A large component to the 2017 Tax Cuts and Jobs Act (“TCJA”) was the adoption of the Base Erosion and Anti-Abuse Tax (“BEAT”).[1] The purpose of BEAT was to prevent corporations operating in the United States from avoiding domestic tax liability by shifting profits out of the United States.[2] Under Internal Revenue Code Section 59A (“Section 59A”), BEAT will experience two major changes following December 31, 2026: (1) the current tax rate of 10 percent will increase to 12.5 percent and (2) the company must reduce its regular tax liability by the total amount of credits it is allowed to use against that liability. However, this reduction cannot reduce the regular tax liability below zero.[3] As a result, BEAT continues to shape corporate tax strategies, particularly in the realm of cross-border transactions, and will remain a key consideration for businesses navigating their tax obligations after calendar year 2026.
Who is Subject to BEAT?
Under Section 59A, an applicable taxpayer must meet three requirements to be eligible for BEAT. The first requirement being the applicable taxpayer must not be a regulated investment company, real estate investment trust, or S corporation.[4] The second requirement being the applicable taxpayer must have an average annual gross receipt of at least $500 million for the prior three tax years.[5] The third, and final, requirement being the base erosion percentage for the taxable year being 3% or more – noting in some instances this is 2%.[6]
How is BEAT Calculated?
To be subject to BEAT, all three requirements previously stated must apply. The final requirement for the applicable taxpayer is the beginning position to calculate BEAT. In the most simplified form, the base erosion percentage is calculated by dividing base erosion payments by the company’s total deduction.[7] Being exclusive to a related foreign party for which a deduction is allowed, a base erosion payment includes, but is not limited to, royalty payments, interest payments, and payments for services.[8] The base erosion percentage does increase as the denominator is computed without regard to eligible deductions and exceptions from the company’s total deductions.[9] If the base erosion percentage is greater than the third requirement of generally 3%, this would lead to computing the BEAT liability.
BEAT liability is the leftover of the adjusted regular tax liability following the amount of the applicable BEAT tax rate multiplied by the modified taxable income.[10] At its most fundamental level, the adjusted regular tax liability is the regular tax liability reduced by eligible tax credits.[11] The modified taxable income adds the base erosion payments and the base erosion percentage of any net operating loss (“NOL”) deduction back to the regular taxable income and is then multiplied by the applicable BEAT tax rate.[12] There is then a BEAT liability if the modified taxable income calculation is greater than the adjusted regular tax liability.[13]
BEAT and the Domestic Impact
The initial expectation of the Joint Committee on Taxation was for BEAT to curate $149.6 billion of revenue from 2018 to 2027.[14] In alignment with the expectation, in 2018, 479 companies paid $1.8 billion in BEAT liability.[15] However, in 2021, 357 companies paid $1.2 billion in BEAT liability.[16] This decrease becomes unsurprising following multinational corporations awareness of mechanisms to mitigate BEAT exposure.[17] An example of one of the many mechanisms is incorporating the foreign intellectual property into the final product to then sell back to the domestic corporation.[18] This would result in a payment of cost of goods sold, which does not fall within the scope of BEAT.[19] These mechanisms show how multinational corporations are creating a fast-declining base, resulting in the increased BEAT tax rate to have a minimal impact.[20]
As commonly known by corporations, tax law is everchanging. This can be seen globally by the emerging Base Erosion and Project Shifting project commenced in 2013 to address tax evasion strategies used by global corporations.[21] Following the Organization for Economic Co-operation and Development Global Tax Deal being finalized in 2021, the establishment of a global minimum tax rate of 15 percent, more commonly known as Pillar Two, has become of focus for many multinational corporations.[22] While there is no current set timeline for Pillar Two to become enacted within the United States tax law, discussions of how this will interplay with BEAT has begun. Specifically, with the new Trump administration and Republican majority of the House and Senate, it is possible of an attempt to pressure countries that have enacted Pillar Two rules to make changes to certain aspects of their Pillar Two rules.[23] One plausible route could be making Pillar Two more akin to the United State BEAT rules.[24] Ultimately, how the U.S. adapts to or challenges the global tax landscape will have significant implications for both multinational corporations and international tax policy moving forward.
[1] Base Erosion and Anti-Abuse Tax (BEAT), Tax Foundation (Feb. 14, 2025), https://taxfoundation.org/taxedu/glossary/base-erosion-anti-abuse-tax-beat/.
[2] Id.
[3] 26 U.S.C. § 59A(b)(2) (2023).
[4] 26 U.S.C. § 59A(e)(1)(A) (2023).
[5] 26 U.S.C. § 59A(e)(1)(B) (2023).
[6] 26 U.S.C. § 59A(e)(1)(C) (2023).
[7] Joint Comm. on Taxation, Overview of the Tax Cuts and Jobs Act, at slide 8 (Apr. 2019), https://www.jct.gov/CMSPages/GetFile.aspx?guid=d35821ce-ed13-42c0-8546-41d093cebde9.
[8] Id. at slide 4.
[9] Id.
[10] Id. at slide 11.
[11] Id. at slide 15.
[12] Base Erosion and Anti-Abuse Tax (BEAT), supra note 1.
[13] Id.
[14] Joint Comm. on Taxation, Estimated Budget Effects of the Conference Agreement for H.R. 1, the Tax Cuts and Jobs Act, Dec. 18, 2017, https://www.jct.gov/publications/2017/jcx-67-17/.
[15] Andrew Lautz, The 2025 Tax Debate: GILTI, FDII, and BEAT Under the Tax Cuts and Jobs Act, Bipartisan Policy Center, (Aug. 26, 2024), https://bipartisanpolicy.org/explainer/the-2025-tax-debate-gilti-fdii-and-beat-under-the-tax-cuts-and-jobs-act/.
[16] SOI Tax Stats – International tax studies based upon provisions introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, IRS (Feb. 14, 2025), https://www.irs.gov/statistics/soi-tax-stats-international-tcja-studies.
[17] Mandy Li, Navigating BEAT and Transfer Pricing: Strategies to Minimize U.S. Tax Liability, MGO (Feb. 6, 2025) https://www.mgocpa.com/perspective/beat-mitigation-transfer-pricing-irs-guidance-intragroup-loans/; See Michael J. Graetz et al., Taxing International Income: Inadequate Principles, Inadequate Policy, SSRN (Aug. 16, 2017), https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=4495&context=faculty_scholarship
[18] Alan Cole, The Impact of GILTI, FDII, and BEAT, Tax Foundation (Jan. 31, 2024), https://taxfoundation.org/research/all/federal/impact-gilti-fdii-beat/.
[19] Id.
[20] Id.
[21] See Press Release, Deloitte, BEPS Actions, Base Erosion and Profit Shifting (Apr. 9, 2015), https://www.deloitte.com/au/en/services/tax/analysis/beps-actions.html; See also Base erosion and profit shifting (BEPS), OECD, https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html (last visited Feb. 14, 2025).
[22] Christopher Ahn, Taxing the Digital Giants: What the OECD Global Tax Deal Means for the U.S., Fordham Law News (Oct. 8, 2024), https://news.law.fordham.edu/jcfl/2024/10/08/taxing-the-digital-giants-what-the-oecd-global-tax-deal-means-for-the-u-s/.
[23] Brin Rajathurai et al., What does 2025 hold fo the Global Minimum Tax (Pillar Two)?, A&O Shearman (Jan. 15, 2025) https://www.aoshearman.com/en/insights/what-does-2025-hold-for-the-global-minimum-tax-pillar-two.
[24] Id.
