updated 6:36 PM CET, Mar 18, 2023

U.S. Treasury, IRS issues final regs on Base Erosion and Anti-Abuse Tax, Foreign Tax Credits

The Internal Revenue Service and the Treasury Department published their final regulations covering two major international tax provisions, the Base Erosion and Anti-abuse Tax (BEAT) and Foreign Tax Credit, both of which had been addressed in President Trump's Tax Cuts and Jobs Act.

The final BEAT regulations were released on Dec. 2 and took effect on Dec. 6, after being published in the Federal Register.

The BEAT regulations are said to be aimed at preventing the "erosion" of the U.S. tax base by large multinational groups that take advantage of deductible payments to foreign related parties and other means in order to reduce their U.S. tax liability.

In a detailed summary of the final BEAT regulations, the IRS estimated that "3,500 to 4,500 taxpayers" may find themselves subject to the BEAT rules, "because those taxpayers (1.) are [either] U.S. shareholders of a foreign corporation, 25% foreign-owned corporations, or foreign corporations engaged in a trade or business within the United States; and (2.) have gross receipts of US$500m or more, without taking into account the gross receipts of members of its aggregate group".

In addition, "as many as 100,000 to 110,000 additional taxpayers may be applicable taxpayers as a result of being members of an aggregate group," the IRS added.

The final regulations provide definitive guidance with respect to which taxpayers are to be subject to a new "section 59A tax", as well as defining what a base erosion payment is, how  base erosion minimum tax amounts are to be calculated, and from that, the resultant base erosion and anti-abuse tax. A reporting requirement related to the tax is also explained.

Final Foreign Tax Credit regs 

Also on Dec. 2, the U.S. Treasury and IRS released what were said to be the final regulations related to the determination of the Foreign Tax Credit, thus finalizing proposed regulations published on Dec. 7, 2018.

The final regulations (T.D. 9882), which run to 386 pages in pdf form,  were released by Treasury and the IRS prior to being published in the Federal Register. 

They provide guidance related to how a FTC is arrived at, including guidance related to changes introduced by the Tax Cuts and Jobs Act, in addition to finalizing "proposed regulations on overall foreign losses that were published on June 25, 2012" as well as "certain portions of proposed regulations published on November 7, 2007, relating to a U.S. taxpayer’s obligation to notify the IRS of a foreign tax redetermination". 

To read a list of what KPMG's experts considered to be a number of "noteworthy" features of the final Foreign Tax Credit regulations, click here.

Signed into law in November 2017 by President Trump, the Tax Cuts and Jobs Act represented the first major overhaul of the U.S. Internal Revenue Code in years. It primarily reduced tax rates for certain businesses and individuals, in a way that was, and continues to be, seen as reflecting Republican party and Trump administration priorities.

Groups representing expatriate individuals and American expat owners of small overseas businesses have been highly critical of certain elements of the TCJA since it was introduced, and as reported, an American citizen living in Israel filed a legal challenge to it earlier this year in U.S. District Court in the District of Columbia, specifically addressing the way it applies to so-called “controlled foreign corporations”.

Among other things, the lawsuit argues that the final version of the TCJA regulations failed to contain a "regulatory flexibility analysis" that is required by the Regulatory Flexibility Act, a U.S. law that requires federal agencies to review regulations for their impact on small businesses.