BEAT is a U.S. minimum tax designed to discourage large corporations from reducing their U.S. tax liability by making certain deductible payments to related foreign parties. These rules can help limit domestic tax avoidance and profit shifting or offshoring that reduces income subject to U.S. tax. Created under the 2017 Tax Cuts and Jobs Act, BEAT generally applies to corporations with average annual gross receipts of at least $500 million that also meet the applicable base erosion percentage threshold. If BEAT applies, the company calculates modified taxable income without certain tax benefits related to base erosion payments and may owe additional tax if its BEAT liability exceeds its adjusted regular tax liability.
The base erosion percentage measures the proportion of a company’s deductions attributable to base erosion tax benefits from certain payments to foreign related parties. It generally compares base erosion tax benefits with the company’s allowed deductions, subject to specific exclusions.
BEAT generally applies only if the base erosion percentage is 3% or higher. For certain taxpayers that are members of an affiliated group including a bank or registered securities dealer, the threshold is generally 2%. A company can meet the $500 million gross-receipts test but remain outside BEAT if its base erosion percentage is below the applicable threshold. Changes in deductible cross-border payments can affect this calculation annually.
The BEAT calculation starts with regular taxable income and adds back certain deductions connected with base erosion payments to determine modified taxable income. These payments may include certain related-party payments for services, interest, rents, royalties, depreciation, and amortization.
Modified Taxable Income = Regular Taxable Income + Base Erosion Tax Benefits
The applicable BEAT rate is then applied to modified taxable income and compared with the company’s adjusted regular tax liability. The corporation generally owes BEAT only when the resulting minimum tax amount exceeds its regular tax liability.
BEAT Liability = (Modified Taxable Income × Applicable BEAT Rate) − Adjusted Regular Tax Liability
If the calculation produces a negative amount, the BEAT liability is generally zero. Under H.R. 1, the applicable rate is 10.5% for tax years beginning after December 31, 2025, replacing the previously scheduled 12.5% rate. Because the amount of qualifying related-party payments directly affects modified taxable income, those payments can significantly affect the final BEAT liability.
Base erosion payments generally include deductible amounts paid or accrued to foreign related parties, such as interest, royalties, rents, certain service payments, reinsurance premiums, and amounts connected with acquiring depreciable or amortizable property. However, payments reflected in cost of goods sold generally are not base erosion payments because they reduce gross receipts rather than generate deductions. Exceptions may also apply to certain low-margin services, qualified derivative payments, and payments treated as effectively connected income. Companies should review each related-party transaction carefully when assessing BEAT exposure and coordinating federal tax planning with broader State and Local Tax considerations.
The Base Erosion and Anti-Abuse Tax and the OECD’s Pillar Two global minimum tax both aim to limit profit shifting, but they operate differently. BEAT applies a U.S. minimum tax to certain large corporations making deductible payments to foreign related parties. Pillar Two generally applies a 15% minimum effective tax rate to qualifying multinational groups on a jurisdiction-by-jurisdiction basis. BEAT also operates alongside other U.S. international tax rules, including Global Intangible Low-Taxed Income (GILTI), which addresses income earned by controlled foreign corporations.
What types of companies are most at risk of BEAT exposure?
Large multinational corporations face the greatest exposure, particularly those with at least $500 million in average annual gross receipts and substantial deductible payments to foreign related parties. Interest, royalties, rents and certain service payments can increase the likelihood that BEAT applies.
Does BEAT apply separately to each subsidiary of a corporate group?
No. BEAT generally applies at the aggregate group level for corporations that are members of the same consolidated group. The group’s gross receipts, base erosion percentage, and applicable tax liability are generally determined using consolidated group rules.
Can a company owe both BEAT and Pillar Two in the same year?
Yes. A company can potentially owe both BEAT and Pillar Two in the same year because they are separate minimum-tax regimes with different rules and calculations.
When did BEAT first take effect and at what rate?
BEAT was enacted as part of the Tax Cuts and Jobs Act of 2017 and initially operated at a 10% rate. H.R. 1 sets the BEAT rate at 10.5% for tax years beginning after December 31, 2025.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Matt Pellegrom, partner in Bennett Thrasher’s International Tax practice, or call us at 770.396.2200.
Never miss an update. Sign up to receive our monthly newsletter to unlock our experts' insights.
Subscribe Now