect to income that is, or is treated as, effectively connected with the conduct of a trade or
business in the United States is not included in this definition.
The proposed regulations clarify that the term “registered securities dealer” is limited to a dealer as defined
in section 3(a)(5) of the Securities Exchange Act of 1934 that is registered, or required to be registered,
under section 15 of the Securities Exchange Act of 1934.
The proposed regulations also confirm that the operative rules that lower the base erosion percentage
threshold and that increase the BEAT rate apply only to a taxpayer that is a member of an affiliated group as
defined in section 1504(a)(1), and thus do not apply, for example, if the taxpayer is not affiliated with another
includible corporation (within the meaning of section 1504(b)(1)), or if the taxpayer is not itself an includible
corporation (for example, a foreign corporation that is an applicable taxpayer).
For purposes of applying the lower base erosion percentage threshold to banks and registered securities
dealers, the proposed regulations clarify that because the base erosion percentage is determined on an
aggregate group basis, the lower threshold applies if any member of the aggregate group is a member of an
affiliated group that includes a bank or registered securities dealer. The proposed regulations provide a

Start Printed
Page 65968

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 12 of 41

limited exception for members of an affiliated group that includes a bank or registered securities dealer
where the bank or registered securities dealer activities are de minimis. This de minimis rule provides that a
consolidated group, or a member of the aggregate group of which the taxpayer is a member, is not subject to
the lower base erosion percentage threshold if its gross receipts attributable to the bank or the registered
securities dealer are less than two percent of the aggregate group's total gross revenue. This de minimis rule
uses the same threshold measurement for exclusion from the special rule for banks and registered securities
dealers (two percent) that is used as the base erosion percentage threshold for banks or registered
securities dealers to determine whether such taxpayers are applicable taxpayers that are subject to the
BEAT, with the latter test functioning in a manner similar to a de minimis threshold for the application of the
BEAT. See Part II.C of this Explanation of Provisions section. The Treasury Department and the IRS
welcome comments on the scope of the de minimis rule for banks and registered securities dealers. See
also Part III.B.5 of this Explanation of Provisions section for a discussion of an exception to base erosion
payment status for interest on TLAC securities.

IX. Rules Relating to Insurance Companies
The definition of a base erosion payment in section 59A(d) includes any premiums or other consideration
paid or accrued by a taxpayer to a foreign related party for any reinsurance payments taken into account
under section 803(a)(1)(B) or 832(b)(4)(A). Generally, section 803(a)(1) defines gross income for a life
insurance company to include the gross amount of premiums and other consideration on insurance and
annuity contracts less return premiums and premiums and other consideration arising out of indemnity
reinsurance. For an insurance company other than a life insurance company, under section 832(b), gross
income generally includes underwriting income, which is comprised of premiums earned during the taxable
year less losses incurred and expenses incurred. Section 832(b)(4)(A) provides that the amount of premiums
earned on insurance contracts is the amount of gross premiums written on insurance contracts during the
taxable year less return premiums and premiums paid for reinsurance.
The Treasury Department and the IRS are aware that certain reinsurance agreements provide that amounts
paid to and from a reinsurer are settled on a net basis or netted under the terms of the agreement. The
Treasury Department and the IRS are also aware that other commercial agreements with reciprocal
payments may be settled on a net basis or netted under the terms of those agreements. The proposed
regulations do not provide a rule permitting netting in any of these circumstances because the BEAT
statutory framework is based on including the gross amount of deductible and certain other payments (base
erosion payments) in the BEAT's expanded modified taxable income base without regard to reciprocal
obligations or payments that are taken into account in the regular income tax base, but not the BEAT's
modified taxable income base. Generally, the amounts of income and deduction are determined on a gross
basis under the Code; however, as discussed in Part III of this Explanation of Provisions section, if there are
situations where an application of otherwise generally applicable tax law would provide that a deduction is
computed on a net basis (because an item received reduces the item of deduction rather than increasing
gross income), the proposed regulations do not change that result. The Treasury Department and the IRS
request comments addressing whether a distinction should be made between reinsurance contracts entered
into by an applicable taxpayer and a foreign related party that provide for settlement of amounts owed on a
net basis and other commercial contracts entered into by an applicable taxpayer and a foreign related party
that provide for netting of items payable by one party against items payable by the other party in determining
that net amount to be paid between the parties.
The proposed regulations also do not provide any specific rules for payments by a domestic reinsurance
company to a foreign related insurance company. In the case of a domestic reinsurance company, claims
payments for losses incurred and other payments are deductible and are thus potentially within the scope of
section 59A(d)(1). See sections 803(c) and 832(c). In the case of an insurance company other than a life
insurance company (non-life insurance company) that reinsures foreign risk, certain of these payments may
also be treated as reductions in gross income under section 832(b)(3), which are not deductions and also not
the type of reductions in gross income described in sections 59A(d)(3). The Treasury Department and the
IRS request comments on the appropriate treatment of these items under subchapter L. The Treasury
Department and the IRS also recognize that to the extent that the items are not treated as deductions for
non-life insurance companies this may lead to asymmetric treatment for life insurance companies that
reinsure foreign risk because part I of subchapter L (the rules for life insurance companies) refers to these
costs only as deductions (that is, does not also refer to the costs as reductions in gross income in a manner
similar to section 832(b)(3)). The Treasury Department and the IRS request comments on whether the
regulations should provide that a life insurance company that reinsures foreign risk is treated in the same
manner as a non-life insurance company that reinsures foreign risk.
The proposed regulations do not address a foreign insurance company that has in effect an election to be
treated as a domestic corporation for purposes of the Code. Amounts paid or accrued to such a company
are not base erosion payments because the corporation is treated as a domestic corporation for purposes of
the Code.

X. Anti-Abuse and Recharacterization Rules
Proposed § 1.59A-9(b) provides that certain transactions that have a principal purpose of avoiding section
59A will be disregarded or deemed to result in a base erosion payment. This proposed anti-abuse rule
addresses the following types of transactions: (a) Transactions involving intermediaries acting as a conduit to
avoid a base erosion payment; (b) transactions entered into to increase the deductions taken into account in
the denominator of the base erosion percentage; and (c) transactions among related parties entered into to
avoid the application of rules applicable to banks and registered securities dealers (for example, causing a
bank or registered securities dealer to disaffiliate from an affiliated group so as to avoid the requirement that
it be a member of such a group).

Start Printed
Page 65969

XI. Consolidated Groups as Taxpayers
Affiliated groups of domestic corporations that elect to file a consolidated income tax return generally
compute their income tax liability on a “single-entity” basis. Because the regular tax liability is computed on a
single entity basis, the additional tax imposed by section 59A must also be imposed on the same basis
(because it is an addition to that regular tax liability). Accordingly, the proposed regulations provide that for
affiliated corporations electing to file a consolidated income tax return, the tax under section 59A is
determined at the consolidated group level, rather than determined separately for each member of the group.
The BEAT is an addition to the regular corporate income tax under section 11, and the regular corporate
income tax is applied to a consolidated group on a consolidated basis. Further, application of the BEAT on a
group level eliminates the differences in the aggregate amount of taxation to a consolidated group that would
otherwise occur, based on the location of deductions, including, for example, the location of related party
interest payments within the group. Accordingly, the BEAT is also applied on a consolidated basis. This
single taxpayer treatment for members of a consolidated group applies separately from the aggregate group
concept in proposed § 1.59A-2(c), which also treats all members of the aggregate group as a single entity,
but in that case, only for purposes of applying the gross receipts test and base erosion percentage test for
determining whether a particular taxpayer is an applicable taxpayer. See generally, Part II of this Explanation
of Provisions section.
To properly reflect the taxable income of the group, consolidated return regulations generally determine the
tax treatment of items resulting from intercompany transactions (as defined in § 1.1502-13(b)(1)(i)) by
treating members of the consolidated group as divisions of a single corporation (single entity treatment). In
general, the existence of an intercompany transaction should not change the consolidated taxable income or
consolidated tax liability of a consolidated group. Consistent with single entity treatment, items from
intercompany transactions are not taken into account for purposes of making the computations under section

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 13 of 41

59A. For example, any increase in depreciation deductions resulting from intercompany sales of property are
disregarded for purposes of determining the taxpayer's base erosion percentage. Similarly, interest
payments on intercompany obligations (as defined in § 1.1502-13(g)(2)(ii)) are not taken into account in
making the computations under section 59A.

XII. Coordinating Consolidated Group Rules for Sections
59A(c)(3) and 163(j)
Section 59A(c)(3) and proposed § 1.59A-3(c)(4) coordinate the application of section 163(j) with the
determination of the amount of base erosion tax benefits when a taxpayer has business interest expense
paid to both unrelated parties and related parties. Those rules provide that, where section 163(j) applies to
limit the amount of a taxpayer's business interest that is deductible in a taxable year, the taxpayer is required
to treat all disallowed business interest as allocable first to interest paid or accrued to persons who are not
related parties, and then to related parties. See Part IV.B of this Explanation of Provisions section.
Proposed § 1.1502-59A provides rules regarding application of section 59A(c)(3) to consolidated groups.
These rules are required for the allocation of the BEMTA among members of the group under section 1552.
In addition, apportionment of the domestic related party status and foreign related party status (defined later
in this Part XII) of section 163(j) carryforwards among members of the group is necessary when a member
deconsolidates from the group.
The proposed regulations implement the classification approach of proposed § 1.59A-3(c)(4) on a
consolidated basis (the “classification rule”), to identify which interest deductions are allocable to domestic
related party payments, foreign related party payments, and unrelated party payments. Slightly different rules
apply to the deduction of current year business interest expense than to the deduction of section 163(j)
carryforwards. A consolidated group applies these rules to the amount of business interest expense (either
from current year business interest expense or from carryforward amounts) that is actually deducted
pursuant to section 163(j) and proposed §§ 1.163(j)-4(d) and 1.163(j)-5(b)(3). If the group deducts business
interest expense paid or accrued in different taxable years (for example, both current year business interest
expense and section 163(j) carryforwards), the classification rule applies separately to business interest
expense incurred in each taxable year. For purposes of the proposed regulations, a member's current year
business interest expense is the member's business interest expense that would be deductible in the current
taxable year without regard to section 163(j) and that is not a disallowed business interest expense
carryforward from a prior taxable year.
The classification rule applies on a single-entity basis to deductions of current year business interest
expense. The consolidated group classifies its aggregate business interest deduction from current year
business interest expense based on the aggregate current year business interest expense of all types
(related or unrelated) paid by members of the group to nonmembers. Business interest deductions are
treated as from payments or accruals to related parties first, and then from payments or accruals to
unrelated parties. If there are payments to both foreign related parties and domestic related parties, the
deductions are classified as to the related parties on a pro-rata basis.
Recognizing the flexibility of related-party financing, these proposed regulations provide that, if the group has
aggregate business interest deductions classified as payments or accruals to a domestic related party
(domestic related party status) or foreign related party (foreign related party status), the status of such
payments or accruals is spread among members of the group (the allocation rule). Specifically, the domestic
related party status and foreign related party status of the deduction is allocated among members of the
group in proportion to the amount of each member's deduction of its current year business interest expense.
Similarly, if any part of a section 163(j) carryforward is from a payment or accrual to a domestic related party
or a foreign related party, the related party status of the section 163(j) carryforwards for the year will be
allocated among members of the group. The allocation is in proportion to the relative amount of each
member's section 163(j) carryforward from that year. Members' additional section 163(j) carryforward
amounts are treated as payments or accruals to unrelated parties. The allocation rule applies separately to
each carryforward year.
With regard to the deduction of any member's section 163(j) carryforward, the classification rule applies on
an entity-by-entity basis. As discussed, before a member's section 163(j) carryforward moves forward into
subsequent years, it is allocated a domestic related party status, foreign related party status, or unrelated
party status. This allocation ensures that business interest deductions drawn from any carryforward
originating in the same consolidated return year bear the same ratio of domestic related, foreign related, and
unrelated statuses. When a member deducts any portion of its section 163(j) carryforward, the member
applies section 59A(c)(3) and proposed § 1.59A-3(c)(4) to determine the status of the deducted carryforward,
based on the status previously allocated to the member's section 163(j) carryforward for the relevant tax
year. The tax liability imposed under section 59A on the consolidated group is allocated among the members
of the consolidated group pursuant to the consolidated group's tax allocation method, taking into account
these allocations. See section 1552.

Start Printed
Page 65970

If a member that is allocated a foreign related party status or domestic related party status to its section 163
(j) carryforward deconsolidates from the group, the departing member's carryforward retains the allocated
status. The departing member (and not the original consolidated group) takes into account the status of that
carryforward for purposes of computing the BEAT in future years.

XIII. Consolidated Tax Liability
In § 1.1502-2, a reference is added to the base erosion anti-abuse tax as a tax included in the computation
of consolidated tax liability. Additionally, the proposed regulations make the following changes: (1) Remove
paragraph (j) of this regulation section because section 1333, relating to war loss recoveries, was repealed
by section 1901(a)(145)(A) of the Tax Reform Act of 1976, Public Law 94-455, (2) remove paragraph (h) of
this regulation section because section 1201, relating to the alternative tax for corporations, was repealed by
section 13001(b)(2)(A) of the Act, and (3) update the cross reference to life insurance taxable income to
section 801, following the revision of subchapter L of chapter 1 of the code in section 211 of the Deficit
Reduction Act of 1984, Public Law 98-369.
In addition, the proposed regulations also make nonsubstantive changes to reorganize the structure of
current § 1.1502-2. Specifically, the proposed regulations reorganize the current § 1.1502-2 to properly
designate the unnumbered paragraphs. The proposed regulations also update other regulation sections that
reference § 1.1502-2.
Finally, the proposed regulations correct an error in § 1.6655-5(e) Example 10. The proposed regulations
replace the reference to “§ 1.1502-2(h)” with a reference to “1.1502-1(h)” because the context of Example 10
demonstrates that the intended reference was to the definition of a consolidated group.

XIV. Sections 382 and 383
Section 1.383-1 provides that only otherwise currently allowable pre-change losses and pre-change credits
will result in the absorption of the section 382 limitation and the section 383 credit limitation. The limitations
under sections 382 and 383 are applied after the application of all other limitations contained in subtitle A of
the Code. If the pre-change losses or pre-change credits cannot be deducted or otherwise used, they are
carried forward to the next taxable year. The BEAT is not a modification to the normal computation of income
tax under Subtitle A of the Code but an addition to that income tax. Therefore, these proposed regulations
clarify that additions to tax under section 59A do not affect whether a loss, deduction, or credit is absorbed
under section 382 or section 383.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 14 of 41

XV. Reporting and Recordkeeping Requirements Pursuant
to Section 6038A
Section 6038A imposes reporting and recordkeeping requirements on domestic corporations that are 25percent foreign-owned. Section 6038C imposes the same reporting and recordkeeping requirements on
certain foreign corporations engaged in a U.S. trade or business. These corporations are collectively known
as “reporting corporations.”
Reporting corporations are required to file an annual return on Form 5472, Information Return of a 25%
Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under
Sections 6038A and 6038C of the Internal Revenue Code), with respect to each related party with which the
reporting corporation has had any “reportable transactions.” See § 1.6038A-2. Reporting corporations are
also subject to specific requirements under sections 6038A and 6038C to maintain and make available the
permanent books of account or records as required by section 6001 that are sufficient to establish the
accuracy of the federal income tax return of the corporation, including information, documents, or records to
the extent they may be relevant to determine the correct U.S. tax treatment of transactions with related
parties. See § 1.6038A-3.
The Act amended section 6038A by adding paragraph (b)(2), which authorizes regulations requiring
information from a reporting corporation that is also a section 59A “applicable taxpayer” for purposes of
administering section 59A. Section 6038A(b)(2) applies to taxable years beginning after December 31, 2017.
These proposed regulations identify certain types of information that will be required to be reported on Form
5472 and Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts, and
also provide the time and manner for reporting. While an applicable taxpayer that is not a reporting
corporation would not be subject to monetary penalties and collateral provisions specific to sections 6038A
and 6038C, the taxpayer remains subject to BEAT-related reporting obligations, including Form 8991, and
applicable consequences for noncompliance.
Under section 59A(d)(4), the status of a foreign shareholder as a surrogate foreign corporation as defined in
section 7874(a)(2)(B) or as a member of the same expanded affiliated group, as defined in section 7874(c)
(1), as the surrogate foreign corporation can affect the treatment of payments from a taxpayer to that
corporation under section 59A(d). If the reporting corporation is an expatriated entity as defined in section
7874(a)(2), the taxation of certain transactions between it and its foreign related persons as defined in
section 7874(d)(3) may be affected. Consequently, the proposed regulations require all reporting
corporations to state whether a foreign shareholder required to be listed on Form 5472 is a surrogate foreign
corporation. The form may provide for reporting of whether the shareholder is a member of an expanded
affiliated group including the surrogate foreign corporation.
In addition, to facilitate screening for important tax compliance concerns under section 59A as well as other
provisions at the return filing stage, these proposed regulations clarify that the IRS may require by form or by
form instructions the following information: (1) Reporting of particular details of the reporting corporation's
relationships with related parties in regard to which it is required to file a Form 5472, (2) reporting of
transactions within certain categories on a more detailed basis, (3) reporting of the manner (such as type of
transfer pricing method used) in which the reporting corporation determined the amount of particular
reportable transactions and items, and (4) summarization of a reporting corporation's reportable transactions
and items with all foreign related parties on a schedule to its annual Form 5472 filing.

XVI. Partial Withdrawal of Proposed Regulations
The proposed regulations also withdraw, in part, a notice of proposed rulemaking. Because of statutory
changes in section 12001 of the Act, the proposed regulations would not incorporate the substance of § 
1.1502-2, relating to the computation of a consolidated group's alternative minimum tax, of the notice of
proposed rulemaking (IA-57-89) published in the Federal Register on December 30, 1992 (57 FR 62251
(/citation/57-FR-62251)). Accordingly, the Partial Withdrawal of Proposed Regulations section in this
document withdraws that section of the notice of proposed rulemaking.

Start Printed
Page 65971

Proposed Applicability Date
Under section 7805(b)(2), and consistent with the applicability date of section 59A, these regulations (other
than the proposed reporting requirements for QDPs in proposed § 1.6038A-2(b)(7)) are proposed to apply to
taxable years beginning after December 31, 2017. Until finalization, a taxpayer may rely on these proposed
regulations for taxable years beginning after December 31, 2017, provided the taxpayer and all related
parties of the taxpayer (as defined in proposed § 1.59A-1(b)(17)) consistently apply the proposed regulations
for all those taxable years that end before the finalization date.
With respect to the reporting requirements for QDPs, proposed § 1.6038A-2(b)(7)(ix) applies to taxable years
beginning one year after final regulations are published in the Federal Register, although simplified QDP
reporting requirements provided in § 1.6038A-2(g) are also proposed to apply to taxable years beginning
after December 31, 2017.
If any provision is finalized after June 22, 2019, the Treasury Department and the IRS generally expect that
such provision will apply only to taxable years ending on or after December 17, 2018. See section 7805(b)(1)
(B).

Special Analyses
Regulatory Planning and Review—Economic Analysis
Executive Orders 13563 and 12866 direct agencies to assess costs and benefits of available regulatory
alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety effects, distributive impacts, and
equity). Executive Order 13563 (/executive-order/13563) emphasizes the importance of quantifying both
costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. The preliminary
Executive Order 13771 (/executive-order/13771) designation for this proposed rule is regulatory.
The proposed regulations have been designated by the Office of Management and Budget's (“OMB”) Office
of Information and Regulatory Affairs (“OIRA”) as subject to review under Executive Order 12866 pursuant to
the Memorandum of Agreement (April 11, 2018) between the Treasury Department and OMB regarding
review of tax regulations. OIRA has determined that the proposed rulemaking is economically significant
under section 1(c) of the Memorandum of Agreement and thereby subject to review. Accordingly, the
proposed regulations have been reviewed by OMB.

A. Overview
The proposed regulations provide guidance under section 59A regarding the determination of the tax on
base erosion payments for certain taxpayers with substantial gross receipts. They provide guidance for
applicable taxpayers to determine the amount of BEAT liability and how to compute the components of the
tax calculation. Among other benefits, this clarity helps ensure that all taxpayers apply section 59A in a
similar manner, which promotes efficiency and equity with respect to the provisions of the overall Code.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 15 of 41

The proposed regulations under sections 59A (proposed §§ 1.59A-1 through 1.59A-10) provide details for
taxpayers regarding whether a taxpayer is an applicable taxpayer and the computation of certain
components of the base erosion minimum tax, including the amount of base erosion payments, the amount
of base erosion tax benefits arising from base erosion payments, and modified taxable income. The
proposed regulations also provide guidance for banks, registered securities dealers, and insurance
companies and provide guidance attributing partnership income and deductions involving partnerships to the
owners of the partnerships (amounts paid by and to partnerships). These proposed regulations also
establish anti-abuse rules to prevent taxpayers from taking measures to inappropriately avoid section 59A.
The proposed regulations under sections 383, 1502 and 6038A (proposed §§ 1.383-1, 1.502-2, 1.502-59A,
1.6038A-1, 1.6038A-2, and 1.6038-4) provide rules for the application of section 59A with respect to
limitations on certain capital losses and excess credits, consolidated groups and their members, and
reporting requirements, which include submitting, in certain cases, new Form 8991, Tax on Base Erosion
Payments of Taxpayers With Substantial Gross Receipts. This economic analysis describes the economic
benefits and costs of the proposed regulations. The Treasury Department and the IRS anticipate that any
final rule will contain the analysis prescribed by the Memorandum of Agreement (April 11, 2018) between the
Treasury Department and OMB.

B. Economic Analysis of the Proposed Regulations
1. Background
Congress was concerned, in part, that foreign-owned U.S. subsidiaries are able to reduce their U.S. tax
liability by making deductible payments to a foreign parent or foreign affiliates, eroding the U.S tax base if the
payments are subject to little or no U.S. withholding tax. This result may favor foreign-headquartered
companies over U.S. headquartered companies, creating a tax-driven incentive for foreign takeovers of U.S.
firms and enhancing the pressure for U.S headquartered companies to re-domicile abroad and shift income
to low-tax jurisdictions. Senate Committee on Finance, Explanation of the Bill, S. Rpt. 115-20, at 391.
Section 59A was introduced, in part, as a minimum tax to prevent excessive reduction in corporate tax
liability using deductible and certain other payments to foreign related parties.
The Treasury Department views section 59A as largely self-executing, which means that it is binding on
taxpayers and the IRS without any regulatory action. The Treasury Department and the IRS recognize,
however, that section 59A, while self-executing, provides interpretive latitude for taxpayers and the IRS that
could, without further implementation guidance, prompt a variety of responses. Consequently, many of the
details behind the relevant terms and necessary calculations required for the computation of an applicable
taxpayer's BEAT liability would benefit from greater specificity. As is expected after the passage of major tax
reform legislation, the proposed regulations answer unresolved questions and provide detail and specificity
for the definitions and concepts described in section 59A, so that taxpayers can readily and accurately
determine if they are applicable taxpayers and, if so, compute their BEMTA. For example, the proposed
regulations define the scope of crucial terms such as applicable taxpayer, base erosion payments, base
erosion tax benefits, de minimis exemptions, and modified taxable income. Specific examples of where
these proposed regulations provide clarification of the statute are discussed in this Part B of the Special
Analyses section.

Start Printed
Page 65972

As explained in Part VI of the Explanation of Provisions section, an applicable taxpayer computes its BEMTA
for the taxable year to determine its liability under section 59A(a). In general, the taxpayer's BEMTA is equal
to the excess of (1) the applicable tax rate for the year at issue multiplied by the taxpayer's modified taxable
income over (2) the taxpayer's adjusted regular tax liability for that year. Modified taxable income is a
taxpayer's taxable income for the year calculated without regard to any base erosion tax benefit or the base
erosion percentage of any allowable net operating loss deductions.
In general, the proposed regulations interpret the statute by answering two important questions: (1) To which
taxpayers does the BEAT apply, and (2) how do the rules apply to those taxpayers?

a. Applicable Taxpayer
In order for the BEAT to apply, a taxpayer must be an applicable taxpayer, as described in Part II of the
Explanation of Provisions section. In general, an applicable taxpayer is a corporation, other than a RIC,
REIT, or an S corporation, that satisfies the gross receipts test and the base erosion percentage test. For
purposes of these tests, members of a group of corporations related by stock ownership are aggregated.
Section 59A(e)(3) refers to aggregation on the basis of persons treated as a single taxpayer under section
52(a) (controlled group of corporations), which includes both domestic and foreign persons. As discussed in
Part II.A of the Explanation of Provisions section, the Treasury Department and the IRS determined that to
implement the provisions of section 59A, it was necessary to treat foreign corporations as outside of the
controlled group for purposes of applying the aggregation rules, except to the extent that the foreign
corporation is subject to net income tax under section 882(a) (tax on income of foreign corporations
connected with U.S. business). Upon aggregation of domestic and foreign controlled groups of corporations,
intra-aggregate group transactions are eliminated. If aggregation were defined to include both domestic and
all foreign persons (i.e., a “single employer” under section 52(a)), this elimination would include most base
erosion payments, which are defined by section 59A(d)(1) as “any amount paid or accrued by the taxpayer to
a foreign person which is a related party of the taxpayer and with respect to which a deduction is allowed
under this chapter.” Without these base erosion payments, virtually no taxpayer or aggregated group would
satisfy the base erosion percentage test; thus substantially all taxpayers (or the aggregate group of which
the taxpayer was a member) would be excluded from the requirement to pay a tax equal to the BEMTA.
A taxpayer, or the aggregate group of which the taxpayer is a member, satisfies the gross receipts test if it
has average annual gross receipts of at least $500 million for the three taxable years ending with the
preceding taxable year.
The base erosion percentage test is satisfied if the taxpayer (or aggregated group) has a base erosion
percentage of three percent or more. A lower two percent base erosion percentage applies for banks and
registered securities dealers. As explained in proposed § 1.52A-2(e), the base erosion percentage is
computed by dividing (1) the aggregate amount of base erosion tax benefits by (2) the sum of the aggregate
amount of deductions plus certain other base erosion tax benefits.
The statute is ambiguous or silent on certain details for determining whether a taxpayer is an applicable
taxpayer, including the aggregation rule described in Part II.A. of the Explanation of Provisions section.
Absent these proposed regulations, there would be uncertainty among taxpayers as to whether the tax equal
to the BEMTA would apply to them. Without guidance, different taxpayers would likely take different positions
regarding the determination of their status as an applicable taxpayer, which would result in inefficient
decision-making and inconsistent application of the statute as taxpayers engage in corporate restructurings,
or adjust investment and spending policies based on tax planning strategies to manage BEAT liability (as
discussed in this Part B.2.b. of the Special Analyses section). The proposed regulations provide clarity by (1)
defining the aggregate group to which the gross receipts and base erosion percentage tests apply, and (2)
providing guidance on the definitions and computations necessary to apply those tests.

b. BEAT Calculation
Part III of the Explanation of Provisions section discusses the rules regarding the types of payments that are
base erosion payments (as defined in proposed § 1.52A-3(b)). Section 59A(d)(5) provides an exception from
the definition of a base erosion payment for an amount paid or accrued by a taxpayer for services if the
services are eligible for the services cost method under section 482 (without regard to certain requirements
under the section 482 regulations) and the amount constitutes the total services cost with no markup
component. The statute is ambiguous as to whether the SCM exception (1) does not apply to a payment or

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 16 of 41

accrual that includes a markup component, or (2) does apply to such a payment or accrual that includes a
markup component, but only to the extent of the total services costs. The proposed regulations follow the
latter approach as discussed in Part B.2.b. of this Special Analyses section.
As discussed in Part III.B.3 of the Explanation of Provisions section, the proposed regulations provide an
exception from the definition of base erosion payment for payments to the U.S. branch of a foreign person to
the extent that payments to the foreign related party are treated as effectively connected income. In general,
whether a payment is a base erosion payment is determined based on whether the recipient is a foreign
person (as defined in section 6038A(c)(3)) and a related party, and whether the payment is deductible to the
payor. See section 59A(f). A foreign person means any person who is not a United States person. However,
as discussed in Part III.B.3. of the Explanation of Provisions section, the Treasury Department and the IRS
determined that establishing whether a payment is a base erosion payment based solely on the status of the
recipient as a foreign person is inconsistent with the statute's intent of eliminating base erosion. Deductible
payments to a foreign person that are treated as effectively connected income are subject to tax under
section 871(b) and 882(a) in substantially the same manner as payments to a U.S. citizen or resident, or a
domestic corporation, and, thus, such payments do not result in base erosion. Proposed § 1.52A-3(b)(3)(iii)
adopts an exception for such amounts.
As described in this Part B.1. of the Special Analyses section, modified taxable income is a taxpayer's
taxable income for the year calculated without regard to any base erosion tax benefit or the base erosion
percentage of any allowable net operating loss deductions under section 172 (net operating loss deduction).
As discussed in Part V.A. of the Explanation of Provisions section, modified taxable income is not calculated
by recomputing the tax base without base erosion tax benefits under an approach similar to the alternative
minimum tax, which the Act repealed for corporations. To do so would require taxpayers to maintain
records for separate carryforward balances for attributes, such as net operating loss deductions and
business interest expense carryovers. These items are limited based on taxable income, so under the
recomputation or alternative minimum tax-approach, there would most likely be different annual limitations
and other computational differences for regular tax purposes and section 59A purposes.

Start Printed
Page 65973

As discussed in Part VII of the Explanation of Provisions section, the proposed regulations apply the
aggregate approach to base erosion payments involving partnerships because partnerships are passthrough entities that are not themselves subject to U.S. income tax, but rather the income of the partnership
is taxed to the partners in the partnership. Accordingly, the proposed regulations provide that payments by a
corporation to a partnership, and payments by a partnership to a corporation, are treated in the first instance
as payments to the partners in the partnership and in second instance as payments by the partners in the
partnership. For example, in the absence of this aggregate approach rule, a payment by an applicable
taxpayer (corporation) to a related foreign partnership could be a base erosion payment even if all of the
partners in the partnership are domestic persons. Under this rule, which applies an aggregate approach to
partnerships, the payment by the applicable taxpayer (corporation) to a related foreign partnership is only
treated as a base erosion payment to the extent that the partners in the foreign partnership are themselves
foreign related parties. Conversely, also in the absence of this aggregate approach rule, a payment by an
applicable taxpayer (corporation) to a related domestic partnership could not be a base erosion payment
even if some or all of the partners in the partnership are foreign related parties. Under the aggregate
approach, the payment by an applicable taxpayer (corporation) to a related domestic partnership is treated
as a base erosion payment to the extent that the partners in the domestic partnership are foreign related
parties. This approach is thus neutral in both preventing potential abuse and preventing potential over
breadth. The regulations thus eliminate a distortion that would otherwise be present if the status of base
erosion payments is made by reference to the partnership, rather than by reference to the partners. For
example, in the absence of the proposed regulations, taxpayers might be incentivized to route payments
through a domestic partnership that is formed by foreign persons as an intermediary to avoid the BEAT.
Conversely, in the absence of the proposed regulations, taxpayers would be incentivized to restructure to
avoid making any payments to a foreign partnership that has partners that are solely domestic because such
payment could be inappropriately classified as a base erosion payment. The Treasury Department requests
comments on the approach to partnerships in the proposed regulations.

c. Anti-Abuse and Reporting Requirements
Section 59A(i) provides the Secretary authority to issue regulations and other guidance to prevent the
avoidance of the purposes of section 59A. As such, proposed § 1.59A-9 provides rules recharacterizing
certain specified transactions as necessary to prevent the avoidance of section 59A, and provides examples.
The proposed regulations also provide reporting requirements necessary to properly administer and enforce
section 59A. In particular, the Treasury Department and the IRS have identified certain types of information
from taxpayers who are applicable taxpayers for purposes of section 59A that will be required to be reported
on Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation
Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code),
and a new Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts.
Further detail regarding anticipated paperwork burdens can be found in Part C (Paperwork Reduction Act) of
this Special Analyses section, which includes a link to draft forms and guidance for providing comment on
the proposed forms.

2. Anticipated Benefits and Costs of the Proposed Regulations
a. Baseline
The Treasury Department and the IRS have assessed the impacts, benefits, and costs of the proposed
regulations against a “no action” baseline that reflects projected tax-related and other behavior in the
absence of the proposed regulations.
The Treasury Department projects that the proposed regulations will have a non-revenue effect on the
economy of at least $100 million per year ($2018) measured against this baseline. The Treasury Department
requests comments on this conclusion.

b. Anticipated Benefits
The Treasury Department and IRS expect that the certainty and clarity provided by these proposed
regulations, relative to the baseline, will enhance U.S. economic performance under the statute. Because a
tax has not previously been imposed on base-eroding payments in this manner and the statute is silent on
certain aspects of definitions and calculations, taxpayers can particularly benefit from enhanced specificity
regarding the relevant terms and necessary calculations they are required to apply under the statute. In the
absence of this enhanced specificity, similarly situated taxpayers might interpret the statutory rules of section
59A differently. For example, different taxpayers might pursue intercompany investment and payment
policies based on different assumptions about whether such investments and payments are base eroding
payments subject to section 59A, and some taxpayers may forego specific investments and payments that
other taxpayers deem worthwhile based on different interpretations of the tax consequences alone. The
guidance provided in these proposed regulations helps to ensure that taxpayers face more uniform
incentives when making economic decisions, a tenet of economic efficiency. Consistent reporting across
taxpayers also increases the IRS's ability to consistently enforce the tax rules, thus increasing equity and
decreasing opportunities for tax evasion.
For example, as described in Part III.B.3 of the Explanation of Provisions section, the proposed regulations
exclude from base erosion payments those payments made to a foreign related party that are treated as
effectively connected income of the foreign payee. Such payments are treated as income to the recipient and
subject to U.S. tax, substantially similar to any payment between related U.S. corporations. The payments
are not base eroding because their receipt is taxable by the United States. Further, treatment of effectively
connected income payments to a foreign related party would produce different tax results for two similarly
situated U.S. taxpayers. That is, if the taxpayer were to make a payment to a related U.S. corporation, the

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax
payment generally would not be subject to the BEAT, but if a taxpayer were to make a payment to a foreign
person with respect to its effectively connected income, it would give rise to BEAT liability, despite the fact
that in both cases the recipients include the payment in U.S. taxable income.
The Treasury Department and the IRS also considered the benefits and costs of providing the specific
proposed terms, calculations, and other details regarding the BEAT. In developing these proposed
regulations, the Treasury Department and the IRS have generally aimed to apply the principle that an
economically efficient tax system would treat income derived from similar economic decisions similarly, to
the extent consistent with the statute and considerations of administrability of the tax system. For example,
as noted in Part B.1.b. of this Special Analyses section, section 59A(d)(5) provides an exception to the
definition of a base erosion payment for certain payments made to foreign related parties for services that
meet the eligibility requirements for use of the SCM (under section 482). The proposed regulations adopt an
approach that allows an SCM exception for the total cost of services even if there is a profit markup so long
as a transaction meets certain other requirements for using the SCM (under section 482). The proposed
regulations provide that the portion of any payment that exceeds the total cost of services is not eligible for
the SCM exception and is a base eroding payment.

Page 17 of 41
Start Printed
Page 65974

Alternatives would have been to disallow the SCM exception for the entire amount of any payment that
includes a markup component, or to not provide any guidance at all regarding the SCM exception. The
Treasury Department and the IRS rejected the former approach. The section 482 regulations mandate
intercompany pricing under an “arm's length standard.” Under specific circumstances, the section 482
regulations provide that intercompany payments for services can be set by a taxpayer at the cost of
providing the service with no profit markup. However, the section 482 regulations prohibit use of this costonly SCM approach for services “that contribute significantly to fundamental risks of business success or
failure” (the “business judgment rule”). See § 1.482-9(b)(5). At arm's length, such services would generally
be priced to include a profit element to satisfy the market's demand for, and supply of, services among
recipients and providers. Section 59A(d)(5)(A) explicitly allows an exception from the BEAT for services that
would be eligible for the SCM, “determined without regard to [the business judgment rule].” By allowing an
exception from the BEAT for intercompany service payments that do not include a profit markup (i.e., under
the SCM transfer pricing method), but also for intercompany service payments that must apply a different
transfer pricing method, and therefore generally would include a profit markup at arm's length (i.e., those
subject to the business judgment rule), the statute creates ambiguity about the SCM exception's application
with respect to the portion of intercompany prices paid for services reflecting the cost of providing the
services when there is also a mark-up component.
To promote the consistent application by taxpayers of a SCM exception to the BEAT, and to provide greater
clarity, the proposed regulations provide that the SCM exception is available if there is a profit markup
(provided that other requirements are satisfied), but the portion of any payment exceeding cost is not eligible
for the SCM exception. The Treasury Department and the IRS also rejected the option of not providing any
guidance at all regarding the SCM exception because if taxpayers relied on statutory language alone,
taxpayers would adopt different approaches due to ambiguity in the statute, leaving it open to differing
statutory interpretations and an inconsistent application of the statute. The Treasury Department and IRS
expect that approximately one-half of taxpayers filing Form 8991 would avail themselves of the SCM
exception. The Treasury Department and the IRS request comments about application of the SCM
exception.
As discussed in Part V.A of the Explanation of Provisions section, the Treasury Department and the IRS also
considered alternatives regarding the method by which modified taxable income could be calculated for
purposes of the BEAT. The proposed regulations could have followed an add-back approach or an approach
more similar to that used for the alternative minimum tax. As noted in Part B.1.b. of this Special Analyses
section, the proposed regulations adopt the former approach, which is expected to be less costly for
taxpayers to apply since taxpayers will not have to recompute their entire tax return on a different basis, or
maintain separate sets of records to track annual limitations on attributes such as net operating loss
carryforwards or business interest expense carryforwards.
In addition, the proposed regulations clarify that the computations of modified taxable income and BEMTA
are done on a taxpayer-by-taxpayer basis. That is, the aggregate group concept is used solely for
determining whether a taxpayer is an applicable taxpayer, and does not apply to the computations of
modified taxable income and the BEMTA. In the absence of these clarifying definitions, taxpayers could
calculate the BEMTA differently depending on their differing views of the base on which the BEAT should be
calculated (i.e., aggregated group, consolidated group, individual company), leading to inequitable results
across otherwise similar taxpayers. Under the proposed regulations' approach for the calculation of modified
taxable income and BEMTA, it is also expected to be less costly for taxpayers to calculate BEMTA since the
statutory framework of section 59A applies in addition to the regular tax liability of a taxpayer. Calculation of
BEAT liability at an aggregate level, for example, would require taxpayers to first aggregate regular taxable
liabilities of the different taxpayers, calculate the BEMTA on an aggregated basis, and then reallocate any
BEAT liability among the separate taxpayers. The approach of the proposed regulations, which clarify that
the tax should be calculated on a separate taxpayer basis, simplifies these calculations.
The proposed regulations also include de minimis thresholds for partnerships and for registered securities
dealers. In general, such thresholds reduce compliance costs for the large number of small taxpayers that
would fall below such threshold without substantially affecting the BEAT base. For the de minimis exception
for banks and registered securities dealers, in the absence of an exception, affiliated groups that are not
principally engaged in banking or securities dealing would be incentivized to alter their business structure to
eliminate minimal banks or registered securities dealers from their aggregate groups. These changes would
give rise to tax-motivated, inefficient restructuring costs. A de minimis threshold reduces this potential
inefficiency again without substantially affecting the BEAT base. In both cases, the thresholds were chosen
to balance these competing concerns and to adhere to generally similar standards elsewhere in the Code.
The Treasury Department and IRS request comment on the impact of this approach.

3. Anticipated Impacts on Administrative and Compliance Costs
Because the statute requires payment of tax regardless of the issuance of regulations or instructions, the
new forms, revisions to existing forms, and other proposed regulations can lower the burden on taxpayers of
determining their tax liability. The Treasury Department and the IRS expect that the proposed regulations will
reduce the costs for taxpayers to comply with the Act, on balance, relative to the baseline of no
promulgated regulations.

Start Printed
Page 65975

Certain record-keeping requirements added by the proposed regulations derive directly from statutory
changes that require information from a reporting corporation that is also a section 59A applicable taxpayer.
Proposed § 1.6038A-2 increases record-keeping requirements for taxpayers because additional information
is to be reported on Form 5472 and Form 8991.
Proposed § 1.59A-3(b)(3) also increases record-keeping requirements for taxpayers because additional
information is required for taxpayers to satisfy a regulatory requirement of the SCM exception. The
requirement added by these proposed regulations is consistent with the requirements for eligibility for the
services cost method under section 482, including the existing requirements of § 1.482-9(b).

C. Paperwork Reduction Act
1. Collections of Information—Forms 8991, 5471, 5472, and 8858
The collections of information in these proposed regulations with respect to section 59A are in proposed §§ 
1.59-3(b)(3) and 1.6038A-2. The information collection requirements pursuant to proposed § 1.59A-3(b)(3)(i)
(C) are discussed further below. The IRS intends that the collections of information pursuant to section 59A,
except with respect to information collected under proposed § 1.59A-3(b)(3), will be conducted by way of the
following:

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 18 of 41

■ Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts;
■ Schedule G to the Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign
Corporations;
■ Part VIII of the updated Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a
Foreign Corporation Engaged in a U.S. Trade or Business;
■ Revised Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities.
For purposes of the Paperwork Reduction Act, the reporting burden associated with the collections of
information with respect to section 59A, other than with respect to proposed § 1.59A-3(b)(3), will be reflected
in the IRS Forms 14029 Paperwork Reduction Act Submission, associated with Forms 5471 (OMB control
numbers 1545-0123, and 1545-0074), 5472 (OMB control number 1545-0123), 8858 (OMB control numbers
1545-0123, 1545-0074, and 1545-1910), and 8991 (OMB control number 1545-0123).
The current status of the Paperwork Reduction Act submissions related to BEAT is provided in the following
table. The BEAT provisions are included in aggregated burden estimates for the OMB control numbers listed
below which, in the case of 1545-0123, represents a total estimated burden time, including all other related
forms and schedules for corporations, of 3.157 billion hours and total estimated monetized costs of $58.148
billion ($2017) and, in the case of 1545-0074, a total estimated burden time, including all other related forms
and schedules for individuals, of 1.784 billion hours and total estimated monetized costs of $31.764 billion
($2017). The burden estimates provided in the OMB control numbers below are aggregate amounts that
relate to the entire package of forms associated with the OMB control number, and will in the future include
but not isolate the estimated burden of only the BEAT requirements. These numbers are therefore unrelated
to the future calculations needed to assess the burden imposed by the proposed regulations. The Treasury
Department and IRS urge readers to recognize that these numbers are duplicates and to guard against
overcounting the burden that international tax provisions imposed prior to TCJA. No burden estimates
specific to the proposed regulations are currently available. The Treasury Department has not estimated the
burden, including that of any new information collections, related to the requirements under the proposed
regulations. Those estimates would capture both changes made by the Act and those that arise out of
discretionary authority exercised in the proposed regulations. The Treasury Department and the IRS request
comment on all aspects of information collection burdens related to the proposed regulations. In addition,
when available, drafts of IRS forms are posted for comment at https://apps.irs.gov/app/picklist/list/
draftTaxForms.htm (https://apps.irs.gov/app/picklist/list/draftTaxForms.htm).
Form

Type of filer

Form 5471
(including
Schedule
G)

Business (NEW Model)

OMB
No.(s)

Status

1545- Published in the FRN on 10/8/18. Public Comment
0123 period closes on 12/10/18.

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposedcollection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h1120-nd (https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposedcollection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h1120-nd).
Individual (NEW Model)

1545- Limited Scope submission (1040 only) on 10/11/18 at
0074 OIRA for review. Full ICR submission for all forms in
3/2019. 60 Day FRN not published yet for full
collection.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031
(https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031).
Form 5472
(including
Part VIII)

Business (NEW Model)

1545- Published in the FRN on 10/11/18. Public Comment
0123 period closes on 12/10/18.

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposedcollection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h1120-nd (https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposedcollection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h1120-nd).
Form 8858

All other Filers (mainly
trusts and estates)
(Legacy system)

1545- Published in the FRN on 10/30/18. Public Comment
1910 period closes on11/30/18. ICR in process by the
Treasury Department as of 9/6/18.

Link: https://www.federalregister.gov/documents/2018/10/30/2018-23644/agencyinformation-collection-activities-submission-for-omb-review-comment-request-multiple-irs
(https://www.federalregister.gov/documents/2018/10/30/2018-23644/agency-informationcollection-activities-submission-for-omb-review-comment-request-multiple-irs).
Business (NEW Model)

1545- Published in the FRN on 10/8/18. Public Comment
0123 period closes on 12/10/18.

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposedcollection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h1120-nd (https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposedcollection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h1120-nd).
Individual (NEW Model)

1545- Limited Scope submission (1040 only) on 10/11/18 at
0074 OIRA for review. Full ICR submission for all forms in
3-2019. 60 Day FRN not published yet for full
collection.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031
(https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031).
Form 8991

Business (NEW Model)

1545- Published in the FRN on 10/11/18. Public Comment
0123 period closes on 12/10/18.

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposedcollection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h1120-nd (https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposedcollection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h1120-nd).
Related New or Revised Tax Forms
New Revision of existing form Number of respondents (2018, estimated)

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 19 of 41

New Revision of existing form Number of respondents (2018, estimated)
Form 8991

Y

Form 5471, Schedule G
Form 5472, Part VIII

3,500-4,500
Y

Y

Form 8858

15,000-25,000
80,000-100,000

Y

15,000-25,000

The numbers of respondents in the Related New or Revised Tax Forms table were estimated by Treasury's
Office of Tax Analysis based on data from IRS Compliance Planning and Analytics using tax return data for
tax years 2015 and 2016. Data for Form 8991 represent preliminary estimates of the total number of
taxpayers which may be required to file the new Form 8991. Only certain large corporate taxpayers with
gross receipts of at least $500 million are expected to file this form. Data for each of the Forms 5471, 5472,
and 8858 represent preliminary estimates of the total number of taxpayers that are expected to file these
information returns regardless of whether that taxpayer must also file Form 8991.

2. Collection of Information—Proposed § 1.59A-3(b)(3)
In contrast to the collections of information pursuant to other provisions of section 59A (as discussed above),
the IRS intends that the information collection requirements pursuant to proposed § 1.59A-3(b)(3)(i)(C) will
be satisfied by the taxpayer maintaining permanent books and records that are adequate to verify the
amount charged for the services and the total services costs incurred by the renderer, including a description
of the services in question, identification of the renderer and the recipient of the services, calculation of the
amount of profit mark-up (if any) paid for the services, and sufficient documentation to allow verification of
the methods used to allocate and apportion the costs to the services.
The collection of information contained in proposed § 1.59A-3(b)(3) has been submitted to the Office of
Management and Budget for review in accordance with the Paperwork Reduction Act of 1994 (44 U.S.C.
3507 (https://www.govinfo.gov/link/uscode/44/3507?type=usc&year=mostrecent&link-type=html)(d)).
Comments on the collection of information should be sent to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington,
DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be
received by February 19, 2019.
Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the proper performance of the duties of the
IRS, including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed collection of information (including
underlying assumptions and methodology);
How the quality, utility, and clarity of the information to be collected may be enhanced;
How the burden of complying with the proposed collection of information may be minimized, including
through the application of automated collection techniques or other forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and purchases of services to
provide information.
The collection of information in proposed § 1.59A-3(b)(3) is mandatory for taxpayers seeking to exclude
certain amounts paid or accrued to a foreign related party for services from treatment as base erosion
payments for purposes of section 59A (the “SCM exception to the BEAT”, as discussed this Part B.2.b. of the
Special Analyses section). Taxpayers seeking to rely on the SCM exception to the BEAT are aggregate
groups of corporations with average annual gross receipts of at least $500 million and that make payments
to foreign related parties. The information required to be maintained will be used by the IRS for tax
compliance purposes.
Estimated total annual reporting burden: 5,000 hours.
Estimated average annual burden hours per respondent: 2.5 hours.
Estimated average cost per respondent ($2017): $238.00.
Estimated number of respondents: 2,000. This estimate is based on the assumption that only a portion of
taxpayers will qualify for the SCM exception, multiplied by the number of respondents shown above.
Estimated annual frequency of responses: Once.
Based on these estimates, the annual three-year reporting burden for those electing the SCM exemption is
$0.16 mn/yr ($2017) ($238 × 2000/3, converted to millions).
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of
information unless it displays a valid control number assigned by the Office of Management and Budget.

Start Printed
Page 65977

Books or records relating to a collection of information must be retained as long as their contents may
become material in the administration of any internal revenue law. Generally, tax returns and tax return
information are confidential, as required by 26 U.S.C. 6103 (https://www.govinfo.gov/link/uscode/26/6103?
type=usc&year=mostrecent&link-type=html).

D. Regulatory Flexibility Act
It is hereby certified that these regulations will not have a significant economic impact on a substantial
number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C.
chapter 6). Accordingly, a regulatory flexibility analysis is not required. This certification is based on the fact
that these regulations will primarily affect aggregate groups of corporations with average annual gross
receipts of at least $500 million and that make payments to foreign related parties. Generally only large
businesses both have substantial gross receipts and make payments to foreign related parties.
Notwithstanding this certification, the Treasury Department and the IRS invite comments from the public
about the impact of this proposed rule on small entities.
Pursuant to section 7805(f), these regulations will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small business.

E. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess
anticipated costs and benefits and take certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in
the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In
2018, that threshold is approximately $150 million. This rule does not include any Federal mandate that may
result in expenditures by state, local, or tribal governments, or by the private sector in excess of that
threshold.

F. Executive Order 13132 (/executive-order/13132): Federalism

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 20 of 41

Executive Order 13132 (/executive-order/13132) (entitled “Federalism”) prohibits an agency from publishing
any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on
state and local governments, and is not required by statute, or preempts state law, unless the agency meets
the consultation and funding requirements of section 6 of the Executive Order. This proposed rule does not
have federalism implications and does not impose substantial direct compliance costs on state and local
governments or preempt state law within the meaning of the Executive Order.

Comments and Request for Public Hearing
Before these proposed regulations are adopted as final regulations, consideration will be given to any
comments that are submitted timely to the IRS as prescribed in this preamble under the “Addresses”
heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules.
All comments will be available at www.regulations.gov (http://www.regulations.gov) or upon request. A public
hearing will be scheduled if requested in writing by any person that timely submits written comments. If a
public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the
Federal Register.

Statement of Availability of IRS Documents
IRS revenue procedures, revenue rulings, notices, and other guidance cited in this preamble are published in
the Internal Revenue Bulletin and are available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov
(http://www.irs.gov).

Drafting Information
The principal authors of the proposed regulations are Sheila Ramaswamy and Karen Walny of the Office of
Associate Chief Counsel (International) and Julie Wang and John P. Stemwedel of the Office of Associate
Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS
participated in their development.

Partial Withdrawal of Proposed Regulations
Accordingly, under the authority of 26 U.S.C. 7805 (https://www.govinfo.gov/link/uscode/26/7805?
type=usc&year=mostrecent&link-type=html) and 26 U.S.C. 1502
(https://www.govinfo.gov/link/uscode/26/1502?type=usc&year=mostrecent&link-type=html), § 1.1502-2 of the
notice of proposed rulemaking (IA-57-89) published in the Federal Register on December 30, 1992 (57 FR
62251 (/citation/57-FR-62251)) is withdrawn.

List of Subjects in 26 CFR Part 1 (/selectcitation/2018/12/21/26-CFR-1)
■ Income taxes
■ Reporting and recordkeeping requirements

Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 (/select-citation/2018/12/21/26-CFR-1) is proposed to be amended as follows:

PART 1—INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by revising the entry for § 1.6038A-2 and adding
entries for §§ 1.59A-1, 1.59A-2, 1.59A-3, 1.59A-4, 1.59A-5, 1.59A-6, 1.59A-7, 1.59A-8, 1.59A-9, 1.59A-10,
1.1502-59A, 1.1502-100, 1.6038A-2, and 1.6038A-2(a)(3) and (b)(7) to read in part as follows:
Authority: 26 U.S.C. 7805 (https://www.govinfo.gov/link/uscode/26/7805?

type=usc&year=mostrecent&link-type=html) * * *

*

*

*

*

*

§ 1.59A-1 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).
§ 1.59A-2 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).
§ 1.59A-3 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).
§ 1.59A-4 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).
§ 1.59A-5 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).
§ 1.59A-6 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).
§ 1.59A-7 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).
§ 1.59A-8 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).
§ 1.59A-9 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).
§ 1.59A-10 also issued under 26 U.S.C. 59 (https://www.govinfo.gov/link/uscode/26/59?
type=usc&year=mostrecent&link-type=html)A(i).

*

*

*

*

*

§ 1.1502-59A also issued under 26 U.S.C. 1502 (https://www.govinfo.gov/link/uscode/26/1502?
type=usc&year=mostrecent&link-type=html).

*

*

*

*

*

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 21 of 41

§ 1.1502-100 also issued under 26 U.S.C. 1502 (https://www.govinfo.gov/link/uscode/26/1502?
type=usc&year=mostrecent&link-type=html).

*

*

*

*

*

§ 1.6038A-2 also issued under 26 U.S.C. 6001 (https://www.govinfo.gov/link/uscode/26/6001?
type=usc&year=mostrecent&link-type=html), 6038A, and 6038C.
§§ 1.6038A-2(a)(3) and (b)(7) also issued under 26 U.S.C. 6038
(https://www.govinfo.gov/link/uscode/26/6038?type=usc&year=mostrecent&link-type=html)A(b)(2).

*

*

*

*

*

Par. 2. Sections 1.59A-1 through 1.59A-10 are added to read as follows:
§ 1.59A-1

Base erosion and anti-abuse tax.

(a) Purpose. This section and §§ 1.59A-2 through 1.59A-10 (collectively, the “section 59A
regulations”) provide rules under section 59A to determine the amount of the base erosion and
anti-abuse tax. Paragraph (b) of this section provides definitions applicable to the section 59A
regulations. Section 1.59A-2 provides rules regarding how to determine whether a taxpayer is an
applicable taxpayer. Section 1.59A-3 provides rules regarding base erosion payments and base
erosion tax benefits. Section 1.59A-4 provides rules for calculating modified taxable income.
Section 1.59A-5 provides rules for calculating the base erosion minimum tax amount. Section
1.59A-6 provides rules relating to qualified derivative payments. Section 1.59A-7 provides rules
regarding application of section 59A to partnerships. Section 1.59A-8 is reserved for rules
regarding the application of section 59A to certain expatriated entities. Section 1.59A-9 provides an
anti-abuse rule to prevent avoidance of section 59A. Finally, § 1.59A-10 provides the applicability
date for the section 59A regulations.

Start Printed
Page 65978

(b) Definitions. For purposes of this section and §§ 1.59A-2 through 1.59A-10, the following terms
have the meanings described in this paragraph (b).
(1) Aggregate group. The term aggregate group means the group of corporations determined by—
(i) Identifying a controlled group of corporations as defined in section 1563(a), except that the
phrase “more than 50 percent” is substituted for “at least 80 percent” each place it appears in
section 1563(a)(1) and the determination is made without regard to sections 1563(a)(4) and (e)(3)
(C), and
(ii) Once the controlled group of corporations is determined, excluding foreign corporations except
with regard to income that is, or is treated as, effectively connected with the conduct of a trade or
business in the United States under an applicable provision of the Internal Revenue Code or
regulations published under 26 CFR chapter I. Notwithstanding the foregoing, if a foreign
corporation determines its net taxable income under an applicable income tax treaty of the United
States, it is excluded from the controlled group of corporations except with regard to income taken
into account in determining its net taxable income.
(2) Applicable section 38 credits. The term applicable section 38 credits means the credits allowed
under section 38 for the taxable year that are properly allocable to—
(i) The low-income housing credit determined under section 42(a),
(ii) The renewable electricity production credit determined under section 45(a), and
(iii) The investment credit determined under section 46, but only to the extent properly allocable to
the energy credit determined under section 48.
(3) Applicable taxpayer. The term applicable taxpayer means a taxpayer that meets the
requirements set forth in § 1.59A-2(b).
(4) Bank. The term bank means an entity defined in section 581.
(5) Base erosion and anti-abuse tax rate. The term base erosion and anti-abuse tax rate means
the percentage that the taxpayer applies to its modified taxable income for the taxable year to
calculate its base erosion minimum tax amount. See § 1.59A-5(c) for the base erosion and antiabuse tax rate applicable to the relevant taxable year.
(6) Business interest expense. The term business interest expense, with respect to a taxpayer and
a taxable year, has the meaning provided in § 1.163(j)-1(b)(2).
(7) Deduction. The term deduction means any deduction allowable under chapter 1 of subtitle A of
the Internal Revenue Code.
(8) Disallowed business interest expense carryforward. The term disallowed business interest
expense carryforward has the meaning provided in § 1.163(j)-1(b)(9).
(9) Domestic related business interest expense. The term domestic related business interest
expense for any taxable year is the taxpayer's business interest expense paid or accrued to a
related party that is not a foreign related party.
(10) Foreign person. The term foreign person means any person who is not a United States
person. For purposes of the preceding sentence, a United States person has the meaning
provided in section 7701(a)(30), except that any individual who is a citizen of any possession of the
United States (but not otherwise a citizen of the United States) and who is not a resident of the
United States is not a United States person. See § 1.59A-7(b) for rules applicable to partnerships.
(11) Foreign related business interest expense. The term foreign related business interest expense
for any taxable year is the taxpayer's business interest expense paid or accrued to a foreign
related party.
(12) Foreign related party. The term foreign related party means a foreign person, as defined in
paragraph (b)(10) of this section, that is a related party, as defined in paragraph (b)(17) of this
section, with respect to the taxpayer. In addition, for purposes of § 1.59A-3(b)(4)(v)(B), a foreign
related party also includes the foreign corporation's home office or a foreign branch of the foreign
corporation. See § 1.59A-7(c) for rules applicable to partnerships.
(13) Gross receipts. The term gross receipts has the meaning provided in § 1.448-1T(f)(2)(iv).
(14) Member of an aggregate group. The term member of an aggregate group means a
corporation that is included in an aggregate group, as defined in paragraph (b)(1) of this section.
(15) Registered securities dealer. The term registered securities dealer means any dealer as
defined in section 3(a)(5) of the Securities Exchange Act of 1934 that is registered, or required to
be registered, under section 15 of the Securities Exchange Act of 1934.
(16) Regular tax liability. The term regular tax liability has the meaning provided in section 26(b).
(17) Related party—(i) In general. A related party, with respect to an applicable taxpayer, is—
(A) Any 25-percent owner of the taxpayer;
(B) Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or
any 25-percent owner of the taxpayer; or

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 22 of 41

(C) A controlled taxpayer within the meaning of § 1.482-1(i)(5) together with, or with respect to, the
taxpayer.
(ii) 25-percent owner. With respect to any corporation, a 25-percent owner means any person who
owns at least 25 percent of—
(A) The total voting power of all classes of stock of the corporation entitled to vote; or
(B) The total value of all classes of stock of the corporation.
(iii) Application of section 318. Section 318 applies for purposes of paragraphs (b)(17)(i) and (ii) of
this section, except that—
(A) “10 percent” is substituted for “50 percent” in section 318(a)(2)(C); and
(B) Section 318(a)(3)(A) through (C) are not applied so as to consider a United States person as
owning stock that is owned by a person who is not a United States person.
(18) TLAC long-term debt required amount. The term TLAC long-term debt required amount
means the specified minimum amount of debt that is required pursuant to 12 CFR 252.162
(/select-citation/2018/12/21/12-CFR-252.162)(a).
(19) TLAC securities amount. The term TLAC securities amount is the sum of the adjusted issue
prices (as determined for purposes of § 1.1275-1(b)) of all TLAC securities issued and outstanding
by the taxpayer.
(20) TLAC security. The term TLAC security means an eligible internal debt security, as defined in
12 CFR 252.161 (/select-citation/2018/12/21/12-CFR-252.161).
(21) Unrelated business interest expense. The term unrelated business interest expense for any
taxable year is the taxpayer's business interest expense paid or accrued to a party that is not a
related party.
§ 1.59A-2

Applicable taxpayer.

(a) Scope. This section provides rules for determining whether a taxpayer is an applicable
taxpayer. Paragraph (b) of this section defines an applicable taxpayer. Paragraph (c) of this
section provides rules for determining whether a taxpayer is an applicable taxpayer by reference
to the aggregate group of which the taxpayer is a member. Paragraph (d) of this section provides
rules regarding the gross receipts test. Paragraph (e) of this section provides rules regarding the
base erosion percentage calculation. Paragraph (f) of this section provides examples illustrating
the rules of this section.

Start Printed
Page 65979

(b) Applicable taxpayer. For purposes of section 59A, a taxpayer is an applicable taxpayer with
respect to any taxable year if the taxpayer—
(1) Is a corporation, but not a regulated investment company, a real estate investment trust, or an
S corporation;
(2) Satisfies the gross receipts test of paragraph (d) of this section; and
(3) Satisfies the base erosion percentage test of paragraph (e) of this section.
(c) Aggregation rules. A taxpayer that is a member of an aggregate group determines its gross
receipts and its base erosion percentage on the basis of the aggregate group as of the end of the
taxpayer's taxable year. For these purposes, transactions that occur between members of the
taxpayer's aggregate group that were members of the aggregate group as of the time of the
transaction are not taken into account. In the case of a foreign corporation that is a member of an
aggregate group, only transactions that relate to income effectively connected with, or treated as
effectively connected with, the conduct of a trade or business in the United States are disregarded
for this purpose. In the case of a foreign corporation that is a member of an aggregate group and
that determines its net taxable income under an applicable income tax treaty of the United States,
only transactions that are taken into account in determining its net taxable income are disregarded
for this purpose.
(d) Gross receipts test—(1) Amount of gross receipts. A taxpayer, or the aggregate group of which
the taxpayer is a member, satisfies the gross receipts test if it has average annual gross receipts of
at least $500,000,000 for the three-taxable-year period ending with the preceding taxable year.
(2) Period for measuring gross receipts for an aggregate group—(i) Calendar year taxpayers that
are members of an aggregate group. In the case of a corporation that has a calendar year and that
is a member of an aggregate group, the corporation applies the gross receipts test in paragraph (d)
(1) of this section on the basis of the gross receipts of the aggregate group for the three-calendaryear period ending with the preceding calendar year, without regard to the taxable year of any
other member of the aggregate group.
(ii) Fiscal year taxpayers that are members of an aggregate group. In the case of a corporation that
has a fiscal year and that is a member of an aggregate group, the corporation applies the gross
receipts test in paragraph (d)(1) of this section on the basis of the gross receipts of the aggregate
group for the three-fiscal-year period ending with the preceding fiscal year of the corporation,
without regard to the taxable year of any other member of the aggregate group.
(3) Gross receipts of foreign corporations. With respect to any foreign corporation, only gross
receipts that are taken into account in determining income that is effectively connected with the
conduct of a trade or business within the United States are taken into account for purposes of
paragraph (d)(1) of this section. In the case of a foreign corporation that is a member of an
aggregate group and that determines its net taxable income under an applicable income tax treaty
of the United States, the foreign corporation includes only gross receipts that are attributable to
transactions taken into account in determining its net taxable income.
(4) Gross receipts of an insurance company. For any corporation that is subject to tax under
subchapter L or any corporation that would be subject to tax under subchapter L if that corporation
were a domestic corporation, gross receipts are reduced by return premiums, but are not reduced
by any reinsurance premiums paid or accrued.
(5) Gross receipts from partnerships. See § 1.59A-7(b)(5)(ii).
(6) Taxpayer not in existence for entire three-year period. If a taxpayer was not in existence for the
entire three-year period referred to in paragraph (d)(1) of this section, the taxpayer determines a
gross receipts average for the period that it was in existence, taking into account paragraph (d)(7)
of this section.
(7) Treatment of short taxable year. If a taxpayer has a taxable year of fewer than 12 months (a
short period), gross receipts are annualized by multiplying the gross receipts for the short period by
365 and dividing the result by the number of days in the short period.
(8) Treatment of predecessors. For purposes of determining gross receipts under this paragraph
(d), any reference to a taxpayer includes a reference to any predecessor of the taxpayer. For this
purpose, a predecessor includes the distributor or transferor corporation in a transaction described
in section 381(a) in which the taxpayer is the acquiring corporation.
(9) Reductions in gross receipts. Gross receipts for any taxable year are reduced by returns and
allowances made during that taxable year.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 23 of 41

(10) Gross receipts of consolidated groups. For purposes of section 59A, the gross receipts of a
consolidated group are determined by aggregating the gross receipts of all of the members of the
consolidated group. See § 1.1502-59A(b).
(e) Base erosion percentage test—(1) In general. A taxpayer, or the aggregate group of which the
taxpayer is a member, satisfies the base erosion percentage test if its base erosion percentage is
three percent or higher.
(2) Base erosion percentage test for banks and registered securities dealers—(i) In general. A
taxpayer that is a member of an affiliated group (as defined in section 1504(a)(1)) that includes a
bank (as defined in § 1.59A-1(b)(4)) or a registered securities dealer (as defined in section § 
1.59A-1(b)(15)) satisfies the base erosion percentage test if its base erosion percentage is two
percent or higher.
(ii) Aggregate groups. An aggregate group of which a taxpayer is a member and that includes a
bank or a registered securities dealer that is a member of an affiliated group (as defined in section
1504(a)(1)) will be subject to the base erosion percentage threshold described in paragraph (e)(2)
(i) of this section.
(iii) De minimis exception for banking and registered securities dealer activities. An aggregate
group that includes a bank or a registered securities dealer that is a member of an affiliated group
(as defined in section 1504(a)(1)) is not treated as including a bank or registered securities dealer
for purposes of paragraph (e)(2)(i) of this section for a taxable year, if, in that taxable year, the total
gross receipts of the aggregate group attributable to the bank or the registered securities dealer
represent less than two percent of the total gross receipts of the aggregate group, as determined
under paragraph (d) of this section. When there is no aggregate group, a consolidated group that
includes a bank or a registered securities dealer is not treated as including a bank or registered
securities dealer for purposes of paragraph (e)(2)(i) of this section for a taxable year, if, in that
taxable year, the total gross receipts of the consolidated group attributable to the bank or the
registered securities dealer represent less than two percent of the total gross receipts of the
consolidated group, as determined under paragraph (d) of this section.
(3) Computation of base erosion percentage—(i) In general. The taxpayer's base erosion
percentage for any taxable year is determined by dividing—

Start Printed
Page 65980

(A) The aggregate amount of the taxpayer's (or in the case of a taxpayer that is a member of an
aggregate group, the aggregate group's) base erosion tax benefits (as defined in § 1.59A-3(c)(1))
for the taxable year, by
(B) The sum of—
(1) The aggregate amount of the deductions (including deductions for base erosion tax benefits
described in § 1.59A-3(c)(1)(i) and base erosion tax benefits described in § 1.59A-3(c)(1)(ii))
allowable to the taxpayer (or in the case of a taxpayer that is a member of an aggregate group, any
member of the aggregate group) under chapter 1 of Subtitle A for the taxable year;
(2) The base erosion tax benefits described in § 1.59A-3(c)(1)(iii) with respect to any premiums or
other consideration paid or accrued by the taxpayer (or in the case of a taxpayer that is a member
of an aggregate group, any member of the aggregate group) to a foreign related party for any
reinsurance payment taken into account under sections 803(a)(1)(B) or 832(b)(4)(A) for the taxable
year; and
(3) Any amount paid or accrued by the taxpayer (or in the case of a taxpayer that is a member of
an aggregate group, any member of the aggregate group) resulting in a reduction of gross receipts
described in § 1.59A-3(c)(1)(iv) for the taxable year.
(ii) Certain items not taken into account in denominator. Except as provided in paragraph (e)(3)(viii)
of this section, the amount under paragraph (e)(3)(i)(B) of this section is determined by not taking
into account—
(A) Any deduction allowed under section 172, 245A, or 250 for the taxable year;
(B) Any deduction for amounts paid or accrued for services to which the exception described in § 
1.59A-3(b)(3)(i) applies;
(C) Any deduction for qualified derivative payments that are not treated as base erosion payments
by reason of § 1.59A-3(b)(3)(ii);
(D) Any exchange loss within the meaning of § 1.988-2 from a section 988 transaction as
described in § 1.988-1(a)(1);
(E) Any deduction for amounts paid or accrued to foreign related parties with respect to TLAC
securities that are not treated as base erosion payments by reason of § 1.59A-3(b)(3)(v); and
(F) Any deduction not allowed in determining taxable income from the taxable year.
(iii) Effect of treaties on base erosion percentage determination. In computing the base erosion
percentage, the amount of the base erosion tax benefit with respect to a base erosion payment on
which tax is imposed by section 871 or 881 and with respect to which tax has been deducted and
withheld under section 1441 or 1442 is equal to the gross amount of the base erosion tax benefit
before the application of the applicable treaty multiplied by a fraction equal to—
(A) The rate of tax imposed without regard to the treaty, reduced by the rate of tax imposed under
the treaty; over
(B) The rate of tax imposed without regard to the treaty.
(iv) Amounts paid or accrued between members of a consolidated group. See § 1.1502-59A(b).
(v) Deductions and base erosion tax benefits from partnerships. See § 1.59A-7(b).
(vi) Mark-to-market positions. For any position with respect to which the taxpayer (or in the case of
a taxpayer that is a member of an aggregate group, a member of the aggregate group) applies a
mark-to-market method of accounting for federal income tax purposes, the taxpayer must
determine its gain or loss with respect to that position for any taxable year by combining all items
of income, gain, loss, or deduction arising with respect to the position during the taxable year,
regardless of how each item arises (including from a payment, accrual, or mark) for purposes of
paragraph (e)(3) of this section. See paragraph (f)(1) of this section (Example 1) for an illustration
of this rule. For purposes of section 59A, a taxpayer computes its losses resulting from positions
subject to a mark-to-market regime under the Internal Revenue Code based on a single mark for
the taxable year on the earlier of the last business day of the taxpayer's taxable year and the
disposition (whether by sale, offset, exercise, termination, expiration, maturity, or other means) of
the position, regardless of how frequently a taxpayer marks to market for other purposes. See § 
1.59A-3(b)(2)(iii) for the application of this rule for purposes of determining the amount of base
erosion payments.
(vii) Computing the base erosion percentage when members of an aggregate group have different
taxable years—(A) Calendar year taxpayers that are members of an aggregate group. In the case
of a taxpayer that has a calendar year and that is a member of an aggregate group, the taxpayer
applies the base erosion percentage in paragraph (e)(1) or (2) of this section (and determines the
base erosion percentage used in § 1.59A-4(b)(2)(ii)) on the basis of the base erosion percentage
for the calendar year in the manner set forth in paragraph (e)(3) of this section, without regard to

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 24 of 41

the taxable year of any other member of the aggregate group. See paragraph (f)(2) of this section
(Example 2) for an illustration of this rule. For purposes of applying paragraph (e)(3)(vi) of this
section, all members of the aggregate group are treated as having a calendar year.
(B) Fiscal year taxpayers that are members of an aggregate group. In the case of a taxpayer that
has a fiscal year and that is a member of an aggregate group, the taxpayer applies the base
erosion percentage test in paragraph (e)(1) or (2) of this section (and determines the base erosion
percentage used in § 1.59A-4(b)(2)(ii)) on the basis of the base erosion percentage for its fiscal
year in the manner set forth in paragraph (e)(3) of this section, without regard to the taxable year of
any other member of the aggregate group. See paragraph (f)(2) of this section (Example 2) for an
illustration of this rule. For purposes of applying paragraph (e)(3)(vi) of this section, all members of
the aggregate group are treated as having the taxpayer's fiscal year.
(C) Transition rule for aggregate group members with different taxable years. For purposes of this
paragraph (e)(3)(vii), if the taxpayer has a different taxable year than another member of the
taxpayer's aggregate group, each taxpayer that is a member of the aggregate group determines
the availability of the exception in § 1.59A-3(b)(3)(vi) (amounts paid or accrued in taxable years
beginning before January 1, 2018) by using the taxpayer's taxable year for all members of the
taxpayer's aggregate group.
(viii) Certain payments that qualify for the effectively connected income exception and another
base erosion payment exception. Subject to paragraph (c) of this section (transactions that occur
between members of the taxpayer's aggregate group), a payment that qualifies for the effectively
connected income exception described in § 1.59A-3(b)(3)(iii) and either the service cost method
exception described in § 1.59A-3(b)(3)(i), the qualified derivative payment exception described in § 
1.59A-3(b)(3)(ii), or the TLAC exception described in § 1.59A-3(b)(3)(v) is not subject to paragraph
(e)(3)(ii)(B), (C), or (E) of this section and those amounts are included in the denominator of the
base erosion percentage if the foreign related party who received the payment is not a member of
the aggregate group.
(f) Examples. The following examples illustrate the rules of this section.

Start Printed
Page 65981

(1) Example 1: Mark-to-market. (i) Facts. (A) Foreign Parent (FP) is a foreign corporation that owns
all of the stock of domestic corporation (DC) and foreign corporation (FC). FP and FC are foreign
related parties of DC under § 1.59A-1(b)(12) but not members of the aggregate group. DC is a
registered securities dealer that does not hold any securities for investment. On January 1 of year
1, DC enters into two interest rate swaps for a term of two years, one with unrelated Customer A
as the counterparty (position A) and one with unrelated Customer B as the counterparty (position
B). Each of the swaps provides for semiannual periodic payments to be made or received on June
30 and December 31. No party makes any payment to any other party upon initiation of either of
the swaps (that is, they are entered into at-the-money). DC is required to mark-to-market positions
A and B for federal income tax purposes. DC is a calendar year taxpayer.
(B) For position A in year 1, DC makes a payment of $150 on June 30, and receives a payment of
$50 on December 31. There are no other payments in year 1. On December 31, position A has a
value to DC of $110 (that is, position A is in-the-money by $110).
(C) For position B in year 1, DC receives a payment of $120 on June 30, and makes a payment of
$30 on December 31. There are no other payments in year 1. On December 31, position B has a
value to DC of ($130) (that is, position B is out-of-the-money by $130).
(ii) Analysis. (A) With respect to position A, based on the total amount of payments made and
received in year 1, DC has a net deduction of $100. In addition, DC has a mark-to-market gain of
$110. As described in paragraph (e)(3)(vi) of this section, the mark-to-market gain of $110 is
combined with the net deduction of $100 resulting from the payments. Therefore, with respect to
position A, DC has a gain of $10, and thus has no deduction in year 1 for purposes of section 59A.
(B) With respect to position B, based on the total amount of payments made and received in year
1, DC has net income of $90. In addition, DC has a mark-to-market loss of $130. As described in
paragraph (e)(3)(vi) of this section, the mark-to-market loss of $130 is combined with the net
income of $90 resulting from the payments. Therefore, with respect to position B, DC has a loss of
$40, and thus has a $40 deduction in year 1 for purposes of section 59A.
(2) Example 2: Determining gross receipts test and base erosion percentage when aggregate
group members have different taxable years. (i) Facts. Foreign Parent (FP) is a foreign corporation
that owns all of the stock of a domestic corporation that uses a calendar year (DC1) and a
domestic corporation that uses a fiscal year ending on January 31 (DC2). FP does not have
income effectively connected with the conduct of a trade or business within the United States. DC2
is a member of DC1's aggregate group, and DC1 is a member of DC2's aggregate group.
(ii) Analysis. (A) For DC1's tax return filed for the calendar year ending December 31, 2026, DC1
determines its gross receipts based on gross receipts of DC1 and DC2 for the calendar years
ending December 31, 2023, December 31, 2024, and December 31, 2025. Further, DC1
determines its base erosion percentage for the calendar year ending December 31, 2026, on the
basis of transactions of DC1 and DC2 for the calendar year ending December 31, 2026.
(B) For DC2's tax return filed for the fiscal year ending January 31, 2027, DC2 determines its gross
receipts based on gross receipts of DC2 and DC1 for the fiscal years ending January 31, 2024,
January 31, 2025, and January 31, 2026. Further, DC2 determines its base erosion percentage for
the fiscal year ending January 31, 2027, on the basis of transactions of DC2 and DC1 for the fiscal
year ending January 31, 2027.
§ 1.59A-3

Base erosion payments and base erosion tax benefits.

(a) Scope. This section provides definitions and related rules regarding base erosion payments
and base erosion tax benefits. Paragraph (b) of this section provides definitions and rules
regarding base erosion payments. Paragraph (c) of this section provides rules for determining the
amount of base erosion tax benefits. Paragraph (d) of this section provides examples illustrating
the rules described in this section.
(b) Base erosion payments—(1) In general. Except as provided in paragraph (b)(3) of this section,
a base erosion payment means—
(i) Any amount paid or accrued by the taxpayer to a foreign related party of the taxpayer and with
respect to which a deduction is allowable under chapter 1 of subtitle A of the Internal Revenue
Code;
(ii) Any amount paid or accrued by the taxpayer to a foreign related party of the taxpayer in
connection with the acquisition of property by the taxpayer from the foreign related party if the
character of the property is subject to the allowance for depreciation (or amortization in lieu of
depreciation);
(iii) Any premium or other consideration paid or accrued by the taxpayer to a foreign related party
of the taxpayer for any reinsurance payments that are taken into account under section 803(a)(1)
(B) or 832(b)(4)(A); or
(iv) Any amount paid or accrued by the taxpayer that results in a reduction of the gross receipts of
the taxpayer if the amount paid or accrued is with respect to—

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 25 of 41

(A) A surrogate foreign corporation, as defined in section 59A(d)(4)(C)(i), that is a related party of
the taxpayer (but only if the corporation first became a surrogate foreign corporation after
November 9, 2017); or
(B) A foreign person that is a member of the same expanded affiliated group, as defined in section
59A(d)(4)(C)(ii), as the surrogate foreign corporation.
(2) Operating rules—(i) Amounts paid or accrued in cash and other consideration. For purposes of
paragraph (b)(1) of this section, an amount paid or accrued includes an amount paid or accrued
using any form of consideration, including cash, property, stock, or the assumption of a liability.
(ii) Transactions providing for net payments. Except as otherwise provided in paragraph (b)(2)(iii)
of this section or as permitted by the Internal Revenue Code or the regulations, the amount of any
base erosion payment is determined on a gross basis, regardless of any contractual or legal right
to make or receive payments on a net basis. For this purpose, a right to make or receive payments
on a net basis permits the parties to a transaction or series of transactions to settle obligations by
offsetting any amounts to be paid by one party against amounts owed by that party to the other
party. For example, any premium or other consideration paid or accrued by a taxpayer to a foreign
related party for any reinsurance payments is not reduced by or netted against other amounts
owed to the taxpayer from the foreign related party or by reserve adjustments or other returns.
(iii) Amounts paid or accrued with respect to mark-to-market position. For any transaction with
respect to which the taxpayer applies the mark-to-market method of accounting for federal income
tax purposes, the rules set forth in § 1.59A-2(e)(3)(vi) apply to determine the amount of base
erosion payment.
(iv) Coordination among categories of base erosion payments. A payment that does not satisfy the
criteria of one category of base erosion payment may be a base erosion payment described in one
of the other categories.
(v) Certain domestic passthrough entities—(A) In general. If an applicable taxpayer pays or
accrues an amount that would be a base erosion payment except for the fact that the payment is
made to a specified domestic passthrough, then the applicable taxpayer will be treated as making
a base erosion payment to each specified foreign related party for purposes of section 59A and §§ 
1.59A-2 through 1.59A-10. This rule has no effect on the taxation of the specified domestic
passthrough under subchapter J or subchapter M of the Code (as applicable).
(B) Amount of base erosion payment. The amount of the base erosion payment is equal to the
lesser of the amount paid or accrued by the applicable taxpayer to or for the benefit of the
specified domestic passthrough and the amount of the deduction allowed under section 561,
651 or 661 to the specified domestic passthrough with respect to amounts paid, credited,
distributed, deemed distributed or required to be distributed to a specified foreign related party.

Start Printed
Page 65982

(C) Specified domestic passthrough. For purposes of this paragraph (b)(2)(v), specified domestic
passthrough means:
(1) A domestic trust that is not a grantor trust under subpart E of subchapter J of Chapter 1 of the
Code (“domestic trust”) and which domestic trust is allowed a deduction under section 651 or
section 661 with respect to amounts paid, credited, or required to be distributed to a specified
foreign related party;
(2) A real estate investment trust (as defined in § 1.856-1(a)) that pays, or is deemed to pay, a
dividend to a specified foreign related party for which a deduction is allowed under section 561; or
(3) A regulated investment company (as defined in § 1.851-1(a)) that pays, or is deemed to pay, a
dividend to a specified foreign related party for which a deduction is allowed under section 561.
(D) Specified foreign related party. For purposes of this paragraph (b)(2)(v), specified foreign
related party means, with respect to a specified domestic passthrough, any foreign related party of
an applicable taxpayer that is a direct or indirect beneficiary or shareholder of the specified
domestic passthrough.
(vi) Transfers of property to related taxpayers. If a taxpayer owns property of a character subject to
the allowance for depreciation (or amortization in lieu of depreciation) with respect to which
paragraph (c)(1)(ii) of this section applies, and the taxpayer sells, exchanges, or otherwise
transfers the property to another taxpayer that is a member of an aggregate group that includes
the taxpayer, any deduction for depreciation (or amortization in lieu of deprecation) by the
transferee taxpayer remains subject to paragraph (c)(1)(ii) of this section to the same extent the
amounts would have been so subject in the hands of the transferor. See paragraph (d)(7) of this
section (Example 7) for an illustration of this rule.
(3) Exceptions to base erosion payment. Paragraph (b)(1) of this section does not apply to the
types of payments or accruals described in paragraphs (b)(3)(i) through (vii) of this section.
(i) Certain services cost method amounts—(A) In general. Amounts paid or accrued by a taxpayer
to a foreign related party for services that meet the requirements in paragraph (b)(3)(i)(B) of this
section, but only to the extent of the total services cost of those services. Thus, any amount paid or
accrued to a foreign related party in excess of the total services cost of services eligible for the
services cost method exception (the mark-up component) remains a base erosion payment. For
this purpose, services are an activity as defined in § 1.482-9(l)(2) performed by a foreign related
party (the renderer) that provides a benefit as defined in § 1.482-9(l)(3) to the taxpayer (the
recipient).
(B) Eligibility for the services cost method exception. To be eligible for the services cost method
exception, all of the requirements of § 1.482-9(b) must be satisfied, except that:
(1) The requirements of § 1.482-9(b)(5) do not apply for purposes of determining eligibility for the
service cost method exception in this section; and
(2) Adequate books and records must be maintained as described in paragraph (b)(3)(i)(C) of this
section, instead of as described in § 1.482-9(b)(6).
(C) Adequate books and records. Permanent books of account and records must be maintained for
as long as the costs with respect to the services are incurred by the renderer. The books and
records must be adequate to permit verification by the Commissioner of the amount charged for
the services and the total services costs incurred by the renderer, including a description of the
services in question, identification of the renderer and the recipient of the services, calculation of
the amount of profit mark-up (if any) paid for the services, and sufficient documentation to allow
verification of the methods used to allocate and apportion the costs to the services in question in
accordance with § 1.482-9(k).
(D) Total services cost. For purposes of this section, total services cost has the same meaning as
total services costs in § 1.482-9(j).
(ii) Qualified derivative payments. Any qualified derivative payment as described in § 1.59A-6.
(iii) Effectively connected income—(A) In general. Amounts paid or accrued to a foreign related
party that are subject to federal income taxation as income that is, or is treated as, effectively
connected with the conduct of a trade or business in the United States under an applicable
provision of the Internal Revenue Code or regulations. This paragraph (b)(3)(iii) applies only if the

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 26 of 41

taxpayer receives a withholding certificate on which the foreign related party claims an exemption
from withholding under section 1441 or 1442 because the amounts are effectively connected
income.
(B) Application to certain treaty residents. Notwithstanding paragraph (b)(3)(iii)(A) of this section, if
a foreign related party determines its net taxable income under an applicable income tax treaty,
amounts paid or accrued to the foreign related party taken into account in determining its net
taxable income.
(iv) Exchange loss on a section 988 transaction. Any exchange loss within the meaning of §
1.988-2 from a section 988 transaction described in § 1.988-1(a)(1) that is an allowable deduction
and that results from a payment or accrual by the taxpayer to a foreign related party of the
taxpayer.
(v) Amounts paid or accrued with respect to TLAC securities—(A) In general. Except as provided
in paragraph (b)(3)(v)(B) of this section, amounts paid or accrued to foreign related parties with
respect to TLAC securities.
(B) Limitation on exclusion for TLAC securities. The amount excluded under paragraph (b)(3)(v)(A)
of this section is no greater than the product of the scaling ratio and amounts paid or accrued to
foreign related parties with respect to TLAC securities for which a deduction is allowed.
(C) Scaling ratio. For purposes of this paragraph (b)(3)(v), the scaling ratio for a taxable year of a
taxpayer is a fraction the numerator of which is the average TLAC long-term debt required amount
and the denominator of which is the average TLAC securities amount. The scaling ratio may in no
event be greater than one.
(D) Average TLAC securities amount. The average TLAC securities amount for a taxable year is
the average of the TLAC securities amounts for the year, computed at regular time intervals in
accordance with this paragraph. The TLAC securities amounts used in calculating the average
TLAC securities amount is computed on a monthly basis.
(E) Average TLAC long-term debt required amount. The average TLAC long-term debt required
amount for a taxable year is the average of the TLAC long-term debt required amounts, computed
on a monthly basis.
(vi) Amounts paid or accrued in taxable years beginning before January 1, 2018. Any amount paid
or accrued in taxable years beginning before January 1, 2018.
(vii) Business interest carried forward from taxable years beginning before January 1, 2018. Any
disallowed business interest described in section 163(j)(2) that is carried forward from a taxable
year beginning before January 1, 2018.
(4) Rules for determining the amount of certain base erosion payments. The following rules apply
in determining the deductible amount that is a base erosion payment.

Start Printed
Page 65983

(i) Interest expense allocable to a foreign corporation's effectively connected income—(A) Method
described in § 1.882-5(b) through (d). A foreign corporation that has interest expense allocable
under section 882(c) to income that is, or is treated as, effectively connected with the conduct of a
trade or business within the United States applying the method described in § 1.882-5(b) through
(d) has base erosion payments under paragraph (b)(1)(i) of this section for the taxable year equal
to the sum of—
(1) The interest expense on a liability described in § 1.882-5(a)(1)(ii)(A) or (B) (direct allocations) or
interest expense on U.S.-booked liabilities, as described in § 1.882-5(d)(2), that is paid or accrued
by the foreign corporation to a foreign related party; and
(2) The interest expense on U.S.-connected liabilities in excess of U.S.-booked liabilities
(hereafter, excess U.S.-connected liabilities), as described in § 1.882-5(d)(5), multiplied by a
fraction, the numerator of which is the foreign corporation's average worldwide liabilities due to a
foreign related party, and the denominator of which is the foreign corporation's average total
worldwide liabilities. For purposes of this fraction, any liability that is a U.S.-booked liability or is
subject to a direct allocation is excluded from both the numerator and the denominator of the
fraction.
(B) Separate currency pools method. A foreign corporation that has interest expense allocable
under section 882(c) to income that is, or is treated as, effectively connected with the conduct of a
trade or business within the United States applying the separate currency pools method described
in § 1.882-5(e) has a base erosion payment under paragraph (b)(1)(i) of this section for the taxable
year equal to the sum of—
(1) The interest expense on a liability described in § 1.882-5(a)(1)(ii)(A) or (B) (direct allocations)
that is paid or accrued by the foreign corporation to a foreign related party; and
(2) The interest expense attributable to each currency pool, as described in § 1.882-5(e)(1)(iii),
multiplied by a fraction equal to the foreign corporation's average worldwide liabilities denominated
in that currency and that is due to a foreign related party over the foreign corporation's average
total worldwide liabilities denominated in that currency. For purposes of this fraction, any liability
that has a direct allocation is excluded from both the numerator and the denominator.
(C) U.S.-booked liabilities in excess of U.S.-connected liabilities. A foreign corporation that is
computing its interest expense under the method described in § 1.882-5(b) through (d) and that
has U.S.-booked liabilities in excess of U.S.-connected liabilities must apply the scaling ratio prorata to all interest expense consistent with § 1.882-5(d)(4) for purposes of determining the amount
of allocable interest expense that is a base erosion payment.
(D) Liability reduction election. A foreign corporation that elects to reduce its liabilities under §
1.884-1(e)(3) must reduce its liabilities on a pro-rata basis, consistent with the requirements under
§ 1.884-1(e)(3)(iii), for purposes of determining the amount of allocable interest expense that is a
base erosion payment.
(ii) Other deductions allowed with respect to effectively connected income. A deduction allowed
under § 1.882-4 for an amount paid or accrued by the foreign corporation to a foreign related party
(including a deduction for an amount apportioned in part to effectively connected income and in
part to income that is not effectively connected income) is treated as a base erosion payment
under paragraph (b)(1) of this section.
(iii) Depreciable property. Any amount paid or accrued by the foreign corporation to a foreign
related party of the taxpayer in connection with the acquisition of property by the foreign
corporation from the foreign related party if the character of the property is subject to the allowance
for depreciation (or amortization in lieu of depreciation) is a base erosion payment to the extent the
property so acquired is used, or held for use, in the conduct of a trade or business within the
United States.
(iv) Coordination with ECI exception. For purposes of this paragraph (b)(4), amounts paid or
accrued to a foreign related party treated as effectively connected income (or, in the case of
foreign related party that determines net taxable income under an applicable income tax treaty,
such amounts that are taken into account in determining net taxable income) are not treated as
paid to a foreign related party. Additionally, for purposes of paragraph (b)(4)(i)(A)(2) or (b)(4)(i)(B)
(2) of this section, a liability with interest paid or accrued to a foreign related party that is treated as

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 27 of 41

effectively connected income (or, in the case of foreign related party that determines net taxable
income under an applicable income tax treaty, interest taken into account in determining net
taxable income) is treated as a liability not due to a foreign related party.
(v) Coordination with certain tax treaties—(A) Allocable expenses. If a foreign corporation elects to
determine its taxable income pursuant to business profits provisions of an income tax treaty rather
than provisions of the Internal Revenue Code, or the regulations published under 26 CFR chapter
I, for determining effectively connected income, and the foreign corporation does not apply §§ 
1.882-5 and 1.861-8 to allocate interest and other deductions, then in applying paragraphs (b)(4)(i)
and (ii) of this section, the foreign corporation must determine whether each allowable deduction
attributed to the permanent establishment in its determination of business profits is a base erosion
payment under paragraph (b)(1) of this section.
(B) Internal dealings under certain income tax treaties. If, pursuant to the terms of an applicable
income tax treaty, a foreign corporation determines the profits attributable to a permanent
establishment based on the assets used, risks assumed, and functions performed by the
permanent establishment, then any deduction attributable to any amount paid or accrued (or
treated as paid or accrued) by the permanent establishment to the foreign corporation's home
office or to another branch of the foreign corporation (an “internal dealing”) is a base erosion
payment to the extent such payment or accrual is described under paragraph (b)(1) of this section.
(vi) Business interest expense arising in taxable years beginning after December 31, 2017. Any
disallowed business interest expense described in section 163(j)(2) that resulted from a payment
or accrual to a foreign related party that first arose in a taxable year beginning after December 31,
2017, is treated as a base erosion payment under paragraph (b)(1)(i) of this section in the year that
the business interest expense initially arose. See paragraph (c)(4) of this section for rules that
apply when business interest expense is limited under section 163(j)(1) in order to determine
whether the disallowed business interest is attributed to business interest expense paid to a
person that is not a related party, a foreign related party, or a domestic related party.
(c) Base erosion tax benefit—(1) In general. Except as provided in paragraph (c)(2) of this section,
a base erosion tax benefit means:
(i) In the case of a base erosion payment described in paragraph (b)(1)(i) of this section, any
deduction that is allowed under chapter 1 of subtitle A of the Internal Revenue Code for the
taxable year with respect to that base erosion payment;

Start Printed
Page 65984

(ii) In the case of a base erosion payment described in paragraph (b)(1)(ii) of this section, any
deduction allowed under chapter 1 of subtitle A of the Internal Revenue Code for the taxable year
for depreciation (or amortization in lieu of depreciation) with respect to the property acquired with
that payment;
(iii) In the case of a base erosion payment described in paragraph (b)(1)(iii) of this section, any
reduction under section 803(a)(1)(B) in the gross amount of premiums and other consideration on
insurance and annuity contracts for premiums and other consideration arising out of indemnity
insurance, or any deduction under section 832(b)(4)(A) from the amount of gross premiums written
on insurance contracts during the taxable year for premiums paid for reinsurance; or
(iv) In the case of a base erosion payment described in paragraph (b)(1)(iv) of this section, any
reduction in gross receipts with respect to the payment in computing gross income of the taxpayer
for the taxable year for purposes of chapter 1 of subtitle A of the Internal Revenue Code.
(2) Withholding tax exception to base erosion tax benefit. Except as provided in paragraph (c)(3) of
this section, any base erosion tax benefit attributable to any base erosion payment is not taken into
account as a base erosion tax benefit if tax is imposed on that payment under section 871 or 881,
and the tax has been deducted and withheld under section 1441 or 1442.
(3) Effect of treaty on base erosion tax benefit. If any treaty between the United States and any
foreign country reduces the rate of tax imposed by section 871 or 881, the amount of base erosion
tax benefit that is not taken into account under paragraph (c)(2) of this section is equal to the
amount of the base erosion tax benefit before the application of paragraph (c)(2) of this section
multiplied by a fraction of—
(i) The rate of tax imposed without regard to the treaty, reduced by the rate of tax imposed under
the treaty; over
(ii) The rate of tax imposed without regard to the treaty.
(4) Application of section 163(j) to base erosion payments—(i) Classification of payments or
accruals of business interest expense based on the payee. The following rules apply for
corporations and partnerships:
(A) Classification of payments or accruals of business interest expense of a corporation. For
purposes of this section, in the year that business interest expense of a corporation is paid or
accrued the business interest expense is classified as foreign related business interest expense,
domestic related business interest expense, or unrelated business interest expense.
(B) Classification of payments or accruals of business interest expense by a partnership. For
purposes of this section, in the year that business interest expense of a partnership is paid or
accrued, the business interest expense that is allocated to a partner is classified separately with
respect to each partner in the partnership as foreign related business interest expense, domestic
related business interest expense, or unrelated business interest expense.
(C) Classification of payments or accruals of business interest expense that is subject to the
exception for effectively connected income. For purposes of paragraph (c)(4)(i)(A) and (B) of this
section, business interest expense paid or accrued to a foreign related party to which the exception
in paragraph (b)(3)(iii) of this section (effectively connected income) applies is classified as
domestic related business interest expense.
(ii) Ordering rules for business interest expense that is limited under section 163(j)(1) to determine
which classifications of business interest expense are deducted and which classifications of
business interest expense are carried forward—(A) In general. Section 163(j) and the regulations
published under 26 CFR chapter I provide a limitation on the amount of business interest expense
allowed as a deduction in a taxable year by a corporation or a partner in a partnership. In the case
of a corporation with a disallowed business interest expense carryforward, the regulations under
section 163(j) determine the ordering of the business interest expense deduction that is allowed on
a year-by-year basis by reference first to business interest expense incurred in the current taxable
year and then to disallowed business interest expense carryforwards from prior years. To
determine the amount of base erosion tax benefit under paragraph (c)(1) of this section, this
paragraph (c)(4)(ii) sets forth ordering rules that determine the amount of the deduction of
business interest expense allowed under section 163(j) that is classified as paid or accrued to a
foreign related party for purposes of paragraph (c)(1)(i) of this section. This paragraph (c)(4)(ii)
also sets forth similar ordering rules that apply to disallowed business interest expense
carryforwards for which a deduction is permitted under section 163(j) in a later year.
(B) Ordering rules for treating business interest expense deduction and disallowed business
interest expense carryforwards as foreign related business interest expense, domestic related
business interest expense, and unrelated business interest expense—(1) General ordering rule for
allocating business interest expense deduction between classifications. For purposes of paragraph
(c)(1) of this section, if a deduction for business interest expense is not subject to the limitation
under section 163(j)(1) in a taxable year, the deduction is treated first as foreign related business

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 28 of 41

interest expense and domestic related business interest expense (on a pro-rata basis), and second
as unrelated business interest expense. The same principle applies to business interest expense
of a partnership that is deductible at the partner level under § 1.163(j)-6(f).
(2) Ordering of business interest expense incurred by a corporation. If a corporation's business
interest expense deduction allowed for any taxable year is attributable to business interest
expense paid or accrued in that taxable year and to disallowed business interest expense
carryforwards from prior taxable years, the ordering of business interest expense deduction
provided in paragraph (c)(4)(ii)(B)(1) of this section among the classifications described therein
applies separately for the carryforward amount from each taxable year, following the ordering set
forth in § 1.163(j)-5(b)(2). Corresponding adjustments to the classification of disallowed business
interest expense carryforwards are made consistent with this year-by-year approach. For purposes
of section 59A and this section, an acquiring corporation in a transaction described in section 381
(a) will succeed to and take into account the classification of any disallowed business interest
expense carryforward. See § 1.381(c)(20)-1.
(3) Ordering of business interest expense incurred by a partnership and allocated to a corporate
partner. For a corporate partner in a partnership that is allocated a business interest expense
deduction under § 1.163(j)-6(f), the ordering rule provided in paragraph (c)(4)(ii)(B)(1) of this
section applies separately to the corporate partner's allocated business interest expense deduction
from the partnership; that deduction is not comingled with the business interest expense deduction
addressed in paragraph (c)(4)(ii)(B)(1) or (2) of this section or the corporate partner's items from
any other partnership. Similarly, when a corporate partner in a partnership is allocated excess
business interest expense from a partnership under the rules set forth in § 1.163(j)-6(f) and the
excess interest expense becomes deductible to the corporate partner, that partner applies the
ordering rule provided in paragraph (c)(4)(ii)(B)(1) of this section separately to that excess interest
expense on a year-by-year basis. Corresponding adjustments to the classification of disallowed
business interest expense carryforwards are made consistent with this year-by-year and
partnership-by-partnership approach.

Start Printed
Page 65985

(d) Examples. The following examples illustrate the application of this section. For purposes of all
the examples, assume that the taxpayer is an applicable taxpayer and all payments apply to a
taxable year beginning after December 31, 2017.
(1) Example 1: Determining a base erosion payment. (i) Facts. FP is a foreign corporation that
owns all of the stock of FC, a foreign corporation, and DC, a domestic corporation. FP has a trade
or business in the United States with effectively connected income (USTB). DC owns FDE, a
foreign disregarded entity. DC pays interest to FDE and FC. FDE pays interest to USTB. All
interest paid by DC to FC and by FDE to USTB is deductible by DC in the current year for regular
income tax purposes. FDE also acquires depreciable property from FP during the taxable year.
FP's income from the sale of the depreciable property is not effectively connected with the conduct
of FP's trade or business in the United States. DC and FP (based only on the activities of USTB)
are applicable taxpayers under § 1.59A-2(b).
(ii) Analysis. The payment of interest by DC to FC is a base erosion payment under paragraph (b)
(1)(i) of this section because the payment is made to a foreign related party and the interest
payment is deductible. The payment of interest by DC to FDE is not a base erosion payment
because the transaction is not a payment to a foreign person and the transaction is not a
deductible payment. With respect to the payment of interest by FDE to USTB, if FP's USTB treats
the payment of interest by FDE to USTB as income that is effectively connected with the conduct
of a trade or business in the United States pursuant to section 864 or as profits attributable to a
U.S. permanent establishment of a tax treaty resident, and if DC receives a withholding certificate
from FP with respect to the payment, then the exception in paragraph (b)(3)(iii) of this section
applies. Accordingly, the payment from DC, through FDE, to USTB is not a base erosion payment
even though the payment is to the USTB of FP, a foreign related party. The acquisition of
depreciable property by DC, through FDE, is a base erosion payment under paragraph (b)(1)(ii) of
this section because there is a payment to a foreign related party in connection with the acquisition
by the taxpayer of property of a character subject to the allowance for depreciation and the
exception in paragraph (b)(3)(iii) of this section does not apply because FP's income from the sale
of the depreciable property is not effectively connected with the conduct of FP's trade or business
in the United States. See § 1.59A-2 for the application of the aggregation rule with respect to DC
and FP's USTB.
(2) Example 2: Interest allocable under § 1.882-5. (i) Facts. FC, a foreign corporation, has income
that is effectively connected with the conduct of a trade or business within the United States. FC
determines its interest expense under the three-step process described in §§ 1.882-5(b) through
(d) with a total interest expense of $125x. The total interest expense is comprised of interest
expense of $100x on U.S.-booked liabilities ($60x paid to a foreign related party and $40x paid to
unrelated persons) and $25x of interest on excess U.S.-connected liabilities. FC has average total
liabilities (that are not U.S.-booked liabilities) of $10,000x and of that number $2000x are liabilities
held by a foreign related party. FC is an applicable taxpayer with respect to its effectively
connected income. Assume all of the interest expense is deductible in the current taxable year and
that none of the interest is subject to the effectively connected income exception in paragraph (b)
(3)(iii) of this section.
(ii) Analysis. Under paragraph (b)(4)(i) of this section, the total amount of interest expense
determined under § 1.882-5 that is a base erosion payment is $65x ($60x + 5x). FC has $60x of
interest on U.S.-booked liabilities that is paid to a foreign related party and that is treated as a base
erosion payment under paragraph (b)(4)(i)(A)(1) of this section. Additionally, $5x of the $25x of
interest on excess U.S.-connected liabilities is treated as a base erosion payment under paragraph
(b)(4)(i)(A)(2) of this section ($25x * ($2000x/$10,000x)).
(3) Example 3: Interaction with section 163(j). (i) Facts. Foreign Parent (FP) is a foreign
corporation that owns all of the stock of DC, a domestic corporation that is an applicable taxpayer.
In Year 1, DC has adjusted taxable income, as defined in section 163(j)(8), of $1000x and pays the
following amounts of business interest expense: $420x that is paid to unrelated Bank, and $360x
that is paid to FP. DC does not earn any business interest income or incur any floor plan financing
interest expense in Year 1. None of the exceptions in paragraph (b)(3) of this section apply, and
the interest is not subject to withholding.
(ii) Analysis—(A) Classification of business interest. In Year 1, DC is only permitted to deduct
$300x of business interest expense under section 163(j)(1) ($1000x × 30%). Paragraph (c)(4)(ii)(B)
of this section provides that for purposes of paragraph (c)(1) of this section the deduction is treated
first as foreign related business interest expense and domestic related business interest expense
(here, only FP); and second as unrelated business interest expense (Bank). As a result, the $300x
of business interest expense that is permitted under section 163(j)(1) is treated entirely as the
business interest paid to the related foreign party, FP. All of DC's $300x deductible interest is
treated as an add-back to modified taxable income in the Year 1 taxable year for purposes of § 
1.59A-4(b)(2)(i).
(B) Ordering rules for business interest expense carryforward. Under section 163(j)(2), the $480x
of disallowed business interest ($420x + $360x−$300x) is carried forward to the subsequent year.
Under paragraph (c)(4)(ii)(B)(1) and (2) of this section, the interest carryforward is correspondingly
treated first as unrelated business interest expense, and second pro-rata as foreign related
business interest expense and domestic related business interest expense. As a result, $420x of
the $480x business interest expense carryforward is treated first as business interest expense paid
to Bank and the remaining $60x of the $480x business interest expense carryforward is treated as
interest paid to FP and as an add-back to modified taxable income.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 29 of 41

(4) Example 4: Interaction with section 163(j); carryforward. (i) Facts. The facts are the same as in
paragraph (d)(3) of this section (the facts in Example 3), except that in addition, in Year 2, DC has
adjusted taxable income of $250x, and pays the following amounts of business interest expense:
$50x that is paid to unrelated Bank, and $45x that is paid to FP. DC does not earn any business
interest income or incur any floor plan financing interest expense in Year 2. None of the exceptions
in paragraph (b)(3) of this section apply.
(ii) Analysis—(A) Classification of business interest. In Year 2, for purposes of section 163(j)(1),
DC is treated as having paid or accrued total business interest of $575x, consisting of $95x
business interest expense actually paid in Year 2 and $480x of business interest expense that is
carried forward from Year 1. DC is permitted to deduct $75x of business interest expense in Year 2
under the limitation in section 163(j)(1) ($250x × 30%). Section 1.163(j)-5(b)(2) provides that, for
purposes of section 163(j), the allowable business interest expense is first attributed to amounts
paid or accrued in the current year, and then attributed to amounts carried over from earlier years
on a first-in-first-out basis from the earliest year. Accordingly, the $75x of deductible business
interest expense is deducted entirely from the $95x business interest expense incurred in Year 2
for section 163(j) purposes. Because DC's business interest expense deduction is limited under
section 163(j)(1) and because DC's total business interest expense is attributable to more than one
taxable year, paragraph (c)(4)(ii)(B)(2) of this section provides that the ordering rule in paragraph
(c)(4)(ii)(B)(1) of this section is applied separately to each annual amount of section 163(j)
disallowed business interest expense carryforward. With respect to the Year 2 layer, which is
deducted first, paragraph (c)(4)(ii)(B) of this section provides that, for purposes of paragraph (c)(1)
of this section, the Year 2 $75x deduction is treated first as foreign related business interest
expense and domestic related business interest expense (here, only FP, $45x); and second as
unrelated business interest expense (Bank, $30x). Consequentially, all of the $45x deduction of
business interest expense that was paid to FP in Year 2 is treated as a base erosion tax benefit
and an add-back to modified taxable income for the Year 2 taxable year for purposes of § 
1.59A-4(b)(2)(i).

Start Printed
Page 65986

(B) Ordering rules for business interest expense carryforward. The disallowed business interest
expense carryforward of $20x from Year 2 is correspondingly treated first as interest paid to Bank
under paragraph (c)(4)(i) of this section. The disallowed business interest expense carryforward of
$480x from the Year 1 layer that is also not allowed as a deduction in Year 2 remains treated as
$420x paid to Bank and $60 paid to FP.
(5) Example 5: Interaction with section 163(j); carryforward. (i) Facts. The facts are the same as in
paragraph (d)(4) of this section (the facts in Example 4), except that in addition, in Year 3, DC has
adjusted taxable income of $4000x and pays no business interest expense. DC does not earn any
business interest income or incur any floor plan financing interest expense in Year 3.
(ii) Analysis. In Year 3, DC is treated as having paid or accrued total business interest expense of
$500x, consisting of $480x of business interest expense that is carried forward from Year 1 and
$20x of business interest expense that is carried forward from Year 2 for purposes of section 163(j)
(1). DC is permitted to deduct $1200x of business interest expense in Year 3 under the limitation in
section 163(j)(1) ($4000x × 30%). For purposes of section 163(j), DC is treated as first deducting
the business interest expense from Year 1 then the business interest expense from Year 2. See § 
1.163(j)-5(b)(2). Because none of DC's $500x business interest expense is limited under section
163(j), the stacking rule in paragraph (c)(4)(ii) of this section for allowed and disallowed business
interest expense does not apply. For purposes of § 1.59A-4(b)(2)(i), DC's add-back to modified
taxable income is $60x determined by the classifications in paragraph (c)(4)(i)(A) of this section
($60x treated as paid to FP from Year 1).
(6) Example 6: Interaction with section 163(j); partnership. (i) Facts. The facts are the same as in
paragraph (d)(4) of this section (the facts in Example 4), except that in addition, in Year 2, DC
forms a domestic partnership (PRS) with Y, a domestic corporation that is not related to DC within
the meaning of § 1.59A-1(b)(17). DC and Y are equal partners in partnership PRS. In Year 2, PRS
has ATI of $100x and $48x of business interest expense. $12x of PRS's business interest expense
is paid to Bank, and $36x of PRS's business interest expense is paid to FP. PRS allocates the
items comprising its $100x of ATI $50x to DC and $50x to Y. PRS allocates its $48x of business
interest expense $24x to DC and $24x to Y. DC classifies its $24x of business interest expense as
$6x unrelated business interest expense (Bank) and $18x as foreign related business interest
expense (FP) under paragraph (c)(4)(i)(B) of this section. Y classifies its $24x of business interest
expense as entirely unrelated business interest expense of Y (Bank and FP) under paragraph (c)
(4)(i)(B) of this section. None of the exceptions in paragraph (b)(3) of this section apply.
(ii) Partnership level analysis. In Year 2, PRS's section 163(j) limit is 30 percent of its ATI, or $30x
($100x × 30 percent). Thus, PRS has $30x of deductible business interest expense and $18x of
excess business interest expense ($48x−$30x). The $30x of deductible business interest expense
is includible in PRS's non-separately stated income or loss, and is not subject to further limitation
under section 163(j) at the partners' level.
(iii) Partner level allocations analysis. Pursuant to § 1.163(j)-6(f)(2), DC and Y are each allocated
$15x of deductible business interest expense and $9x of excess business interest expense. At the
end of Year 2, DC and Y each have $9x of excess business interest expense from PRS, which
under § 1.163(j)-6 is not treated as paid or accrued by the partner until such partner is allocated
excess taxable income or excess business interest income from PRS in a succeeding year.
Pursuant to § 1.163(j)-6(e), DC and Y, in computing their limit under section 163(j), do not increase
any of their section 163(j) items by any of PRS's section 163(j) items.
(iv) Partner level allocations for determining base erosion tax benefits. The $15x of deductible
business interest expense allocated to DC is treated first as foreign related business interest
expense (FP) under paragraph (c)(4)(ii)(B) of this section. DC's excess business interest expense
from PRS of $9x is classified first as the unrelated business interest expense with respect to Bank
($6x) and then as the remaining portion of the business interest expense paid to FP ($3x, or
$18x−$15x). Under paragraph (c)(4)(ii)(B)(3) of this section, these classifications of the PRS items
apply irrespective of the classifications of DC's own interest expense as set forth in paragraph (d)
(4) of this section (Example 4).
(v) Computation of modified taxable income. For Year 2, DC is treated as having incurred base
erosion tax benefits of $60x, consisting of the $15x base erosion tax benefit with respect to its
interest in PRS that is computed in paragraph (d)(6)(iii) of this section (Example 6) and $45x that is
computed in paragraph (d)(4) of this section (Example 4).
(7) Example 7: Transfers of property to related taxpayers. (i) Facts. FP is a foreign corporation that
owns all of the stock of DC1 and DC2, both domestic corporations. DC1 and DC2 are both
members of the same aggregate group but are not members of the same consolidated tax group
under section 1502. In Year 1, FP sells depreciable property to DC1. On the first day of the Year 2
tax year, DC1 sells the depreciable property to DC2.
(ii) Analysis—(A) Year 1. The acquisition of depreciable property by DC1 from FP is a base erosion
payment under paragraph (b)(1)(ii) of this section because there is a payment to a foreign related
party in connection with the acquisition by the taxpayer of property of a character subject to the
allowance for depreciation.
(B) Year 2. The acquisition of the depreciable property in Year 2 by DC2 is not itself a base erosion
payment because DC2 did not acquire the property from a foreign related party. However, under
paragraph (b)(2)(vi) of this section any depreciation expense taken by DC2 on the property
acquired from DC1 is a base erosion payment and a base erosion tax benefit under paragraph (c)
(1)(ii) of this section because the acquisition of the depreciable property was a base erosion

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 30 of 41

payment by DC1 and the property was sold to a member of the aggregate group; therefore, the
depreciation expense continues as a base erosion tax benefit to DC2 as it would have been to
DC1 if it continued to own the property.
§ 1.59A-4

Modified taxable income.

(a) Scope. Paragraph (b)(1) of this section provides rules for computing modified taxable income.
Paragraph (b)(2) of this section provides rules addressing how base erosion tax benefits and net
operating losses affect modified taxable income. Paragraph (b)(3) of this section provides a rule for
a holder of a residual interest in a REMIC. Paragraph (c) of this section provides examples
illustrating the rules described in this section.
(b) Computation of modified taxable income—(1) In general. The term modified taxable income
means a taxpayer's taxable income, as defined in section 63(a), determined with the additions
described in paragraph (b)(2) of this section. Notwithstanding the foregoing, the taxpayer's taxable
income may not be reduced to an amount less than zero as a result of a net operating loss
deduction allowed under section 172. See paragraphs (c)(1) and (2) of this section (Examples 1
and 2).
(2) Modifications to taxable income. The amounts described in this paragraph (b)(2) are added
back to a taxpayer's taxable income to determine its modified taxable income.
(i) Base erosion tax benefits. The amount of any base erosion tax benefit as defined in § 1.59A-3
(c)(1).
(ii) Certain net operating loss deductions. The base erosion percentage, as described in § 1.59A-2
(e)(3), of any net operating loss deduction allowed to the taxpayer under section 172 for the
taxable year. For purposes of determining modified taxable income, the net operating loss
deduction allowed does not exceed taxable income before taking into account the net operating
loss deduction. See paragraph (c)(1) and (2) of this section (Examples 1 and 2). The base erosion
percentage for the taxable year that the net operating loss arose is used to determine the addition
under this paragraph (b)(2)(ii). For a net operating loss that arose in a taxable year beginning
before January 1, 2018, the base erosion percentage for the taxable year is zero.
(3) Rule for holders of a residual interest in a REMIC. For purposes of paragraph (b)(1) of this
section, the limitation in section 860E(a)(1) is not taken into account for determining the taxable
income amount that is used to compute modified taxable income for the taxable year.

Start Printed
Page 65987

(c) Examples. The following examples illustrate the rules of paragraph (b) of this section.
(1) Example 1: Current year loss. (i) Facts. A domestic corporation (DC) is an applicable taxpayer
that has a calendar taxable year. In 2020, DC has gross income of $100x, a deduction of $80x that
is not a base erosion tax benefit, and a deduction of $70x that is a base erosion tax benefit. In
addition, DC has a net operating loss carryforward to 2020 of $400x that arose in 2016.
(ii) Analysis. DC's starting point for computing modified taxable income is $(50x), computed as
gross income of $100x, less a deduction of $80x (non-base erosion tax benefit) and a deduction of
$70x (base erosion tax benefit). Under paragraph (b)(2)(ii) of this section, DC's starting point for
computing modified taxable income does not take into account the $400x net operating loss
carryforward because the allowable deductions for 2020, not counting the NOL deduction, exceed
the gross income for 2020. DC's modified taxable income for 2020 is $20x, computed as $(50x) +
$70x base erosion tax benefit.
(2) Example 2: Net operating loss deduction. (i) Facts. The facts are the same as in paragraph (c)
(1)(i) of this section (the facts in Example 1), except that DC's gross income in 2020 is $500x.
(ii) Analysis. DC's starting point for computing modified taxable income is $0x, computed as gross
income of $500x, less: A deduction of $80x (non-base erosion tax benefit), a deduction of $70x
(base erosion tax benefit), and a net operating loss deduction of $350x (which is the amount of
taxable income before taking into account the net operating loss deduction, as provided in
paragraph (b)(2)(ii) of this section ($500x−$150x)). DC's modified taxable income for 2020 is $70x,
computed as $0x + $70x base erosion tax benefit. DC's modified taxable income is not increased
as a result of the $350x net operating loss deduction in 2020 because the base erosion percentage
of the net operating loss that arose in 2016 is zero under paragraph (b)(2)(ii) of this section.
§ 1.59A-5

Base erosion minimum tax amount.

(a) Scope. Paragraph (b) of this section provides rules regarding the calculation of the base
erosion minimum tax amount. Paragraph (c) of this section describes the base erosion and antiabuse tax rate applicable to the taxable year.
(b) In general. With respect to any applicable taxpayer, the base erosion minimum tax amount for
any taxable year is, the excess (if any) of—
(1) An amount equal to the base erosion and anti-abuse tax rate multiplied by the modified taxable
income of the taxpayer for the taxable year, over
(2) An amount equal to the regular tax liability as defined in § 1.59A-1(b)(16) of the taxpayer for the
taxable year, reduced (but not below zero) by the excess (if any) of—
(i) The credits allowed under chapter 1 of subtitle A of the Code against regular tax liability over
(ii) The sum of the credits described in paragraph (b)(3) of this section.
(3) Credits that do not reduce regular tax liability. The sum of the following credits are used in
paragraph (b)(2)(ii) of this section to limit the amount by which the credits allowed under chapter 1
of subtitle A of the Internal Revenue Code reduce regular tax liability—
(i) Taxable years beginning on or before December 31, 2025. For any taxable year beginning on or
before December 31, 2025—
(A) The credit allowed under section 38 for the taxable year that is properly allocable to the
research credit determined under section 41(a);
(B) The portion of the applicable section 38 credits not in excess of 80 percent of the lesser of the
amount of those applicable section 38 credits or the base erosion minimum tax amount
(determined without regard to this paragraph (b)(3)(i)(B)); and
(C) Any credits allowed under sections 33 and 37.
(ii) Taxable years beginning after December 31, 2025. For any taxable year beginning after
December 31, 2025, any credits allowed under sections 33 and 37.
(c) Base erosion and anti-abuse tax rate—(1) In general. For purposes of calculating the base
erosion minimum tax amount, the base erosion and anti-abuse tax rate is—
(i) Calendar year 2018. For taxable years beginning in calendar year 2018, five percent.
(ii) Calendar years 2019 through 2025. For taxable years beginning after December 31, 2018,
through taxable years beginning before January 1, 2026, 10 percent.
(iii) Calendar years after 2025. For taxable years beginning after December 31, 2025, 12.5
percent.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 31 of 41

(2) Increased rate for banks and registered securities dealers. In the case of a taxpayer that is a
member of an affiliated group (as defined in section 1504(a)(1)) that includes a bank or a
registered securities dealer, the percentage otherwise in effect under paragraph (c)(1) of this
section is increased by one percentage point.
(3) Application of section 15. Section 15 does not apply to any taxable year that includes January
1, 2018. See § 1.15-1(d). For a taxpayer using a taxable year other than the calendar year, section
15 applies to any taxable year beginning after January 1, 2018.
§ 1.59A-6

Qualified derivative payment.

(a) Scope. This section provides additional guidance regarding qualified derivative payments.
Paragraph (b) of this section defines the term qualified derivative payment. Paragraph (c) of this
section provides guidance on certain payments that are not treated as qualified derivative
payments. Paragraph (d) defines the term derivative for purposes of section 59A. Paragraph (e) of
this section provides an example illustrating the rules of this section.
(b) Qualified derivative payment—(1) In general. A qualified derivative payment means any
payment made by a taxpayer to a foreign related party pursuant to a derivative with respect to
which the taxpayer—
(i) Recognizes gain or loss as if the derivative were sold for its fair market value on the last
business day of the taxable year (and any additional times as required by the Internal Revenue
Code or the taxpayer's method of accounting);
(ii) Treats any gain or loss so recognized as ordinary; and
(iii) Treats the character of all items of income, deduction, gain, or loss with respect to a payment
pursuant to the derivative as ordinary.
(2) Reporting requirements—(i) In general. No payment is a qualified derivative payment under
paragraph (b)(1) of this section for any taxable year unless the taxpayer reports the information
required in § 1.6038A-2(b)(7)(ix) for the taxable year.
(ii) Failure to satisfy the reporting requirement. If a taxpayer fails to satisfy the reporting
requirement described in paragraph (b)(2)(i) of this section with respect to any payments, those
payments will not be eligible for the qualified derivative payment exception described in § 1.59A-3
(b)(3)(ii). A taxpayer's failure to report a payment as a qualified derivative payment does not impact
the eligibility of any other payment which the taxpayer properly reported under paragraph (b)(2)(i)
of this section from being a qualified derivative payment.
(3) Amount of any qualified derivative payment. The amount of any qualified derivative payment
excluded from the denominator of the base erosion percentage as provided in § 1.59A-2(e)(3)(ii)
(C) is determined as provided in § 1.59A-2(e)(3)(vi).
(c) Exceptions for payments otherwise treated as base erosion payments. A
constitute a qualified derivative payment if—

payment does not

Start Printed
Page 65988

(1) The payment would be treated as a base erosion payment if it were not made pursuant to a
derivative, including any interest, royalty, or service payment; or
(2) In the case of a contract that has derivative and nonderivative components, the payment is
properly allocable to the nonderivative component.
(d) Derivative defined—(1) In general. For purposes of this section, the term derivative means any
contract (including any option, forward contract, futures contract, short position, swap, or similar
contract) the value of which, or any payment or other transfer with respect to which, is (directly or
indirectly) determined by reference to one or more of the following:
(i) Any share of stock in a corporation;
(ii) Any evidence of indebtedness;
(iii) Any commodity that is actively traded;
(iv) Any currency; or
(v) Any rate, price, amount, index, formula, or algorithm.
(2) Exceptions. The following contracts are not treated as derivatives for purposes of section 59A.
(i) Direct interest. A derivative contract does not include a direct interest in any item described in
paragraph (d)(1)(i) through (v) of this section.
(ii) Insurance contracts. A derivative contract does not include any insurance, annuity, or
endowment contract issued by an insurance company to which subchapter L applies (or issued by
any foreign corporation to which the subchapter would apply if the foreign corporation were a
domestic corporation).
(iii) Securities lending and sale-repurchase transactions. A derivative contract does not include any
securities lending transaction, sale-repurchase transaction, or substantially similar transaction.
Securities lending transaction and sale-repurchase transaction have the same meaning as
provided in § 1.861-2(a)(7).
(3) American depository receipts. For purposes of section 59A, American depository receipts (or
any similar instruments) with respect to shares of stock in a foreign corporation are treated as
shares of stock in that foreign corporation.
(e) Example. The following example illustrates the rules of this section.
(1) Facts. Domestic Corporation (DC) is a dealer in securities within the meaning of section 475.
On February 1, 2019, DC enters into a contract (Interest Rate Swap) with Foreign Parent (FP), a
foreign related party, for a term of five years. Under the Interest Rate Swap, DC is obligated to
make a payment to FP each month, beginning March 1, 2019, in an amount equal to a variable
rate determined by reference to the prime rate, as determined on the first business day of the
immediately preceding month, multiplied by a notional principal amount of $50 million. Under the
Interest Rate Swap, FP is obligated to make a payment to DC each month, beginning March 1,
2019, in an amount equal to 5% multiplied by the same notional principal amount. The Interest
Rate Swap satisfies the definition of a notional principal contract under § 1.446-3(c). DC
recognizes gain or loss on the Interest Rate Swap pursuant to section 475. DC reports the
information required to be reported for the taxable year under § 1.6038A-2(b)(7)(ix).
(2) Analysis. The Interest Rate Swap is a derivative as described in paragraph (d) of this section
because it is a contract that references the prime rate and a fixed rate for determining the amount
of payments. The exceptions described in paragraph (c) of this section do not apply to the Interest
Rate Swap. Because DC recognizes ordinary gain or loss on the Interest Rate Swap pursuant to
section 475(d)(3), it satisfies the condition in paragraph (b)(1)(ii) of this section. Because DC
satisfies the requirement relating to the information required to be reported under paragraph (b)(2)
of this section, any payment to FP with respect to the Interest Rate Swap will be a qualified
derivative payment. Therefore, under § 1.59A-3(b)(3)(ii), the payments to FP are not base erosion
payments.
§ 1.59A-7

Application of base erosion and anti-abuse tax to partnerships .

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 32 of 41

(a) Scope. This section provides rules regarding how partnerships and their partners are treated
for purposes of section 59A. Paragraph (b) of this section provides the general application of an
aggregate approach to partnerships for purposes of section 59A, including specific rules
addressing the application of section 59A to amounts paid or accrued by a partnership to a related
party, rules addressing the application of section 59A to amounts paid or accrued to a partnership
from a related party, and other operating rules. Paragraph (c) of this section provides rules for
determining whether a party is a foreign related party.
(b) Application of section 59A to a partnership—(1) In general. Except as otherwise provided in this
section, section 59A is applied at the partner level in the manner described in this section. The
provisions of section 59A must be interpreted in a manner consistent with this approach.
(2) Payment made by a partnership. Except as provided in paragraph (b)(4) of this section, for
purposes of determining whether a payment or accrual by a partnership is a base erosion
payment, any amount paid or accrued by a partnership is treated as paid or accrued by each
partner based on the partner's distributive share of items of deduction (or other amounts that could
be base erosion tax benefits) with respect to that amount (as determined under section 704).
(3) Payment received by a partnership. For purposes of determining whether a payment or accrual
to a partnership is a base erosion payment of the payor, any amount paid or accrued to a
partnership is treated as paid or accrued to each partner based on the partner's distributive share
of the income or gain with respect to that amount (as determined under section 704).
(4) Exception for base erosion tax benefits of certain partners—(i) In general. For purposes of
determining a partner's amount of base erosion tax benefits, a partner does not take into account
its distributive share of any partnership amount of base erosion tax benefits for the taxable year
if—
(A) The partner's interest in the partnership represents less than ten percent of the capital and
profits of the partnership at all times during the taxable year;
(B) The partner is allocated less than ten percent of each partnership item of income, gain, loss,
deduction, and credit for the taxable year; and
(C) The partner's interest in the partnership has a fair market value of less than $25 million on the
last day of the partner's taxable year, determined using a reasonable method.
(ii) Attribution. For purposes of paragraph (b)(4)(i) of this section, a partner's interest in a
partnership or partnership item is determined by adding the interests of the partner and any related
party of the partner (as determined under section 59A), taking into account any interest owned
directly, indirectly, or through constructive ownership (applying the section 318 rules as modified
by section 59A (except section 318(a)(3)(A) through (C) will also apply so as to consider a United
States person as owning stock that is owned by a person who is not a United States person), but
excluding any interest to the extent already taken into account).
(5) Other relevant items—(i) In general. For purposes of section 59A, subject to paragraph (b)(4) of
this section, each partner is treated as owning its share of the partnership items determined under
section 704, including the assets of the partnership, using a reasonable method with respect to the
assets. For items that are allocated to the partners, the partner is treated as owning its distributive
share (including of deductions and base erosion tax benefits). For items that are not allocated to
the partners, the partner is treated as owning an interest proportionate with the partner's
distributive share of partnership income.

Start Printed
Page 65989

(ii) Gross receipts—(A) In general. For purposes of section 59A, each partner in the partnership
includes a share of partnership gross receipts in proportion to the partner's distributive share (as
determined under section 704) of items of gross income that were taken into account by the
partnership under section 703.
(B) Foreign corporation. A foreign corporation takes into account a share of gross receipts only
with regard to receipts that produce income that is effectively connected with the conduct of a trade
or business within the United States. In the case of a foreign corporation that determines its net
taxable income under an applicable income tax treaty, the foreign corporation takes into account
its share of gross receipts only with regard to such gross receipts that are taken into account in
determining its net taxable income.
(iii) Registered securities dealers. If a partnership, or a branch of the partnership, is a registered
securities dealer, each partner is treated as a registered securities dealer unless the partner's
interest in the registered securities dealer would satisfy the criteria for the exception in paragraph
(b)(4) of this section. For purposes of applying the de minimis exception in § 1.59A-2(e)(2)(iii), the
partner takes into account its distributive share of the relevant partnership items.
(iv) Application of sections 163(j) and 59A(c)(3) to partners of partnerships. See § 1.59A-3(c)(4).
(6) Tiered partnerships. If the partner of a partnership is a partnership, then paragraphs (b) and (c)
of this section are applied again at the level of the partner, applying this paragraph successively
until the partner is not a partnership. Paragraph (b)(4) of this section is only applied at the level
where the partner is not itself a partnership.
(c) Foreign related party. With respect to any person that owns an interest in a partnership, the
related party determination in section 59A(g) applies at the partner level.
§ 1.59A-8

Application of base erosion and anti-abuse tax to certain expatriated entities. [Reserved]

§ 1.59A-9

Anti-abuse and recharacterization rules.

(a) Scope. This section provides rules for recharacterizing certain transactions according to their
substance for purposes of applying section 59A and the section 59A regulations. Paragraph (b) of
this section provides specific anti-abuse rules. Paragraph (c) of this section provides examples
illustrating the rules of paragraph (b) of this section.
(b) Anti-abuse rules—(1) Transactions involving unrelated persons, conduits, or intermediaries. If a
taxpayer pays or accrues an amount to one or more intermediaries (including an intermediary
unrelated to the taxpayer) that would have been a base erosion payment if paid or accrued to a
foreign related party, and one or more of the intermediaries makes (directly or indirectly)
corresponding payments to or for the benefit of a foreign related party as part of a transaction (or
series of transactions), plan or arrangement that has as a principal purpose avoiding a base
erosion payment (or reducing the amount of a base erosion payment), the role of the intermediary
or intermediaries is disregarded as a conduit, or the amount paid or accrued to the intermediary is
treated as a base erosion payment, as appropriate.
(2) Transactions to increase the amount of deductions taken into account in the denominator of the
base erosion percentage computation. A transaction (or component of a transaction or series of
transactions), plan or arrangement that has a principal purpose of increasing the deductions taken
into account for purposes of § 1.59A-2(e)(3)(i)(B) (the denominator of the base erosion percentage
computation) is disregarded for purposes of § 1.59A-2(e)(3).
(3) Transactions to avoid the application of rules applicable to banks and registered securities
dealers. A transaction (or series of transactions), plan or arrangement that occurs among related
parties that has a principal purpose of avoiding the rules applicable to certain banks and registered
securities dealers in § 1.59A-2(e)(2) (base erosion percentage test for banks and registered

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 33 of 41

securities dealers) or § 1.59A-5(c)(2) (increased base erosion and anti-abuse tax rate for banks
and registered securities dealers) is not taken into account for purposes of § 1.59A-2(e)(2) or § 
1.59A-5(c)(2).
(c) Examples. The following examples illustrate the application of paragraph (b) of this section. For
purposes of all of the examples, assume that FP, a foreign corporation, owns all the stock of DC, a
domestic corporation and an applicable taxpayer and that none of the foreign corporations are
subject to federal income taxation with respect to income that is, or is treated as, effectively
connected with the conduct of a trade or business in the United States under an applicable
provision of the Internal Revenue Code or regulations thereunder. Also assume that all payments
occur in a taxable year beginning after December 31, 2017.
(1) Example 1: Substitution of payments that are not base erosion payments for payments that
otherwise would be base erosion payments through a conduit or intermediary. (i) Facts. FP owns
Property 1 with a fair market value of $95x, which FP intends to transfer to DC. A payment from
DC to FP for Property 1 would be a base erosion payment. Corp A is a domestic corporation that is
not a related party with respect to DC. As part of a plan with a principal purpose of avoiding a base
erosion payment, FP enters into an arrangement with Corp A to transfer Property 1 to Corp A in
exchange for $95x. Pursuant to the same plan, Corp A transfers Property 1 to DC in exchange for
$100x. Property 1 is subject to the allowance for depreciation (or amortization in lieu of
depreciation) in the hands of DC.
(ii) Analysis. The arrangement between FP, DC, and Corp A is deemed to result in a $95x base
erosion payment under paragraph (b)(1) of this section because DC's payment to Corp A would
have been a base erosion payment if paid to a foreign related person, and Corp A makes a
corresponding payment to FP as part of the series of transactions that has as a principal purpose
avoiding a base erosion payment.
(2) Example 2: Alternative transaction to base erosion payment. (i) Facts. The facts are the same
as in paragraph (c)(1)(i) of this section (the facts in Example 1), except that DC does not purchase
Property 1 from FP or Corp A. Instead, DC purchases Property 2 from Corp B, a domestic
corporation that is not a related party with respect to DC and that originally produced or acquired
Property 2 for Corp B's own account. Property 2 is substantially similar to Property 1, and DC uses
Property 2 in substantially the same manner that DC would have used Property 1.
(ii) Analysis. Paragraph (b)(1) of this section does not apply to the transaction between DC and
Corp B because Corp B does not make a corresponding payment to or for the benefit of FP as part
of a transaction, plan or arrangement.
(3) Example 3: Alternative financing source. (i) Facts. On Date 1, FP loaned $200x to DC in
exchange for Note A. DC pays or accrues interest annually on Note A, and the payment or accrual
is a base erosion payment within the meaning of § 1.59A-3(b)(1)(i). On Date 2, DC borrows $200x
from Bank, a corporation that is not a related party with respect to DC, in exchange for Note B. The
terms of Note B are substantially similar to the terms of Note A. DC uses the proceeds from Note B
to repay Note A.
(ii) Analysis. Paragraph (b)(1) of this section does not apply to the transaction between DC and
Bank because Bank does not make a corresponding payment to or for the benefit of FP as part of
the series of transactions.
(4) Example 4: Alternative financing source that is a conduit. (i) Facts. The facts are the same as in
paragraph (c)(3)(i) of this section (the facts in Example 3) except that in addition, with a principal
purpose of avoiding a base erosion payment, and as part of the same plan or arrangement as the
Note B transaction, FP deposits $250x with Bank. The difference between the interest rate paid by
Bank to FP on FP's deposit and the interest rate paid by DC to Bank is less than one percentage
point. The interest rate charged by Bank to DC would have differed absent the deposit by FP.

Start Printed
Page 65990

(ii) Analysis. The transactions between FP, DC, and Bank are deemed to result in a base erosion
payment under paragraph (b)(1) of this section because DC's payment to Bank would have been a
base erosion payment if paid to a foreign related person, and Bank makes a corresponding
payment to FP as part of the series of transactions that has as a principal purpose avoiding a base
erosion payment. See Rev. Rul. 87-89, 1987-2 C.B. 195, Situation 3.
(5) Example 5: Transactions to increase the amount of deductions taken into account in the
denominator of the base erosion percentage computation. (i) Facts. With a principal purpose of
increasing the deductions taken into account by DC for purposes of § 1.59A-2(e)(3)(i)(B), DC
enters into a long position with respect to Asset with Financial Institution 1 and simultaneously
enters into a short position with respect to Asset with Financial Institution 2. Financial Institution 1
and Financial Institution 2 are not related to DC and are not related to each other.
(ii) Analysis. Paragraph (b)(2) of this section applies and the transactions between DC and
Financial Institution 1 and DC and Financial Institution 2. These transactions are not taken into
account for purposes of § 1.59A-2(e)(3)(i)(B) because the transactions have a principal purpose of
increasing the deductions taken into account for purposes of § 1.59A-2(e)(3)(i)(B).
§ 1.59A-10

Applicability date.

Sections 1.59A-1 through 1.59A-9 apply to taxable years beginning after December 31, 2017.
Par. 3. Section 1.383-1 is amended by adding two sentences at the end of paragraph (d)(3)(i) to read as
follows:
§ 1.383-1

Special limitations on certain capital losses and excess credits.

*

*

*

*

*

(d) * * *
(3) * * *
(i) * * * The application of section 59A is not a limitation contained in subtitle A for purposes of this
paragraph (d)(3)(i). Therefore, the treatment of pre-change losses and pre-change credits in the
computation of the base erosion minimum tax amount will not affect whether such losses or credits
result in absorption of the section 382 limitation and the section 383 credit limitation.

*

*

*

*

*

Par. 4. Section 1.1502-2 is revised to read as follows:
§ 1.1502-2

Computation of tax liability.

(a) Taxes imposed. The tax liability of a group for a consolidated return year is determined by
adding together—
(1) The tax imposed by section 11(a) in the amount described in section 11(b) on the consolidated
taxable income for the year (reduced by the taxable income of a member described in paragraphs
(a)(5) through (8) of this section);
(2) The tax imposed by section 541 on the consolidated undistributed personal holding company
income;

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 34 of 41

(3) If paragraph (a)(2) of this section does not apply, the aggregate of the taxes imposed by
section 541 on the separate undistributed personal holding company income of the members
which are personal holding companies;
(4) If neither paragraph (a)(2) nor (3) of this section apply, the tax imposed by section 531 on the
consolidated accumulated taxable income (see § 1.1502-43);
(5) The tax imposed by section 594(a) in lieu of the taxes imposed by section 11 on the taxable
income of a life insurance department of the common parent of a group which is a mutual savings
bank;
(6) The tax imposed by section 801 on consolidated life insurance company taxable income;
(7) The tax imposed by section 831(a) on consolidated insurance company taxable income of the
members which are subject to such tax;
(8) Any increase in tax described in section 1351(d)(1) (relating to recoveries of foreign
expropriation losses); and
(9) The tax imposed by section 59A on base erosion payments of taxpayers with substantial gross
receipts.
(b) Credits. A group is allowed as a credit against the taxes described in paragraph (a) (except for
paragraph (a)(9) of this section) of this section: the general business credit under section 38 (see § 
1.1502-3), the foreign tax credit under section 27 (see § 1.1502-4), and any other applicable
credits provided under the Internal Revenue Code. Any increase in tax due to the recapture of a
tax credit will be taken into account. See section 59A and the regulations thereunder for credits
allowed against the tax described in paragraph (a)(9) of this section.
(c) Allocation of dollar amounts. For purposes of this section, if a member or members of the
consolidated group are also members of a controlled group that includes corporations that are not
members of the consolidated group, any dollar amount described in any section of the Internal
Revenue Code is apportioned among all members of the controlled group in accordance with the
provisions of the applicable section and the regulations thereunder.
(d) Applicability date—(1) Except as provided in paragraph (d)(2) of this section, this section
applies to any consolidated return year for which the due date of the income tax return (without
regard to extensions) is on or after the date of publication of the Treasury Decision adopting these
rules as final regulations in the Federal Register.
(2) Paragraph (a)(9) of this section applies to consolidated return years beginning after December
31, 2017.
Par.5. Section 1.1502-4 is amended by revising paragraph (d)(3) to read as follows:
§ 1.1502-4

Consolidated foreign tax credit.

*

*

*

*

*

(d) * * *
(3) Computation of tax against which credit is taken. The tax against which the limiting fraction
under section 904(a) is applied will be the consolidated tax liability of the group determined under § 
1.1502-2, but without regard to paragraphs (a)(2), (3), (4), (8), and (9) of that section, and without
regard to any credit against such liability.

*

*

*

*

*

Par.6. Section 1.1502-43 is amended by revising paragraph (b)(2)(i)(A) to read as follows:
§ 1.1502-43

Consolidated accumulated earnings tax.

*

*

*

*

*

(b) * * *
(2) * * *
(i) * * *
(A) The consolidated liability for tax determined without § 1.1502-2(a)(2) through (a)(4), and
without the foreign tax credit provided by section 27, over

*

*

*

*

*

Par.7. Section 1.1502-47 is amended by revising paragraph (f)(7)(iii) to read as follows.
§ 1.1502-47

Consolidated returns by life-nonlife groups.

*

*

*

*

*

(f) * * *
(7) * * *
(iii) Any taxes described in § 1.1502-2 (other than by paragraphs (a)(1) and (d)(6) of that section).

*

*

*

*

*

Par.8. Section 1.1502-59A is added to read as follows:
§ 1.1502-59A

Application of section 59A to consolidated groups.

(a) Scope. This section provides rules for the application of section 59A and the regulations
thereunder (the section 59A regulations, see §§ 1.59A-1 through 1.59A-10) to consolidated
groups and their members (as defined in § 1.1502-1(h) and (b), respectively). Rules in the section
59A regulations apply to consolidated groups except as modified in this section. Paragraph (b) of
this section provides rules treating a consolidated group (rather than each member of the group)
as a single taxpayer, and a single applicable taxpayer, as relevant, for certain purposes.
Paragraph (c) of this section coordinates the application of the business interest stacking rule
under § 1.59A-3(c)(4) to consolidated groups. Paragraph (d) of this section addresses how the
base erosion minimum tax amount is allocated among members of the consolidated group.
Paragraph (e) of this section sets forth definitions. Paragraph (f) of this section provides examples.
Paragraph (g) of this section provides the applicability date and a transition rule.

Start Printed
Page 65991

(b) Consolidated group as the applicable taxpayer—(1) In general. For purposes of determining
whether the consolidated group is an applicable taxpayer (within the meaning of § 1.59A-2(b)) and
the amount of tax due pursuant to section 59A(a), all members of a consolidated group are treated
as a single taxpayer. Thus, for example, members' deductions are aggregated in making the
required computations under section 59A. In addition, items resulting from intercompany
transactions (as defined in § 1.1502-13(b)(1)(i)) are disregarded for purposes of making the

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 35 of 41

required computations. For example, additional depreciation deductions resulting from
intercompany asset sales are not taken into account for purposes of applying the base erosion
percentage test under § 1.59A-2(e).
(2) Consolidated group as member of the aggregate group. The consolidated group is treated as a
single member of an aggregate group for purposes of § 1.59A-2(c).
(3) Related party determination. For purposes of section 59A and the section 59A regulations, if a
person is a related party with respect to any member of a consolidated group, that person is a
related party of the group and of each of its members.
(c) Coordination of section 59A(c)(3) and section 163(j) in a consolidated group—(1) Overview.
This paragraph (c) provides rules regarding the application of § 1.59A-3(c)(4) to a consolidated
group's section 163(j) interest deduction. The classification rule in paragraph (c)(3) of this section
addresses how to determine if, and to what extent, the group's section 163(j) interest deduction is
a base erosion tax benefit. These regulations contain a single-entity classification rule with regard
to the deduction of the consolidated group's aggregate current year business interest expense
(“BIE”), but a separate-entity classification rule for the deduction of the consolidated group's
disallowed BIE carryforwards. Paragraph (c)(3) of this section classifies the group's aggregate
current year BIE deduction, in conformity with § 1.59A-3(c)(4), as constituting domestic related
current year BIE deduction, foreign related current year BIE deduction, or unrelated current year
BIE deduction. The allocation rules in paragraph (c)(4) of this section then allocate to specific
members of the group the domestic related current year BIE deduction, foreign related current year
BIE deduction, and unrelated current year BIE deduction taken in the taxable year. Any member's
current year BIE that is carried forward to the succeeding taxable year as a disallowed BIE
carryforward is allocated a status as domestic related BIE carryforward, foreign related BIE
carryforward, or unrelated BIE carryforward under paragraph (c)(5) of this section. The status of
any disallowed BIE carryforward deducted by a member in a later year is classified on a separateentity basis by the deducting member under paragraph (c)(3) of this section, based on the status
allocated to the member's disallowed BIE carryforward under paragraph (c)(5) of this section. This
paragraph (c) also provides rules regarding the consequences of the deconsolidation of a
corporation that has been allocated a domestic related BIE carryforward status, a foreign related
BIE carryforward status, or an unrelated BIE carryforward status; and the consolidation of a
corporation with a disallowed BIE carryforward classified as from payments to a domestic related
party, foreign related party, or unrelated party.
(2) Absorption rule for the group's business interest expense. To determine the amount of the
group's section 163(j) interest deduction, and to determine the year in which the member's
business interest expense giving rise to the deduction was incurred or accrued, see §§ 1.163(j)-4
(d) and 1.163(j)-5(b)(3).
(3) Classification of the group's section 163(j) interest deduction—(i) In general. Consistent with §
1.59A-3(c)(4)(i) and paragraph (b) of this section, the classification rule of this paragraph (c)(3)
determines whether the consolidated group's section 163(j) interest deduction is a base erosion
tax benefit. To the extent the consolidated group's business interest expense is permitted as a
deduction under section 163(j)(1) in a taxable year, the deduction is classified first as from
business interest expense paid or accrued to a foreign related party and business interest expense
paid or accrued to a domestic related party (on a pro-rata basis); any remaining deduction is
treated as from business interest expense paid or accrued to an unrelated party.
(ii) Year-by-year application of the classification rule. If the consolidated group's section 163(j)
interest deduction in any taxable year is attributable to business interest expense paid or accrued
in more than one taxable year (for example, the group deducts the group's aggregate current year
BIE, the group's disallowed BIE carryforward from year 1, and the group's disallowed BIE
carryforward from year 2), the classification rule in paragraph (c)(3)(i) of this section applies
separately to each of those years, pursuant to paragraphs (c)(3)(iii) and (iv) of this section.
(iii) Classification of current year BIE deductions. Current year BIE deductions are classified under
the section 59A regulations and this paragraph (c) as if the consolidated group were a single
taxpayer that had paid or accrued the group's aggregate current year BIE to domestic related
parties, foreign related parties, and unrelated parties. The rules of paragraph (c)(4) of this section
apply for allocating current year BIE deductions among members of the consolidated group. To the
extent the consolidated group's aggregate current year BIE exceeds its section 163(j) limitation,
the rules of paragraph (c)(5) of this section apply.
(iv) Classification of deductions of disallowed BIE carryforwards. Each member of the group
applies the classification rule in this paragraph (c)(3) to its deduction of any part of a disallowed
BIE carryforward from a year, after the group applies paragraph (c)(5) of this section to the
consolidated group's disallowed BIE carryforward from that year. Therefore, disallowed BIE
carryforward that is actually deducted by a member is classified based on the status of the
components of that carryforward, assigned pursuant to paragraph (c)(5) of this section.
(4) Allocation of domestic related current year BIE deduction status and foreign related current
year BIE deduction status among members of the consolidated group—(i) In general. This
paragraph (c)(4) applies if the group has domestic related current year BIE deductions, foreign
related current year BIE deductions, or both, as a result of the application of the classification rule
in paragraph (c)(3) of this section. Under this paragraph (c)(4), the domestic related current year
BIE, foreign related current year BIE, or both, that is treated as deducted in the current year are
deemed to have been incurred pro-rata by all members that have current year BIE deduction in
that year, regardless of which member or members actually incurred the current year BIE to a
domestic related party or a foreign related party.

Start Printed
Page 65992

(ii) Domestic related current year BIE deduction—(A) Amount of domestic related current year BIE
deduction status allocable to a member. The amount of domestic related current year BIE
deduction status that is allocated to a member is determined by multiplying the group's domestic
related current year BIE deduction (determined pursuant to paragraph (c)(3) of this section) by the
percentage of current year BIE deduction allocable to such member in that year.
(B) Percentage of current year BIE deduction allocable to a member. The percentage of current
year BIE deduction allocable to a member is equal to the amount of the member's current year BIE
deduction divided by the amount of the group's aggregate current year BIE deduction.
(iii) Amount of foreign related current year BIE deduction status allocable to a member. The
amount of foreign related current year BIE deduction status that is allocated to a member is
determined by multiplying the group's foreign related current year BIE deduction (determined
pursuant to paragraph (c)(3) of this section) by the percentage of current year BIE deduction
allocable to such member (defined in paragraph (c)(4)(ii)(B) of this section).
(iv) Treatment of amounts as having unrelated current year BIE deduction status. To the extent the
amount of a member's current year BIE that is absorbed under paragraph (c)(2) of this section
exceeds the domestic related current year BIE deduction status and foreign related current year
BIE deduction status allocated to the member under paragraph (c)(4)(ii) and (iii) of this section,
such excess amount is treated as from payments or accruals to an unrelated party.
(5) Allocation of domestic related BIE carryforward status and foreign related BIE carryforward
status to members of the group—(i) In general. This paragraph (c)(5) applies in any year the
consolidated group's aggregate current year BIE exceeds its section 163(j) limitation. After the
application of paragraph (c)(4) of this section, any remaining domestic related current year BIE,
foreign related current year BIE, and unrelated current year BIE is deemed to have been incurred

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 36 of 41

pro-rata by members of the group pursuant to the rules in paragraph (c)(5)(ii), (iii), and (iv) of this
section, regardless of which member or members actually incurred the business interest expense
to a domestic related party, foreign related party, or unrelated party.
(ii) Domestic related BIE carryforward—(A) Amount of domestic related BIE carryforward status
allocable to a member. The amount of domestic related BIE carryforward status that is allocated to
a member equals the group's domestic related BIE carryforward from that year multiplied by the
percentage of disallowed BIE carryforward allocable to the member.
(B) Percentage of disallowed BIE carryforward allocable to a member. The percentage of
disallowed BIE carryforward allocable to a member for a taxable year equals the member's
disallowed BIE carryforward from that year divided by the consolidated group's disallowed BIE
carryforwards from that year.
(iii) Amount of foreign related BIE carryforward status allocable to a member. The amount of
foreign related BIE carryforward status that is allocated to a member equals the group's foreign
related BIE carryforward from that year multiplied by the percentage of disallowed BIE
carryforward allocable to the member (as defined in paragraph (c)(5)(ii)(B) of this section).
(iv) Treatment of amounts as having unrelated BIE carryforward status. If a member's disallowed
BIE carryforward for a year exceeds the amount of domestic related BIE carryforward status and
foreign related BIE carryforward status that is allocated to the member pursuant to paragraphs (c)
(5)(ii) and (iii) of this section, respectively, the excess carryforward amount is treated as from
payments or accruals to an unrelated party.
(v) Coordination with section 381. If a disallowed BIE carryforward is allocated a status as a
domestic related BIE carryforward, foreign related BIE carryforward, or unrelated BIE carryforward
under the allocation rule of paragraph (c)(5) of this section, the acquiring corporation in a
transaction described in section 381(a) will succeed to and take into account the allocated status of
the carryforward for purposes of section 59A. See § 1.381(c)(20)-1.
(6) Member deconsolidates from a consolidated group. When a member deconsolidates from a
group (the original group), the member's disallowed BIE carryforwards retain their allocated status,
pursuant to paragraph (c)(5) of this section, as a domestic related BIE carryforward, foreign related
BIE carryforward, or unrelated BIE carryforward (as applicable). Following the member's
deconsolidation, no other member of the original group is treated as possessing the domestic
related BIE carryforward status, foreign related BIE carryforward status, or unrelated BIE
carryforward status that is carried forward by the departing member.
(7) Corporation joins a consolidated group. If a corporation joins a consolidated group (the
acquiring group), and that corporation was allocated a domestic related BIE carryforward status,
foreign related BIE carryforward status, or unrelated BIE carryforward status pursuant to paragraph
(c)(5) of this section from another consolidated group (the original group), or separately has a
disallowed BIE carryforward that is classified as from payments or accruals to a domestic related
party, foreign related party, or unrelated party, the status of the carryforward is taken into account
in determining the acquiring group's base erosion tax benefit when the corporation's disallowed
BIE carryforward is absorbed.
(d) Allocation of the base erosion minimum tax amount to members of the consolidated group. For
rules regarding the allocation of the base erosion minimum tax amount, see section 1552.
Allocations under section 1552 take into account the classification and allocation provisions of
paragraphs (c)(3) through (5) of this section.
(e) Definitions. The following definitions apply for purposes of this section—
(1) Aggregate current year BIE. The consolidated group's aggregate current year BIE is the
aggregate of all members' current year BIE.
(2) Aggregate current year BIE deduction. The consolidated group's aggregate current year BIE
deduction is the aggregate of all members' current year BIE deductions.
(3) Applicable taxpayer. The term applicable taxpayer has the meaning provided in § 1.59A-2(b).
(4) Base erosion minimum tax amount. The consolidated group's base erosion minimum tax
amount is the tax imposed under section 59A.
(5) Base erosion tax benefit. The term base erosion tax benefit has the meaning provided in §
1.59A-3(c)(1).
(6) Business interest expense. The term business interest expense, with respect to a member and
a taxable year, has the meaning provided in § 1.163(j)-1(b)(2), and with respect to a consolidated
group and a taxable year, has the meaning provided in § 1.163(j)-4(d)(2)(iii).
(7) Consolidated group's disallowed BIE carryforwards. The term consolidated group's disallowed
BIE carryforwards has the meaning provided in § 1.163(j)-5(b)(3)(i).

Start Printed
Page 65993

(8) Current year BIE. A member's current year BIE is the member's business interest expense that
would be deductible in the current taxable year without regard to section 163(j) and that is not a
disallowed business interest expense carryforward from a prior taxable year.
(9) Current year BIE deduction. A member's current year BIE deduction is the member's current
year BIE that is permitted as a deduction in the taxable year.
(10) Domestic related BIE carryforward. The consolidated group's domestic related BIE
carryforward for any taxable year is the excess of the group's domestic related current year BIE
over the group's domestic related current year BIE deduction (if any).
(11) Domestic related current year BIE. The consolidated group's domestic related current year
BIE for any taxable year is the consolidated group's aggregate current year BIE paid or accrued to
a domestic related party.
(12) Domestic related current year BIE deduction. The consolidated group's domestic related
current year BIE deduction for any taxable year is the portion of the group's aggregate current year
BIE deduction classified as from interest paid or accrued to a domestic related party under
paragraph (c)(3) of this section.
(13) Domestic related party. A domestic related party is a related party that is not a foreign related
party and is not a member of the same consolidated group.
(14) Disallowed BIE carryforward. The term disallowed BIE carryforward has the meaning provided
in § 1.163(j)-1(b)(9).
(15) Foreign related BIE carryforward. The consolidated group's foreign related BIE carryforward
for any taxable year, is the excess of the group's foreign related current year BIE over the group's
foreign related current year BIE deduction (if any).
(16) Foreign related current year BIE. The consolidated group's foreign related current year BIE for
any taxable year is the consolidated group's aggregate current year BIE paid or accrued to a
foreign related party.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 37 of 41

(17) Foreign related current year BIE deduction. The consolidated group's foreign related current
year BIE deduction for any taxable year is the portion of the consolidated group's aggregate
current year BIE deduction classified as from interest paid or accrued to a foreign related party
under paragraph (c)(3) of this section.
(18) Foreign related party. A foreign related party has the meaning provided in § 1.59A-1(b)(12).
(19) Related party. The term related party has the meaning provided in § 1.59A-1(b)(17), but
excludes members of the same consolidated group.
(20) Section 163(j) interest deduction. The term section 163(j) interest deduction means, with
respect to a taxable year, the amount of the consolidated group's business interest expense
permitted as a deduction pursuant to § 1.163(j)-5(b)(3) in the taxable year.
(21) Section 163(j) limitation. The term section 163(j) limitation has the meaning provided in §
1.163(j)-1(b)(31).
(22) Unrelated BIE carryforward. The consolidated group's unrelated BIE carryforward for any
taxable year is the excess of the group's unrelated current year BIE over the group's unrelated
current year BIE deduction.
(23) Unrelated current year BIE. The consolidated group's unrelated current year BIE for any
taxable year is the consolidated group's aggregate current year BIE paid or accrued to an
unrelated party.
(24) Unrelated current year BIE deduction. The consolidated group's unrelated current year BIE
deduction for any taxable year is the portion of the group's aggregate current year BIE deduction
classified as from interest paid or accrued to an unrelated party under paragraph (c)(3) of this
section.
(25) Unrelated party. An unrelated party is a party that is not a related party.
(f) Examples. The following examples illustrate the general application of this section. For
purposes of the examples, a foreign corporation (FP) wholly owns domestic corporation (P), which
in turn wholly owns S1 and S2. P, S1, and S2 are members of a consolidated group. The
consolidated group is a calendar year taxpayer.
(1) Example 1: Computation of the consolidated group's base erosion minimum tax amount. (i) The
consolidated group is the applicable taxpayer. (A) Facts. The members have never engaged in
intercompany transactions. For the 2019 taxable year, P, S1, and S2 were permitted the following
amounts of deductions (within the meaning of section 59A(c)(4)), $2,400x, $1,000x, and $2,600x;
those deductions include base erosion tax benefits of $180x, $370x, and $230x. The group's
consolidated taxable income for the year is $150x. In addition, the group satisfies the gross
receipts test in § 1.59A-2(d).
(B) Analysis. Pursuant to paragraph (b) of this section, the receipts and deductions of P, S1, and
S2 are aggregated for purposes of making the computations under section 59A. The group's base
erosion percentage is 13% (($180x + $370x + $230x)/($2,400x + $1,000x + $2,600x)). The
consolidated group is an applicable taxpayer under § 1.59A-2(b) because the group satisfies the
gross receipts test and the group's base erosion percentage (13%) is higher than 3%. The
consolidated group's modified taxable income is computed by adding back the members' base
erosion tax benefits (and, when the consolidated group has consolidated net operating loss
available for deduction, the consolidated net operating loss allowed times base erosion
percentage) to the consolidated taxable income, $930x ($150x + $180x + $370x + $230x). The
group's base erosion minimum tax amount is then computed as 10 percent of the modified taxable
income less the regular tax liability, $61.5x ($930x × 10%−$150x × 21%).
(ii) The consolidated group engages in intercompany transactions. (A) Facts. The facts are the
same as in paragraph (f)(1)(i)(A) of this section (the facts in Example 1 (i)), except that S1 sold
various inventory items to S2 during 2019. Such items are depreciable in the hands of S2 (but
would not have been depreciable in the hands of S1) and continued to be owned by S2 during
2019.
(B) Analysis. The result is the same as paragraph (f)(1)(i)(A) of this section (the facts in Example 1
(i)). Pursuant to paragraph (b)(2) of this section, items resulting from the intercompany sale (for
example, gross receipts, depreciation deductions) are not taken into account in computing the
group's gross receipts under § 1.59A-2(d) and base erosion percentage under § 1.59A-2(e)(3).
(2) Example 2: Business interest expense subject to section 163(j) and the group's domestic
related current year BIE and foreign related current year BIE for the year equals its section 163(j)
limitation. (i) Facts. During the current year (Year 1), P incurred $150x of business interest
expense to domestic related parties; S1 incurred $150x of business interest expense to foreign
related parties; and S2 incurred $150x of business interest expense to unrelated parties. The
group's section 163(j) limitation for the year is $300x. After applying the rules in § 1.163(j)-5(b)(3),
the group deducts $150x of P's Year 1 business interest expense, and $75x each of S1 and S2's
Year 1 business interest expense. Assume the group is an applicable taxpayer for purposes of
section 59A.
(ii) Analysis—(A) Application of the absorption rule in paragraph (c)(2) of this section. Following the
rules in section 163(j), the group's section 163(j) interest deduction for Year 1 is $300x, and the
entire amount is from members' Year 1 business interest expense.
(B) Application of the classification rule in paragraph (c)(3) of this section. Under paragraph (c)(3)
of this section, the group's aggregate current year BIE deduction of $300x is first classified as
payments or accruals to related parties (pro-rata among domestic related parties and foreign
related parties), and second as payments or accruals to unrelated parties. For Year 1, the group
has $150x of domestic related current year BIE and $150x of foreign related current year BIE, and
the group's aggregate current year BIE deduction will be classified equally among the related
party expenses. Therefore, $150x of the group's deduction is classified as domestic related current
year BIE deduction and $150x is classified as a foreign related current year BIE deduction.

Start Printed
Page 65994

(C) Application of the allocation rule in paragraph (c)(4) of this section. After the application of the
classification rule in paragraph (c)(3) of this section, the group has $150x each of domestic related
current year BIE deduction and foreign related current year BIE deduction from the group's
aggregate current year BIE in Year 1. The domestic related current year BIE deduction and foreign
related current year BIE deduction will be allocated to P, S1, and S2 based on each member's
deduction of its Year 1 business interest expense.
(1) Allocations to P. The percentage of current year BIE deduction attributable to P is 50% (P's
deduction of its Year 1 current year BIE, $150x, divided by the group's aggregate current year BIE
deduction for Year 1, $300x). Thus, the amount of domestic related current year BIE deduction
status allocated to P is $75x (the group's domestic related current year BIE deduction, $150x,
multiplied by the percentage of current year BIE deduction allocable to P, 50%); and the amount of
foreign related current year BIE deduction status allocated to P is $75x (the group's foreign related
current year BIE deduction, $150x, multiplied by the percentage of current year BIE deduction
allocable to P, 50%).
(2) Allocations to S1 and S2. The percentage of current year BIE deduction attributable to S1 is
25% (S1's deduction of its Year 1 current year BIE, $75x, divided by the group's aggregate current
year BIE deduction for Year 1, $300x). Thus, the amount of domestic related current year BIE
deduction status allocated to S1 is $37.5x (the group's domestic related current year BIE

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 38 of 41

deduction, $150x, multiplied by the percentage of current year BIE deduction allocable to S1,
25%); and the amount of foreign related current year BIE deduction status allocated to S1 is
$37.5x (the group's foreign related current year BIE deduction, $150x, multiplied by the percentage
of current year BIE deduction allocable to S1, 25%). Because S2 also deducted $75 of its Year 1
current year BIE, S2's deductions are allocated the same pro-rata status as those of S1 under this
paragraph (f)(2)(ii)(C)(2).
(D) Application of the allocation rule in paragraph (c)(5) of this section. Although the group will
have disallowed BIE carryforwards after Year 1 (the group's aggregate current year BIE of $450x
($150x + $150x + $150x) exceeds the section 163(j) limitation of $300x), all of the domestic related
current year BIE and foreign related current year BIE in Year 1 has been taken into account
pursuant to the classification rule in paragraph (c)(3) of this section. Thus, under paragraph (c)(5)
(iv) of this section, each member's disallowed BIE carryforward is treated as from payments or
accruals to unrelated parties.
(3) Example 3: Business interest expense subject to section 163(j). (i) The group's domestic
related current year BIE and foreign related current year BIE for the year exceeds its section 163(j)
limitation. (A) Facts. During the current year (Year 1), P incurred $60x of business interest expense
to domestic related parties; S1 incurred $40x of business interest expense to foreign related
parties; and S2 incurred $80x of business interest expense to unrelated parties. The group's
section 163(j) limitation for the year is $60x. After applying the rules in § 1.163(j)-5(b)(3), the group
deducts $20x each of P, S1, and S2's current year business interest expense. Assume the group
is an applicable taxpayer for purposes of section 59A.
(B) Analysis—(1) Application of the absorption rule in paragraph (c)(2) of this section. Following
the rules in section 163(j), the group's section 163(j) interest deduction is $60x, and the entire
amount is from members' Year 1 business interest expense.
(2) Application of the classification rule in paragraph (c)(3) of this section. Under paragraph (c)(3)
of this section, the group's $60x of aggregate current year BIE deduction is first classified as
payments or accruals to related parties (pro-rata among domestic related parties and foreign
related parties), and second as payments or accruals from unrelated parties. The group's total
related party interest expense in Year 1, $100x (sum of the group's Year 1 domestic related current
year BIE, $60x, and the group's Year 1 foreign related current year BIE, $40x), exceeds the
group's aggregate current year BIE deduction of $60x. Thus, the group's aggregate current year
BIE deduction will be classified, pro-rata, as from payments or accruals to domestic related parties
and foreign related parties. Of the group's aggregate current year BIE deduction in Year 1, $36x is
classified as a domestic related current year BIE deduction (the group's aggregate current year
BIE deduction, $60x, multiplied by the ratio of domestic related current year BIE over the group's
total Year 1 related party interest expense ($60x/($60x + $40x))); and $24x of the group's
aggregate current year BIE deduction is classified as a foreign related current year BIE deduction
(the group's section 163(j) interest deduction, $60x, multiplied by the ratio of foreign related current
year BIE over the group's total Year 1 related party interest expense ($40x/($60x + $40x))).
(3) Application of the allocation rule in paragraph (c)(4) of this section. After the application of the
classification rule in paragraph (c)(3) of this section, the group has $36x of domestic related
current year BIE deduction and $24x of foreign related current year BIE deduction from the group's
aggregate current year BIE in Year 1. The domestic related current year BIE deduction and foreign
related current year BIE deduction will be allocated to P, S1, and S2 based on each member's
current year BIE deduction in Year 1.
(i) Allocation of the group's domestic related current year BIE deduction status. Because each
member is deducting $20x of its Year 1 business interest expense, all three members have the
same percentage of current year BIE deduction attributable to them. The percentage of current
year BIE deduction attributable to each of P, S1, and S2 is 33.33% (each member's current year
BIE deduction in Year 1, $20x, divided by the group's aggregate current year BIE deduction for
Year 1, $60x). Thus, the amount of domestic related current year BIE deduction status allocable to
each member is $12x (the group's domestic related current year BIE deduction, $36x, multiplied by
the percentage of current year BIE deduction allocable to each member, 33.33%).
(ii) Allocations of the group's foreign related current year BIE deduction status. The amount of
foreign related current year BIE deduction status allocable to each member is $8x (the group's
foreign related current year BIE deduction, $24x, multiplied by the percentage of current year BIE
deduction allocable to each member, 33.33%, as computed earlier in paragraph (f)(3) of this
section (Example 3).
(4) Application of the allocation rule in paragraph (c)(5) of this section. In Year 1 the group has
$60x of domestic related current year BIE, of which $36x is deducted in the year (by operation of
the classification rule). Therefore, the group has $24x of domestic related BIE carryforward.
Similarly, the group has $40x of foreign related current year BIE in Year 1, of which $24x is
deducted in the year. Therefore, the group has $16x of foreign related BIE carryforward. The $24x
domestic related BIE carryforward status and $16x foreign related BIE carryforward status will be
allocated to P, S1, and S2 in proportion to the amount of each member's disallowed BIE
carryforward.
(i) Allocation to P. The percentage of disallowed BIE carryforward allocable to P is 33.33% (P's
Year 1 disallowed BIE carryforward, $40x ($60x − $20x), divided by the group's Year 1 disallowed
BIE carryforward, $120x ($60x + $40x + 80x − $60x)). Thus, the amount of domestic related BIE
carryforward status allocated to P is $8x (the group's domestic related BIE carryforward, $24x,
multiplied by the percentage of disallowed BIE carryforward allocable to P, 33.33%); and the
amount of foreign related BIE carryforward status allocated to P is $5.33x (the group's foreign
related BIE carryforward, $16x, multiplied by the percentage of disallowed BIE carryforward
allocable to P, 33.33%). Under paragraph (c)(5)(iv) of this section, P's disallowed BIE carryforward
that has not been allocated a status as either a domestic related BIE carryforward or a foreign
related BIE carryforward will be treated as interest paid or accrued to an unrelated party.
Therefore, $26.67x ($40x P's disallowed BIE carryforward − $8x domestic related BIE carryforward
status allocated to P − $5.33x foreign related BIE carryforward status allocated to P) is treated as
interest paid or accrued to an unrelated party.
(ii) Allocation to S1. The percentage of disallowed BIE carryforward allocable to S1 is 16.67% (S1's
Year 1 disallowed BIE carryforward, $20x ($40x − $20x), divided by the group's Year 1 disallowed
BIE carryforward, $120x ($60x + $40x + 80x − $60x). Thus, the amount of domestic related BIE
carryforward status allocated to S1 is $4x (the group's domestic related BIE carryforward, $24x,
multiplied by the percentage of disallowed BIE carryforward allocable to S1, 16.67%); and the
amount of foreign related BIE carryforward status allocated to S1 is $2.67x (the group's foreign
related BIE carryforward, $16x, multiplied by the percentage of disallowed BIE carryforward
allocable to S1, 16.67%). Under paragraph (c)(5)(iv) of this section, S1's disallowed BIE that has
not been allocated a status as either a domestic related BIE carryforward or a foreign related BIE
carryforward will be treated as interest paid or accrued to an unrelated party. Therefore, $13.33x
($20x S1's disallowed BIE carryforward − $4x domestic related BIE carryforward status allocated
to S1 − $2.67x foreign related BIE carryforward status allocated to S1) is treated as interest paid or
accrued to an unrelated party.

Start Printed
Page 65995

(iii) Allocation to S2. The percentage of disallowed BIE carryforward allocable to S2 is 50% (S2's
Year 1 disallowed BIE carryforward, $60x ($80x − $20x), divided by the group's Year 1 disallowed
BIE carryforward, $120x ($60x + $40x + 80x − $60x). Thus, the amount of domestic related BIE
carryforward status allocated to S2 is $12x (the group's domestic related BIE carryforward, $24x,
multiplied by the percentage of disallowed BIE carryforward allocable to S2, 50%); and the amount

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 39 of 41

of foreign related BIE carryforward status allocated to S2 is $8x (the group's foreign related BIE
carryforward, $16x, multiplied by the percentage of disallowed BIE carryforward allocable to S2,
50%). Under paragraph (c)(5)(iv) of this section, S2's disallowed BIE that has not been allocated a
status as either a domestic related BIE carryforward or a foreign related BIE carryforward will be
treated as interest paid or accrued to an unrelated party. Therefore, $40x ($60x S2's disallowed
BIE carryforward − $12x domestic related BIE carryforward status allocated to S2 − $8x foreign
related BIE carryforward status allocated to S2) is treated as interest paid or accrued to an
unrelated party.
(ii) The group deducting its disallowed BIE carryforwards. (A) Facts. The facts are the same as in
paragraph (f)(3)(i)(A) of this section (the facts in Example 3 (i)), and in addition, none of the
members incurs any business interest expense in Year 2. The group's section 163(j) limitation for
Year 2 is $30x.
(B) Analysis—(1) Application of the absorption rule in paragraph (c)(2) of this section. Following
the rules in section 163(j), each member of the group is deducting $10x of its disallowed BIE
carryforward from Year 1. Therefore, the group's section 163(j) deduction for Year 2 is $30x.
(2) Application of the classification rule in paragraph (c)(3) of this section. Under paragraph (c)(3)
(iv) of this section, to the extent members are deducting their Year 1 disallowed BIE carryforward
in Year 2, the classification rule will apply to the deduction in Year 2 after the allocation rule in
paragraph (c)(5) of this section has allocated the related and unrelated party status to the
member's disallowed BIE carryforward in Year 1. The allocation required under paragraph (c)(5) of
this section is described in paragraph (f)(3)(i)(B)(4) of this section.
(i) Use of P's allocated domestic related BIE carryforward status and foreign related BIE
carryforward status. P has $40x of Year 1 disallowed BIE carryforward, and P was allocated $8x of
domestic related BIE carryforward status and $5.33x of foreign related BIE carryforward status. In
Year 2, P deducts $10x of its Year 1 disallowed BIE carryforward. Under the classification rule of
paragraph (c)(3) of this section, P is treated as deducting pro-rata from its allocated status of
domestic related BIE carryforward and foreign related BIE carryforward. Therefore, P is treated as
deducting $6x of its allocated domestic related BIE carryforward ($10x × $8x/($8x + $5.33x)), and
$4x of its allocated foreign related BIE carryforward ($10x × $5.33x/$8x + $5.33x)). After Year 2, P
has remaining $30x of Year 1 disallowed BIE carryforward, of which $2x has a status of domestic
related BIE carryforward, $1.33x has the status of foreign related BIE carryforward, and $26.67x of
interest treated as paid or accrued to unrelated parties.
(ii) Use of S1's allocated domestic related BIE carryforward status and foreign related BIE
carryforward status. S1 has $20x of Year 1 disallowed BIE carryforward, and S1 was allocated $4x
of domestic related BIE carryforward status and $2.67x of foreign related BIE carryforward status.
In Year 2, S2 deducts $10x of its Year 1 disallowed BIE carryforward. Because S2's deduction of
its Year 1 disallowed BIE carryforward, $10x, exceeds its allocated domestic related BIE
carryforward status ($4x) and foreign related BIE carryforward status ($2.67x), all of the allocated
related party status are used up. After Year 2, all of S1's Year 1 disallowed BIE carryforward, $10x,
is treated as interest paid or accrued to an unrelated party.
(iii) Use of S2's allocated domestic related BIE carryforward status and foreign related BIE
carryforward status. S2 has $60x of Year 1 disallowed BIE carryforward, and S2 was allocated
$12x of domestic related BIE carryforward status and $8x of foreign related BIE carryforward
status. In Year 2, S2 deducts $10x of its Year 1 disallowed BIE carryforward. Under the
classification rule of paragraph (c)(3) of this section, S2 is treated as deducting $6x of its allocated
domestic related BIE carryforward ($10x × $12x/($12x + $8x)), and $4x of its allocated foreign
related BIE carryforward ($10x × $8x/$8x + $12x)). After Year 2, P has remaining $50x of Year 1
disallowed BIE carryforward, of which $6x has a status of domestic related BIE carryforward, $4x
has the status of foreign related BIE carryforward, and $40x of interest treated as paid or accrued
to unrelated parties.
(g) Applicability date—(1) In general. Except as provided in this paragraph (g), this section applies
to taxable years beginning after December 31, 2017.
(2) Application of section 59A if S joins a consolidated group with a taxable year beginning before
January 1, 2018. If during calendar year 2018 a corporation (S) joins a consolidated group during a
consolidated return year beginning before January 1, 2018, then section 59A will not apply to S's
short taxable year that is included in the group's consolidated return year, even though S's short
taxable year begins after December 31, 2017.
Par. 9. Section 1.1502-100 is amended by revising paragraph (b) to read as follows:
§ 1.1502-100

*

Corporations exempt from tax.

*

*

*

*

(b) The tax liability for a consolidated return year of an exempt group is the tax imposed by section
511(a) on the consolidated unrelated taxable income for the year (determined under paragraph (c)
of this section), and by allowing the credits provided in § 1.1502-2(b).

*

*

*

*

*

Par. 10. Section 1.6038A-1 is amended by adding a sentence to the end of paragraph (n)(2) and revising
the last sentence of paragraph (n)(3) to read as follows:
§ 1.6038A-1

General requirements and definitions.

*

*

*

*

*

(n) * * *
(2) * * * Section 1.6038A-2(a)(3), (b)(6), and (b)(7) apply for taxable years beginning after
December 31, 2017.
(3) * * * For taxable years ending on or before December 31, 2017, see § 1.6038A-4 as contained
in 26 CFR part 1 (/select-citation/2018/12/21/26-CFR-1) revised as of April 1, 2018.

*

*

*

*

*

Par. 11. Section 1.6038A-2 is amended by

1. Revising the headings for paragraphs (a) and (a)(1).
2. Revising paragraph (a)(2).
3. Adding paragraph (a)(3).
4. Revising paragraphs (b)(1)(ii), (b)(2)(iv), and the second sentence of paragraph (b)(3).
5. Redesignating paragraphs (b)(6) through (b)(9) as paragraphs (b)(8) through (b)(11).
6. Adding new paragraphs (b)(6) and (7).
7. Revising paragraph (c) and the first sentence of paragraph (d).

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 40 of 41

8. Removing the language “Paragraph (b)(8)” from the second sentence of paragraph (g) and adding the
language “Paragraph (b)(10)” in its place.

9. Adding two sentences to the end of paragraph (g).
The revisions and additions read as follows:
§ 1.6038A-2

Requirement of return.

(a) Forms required. (1) Form 5472. * * *
(2) Reportable transaction. A reportable transaction is any transaction of the types listed in
paragraphs (b)(3) and (4) of this section, and, in the case of a reporting corporation that is an
applicable taxpayer, as defined under § 1.59A-2(b), any other arrangement that, to prevent
avoidance of the purposes of section 59A, is identified on Form 5472 as a reportable transaction.
However, except as the Secretary may prescribe otherwise for an applicable taxpayer, the
transaction is not a reportable transaction if neither party to the transaction is a United States
person as defined in section 7701(a)(30) (which, for purposes of section 6038A, includes an entity
that is a reporting corporation as a result of being treated as a corporation under § 301.7701-2(c)
(2)(vi) of this chapter) and the transaction—

Start Printed
Page 65996

(i) Will not generate in any taxable year gross income from sources within the United States or
income effectively connected, or treated as effectively connected, with the conduct of a trade or
business within the United States, and
(ii) Will not generate in any taxable year any expense, loss, or other deduction that is allocable or
apportionable to such income.
(3) Form 8991. Each reporting corporation that is an applicable taxpayer, as defined under §
1.59A-2(b), must make an annual information return on Form 8991. The obligation of an applicable
taxpayer to report on Form 8991 does not depend on applicability of tax under section 59A or
obligation to file Form 5472.
(b) * * *
(1) * * *
(ii) The name, address, and U.S. taxpayer identification number, if applicable, of all its direct and
indirect foreign shareholders (for an indirect 25-percent foreign shareholder, explain the attribution
of ownership); whether any 25-percent foreign shareholder is a surrogate foreign corporation under
section 7874(a)(2)(B) or a member of an expanded affiliated group as defined in section 7874(c)
(1); each country in which each 25-percent foreign shareholder files an income tax return as a
resident under the tax laws of that country; the places where each 25-percent shareholder
conducts its business; and the country or countries of organization, citizenship, and incorporation
of each 25-percent foreign shareholder.

*

*

*

*

*

(2) * * *
(iv) The relationship of the reporting corporation to the related party (including, to the extent the
form may prescribe, any intermediate relationships).
(3) * * * The total amount of such transactions, as well as the separate amounts for each type of
transaction described below, and, to the extent the form may prescribe, any further description,
categorization, or listing of transactions within these types, must be reported on Form 5472, in the
manner the form prescribes. * * *

*

*

*

*

*

(6) Compilation of reportable transactions across multiple related parties. A reporting corporation
must, to the extent and in the manner Form 5472 may prescribe, include a schedule tabulating
information with respect to related parties for which the reporting corporation is required to file
Forms 5472. The schedule will not require information (beyond totaling) that is not required for the
individual Forms 5472. The schedule may include the following:
(i) The identity and status of the related parties;
(ii) The reporting corporation's relationship to the related parties;
(iii) The reporting corporation's reportable transactions with the related parties; and
(iv) Other items required to be reported on Form 5472.
(7) Information on Form 5472 and Form 8991 regarding base erosion payments. If any reporting
corporation is an applicable taxpayer, as defined under § 1.59A-2(b), it must report the information
required by Form 8991 and by any Form 5472 it is required to file, regarding:
(i) Determination of whether a taxpayer is an applicable taxpayer;
(ii) Computation of base erosion minimum tax amount, including computation of regular tax liability
as adjusted for purposes of computing base erosion minimum tax amount;
(iii) Computation of modified taxable income;
(iv) Base erosion tax benefits;
(v) Base erosion percentage calculation;
(vi) Base erosion payments;
(vii) Amounts with respect to services as described in § 1.59A-3(b)(3)(i), including a breakdown of
the amount of the total services cost and any mark-up component;
(viii) Arrangements or transactions described in § 1.59A-9;
(ix) Any qualified derivative payment, including:
(A) The aggregate amount of qualified derivative payments for the taxable year, including as
determined by type of derivative contract;
(B) The identity of each counterparty and the aggregate amount of qualified derivative payments
made to that counterparty; and
(C) A representation that all payments satisfy the requirements of § 1.59A-6(b)(2), and
(x) Any other information necessary to carry out section 59A.

*

*

*

*

*

(c) Method of reporting. All statements required on or with the Form 5472 or Form 8991 under this
section and § 1.6038A-5 must be in the English language. All amounts required to be reported
under paragraph (b) of this section must be expressed in United States currency, with a statement
of the exchange rates used, and, to the extent the forms may require, must indicate the method by
which the amount of a reportable transaction or item was determined.

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018

Federal Register :: Base Erosion and Anti-Abuse Tax

Page 41 of 41

(d) * * * A Form 5472 and Form 8991 required under this section must be filed with the reporting
corporation's income tax return for the taxable year by the due date (including extensions) of that
return. * * *

*

*

*

*

*

(g) * * * Paragraph (b)(7)(ix) of this section applies to taxable years beginning one year after final
regulations are published in the Federal Register. Before these regulations are applicable, a
taxpayer will be treated as satisfying the reporting requirement described in § 1.59A-6(b)(2) only to
the extent that it reports the aggregate amount of qualified derivative payments on Form 8991.
§ 1.6038A-4

[Amended]

Par. 12. For each paragraph listed in the table, remove the language in the “Remove” column from
wherever it appears and add in its place the language in the “Add” column as set forth below:
Section

Remove

Add

Section 1.6038A-4(a)(1) $10,000 $25,000
Section 1.6038A-4(a)(3)

10,000

25,000

Section 1.6038A-4(d)(1)

10,000

25,000

Section 1.6038A-4(d)(4)

10,000

25,000

Section 1.6038A-4(f)

10,000

25,000

Section 1.6038A-4(f)

30,000

75,000

Section 1.6038A-4(f)

90,000 225,000

§ 1.6655-5

[Amended]

Par. 13. Section 1.6655-5 is amended by removing the language “§ 1.1502-2(h)” in paragraph (e)
Example 10 and adding the language“§ 1.1502-1(h)” in its place.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-27391 (/a/2018-27391) Filed 12-17-18; 4:15 pm]
BILLING CODE 4830-01-P
PUBLISHED DOCUMENT

https://www.federalregister.gov/documents/2018/12/21/2018-27391/base-erosion-and-anti-abuse-tax

12/21/2018