IRS Publishes Proposed Regulations On BEAT

On December 13, 2018, the IRS published proposed regulations (REG-104259-18) on the Base Erosion and Anti-Abuse Tax (the "BEAT"), a new tax regime under the Tax Cuts and Jobs Act ("TCJA"). BEAT is designed to discourage multinational corporations from profit-shifting behavior by making deductible payments to their foreign affiliates, such as interest, high-margin service payments, rents and royalties. While the proposed regulations shed light on the implementation mechanism of BEAT, there are some unwelcome surprises and open questions that taxpayers should be aware of.

In essence, BEAT imposes a maximum of a 12.5% tax on base erosion payments a taxpayer corporation makes to its foreign affiliates, which are deemed to be related parties if the ownership overlap with the taxpayer is greater than 25%. BEAT does not apply to real estate investment companies, real estate investment trusts, and S corporations. Whether BEAT applies is determined by the base erosion