U.S. multinationals face a “tricky situation” in trying to plot a tax strategy around the new base erosion and anti-abuse tax (BEAT) in the 2017 U.S. tax law, a UPS official said.
The new law is like a game of whack-a-mole: Multinationals structure their tax planning around provisions like the global intangible low-taxed income or foreign tax credits, “then all of a sudden, BEAT pops up,” said Laura O’Leary, director of tax and products for the Americas region at UPS Inc. in Miami.
The BEAT, meant to limit earnings stripping, effectively imposes a minimum tax on companies with annual gross receipts of $500 million or more that make base erosion payments to foreign parties equal to at least 3% of their total deductions.
“You have to take all the provisions together, because all your actions in one are going to have an impact on another,” she said, speaking June 14 at an American Bar Association event in Miami. “And the BEAT is a really good example of this.”
For example, in some jurisdictions, a multinational has to weigh the potential cost under BEAT against potential liabilities under that jurisdiction’s value-added tax (VAT) regimes.
“If you’re providing a service in Mexico, you’d have to look at whether or not it qualifies as export services to a U.S. customer,” O’Leary said. “If not, you’re going to get an automatic VAT cost added to your price. This is where you’ve got to figure out what’s the biggest cost: Is your biggest cost the extra VAT, or is your cost going to be higher with the BEAT?”
High tariff rates in some jurisdictions may also result in additional costs that are greater than the cost of paying the BEAT. She also suggested transferring fees into an inventoriable cost, because cost of goods sold is an exception to the BEAT.
As a practical approach, O’Leary said tax counsels and advisers should list out all potentially deductible payments that fall under BEAT, then “look to see if you can identify an exception you can restructure around to meet.”
The provision seems intended to target the income of foreign corporations operating in the U.S., O’Leary said, but “a lot of U.S. taxpayers are caught up in this as well” — including her own company.
“We obviously have to pay related parties for services, because we have to be physically located in the country where we perform services,” she said. “Potentially, we have a lot of modified taxable income because of our add-back of all service income.”
“I don’t think that was the intent,” she added. “That’s what we have to live with right now.”