According to Senior Economist, Alan Cole at the Tax Foundation, BEAT is the acronym for Base Erosion and Anti-abuse Tax.
“Base erosion is the loss of corporate income tax revenues from global companies due to profit shifting. BEAT is intended to address a legitimate problem, and there are virtues to BEAT’s overall strategic approach; however, its execution leaves room for improvement.
BEAT concerns the tax treatment of cross-border tax payments made by a multinational enterprise (MNE) to related companies abroad. Now, since the companies are related—that is, they have the same ownership—it does not change the total income of the group. A loss for one part of the MNE is a gain for another. But it does have tax implications: cross-border payments create a deductible expense in one country and income in another, reducing taxable income in the first country and increasing it in the second. The practice of accounting for cross-border transactions is known as transfer pricing.
While transfer pricing is a necessary part of doing business, and deductibility is a normal feature of traditional income tax systems, MNEs have an incentive to use transfer pricing to create deductions in the U.S. and income in the low-tax jurisdiction. This functionally shifts the profits to that low-tax jurisdiction, reducing the overall tax burden for the company and “eroding” the U.S. tax base.
An MNE cannot simply arbitrarily shift profits around with any payment it desires. Regulations for transfer pricing require that cross-border payments follow an “arm’s length principle”—that is, they must be priced as if the two related parties were independent and negotiating based on their own interests, hopefully resulting in accounting that reflects economic substance.
In practice, though, certain categories of transactions are quite subjective, leaving MNEs some wiggle room to shift profits. For example, payments for commodities are relatively objective, while royalties—payments for unique intellectual property—are much less objective, allowing the wiggle room to shift profits. As a result, base erosion is associated with certain categories of expense far more often than others.”
Furthermore, Mr. Cole states…
“BEAT is an attempt to slow this practice down. It creates a category for base erosion payments—expenses paid to related corporations abroad in categories often associated with profit shifting, such as services, interest, rents, and royalties—and taxes MNEs with too many of these base erosion payments.
While BEAT is intended to address abuse of cross-border transactions in general, BEAT should not be thought of as a system for adjudicating guilt; a BEAT liability is not by itself evidence that an MNE has engaged in transfer mispricing. However, a BEAT liability does indicate that the MNE’s overall tax profile, as measured by an aggregate accounting metric, is statistically more consistent with transfer mispricing than an average company’s tax profile might be. As a result, the MNE is instructed to pay more taxes.”
