Daniel Nir Published in Thomson Reuters’ Journal of International Taxation – Transfer Pricing and the BEAT

Daniel Nir, Managing Director in Duff & Phelps Transfer Pricing practice, and Elizabeth Patrun, Economist at the Internal Revenue Service¹, recently jointly published an article in the September 2020 issue of Thomson Reuters’ Journal of International Taxation titled, “Mitigating the BEAT: Practical Transfer Pricing Strategies”. 

Taxpayers’ internal supply chains and transfer pricing structures significantly affect the likely impact of the BEAT. While restructuring these arrangements and associated intercompany transactions may help mitigate the BEAT, many corporate taxpayers are also exploring other practical near-term transfer pricing strategies that are significantly less burdensome and costly to implement.

On December 6, 2019, the U.S. Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued final regulations implementing the base erosion and anti-abuse tax (“BEAT”) codified under Internal Revenue Code (“IRC”) section 59A (the “Final Regulations”), applying to tax years ending on or after December 17, 2018.² Since the BEAT’s enactment in 2017 through the issuance of both the proposed and Final Regulations, transfer pricing has emerged as a significant area of focus for multinationals seeking to strategically manage their tax exposure under the BEAT.

As a general matter, corporate taxpayers’ strategies to manage the BEAT are highly specific to their unique facts and circumstances, and involve many complex tax considerations beyond the nature and quantum of their base erosion payments. Notwithstanding this, international tax planning strategies with respect to the BEAT often require a holistic assessment of all of the taxpayer’s U.S. outbound intercompany flows. Eliminating or reducing the value of such flows within the parameters and rules of IRC section 482 and certain related exceptions under the Final Regulations can help taxpayers manage their positions relative to the three percent base erosion percentage threshold or mitigate the effect of the BEAT’s application.

In this article, we further explore the interplay between a company’s transfer pricing policies and its exposure under the BEAT, as well as some specific transfer pricing strategies that companies have considered and implemented in response. We acknowledge a range of strategies but pay particular attention to how taxpayers are (1) maximizing the benefit of the taxpayer-favorable SCM exception and (2) simplifying intercompany services arrangements to minimize base erosion payments. In our experience, assessments in these specific areas have proven effective and practical. We conclude by highlighting some key considerations with respect to intercompany financial transactions. These strategies may become more useful in the immediate future, as taxpayers face increased exposure to the BEAT following expected decreases in sales, margins and taxable income resulting from the COVID-19 pandemic.

Subscribers of Thomson Reuters can access the full article here.

^1.At the time of writing the article, Elizabeth Patrun was a Director in the Duff & Phelps transfer pricing practice based in Chicago. Elizabeth has since joined the Internal Revenue Service as an Economist. The content of this article is the opinion of the writer and does not necessarily represent the position of the Internal Revenue Service.
^2.The Final Regulations were published in the Federal Register along with additional proposed regulations on the BEAT (the “2019 Proposed Regulations”). The 2019 Proposed Regulations provide (1) additional modified rules for the determination of taxpayers’ aggregate group for the purposes of determining gross receipts and the base erosion percentage, (2) proposed regulations providing an election to waive deductions, and (3) proposed regulations addressing the application of the BEAT to partnerships. These proposed regulations are outside the scope of this article.