[Federal Register Volume 84, Number 235 (Friday, December 6, 2019)]
[Rules and Regulations]
[Pages 66968-67045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25744]



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Vol. 84

Friday,

No. 235

December 6, 2019

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Base Erosion and Anti-Abuse Tax and Additional Rules Regarding Base 
Erosion and Anti-Abuse Tax; Final Rule and Proposed Rule

  Federal Register / Vol. 84 , No. 235 / Friday, December 6, 2019 / 
Rules and Regulations  

[[Page 66968]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9885]
RIN 1545-BO56


Base Erosion and Anti-Abuse Tax

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations implementing the base 
erosion and anti-abuse tax, designed to prevent the reduction of tax 
liability by certain large corporate taxpayers through certain payments 
made to foreign related parties and certain tax credits. These final 
regulations also provide reporting requirements related to this tax. 
This tax was added to the Internal Revenue Code (the ``Code'') as part 
of the Tax Cuts and Jobs Act. This document finalizes the proposed 
regulations published on December 21, 2018. The final regulations 
affect corporations with substantial gross receipts that make payments 
to foreign related parties. The final regulations also affect any 
reporting corporations required to furnish information relating to 
certain related-party transactions and information relating to a trade 
or business conducted within the United States by a foreign 
corporation.

DATES: Effective date: The final regulations are effective on December 
6, 2019. Applicability dates: For dates of applicability, see 
Sec. Sec.  1.59A-10, 1.1502-2(d), 1.1502-59A(h), and 1.6038A-2(g).

FOR FURTHER INFORMATION CONTACT: Concerning Sec. Sec.  1.59A-1 through 
1.59A-10, Azeka J. Abramoff, Sheila Ramaswamy, or Karen Walny at (202) 
317-6938; concerning the services cost method exception, L. Ulysses 
Chatman at (202) 317-6939; concerning Sec. Sec.  1.383-1, 1.1502-2, 
1.1502-4, 1.1502-43, 1.1502-47, 1.1502-59A, 1.1502-100, and 1.6655-5, 
Julie Wang at (202) 317-6975 or John P. Stemwedel at (202) 317-5024; 
concerning Sec. Sec.  1.6038A-1, 1.6038A-2, and 1.6038A-4, Brad 
McCormack or Anand Desai at (202) 317-6939 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    On December 21, 2018, the Department of the Treasury (``Treasury 
Department'') and the IRS published proposed regulations (REG-104259-
18) under section 59A, and proposed amendments to 26 CFR part 1 under 
sections 383, 1502, 6038A, and 6655 in the Federal Register (83 FR 
65956) (the ``proposed regulations''). The base erosion and anti-abuse 
tax (``BEAT'') in section 59A was added to the Code by the Tax Cuts and 
Jobs Act, Public Law 115-97 (2017) (the ``Act''), which was enacted on 
December 22, 2017. The Act also added reporting obligations regarding 
this tax for 25-percent foreign-owned corporations subject to section 
6038A and foreign corporations subject to section 6038C.
    A public hearing was held on March 25, 2019. The Treasury 
Department and the IRS also received written comments with respect to 
the proposed regulations. Comments outside the scope of this rulemaking 
are generally not addressed but may be considered in connection with 
future guidance projects. All written comments received in response to 
the proposed regulations are available at www.regulations.gov or upon 
request.

Summary of Comments and Explanation of Revisions

I. Overview

    The final regulations retain the basic approach and structure of 
the proposed regulations, with certain revisions. This Summary of 
Comments and Explanation of Revisions discusses those revisions as well 
as comments received in response to the solicitation of comments in the 
notice of proposed rulemaking accompanying the proposed regulations.

II. Comments and Changes to Proposed Sec.  1.59A-1--Overview and 
Definitions

    Proposed Sec.  1.59A-1 provides general definitions under section 
59A. Proposed Sec.  1.59A-1(b)(17) provides a definition of the term 
``related party.'' The proposed regulations generally define a related 
party with respect to an applicable taxpayer as (a) any 25-percent 
owner of the taxpayer, (b) any person related (within the meaning of 
section 267(b) or 707(b)(1)) to the taxpayer or any 25-percent owner of 
the taxpayer, or (c) a controlled taxpayer within the meaning of Sec.  
1.482-1(i)(5).
    The proposed regulations' definition of ``related party'' is 
identical to the definition provided by section 59A(g), except with 
respect to the relatedness standard under section 482. Specifically, 
the proposed regulations provide a more precise citation to the section 
482 regulations (``a controlled taxpayer within the meaning of Sec.  
1.482-1(i)(5)'') than the general cross-reference that is provided in 
section 59A(g)(1)(C) (``any other person who is related (within the 
meaning of section 482) to the taxpayer'').
    Comments recommended that the final regulations modify the 
definition of ``related party'' to exclude related publicly traded 
companies or otherwise provide an exception for payments between 
publicly traded companies. These comments suggested that payments 
between related publicly traded companies do not result in base 
erosion. The comments explained that the boards of directors of 
publicly traded companies generally have fiduciary obligations to 
shareholders to act in the best interest of the company and are subject 
to regulatory oversight. On this basis, the comments asserted that a 
domestic corporation cannot artificially shift profits to a foreign 
corporation in this situation. Comments also noted that the Treasury 
Department and the IRS have provided relief for publicly traded 
companies in circumstances where there is no explicit legislative 
history or statutory authority to do so, such as where minority 
shareholders of publicly traded companies must be identified. See Sec.  
1.367(e)-1(d)(3) and Sec.  1.382-2T(j).
    The Treasury Department and the IRS have determined that it is not 
appropriate to modify the statutory definition of a related party to 
exclude publicly traded companies because this recommendation is 
inconsistent with the statutory language of section 59A(g). Section 
59A(g) sets forth specific limits on the definition of a ``related 
party'' that include a corporation and its 25-percent owner. Under the 
proposal recommended by the comments, section 59A would not apply to 
any less than 100 percent owned affiliate, so long as other ``public'' 
shareholders owned some interest in the corporation. The corporate laws 
of a state of the United States or a foreign jurisdiction may, and 
often do, impose certain duties on the board of directors of a company, 
including obligations with respect to the interests of minority 
shareholders. These companies are also subject to securities laws in 
the United States. Notwithstanding this regulatory environment, the 
Code includes many provisions that apply to related parties, and none 
of those provisions are limited to corporations that are 100 percent 
related.
    For example, section 267(a) generally applies to transactions among 
greater than 50 percent controlled parties. Section 482 provides a test 
that can be satisfied by a quantitative measure of ownership or a 
qualitative test of control (``two or more organizations, trades, or 
businesses . . . owned or controlled directly or indirectly by the same 
interests''), that, as interpreted by regulations, can apply at well 
below a 100 percent relatedness standard. See Sec.  1.482-1(i)(5). 
Other sections of the

[[Page 66969]]

Code apply based on a relatedness standard of 80 percent. See, 
generally, section 1504; section 351(a). In section 59A, Congress 
adopted, disjunctively, both the 50 percent relatedness-test from 
section 267(a) and the relatedness-test from section 482. Moreover, 
Congress also added, disjunctively, a lower objective standard for 
determining relatedness for a 25-percent owner.
    Finally, the Treasury Department and IRS concluded that a rule that 
confers special status on payments to a publicly traded foreign 
corporation that is related (using a 25 percent or greater standard) to 
the payor would not be analogous to the rules in Sec.  1.367(e)-1(d)(3) 
or Sec.  1.382-2T(j), which provide special rules that pertain to 
shareholders that own less than 5 percent of publicly traded 
corporations, in light of challenges in determining the identity of 
such shareholders.
    For these reasons, the final regulations do not modify the 
relatedness thresholds that are set forth in section 59A and the 
proposed regulations.

III. Comments and Changes to Proposed Sec.  1.59A-2--Applicable 
Taxpayer, Aggregation Rules, Gross Receipts Test, and Base Erosion 
Percentage Test

    Proposed Sec.  1.59A-2 contains rules for determining whether a 
taxpayer is an applicable taxpayer on which the BEAT may be imposed, 
including rules relating to the gross receipts test, base erosion 
percentage test, and the determination of the aggregate group for 
purposes of applying these tests.

A. Determining the Gross Receipts and Base Erosion Percentage of an 
Aggregate Group That Includes a RIC, a REIT, or an Entity Treated as a 
Corporation by Section 892

    Section 59A(e)(1)(A) excludes corporations that are (1) regulated 
investment companies (``RICs''), (2) real estate investment trusts 
(``REITs''), or (3) S corporations from the definition of an applicable 
taxpayer. A comment requested that the final regulations clarify that 
controlled RICs and REITs are similarly excluded from the aggregate 
group for purposes of the gross receipts test and base erosion 
percentage test. The comment implied that the Treasury Department and 
the IRS did not intend for RICs and REITs to be part of an aggregate 
group because RICs and REITs are not subject to the BEAT as separate 
taxpayers. The proposed regulations do not exclude RICs and REITs from 
membership in an aggregate group. A corporation is an applicable 
taxpayer if it is not one of the excluded categories of corporations 
(RIC, REIT, or S corporation), it satisfies the gross receipts test in 
section 59A(e)(1)(B), and it satisfies the base erosion percentage test 
in section 59A(e)(1)(C). The proposed regulations provide that when 
applying the gross receipts test and the base erosion percentage test 
with respect to a particular corporation for purposes of section 59A, 
those tests are applied on the basis of that corporation and members of 
that corporation's aggregate group. The proposed regulations define an 
aggregate group by reference to section 1563(a) in a manner consistent 
with section 59A(e)(3), which references section 1563(a) indirectly. 
The section 1563(a) definition refers to controlled groups of 
corporations, whether brother-sister groups or parent-subsidiary 
groups. Section 1563(c) provides special rules excluding certain 
categories of stock in a corporation from the aggregation rules in 
section 1563(a) (for example, certain stock held by an organization to 
which section 501 applies). None of those provisions exclude the stock 
of, or held by, a RIC or REIT. Moreover, just as the gross receipts and 
deductions of non-applicable taxpayers (such as partnerships) can inure 
to the benefit of an applicable taxpayer (such as a domestic 
corporation that is a partner in a partnership), so too can the gross 
receipts and deductions of a controlled RIC or REIT that is a member of 
a corporation's aggregate group inure to the benefit of that 
corporation. Because of these considerations, the final regulations do 
not adopt this recommendation.
    Similarly, another comment requested that the final regulations 
exclude from the aggregate group foreign government owners of stock of 
corporations when the foreign government is treated as a corporation 
under section 892 and the regulations thereunder. The comment cited the 
exclusion from section 1563(a) of certain stock held by an organization 
to which section 501 applies, and suggested that a foreign government 
should be provided similar treatment because a foreign government, like 
a section 501 organization, does not have private shareholders. In 
addition, the comment asserted that it cannot be engaged in direct 
commercial activities with respect to its portfolio companies and that 
its investment managers consist of separate teams.
    The Treasury Department and the IRS have determined that it is not 
appropriate to provide a regulatory exception from the aggregate group 
rules for entities that are commonly controlled by a foreign government 
shareholder and that are treated as corporations under section 892. 
Congress provided that the activities of an aggregate group are fully 
taken into account when applying the gross receipts test and the base 
erosion percentage test to a corporation. The fact that a common 
shareholder of a different chain of corporations may be more passive 
than other common shareholders, or that the common shareholder's 
investment teams are within different lines of a management structure 
does not change the fact the common shareholder has economic interests 
in the subsidiary corporation that is within the statutory aggregate 
group definition adopted for section 59A. Accordingly, the final 
regulations do not adopt this recommendation.

B. Gross Receipts From Certain Inventory and Similar Transactions

    To determine gross receipts, section 59A(e)(2)(B) provides for 
``rules similar to the rules'' of section 448(c)(3)(B), (C), and (D). 
Accordingly, these final regulations provide rules that are similar to, 
but not necessarily the same as, the rules of section 448(c)(3) and the 
implementing regulations. Proposed Sec.  1.59A-1(b)(13) defines the 
term ``gross receipts'' for purposes of section 59A by reference to 
Sec.  1.448-1T(f)(2)(iv), which provides that gross receipts include 
total sales, net of returns and allowances, and all amounts received 
for services. Section 1.448-1T(f)(2)(iv) further provides that gross 
receipts are not reduced by cost of goods sold (``COGS'') or reduced by 
the cost of property sold if such property is described in section 
1221(a)(1), (3), (4), or (5) (types of property excluded from the 
definition of a capital asset). Separately, Sec.  1.448-1T(f)(2)(iv) 
provides that gross receipts from the sale of capital assets or a sale 
of property described in section 1221(a)(2) (relating to property used 
in a trade or business) are reduced by the adjusted basis of the 
property sold. Section 1.448-1T(f)(2)(iv) further provides that gross 
receipts include income from investments, but not the repayment of a 
loan or similar instrument.
    Comments observed that, pursuant to the definition of gross 
receipts in the proposed regulations, banks that originate and then 
sell loans are required to include the gross proceeds from the sale of 
the loan in their gross receipts because banks generally treat loans 
originated in the ordinary course of business as ordinary assets under 
section 1221(a)(4). These comments contrasted a situation where a bank 
originates and holds a loan to maturity, in which case the proceeds the 
bank receives upon repayment are not

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included in gross receipts due to the express exclusion of these 
amounts contained in Sec.  1.448-1T(f)(2)(iv). The comments recommended 
that the regulations provide for a separate reduction of gross receipts 
from the sale of a loan for the basis in loans originated by a bank. 
Another comment recommended a similar exception for a bank or broker-
dealer that holds stocks and bonds in inventory. This comment proposed 
that final regulations permit banks and broker-dealers to reduce gross 
receipts from ordinary course sales of stocks and bonds by the basis of 
these instruments. The comment also observed that the gains or losses 
recognized with respect to the stocks and bonds are from sales in the 
ordinary course and may be small relative to the cost basis in the 
property.
    The final regulations do not adopt the approach suggested by these 
comments. The final regulations continue to define the term ``gross 
receipts'' by cross-referencing to Sec.  1.448-1T(f)(2)(iv), and those 
rules are used to determine how an item is included in gross receipts. 
The rules in section 59A for implementing the gross receipts test are 
similar to the rules described in section 448(c). See section 59A(e)(3) 
(adopting an aggregation rule similar to that in section 448(c)(2)); 
section 59A(e)(2)(B) (specifically cross-referencing rules similar to 
section 448(c)(3)(B), (C), and (D) for the treatment of short taxable 
years, reductions for returns and allowances, and predecessors, 
respectively); and section 59A(e)(2)(A) (adopting a broad concept of 
gross receipts, narrowed to exclude gross receipts of a foreign person 
that are not taken into account in determining income that is 
effectively connected with the conduct of a trade or business within 
the United States). Because of this statutory link between section 
59A(e)(2) and section 448, the final regulations adopt the definition 
of gross receipts for purposes of section 59A that is used for section 
448 purposes--that is, the definition in Sec.  1.448-1T(f)(2)(iv). 
Because the Act includes other new rules that cross-reference section 
448, the Treasury Department and the IRS are studying section 448 
generally and whether changes should be made to the regulations under 
section 448 to take into account the Act.

C. Determining the Aggregate Group for Purposes of Applying the Gross 
Receipts Test and Base Erosion Percentage Test

    Section 59A determines the status of a corporation as an applicable 
taxpayer on the basis of the aggregate group rules by taking into 
account the gross receipts and base erosion payments of each member of 
the aggregate group. However, each taxpayer must compute the amount of 
gross receipts and base erosion payments for its aggregate group using 
its own taxable year and based on those corporations that are members 
of the aggregate group at the end of the taxable year. See section 
59(e)(3). Therefore, members with different taxable years may have 
different base erosion percentages.
1. Members of an Aggregate Group With Different Taxable Years
    The proposed regulations provide rules for determining whether the 
gross receipts test and base erosion percentage test are satisfied for 
purposes of section 59A with respect to a specific taxpayer when other 
members of its aggregate group have different taxable years. See 
proposed Sec.  1.59A-2(e)(3)(vii). In general, the proposed regulations 
provide that, for purposes of section 59A only, each taxpayer 
determines its gross receipts and base erosion percentage by reference 
to its own taxable year, taking into account the results of other 
members of its aggregate group during that taxable year. In other 
words, the gross receipts, base erosion tax benefits, and deductions of 
the aggregate group for a taxable year are determined by reference to 
the taxpayer's own taxable year, without regard to the taxable year of 
the other member. This rule applies regardless of whether the taxable 
year of the member begins before January 1, 2018; as a result, a 
taxpayer includes gross receipts, base erosion tax benefits, and 
deductions of the member even if that member is not subject to section 
59A for that taxable year. The proposed regulations adopted this 
approach to reduce compliance burden through providing certainty for 
taxpayers and avoid the complexity of a rule that identifies a single 
taxable year for an aggregate group for purposes of section 59A that 
may differ from a particular member of the aggregate group's taxable 
year. As a result, under the proposed regulations, two related 
taxpayers with different taxable years may compute their respective 
gross receipts and base erosion percentages for purposes of section 59A 
by reference to different periods, even though each taxpayer calculates 
these amounts on an aggregate group basis that takes into account other 
members of the controlled group. The preamble to the proposed 
regulations explains that taxpayers may use a reasonable method to 
determine the gross receipts and base erosion percentage information 
with regard to the taxable year of the taxpayer when members of the 
aggregate group of the taxpayer have a different taxable year. REG-
104259-18, 83 FR 65956, 65959 (December 21, 2018).
    Comments expressed concern regarding the potential administrative 
burdens of treating all members of a taxpayer's aggregate group as 
having the same taxable year as the taxpayer. These comments argued 
that, in many cases, companies do not maintain monthly accounting 
records as detailed as they do on a quarterly basis (for publicly 
traded companies) or an annual basis (for privately held companies). 
Also, comments noted that this rule does not take into account the 
effect of deductions that are determined on a yearly basis or subject 
to annual limitations, such as under section 163(j).
    Comments requested that the determination of gross receipts and the 
base erosion percentage of a taxpayer's aggregate group be made on the 
basis of the taxpayer's taxable year and the taxable year of each 
member of its aggregate group that ends with or within the applicable 
taxpayer's taxable year (the ``with-or-within method''). With respect 
to members of an aggregate group with different taxable years, the 
Treasury Department and the IRS appreciate the concerns raised 
regarding the potential administrative burden of proposed Sec.  1.59A-
2(e)(3)(vii) and believe that the approach described in the comments 
represents a reasonable approach. The final regulations, therefore, 
adopt the with-or-within method, for purposes of section 59A only, to 
determine the gross receipts and the base erosion percentage of an 
aggregate group. See Sec.  1.59A-2(c)(3). In addition, the Treasury 
Department and the IRS are issuing a notice of proposed rulemaking (the 
``2019 proposed regulations'') published in the same issue of the 
Federal Register as these final regulations that proposes rules to 
further address how to implement the with-or-within method, and how to 
take into account the changing composition of the aggregate group with 
respect to a particular taxpayer during the relevant periods for 
applying the gross receipts test and the base erosion percentage test. 
The final regulations do not include rules on predecessors or short 
taxable years. Instead, rules relating to these situations have been 
re-proposed in the 2019 proposed regulations. Until final rules are 
applicable relating to predecessors or short taxable years, taxpayers 
must take a reasonable approach consistent with section 59A(e)(2)(B) to 
determine gross receipts and base erosion benefits in these situations.

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2. Time for Determining That Transactions Occurred Between Members of 
the Aggregate Group
    The proposed regulations provide that, for purposes of section 59A, 
transactions that occur between members of the aggregate group that 
were members of the aggregate group at the time of the transaction are 
not taken into account for purposes of determining the gross receipts 
and base erosion percentage of an aggregate group. See proposed Sec.  
1.59A-2(c). In the case of a foreign corporation that is a member of an 
aggregate group, only transactions that relate to income effectively 
connected with the conduct of a trade or business in the United States 
are disregarded for this purpose. The preamble to the proposed 
regulations explains that this limitation on the extent to which 
foreign corporations are included in the aggregate group is intended to 
prevent payments from a domestic corporation, or a foreign corporation 
with respect to effectively connected income, to a foreign related 
person, from being inappropriately excluded from the base erosion 
percentage test. REG-104259-18, 83 FR 65956, 65957 (December 21, 2018).
    A comment requested clarity on determining whether transactions 
between members of an aggregate group are disregarded. Specifically, 
the comment requested clarity on whether a transaction is disregarded 
when both parties to the transaction are members of the aggregate group 
at the time of the transaction, or whether it is also a condition that 
both parties to the transaction must also be members of the aggregate 
group on the last day of the taxpayer's taxable year.
    As requested by the comment, the final regulations clarify that a 
transaction between parties is disregarded for purposes of section 59A 
when determining the gross receipts and base erosion percentage of an 
aggregate group if both parties were members of the aggregate group at 
the time of the transaction, without regard to whether the parties were 
members of the aggregate group on the last day of the taxpayer's 
taxable year. See Sec.  1.59A-2(c)(1).
3. Base Erosion Tax Benefits and Deductions of a Member of an Aggregate 
Group With a Taxable Year Beginning Before January 1, 2018
    For purposes of determining the base erosion percentage, comments 
also expressed concern about including the base erosion tax benefits 
and deductions of a member when the taxable year of the member begins 
before January 1, 2018. The comments noted that this taxable year of 
the member is not otherwise subject to section 59A because of the 
effective date in section 14401(e) of the Act. However, one comment 
agreed with including these base erosion tax benefits and deductions in 
the aggregate group of a taxpayer for a taxable year of the taxpayer to 
which section 59A applies.
    The Treasury Department and the IRS agree with comments that it is 
not appropriate for a taxpayer to include base erosion tax benefits and 
deductions attributable to a taxable year of a member of its aggregate 
group that begins before the effective date of section 59A when 
determining the base erosion percentage of the aggregate group. 
Accordingly, when determining the base erosion percentage of an 
aggregate group, the final regulations exclude the base erosion tax 
benefits and deductions attributable to the taxable year of a member of 
the aggregate group that begins before January 1, 2018. See Sec.  
1.59A-2(c)(8). This rule avoids requiring members of an aggregate group 
to calculate their hypothetical base erosion tax benefits for a year in 
which the base erosion tax benefit rules do not apply.
4. Other Comments Regarding the Aggregate Group Rules
    Comments also addressed the following issues with respect to the 
aggregate group rules in the proposed regulations: (1) How to take into 
account transactions when a member joins or leaves an aggregate group, 
(2) the treatment of predecessors of a taxpayer, (3) the determination 
of the aggregate group of a consolidated group, and (4) the treatment 
of short taxable years. The Treasury Department and the IRS continue to 
study the recommendations provided in several comments relating to 
these issues. Therefore, the Treasury Department and the IRS are 
issuing the 2019 proposed regulations to further address aggregate 
group issues.

D. Mark-to-Market Deductions

    To determine the base erosion percentage for the year, the taxpayer 
(or in the case of a taxpayer that is a member of an aggregate group, 
the aggregate group) must determine the amount of base erosion tax 
benefits in the numerator and the total amount of certain deductions, 
including base erosion tax benefits, in the denominator. The proposed 
regulations provide rules for determining the total amount of the 
deductions that are included in the denominator of the base erosion 
percentage computation in the case of transactions that are marked to 
market. In determining the amount of the deduction that is used for 
purposes of the base erosion percentage test, the proposed regulations 
require the combination of all items of income, deduction, gain, or 
loss on each marked transaction for the year (``the BEAT Netting 
Rule''), such as from a payment, accrual, or mark. See proposed Sec.  
1.59A-2(e)(3)(vi). The BEAT Netting Rule was adopted to ensure that 
only a single deduction is claimed with respect to each marked 
transaction and to prevent distortions in deductions from being 
included in the denominator of the base erosion percentage, including 
as a result of the use of an accounting method that values a position 
more frequently than annually.
    A comment requested guidance clarifying whether the BEAT Netting 
Rule applies to physical securities such as stocks, bonds, repurchase 
agreements, and securities loans with respect to which a taxpayer 
applies a mark-to-market method of accounting. The comment questioned 
whether the BEAT Netting Rule should apply to these types of positions. 
The comment acknowledged that the BEAT Netting Rule produces an 
appropriate result with respect to derivatives by avoiding double-
counting of both a current mark-to-market loss as well as a future 
payment to which the current loss relates. Unlike in the case of many 
derivatives, the comment observed that transactions involving stocks, 
bonds, repurchase agreements, and securities loans generally do not 
result in a loss of value to the holder of the relevant instrument that 
is subsequently realized in the form of a payment made by the holder 
and that effectively gives rise to an offsetting mark-up of the 
instrument.
    To illustrate this observation, the comment provided the following 
example. On January 1, 2018, a dealer buys one share of stock in 
Company XYZ for $100. Then, during 2018, Company XYZ pays dividends of 
$1 with respect to the share. On December 31, 2018, the share price of 
Company XYZ is $90. Finally, on January 1, 2019, the dealer sells the 
share of Company XYZ stock for $90. The comment noted that in the 
absence of the BEAT Netting Rule, the amount of the dealer's deduction 
after marking the stock to market on December 31, 2018, would be $10. 
With the application of the BEAT Netting Rule, however, the comment 
noted that the amount of the deduction that will be included in the 
base erosion percentage denominator is $9. According to this comment, 
the BEAT Netting Rule may not be necessary to avoid the double-counting 
of deductions

[[Page 66972]]

in these transactions, and could result in the netting of amounts that 
would not be netted under section 475 and that are not duplicative of 
other inclusions or deductions by the taxpayer.
    Proposed Sec.  1.59A-2(e)(3)(vi) applies to any position with 
respect to which the taxpayer (or in the case of a taxpayer that is a 
member of an aggregate group, a member of the aggregate group) applies 
a mark-to-market method of accounting. Therefore, the BEAT Netting Rule 
in the proposed regulations applies to stocks, bonds, repurchase 
agreements, and securities lending transactions that the taxpayer marks 
to market, rendering further clarification unnecessary. The Treasury 
Department and the IRS have determined that the applicability of the 
BEAT Netting Rule should not be limited in the manner suggested by the 
comment. In addition to avoiding the double counting that the comment 
acknowledged, the proposed regulations adopt the BEAT Netting Rule to 
enhance administrability and reduce compliance burden. That is, having 
a single rule apply to all transactions that are marked to market will 
enhance administrability, especially given the challenges in (a) 
distinguishing the specific financial transactions that should qualify 
for exclusion; (b) determining whether a distribution or payment 
received on an excluded instrument is duplicative of other inclusions 
or deductions; and (c) determining the extent to which a payment 
ultimately gives rise to an offsetting decline in the value of the 
instrument. For these reasons, the BEAT Netting Rule in the final 
regulations does not exclude physical securities.
    Another comment recommended that the BEAT Netting Rule should not 
be mandatory and should instead be included in the final regulations as 
only a safe harbor. The comment reasoned that section 59A is generally 
applied on a gross basis and that requiring taxpayers to offset 
deductions and losses with income and gain when determining the base 
erosion percentage is inconsistent with a gross approach. The BEAT 
Netting Rule was adopted to ensure that taxpayers do not overstate the 
amount of deductions includible in the denominator with respect to 
transactions subject to a mark-to-market method of accounting. If the 
BEAT Netting Rule were provided as a safe harbor in the final 
regulations, as this comment requested, taxpayers could inappropriately 
inflate the denominator of the base erosion percentage by treating 
multiple marks as separate deductions. Therefore, the final regulations 
do not adopt this comment.
    As discussed in Part III.D of this Summary of Comments and 
Explanation of Revisions, the taxpayer must also determine the amount 
of base erosion tax benefits in the numerator to determine the base 
erosion percentage for the year. Proposed Sec.  1.59A-3(b)(2)(iii) also 
applies the BEAT Netting Rule for purposes of determining the amount of 
base erosion payments that result from transactions that are marked to 
market. A comment expressed concern that this rule could result in 
mark-to-market losses being treated as base erosion payments and 
recommended the withdrawal of proposed Sec.  1.59A-3(b)(2)(iii), 
although the comment observed that if the Treasury Department and the 
IRS were to adopt the comment to make the qualified derivative payments 
(``QDP'') exception available to securities loans (which is discussed 
in Part VII of this Summary of Comments and Explanation of Revisions), 
that change would make this issue moot. The Treasury Department and the 
IRS do not view this concern to be valid, considering that a mark-to-
market loss arising from a deemed sale or disposition of a third-party 
security held by a taxpayer is not within the general definition of a 
base erosion payment because the loss is not attributable to any 
payment made to a foreign related party. Rather, the mark-to-market 
loss is attributable to a decline in the market value of the security. 
The Treasury Department and the IRS also note that the BEAT Netting 
Rule will apply primarily for purposes of determining the amount of 
deductions that are taken into account in the denominator of the base 
erosion percentage. The Treasury Department and the IRS agree with the 
comment that the QDP exception of Sec.  1.59A-3(b)(3)(ii) eliminates 
most mark-to-market transactions from characterization as a base 
erosion payment, including as a result of the expansion of the QDP 
exception to apply to the securities leg of a securities loan. See Part 
VII of this Summary of Comments and Explanation of Revisions for a 
discussion of the qualification of the securities leg of a securities 
loan for the QDP exception. Thus, the BEAT Netting Rule will apply only 
in limited circumstances such as when the taxpayer fails to properly 
report a QDP. The final regulations therefore continue to apply the 
BEAT Netting Rule for purposes of determining the amount of base 
erosion payments that result from transactions that are marked to 
market.

IV. Comments and Changes to Proposed Sec.  1.59A-3--Base Erosion 
Payments and Base Erosion Tax Benefits

    Proposed Sec.  1.59A-3 contains rules for determining whether a 
payment or accrual gives rise to a base erosion payment and the base 
erosion tax benefits that arise from base erosion payments.

A. How Base Erosion Payments Are Determined in General

    Proposed Sec.  1.59A-3(b)(1) defines a base erosion payment as a 
payment or accrual by the taxpayer to a foreign related party that is 
described in one of four categories: (1) A payment with respect to 
which a deduction is allowable; (2) a payment made in connection with 
the acquisition of depreciable or amortizable property; (3) premiums or 
other consideration paid or accrued for reinsurance that is taken into 
account under section 803(a)(1)(B) or 832(b)(4)(A); or (4) a payment 
resulting in a reduction of the gross receipts of the taxpayer that is 
with respect to certain surrogate foreign corporations or related 
foreign persons.
    The Conference Report to the Act states that base erosion payments 
do not include any amounts that constitute reductions to determine 
gross income including payments for COGS (except for reductions to 
determine gross income for certain surrogate foreign corporations). 
Conf. Rep. at 657. The proposed regulations do not contain a provision 
that expressly provides that amounts paid or accrued to a related 
foreign person that result in reductions to determine gross income are 
not treated as base erosion payments (except in the case of certain 
surrogate foreign corporations). A comment requested that, in order to 
provide more certainty to taxpayers, the final regulations expressly 
reflect that payments that result in reductions to determine gross 
income are not subject to section 59A. In response to this comment, 
Sec.  1.59A-3(b) has been modified to explicitly clarify that payments 
resulting in a reduction to determine gross income, including COGS, are 
not treated as base erosion payments within the meaning of section 
59A(d)(1) or (2). See Sec.  1.59A-3(b)(2)(viii).
    The proposed regulations do not establish any specific rules for 
determining whether a payment is treated as a deductible payment. 
However, the preamble to the proposed regulations states that, except 
as otherwise provided in the proposed regulations, the determination of 
whether a payment or accrual by the taxpayer to a foreign related party 
is

[[Page 66973]]

described in one of the four categories is made under general U.S. 
federal income tax law. REG-104259-18, 83 FR 65956, 65959 (December 21, 
2018). The preamble to the proposed regulations refers specifically to 
agency principles, reimbursement doctrine, case law conduit principles, 
and assignment of income as examples of principles of generally 
applicable tax law. Id. A comment noted the potential for ambiguity 
that could result by failing to reflect in the text of the proposed 
regulations the language contained in the preamble to the proposed 
regulations and requested that the final regulations provide more 
specific guidance on how the determination of whether a payment is a 
base erosion payment is made. In response to this comment, the final 
regulations include in the regulatory text a rule that the 
determination of whether a payment or accrual is a base erosion payment 
is made under general U.S. federal income tax law. See Sec.  1.59A-
3(b)(2)(i).
    Similarly, because existing tax law generally applies, the amounts 
of income and deduction for purposes of section 59A are generally 
determined on a gross basis under the Code and regulations. The 
proposed regulations generally do not permit netting of income and 
expense in determining amounts of base erosion payments. Comments to 
the proposed regulations requested guidance regarding (1) transactions 
involving a middle-man or a passthrough payment, (2) divisions of 
revenues in connection with global service arrangements, and (3) the 
general netting of income and expense.
1. Transactions Involving a ``Middle-Man'' or ``Passthrough Payments''
    Several comments requested additional guidance relating to 
transactions or arrangements in which a taxpayer serves as a so-called 
middle-man for a payment to a foreign related party or makes a so-
called passthrough payment to a foreign related party that may 
frequently arise in connection with global services and similar 
businesses. Broadly, the comments considered situations where a 
domestic corporation makes a deductible payment to a foreign related 
party, and that foreign related party in turn makes corresponding 
payments to unrelated third parties. Comments that addressed this 
concern arose in a variety of industries and business models. In some 
situations, the comments observed that business exigencies require the 
domestic corporation to make payments to the foreign related party. For 
example, in a business involving the physical delivery of goods within 
a foreign jurisdiction, a domestic corporation may subcontract with its 
foreign related party to perform the foreign in-country delivery 
function. Another example involves global service contracts that may be 
entered into by a domestic corporation and a client that does business 
in multiple jurisdictions, and may require services in connection with 
the client's global operations that are also subcontracted to foreign 
related parties. Some more specific comments observed that this global 
services situation may arise in connection with U.S.-based 
manufacturers that sell manufactured products to unrelated global 
customers and simultaneously enter into contracts to provide services 
for the product in multiple jurisdictions in connection with the sale 
of equipment. The comments observed that these service contracts, like 
other global services contracts, frequently involve subcontracting with 
a foreign related party to perform the services in foreign 
jurisdictions.
    Multiple comments requested that the final regulations provide that 
the definition of a base erosion payment does not include payments made 
pursuant to a contract when a taxpayer makes a corresponding payment to 
a foreign related party for third party costs. Other comments requested 
that the final regulations more specifically exempt the types of 
business models discussed in the comment letters. For example, some 
comments recommended that the final regulations provide an exception to 
the term ``base erosion payment'' for payments made by a taxpayer to a 
foreign related party with respect to services performed for an 
unrelated party, provided that the foreign related party performs the 
services outside of the United States. Other comments recommended a 
similar exception that would apply only to services that are performed 
in connection with tangible property produced or manufactured by the 
taxpayer (or a related party). These comments observed that Congress 
intended to exclude manufacturers from the BEAT because it effectively 
created an exception for COGS, and that this exception should be 
carried through to services in connection with manufacturing.
    Other comments recommended an exception to the definition of base 
erosion payment for payments to foreign related parties that are 
mandated under regulatory requirements. In other situations, comments 
observed that regulatory considerations affect the decision by the 
domestic corporation to make a payment to the foreign related party. An 
example includes a global dealing operation where a U.S. securities 
dealer has a client who wants to trade its securities on a foreign 
securities exchange that requires a locally registered dealer; for 
those trades, a foreign related party of the U.S. securities dealer 
conducts those trades. Other examples involving regulatory 
considerations include U.S. life sciences companies that, in connection 
with obtaining food and drug approval to sell a product in a foreign 
market, use a foreign related party to conduct clinical trials in that 
market because foreign regulators require testing on local patients.
    The final regulations do not adopt a general exception to the 
definition of a base erosion payment in situations when the foreign 
related payee also makes payments to unrelated persons. The BEAT 
statute and the legislative history contain no indication of such an 
exception. Moreover, this recommended exception is inconsistent with 
the statutory framework of the BEAT. If traced to the ultimate 
recipient, most expenses of a taxpayer could be linked to a payment to 
an unrelated party, through direct tracing or otherwise, leaving a 
residual of profit associated with the payment. Accordingly, adopting 
such an exception would have the effect of eliminating a significant 
portion of service payments to foreign related parties from the BEAT 
because it would impose the BEAT on the net rather than the gross 
amount of the payment. The only net income based concept included in 
the BEAT statute is the treatment of payments covered by the services 
cost method (``SCM'') exception. For a further discussion of the SCM 
exception, see Part IV.C.1 of this Summary of Comments and Explanation 
of Revisions.
    The final regulations also do not adopt a narrower regulatory 
exception for payments that arise in similar circumstances but that are 
also associated with manufacturing or the production of tangible 
property. The Treasury Department and the IRS do not view the presence 
or absence of manufacturing as bearing on the statutory definition of a 
base erosion payment for services. Further, the Treasury Department and 
the IRS do not view the fact that payments that reduce gross receipts, 
such as COGS, are not base erosion payments under section 59A(d)(1) as 
demonstrating Congressional intent to exclude services that do not 
qualify as COGS from the definition of a base erosion payment under 
section 59A(d)(1) if those services have a connection to manufacturing 
operations. Congress included a single specific exception for 
services--the SCM exception. For a further discussion

[[Page 66974]]

of that exception, see Part IV.C.1 of this Summary of Comments and 
Explanation of Revisions.
    The final regulations do not adopt a narrower exception for 
payments to foreign related parties that arise because of non-tax 
business considerations, including a non-tax foreign regulatory 
requirement. The Treasury Department and the IRS recognize that there 
may be non-tax reasons that compel a taxpayer to perform a particular 
global service outside the United States. For example, an international 
delivery service may need to engage a foreign related party in the 
destination country to deliver goods in a foreign jurisdiction.
    The final regulations do not adopt this recommended exception 
because it would require rules to distinguish between the conditions 
under which a domestic corporation is compelled to operate through a 
foreign related party and the conditions under which a domestic 
corporation operates through a foreign related party as a result of a 
business choice. This distinction would be inherently subjective. For 
example, in a global service business that provides services to a 
global client that has operations around the world, the decision to 
provide personnel on-site in a foreign location may or may not be 
compelled by the business needs of its client. Similarly, in the case 
of the back-office functions of a global services business, those 
functions may be performed in the United States or in a location 
outside of the United States; the location of those services may or may 
not be compelled by the business needs of their client. Moreover, even 
if there is a compelling reason to operate the activities outside the 
United States, a base erosion payment exists only if a taxpayer makes a 
payment to a foreign related party. Thus, if a foreign branch of the 
domestic corporation performs services in the foreign jurisdiction, 
there will be no payment or accrual to a foreign related party. 
Finally, there is no indication that Congress intended to create a 
broad services exception, outside of the SCM exception, even though 
these global services conditions are common in the modern economy.
2. Division of Revenues From Global Services
    Comments requested that final regulations provide an exception from 
the term ``base erosion payment'' for revenue sharing payments or 
arrangements, including allocations with respect to global dealing 
operations. Specifically, some comments recommended that the final 
regulations provide that a payment is not a base erosion payment in a 
situation where the domestic corporation records revenue from 
transactions with third party customers, and in turn the domestic 
corporation makes payments to a foreign related party. Other comments 
recommended that payments by the domestic corporation to foreign 
related parties should not be base erosion payments if the parties have 
adopted a profit split as their best method of pricing the related-
party transactions for purposes of section 482. Some of these comments 
asserted that parties to such payments could be viewed as splitting the 
customer revenue for purposes of section 59A. Under this view, the 
payments received by the foreign related party would be treated as 
received directly from the third-party customer, with the result that 
there would be no corresponding deductible payment from the domestic 
corporation to the foreign related party.
    Other comments more specifically addressed this issue in the 
narrower context of a global dealing operation within the meaning of 
proposed Sec.  1.482-8(a)(2)(i). These comments requested that payments 
made pursuant to a global dealing operation not be treated as base 
erosion payments.
    The final regulations do not adopt the recommendations to 
specifically exclude from the definition of a base erosion payment 
transactions that are priced based on the profit split or similar 
transfer pricing method that is used for purposes of section 482. Under 
section 482, the parties to a controlled transaction apply the best 
method to determine if the parties are compensated at arm's length. 
However, the use of a particular method, whether the profit split 
method or another method, does not change the contractual relationship 
between the parties. Accordingly, the final regulations do not adopt 
this recommendation because the proper characterization depends on the 
underlying facts and the relationships between the parties. See Sec.  
1.59A-3(b)(2).
    Similarly, with respect to a global dealing operation, the final 
regulations do not adopt the comment to provide that global dealing 
operations do not give rise to base erosion payments because the proper 
characterization depends on the underlying facts. Under general tax 
principles, and consistent with proposed Sec.  1.863-3(h), a global 
dealing operation in which participants manage a single book of assets, 
bear risk, and share in trading profits may be viewed as co-ownership 
of the trading positions or similar arrangement, with no deductible 
payments made by any participants for purposes of section 59A. In 
contrast, where non-U.S. participants are compensated for services 
performed, the arrangement may be more properly characterized as 
trading income to the U.S. participant and a deductible payment to the 
foreign participant for purposes of section 59A.
    To the extent that an amount is treated under general U.S. federal 
income tax law as received by a U.S. person as an agent for, and is 
remitted to, a foreign related party, see also Part IV.A (How Base 
Erosion Payments are Determined in General) of this Summary of Comments 
and Explanation of Revisions, which discusses the addition of Sec.  
1.59A-3(b)(2)(i) to clarify that the determination of whether a payment 
or accrual by the taxpayer to a foreign related party is described in 
one of four categories of a base erosion payment is made under general 
U.S. federal income tax law, including agency principles.
3. Netting of Income and Expense
    Proposed Sec.  1.59A-3(b)(ii) generally states that the amount of 
any base erosion payment is determined on a gross basis, regardless of 
any contractual or legal right to make or receive payments on a net 
basis, except as otherwise provided in paragraph (b)(2)(iii) of that 
section, which addresses mark-to-market positions, or as permitted by 
the Code or regulations. As explained in the preamble to the proposed 
regulations, the BEAT statutory framework is based on including the 
gross amount of base erosion payments in the BEAT's expanded modified 
taxable income base. REG-104259-18, 83 FR 65956, 65968 (December 21, 
2018).
a. In General
    Numerous comments recommended that the final regulations permit 
netting for purposes of section 59A. Generally, netting would allow a 
taxpayer to determine the amount of a base erosion payment by reducing 
the amount of that payment by the amount of another corresponding 
obligation.
    A comment asserted that netting should be permitted for all base 
erosion payments other than with respect to reinsurance payments. The 
comment explained that the plain language of section 59A(d)(1) provides 
that only amounts paid or accrued are taken into account; this comment 
interpreted this language to mean the net amount paid or accrued. 
Because section 59A(d)(3) refers to gross premiums in the reinsurance 
context, the comment maintained that netting is permitted for other 
base erosion payments. This comment also noted that netting was 
provided under proposed section 4491, an inbound base erosion provision

[[Page 66975]]

included in section 4303 of the House version of H.R. 1, before the 
Senate amended H.R.1 to include the BEAT in place of proposed section 
4491. This comment also recommended that netting be permitted because 
other sections of the Code or regulations include netting concepts, 
such as sections 163(j), 250 and 951A, and the aggregation rule in 
Sec.  1.482-1T(f)(2)(i)(B).
    Some comments recommended that the final regulations permit netting 
when the foreign related party payee has a corresponding obligation to 
make payments to an unrelated third party payee. Some of these comments 
asserted that base erosion payments arise because of commercial and 
regulatory efficiency and expediency, rather than because of tax 
planning. These comments recommended that netting be permitted in 
ordinary course transactions. Other comments recommended that the final 
regulations permit netting for deductible amounts owed by a domestic 
corporation to a foreign related party if the foreign related party 
also owes amounts to the domestic corporation and the obligations are 
settled on a net basis.
    The Treasury Department and the IRS have determined that it is 
appropriate to retain the approach in the proposed regulations that the 
amount of a base erosion payment is determined on a gross basis, except 
as provided in the BEAT Netting Rule and to the extent permitted by the 
Code or regulations. See part III.D of this Summary of Comments and 
Explanation of Revisions (Mark-to-market deductions). As explained in 
the preamble to the proposed regulations, amounts of income and 
deduction are generally determined on a gross basis under the Code. 
REG-104259-18, 83 FR 65956, 65968 (December 21, 2018). For example, 
whether the amount of income or deductions with respect to financial 
contracts that provide for offsetting payments is taken into account on 
a gross or net basis is determined under generally applicable federal 
income tax law. Section 59A does not change that result.
    The final regulations are consistent with the statutory framework 
of section 59A. Section 59A specifically addresses deductible payments 
and other statutorily defined base erosion payments, and imposes tax on 
an increased base of modified taxable income, but at a lower tax rate 
than the corporate income tax rate set forth in section 11. If 
regulations provided that statutorily defined base erosion payments 
could be reduced by offsetting amounts received, then the regulations 
would substantially limit the scope of section 59A. Section 11 imposes 
a tax on a corporation's taxable income. Taxable income is defined as 
gross income minus the deductions allowed by chapter 1 of the Code. 
Section 63. Gross income is generally defined as income from whatever 
source derived. Section 61. The amount of income and deductions are 
generally determined on a gross basis under the Code. Nothing in 
section 59A evidences Congressional intent to alter this framework. In 
fact, section 59A(c) determines modified taxable income from the 
starting point of taxable income as defined in section 63.
    A netting rule would have the same effect as allowing a deduction 
from gross income because it would reduce the amount of a taxpayer's 
modified taxable income, and in that sense would conflict with section 
59A(c)(1) (disallowing a deduction for base erosion tax benefits). 
Congress determined that certain deductions, namely those that are 
within the statutory definition of a base erosion payment, should not 
be allowed for purposes of the tax imposed under section 59A, and 
therefore, limited the availability of these deductions. Permitting 
netting of items of gross income and deductions to determine the amount 
of a base erosion payment would frustrate Congress' purpose in enacting 
section 59A.
    In addition, the other provisions of the Code and regulations that 
are cited by comments are irrelevant to the analysis of section 59A and 
do not provide support for adopting a netting rule for purposes of 
section 59A. Whereas sections 163(j) and 951A refer explicitly to net 
amounts, section 59A explicitly refers to a deduction allowable under 
Chapter 1 of the Code. Section 250 provides rules for determining 
whether services are for ``foreign use'' by contemplating services 
provided to and from a related party that are substantially similar. 
This destination-based rule is entirely different from the construct of 
section 59A, and, moreover, section 59A contains no similar language 
contemplating payments to and from a related party. Proposed section 
4491 would have operated through the regular income tax system and 
would have represented a fundamentally different approach to inbound 
base erosion than section 59A; therefore, that proposed revision to the 
Code is not relevant here. The aggregation rule in Sec.  1.482-
1T(f)(2)(i)(B) does not involve the treatment of payments to foreign 
related parties, and thus is not relevant for purposes of analyzing the 
meaning of section 59A.
    Some comments also cited the heading to section 59A(h) (exception 
for certain payments made in the ordinary course of trade or business) 
as support for a regulatory exception for ordinary course transactions 
for which a taxpayer has not adopted a mark-to-market method of 
accounting. Specifically, these comments suggested that Congress did 
not intend for section 59A(h)(2)(A)(i) to limit the QDP exception to 
only transactions that are marked-to-market. The citations to the 
heading to section 59A(h) are inconsistent with the statutory rule in 
section 59A(h), which provides a narrowly defined exception applicable 
to derivative payments under specific circumstances.
b. Hedging Transactions
    Another comment recommended that the final regulations permit 
netting in the narrow context of related-party hedging transactions. 
The comment observed that the QDP exception applies to related-party 
hedging transactions when the taxpayer uses a mark-to-market method of 
accounting. The comment asserted that there is no policy rationale for 
limiting netting relief to taxpayers that use a mark-to-market method 
of accounting; therefore, the comment requested that the QDP exception 
be expanded to also apply to taxpayers that apply the mark-to-market 
method for financial accounting purposes. Alternatively, the comment 
recommended that taxpayers engaged in related- party hedging 
transactions be permitted to net income items against deduction items.
    The final regulations do not provide for a netting rule for 
related-party hedging transactions. As discussed in Part IV.A.3.a of 
this Summary of Comments and Explanation of Revisions, permitting 
netting for related-party hedging transactions would be inconsistent 
with the statutory framework of section 59A. Furthermore, this 
recommendation would eliminate or substantially modify one of the three 
statutory requirements for the QDP exception (that is, use of the mark-
to-market accounting method).
c. Clarification of Netting Under Current Law
    Finally, some comments recommended that the final regulations 
clarify when netting is permitted under the Code and regulations, 
including confirming that netting is permitted for notional principal 
contracts and for cost sharing transaction payments under Sec.  1.482-
7(j)(3)(i). The Treasury Department and the IRS decline to provide such 
specific guidance because

[[Page 66976]]

it is beyond the scope of the final regulations; however, the Treasury 
Department and the IRS are cognizant that section 59A may place more 
significance on some sections of the Code than was the case before the 
Act. The Treasury Department and the IRS intend to study the effect of 
these provisions on the BEAT and whether changes should be made to the 
regulations thereunder to better take into account new considerations 
under the BEAT.

B. Treatment of Certain Specific Types of Payments

1. Losses Recognized With Respect to the Sale or Transfer of Property 
to a Foreign Related Party
    Section 59A(d) defines a base erosion payment to include any amount 
paid or accrued by a taxpayer to a foreign related party with respect 
to which a deduction is allowable. Proposed Sec.  1.59A-3(b)(1)(i) 
repeats this statutory language. Proposed Sec.  1.59A-3(b)(2)(i) 
provides that ``an amount paid or accrued'' includes an amount paid or 
accrued using any form of consideration, including cash, property, 
stock, or the assumption of a liability. In explaining this provision, 
the preamble to the proposed regulations states that ``a base erosion 
payment also includes a payment to a foreign related party resulting in 
a recognized loss; for example, a loss recognized on the transfer of 
property to a foreign related party.'' REG-104259-18, 83 FR 65956, 
65960 (December 21, 2018).
    This principle would apply if, for example, a taxpayer transfers to 
a foreign related party (a) built-in-loss property as payment for a 
deductible service provided by the foreign related party to the 
taxpayer (the latter of which may also be a base erosion payment), (b) 
built-in-loss property as payment for a good or service that the 
taxpayer is required to capitalize (for example, COGS) such that the 
payment is not deductible to the taxpayer (the latter of which is not a 
base erosion payment), or (c) depreciated nonfunctional currency as a 
payment for a nonfunctional currency denominated amount owed by a 
taxpayer.
    Comments requested that the final regulations revise the definition 
of a base erosion payment to exclude losses recognized on the sale or 
exchange of property by a taxpayer to a foreign related party. 
According to these comments, a payment made with, or a sale of, built-
in-loss property is not encompassed within the statutory definition of 
a base erosion payment. Comments stated that both the statutory and 
proposed regulations' definition contain two requirements for a payment 
to be a base erosion payment: There must be (i) an amount paid or 
accrued by the taxpayer to a foreign person that is a related party of 
the taxpayer; and (ii) a deduction must be allowable with respect to 
that amount.
    Regarding the first requirement--that there must be an amount paid 
or accrued by the taxpayer to a foreign related party--when a U.S. 
taxpayer sells property to a foreign related party for cash, the 
comments noted that no payment or accrual has taken place by the U.S. 
taxpayer for purposes of section 59A; rather, the U.S. taxpayer is 
receiving a cash payment in exchange for the transferred property, and 
is not making a payment. Thus, the comments argued, the first 
requirement for a base erosion payment, that a payment or accrual 
exists, has not been met.
    Regarding the second requirement--that a deduction must be 
allowable with respect to that amount--comments argued that even if a 
payment is found to have been made to the foreign related party, the 
deduction for the loss on the built-in-loss property is not with 
respect to this payment. That is, the comments argued that the loss 
deduction is not attributable to any ``payment'' made to the foreign 
related party (the form of consideration in the transaction); rather, 
the loss is attributable to the taxpayer's basis in the built-in loss 
property. Although that built-in-loss is recognized in connection with 
the transfer to a foreign related party, and thus could meet the 
statutory requirement as allowed ``with respect to'' the payment, the 
comments recommended a narrower interpretation that views the 
recognized loss as arising independently from the payment, that is 
viewed as merely a corollary consequence unrelated to the payment being 
made to the foreign related party.
    The final regulations adopt the recommendation provided in these 
comments. The final regulations clarify the definition of a base 
erosion payment in Sec.  1.59A-3(b)(1)(i) and (b)(2)(ix) to provide 
that a loss realized from the form of consideration provided to the 
foreign related party is not itself a base erosion payment. For the 
reasons described in the comments and discussed in this Part of the 
Summary of Comments and Explanation of Revisions, this treatment aligns 
the definition of base erosion payment with the economics of the 
payment made by the applicable taxpayer to the foreign related party. 
That is, the term ``base erosion payment'' does not include the amount 
of built-in-loss because that built-in-loss is unrelated to the payment 
made to the foreign related party. This rule applies regardless of 
whether the loss realized from the form of consideration provided to 
the foreign related party is itself consideration for an underlying 
base erosion payment. To the extent that a transfer of built-in-loss 
property results in a deductible payment to a foreign related party 
that is a base erosion payment, the final regulations clarify that the 
amount of the base erosion payment is limited to the fair market value 
of that property.
2. Transfers of Property Between Related Taxpayers
    The proposed regulations limit the ability of a taxpayer to 
eliminate base erosion tax benefits by transferring depreciable or 
amortizable property to another member of the taxpayer's aggregate 
group. Specifically, proposed Sec.  1.59A-3(b)(2)(vii) provides that if 
a taxpayer holds depreciable or amortizable property that produces 
depreciation or amortization deductions that are base erosion tax 
benefits to the taxpayer, those depreciation or amortization deductions 
will continue to be treated as a base erosion tax benefit for the 
acquirer if the taxpayer transfers the property to another member of 
its aggregate group.
    The Treasury Department and the IRS are aware of similar 
transactions involving a domestic corporation that ordinarily acquires, 
from a foreign related party, property that is subject to an allowance 
for depreciation or amortization in the hands of the domestic 
corporation. In the transaction, the domestic corporation inserts into 
its supply chain a second domestic corporation, with a principal 
purpose of avoiding base erosion payments. Specifically, the second 
domestic corporation, a dealer in property that avails itself of the 
exclusion of COGS from the definition of a base erosion payment in 
section 59A(d)(1) and (2), acquires the property from the foreign 
related party and in turn resells the property to the first domestic 
corporation. The Treasury Department and the IRS view this type of 
transaction as already within the scope of the anti-abuse rule set 
forth in proposed Sec.  1.59A-9(b)(1) (transactions involving unrelated 
persons, conduits, or intermediaries), and have added an example to the 
final regulations clarifying the application of this anti-abuse rule to 
similar fact patterns.
3. Corporate Transactions
    The proposed regulations provide that a payment or accrual by a 
taxpayer to a foreign related party may be a base erosion payment 
regardless of whether

[[Page 66977]]

the payment is in cash or in any form of non-cash consideration. See 
proposed Sec.  1.59A-3(b)(2)(i). There may be situations where a 
taxpayer incurs a non-cash payment or accrual to a foreign related 
party in a transaction that meets one of the definitions of a base 
erosion payment, and that transaction may also qualify under certain 
nonrecognition provisions of the Code. Examples of these transactions 
include a domestic corporation's acquisition of depreciable assets from 
a foreign related party in an exchange described in section 351, a 
liquidation described in section 332, and a reorganization described in 
section 368.
    The proposed regulations do not include any specific exceptions for 
these types of transactions even though (a) the transferor of the 
assets acquired by the domestic corporation may not recognize gain or 
loss, (b) the acquiring domestic corporation may take a carryover basis 
in the depreciable or amortizable assets, and (c) the importation of 
depreciable or amortizable assets into the United States in these 
transactions may increase the regular income tax base as compared to 
the non-importation of those assets. In the preamble to the proposed 
regulations, the Treasury Department and the IRS also note that for 
transactions in which a taxpayer that owns stock in a foreign related 
party receives depreciable property from the foreign related party as 
an in-kind distribution subject to section 301, there is no base 
erosion payment because there is no consideration provided by the 
taxpayer to the foreign related party in exchange for the property. 
REG-104259-18, 83 FR 65956, 65960 (December 21, 2018). Thus, there is 
no payment or accrual in that transaction.
    The preamble to the proposed regulations requests comments about 
the treatment of payments or accruals that consist of non-cash 
consideration. REG-104259-18, 83 FR 65956, 65960 (December 21, 2018). 
Comments have suggested that corporate nonrecognition transactions or 
transactions in which U.S. taxpayers do not obtain a step-up in the tax 
basis of an acquired asset should not be treated as a base erosion 
payment. They argued that these nonrecognition transactions should not 
be treated as a payment or accrual. Based on this position, some 
comments argued either that the Treasury Department and the IRS do not 
have the authority to treat nonrecognition transactions as base erosion 
payments or that the better policy is to exclude nonrecognition 
transactions from the definition of base erosion payments. Furthermore, 
comments argued that nonrecognition provisions such as sections 332, 
351, and 368 reflect the judgment of Congress that certain corporate 
transactions such as the formation and dissolution of businesses and 
the readjustment of continuing interests in property do not warrant the 
imposition of tax. They also argued that the legislative history of 
section 59A does not suggest that Congress intended for it to apply to 
nonrecognition transactions.
    With regard to section 332 liquidations, comments argued that a 
section 332 liquidation should not be treated as a base erosion payment 
when a section 301 distribution is not. Furthermore, comments argued 
that transactions in which stock is merely deemed to be exchanged, like 
certain section 351 transactions or section 332 liquidations, should 
not be treated as base erosion payments since there is no actual 
transfer of shares.
    Comments also argued that nonrecognition transactions are not base 
eroding. Comments asserted that inbound nonrecognition transactions are 
often used in post-acquisition restructurings, as well as in other 
internal restructurings to better align a multinational organization's 
legal structure with its commercial operations. Comments also argued 
that treating these transactions as base erosion payments would provide 
a disincentive to move intangible property and other income-producing 
property into the United States, contrary to the goals of the Act.
    Furthermore, comments argued that amortization of a carryover tax 
basis of an asset acquired by a U.S. taxpayer from a related party in a 
nonrecognition transaction would not create the same base erosion 
concerns as other types of deductions. However, comments acknowledged 
that, if final regulations adopted a broad exception for nonrecognition 
transactions, taxpayers could abuse that exception by engaging in 
certain basis step-up transactions immediately before an inbound 
nonrecognition transfer. Comments suggested that augmenting the conduit 
anti-abuse rule of proposed Sec.  1.59A-9 may be sufficient to prevent 
these types of transactions. Alternatively, comments also suggested 
that, to delineate cases of potential abuse, a rule similar to the 5-
year active trade or business rules in Sec.  1.355-3 could apply to 
specify instances when assets would qualify as not being ``recently 
stepped up assets.''
    Comments generally supported the statement in the preamble to the 
proposed regulations that a section 301 distribution is not treated as 
a base erosion payment because there is no exchange, and requested that 
the exclusion be included in the final regulations as well as the 
preamble. Comments also requested that the definition of a base erosion 
payment also exclude exchanges (including section 302 and 304 
transactions) that are treated as section 301 distributions pursuant to 
section 302(d).
    Comments have generally acknowledged that the taxable transfer of 
depreciable or amortizable property in exchange for stock should be 
subject to the BEAT. For example, comments stated that the transfer of 
assets to a corporation that is partially taxable to the transferor 
pursuant to section 351(b) or 356 as a result of the receipt of 
``boot'' by the transferor is appropriately treated as a base erosion 
payment. The amount of the base erosion payment could be determined 
based on the gain or increase in basis of the property, the amount of 
boot allocated to the property, or by treating all of the boot as paid 
for depreciable or amortizable property first, to the extent thereof. 
Comments also requested clarity on the treatment of the assumption of 
liabilities pursuant to a nonrecognition transaction. One comment 
requested that the assumption of liabilities in a nonrecognition 
transaction be excluded from the definition of a base erosion payment 
to the extent that the assumption is not treated as money or other 
property. This comment suggested that, if the Treasury Department and 
the IRS are concerned about abusive transactions, an anti-abuse rule 
could be designed to treat certain liabilities as base erosion 
payments.
    Similarly, comments stated that the taxable transfer of assets to a 
domestic corporation in exchange for stock, such as in a so-called 
``busted section 351 transaction,'' should be subject to the BEAT. 
Comments also discussed whether a taxable distribution to a domestic 
corporation in a section 331 liquidation of a foreign corporation 
should be subject to the BEAT. These comments acknowledged that taxable 
transactions generally give rise to base erosion payments and did not 
take a view on whether section 331 liquidations should be subject to 
the BEAT. Accordingly, comments requested that nonrecognition 
transactions be excluded from the definition of a base erosion payment 
only to the extent that the U.S. taxpayer obtains a carryover basis in 
the acquired asset. Alternatively, comments have requested a safe 
harbor that would exclude nonrecognition transactions that are part of 
post-acquisition restructuring to allow taxpayers to transfer into the 
United States

[[Page 66978]]

intellectual property that was recently acquired from a third party. 
Comments have also requested that final regulations clarify that 
nonrecognition transactions that occurred before the effective date of 
the BEAT will not be treated as base erosion payments.
    Finally, comments have noted that a nonrecognition transaction 
involving a U.S. branch of a foreign corporation may not qualify for 
the ECI exception under proposed Sec.  1.59A-3(b)(3)(iii) for payments 
that are treated as effectively connected income in the hands of the 
payee, because the ECI exception under proposed Sec.  1.59A-
3(b)(3)(iii) is predicated on the payment or accrual being subject to 
U.S. federal income taxation, which cannot occur when the transaction 
is not taxable.
    Consistent with these comments, the final regulations generally 
exclude amounts transferred to, or exchanged with, a foreign related 
party in a transaction described in sections 332, 351, and 368 
(``corporate nonrecognition transaction'') from the definition of a 
base erosion payment. In light of the comments, the Treasury Department 
and the IRS have determined a limited exclusion of corporate 
nonrecognition transactions is consistent with the underlying anti-base 
erosion purpose of the BEAT, tends to reduce disincentives for 
taxpayers to move intangible property and other income-producing 
property into the United States in corporate nonrecognition treatment 
transactions, and is consistent with the general treatment of corporate 
nonrecognition transactions under other sections of the Code. However, 
the Treasury Department and the IRS have determined that it is not 
appropriate to apply this exception to the transfer of other property, 
or property transferred in exchange for other property, in a corporate 
nonrecognition transaction. Solely for purposes of determining what is 
a base erosion payment, ``other property'' has the meaning of other 
property or money, as used in sections 351(b), 356(a)(1)(B), and 
361(b), as applicable, including liabilities described in section 
357(b). However, other property does not include the sum of any money 
and the fair market value of any property to which section 361(b)(3) 
applies. Other property also includes liabilities that are assumed by 
the taxpayer in a corporate nonrecognition transaction, but only to the 
extent of the amount of gain recognized under section 357(c).
    For example, if a foreign corporation transfers depreciable 
property to its wholly owned domestic subsidiary in a transaction to 
which section 351 applies, and if the foreign corporation receives 
subsidiary common stock and cash in exchange, the cash may be treated 
as a base erosion payment, while the common stock is not. Similarly, 
property transferred in a section 351 or 368 transaction in exchange, 
in whole or in part, for other property may be a base erosion payment 
if it otherwise meets the definition of a base erosion payment. For 
example, if a domestic corporation transfers property to its wholly-
owned foreign subsidiary in a transaction to which section 351 applies, 
and if the domestic corporation receives common stock in the foreign 
corporation and other property consisting of depreciable property, the 
property transferred by the domestic corporation may be a base erosion 
payment. These rules apply without regard to whether or not gain or 
loss is recognized in the transaction.
    When a taxpayer transfers other property to a foreign related 
party, or transfers property to a foreign related party in exchange for 
other property, the determination of the amount of property that is 
treated as received from the foreign related party in exchange for the 
property transferred to the foreign related party is based on U.S. 
federal income tax law. See, for example, Rev. Rul. 68-55, 1968-1 C.B. 
140.
    Consistent with concerns raised by comments, the Treasury 
Department and the IRS are concerned that the exclusion of 
nonrecognition transactions could lead to inappropriate results in 
certain situations. An example of an inappropriate result is the sale 
of depreciable property between foreign related parties shortly before 
a nonrecognition transaction, which could step up the taxpayer's basis 
in the property and increase depreciation or amortization deductions of 
the domestic corporation after the nonrecognition transaction relative 
to the alternative in which the step-up basis transactions did not 
occur. Accordingly, the Treasury Department and the IRS have determined 
that it is appropriate to specifically address these transactions with 
an anti-abuse rule. See Sec.  1.59A-9(b)(4). The anti-abuse rule 
applies in addition to, and in conjunction with, section 357(b). In 
addition, the Treasury Department and the IRS observe that, because the 
BEAT is applied after the application of general U.S. federal income 
tax law, other doctrines--including the step transaction doctrine and 
economic substance doctrine--also may apply.
    Because the final regulations provide an exception for corporate 
nonrecognition transactions, it is not necessary for the final 
regulations to include other suggested modifications, such as (i) 
modifying the ECI exception for nonrecognition transactions involving 
U.S. branches, (ii) providing a safe harbor that would exclude 
nonrecognition transactions that are part of a post-acquisition 
restructuring, or (iii) clarifying that nonrecognition transactions 
that occurred before the effective date of the BEAT are not treated as 
base erosion payments.
    The final regulations also clarify the treatment of distribution 
transactions, such as distributions described in section 301, and 
redemption transactions, such as redemptions described in section 302. 
A distribution with respect to stock for which there is no 
consideration (a ``pure distribution'') is not treated as an exchange. 
Accordingly, the final regulations provide that a pure distribution of 
property made by a corporation to a shareholder with respect to its 
stock is not an amount paid or accrued by the shareholder to the 
corporation. These pure distributions include distributions under 
section 301, without regard to the application of section 301(c) to the 
shareholder (addressing distributions in excess of earnings and 
profits). Sec.  1.59A-3(b)(2)(ii). However, unlike a pure distribution, 
a redemption of stock in exchange for property constitutes an exchange. 
Accordingly, the final regulations provide that a redemption of stock 
by a corporation within the meaning of section 317(b) (such as a 
redemption described in section 302(a) and (d) or section 306(a)(2)), 
or an exchange of stock described in section 304 or section 331, is an 
amount paid or accrued by the shareholder to the corporation (or by the 
acquiring corporation to the transferor in a section 304 transaction).
4. Interest Expense Allocable to a Foreign Corporation's Effectively 
Connected Income
a. In General
    Section 59A applies to foreign corporations that have income that 
is subject to net income taxation as effectively connected with the 
conduct of a trade or business in the United States, taking into 
account any applicable income tax treaty of the United States. The 
proposed regulations generally provide that a foreign corporation that 
has interest expense allocable under section 882(c) to income that is 
effectively connected with the conduct of a trade or business within 
the United States will have a base erosion payment to the extent the 
interest expense results from a payment or accrual to a foreign related 
party. The amount of interest that will be treated as

[[Page 66979]]

a base erosion payment depends on the method used under Sec.  1.882-5.
    If a foreign corporation uses the three-step method described in 
Sec.  1.882-5(b) through (d), the proposed regulations provide that 
interest on direct allocations and on U.S.-booked liabilities that is 
paid or accrued to a foreign related party will be a base erosion 
payment.\1\ See proposed Sec.  1.59A-3(b)(4)(i)(A). If U.S.-booked 
liabilities exceed U.S.-connected liabilities, the proposed regulations 
provide that a foreign corporation computing its interest expense under 
this method must apply the scaling ratio to all of its interest expense 
on a pro-rata basis to determine the amount that is a base erosion 
payment. The amount of interest on excess U.S.-connected liabilities 
that is a base erosion payment is equal to the interest on excess U.S.-
connected liabilities multiplied by the foreign corporation's ratio of 
average foreign related-party liabilities over average total 
liabilities. See proposed Sec.  1.59A-3(b)(4)(i)(A)(2).
---------------------------------------------------------------------------

    \1\ For purposes of Sec.  1.882-5, direct allocations generally 
refer to the requirement that a foreign corporation allocate 
interest expense to income from particular assets; these 
circumstances generally arise with respect to (i) certain assets 
that are subject to qualified nonrecourse indebtedness or (ii) 
certain assets that are acquired in an integrated financial 
transaction.
---------------------------------------------------------------------------

    If a foreign corporation determines its interest expense under the 
separate currency pools method described in Sec.  1.882-5(e), the 
proposed regulations provide that the amount of interest expense that 
is a base erosion payment is equal to the sum of (1) the interest 
expense on direct allocations paid or accrued to a foreign related 
party and (2) the interest expense in each currency pool multiplied by 
the ratio of average foreign related-party liabilities over average 
total liabilities for that pool. See proposed Sec.  1.59A-
3(b)(4)(i)(B).
    Comments requested that a consistent method apply to determine the 
portion of interest allocated to a U.S. branch that is treated as paid 
to a foreign related party. The comments noted that the methods in the 
proposed regulations may produce meaningfully different amounts of base 
erosion payments depending on which method the taxpayer uses to 
determine its branch interest expense. Comments noted that a branch 
that uses the method described in Sec.  1.882-5(b) through (d) may have 
a lower amount of base erosion payments than a branch using the method 
described in Sec.  1.882-5(e) or a permanent establishment applying a 
U.S. tax treaty, although those differences will ultimately depend on 
the composition of the counterparties of the U.S.-booked liabilities 
and the excess U.S.-connected liabilities (as foreign related parties 
or not foreign related parties). See also Part IV.B.5 of this Summary 
of Comments and Explanation of Revisions for a discussion of interest 
allowed to permanent establishments applying a U.S. tax treaty. The 
comments argued that these differences are not supported by tax policy.
    Comments generally requested a rule permitting or requiring foreign 
corporations to use U.S.-booked liabilities to determine the portion of 
U.S. branch interest expense that is treated as paid to foreign related 
parties, consistent with the method described in the proposed 
regulations for corporations that determine U.S. branch interest 
expense using the method described in Sec.  1.882-5(b) through (d), 
even if the U.S. branch uses a different method to determine its 
interest expense. The comments argued that U.S. assets are used to 
determine the amount of leverage that is properly allocable to a U.S. 
branch, and, as a result, U.S.-booked liabilities should determine the 
amount of interest treated as a base erosion payment. Specifically with 
regard to banks, a comment argued that banks are highly regulated with 
limited or no ability to manipulate U.S.-booked liabilities, and, as a 
result, should be permitted to use U.S.-booked liabilities to determine 
the amount of U.S. branch interest expense treated as paid to foreign 
related parties.
    The Treasury Department and the IRS agree that the rules for 
determining the portion of U.S. branch interest paid to foreign related 
parties should be consistent, regardless of whether taxpayers apply the 
method described in Sec.  1.882-5(b) through (d) or Sec.  1.882-5(e). 
For purposes of section 59A, the Treasury Department and the IRS agree 
that the starting point for determining the identity of the recipient 
should be the U.S. booked liabilities of the U.S. branch. The final 
regulations, therefore, provide that the amount of U.S. branch interest 
expense treated as paid to a foreign related party is the sum of: (1) 
The directly allocated interest expense that is paid or accrued to a 
foreign related party, (2) the interest expense on U.S.-booked 
liabilities that is paid or accrued to a foreign related party, and (3) 
the interest expense on U.S.-connected liabilities in excess of 
interest expense on U.S.-booked liabilities multiplied by the ratio of 
average foreign related-party interest over average total interest 
(excluding from this ratio interest expense on U.S. booked liabilities 
and interest expense directly allocated). See Sec.  1.59A-
3(b)(4)(i)(A); see also Part IV.B.4.b.i of this Summary of Comments and 
Explanation of Revisions (discussing the change from a worldwide 
liability ratio to a worldwide interest ratio). In adopting a 
consistent approach, the final regulations use the same ratio to 
determine whether the interest expense on U.S.-connected liabilities is 
paid to a foreign related party regardless of whether a taxpayer 
applies the method described in Sec.  1.882-5(b) through (d) or Sec.  
1.882-5(e). See Sec.  1.59A-3(b)(4)(i)(A)(3).
b. Simplifying Conventions
    The Treasury Department and the IRS recognize that Sec.  1.882-5 
provides certain simplifying elections for determining the interest 
deduction of a foreign corporation. The proposed regulations request 
comments about similar simplifying elections for determining the 
portion of U.S.-connected liabilities that are paid to a foreign 
related party for purposes of section 59A. REG-104259-18, 83 FR 65956, 
65960 (December 21, 2018).
    Comments, in response to the request for comments on simplifying 
conventions, indicated that it may be difficult for foreign 
corporations to determine their worldwide ratio of liabilities owed to 
foreign related parties over total liabilities (``worldwide liabilities 
ratio''). For example, they argued that U.S. branches of foreign banks 
typically do not have full access to information about the bank's 
global operations and funding arrangements. These comments argued that 
even if a U.S. branch does have that information, U.S. tax law may 
treat some transactions as debt that non-U.S. tax law does not, or may 
integrate some hedging costs that are not integrated for non-U.S. tax 
purposes, or vice-versa. These comments further observed that if the 
taxpayer is using the fixed ratio election for purposes of Sec.  1.882-
5, the taxpayer would not be required to obtain that information or 
reconcile the home office balance sheet to U.S. tax law principles for 
purposes of Sec.  1.882-5. Thus, the comments argued that attempting to 
reconstruct a global balance sheet and payments under U.S. tax 
principles for purposes of proposed Sec.  1.59A-3 is burdensome and 
should not be required.
    The comments also requested various simplifying elections for 
determining the amount of U.S. branch interest treated as paid to 
foreign related parties, including (a) computing the worldwide ratio by 
reference to interest expense rather than worldwide liabilities 
(``worldwide interest ratio''), (b) using financial accounting books 
and records rather than U.S. tax principles to determine a worldwide 
ratio, or (c)

[[Page 66980]]

providing a fixed ratio for purposes of determining the minimum amount 
of interest treated as paid to third parties (such as 85 percent).
i. Worldwide Interest Ratio
    The final regulations adopt the comment recommending that taxpayers 
apply the worldwide ratio to determine the amount of a U.S. branch's 
interest expense paid to foreign related parties by reference to a 
worldwide ratio of interest expense, rather than a worldwide ratio of 
liabilities. See Sec.  1.59A-3(b)(4)(i)(A)(3). The final regulations 
adopt this approach as a rule, rather than as an election, because the 
Treasury Department and the IRS agree with the comments that a 
worldwide ratio based on interest expense, rather than liabilities, is 
the appropriate measurement for determining a U.S. branch's base 
erosion payments. Section 59A determines the amount of interest that is 
a base erosion payment based on the amount of interest paid or accrued 
to foreign related parties, rather than the amount of liabilities owed 
to foreign related parties. Accordingly, the final regulations 
determine the amount of a U.S. branch's interest expense treated as a 
base erosion payment based on the foreign corporation's worldwide 
interest ratio.
ii. Use of Applicable Financial Statements
    The Treasury Department and the IRS recognize that it may be 
difficult for foreign corporations to determine their worldwide 
interest ratio under U.S. tax principles, as indicated by the comments. 
Accordingly, for simplicity and to reduce the administrative burden on 
taxpayers, the final regulations adopt the comment to allow taxpayers 
to elect to determine their worldwide interest ratio using their 
applicable financial statements as described in section 451(b)(3). See 
Sec.  1.59A-3(b)(4)(i)(D). The final regulations also clarify that the 
applicable financial statement must be the applicable financial 
statement of the taxpayer, not a consolidated applicable financial 
statement, because a consolidated applicable financial statement may 
eliminate inter-company liabilities. The final regulations provide that 
a taxpayer makes this election on Form 8991 or a successor form. Until 
the Form 8991 is revised to incorporate the election, a taxpayer should 
attach a statement with that form to make this election as provided in 
forms and instructions.
iii. Fixed Ratio or Safe Harbor for the Worldwide Interest Ratio
    The final regulations do not adopt a fixed ratio or safe harbor for 
the worldwide interest ratio as suggested in comments because the 
actual worldwide interest ratio of an enterprise may vary significantly 
from one industry to another and from one taxpayer to another. As a 
result, it is not possible to establish a single safe harbor that 
appropriately takes into account the differing position of industries 
and taxpayers while protecting the interests of the government. The 
Treasury Department and the IRS recognize that Sec.  1.882-5 provides 
other safe harbors, such as the fixed ratio safe harbor for determining 
the ratio of liabilities to assets of 95 percent for banks and 50 
percent for other taxpayers. Sec.  1.882-5(c)(4). In the context of 
determining the portion of a U.S. branch's interest expense that is 
deemed attributed to foreign related parties (versus other persons), 
the Treasury Department and the IRS determined that there is not a 
sufficient basis to establish a safe harbor because different taxpayers 
could have different internal capital structures.
    One comment suggested that a U.S. branch of a bank should be 
permitted to assume that 85 percent of its funding is from unrelated 
lenders because regulations under section 884 provide a safe harbor 
assumption that 85 percent of a bank's capital can be deemed to come 
from deposits (and thus eligible for the bank deposit interest 
exemption from the tax imposed by section 881(a)). See Sec.  1.884-
4(a)(2)(iii). The section 884 safe harbor, however, is not relevant to 
the determination of the ratio of funding from foreign related parties 
because the bank deposit exception is available for both related and 
unrelated depositors/lenders. Thus, this section 884 safe harbor does 
not reflect the expected percentage of the lenders who are not foreign 
related parties. See section 871(i)(2) and section 881(d).
c. Other Coordinating Rules
    The final regulations also revise Sec.  1.59A-3(b)(4)(1) to take 
into account the expansion of the exception for certain total loss-
absorbing capacity securities to include foreign issuers. See Part 
IV.C.5 of this Summary of Comments and Explanation of Revisions 
(Exception for Interest on Certain Instruments Issued by Globally 
Systemically Important Banking Organizations).
    Finally, a comment recommended that the final regulations revise 
proposed Sec.  1.59A-3(b)(4)(i)(D), which provides that to the extent 
that a taxpayer makes an election to reduce its U.S.-connected 
liabilities pursuant to Sec.  1.884-1(e)(3), the reduction is treated 
as proportionally reducing all liabilities for purposes of determining 
the amount of allocable interest expense that is treated as a base 
erosion payment. The comment argued that Sec.  1.59A-3(b)(4)(i)(D) is 
inconsistent with Sec.  1.884-1(e)(3), which applies for all purposes 
of the Code, and which the comment asserted does not require 
proportionate reduction. In response to this comment, the final 
regulations do not include the rule in proposed Sec.  1.59A-
3(b)(4)(i)(D). The Treasury Department and the IRS are considering 
Sec.  1.884-1(e)(3) for possible future guidance.
5. Allocations of Interest and Other Expenses Pursuant to Income Tax 
Treaties
    The proposed regulations provide a specific rule for determining 
the amount of base erosion payments attributable to interest and 
deductions allocated to a permanent establishment under a U.S. income 
tax treaty. Certain U.S. income tax treaties provide alternative 
approaches for the allocation or attribution of business profits of an 
enterprise of one contracting state to its permanent establishment in 
the other contracting state on the basis of assets used, risks assumed, 
and functions performed by the permanent establishment. These treaties 
allow notional payments that take into account interbranch transactions 
and value the interbranch transactions using the most appropriate arm's 
length method for those transactions. A treaty-based expense allocation 
or attribution method does not itself create legal obligations between 
the U.S. permanent establishment and the rest of the enterprise. The 
proposed regulations reflect that under a treaty-based expense 
allocation or attribution method, amounts equivalent to deductible 
payments may be allowed in computing the business profits of an 
enterprise with respect to transactions between the permanent 
establishment and the home office or other branches of the foreign 
corporation (``internal dealings''). The deductions from internal 
dealings would not be allowed under the Code and regulations. The 
proposed regulations provide that deductions from internal dealings 
allowed in computing the business profits of the permanent 
establishment are base erosion payments.
    The proposed regulations distinguish between the allocations of 
expenses and internal dealings. The allocation and apportionment of 
expenses of the

[[Page 66981]]

enterprise to the branch or permanent establishment is not a base 
erosion payment because the allocation represents a division of the 
expenses of the enterprise, rather than a payment between the branch or 
permanent establishment and the rest of the enterprise. Internal 
dealings, however, are not mere divisions of enterprise expenses; 
rather, internal dealings are priced on the basis of assets used, risks 
assumed, and functions performed by the permanent establishment in a 
manner consistent with the arm's length principle. The proposed 
regulations create parity between deductions for actual regarded 
payments between two separate corporations (which are subject to 
section 482), and internal dealings (which are generally priced in a 
manner consistent with the applicable treaty and, if applicable, the 
OECD Transfer Pricing Guidelines). The proposed regulations apply only 
to deductions attributable to internal dealings, and not to payments to 
entities outside of the enterprise, which are subject to the general 
base erosion payment rules as provided in proposed Sec.  1.59A-
3(b)(4)(v)(A).
    Comments noted that internal dealings are a fiction and do not 
involve an actual payment or accrual under general U.S. tax principles. 
The comments suggested that internal dealings should be relevant only 
for purposes of determining the profit attributable to the permanent 
establishment and should not be recognized for other purposes. They 
noted that the OECD 2010 Report on the Attribution to Profits to 
Permanent Establishments (``2010 OECD Report'') states that recognizing 
internal dealings by a permanent establishment ``is relevant only for 
the attribution of profits'' and ``does not carry wider implications as 
regards, for example, withholding taxes.'' 2010 OECD Report (July 22, 
2010), Part IV, C-1(iii)(f), section 166. Thus, comments suggested that 
internal dealings should not be relevant for BEAT purposes.
    The Treasury Department and the IRS disagree that internal dealings 
are not relevant for purposes of determining a foreign corporation's 
base erosion payments. Unlike the allocation of a foreign corporation's 
deductions to a U.S. branch under the Code and regulations, internal 
dealings are not a mere allocation of expenses, but rather are 
determined on the basis of assets used, risks assumed, and functions 
performed by the permanent establishment in a manner consistent with 
the arm's length principle. Deductions determined under internal 
dealings, like deductions determined under the Code and regulations, 
reduce the U.S. income tax base of the permanent establishment. Because 
internal dealings are not an allocation of expenses, the foreign 
corporation's worldwide ratio may not be an appropriate measure of 
related party payments. Instead, in the proposed regulations, the 
Treasury Department and the IRS determined that it is appropriate to 
look to the internal dealings, rather than the foreign corporation's 
worldwide expenses, for purposes of determining base erosion payments.
    However, the Treasury Department and the IRS recognize that 
interest expense allowed to a permanent establishment as internal 
dealings often represents interest expense on back-to-back loans 
between (1) the permanent establishment and the home office, and (2) 
the home office and another entity. Furthermore, unlike other 
deductions that are often based on payments to the home office or to 
another branch for goods or services or the use of intellectual 
property unique to the home office or branch, money is fungible. A 
permanent establishment may be indifferent to whether its capital comes 
from the home office or a loan from another entity.
    The Treasury Department and the IRS have determined that interest 
expense determined under Sec.  1.882-5 generally provides a reasonable 
estimate of the amount of interest of the foreign corporation that 
should be allocated to the permanent establishment based on the assets 
of the permanent establishment. Accordingly, it is appropriate to treat 
interest expense determined in accordance with a U.S. tax treaty 
(including interest expense determined by internal dealings) in a 
manner consistent with the treatment of interest expense determined 
under Sec.  1.882-5, to the extent it would have been allocated to the 
permanent establishment under Sec.  1.882-5. In effect, the internal 
dealing permits the permanent establishment to replace an external 
borrowing with an internal dealing, and this internal dealing should be 
treated as creating additional interest expense paid to the home 
office, and thus treated as a base erosion payment to a foreign payee. 
Accordingly, interest expense determined in accordance with a U.S. tax 
treaty (including interest expense determined by internal dealings) 
that is in excess of the amount that would have been allocated to the 
permanent establishment under Sec.  1.882-5 is treated as interest 
expense paid by the permanent establishment to the home office or 
another branch of the foreign corporation.
    Specifically, the final regulations treat interest expense 
determined in accordance with a U.S. tax treaty (including interest 
expense determined by internal dealings) in a manner consistent with 
the treatment of interest expense determined under Sec.  1.882-5, to 
the extent of the hypothetical amount of interest expense that would 
have been allocated to the permanent establishment under Sec.  1.882-5 
(the ``hypothetical Sec.  1.882-5 interest expense''). For purposes of 
this calculation, the hypothetical Sec.  1.882-5 interest expense 
cannot exceed the amount of interest expense determined under the U.S. 
tax treaty. Interest expense in excess of the hypothetical Sec.  1.882-
5 interest expense is treated as interest expense paid by the permanent 
establishment to the home office or another branch of the foreign 
corporation, and therefore is treated as a base erosion payment. See 
Sec.  1.59A-3(b)(4)(i)(E).
    Accordingly, under the final regulations, a foreign corporation 
determines its hypothetical Sec.  1.882-5 interest expense by 
calculating the amount of interest that would have been allocated to 
effectively connected income if the foreign corporation determined its 
interest expense under Sec.  1.882-5. See Sec.  1.59A-3(b)(4)(i)(E)(2). 
Therefore, a foreign corporation will use the method provided in Sec.  
1.59A-3(b)(4)(i)(A), as described in Part IV.B.4.a in this Summary of 
Comments and Explanation of Provisions, to determine its hypothetical 
Sec.  1.882-5 interest expense.
    In this regard, the Treasury Department and the IRS observe that 
corporations eligible for benefits under a U.S. income tax treaty are 
permitted to choose whether to apply the treaty or the Code and 
regulations to calculate interest expense allocable to a permanent 
establishment or U.S. branch, and understand that many corporations 
eligible for treaty benefits calculate interest expense allocated to a 
U.S. branch or permanent establishment under both Sec.  1.882-5 and the 
applicable treaty to determine whether to claim treaty benefits. 
Additionally, the Treasury Department and the IRS also understand that 
corporations that determine interest expense allowed to a permanent 
establishment under a U.S. income tax treaty may nonetheless be 
required to allocate interest to the permanent establishment under 
Sec.  1.882-5 for state or local tax purposes.
6. Related-Party Hedging Payments
    Comments requested that the final regulations provide relief from 
the application of the BEAT for hedging

[[Page 66982]]

payments made by domestic corporations to foreign related parties, 
specifically in the context of the energy industry. The comments 
described a scenario in the energy industry where large multinational 
groups designate one or more members of their worldwide group to act as 
a hedging center to manage price risk associated with commodities that 
the group produces or sells through the execution of commodities 
derivatives. The comments indicated that under prevailing industry 
practice and applicable financial accounting standards, income, gain, 
loss, or expense on commodity derivatives are often accounted for as 
items of COGS or as a reduction to determine gross income for book 
accounting purposes. These items, however, are not treated as COGS or 
as another form of reduction to determine gross income for tax 
purposes; the items are deductions for tax purposes and potentially 
within the scope of section 59A(d)(1) and proposed Sec.  1.59A-
3(b)(1)(i). The payments described in these comments are not eligible 
for the QDP exception in section 59A(h) and proposed Sec.  1.59A-6. The 
comments requested that the final regulations include a rule that 
related-party hedging payments are not base erosion payments.
    The final regulations do not adopt this recommendation. The status 
of an item as a deduction is determined under U.S. federal income tax 
law, not industry practice or financial accounting treatment. Although 
the legislative history of section 59A states that base erosion 
payments do not include any amount that constitutes reductions to 
determine gross income, including payments for COGS, these statements 
are in the context of U.S. federal income tax law, which sets forth the 
tax law for deductions. In addition, section 59A(d)(1) refers to 
``deductions allowable under this chapter,'' that is, chapter 1 (normal 
taxes and surtaxes) of Subtitle A (income taxes) of the Code, which 
includes section 1 through section 1440Z-2. Congress did not indicate 
that the definition of a reduction to determine gross income or COGS 
for purposes of section 59A should be derived from financial accounting 
principles. In the absence of clear Congressional intent otherwise, the 
Treasury Department and the IRS believe that whether an amount 
constitutes a reduction to determine gross income or COGS must be 
determined under established principles of U.S. federal income tax law. 
Consequently, if related-party hedging payments are not properly 
treated as reductions to determine gross income for tax purposes, these 
payments are not excluded from the definition of base erosion payments. 
See also Part IV.A.3.b of this Summary of Comments and Explanation of 
Revisions (Netting of income and expense; Hedging transactions).
7. Captive Finance Subsidiaries
    Comments addressed the impact of the BEAT on domestic corporate 
captive finance subsidiaries that purchase property (business 
equipment) from a foreign related party and then lease the property to 
unrelated third party end users. The comments requested that the final 
regulations permit taxpayers using this type of business model to treat 
the depreciation deductions attributable to the leased property as COGS 
for purposes of the BEAT. The comments premised this requested 
treatment on the theory that the cost of the leased property and its 
associated depreciation deductions are directly correlated with the 
rental income generated from leasing the property and on the unique 
nature of this particular business model.
    The final regulations do not include an exception from the 
definition of base erosion payments for the transactions described in 
these comments. Under section 59A(d)(2), the deduction allowed for 
depreciation with respect to property acquired from a foreign related 
party is a base erosion tax benefit, notwithstanding that the property 
acquired by the taxpayer is used in an income-generating business in 
the United States, such as the leasing of the business equipment to 
unrelated third party lessees of the property or operating the business 
equipment itself as a service for unrelated third parties.
8. Capitalization and Amortization of Research and Experimental 
Expenditures
    One comment recommended that the final regulations clarify the 
treatment of research and experimental (``R&E'') expenditures after 
such costs are required to be amortized in taxable years beginning 
after December 31, 2021, under section 174. The comment recommended 
clarification that after the change to section 174 is in effect, the 
BEAT payment associated with R&E expenses is limited to the amount of 
amortization. The final regulations do not adopt this comment because 
the Treasury Department and the IRS view Sec.  1.59A-3(b)(1)(i) and 
Sec.  1.59A-3(c)(1)(i) as sufficiently clear in setting forth that a 
base erosion payment to a foreign related party does not result in a 
base erosion tax benefit until the deduction is ``allowed under chapter 
1 of subtitle A of the [Code].''

C. Other Exceptions From the Base Erosion Payment Definition Contained 
in the Proposed Regulations

1. Exception for Certain Amounts With Respect to Services and the 
Services Cost Method
    Proposed Sec.  1.59A-3(b)(3)(i) provides that a base erosion 
payment does not result from amounts paid or accrued to a foreign 
related party for services that are eligible for the SCM exception 
described in proposed Sec.  1.59A-3(b)(3)(i)(B), but only to the extent 
of the total services cost of those services. Any amount paid or 
accrued to a foreign related party in excess of the total services cost 
of services eligible for the SCM exception (the mark-up component) 
remains a base erosion payment. Proposed Sec.  1.59A-3(b)(3)(i)(B) 
provides that the SCM exception applies if all of the requirements of 
Sec.  1.482-9(b), which describes the SCM, are satisfied, with two 
exceptions. First, the requirements of Sec.  1.482-9(b)(5), commonly 
referred to as the business judgment rule, do not apply. Second, the 
books and records requirement described in Sec.  1.482-9(b)(6) is 
replaced with the requirements of proposed Sec.  1.59A-3(b)(3)(i)(C). 
Section 1.482-9(b)(4) provides that certain activities, including 
research, development, and experimentation, are not eligible for the 
SCM. As a result, payments for these services do not qualify for the 
SCM exception described in proposed Sec.  1.59A-3(b)(3)(i)(B).
    Comments supported the SCM exception and recommended that final 
regulations adopt this approach. The final regulations continue to 
provide that the SCM exception is available for the cost portion of a 
payment that otherwise meets the requirements for the SCM exception. A 
comment recommended that the final regulations provide examples or 
clarification as to the requirement in proposed Sec.  1.59A-
3(b)(3)(i)(C) that taxpayers' books and records provide sufficient 
documentation to allow verification of the methods used to allocate and 
apportion the costs to the services in question in accordance with 
Sec.  1.482-9(k). The final regulations include additional detail on 
the documentation required to satisfy this requirement. Sec.  1.59A-
3(b)(3)(i)(C).
    Comments also recommended that the final regulations extend the SCM 
exception to the cost element of payments for other types of services 
that are not eligible for the SCM. Some comments suggested that an 
exception

[[Page 66983]]

should be available for all services. Some comments suggested that an 
exception should be available for services that are excluded under 
Sec.  1.482-9(b)(4) (excluded activities) but that otherwise would be 
eligible for the SCM exception described in proposed Sec.  1.59A-
3(b)(3)(i)(B). Some comments suggested that an exception should be 
available for research and experimentation services.
    Comments suggested that applying the SCM exception to only some 
services will lead to inequitable results for services companies as 
compared to similarly situated U.S. manufacturers and distributors 
because the definition of base erosion payments does not include 
payments included in COGS, but there is not a similar rule for the 
costs in a services business. Comments also claimed that, relative to 
manufacturers or distributors, service companies are more constrained 
in where they operate. Comments also asserted that no base erosion 
could result from an expansion of the SCM exception because only the 
cost element of the service fee would be subject to the exception.
    The comments suggesting that an exception should be available for 
excluded activities that otherwise would be eligible for the SCM also 
asserted that the list of excluded activities serves a similar purpose 
as the business judgment rule, which is to identify services for which 
total services costs can constitute an inappropriate reference point 
for determining profitability or that should be subject to a more 
robust transfer pricing analysis. Comments suggested that Sec.  1.482-
9(b)(4) is essentially a list of specific activities for which the SCM 
is unavailable because they are deemed to contribute significantly to 
key competitive advantages, core capabilities, or fundamental risks of 
success or failure of the business. These comments suggested that when 
section 59A(d) states that the exception therein is based on compliance 
with the services cost exception in section 482 ``(determined without 
regard to the requirement that the services not contribute 
significantly to fundamental risks of business success or failure)'', 
that language was intended to disregard the list of excluded 
activities.
    The comments requesting an expansion of the SCM exception for 
research and experimentation services also asserted that extending the 
SCM exception to these services would reduce the incentive to move 
intangible property offshore and would broaden the U.S. tax base by 
encouraging U.S. ownership and exploitation of newly created intangible 
property.
    Section 59A(d)(5)(A) sets forth the parameters under which certain 
services--those that are eligible for the SCM without regard to the 
business judgment rule--are eligible for the SCM exception. The 
Treasury Department and IRS have considered the policy considerations 
that the comments raised for expanding the SCM exception, but have 
determined that the recommendation to expand the SCM exception is 
inconsistent with the parameters that Congress set forth in section 
59A(d)(5). Further, the Treasury Department and IRS disagree with the 
premise in the comments that the list of excluded activities serves the 
same purpose as the business judgment rule. While certain services that 
are ineligible for the SCM as a result of being on the list of excluded 
activities also may be ineligible for the SCM as a result of failing 
the business judgment rule, the list of excluded activities from the 
SCM provides an objective list of categories that tend to be high 
margin or for which the cost of the services tends to be an 
inappropriate reference point for the price of those services. See 71 
FR 44466, 44467-68 (Aug. 4, 2006). By contrast, the business judgment 
rule also excludes from the SCM services that tend to be low margin as 
a general matter, but in the context of a particular business are a 
core competency of the business. See 71 FR 44466, 44467 (Aug. 4, 2006). 
The parenthetical language in section 59A(d)(5)(A) indicates 
unambiguously that Congress intended the SCM exception to be available 
for all services that are typically low margin even if, in the context 
of a particular business, the service is a core competency of a 
business that may not satisfy the criteria in Sec.  1.482-9(b)(5). 
Accordingly, the Treasury Department and the IRS have determined that 
the SCM exception should continue to follow the statute, and the rule 
is unchanged from the proposed regulations.
2. Qualified Derivatives Payments
    For a discussion of QDPs, see Part VII of this Summary of Comments 
and Explanation of Revisions.
3. Exception to Base Erosion Payment Status for Payments the Recipient 
of Which Is Subject to U.S. Tax
    Proposed Sec.  1.59A-3(b)(3)(iii) generally provides that a base 
erosion payment does not result from amounts paid or accrued to a 
foreign related party that are subject to tax as income effectively 
connected with the conduct of a trade or business in the United States 
(ECI). Comments recommended that final regulations adopt this rule. 
Accordingly, this rule is unchanged in the final regulations.
    Several comments recommended that final regulations include a 
similar exception from the definition of a base erosion payment for 
payments made by a domestic corporation to a controlled foreign 
corporation (CFC) that result in a subpart F or global intangible low 
tax income (GILTI) inclusion. Another comment requested that this 
exception be extended to apply to payments made to a passive foreign 
investment company (PFIC) when a U.S. person has made a qualified 
electing fund (QEF) election, and the payment is included in the 
electing U.S. person's gross income. The comments asserted that 
payments that give rise to a subpart F or GILTI inclusion do not erode 
the U.S. tax base, and accordingly, warrant a base erosion payment 
exception under the same policy rationale for granting this type of 
exception in the proposed regulations for ECI, section 988 losses, and 
interest paid with respect to total loss-absorbing capacity (TLAC) 
securities. Finally, comments noted that proposed regulations under 
section 267A provide an exception for certain payments that result in 
income inclusions under section 951 and section 951A and suggested 
equivalent treatment was justified in the case of the BEAT.
    The final regulations do not include a subpart F, GILTI, or PFIC 
exception to base erosion payment status. The Treasury Department and 
the IRS have determined that the reasons for adopting the other 
exceptions cited in the comments (such as the ECI exception and the 
exception under section 267A) do not warrant a subpart F, GILTI, or QEF 
exception from base erosion payment status.
    First, comments have misinterpreted the underlying policy rationale 
for providing an ECI exception in the proposed regulations. The 
proposed regulations' ECI exception was adopted in part based upon the 
determination that it would be appropriate in defining a base erosion 
payment to consider the U.S. federal tax treatment of the foreign 
recipient--particularly, whether a payment received by a foreign 
related party was subject to tax on a net basis in substantially the 
same manner as amounts paid to a U.S. person. In contrast to the tax 
directly imposed on a foreign person with respect to its ECI under 
sections 871(b) and 882(a), a CFC receiving a base erosion payment is 
not directly subject to U.S. taxation. Rather, the U.S. shareholder is 
subject to tax under the subpart F or GILTI regime (or the PFIC rules). 
Thus, the CFC recipient

[[Page 66984]]

(or PFIC recipient) of a payment is not itself subject to tax on a net 
basis in substantially the same manner as a U.S. person.
    In addition, a foreign corporation that is engaged in a U.S. trade 
or business is itself subject to section 59A. In contrast, because 
neither a CFC nor a PFIC is subject to section 59A, the CFC or PFIC can 
make payments to a foreign related party without any BEAT consequences.
    The ECI exception was also adopted to achieve symmetry with 
proposed Sec.  1.59A-2(c), which treats foreign corporations as outside 
of the controlled group, except to the extent that the foreign 
corporation has ECI. Because foreign corporations with ECI are treated 
as part of the aggregate group in determining whether a taxpayer will 
ultimately be subject to the BEAT, the ECI exception to base erosion 
payment status is necessary to ensure that the foreign corporation is 
treated equivalently to a domestic member of its aggregate group 
receiving deductible payments.
    The Treasury Department and the IRS further disagree with the 
premise that the approaches in the proposed regulations with respect to 
TLAC interest and section 988 losses support an exception for subpart F 
or GILTI income in the final regulations. With respect to TLAC, the 
preamble to the proposed regulations notes that the TLAC exception is 
appropriate because of the special status of TLAC as part of a global 
system to address bank solvency and the precise limits that regulations 
place on the terms of TLAC securities. REG-104259-18, 83 FR 65956, 
65963 (December 21, 2018).
    With respect to section 988, the preamble to the proposed 
regulations states that the exception is based on a determination that 
the losses did not present the same base erosion concerns as other 
types of losses that arise in connection with payments to a foreign 
related party. See REG-104259-18, 83 FR 65956, 65963 (December 21, 
2018).
    The Treasury Department and the IRS also disagree with the premise 
that the approach in the proposed hybrid regulations under section 267A 
provides support for a regulatory exception. Section 267A(b)(1) 
expressly provides that the disqualified related-party amount does not 
include any payment to the extent that the payment is included in the 
gross income of a United States shareholder under section 951(a). 
Whereas Congress expressly provided an exception for subpart F in 
section 267A, Congress did not provide a similar exception for purposes 
of section 59A. The Treasury Department and the IRS have determined 
that the inclusion of a similar exception in another section of the 
Act, but not in section 59A, reflects Congressional intent to not 
provide a GILTI or subpart F exception for purposes of section 59A. In 
addition, section 59A(c)(4)(B) provides that a deduction under section 
250 (providing a domestic corporation a deduction for a portion of its 
GILTI amount) is not included in the denominator for purposes of the 
base erosion percentage; this shows that Congress considered the 
interaction between section 59A and GILTI, but did not provide an 
exception from the term base erosion payment for payments subject to 
tax under section 951A.
    Finally, with respect to the suggested GILTI exception, the 
Treasury Department and the IRS are concerned that a GILTI exception 
would be difficult to administer because it would require a 
determination of whether a particular payment to a CFC is included in 
the taxpayer's GILTI inclusion, but a taxpayer's GILTI inclusion often 
cannot be traced to particular payments to a CFC because a taxpayer's 
GILTI inclusion amount depends on multiple factors. A GILTI exception 
would also need to take into account differences in effective and 
marginal tax rates under GILTI, BEAT, and regular corporate income tax.
    For the foregoing reasons, the final regulations do not provide a 
regulatory exception to the definition of a base erosion payment for a 
payment that may give rise to subpart F, GILTI, or PFIC inclusions.
4. Exchange Loss From a Section 988 Transaction
    Proposed Sec.  1.59A-3(b)(3)(iv) provides that exchange losses from 
section 988 transactions described in Sec.  1.988-1(a)(1) are excluded 
from the definition of base erosion payments. Proposed Sec.  1.59A-
2(e)(3)(ii)(D) provides that an exchange loss from a section 988 
transaction (including with respect to transactions with persons other 
than foreign related parties) is not included in the denominator when 
calculating the base erosion percentage. The preamble to the proposed 
regulations requests comments on whether the denominator should exclude 
only section 988 losses with respect to foreign related-party 
transactions. REG-104259-18, 83 FR 65956, 65963 (December 21, 2018). 
Comments recommended that section 988 losses should not be excluded 
from the denominator of the base erosion percentage because excluding 
all section 988 losses is not consistent with the statute. Some 
comments, however, recommended that section 988 losses with respect to 
transactions with foreign related parties that are also excluded from 
the numerator should continue to be excluded from the denominator, and 
that this approach would be symmetrical with the approach in the 
statute for deductions for qualified derivative payments and for 
amounts eligible for the SCM exception. The final regulations adopt 
this recommendation. See Sec.  1.59A-2(e)(3)(ii)(D). This approach is 
also consistent with the treatment of amounts paid to foreign related 
parties with respect to TLAC securities, which are excluded from the 
denominator only if the deductions arise from foreign related-party 
transactions.
5. Exception for Interest on Certain Instruments Issued by Globally 
Systemically Important Banking Organizations (GSIBs)
    Proposed Sec.  1.59A-3(b)(3)(v) provides that the amount paid or 
accrued to a foreign related party with respect to total loss-absorbing 
capacity (``TLAC'') securities is not a base erosion payment, but only 
to the extent of the amount of TLAC securities required by the Board of 
Governors of the Federal Reserve (Federal Reserve Board) under subpart 
P of 12 CFR part 252. See proposed Sec.  1.59A-1(b)(18) and (20). 
Specifically, proposed Sec.  1.59A-3(b)(3)(v) provides that the amount 
excluded is no greater than the amount paid to foreign related parties 
multiplied by the scaling ratio, which is the average TLAC long-term 
debt required over the average TLAC security amount. The preamble to 
the proposed regulations requests comments regarding whether the TLAC 
exception should also apply to similar instruments issued by foreign 
corporations that are required by law to issue a similar type of loss-
absorbing instruments. These instruments issued by foreign corporations 
would be relevant for section 59A if interest expense from those 
instruments is deducted by the U.S. branch or permanent establishment 
of the foreign corporation. Comments generally supported the exception 
for amounts paid to a foreign related party with respect to TLAC and 
suggested that the final regulations expand the exception to foreign 
issuers.
a. TLAC Issued in Compliance With Foreign Law
    Comments requested that the TLAC exception be expanded to include 
TLAC issued to comply with foreign laws and regulations that are 
similar to the TLAC requirements prescribed by the Federal Reserve 
Board. One comment observed that an exception for interest on TLAC that 
is issued to comply with foreign

[[Page 66985]]

law and allocated to a U.S. branch or permanent establishment would 
provide branch parity, by excluding interest from base erosion payment 
status to the same extent, whether that internal TLAC debt is issued by 
a U.S. subsidiary or branch. See generally Rev. Proc. 2017-12, 2017-3 
I.R.B. 424, for the definition of internal TLAC.
    The Treasury Department and the IRS generally agree with comments 
that the special status of TLAC as part of the global system to address 
bank solvency applies equally to TLAC securities whether issued 
pursuant to U.S. law or foreign law. Consistent with comments, the 
final regulations expand the scope of the TLAC exception to include 
internal securities issued by GSIBs pursuant to laws of a foreign 
country that are comparable to the rules established by the Federal 
Reserve Board (``foreign TLAC''), where those securities are properly 
treated as indebtedness for U.S. federal income tax purposes.\2\ In 
order to provide consistency between interest deductions on TLAC of a 
domestic subsidiary and a U.S. branch or permanent establishment, the 
final regulations limit the foreign TLAC exception to interest expense 
of GSIBs, and determine the limitation on the exception by reference to 
the specified minimum amount of TLAC debt that would be required 
pursuant to rules established by the Federal Reserve Board for TLAC if 
the branch or permanent establishment were a domestic subsidiary that 
is subject to Federal Reserve Board requirements. In addition, to 
ensure that the limitation is not greater than the amount required 
under foreign law, the final regulations express the limitation as the 
lesser of the hypothetical Federal Reserve Board limitation described 
in the preceding sentence and the specified minimum amount of TLAC debt 
that is required pursuant to bank regulatory requirements of a foreign 
country that are comparable to the requirements established by the 
Federal Reserve Board. Further, the Treasury Department and the IRS 
understand that in some jurisdictions, foreign TLAC may apply in a more 
discretionary manner than the framework established in the proposed 
regulations that references the specified minimum amount of TLAC debt 
that is required pursuant to rules established by the Federal Reserve 
Board for TLAC of U.S. issuers, for example, with no specified minimum 
amount. For that reason, if the bank regulatory requirements of a 
foreign country do not specify a minimum amount, the limitation is 
determined by reference solely to the hypothetical Federal Reserve 
Board limitation. The second prong serves to provide general 
consistency with TLAC of a domestic subsidiary, by limiting the foreign 
TLAC exception to no more than the amount of TLAC that would be 
required by the Federal Reserve Board if the branch were a subsidiary 
(subject to the modification for a buffer that is also discussed in 
this Part IV.C.5.b). These rules tend to support the systemic bank 
solvency goals of TLAC by reducing the tax cost of issuing such 
securities via foreign related parties. The Treasury Department and the 
IRS understand that information necessary to determine this amount is 
generally knowable to banks with U.S. operations. The Treasury 
Department and the IRS also understand that in some foreign 
jurisdictions, the foreign TLAC requirements may apply to organizations 
other than GSIBs; however, to provide general consistency with interest 
deductions on TLAC of a domestic subsidiary, the final regulations 
limit the foreign TLAC exception to only GSIBs.
---------------------------------------------------------------------------

    \2\ While final regulations adopt the comment recommending 
similar treatment as between TLAC that is required under Federal 
Reserve Board regulations and similar foreign TLAC instruments, the 
final regulations do not address, and provide no inference, on 
whether those instruments issued pursuant to foreign law are treated 
as debt for U.S. federal income tax purposes. See Rev. Proc. 2017-
12, 2017-3 I.R.B. 424 (providing generally that the IRS will treat 
as indebtedness internal TLAC that is issued by an intermediate 
holding company of a foreign GSIB pursuant to the Federal Reserve 
Board regulations, and that ``[n]o inference should be drawn about 
the federal tax characterization of an instrument that is outside 
the scope of [Rev. Proc. 2017-12].'').
---------------------------------------------------------------------------

b. Buffer Amount Above Specified Minimum Amount
    Comments also recommended that the final regulations increase the 
specified minimum amount of interest eligible for the TLAC exception to 
permit an additional ``buffer'' amount of TLAC that exceeds the minimum 
amount required to satisfy regulatory requirements (such as 115 percent 
of the specified minimum amount or a buffer equal to 1 to 1.5 percent 
of the risk-weighted assets). Comments explained that the inputs used 
to determine the minimum amount of TLAC needed to satisfy regulatory 
requirements change on a daily basis; as a result, the amount of TLAC 
securities needed also may change on a daily basis. The comments also 
noted that market issues dictate a certain lead time to issue TLAC 
securities. As a result, comments stated that it is the market 
expectation and practice that GSIBs operate with a buffer, which helps 
to ensure that TLAC does not fall below the minimum amount when risk-
weighted assets or total leverage increase. Finally, the comments 
asserted that because the cost of issuing TLAC securities significantly 
exceeds the cost of issuing non-loss absorbing securities, banks are 
commercially incentivized to issue no more TLAC securities than 
necessary.
    Because of the special status of TLAC as part of a global system to 
address bank solvency and the specific requirements established by the 
Board and other regulators, the Treasury Department and the IRS 
recognize that it is necessary and appropriate to take into account the 
market practices that have been adopted to prevent TLAC from falling 
below the specified minimum amount as required by regulations. For 
these reasons, the final regulations adopt the recommendation to 
provide a 15 percent buffer on the specified minimum amount of interest 
eligible for the exception. This buffer applies for both TLAC and 
foreign TLAC.
c. Requests To Extend the TLAC Exception To Include Other Regulatory 
Capital Requirements
    The Treasury Department and the IRS decline to expand the TLAC 
exception to cover interest payments on debt to foreign related parties 
that may satisfy regulatory capital requirements other than TLAC. The 
TLAC exception was adopted because of the unique role of TLAC 
securities in the global banking system for GSIBs; while other 
regulatory capital requirements may also serve an important role in 
bank regulation, the Treasury Department and the IRS are cognizant that 
the BEAT applies as a general matter to interest paid to foreign 
related parties, and have thus limited this regulatory exception to 
only those specific securities that are issued as part of the 
integrated international financial regulation and supervision system.
d. TLAC Issued During Transition Period
    Comments recommended that the final regulations increase the 
specified minimum amount of interest eligible for the TLAC exception to 
permit interest with respect to TLAC debt in place during a three-year 
transition period before the year in which a corporation is required to 
have issued TLAC. The final regulations do not extend the TLAC 
exception to cover TLAC issued during a pre-effective date or 
transition period before being required to comply with the regulations 
prescribed by the Federal Reserve Board, because in that situation all 
of the debt is discretionary rather than mandatory. Further, there is 
no clear objective metric to scope discretionary issuances during a 
pre-effective period.

[[Page 66986]]

e. Other Operational Elements of the TLAC Exception
    A comment recommended modifying the limitation on the exclusion for 
internal TLAC when a portion of the internal TLAC is held by the U.S. 
branch of a foreign person such that interest payments on the internal 
TLAC is also eligible for the ECI exception. The comment recommended 
that interest on the internal TLAC be first attributed to TLAC held by 
the U.S. branch of a foreign person, and thus excluded from the 
definition of a base erosion payment on the basis of the interest being 
ECI; and then only the incremental interest expense in excess of the 
amount payable to that branch would be subject to the TLAC scaling 
ratio limitation. The final regulations do not further expand the TLAC 
exception through such a rule, so as to retain the narrow scope of the 
TLAC exception to those securities that are required to be in place 
because of Federal Reserve Board requirements (taking into account the 
buffer described in this Part IV.C.5.b). The final regulations clarify 
the definition of TLAC securities amount to confirm that the TLAC 
scaling ratio applies without regard to whether TLAC interest is also 
eligible for another exclusion from base erosion payment status, and 
thus that the TLAC scaling ratio applies pro-rata to all internal TLAC. 
See Sec.  1.59A-1(b)(19).
    Another comment recommended that the final regulations modify the 
definition of the ``TLAC long term debt minimum amount'' to reflect 
international standards, rather than Federal Reserve Board requirements 
because the comment asserted that the Federal Reserve Board may, in the 
future, eliminate the minimum requirement in the Federal Reserve Board 
regulations. Comments also recommended expanding the TLAC exception to 
apply to other intercompany debt that is issued to comply with other 
bank regulatory capital requirements. The Treasury Department and the 
IRS have determined that it is appropriate to limit the amount of the 
TLAC exception by reference to Federal Reserve Board requirements, 
notwithstanding comments suggesting that in the future the Federal 
Reserve Board may eliminate its minimum required amount. If there are 
meaningful changes in the total loss absorbing capacity systems in the 
future, the Treasury Department and the IRS would be able to reassess 
the section 59A regulations.
    Finally, a comment recommended that the final regulations should 
not exclude interest on TLAC borrowing from the denominator of the base 
erosion percentage calculation, which is discussed in Part III of this 
Summary of Comments and Explanation of Revisions. The proposed 
regulations exclude from the denominator of the base erosion percentage 
amounts excluded under certain of the specific exceptions to base 
erosion payment status in Sec.  1.59A-3(b) for SCM, QDP, and TLAC. This 
is in contrast to those amounts that are not base erosion payments 
because they are not within the main definition of a base erosion 
payment, for example, a payment to an unrelated third party, which 
remain in the denominator. The comment suggested that interest expense 
that is excluded from the definition of a base erosion payment under 
the TLAC exception should be viewed as like a payment to an unrelated 
third party, that is, the interest expense should remain in the 
denominator of the base erosion percentage. The comment premised this 
position on the view that internal TLAC should be viewed as issued to 
the holders of external TLAC (that is, to unrelated third party 
investors) under a theory that the issuer of internal TLAC is an 
intermediary or conduit for the issuer of the external TLAC securities. 
Therefore, there would be no underlying base erosion payment by the 
U.S. borrower on the internal TLAC, and thus the internal TLAC interest 
expense would remain in the denominator of the base erosion percentage 
calculation like interest paid to unrelated third parties. The proposed 
regulations and the final regulations provide a regulatory exception 
for internal TLAC on the basis of the special status of TLAC issued by 
GSIBs as part of the global system to address bank solvency. That is, 
the rationale for the TLAC exception in the proposed regulations and 
final regulations is not that the internal TLAC is a conduit for the 
external TLAC. For this reason, the final regulations (consistent with 
the proposed regulations) exclude from the denominator the TLAC 
interest in a manner consistent with the treatment of deductions 
covered by the SCM and QDP exceptions.

D. Base Erosion Tax Benefits

1. Withholding Tax on Payments
    The proposed regulations provide that if tax is imposed by section 
871 or 881, and the tax is deducted and withheld under section 1441 or 
1442 without reduction by an applicable income tax treaty on a base 
erosion payment, the base erosion payment is treated as having a base 
erosion tax benefit of zero for purposes of calculating a taxpayer's 
modified taxable income and base erosion percentage. If an income tax 
treaty reduces the amount of withholding imposed on the base erosion 
payment, the amount of the base erosion payment that is treated as a 
base erosion tax benefit is reduced in proportion to the reduction in 
withholding. In the regulation section pertaining to base erosion tax 
benefits, the final regulations include a technical correction to the 
fraction used to determine the amount of a base erosion payment that is 
treated as a base erosion tax benefit when the rate of withholding 
imposed on that payment is reduced by an income tax treaty. Sec.  
1.59A-3(c)(3)(i). To avoid duplication, the final regulation section 
pertaining to the base erosion percentage replaces a similar operating 
rule with a cross reference to the rule for determining base erosion 
tax benefits. See Sec.  1.59A-2(e)(3)(iii).
    Under section 884(f) and Sec.  1.884-4, a portion of interest 
expense allocated to income of a foreign corporation that is, or is 
treated as, effectively connected with the conduct of a trade or 
business in the United States (``excess interest'') is treated as 
interest paid by a wholly-owned domestic corporation to the foreign 
corporation. The foreign corporation is subject to tax under section 
881 on the excess interest and is required to report the excess 
interest on its income tax return, subject to the exemption provided in 
section 881 for bank deposit interest and reduction or elimination 
under applicable tax treaties. However, no withholding is required 
under section 1441 and 1442. See Sec.  1.884-4(a)(2)(iv). Because no 
withholding is required, excess interest is not excluded from treatment 
as a base erosion tax benefit under the proposed regulations.
    A comment suggested that because excess interest is subject to tax 
under section 881(a) as if it were interest paid to a foreign 
corporation by a wholly-owned domestic corporation, the exclusion from 
base erosion tax benefits that applies to payments subject to full 
withholding should also apply to excess interest. The comment suggested 
that the exclusion from treatment as a base erosion tax benefit might 
apply to excess interest under the proposed regulations, but requested 
clarification. While excess interest would not be excluded from 
treatment as a base erosion tax benefit under the proposed regulations 
because it is not subject to withholding, the Treasury Department and 
the IRS have determined that it is appropriate to expand the general 
exclusion from base erosion tax benefits to include excess interest. 
Accordingly, the final regulations reduce any base

[[Page 66987]]

erosion tax benefit attributable to interest in excess of interest on 
U.S.-connected liabilities by excess interest to the extent that tax is 
imposed on the foreign corporation with respect to the excess interest 
under section 884(f) and Sec.  1.884-4, and the tax is properly 
reported on the foreign corporation's income tax return and paid in 
accordance with Sec.  1.884-4(a)(2)(iv). Sec.  1.59A-3(c)(2)(ii). If an 
income tax treaty reduces the amount of tax imposed on the excess 
interest, the amount of base erosion tax benefit under this rule is 
reduced in proportion to the reduction in tax.
    The final regulations also provide a coordination rule to clarify 
the interaction between the withholding tax exception and the rules 
determining the portion of interest expense attributable to ECI that is 
treated as paid to a foreign related party. As discussed in part 
IV.B.4. of this Summary of Comments Explanation of Revisions, interest 
expense attributable to ECI that is in excess of direct allocations and 
interest expense on U.S.-booked liabilities is treated as paid to a 
foreign related party in proportion to the foreign corporation's 
average worldwide ratio of interest expense paid to a foreign related 
party over total interest expense. This coordination rule provides that 
any interest, including branch interest under Sec.  1.884-4(b)(1), on 
which tax is imposed under 871 or 881 and tax has been deducted and 
withheld under section 1441 or 1442 but which is not attributable to 
direct allocations or interest expense on U.S.-booked liabilities is 
treated as not paid to a foreign related party for purposes of 
determining the foreign corporation's average worldwide ratio.
2. Rule for Classifying Interest for Which a Deduction Is Allowed When 
Section 163(j) or Another Provision of the Code Limits Deductions
    Section 59A(c)(3) provides a stacking rule in cases in which 
section 163(j) applies to a taxpayer, under which the reduction in the 
amount of deductible interest is treated as allocable first to interest 
paid or accrued to persons who are not related parties with respect to 
the taxpayer and then to related parties. The statute does not provide 
a rule for determining which portion of the interest treated as paid to 
related parties (and thus potentially treated as a base erosion 
payment) is treated as paid to a foreign related party as opposed to a 
domestic related party. Proposed Sec.  1.59A-3(c)(4) provides rules 
coordinating section 163(j) with the determination of the amount of 
base erosion tax benefits. This rule provides, consistent with section 
59A(c)(3), that where section 163(j) applies to limit the amount of a 
taxpayer's business interest expense that is deductible in the taxable 
year, a taxpayer is required to treat all disallowed business interest 
first as interest paid or accrued to persons who are not related 
parties, and then as interest paid or accrued to related parties for 
purposes of section 59A. More specifically, with respect to interest 
paid to related parties, the proposed regulations provide that the 
amount of allowed business interest expense is treated first as the 
business interest expense paid to related parties, proportionately 
between foreign and domestic related parties. Conversely, the amount of 
a disallowed business interest expense carryforward is treated first as 
business interest expense paid to unrelated parties, and then as 
business interest expense paid to related parties, proportionately 
between foreign and domestic related-party business interest expense.
    Proposed Sec.  1.59A-3(c)(4)(i)(C) provides that business interest 
expense paid or accrued to a foreign related party to which the ECI 
exception in proposed Sec.  1.59A-3(b)(3)(iii) applies is classified as 
domestic related business interest expense. One comment observed that 
the proposed regulations do not expressly provide similar rules for 
business interest expense paid to foreign related parties that is 
excluded from the definition of a base erosion payment under the TLAC 
exception or excluded from the definition of a base erosion tax benefit 
under the exception for payments subject to withholding tax. The final 
regulations confirm that those categories of interest expense retain 
their classification as payments to foreign related parties, but also 
that the foreign related business interest expense category is treated 
as consisting of interest that is eligible for these exceptions and 
interest that is not eligible for these exceptions, on a pro-rata 
basis. See Sec.  1.59A-3(c)(4)(i)(C)(2).

E. Election To Waive Allowable Deductions

    See the 2019 proposed regulations for a proposal to provide an 
election (and certain procedural safeguards) by which a taxpayer may 
permanently forego a deduction for all U.S. federal tax purposes, with 
the result that the foregone deduction will not be treated as a base 
erosion tax benefit.

V. Comments and Changes To Proposed Sec.  1.59A-4--Modified Taxable 
Income

    Proposed Sec.  1.59A-4 contains rules relating to the determination 
of modified taxable income.

A. Method of Computing Modified Taxable Income

    Section 59A(c)(1) defines modified taxable income as ``the taxable 
income of the taxpayer computed under this chapter for the taxable 
year, determined without regard to--(A) any base erosion tax benefit 
with respect to any base erosion payment, or (B) the base erosion 
percentage of any net operating loss deduction allowed under section 
172 for the taxable year.'' Proposed Sec.  1.59A-4(b)(2) clarifies that 
modified taxable income is computed by adding back the base erosion tax 
benefits and base erosion percentage of any net operating loss 
deductions (the ``add-back method''). In addition, to prevent net 
operating loss benefits from being duplicated, proposed Sec.  1.59A-
4(b)(1) provides that taxable income may not be reduced below zero as a 
result of a net operating loss deduction.
    Comments generally recommended one of three approaches to calculate 
modified taxable income: (1) The add-back method, (2) the 
``recomputation method,'' and (3) the ``limited recomputation method.''
1. The Add-Back Method
    Some comments recommended that the final regulations retain the 
add-back method because it would be simpler and easier to administer 
this method than a recomputation method. See Part V.A.2 of this Summary 
of Comments and Explanation of Revisions for a description of the 
recomputation method. Comments highlighted that the add-back method 
does not require attributes to be separately computed and tracked for 
regular income tax purposes and the BEAT. In addition, a comment 
asserted that this method more closely follows the statute, observing 
that the statutory language in section 59A(c) is substantially 
different from the recomputation-like language that was in section 
59(a)(1)(B) relating to the foreign tax credit determination for 
alternative minimum tax purposes, which is now repealed for 
corporations. See section 59(a)(1)(B) (providing explicit language 
referencing computing the alternative minimum tax foreign tax credit as 
if section 904 were applied on the basis of alternative minimum taxable 
income instead of taxable income); see also the Act, Sec.  12001(a) 
(repealing the alternative minimum tax for corporations and rendering 
section 59(a)(1)(B) inapplicable to corporations). Another comment 
noted that the add-back method is harmonious with the language of 
section 59A(c)(1)(B) because that section includes the base erosion 
percentage of net operating loss

[[Page 66988]]

deductions as an item included in modified taxable income as the method 
for determining which portion of net operating loss carryovers from 
prior years resulted from base erosion tax benefits. (Under a 
recomputation method with a net operating loss carryover that is 
computed on a BEAT basis, base erosion tax benefits would already be 
excluded from the net operating loss carryover, so it would be 
anomalous to also apply section 59A(c)(1)(B) to the net operating loss 
deduction.) In support of the add-back method, one comment asserted 
that applying a recomputation approach would exceed statutory 
authority.
2. The Recomputation Method
    Some comments recommended that the final regulations determine 
modified taxable income by using the recomputation method that is 
described in the preamble to the proposed regulations whereby the 
taxpayer's taxable income is recomputed without the excluded items, or 
a variation of that method. See REG-104259-18, 83 FR 65965 (December 
21, 2018) (describing a recomputation approach as requiring attributes 
that are limited based on taxable income to be recomputed for purposes 
of section 59A). For example, some comments recommended making the 
recomputation method elective. One comment requested a recomputation 
method with a special rule for net operating loss deductions, which is 
discussed in Part V.A.3 of this Summary of Comments and Explanation of 
Revisions (limited recomputation method). While comments acknowledged 
that the add-back method is less complex, comments asserted that the 
add-back method may result in greater BEAT liability. Comments claimed 
that the recomputation method more accurately computes the base erosion 
minimum tax amount (``BEMTA''). Comments also asserted that the 
language in section 59A(c)--specifically the clause ``computed without 
regard to''--is more consistent with the recomputation method. Another 
comment noted that nothing in section 59A or its legislative history 
mandates the use of the add-back method and that taxpayers familiar 
with the prior corporate alternative minimum tax would have anticipated 
using the recomputation method.
    Additionally, some comments requested a recomputation method with a 
separate tracking of attributes such as net operating loss carryovers, 
while others requested a recomputation method without a separate 
tracking of attributes. Some comments acknowledged that the 
recomputation method could give taxpayers a double benefit from non-
base eroding deductions unless it required separate tracking of 
attributes for purposes of the BEAT. For example, one comment noted 
that the recomputation method would generally allow net operating loss 
carryovers to be used more rapidly for purposes of modified taxable 
income than for regular tax purposes because the taxable income 
limitation under section 172 on net operating loss deductions would be 
lower for regular tax purposes. As a result, the comment noted that if 
net operating loss carryovers are not separately tracked for purposes 
of the BEAT, a taxpayer may receive a double benefit from the non-base 
eroding deductions because those attributes reduce modified taxable 
income in the loss year, but if the attributes do not reduce the 
taxpayer's regular tax liability, the attributes would remain available 
to reduce modified taxable income in a future year. In contrast, 
another comment asserted that attributes should not be separately 
tracked because section 59A requires a snapshot of relative tax 
attributes that are applied independently to calculate taxable income 
and modified taxable income.
3. The Limited Recomputation Method
    Some comments recommended that the final regulations permit a 
taxpayer to elect to recompute its taxable income with respect to pre-
2018 net operating loss carryovers (the ``limited recomputation 
method''). Under this approach, comments generally suggested the 
taxpayer would use the add-back method except with respect to pre-2018 
net operating loss carryovers, which would be separately used and 
tracked for purposes of the BEAT. One comment suggested that this 
approach should apply to net operating losses generally, not only pre-
2018 net operating loss carryovers. Comments asserted that the proposed 
regulations have the effect of denying some taxpayers the economic 
benefit of their pre-2018 net operating loss carryovers because they do 
not allow pre-2018 net operating loss carryovers to offset full tax 
liability of taxpayers. Some comments acknowledged that using net 
operating loss carryovers under any of the three methods discussed in 
this Part V.A of the Summary of Comments and Explanation of Revisions 
are timing differences (rather than permanent differences that would 
deny economic benefit) because pre-2018 net operating loss carryovers 
are allowed against modified taxable income as and when those net 
operating loss carryovers are deducted for regular tax purposes. 
Comments generally asserted that limiting the utilization of net 
operating loss carryovers is arguably retroactive in nature because it 
limits the tax benefit of pre-2018 net operating loss carryovers and is 
unduly harsh because it may cause a taxpayer to pay tax on an amount 
greater than its economic income. Some comments also asserted that the 
limited recomputation approach is more consistent with pre-Act section 
172 and the policies supporting section 59A. The comments noted that 
the section 172 legislative history suggests that net operating loss 
deductions were allowed primarily to alleviate economic losses incurred 
by taxpayers and asserted that absent clear statutory language and 
expressed legislative intent to limit the use of net operating losses, 
taxpayers should be able to use the net operating loss carryovers 
without limitation in calculating their modified taxable income. 
However, the comment acknowledged that an attribute tracking system is 
required to prevent the same net operating loss carryovers from being 
deducted multiple times for the BEAT.
4. Add-Back Method Retained in Final Regulations
    The final regulations retain the add-back method. The add-back 
method takes into account all the statutory language in section 
59A(c)(1), which determines modified taxable income without regard to 
both the base erosion tax benefits and the base erosion percentage of 
net operating loss deductions. This approach is also consistent with 
the Joint Committee on Taxation's Explanation of the Act, which states 
that ``an applicable taxpayer's modified taxable income is its taxable 
income for the taxable year, increased by (1) any base erosion tax 
benefit with respect to any base erosion payment and (2) the base 
erosion percentage of any NOL deduction allowed under section 172 for 
such taxable year.'' Joint Comm. on Tax'n, General Explanation of 
Public Law 115-97 (``Bluebook''), at 403 (emphasis added). By contrast, 
the recomputation method conflicts with section 59A(c)(1). If taxable 
income is recomputed without any base erosion tax benefits for modified 
taxable income, it is a necessary premise that net operating loss 
carryovers would also be recomputed as BEAT-basis attributes, which, 
under the recomputation framework, would not include the effect of any 
base erosion tax benefits (because the recomputation method is without 
regard to base erosion tax benefits). However, that framework would 
make the language in section 59A(c)(1)(B)

[[Page 66989]]

superfluous or inexplicable because section 59A(c)(1)(B) addresses the 
percentage of base erosion tax benefits embedded in a net operating 
loss carryover, whereas a recomputed BEAT-basis net operating loss 
carryover would already exclude all base erosion tax benefits.\3\
---------------------------------------------------------------------------

    \3\ For example, assume that a domestic corporation (DC) is an 
applicable taxpayer that has a calendar year. In 2020, DC has gross 
income of $0, a deduction of $60x that is not a base erosion tax 
benefit, and a deduction of $40x that is a base erosion tax benefit. 
For regular tax purposes, DC has a net operating loss carryover 
within the meaning of section 172(b) of $100x. DC also has a base 
erosion percentage of 40 percent for the 2020 taxable year. Under 
the recomputation method, DC's taxable income would presumably be 
recomputed without regard to base erosion tax benefits, and as a 
result, DC would presumably have a BEAT-basis net operating loss 
carryover of $60x, computed as DC's excess of deductions over gross 
income, without regard to the $40x of deductions that are base 
erosion tax benefits.
    Assume further that in 2021, DC has gross income of $70x, and no 
current year deductions. For regular tax purposes, DC is permitted a 
net operating loss deduction of $56x (section 172(a) limits the 
regular tax deduction for net operating losses that originated after 
the Act to 80 percent of taxable income before the net operating 
loss deduction), and thus DC has regular taxable income of $14x 
($70x - $56x = $14x). Under the add-back method, DC's modified 
taxable income for 2021 would be computed as $36.4x, computed as 
regular taxable income of $14x, plus $0 base erosion tax benefits in 
2021, plus the section 59A(c)(1)(B) base erosion percentage of the 
net operating loss allowed under section 172, $22.4x ($56x x 40 
percent = $22.4x).
    Under the recomputation method, DC would presumably need to 
recompute its 2021 taxable income without regard to its base erosion 
tax benefits in 2021 (there are none in the example) and also 
without regard to the base erosion percentage of the net operating 
loss deduction allowed under section 172 for the taxable year 
($56x). Section 59A(c)(1)(B). However, the basic premise of the 
recomputation method is that DC has a BEAT-basis net operating loss 
carryover from 2020 of $60x that already excludes the 2020 base 
erosion tax benefits. DC's modified taxable income for 2021 might 
thus be computed as $14x ($70x gross income, reduced by $56x, which 
is the lesser of (i) the $60x BEAT-basis net operating loss 
carryover from 2020 or (ii) 80 percent of the taxable income ($70x) 
computed without regard to the section 172 deduction, or $56x). 
However that adaptation would render section 59A(c)(1)(B) 
irrelevant. If instead, section 59A(c)(1)(B) was taken into account 
in computing DC's modified taxable income, then DC's modified 
taxable income would include the erosion percentage (40 percent) of 
the BEAT-basis net operating loss carryover from 2020 ($60x), even 
though that BEAT-basis net operating loss carryover has already been 
stripped of any 2020 base erosion tax benefits. Thus, this 
adaptation that gives regard to section 59A(c)(1)(B) would seem to 
incongruously increase modified taxable income by $24x (40 percent 
of $60x = $24x). Some comments observed these anomalies, but no 
comments appear to provide a complete reconciliation of how the 
recomputation method would address the anomalies under the terms of 
the statute.
---------------------------------------------------------------------------

    Further, as some comments noted, the add-back method is more 
consistent with the statutory framework of section 59A because the add-
back method does not require additional rules regarding the treatment 
of separate tax attributes. The Treasury Department and the IRS have 
determined, and numerous comments acknowledged, that if the 
recomputation method were used, separate tracking of attributes would 
be required to avoid duplication of benefits. Unlike the alternative 
minimum tax that was repealed for corporations, the BEAT does not 
contain rules to address how a recomputation method would be 
implemented, including in the case of a section 381 transaction, a 
section 382 ownership change, or a deconsolidation. Thus, the 
recomputation methods would require the Treasury Department and the IRS 
to construct such rules by regulation. Moreover, as also identified by 
comments, the add-back method is simpler and easier to comply with and 
administer for both taxpayers and the IRS than the recomputation method 
or other methods (including a method by which a taxpayer could elect to 
apply the add-back or recomputation method) because the recomputation-
based methods would require the taxpayer to calculate an entire 
parallel tax return and schedules to take into account iterative 
effects, whereas the add-back approach only requires addition, rather 
than iterative effects. As a result of these factors, the Treasury 
Department and the IRS have determined that it is not appropriate to 
permit the recomputation method.
    These reasons for rejecting the recomputation method also apply to 
the limited recomputation method. Because the recomputation approach 
generally is not consistent with the statutory construct, it would be 
inappropriate to create a limited version of that approach to permit a 
taxpayer to use its pre-2018 net operating loss carryovers or all net 
operating loss carryovers. Section 59A does not provide special rules 
or preferences for pre-2018 net operating loss carryovers. In addition, 
the comments' assertions for pre-2018 net operating loss carryovers 
generally apply to subsequent net operating loss carryovers of certain 
taxpayers, and those carryovers would raise all the issues discussed.
    The claim that taxpayers are losing the benefit of their net 
operating loss carryovers as a result of the add-back method in the 
proposed regulations is erroneous. Net operating loss carryovers 
continue to offset regular taxable income. Section 59A does not change 
that result, as the net operating loss deduction is allowed against 
modified taxable income as and when deducted for regular tax purposes. 
Section 172 does not provide that if a taxpayer has a net operating 
loss carryover then the taxpayer does not have to pay any taxes under 
any provision. Because the base erosion percentage of any net operating 
loss deduction is taken into account in determining modified taxable 
income, section 59A(c)(1)(B) specifically contemplates that a taxpayer 
may not obtain the full benefit of net operating loss carryovers even 
in a year in which the taxpayer uses a net operating loss deduction to 
fully offset taxable income for purposes of its regular tax liability.
    Moreover, the statutory language in section 59A does not explicitly 
limit that provision to net operating loss deductions related to 
carryovers that originated in tax years beginning after December 31, 
2017; rather, that limitation resulted from the vintage year approach 
adopted in proposed Sec.  1.59A-4(b)(2)(ii). Absent that provision, or 
if proposed Sec.  1.59A-4(b)(2)(ii) had adopted a current year base 
erosion percentage approach, the add-back provision in section 
59A(c)(1)(B) could have also applied to net operating loss deductions 
related to carryovers that originated in pre-2018 tax years. See Part 
V.B of this Summary of Comments and Explanation of Revisions for a 
discussion of the comments related to proposed Sec.  1.59A-4(b)(1) and 
limiting the net operating loss deduction for purposes of computing 
modified taxable income.

B. Amount of Net Operating Loss Deduction From Net Operating Loss 
Carryovers

    Under the add-back method, section 59A(c) provides that the 
computation of modified taxable income starts with the taxpayer's 
regular taxable income for the year. Section 172(a) generally provides 
that for regular tax purposes a deduction is allowed for the tax year 
in an amount equal to the net operating loss carryover to the year. For 
net operating loss carryovers originating after the Act, the net 
operating loss deduction is generally limited for regular tax purposes 
to 80 percent of taxable income computed without regard to the net 
operating loss deduction. Section 172(a). For net operating loss 
carryovers originating before the Act, the net operating loss carryover 
deduction generally is not limited for regular tax purposes. Section 
13302(e)(1) of the Act. Proposed Sec.  1.59A-4(b)(1) provides that 
taxable income may not be reduced below zero as a result of net 
operating loss deductions. The preamble to the proposed regulations 
explains that the rule is necessary because section 172(a) could be 
read to provide that the same net operating loss carryover could reduce 
modified taxable income in multiple years. REG-104259-18, 83 FR 65965 
(December 21, 2018).

[[Page 66990]]

    The preamble to the proposed regulations provides an example where 
a taxpayer has a net operating loss carryover of $100x that arose in a 
taxable year beginning before January 1, 2018. REG-104259-18, 83 FR 
65965 (December 21, 2018). In a subsequent year, the taxpayer has 
taxable income of $5x before taking into account the $100x net 
operating loss carryover. Absent the rule in proposed Sec.  1.59A-
4(b)(1), the taxpayer might claim the entire $100x net operating loss 
carryover as a $100x deduction in that year to create a $95x taxable 
loss for determining modified taxable income, even though $95x of the 
net operating loss carryover would remain as a carryover to future 
years. Proposed Sec.  1.59A-4(b)(1) ensures that a net operating loss 
is taken into account only once in determining a taxpayer's modified 
taxable income.
    Some comments recognized the need for proposed Sec.  1.59A-4(b)(1) 
consistent with the preamble to the proposed regulations. A comment 
acknowledged that if the net operating loss carryover deductions are 
not limited to the amount of taxable income, those net operating losses 
could reduce taxable income--and therefore the taxpayer's BEAT 
liability--multiple times. Another comment noted that, without proposed 
Sec.  1.59A-4(b)(1), allowing net operating loss carryovers to be taken 
into account for modified taxable income to the same extent as general 
taxable income would give rise to certain complex questions concerning 
net operating loss carryovers for general tax purposes.
    Other comments asserted that there is no authority in section 59A 
for limiting the net operating loss deduction to the amount of taxable 
income, that the rule in proposed Sec.  1.59A-4(b)(1) is contrary to 
the statute, and that the final regulations should permit taxable 
income to be negative as a result of net operating loss carryovers. 
Comments noted that modified taxable income is determined based on 
taxable income, which generally is gross income minus deductions 
allowed under chapter 1, including the net operating loss deduction. 
Another comment noted that with respect to the amount of net operating 
loss deduction in a taxable year, when Congress wants to place a floor 
on a number, it does so expressly; for example, section 59A(b)(1)(B) 
provides that regular tax liability is ``reduced (but not below 
zero).'' In contrast, there is no similar language in section 59A or 
section 172(a) prior to the Act for net operating loss deductions.
    Comments also asserted that the limitation on the use of net 
operating loss carryovers as deductions in a taxable year causes 
taxpayers to be liable for tax pursuant to the BEAT on their base 
erosion tax benefits even though they are not liable for regular income 
tax because of their net operating loss deductions that reduced regular 
taxable income to zero. Comments also asserted that the proposed 
regulations effectively reduce the extent to which the net operating 
loss carryforwards may be used.
    Other comments requested that the final regulations provide a 
transition to the proposed rule preventing taxable income to be 
negative as a result of a net operating loss deduction. One comment 
requested that final regulations provide for a deferral of the 
effective date of proposed Sec.  1.59A-4(b)(1) of one or two years. 
Another comment requested that final regulations provide that taxpayers 
may reduce their BEAT liability by (a) an amount equal to the pre-2018 
net operating loss carryover that offset taxable income, multiplied by 
(b) the difference between the regular income tax rate and the BEAT 
rate because section 59A should not retroactively reduce the value of 
the pre-2018 net operating loss carryovers. These comments also 
highlighted a situation where a taxpayer's regular taxable income is 
reduced entirely by available pre-2018 net operating loss carryovers, 
but the taxpayer also has base erosion tax benefits that increase 
modified taxable income, causing a BEAT liability. The comments 
asserted that imposing BEAT on this modified taxable income amounts to 
a retroactive reduction in the value of the taxpayer's pre-2018 net 
operating loss carryovers, and recommended that the final regulations 
adopt this methodology by which pre-2018 attributes are provided a 21 
percent tax rate benefit, which is similar to the limited recomputation 
method discussed in Part V.A of this Summary of Comments and 
Explanation of Revisions.
    These comments are not adopted in the final regulations. First, the 
comments focused on a technical reading of section 172(a) as it applies 
to net operating loss carryovers that originated before the Act. That 
version of section 172(a) did not expressly limit the amount of net 
operating loss deduction for regular tax purposes to 100 percent of 
taxable income computed without regard to the net operating loss 
deduction. As it existed before the Act, there was no reason to limit 
the section 172(a) deduction in this manner because before the Act 
there was no consequence to claiming a net operating loss deduction 
greater than 100 percent of current year taxable income. For example, 
before the Act, a taxpayer's net operating loss carryover was only 
reduced by the amount of net operating loss deduction that was actually 
used to reduce taxable income to zero. See Sec.  1.172-4(a)(3).
    In addition to the technical reading of section 172(a) as it 
applies to net operating loss carryovers that originated before the 
Act, the Treasury Department and the IRS continue to believe, 
consistent with some of the comments received, that limiting net 
operating loss deductions to the amount of taxable income for purposes 
of computing modified taxable income is necessary and appropriate to 
prevent net operating loss carryovers from being used multiple times to 
reduce modified taxable income. If the final regulations did not limit 
the amount of net operating loss carryover deductions for purposes of 
calculating modified taxable income, a taxpayer with a large pre-2018 
net operating loss carryover would be able to reduce modified taxable 
income in multiple years with the same net operating loss carryover, 
without reducing the net operating loss carryover for regular income 
tax purposes.
    The fact that taxpayers with sufficiently large pre-2018 net 
operating loss carryovers may be able to avoid paying regular income 
tax in a taxable year does not mean that those taxpayers should be 
permitted to offset the entire amount of their BEAT liability in that 
taxable year, or in other words, not be liable for tax under the BEAT. 
As discussed in Part V.A. of this Summary of Comments and Explanation 
of Revisions, the limitation on net operating loss deductions for 
determining modified taxable income impacts only the BEMTA. This 
limitation does not prevent the use of pre-2018 net operating loss 
carryover to reduce regular taxable income to zero. Further, to the 
extent a taxpayer's pre-2018 net operating loss carryovers exceed the 
taxpayer's taxable income, the taxpayer continues to use those 
remaining net operating loss carryovers in later years to offset some 
or all regular taxable income; and the taxpayer continues to reduce 
modified taxable income by the same amount in those later years.
    A comment asserted that the add-back method creates an economic 
disparity between similarly situated taxpayers because taxpayers 
without pre-2018 net operating loss carryovers can make more base 
erosion payments than taxpayers with pre-2018 net operating loss 
carryovers before being subject to BEAT liability. However, taxpayers 
with pre-2018 net operating loss carryovers are not similarly situated 
to taxpayers

[[Page 66991]]

without pre-2018 net operating loss carryovers, as the former are 
paying less regular income taxes than the latter, which is a factor in 
determining the amount of BEAT liability.
    One comment questioned why current year losses can result in 
negative taxable income for BEAT purposes, while net operating losses 
that are carried to a different year cannot result in negative taxable 
income in that different year. Proposed Sec.  1.59A-4(b)(1) permits 
taxpayers that have current year losses to use that negative income 
amount as a starting point for computing modified taxable income 
because the Treasury Department and the IRS determined that if 
taxpayers were not permitted to use that negative amount as a starting 
point for calculating modified taxable income, the base erosion tax 
benefits for that year could be double counted. That is, the base 
erosion tax benefits for that year could be included in modified 
taxable income for the current year and in the year the net operating 
loss carryover is used because of the add-back of the base erosion 
percentage of the net operating loss deduction in the year used. 
Because of this concern, the proposed regulations expressly permit 
current year losses to be taken into account as the starting point for 
computing modified taxable income. Proposed Sec. Sec.  1.59A-4(b)(1) 
and (c).
    Section 59A(i) provides a broad grant of regulatory authority, 
permitting the Secretary to prescribe regulations as may be necessary 
or appropriate to carry out the provisions of the section. For the 
reasons discussed, the Treasury Department and the IRS have determined 
that limiting the net operating loss deduction to taxable income in 
computing modified taxable income is within the grant of authority, and 
the final regulations do not adopt the comments requesting a different 
rule. The final regulations also do not adopt a rule providing a fixed 
21 percent tax rate benefit for all pre-2018 net operating loss 
carryovers. The fact that a taxpayer may have positive modified taxable 
income (resulting in a positive BEAT tax liability) even if the 
taxpayer has a lesser amount of regular taxable income because pre-2018 
net operating loss carryovers reduce taxable income is a part of the 
statutory framework of the BEAT; that is, imposing tax on a modified 
taxable income base. See also, the response to the limited 
recomputation method discussed in Part V.A of this Summary of Comments 
and Explanation of Revisions.

C. Use of Aggregate Base Erosion Percentage for Net Operating Loss 
Deductions

    Proposed Sec.  1.59A-4(b)(1) generally defines modified taxable 
income as a taxpayer's taxable income computed under chapter 1, 
determined without regard to base erosion tax benefits and the base 
erosion percentage of any net operating loss deduction under section 
172 for the taxable year. Under the proposed regulations, the base 
erosion percentage for the year that the net operating loss carryover 
arose (the ``vintage year'' base erosion percentage) is used to compute 
modified taxable income. Proposed Sec.  1.59A-4(b)(2)(ii). Although the 
computation of modified taxable income is made on a taxpayer-by-
taxpayer basis, the proposed regulations clarify that in computing the 
add-back for net operating loss deductions, the relevant base erosion 
percentage is the base erosion percentage for the aggregate group, 
which is used to determine whether the taxpayer is an applicable 
taxpayer.
    A comment noted that an aggregate base erosion percentage could 
potentially take into account deductions of another aggregate group 
member that are not otherwise included in a taxpayer's return. The 
comment questioned whether a more precise determination of a taxpayer's 
vintage year base erosion percentage is appropriate.
    The Treasury Department and the IRS have determined that the base 
erosion percentage that is applied to net operating loss deductions 
when computing modified taxable income should be computed on the basis 
of the taxpayer and its aggregate group in the same manner as the base 
erosion percentage that is computed for determining whether the 
taxpayer is an applicable taxpayer under section 59A(e). Section 
59A(e)(3) requires aggregation for purposes of computing the base 
erosion percentage that is used to determine whether a taxpayer is an 
applicable taxpayer and to determine the portion of net operating loss 
deductions that are included in computing modified taxable income 
pursuant to section 59A(c)(1)(B). Because Congress chose to determine 
the base erosion percentage on an aggregate basis, it follows that one 
aggregate group member's deductions can affect the base erosion 
percentage that will apply with respect to another member of the group. 
For these reasons, the final regulations do not revise the rules for 
determining the base erosion percentage that is applied to net 
operating loss deductions when computing modified taxable income.

D. Operation of Vintage Approach for Net Operating Losses

    Section 59A(c)(1)(B) provides that modified taxable income includes 
the base erosion percentage of any net operating loss deduction allowed 
under section 172 for the taxable year. Proposed Sec.  1.59A-
4(b)(2)(ii) provides that the base erosion percentage of the year in 
which the loss arose, or the ``vintage year,'' is used to compute 
modified taxable income rather than the base erosion percentage in the 
year in which the taxpayer takes the net operating loss deduction.
    One comment requested guidance on how the vintage year approach is 
applied when in the vintage year the taxpayer has both deductions that 
are base erosion tax benefits and deductions that are not base erosion 
tax benefits. The comment stated that it is not clear how to compute or 
order the base erosion percentage because the proposed regulations do 
not provide rules for determining which type of deductions were used in 
that vintage year to offset gross income, and which deductions were 
carried forward as net operating loss carryforwards. The comment 
provided an example in which the taxpayer in year 1 has gross income of 
$800x and deductions of $1000x that consist of $250x of base erosion 
tax benefits and $750x of non-base erosion tax benefits, resulting in a 
$200x net operating loss. The comment requested clarification for 
determining how the deductions are ordered for determining the base 
erosion percentage of the year 1 $200x net operating loss carryover 
when that carryover is deducted in a later year.
    The final regulations do not revise the vintage year rule because 
section 59A(c)(1)(B) and the proposed regulations already provide that 
the base erosion percentage used with respect to the net operating loss 
deduction is the base erosion percentage of the taxpayer in the 
relevant taxable year (in this example, $250x/$1000x = 25 percent). 
That is, no specific ordering rule is required because the base erosion 
percentage calculation for the vintage year takes into account a 
proportionate amount of each type of deduction (or $250x divided by 
$1000x in the example).
    Another comment suggested that in applying the vintage year 
approach to net operating loss deductions, a simplifying convention 
should be provided to address target corporations that have net 
operating loss carryovers and become members of a taxpayer's

[[Page 66992]]

aggregate group by acquisition. The comment suggested that taxpayers be 
permitted to elect to use their current year base erosion percentage 
with respect to the net operating loss deductions, rather than the 
vintage year base erosion percentage of the target because it may be 
complicated to determine the target's vintage year base erosion 
percentage. The comment specifically noted the difficulty in cases 
where the target was not an applicable taxpayer in the vintage year. 
The final regulations do not adopt this elective approach. Because the 
net operating loss carryover is an attribute of the target corporation, 
the target corporation is required to maintain documentation to support 
both the carryover amount and the other aspects of its attributes that 
affect the target corporation's tax liability--namely the base erosion 
percentage with respect to its net operating loss carryovers. 
Accordingly, the acquiring corporation should be able to obtain the 
information necessary to determine the target corporation's vintage 
year base erosion percentage.

VI. Comments and Changes to Proposed Sec.  1.59A-5--BEMTA

    Proposed Sec.  1.59A-5 contains rules regarding the calculation of 
BEMTA and provides the base erosion and anti-abuse tax rate that 
applies to the taxpayer's taxable year. The proposed regulations 
provide that an applicable taxpayer computes its BEMTA for the taxable 
year to determine its liability under section 59A(a). Proposed Sec.  
1.59A-5(b). Generally, the taxpayer's BEMTA equals the excess of (1) 
the applicable tax rate for the taxable year (``BEAT rate'') multiplied 
by the taxpayer's modified taxable income for the taxable year over (2) 
the taxpayer's adjusted regular tax liability for that year. Proposed 
Sec.  1.59A-5(b). In determining the taxpayer's adjusted regular tax 
liability for the taxable year, credits (including the foreign tax 
credit) are generally subtracted from the regular tax liability amount. 
Proposed Sec.  1.59A-5(b)(2). Consistent with section 59A(b)(1)(B), the 
proposed regulations provide that for taxable years beginning before 
January 1, 2026, the credits allowed against regular tax liability 
(which reduce the amount of regular tax liability for purposes of 
calculating BEMTA) are not reduced by the research credit determined 
under section 41(a) or by a portion of applicable section 38 credits.
    To prevent an inappropriate understatement of a taxpayer's adjusted 
regular tax liability, the proposed regulations provide that credits 
for overpayment of taxes and for taxes withheld at source are not 
subtracted from the taxpayer's regular tax liability because these 
credits relate to U.S. federal income tax paid for the current or 
previous year. Proposed Sec.  1.59A-5(b)(3)(i)(C) and (ii).

A. Applicability of Aggregation Rule to BEMTA

    The proposed regulations provide that the computations of modified 
taxable income and BEMTA are done on a taxpayer-by-taxpayer basis. That 
is, the aggregate group concept is used solely for determining whether 
a taxpayer is an applicable taxpayer, and does not apply to the 
computations of modified taxable income and the BEMTA. The preamble to 
the proposed regulations explains that if taxpayers calculated BEMTA 
differently depending on their differing views of the base on which the 
BEAT should be calculated (that is, aggregate group, consolidated 
group, individual company), this could lead to inequitable results 
across otherwise similar taxpayers. REG-104259-18, 83 FR 65974 
(December 21, 2018).
    The proposed regulations also explain that it is expected to be 
less costly for taxpayers to calculate BEMTA on a taxpayer-by-taxpayer 
basis because the statutory framework of section 59A applies in 
addition to the regular tax liability of a taxpayer. Calculating BEAT 
liability at an aggregate level, for example, would require any BEAT 
liability to be reallocated among the separate taxpayers.
    Comments requested that electing taxpayers be permitted to apply 
the aggregation rules of section 59A(e)(3) to determine their modified 
taxable income and BEMTA. Electing taxpayers would effectively compute 
modified taxable income and BEMTA at the level of the aggregate group 
rather than at the level of the separate taxpayer.
    The comments explained that aggregation would permit a group with 
multiple consolidated returns to be given full credit for the group's 
contributions to the U.S. tax base. Comments further explained that, in 
certain instances, business, legal, or regulatory reasons prevent 
groups with multiple taxpayers from forming an affiliated group of 
corporations within the meaning of section 1504 that can file a single 
consolidated return. However, the comments asserted that these groups 
still represent a single economic unit where they have a common parent 
and overall management, share services, and are generally treated as a 
single employer.
    Comments also suggested that an election to apply the aggregation 
rules for BEMTA would prevent inequitable results in the application of 
the BEAT. For example, some comments suggested that it would be 
inequitable for a single consolidated group within an aggregate group 
that had a large amount of NOLs, minimal regular tax liability, and 
little to no base erosion payments to be subject to the BEAT as a 
result of a separate consolidated group's high base erosion percentage.
    The comments suggested that an aggregate approach would result in 
an insignificant amount of additional complexity and little additional 
burden to taxpayers and the government. Comments also made suggestions 
regarding particular requirements of the election, such as requirements 
that each taxpayer joining the election have the same taxable year-end, 
agree to provide the IRS with all information needed to compute the 
aggregate BEAT liability, agree to be allocated a pro-rata share of the 
aggregate BEAT liability, and give consent for the statute of 
limitations to remain open until the audits of all group members with 
respect to the information used to determine that aggregate BEAT 
liability have closed.
    The final regulations do not adopt the recommendations. The 
Treasury Department and the IRS recognize that, in determining whether 
a taxpayer is an applicable taxpayer, and for determining certain 
computational matters relating to modified taxable income and the 
BEMTA, section 59A applies by reference to the taxpayer and the members 
of its aggregate group. Section 59A does not explicitly extend that 
aggregate group treatment to the computation of a taxpayer's BEMTA or 
the resulting tax liability. The rules relating to the aggregate group 
concept are complex, and they produce meaningful differences from the 
single-entity concepts in the consolidated return regulations. See Part 
III of this Summary of Comments and Explanation of Revisions. Section 
1502 and the regulations thereunder contain detailed rules for 
implementing the single taxpayer elements of the consolidated return 
regulations. No similar rules are expressly contemplated in section 59A 
with respect to BEMTA. Adding similar rules to these final regulations 
would add significant complexity and would require the IRS to audit a 
parallel BEMTA computation system. Consistent with section 1502 and the 
regulations thereunder, aggregate groups of taxpayers that file a 
consolidated return must compute BEMTA on a single-entity basis under 
section 59A and the final regulations. See Sec.  1.1502-59A(b). 
Therefore, the final regulations continue to provide that BEMTA is 
calculated on a taxpayer-by-taxpayer basis.

[[Page 66993]]

B. Treatment of General Business Credits and Foreign Tax Credits

    A comment noted that taxpayers may have credits generated in 
taxable years beginning before January 1, 2018, that carry forward to 
be used in taxable years beginning after December 31, 2017. In the case 
of net operating losses that arose in taxable years beginning before 
January 1, 2018, and that are deducted as carryovers in taxable years 
beginning after December 31, 2017, the comment also noted that proposed 
Sec.  1.59A-4(b)(2)(ii) provides that those deductions are excluded 
from modified taxable income.
    The comment requested that the final regulations exclude section 38 
credits and foreign tax credits generated in pre-2018 taxable years 
from the definition of credits allowed under chapter 1 of the Code. As 
a result of this request, these credits would not be subtracted from 
the regular tax liability amount in determining BEMTA. Alternatively, 
the comment requested that the partial exclusion of section 38 credits 
from the calculation of BEMTA in proposed Sec.  1.59A-5(b)(3)(i)(B) be 
extended to foreign tax credits.
    The final regulations do not adopt this comment. With respect to 
net operating losses that arose in taxable years beginning before 
January 1, 2018, the exclusion of these deductions from the calculation 
of modified taxable income results from two statutory elements: (i) 
Section 59A(c)(1) provides that the starting point for modified taxable 
income is ``taxable income of the taxpayer computed under [chapter 1 of 
the Code] for the taxable year . . .''; that is, modified taxable 
income starts with taxable income, as reduced for any net operating 
loss deduction under section 172; and (ii) section 59A(c)(1)(B) 
provides that modified taxable income includes, or adds back to taxable 
income, the base erosion percentage of any NOL deduction under section 
172 for the taxable year. This statutory framework for determining 
modified taxable income establishes that section 59A permits the net 
operating loss deduction to reduce some or all of the current year's 
pre-NOL taxable income, but that a portion of the tax benefit from that 
NOL deduction is added back to taxable income. Further, Sec.  1.59A-
4(b)(2)(ii) applies the base erosion percentage of the year in which 
the loss arose for this purpose, which effectively means that net 
operating losses incurred in taxable years ending on or before December 
31, 2017, are entirely excluded from the calculation from modified 
taxable income when those deductions are used to reduce or eliminate 
regular taxable income. In contrast to this explicit statutory 
framework that addresses the lifecycle of the net operating loss 
carryforward, section 59A does not provide a similar rule for credits. 
Instead, section 59A(b)(1)(B) provides that all credits allowed under 
chapter 1 of the Code against regular taxable income for the taxable 
year are excluded from the calculation of BEMTA, except for 
specifically enumerated credits that are partially or fully allowed to 
reduce BEMTA. Because section 59A(b)(1) refers to all credits allowed 
to reduce taxable income during the taxable year and makes no 
distinction as between those credits that originated in the current 
taxable year or a prior taxable year, the Treasury Department and the 
IRS have determined that the proposed regulations are consistent with 
the statute, and the final regulations retain the same rules with 
respect to section 38 credits and foreign tax credits.

C. Exclusion of AMT Credits From Credits Reducing Regular Tax Liability

    Generally, a taxpayer's BEMTA equals the excess of (1) the 
applicable tax rate for the year multiplied by the taxpayer's modified 
taxable income for the taxable year over (2) the taxpayer's adjusted 
regular tax liability for that year. In determining the taxpayer's 
adjusted regular tax liability for the taxable year, credits are 
generally subtracted from the regular tax liability amount. To prevent 
an inappropriate understatement of a taxpayer's adjusted regular tax 
liability, the proposed regulations provide that credits for 
overpayment of taxes and for taxes withheld at source are not 
subtracted from the taxpayer's regular tax liability because these 
credits relate to U.S. federal income tax paid for the current or 
previous year.
    Historically, an alternative minimum tax (``AMT'') was imposed on a 
corporation to the extent the corporation's tentative minimum tax 
exceeded its regular tax. If a corporation was subject to AMT in any 
year, the amount of AMT was allowed as an AMT credit in any subsequent 
taxable year to the extent the corporation's regular tax liability 
exceeded its tentative minimum tax in the subsequent year. Bluebook, 
pp. 92, 94.
    The Act repealed the corporate AMT, and allows the corporate AMT 
credit to offset the entire regular tax liability of the corporation 
for a taxable year. In addition, the AMT credit is allowable and 
generally refundable for a taxable year beginning after 2017 and before 
2022 in an amount equal to 50 percent (100 percent in the case of 
taxable years beginning in 2021) of the excess (if any) of the minimum 
tax credit for the taxable year over the amount of the credit allowed 
for the year against regular tax liability. Bluebook p. 97.
    Comments requested that AMT credits be excluded from the 
calculation of credits that reduce adjusted regular tax liability 
because they represent income taxes imposed in a previous tax year and 
allowed as credits in a subsequent tax year. The Treasury Department 
and the IRS agree with these comments. Accordingly, Sec.  1.59A-5(b)(3) 
provides that AMT credits, like overpayment of taxes and for taxes 
withheld at source, do not reduce adjusted regular tax liability for 
purposes of section 59A.

D. Rules Relating to Banks and Registered Securities Dealers for 
Purposes of Computing the Base Erosion Percentage and Determining the 
BEAT Rate for Computing BEMTA

    Generally, under proposed Sec.  1.59A-2(e)(1), a taxpayer, or the 
aggregate group of which the taxpayer is a member, satisfies the base 
erosion percentage test to determine applicable taxpayer status if its 
base erosion percentage is at least three percent. However, section 
59A(e)(1)(C) and proposed Sec.  1.59A-2(e)(2)(i) provide that a lower 
threshold of two percent applies if the taxpayer is a member of an 
affiliated group (as defined in section 1504(a)(1)) that includes a 
domestic bank or registered securities dealer. Proposed Sec.  1.59A-
2(e)(2)(ii) applies this two-percent threshold to the aggregate group 
of which a taxpayer is a member that includes a bank or registered 
securities dealer that is a member of an affiliated group. Proposed 
Sec.  1.59A-2(e)(2)(iii) provides a de minimis exception to this lower 
two-percent base erosion percentage threshold in the case of an 
aggregate group or consolidated group that has de minimis bank or 
registered securities dealer activities as measured by gross receipts. 
Specifically, proposed Sec.  1.59A-2(e)(2)(iii) provides that an 
aggregate group that includes a bank or a registered securities dealer 
that is a member of an affiliated group is not treated as including a 
bank or registered securities dealer for a taxable year if the total 
gross receipts of the aggregate group attributable to the bank or the 
registered securities dealer represent less than two percent of the 
total gross receipts of the aggregate group (or consolidated group if 
there is no aggregate group). Even if a taxpayer qualifies for the de 
minimis exception to the lower base erosion percentage test threshold, 
proposed Sec.  1.59A-5(c)(2) provides that the BEAT rate is increased 
by an additional one percent for any

[[Page 66994]]

taxpayer that is a member of an affiliated group that includes a bank 
or registered securities dealer. See section 59A(b)(3) (requiring that 
the base erosion and anti-abuse tax rate in effect for the taxable year 
for these taxpayers must be increased by one percentage point).
    A comment requested that the final regulations provide for a higher 
de minimis threshold of five percent and clarify that in characterizing 
the income of a corporation with a bank or securities dealer division 
for purposes of this threshold, only the gross receipts arising from 
the conduct of the banking or securities business would be taken into 
account. The Treasury Department and the IRS have determined that this 
modification to the de minimis threshold is not warranted because this 
de minimis exception in the proposed regulations was developed based on 
a qualitative assessment of a very small degree of activities to 
justify a regulatory-based exception to the statutory provision that 
applies to a bank or registered securities dealer. Accordingly, the 
final regulations retain the two-percent de minimis threshold.
    Comments supported the proposed regulations' de minimis exception 
to the lower base erosion percentage threshold and suggested that a 
similar exception be created regarding the increased BEAT rate for a 
taxpayer that is a member of an affiliated group with de minimis gross 
receipts attributable to banking or securities dealer activities. In 
instances where the base erosion percentage exceeds three percent, the 
comments questioned the appropriateness of applying the BEAT rate add-
on of one percent to the non-financial members of the affiliated group 
when the gross receipts of the financial members are insignificant 
relative to the non-financial members.
    The final regulations adopt this comment by revising Sec.  1.59A-
5(c)(2) to provide that the additional one percent add-on to the BEAT 
rate will not apply to a taxpayer that is part of an affiliated group 
with de minimis banking and securities dealer activities.
    A comment recommended that an additional exception to the increased 
BEAT rate should be provided where the bank or securities dealer 
members of an affiliated group make no more than a de minimis amount of 
base erosion payments, measured by reference to aggregate affiliated 
group base erosion payments. The final regulations do not adopt this 
recommendation because the base erosion percentage test already 
operates as a statutory rule that limits the BEAT to taxpayers (without 
regard to any particular type of business) that have a relatively low 
degree of base erosion payments.
    A comment requested that the final regulations include a transitory 
ownership exception to apply where a bank or securities dealer is a 
member of an affiliated group for only a short period (such as 90 days) 
during the taxable year. The stated purpose of this request was to 
allow time for a taxpayer that acquires a group that includes a bank or 
registered securities dealer to dispose of the bank or securities 
dealer member of a target affiliated group without causing the entire 
acquiring affiliated group to become subject to the higher BEAT rate 
applicable to taxpayers with bank or registered securities dealer 
members. The Treasury Department and the IRS decline to expand the 
regulatory de minimis exception to include an exception based on short-
term ownership, but note that a taxpayer in this situation may be 
eligible for the de minimis regulatory exception if the bank and 
securities dealer operations are relatively small. If the operations 
are not sufficiently small, the statutory rules that apply to banks and 
registered securities dealers would no longer apply in taxable years 
after the disposition of the bank or securities dealer.
    A comment observed that the rule in the proposed regulations 
extending the lower base erosion percentage threshold to the entire 
aggregate group that includes a bank or registered securities dealer is 
not supported by the language of section 59A. The comment proposed that 
the proper application of section 59A requires that the lower base 
erosion percentage should be limited to only the affiliated group that 
includes a bank or registered securities dealer, and not the remainder 
of the taxpayer's aggregate group. The final regulations do not adopt 
this comment. The Treasury Department and the IRS note that section 
59A(e)(3) specifically requires aggregation for purposes of computing 
the base erosion percentage. Further, the implication of the comment is 
that in measuring whether a particular taxpayer has a base erosion 
percentage that is greater than the prescribed level in section 
59A(e)(3)(C), the threshold level would be blended. That is, under the 
approach recommended by the comment, a taxpayer with a bank or 
securities dealer in its aggregate group would compute a relative 
weighting of the bank/dealers (two percent threshold) vs. non-bank/
dealers (three percent threshold) in order to compute a blended 
threshold that is used for the base erosion percentage test. There is 
no indication in the statutory language supporting this approach. 
Accordingly, no changes are made to the final regulations in this 
regard.

E. Applicability of Section 15 to the BEAT Rate

    Section 59A(b)(1)(A) provides that the base erosion minimum tax 
amount of an applicable taxpayer for any taxable year is the excess of 
an amount equal to 10 percent (5 percent in the case of taxable years 
beginning in calendar year 2018) of the modified taxable income of the 
taxpayer for the taxable year. Proposed Sec.  1.59A-5(c) provides the 
base erosion and anti-abuse tax rates that apply for purposes of 
calculating the BEMTA. The base erosion and anti-abuse tax rate is five 
percent for taxable years beginning in calendar year 2018 and 10 
percent for taxable years beginning after December 31, 2018, and before 
January 1, 2026. Proposed Sec.  1.59A-5(c)(1)(i) and (ii). Proposed 
Sec.  1.59A-5(c)(3) provides that section 15 does not apply to any 
taxable year that includes January 1, 2018, and further provides that 
for a taxpayer using a taxable year other than the calendar year, 
section 15 applies to any taxable year beginning after January 1, 2018. 
In the case of taxpayers that use a taxable year other than the 
calendar year and that includes January 1, 2019, this proposed 
regulation provides that section 15 applies to the change in the 
section 59A tax rate from 5 percent to 10 percent, based on an 
effective date of January 1, 2019.
    Several comments asserted that final regulations should provide 
that section 15 applies only to the change in tax rate set forth in 
section 59A(b)(2) and should not apply to the change in tax rate 
included in section 59A(b)(1)(A) for taxable years beginning in 
calendar year 2018. The final regulations adopt this comment. In 
adopting this comment that section 15 not apply to the change in tax 
rate included in section 59A(b)(1)(A) for taxable years beginning in 
calendar year 2018, the final regulations provide no inference as to 
the application of section 15 to other provisions of the Code that do 
not set forth an explicit effective date.

VII. Comments and Changes to Proposed Sec.  1.59A-6--Qualified 
Derivative Payments

    Proposed Sec.  1.59A-6 provides guidance regarding QDPs.

A. Scope of the QDP Exception

    Proposed Sec.  1.59A-6(b) defines a QDP as a payment made by a 
taxpayer to a foreign related party pursuant to a derivative with 
respect to which the taxpayer (i) recognizes gain or loss as if the 
derivative were sold for its fair market value on the last business day 
of

[[Page 66995]]

the taxable year (and any additional times as required by the Code or 
the taxpayer's method of accounting); (ii) treats any recognized gain 
or loss as ordinary; and (iii) treats the character of all items of 
income, deduction, gain, or loss with respect to a payment pursuant to 
the derivative as ordinary. The definition in the proposed regulations 
adopts the statutory definition of a QDP contained in section 
59A(h)(2)(A). The QDP exception under the statute and the proposed 
regulations is subject to further limitations that are discussed in 
Parts VII.B and C of this Summary of Comments and Explanation of 
Revisions.
    A comment requested that the scope of the QDP definition be 
expanded. The comment requested that the final regulations extend the 
scope of the QDP exception so that multinational corporations that use 
a centralized hedging center structure can benefit from this exception 
from the definition of a base erosion payment with respect to their 
outbound related-party hedging payments. The comment stated that 
taxpayers in the oil and gas sector often do not adopt a mark-to-market 
method of tax accounting for a variety of business and tax-related 
reasons. The comment recommended that the final regulations adopt a 
distinct QDP exception that would be applicable to oil and gas hedging 
centers (as well as any similarly situated hedging centers). The 
comment requested that this QDP exception exclude related-party hedging 
payments from the scope of base erosion payments, without regard to 
whether the taxpayer satisfies the requirement in section 
59A(h)(2)(A)(i) that the taxpayer accounts for the underlying commodity 
derivative on a mark-to-market basis. As an alternative, the comment 
suggested that the final regulations could interpret the mark-to-market 
requirement of section 59A(h)(2)(A)(i) broadly to cover taxpayers that 
undertake mark-to-market accounting for derivatives for either 
financial accounting or tax purposes.
    For a derivative payment to qualify for the QDP exception, section 
59A(h)(2)(A) requires that the taxpayer recognize gain or loss with 
respect to the derivative as if the derivative were sold for its fair 
market value on the last business day of the taxable year, and ``such 
additional times as required by this title or the taxpayer's method of 
accounting'' (emphasis added). The Treasury Department and the IRS, 
therefore, interpret section 59A as excluding a derivative from the QDP 
exception if the taxpayer does not adopt a mark-to-market method of tax 
accounting. In light of the statute's clear requirement for the QDP 
exception that a derivative must be treated as sold for its fair market 
value on the last business day of the taxable year (or more frequently, 
if required by the Code or the taxpayer's method of accounting), the 
final regulations do not adopt the comment. See Sec.  1.475(a)-4(d).

B. Sale-Repurchase Transactions and Securities Lending Transactions

    Section 59A(h)(1) provides that a QDP is not treated as a base 
erosion payment. To qualify for the QDP exception, the payment must be 
made with respect to a derivative. A derivative is generally defined in 
section 59A(h)(4) as any contract the value of which, or any payment or 
other transfer with respect to which, is directly or indirectly 
determined by reference to one or more listed items, including any 
share of stock in a corporation or any evidence of indebtedness. A 
derivative does not include any of the listed items. Section 59A(h)(3) 
excludes from the QDP exception any payment that would be treated as a 
base erosion payment if it were not made pursuant to a derivative (for 
example, interest on a debt instrument). Section 59A(h)(3) also 
excludes any payment properly allocable to a nonderivative component of 
a contract that contains derivative and nonderivative components.
    The preamble to the proposed regulations notes that a sale-
repurchase transaction satisfying certain conditions is treated as a 
secured loan for U.S. federal tax purposes, and therefore, is not a 
derivative. REG-104259-18, 83 FR 65962 (December 21, 2018). The 
preamble to the proposed regulations explains that ``[b]ecause sale-
repurchase transactions and securities lending transactions are 
economically similar to each other, the Treasury Department and the IRS 
have determined that these transactions should be treated similarly for 
purposes of section 59A(h)(4), and therefore payments on those 
transactions are not treated as QDPs.'' REG-104259-18, 83 FR 65963 
(December 21, 2018). As a result, proposed Sec.  1.59A-6(d)(2)(iii) 
provides that a derivative does not include any securities lending 
transaction, sale-repurchase transaction, or substantially similar 
transaction.
    Comments generally agreed that a sale-repurchase transaction that 
is treated as a secured loan for U.S. federal income tax purposes is 
not a derivative; therefore, comments acknowledged that a sale-
repurchase transaction that is treated as a secured loan for U.S. 
federal tax purposes is not eligible for the QDP exception under 
section 59A, regardless of the specific exclusion language in proposed 
Sec.  1.59A-6(d)(2)(iii). Certain comments explained that the nominal 
seller of the securities in a sale-repurchase transaction is treated as 
transferring the securities as collateral of a loan. Comments interpret 
current federal income tax law to provide that the nominal seller 
remains the tax owner of the securities when a sale-repurchase 
transaction is treated as a secured loan for federal income tax 
purposes. Therefore, when the nominal buyer of the securities receives 
payments with respect to the collateral securities (for example, in the 
case of an equity security, the dividend payments), and passes those 
payments on to the nominal seller (or otherwise credits the seller for 
the amount of the payments), the comments asserted that the nominal 
seller is treated as having directly received those payments from the 
issuer of the securities.
    In the context of section 59A, if the nominal seller in a sale-
repurchase transaction that is treated as a loan is a domestic 
corporation and the nominal buyer is a foreign related party, any 
interest paid with respect to the secured loan from the domestic 
corporation to the foreign related party would be a base erosion 
payment, not a QDP. In a sale-repurchase transaction that is treated as 
a loan for which the nominal seller is instead a foreign related party 
and the nominal buyer is a domestic corporation, the payments with 
respect to the security held by the nominal buyer as collateral for 
that transaction are treated as received by the nominal buyer for the 
benefit of the nominal seller. Because there is no regarded 
``substitute payment'' from the nominal buyer to the nominal seller, 
there cannot be a base erosion payment.
    Comments asserted that securities lending transactions and sale-
repurchase transactions are treated differently with respect to 
underlying payments or substitute payments as a result of proposed 
Sec.  1.59A-6(d)(2)(iii) even though the transactions are economically 
similar. Comments observed that in a typical fully-collateralized 
securities lending transaction, the securities lender transfers the 
securities to the securities borrower in exchange for an obligation by 
the borrower to make certain payments to the securities lender and 
return identical securities. Unlike a sale-repurchase transaction, 
comments remarked that this transaction results in a transfer of 
beneficial ownership of the securities to the securities borrower for 
U.S. federal income tax purposes. Comments noted that these securities 
lending transactions may arise in the ordinary course of business, for 
example, to facilitate a short sale of the

[[Page 66996]]

underlying security. In connection with the transfer of securities, the 
securities borrower provides cash or other collateral to the securities 
lender, typically with the same or greater value as the underlying 
security. Comments observed that the securities lender in these 
transactions can be viewed as both a lender of securities to the 
counterparty, and as the borrower of cash from the counterparty.
    Comments suggested that the final regulations should treat a 
collateralized securities lending transaction as consisting of two 
legs: (1) A loan of securities, or a ``securities leg'', and (2) a loan 
of cash, or a ``cash leg.'' Comments stated that the cash leg is simply 
a cash borrowing by the security lender. Many comments conceded that 
the cash leg of a securities lending transaction should not be eligible 
for the QDP exception because the cash leg is properly treated as a 
loan and any payments should be treated as interest. Certain of these 
comments observed that the treatment of the cash leg of a securities 
lending transaction as debt giving rise to interest payments is 
consistent with the broadly symmetrical treatment of securities lending 
transactions and sale-repurchase transactions that are treated as 
secured loans for U.S. federal income tax purposes.
    Comments, however, asserted that the securities leg of a securities 
lending transaction should be treated as a derivative that qualifies 
for the QDP exception. The comments argued that a securities leg meets 
the statutory requirement of a derivative because it represents a 
contract, which includes any short position, the value of which, or any 
payment or other transfer with respect to which, is (directly or 
indirectly) determined by reference to any share of stock in a 
corporation. By treating a substitute payment in a securities lending 
transaction as eligible for the QDP exception, those payments would 
receive similar treatment for purposes of section 59A as in the case of 
a sale-repurchase transaction that is treated as a secured loan. That 
is, in the sale-repurchase transaction, the remittances on the 
collateral by the nominal buyer to the nominal seller are treated as a 
payment from the issuer of the security to the nominal seller for U.S. 
federal income tax purposes.
    Some comments acknowledged that in certain circumstances, there is 
the potential to use a securities lending transaction as a financing. 
One comment described a scenario involving an uncollateralized 
securities borrowing by a domestic corporation of relatively risk-free 
debt, such as short-term Treasury bills, from a foreign related party. 
As a second step, the domestic corporation immediately sells the 
Treasury bills for cash; after a short period, the taxpayer buys even 
shorter-term Treasury bills and redelivers them to the lender. Comments 
acknowledged that in this situation, or in similar situations, the 
transaction may be viewed as economically equivalent to borrowing 
money, with the taxpayer exposed to the relatively small risk of 
changes in the value of the security (here, U.S. government-backed 
Treasury bills).
    Rather than excluding all securities lending transactions from QDP 
status, comments generally recommended that the final regulations adopt 
rules to address this particular risk. Some comments recommended 
adopting a specific operating rule to address this concern, including 
(i) providing that only contracts entered into in the ordinary course 
of the taxpayer's trade or business can qualify for the QDP exception, 
(ii) providing that only fully collateralized transactions can qualify 
for the QDP exception, or (iii) applying different rules for securities 
lending transactions involving relatively low-risk securities (such as 
Treasury bills) than for other securities that are subject to more 
market risk. Regarding fully collateralized securities lending 
transactions, some comments asserted that under certain bank regulatory 
regimes, other amounts outside of the actual collateral in the 
transaction may effectively serve as collateral due to the securities 
borrower's compliance with any specific regulatory regime governing 
securities borrowing. Some comments recommended that the final 
regulations adopt an anti-abuse rule rather than an operating rule to 
address this concern. One comment suggested an anti-abuse rule that 
excludes from the QDP exception transactions with specific debt-like 
features that make the transaction substantially similar to a 
financing, while another comment noted that it would be unduly 
burdensome to test contracts based on certain characteristics, 
particularly for taxpayers that engage in a high volume of these 
transactions in the ordinary course. This comment instead suggested 
that all securities lending transactions entered into for valid non-tax 
business purposes should be eligible for the QDP exception.
    In response to these comments, the final regulations make certain 
revisions to Sec.  1.59A-6(d)(2)(iii). First, Sec.  1.59A-6(d)(2)(iii) 
has been revised to more directly provide that a derivative contract as 
defined in section 59A(h)(4) does not include a sale-repurchase 
transaction or substantially similar transaction that is treated as a 
secured loan for U.S. federal income tax purposes. Second, Sec.  1.59A-
6(d)(2)(iii) is also revised to exclude from the definition of a 
derivative for purposes of section 59A(h) the cash leg of a securities 
lending transaction, along with cash payments pursuant to a sale-
repurchase transaction, or other similar transaction. The final 
regulations no longer expressly exclude securities lending transactions 
from the definition of a derivative contract in Sec.  1.59A-
6(d)(2)(iii). As a result, payments (such as a borrow fee) made with 
respect to the securities leg of a securities lending transaction may 
qualify as a QDP.
    To address the concern about securities lending transactions that 
have a significant financing component, the final regulations adopt the 
recommendation from comments to provide an anti-abuse rule. See Sec.  
1.59A-6(d)(2)(iii)(C). The anti-abuse rule in the final regulations 
includes criteria to limit the rule to situations that have been 
identified as presenting clear opportunities for abuse. The anti-abuse 
rule takes into account two factors: (a) Whether the securities lending 
transaction or substantially similar transaction provides the taxpayer 
with the economic equivalent of a substantially unsecured cash 
borrowing and (b) whether the transaction is part of an arrangement 
that has been entered into with a principal purpose of avoiding the 
treatment of any payment with respect to the transaction as a base 
erosion payment. The determination of whether a securities lending 
transaction or substantially similar transaction provides the taxpayer 
with the economic equivalent of a substantially unsecured cash 
borrowing takes into account arrangements that effectively serve as 
collateral due to the taxpayer's compliance with any U.S. regulatory 
requirements governing such transaction. The anti-abuse rule is based 
on these factors because the Treasury Department and the IRS are 
cognizant that an objective mechanical rule based on the level of 
collateralization may be difficult for both taxpayers and the IRS to 
apply, in particular due to the high volume of transactions issued 
under varying conditions.

C. QDP Reporting Requirements

    Section 59A(h)(2)(B) provides that no payment is a QDP for a 
taxable year ``unless the taxpayer includes in the information required 
to be reported under section 6038B(b)(2) \4\ [sic] with

[[Page 66997]]

respect to such taxable year such information as is necessary to 
identify the payments to be so treated and such other information as 
the Secretary determines necessary to carry out the provisions of this 
subsection.'' Proposed Sec.  1.59A-6(b)(2)(i) clarifies that no payment 
is a QDP unless the taxpayer reports the information required by the 
Secretary in proposed Sec.  1.6038A-2(b)(7)(ix). Proposed Sec.  
1.6038A-2(b)(7)(ix) identifies the specific information that a taxpayer 
needs to report to comply with the reporting requirement of section 
59A(h)(2)(B) and proposed Sec.  1.59A-6(b)(2)(i). The proposed 
regulations provide that the rule for reporting QDPs applies to taxable 
years beginning one year after final regulations are published in the 
Federal Register. Proposed Sec.  1.6038A-2(g). Before proposed Sec.  
1.6038A-2(b)(7)(ix) is applicable, a taxpayer is treated as complying 
with the QDP reporting requirement by reporting the aggregate amount of 
QDPs on Form 8991. Id.
---------------------------------------------------------------------------

    \4\ As enacted, section 59A(h)(2)(B) cross-references section 
6038B(b)(2). This cross-reference in section 59A(h)(2)(B) is a 
typographical error. Section 6038B(b)(2) does not relate to section 
59A. The correct cross-reference is to section 6038A(b)(2). The Act 
added reporting requirements for section 59A in section 6038A(b)(2). 
See Act, Sec.  14401(b).
---------------------------------------------------------------------------

1. Scope of QDP Reporting
    Section 1.6038A-1(c) generally defines a reporting corporation as 
either a domestic corporation that is 25-percent foreign-owned, or a 
foreign corporation that is 25-percent foreign-owned and engaged in 
trade or business within the United States. A comment recommended that 
the final regulations clarify that a failure to comply with the Form 
8991 reporting requirements by a taxpayer that is not a reporting 
corporation (within the meaning of Sec.  1.6038A-1(c)) does not affect 
the QDP status of any payments made by the taxpayer. The comment also 
recommended that the final regulations clarify the consequences of 
failing to comply with the Form 8991 QDP reporting requirements.
    Section 59A(h)(2)(B) requires that all taxpayers, whether or not 
the taxpayer is a reporting corporation within the meaning of section 
6038A, report QDPs in order for the exception to apply to any 
particular payment. The Treasury Department and the IRS interpret the 
language in section 59A(h)(2)(B) referencing section 6038B(b)(2) (``the 
information required to be reported under section 6038B(b)(2) [sic]'') 
as addressing the scope of information required to be reported rather 
than limiting the scope of taxpayers that must report in order to 
qualify derivatives as QDPs under section 59A(h). The final 
regulations, therefore, clarify that Sec.  1.59A-6(b)(2)(i) applies to 
all taxpayers (whether or not a taxpayer is a reporting corporation as 
defined in Sec.  1.6038A-1(c)) and that all taxpayers must report the 
information required by Sec.  1.6038A-2(b)(7)(ix) for a payment to be 
eligible for QDP status.
    Comments also requested additional guidance regarding the 
consequences when a taxpayer fails to comply with the QDP reporting 
requirements with respect to a particular payment. The proposed 
regulations provide that a failure by a taxpayer to report a particular 
payment as a QDP disqualifies only that payment and does not affect the 
taxpayer's properly reported payments. The final regulations retain 
that rule. In addition, Sec.  1.59A-6(b)(2)(i) provides that a taxpayer 
satisfies the reporting requirement by including a QDP in the aggregate 
amount of all QDPs (rather than the aggregate amount as determined by 
type of derivative contract as provided in proposed Sec.  1.6038A-
2(b)(7)(ix)(A)) on Form 8991 or a successor form.
    Another comment requested a reasonable cause exception to the QDP 
reporting requirements because treating a payment as a base erosion 
payment solely when a taxpayer failed to report the payments as a QDP 
would unfairly penalize a taxpayer for making an error. The Treasury 
Department and the IRS have determined that a reasonable cause 
exception is inappropriate because section 59A(h)(2)(B) provides that a 
taxpayer must identify all base erosion payments. A taxpayer must 
determine that a payment is eligible for the QDP exception and, 
therefore, properly excluded from the base erosion percentage 
calculation. Similarly, a taxpayer must determine that a payment is 
properly characterized as a QDP to properly determine modified taxable 
income for purposes of section 59A. In addition, a reasonable cause 
exception would make it more difficult for the IRS to administer 
section 59A. However, as discussed in Part VII.C.3 of this Summary of 
Comments and Explanation of Revisions, the final regulations provide a 
good faith standard that applies during the QDP transition period 
before the reporting set forth in Sec.  1.6038A-2(b)(7)(ix) is 
required. In addition, in response to comments, the transition period 
has been extended to 18 months.
2. Determining the Amount of QDP Payment
    A comment recommended that the final regulations clarify that 
taxpayers may use the net amount with respect to each derivative 
transaction to arrive at the aggregate QDP amount that must be reported 
on Form 8991. The comment noted that this approach would be consistent 
with the BEAT Netting Rule for mark-to-market transactions. See Part 
III.D of Summary of Comments and Explanation of Revisions. Generally, 
the Treasury Department and the IRS have adopted this comment. See 
Sec.  1.59A-6(b)(2)(iii). A taxpayer, however, must exclude from the 
net amount of a QDP any payment made with respect to a derivative that 
is either excluded from QDP status pursuant to section 59A9(h)(3) or 
otherwise treated as a type of payment that is not a derivative 
payment. See Sec.  1.59A-6(b)(3)(ii).
    Another comment requested excluding from QDP reporting requirements 
any payments with respect to securities lending transactions and sale-
repurchase transactions that are not regarded under generally accepted 
accounting principles (GAAP). The final regulations do not adopt this 
recommendation. Reporting QDPs is a statutory requirement to provide 
the IRS with data about transactions that have been excluded under the 
QDP exception, and the financial accounting for these transactions is 
not relevant to QDP status. Furthermore, the Treasury Department and 
the IRS have determined that the deferred applicability date and 
transition period, described in Part VII.C.3 of Summary of Comments and 
Explanation of Revisions, will provide taxpayers with adequate time to 
develop systems to track the information that may not have been 
previously maintained in accounting systems.
3. Applicability Date and Transition Period for QDP Reporting
    Comments asserted that taxpayers needed additional time before the 
final regulations regarding QDP reporting are applicable. Comments 
noted that before the enactment of section 59A, taxpayers generally 
were not required to separately track or account for certain 
transactions with foreign related parties. The Treasury Department and 
the IRS recognize that section 59A will require taxpayers to develop 
new systems to properly report QDPs; therefore, the final regulations 
extend the transition period for meeting the complete QDP reporting 
requirements until taxable years beginning Monday, June 7, 2021.
    Another comment requested additional guidance regarding the QDP 
reporting requirements that apply before the applicability date of the 
final regulations for these rules (the ``QDP transition period''). 
Specifically,

[[Page 66998]]

comments interpreted the QDP transition period as applying only to a 
reporting corporation as defined in Sec.  1.6038A-1(c). They 
recommended that all taxpayers be permitted to report QDPs on an 
aggregate basis during the QDP transition period and that the good 
faith effort standard for reporting QDPs during the transition period 
should apply to all taxpayers. The final regulations adopt these 
comments by clarifying that Sec.  1.6038A-2(b)(7)(ix) applies to a 
taxpayer whether or not the taxpayer is a reporting corporation as 
defined in Sec.  6038A-1(c). See Sec.  1.59A-6(b)(2)(i). In addition, 
the final regulations eliminate the rule in the proposed regulations 
requiring a taxpayer to report the aggregate amount of QDPs as 
determined by type of derivative contract, the identity of each 
counterparty, and the aggregate amount of QDPs made to each 
counterparty. The Treasury Department and the IRS anticipate that the 
aggregate amount of QDPs provides adequate information to allow the IRS 
to administer the QDP rules.

VIII. Comments and Changes to Proposed Sec.  1.59A-7--Application of 
BEAT to Partnerships

    Proposed Sec.  1.59A-7 provides rules regarding how partnerships 
and their partners are treated for purposes of the BEAT. The proposed 
regulations generally apply an aggregate approach in addressing the 
treatment of payments made by a partnership or received by a 
partnership for purposes of section 59A.

A. Partnership Contributions and Distributions

1. Request for Contribution Exception
    The proposed regulations treat a contribution to a partnership as a 
transaction between the partners that may result in a base erosion 
payment, including when a partnership with a domestic corporate partner 
receives a contribution of depreciable property from a foreign related 
party. Several comments requested a change to the approach taken in the 
proposed regulations. One comment asserted that the issuance of a 
partnership interest in exchange for a contribution to a partnership 
was not intended to be a base erosion payment covered by section 
59A(d)(2) and that subjecting inbound nonrecognition transactions to 
the BEAT seems contrary to the purpose of the Act, which the comment 
stated was to encourage taxpayers to relocate business functions and 
assets to the United States and expand business activities in the 
United States. The comment noted that if Congress intended to subject 
nonrecognition transactions to the BEAT, it would have done so more 
explicitly.
    Other comments generally asserted that nonrecognition transactions 
should not be subject to the BEAT. Some of these comments specifically 
addressed section 721 transactions and recommended that the same 
exception for section 351 transactions that is discussed in Part IV.B.3 
of this Summary of Comments and Explanation of Revisions apply to 
section 721(a) transactions.
    In contrast, a comment noted that applying an aggregate approach to 
partnerships for purposes of the BEAT was consistent with the purposes 
of the statute. The comment asserted that treating a contribution of 
property in exchange for a partnership interest as a potential base 
erosion payment is consistent with the concept of treating a 
partnership as an aggregate of its partners and with the purposes of 
section 59A. The comment explained that to the extent there is a base 
eroding transaction when property (such as depreciable property) is 
contributed to a partnership under section 721, it is the acquisition 
of a proportionate share of new property by the existing partners from 
a contributing partner (assuming that partner is a foreign related 
party). The comment also explained that the existing partners would 
have paid for the new property with a proportionate share of the 
existing assets of the partnership. In addition, the comment noted that 
a contributing partner (such as a domestic corporation) could be 
acquiring a proportionate share of the partnership's existing assets 
(where one or more partners of the partnership are foreign related 
parties).
    The final regulations do not adopt the comments requesting an 
exception for nonrecognition transactions involving partnerships. The 
general premise of the aggregate approach to transactions involving 
partners and partnerships in both the proposed regulations and the 
final regulations is to treat partners as engaging in transactions 
directly with each other, not as engaging in transactions with the 
partnership as a separate entity (solely for purposes of section 59A). 
See Sec.  1.59A-7(b) and (c); proposed Sec.  1.59A-7(b)(1)-(3); REG-
104259-18, 83 FR 65965 (December 21, 2018). The Treasury Department and 
the IRS acknowledge that the final regulations include an exception for 
specified corporate nonrecognition transactions that is discussed in 
Part IV.B.3 of the Summary of Comments and Explanation of Revisions, 
which presents some similarity with the types of transactions 
contemplated by this comment. For example, if a domestic corporation 
and a foreign related party each contribute depreciable property to a 
new domestic corporation in exchange for stock of the new domestic 
corporation in a transaction that qualifies under section 351(a), the 
new domestic corporation generally will not be treated as making a base 
erosion payment in exchange for the depreciable property pursuant to 
the new exception in the final regulations for specified corporate 
nonrecognition transactions that is discussed in Part IV.B.3 of the 
Summary of Comments and Explanation of Revisions. In contrast, if the 
same domestic corporation and a foreign related party each contribute 
depreciable property to a new partnership in exchange for interests in 
the partnership in a transaction that qualifies under section 721(a), 
the transaction is treated as a partner-to-partner exchange that may 
result in a base erosion payment solely for purposes of section 59A, 
with no specific exception adopted in the final regulations.
    The final regulations do not extend the exception for specified 
corporate nonrecognition transactions to partnership transactions 
because that treatment would be generally inconsistent with the 
approach of treating partners in a partnership as engaging in 
transactions with each other. The preamble to the proposed regulations 
states that the Treasury Department and the IRS determined that a rule 
that applies the aggregate principle consistently is necessary to align 
the treatment of economically similar transactions. REG-104259-18, 83 
FR 65956, 65967 (Dec. 21, 2018).
    The adoption of a section 721(a) exception to the BEAT could permit 
related parties to use a partnership to avoid a transaction that would 
be a base erosion payment if that transaction occurred directly among 
the partners. The Treasury Department and the IRS acknowledge that in 
some respects, a similar argument could be made against adopting the 
exception for specified corporate nonrecognition transactions that 
applies to the section 351(a) example that is described in this Part 
VIII.A.1; however, the general tax rules that apply to corporations 
under subchapter C are fundamentally different from the general tax 
rules that apply to partnerships under subchapter K. In particular, 
when property is distributed by a partnership back to the partner, 
nonrecognition by the partnership and the partner is the general rule 
under subchapter K; however, when property is distributed by a 
corporation back to its shareholder,

[[Page 66999]]

recognition and income by the corporation and the shareholder is the 
general rule under subchapter C. Compare sections 731(b) and (a) with 
sections 311(b) and 301(c). For these reasons, the final regulations do 
not extend the exception that is provided to specified corporate 
nonrecognition transactions to partnership nonrecognition transactions, 
such as contributions.
2. Amounts Paid or Accrued
    Proposed Sec.  1.59A-3(b)(2)(i) confirms that an amount ``paid or 
accrued,'' as those terms are used for purposes of determining whether 
there is a base erosion payment, includes an amount paid or accrued 
using any form of consideration.
    A comment asserted that subchapter K of the Code contains well-
developed provisions to distinguish between a sale or exchange, as 
opposed to a contribution, and that there should only be a ``payment or 
accrual'' for purposes of section 59A(d) to the extent a partner is 
treated as receiving proceeds from the partnership pursuant to a sale 
(for example, under the disguised sale rules of section 707). 
Similarly, a comment recommended that a distribution by a partnership 
described in section 731 generally not be treated as an amount paid or 
accrued for purposes of section 59A, except to the extent that the 
transaction would be treated as a deemed sale of property by the 
partnership.
    In addition, one comment recommended that if the final regulations 
continue to treat certain partnership contributions and distributions 
as ``payments'' that could be base erosion payments, the applicability 
date of the provisions relating to this treatment should be modified to 
take into account that taxpayers have engaged in contributions to (or 
distributions by) partnerships between December 31, 2017, and December 
21, 2018, without guidance that these transactions could be treated as 
base erosion payments. The comment also recommended a special rule to 
exclude pro-rata contributions (contributions made by each partner of 
the partnership in proportion to its interest in the partnership) from 
the definition of ``an amount paid or accrued.''
    The final regulations continue to treat contributions to and 
distributions from partnerships as ``payments'' that could be base 
erosion payments under the aggregate approach. Section 59A does not 
contain an explicit restriction on the type of consideration that 
constitutes a payment. Proposed Sec.  1.59A-3(b)(2)(i) confirms that 
``an amount paid or accrued includes an amount paid or accrued using 
any form of consideration, including cash, property, stock, or the 
assumption of a liability.'' The final regulations include the same 
language. The Treasury Department and the IRS have determined that it 
is not appropriate to change the operating rule describing payment 
consideration or delay its application. However, in response to 
comments, the final regulations add partnership interests to the non-
exclusive list of examples of consideration in Sec.  1.59A-3(b)(2)(ii) 
to reaffirm this result.
    The final regulations do not exclude pro-rata contributions from 
the definition of ``an amount paid or accrued'' and therefore, they are 
not excluded from the definition of a base erosion payment. If pro-rata 
contributions are made by each partner, each transaction must be 
separately considered, consistent with the general rule in section 59A 
that assesses transactions on a gross, rather than net, basis. A pro-
rata contribution exclusion would be inconsistent with the aggregate 
approach taken in these final regulations. For example, if there was an 
exception, a domestic corporation could contribute cash to a new 
partnership and its foreign parent could contribute depreciable 
property, each in proportion to their interest in the partnership, and 
under the exception, the transaction would not be subject to section 
59A even though, under the aggregate approach, the domestic corporation 
effectively acquired its proportionate share of the contributed 
depreciable property from a foreign related party in exchange for cash. 
See also Part VIII.B of this Summary of Comments and Explanation of 
Revisions (Netting). To clarify this point, Sec.  1.59A-7(c)(5)(iv) 
provides that when both parties to a transaction use non-cash 
consideration, each party must separately determine its base erosion 
payment with respect to each property, and Sec.  1.59A-7(d)(1) provides 
that base erosion tax benefits are calculated separately for each 
payment or accrual on a property-by-property basis and are not netted.
    Consistent with the approach taken for contributions to a 
partnership, the Treasury Department and the IRS determined that no 
special rule should be provided for distributions by a partnership. The 
approach suggested by a comment--only treating distributions subject to 
the disguised sales rules as potential base erosion payments--would be 
inconsistent with the aggregate approach to partnerships for the 
reasons discussed in the context of partnership contributions.
3. Request for ECI Exception
    A comment recommended that contributions of depreciable (or 
amortizable) property by a foreign related party to a partnership (in 
which an applicable taxpayer is a partner) or distributions of 
depreciable or amortizable property by a partnership (in which a 
foreign related party is a partner) to an applicable taxpayer be 
excluded from the definition of a base erosion payment to the extent 
that the foreign related party would receive (or would be expected to 
receive) allocations of income from that partnership interest that 
would be taxable to the foreign related party as effectively connected 
income. The final regulations do not include rules relating to these 
comments. In the 2019 proposed regulations, however, the Treasury 
Department and the IRS request comments regarding how to address a 
contribution by a foreign person to a partnership engaged in a U.S. 
trade or business, transfers of partnership interests by a foreign 
person, and transfers of property by the partnership with a foreign 
person as a partner to a related U.S. person. See Part VI.B of the 
Explanation of Provisions of the preamble to the 2019 proposed 
regulations in which the Treasury Department and the IRS request 
comments regarding transactions involving partners and partnerships 
that have effectively connected income.

B. Netting

    Proposed Sec.  1.59A-3(b)(2)(iii) provides that the amount of any 
base erosion payment is determined on a gross basis unless the 
transaction is subject to a special mark-to-market rule or the Code or 
regulations otherwise provide. A comment requested that a special 
netting rule be provided for partnerships when the base erosion tax 
benefits allocated by a partnership are reduced by deductions foregone 
as a result of the partner contributing property to the partnership.
    The Treasury Department and the IRS have determined that this 
suggestion is inconsistent with the gross basis regime generally. See 
Part IV.A.3 of this Summary of Comments and Explanation of Revisions 
(Netting). The result addressed in the comment is the same result that 
would arise if the transactions had occurred outside of a partnership. 
For example, a taxpayer that acquired one depreciable asset from a 
foreign related party and sold another asset would be in a similar 
position: the taxpayer would treat the depreciation with respect to the 
acquired asset as a base erosion tax benefit and there would

[[Page 67000]]

be no offset for deductions from the asset the taxpayer sold (even if 
those ``foregone'' deductions would not have been base erosion tax 
benefits). Section 1.59A-7(d)(1) clarifies that base erosion tax 
benefits are determined separately for each asset, payment, or accrual, 
as applicable, and are not netted with other items.

C. Aggregate Approach to Ownership of Partnership Assets

    Proposed Sec.  1.59A-7(b)(5)(i) provides that (subject to the small 
partner exception), for purposes of section 59A, each partner is 
treated as owning its share of the partnership items determined under 
section 704, including the assets of the partnership, using a 
reasonable method with respect to the assets. A comment proposed either 
removing the phrase ``including the assets of the partnership'' from 
this rule or including examples that clarify the purposes of section 
59A for which the aggregate approach to the ownership of partnership 
assets is relevant.
    In response to this comment, the final regulations remove this 
language from Sec.  1.59A-7(b)(5)(i). Instead, when it is necessary for 
a person to determine what assets were transferred from or to a partner 
in a partnership, the relevant provision refers to the partner's 
proportionate share of the assets, as determined based on all of the 
facts and circumstances. See Sec.  1.59A-7(c)(2), (3), and (4).

D. Determining the Base Erosion Payment

    Proposed Sec.  1.59A-7(b) generally provides that section 59A is 
applied at the partner level and that amounts paid or accrued by (or 
to) a partnership are treated as paid or accrued by (or to) the 
partners based on their distributive shares.
    A number of comments requested clarification with respect to the 
aggregate approach taken in the proposed regulations. For example, a 
comment indicated that the proposed regulations do not address how to 
determine each partner's share of a payment received by a partnership 
if the payment results in no income or gain or results in a deduction 
or loss (for example, where a partnership sells depreciable or 
amortizable property to an applicable taxpayer and the amount realized 
is equal to or less than the partnership's adjusted basis in the 
property). The comment recommended that the final regulations provide 
rules for determining the extent to which a partner is treated as 
receiving a payment received by a partnership where the payment results 
in no income or a deduction or loss. The comment suggested that 
taxpayers be permitted to use a reasonable method to determine each 
partner's share of a payment received by the partnership if the payment 
results in no income and that, in circumstances where a payment results 
in a deduction or loss, the partner's share of the payment be 
determined by the partner's share of the deduction or loss. 
Additionally, the comment suggested that the final regulations permit 
taxpayers to use a reasonable method to determine each partner's share 
of the payment received by the partnership where the income or gain is 
recognized over multiple taxable years (such as in an installment 
sale).
    Comments also requested that the final regulations clarify that 
depreciation deductions allocated to a taxpayer by a partnership that 
are attributable to property contributed to the partnership by a 
foreign related party are not treated as base erosion tax benefits if 
the property was contributed before the effective date of the BEAT.
    One comment requested clarification regarding a scenario described 
in the preamble in which a foreign related party and a taxpayer form a 
partnership, and the foreign related party contributes depreciable 
property to the partnership. The preamble concludes that deductions for 
depreciation of the property contributed generally are base erosion tax 
benefits because the partnership is treated as acquiring the property 
in exchange for an interest in the partnership under section 721(a). 
REG-104259-18, 83 FR 65956, 65967 (Dec. 21, 2018). The comment 
requested that the final regulations clarify whether, in the scenario 
described in the preamble, each partner is treated as making its share 
of the payment (in the form of an interest in the partnership) to the 
foreign related party contributing the depreciable property under 
proposed Sec.  1.59A-7(b)(2) in determining if there is a base erosion 
payment. The language in the preamble to the proposed regulations that 
the comment discussed was in error. Consistent with the aggregate 
approach, the language should have stated that the deductions for 
depreciation of the property contributed generally are base erosion tax 
benefits because the other partners are treated as acquiring the 
property in exchange for a portion of their interest in the partnership 
assets, and this is clarified in the final regulations. See Sec.  
1.59A-7(c)(3).
    In response to the comments, the final regulations provide a more 
detailed explanation of how the aggregate approach set forth in the 
proposed regulations operates, including the treatment of partnership 
contributions and transfers of partnership interests (including 
issuances). In addition, Sec.  1.59A-7(g) includes examples 
illustrating the application of the rules.
    The final regulations clarify that if property described in Sec.  
1.59A-3(b)(1)(ii) or (iv) (depreciable or amortizable property or 
property that results in reductions to determine gross income) is 
transferred to a partnership, each partner is treated as receiving its 
proportionate share of the property for purposes of determining if it 
has a base erosion payment. Similarly, if the partnership transfers 
property described in Sec.  1.59A-3(b)(1)(ii) or (iv), each partner is 
treated as transferring its proportionate share of the property for 
purposes of determining if the recipient has a base erosion payment. 
See Sec.  1.59A-7(c)(2). If a partnership interest is transferred 
(other than by a partnership), the transferor generally is treated as 
transferring its proportionate share of the partnership's assets. When 
a partnership interest is transferred by a partnership, each partner 
whose proportionate share of assets is reduced is treated as 
transferring the amount of the reduction. See Sec.  1.59A-7(c)(3).
    In keeping with this construct, if a taxpayer was a partner in a 
partnership and a foreign related party contributed depreciable 
property to the partnership before January 1, 2018, there would be no 
base erosion payment. However, also consistent with this construct, if 
a taxpayer acquires an interest (including an increased interest) in 
any partnership asset (including pursuant to a transfer of a 
partnership interest either by the partnership or by another person) on 
or after January 1, 2018, from a partnership that holds depreciable 
property and has a foreign related party as a partner whose interest in 
the asset is reduced, with or without a section 754 election by the 
partnership, that transaction will be a base erosion payment because 
the property will be treated as acquired on or after January 1, 2018. 
See Sec.  1.59A-7(c).
    The final regulations also clarify that the amount of deduction 
resulting from a payment is not impacted by the gain or loss arising 
from the consideration used to make the payment. Therefore, if the 
partnership makes a payment, that payment from the partnership may 
result in a deduction even if the partnership incurs a gain on the 
transfer under general tax principles because the partnership used 
built-in gain property as consideration. Similarly, if the partnership 
receives a payment as consideration for the sale of built-in loss 
property, that payment to the partnership will result in income. See

[[Page 67001]]

Sec.  1.59A-3(b)(2)(ix) and Sec.  1.59A-7(c)(5)(iv) and (d)(1).
    If a series of payments or accruals with respect to a transaction 
occurs over time, whether there is a base erosion payment is determined 
each time there is a payment or accrual. If, instead, there is a single 
payment that results in base erosion tax benefits being allocated by a 
partnership over multiple years, the portion of the payment that is a 
base erosion payment must be determined at the time of the payment, but 
the amount of the base erosion tax benefits will be determined based on 
the allocations by the partnership that occur each year. For example, 
if a partnership, whose partners are a domestic corporation and an 
unrelated person, acquires depreciable property from a foreign related 
party of the domestic corporation, then the entire amount is a base 
erosion payment with respect to the domestic corporation and any 
allocations by the partnership of depreciation to the domestic 
corporation are base erosion tax benefits.
    The final regulations clarify that if a distribution of property 
from a partnership to a partner causes an increase in the tax basis of 
property that either continues to be held by the partnership or is 
distributed from the partnership to a partner, such as under section 
732(b) or 734(b), the increase in tax basis for the benefit of a 
taxpayer that is attributable to a foreign related party is treated as 
if it was newly purchased property by the taxpayer from the foreign 
related party that is placed in service when the distribution occurs 
for purposes of determining if a taxpayer has a base erosion payment. 
See Sec.  1.59A-7(c)(4).
    The final regulations also include certain additional operating 
rules to clarify how Sec.  1.59A-7 applies. For example, Sec.  1.59A-
7(c)(5)(ii) clarifies the order in which the base erosion payment rules 
apply, and Sec.  1.59A-7(c)(5)(iv) reaffirms that if both parties to a 
transaction use non-cash consideration, each transfer of property must 
be separately analyzed to determine if there is a base erosion payment.
    The final regulations also clarify that if a transaction is not 
specifically described in Sec.  1.59A-7, whether it gives rise to a 
base erosion payment or base erosion tax benefit will be determined in 
accordance with the principles of Sec.  1.59A-7 and the purposes of 
section 59A. See Sec.  1.59A-7(b). Further, the final regulations 
clarify that the aggregate approach under Sec.  1.59A-7 does not 
override the treatment of any partnership item under any Code section 
other than section 59A. See Sec.  1.59A-7(a). That clarification is 
consistent with the principle that a rule of general applicability 
applies unless explicitly replaced or turned off by another rule. Thus, 
for example, section 482 continues to apply to controlled transactions 
involving partnerships (such as transfers of property or provisions of 
services, contributions, and distributions), as it applies to all 
controlled transactions, and is taken into account in determining the 
arm's length consideration for such transactions (such as the pricing 
of transferred property or services, and the valuation of contributions 
and distributions) and in determining whether partnership transactions 
(including partnership allocations) otherwise clearly reflect income. 
See, for example, Sec. Sec.  1.482-1(f)(1)(iii) and (i)(7) and (8) and 
1.704-1(b)(1)(iii) and (5)(Ex. 28); Notice 2015-54, 2015-34 I.R.B. 210, 
Sec. Sec.  2.03 and 2.04.
    Given the absence in the statute of a provision describing the 
specific treatment of partnerships and partners, the Act's legislative 
history, and the overall significance of the proper functioning of the 
BEAT regime, the Treasury Department and the IRS have determined that, 
in addition to section 59A, certain authorities in subchapter K provide 
support for the treatment of partners and partnerships under these 
final regulations. The 1954 legislative history to subchapter K makes 
clear that this determination of aggregate versus entity should be 
based on the policies of the provision at issue, in this case, section 
59A. See H.R. Rep. No. 83-2543, at 59 (1954). Under the rules of 
subchapter K, an aggregate approach applies if it is appropriate to 
carry out the purpose of a provision of the Code, unless an entity 
approach is specifically prescribed and clearly contemplated by the 
relevant statute. See, for example, Sec.  1.701-2(e). The BEAT regime 
does not prescribe the treatment of a partnership as an entity and the 
treatment of a partnership as an aggregate is appropriate with respect 
to payments made to or received by it.

E. Determining a Partner's Base Erosion Tax Benefit

    For purposes of determining whether a payment or accrual by a 
partnership is a base erosion payment, proposed Sec.  1.59A-7(b)(2) 
provides that (subject to the small partner exception) any amount paid 
or accrued by a partnership is treated as paid or accrued by each 
partner based on the partner's distributive share of items of deduction 
(or other amounts that could be base erosion tax benefits) with respect 
to that amount (as determined under section 704). A comment noted that 
proposed Sec.  1.59A-7(b)(2) does not indicate how a partner's base 
erosion tax benefits would be determined if a partner's distributive 
share of the partnership item that produces the base erosion tax 
benefits changed from one taxable year to another taxable year. The 
comment concluded that the amount of a partner's distributive share of 
deductions with respect to property acquired by the partner's base 
erosion payment that is treated as a base erosion tax benefit may not 
correspond to the amount of the partner's initial base erosion payment 
with respect to that property. The comment recommended that the final 
regulations clarify whether any amount of the partner's distributive 
share of deductions with respect to property acquired by a base erosion 
payment (in any amount) that is treated as made by the partner would be 
a base erosion tax benefit, subject to the small partner exception.
    Another comment requested that the final regulations provide that 
when depreciable property is contributed to a partnership that adopts 
the remedial method under Sec.  1.704-3(d) with respect to that 
property, the remedial items of depreciation (which may be allocated to 
a partner that is an applicable taxpayer) should not be treated as base 
erosion tax benefits. The comment further asserted that treating 
remedial items as base erosion tax benefits would penalize applicable 
taxpayers that are U.S. transferors in section 721(c) partnerships for 
which the gain deferral method is applied. See generally Sec.  
1.721(c)-1T.
    As recommended by a comment, Sec.  1.59A-7(d)(1) clarifies that the 
base erosion tax benefits are not dependent on the amount of the base 
erosion payment, and provides that a partner's base erosion tax 
benefits are the partner's distributive share of any deductions 
described in Sec.  1.59A-3(c)(1)(i) or (ii) or reductions to determine 
gross income described in Sec.  1.59A-3(c)(1)(iii) or (iv) attributable 
to the base erosion payment.
    The final regulations also clarify that a taxpayer's base erosion 
tax benefits resulting from a base erosion payment include the 
partner's distributive share of any deduction or reduction to determine 
gross income attributable to the base erosion payment, including as a 
result of section 704(c), section 734(b), section 743(b) or certain 
other sections. See Sec.  1.59A-7(d)(1). As a result, if a taxpayer is 
allocated depreciation or amortization deductions from property 
acquired pursuant to a base erosion payment, those deductions are base

[[Page 67002]]

erosion tax benefits. If the partner obtains depreciation deductions in 
excess of the partner's proportionate share of the depreciable 
property, those deductions still arise from the acquisition of the 
property pursuant to a base erosion payment, and the Treasury 
Department and the IRS have determined that it would not be appropriate 
to exclude those deductions from base erosion tax benefit treatment.

F. Small Partner Exception

    The proposed regulations provide that partners with certain small 
ownership interests are excluded from the aggregate approach for 
purposes of determining base erosion tax benefits from the partnership. 
This small partner exception generally applies to partnership interests 
that: (i) Represent less than ten percent of the capital and profits of 
the partnership; (ii) represent less than ten percent of each item of 
income, gain, loss, deduction, and credit; and (iii) have a fair market 
value of less than $25 million.
    Comments recommended expanding the thresholds for the small partner 
exception for partnership interests and items to 25 percent, and 
eliminating the fair market value limitation. The comments suggested 
that the compliance burden associated with the thresholds in the 
proposed regulations would be substantial and that minority partners 
may have little or no ability to obtain the necessary information from 
the partnership.
    The final regulations do not adopt these recommendations. In 
determining the appropriate threshold for a small ownership interest in 
the proposed regulations, the Treasury Department and the IRS 
considered the treatment of small ownership interests in partnerships 
in analogous situations in other Treasury regulations. Further, the 
fair market value threshold addresses a concern that while a partner 
may have a relatively small interest in a partnership, the partnership 
itself could have significant value such that partnership items should 
not be excluded from the BEAT base when an analogous payment made 
outside of the partnership context is not similarly excluded from the 
BEAT base. The $25 million fair market value threshold was developed 
after qualitative consideration of these factors.
    Comments also recommended that the small partner exception apply to 
payments made to a partnership. The final regulations do not adopt this 
recommendation. The proposed regulations included the small partner 
interest exception for payments by a partnership in part because the 
Treasury Department and the IRS were cognizant that small partners in a 
partnership may not always have sufficient information about the 
amounts of payments made by the partnership and the identity of the 
payee. The Treasury Department and the IRS were also cognizant that 
this type of information is not currently reportable by the partnership 
to its partners on a Form K-1; that is, without information provided by 
the partnership to the taxpayer partner, that partner may not be able 
to determine whether it is treated as having made a base erosion 
payment through the partnership pursuant to proposed Sec.  1.59A-7. The 
Treasury Department and the IRS considered these factors, and reached a 
qualitative conclusion that at or below the threshold level set forth 
in the proposed regulations, the administrability considerations 
outweighed the competing consideration of ensuring that base erosion 
payments through a partnership are properly taken into account by 
taxpayer partners in the partnership.
    In a situation where a taxpayer makes a payment to a partnership 
(that is, a payment that may be a base erosion payment under proposed 
Sec.  1.59A-7 because a partner in the partnership is a foreign related 
party with respect to the payor), the administrability concerns that 
factored into the small partner exception for payments by a partnership 
are less pronounced. That is, the taxpayer (payor) will generally have 
information to determine whether it has made a payment to a partnership 
in which any foreign related party is a partner without needing to 
obtain significant information from the partnership. Based on these 
factors, the Treasury Department and the IRS reached a qualitative 
conclusion that the administrability aspects of accounting for payments 
by a taxpayer to a partnership are not outweighed by the competing 
consideration of ensuring that base erosion payments to a partnership 
are properly taken into account by taxpayer payors.

IX. Comments and Changes to Proposed Sec.  1.59A-9--Anti-Abuse and 
Recharacterization Rules

    Proposed Sec.  1.59A-9 contains anti-abuse rules that 
recharacterize certain transactions in accordance with their substance 
for purposes of carrying out the provisions of section 59A. The 
proposed anti-abuse rules address the following types of transactions: 
(a) Transactions involving intermediaries acting as a conduit if there 
is a principal purpose of avoiding a base erosion payment (or reducing 
the amount of a base erosion payment); (b) transactions with a 
principal purpose of increasing the deductions taken into account in 
the denominator of the base erosion percentage; and (c) transactions 
among related parties entered into with a principal purpose of avoiding 
the application of rules applicable to banks and registered securities 
dealers (for example, causing a bank or registered securities dealer to 
disaffiliate from an affiliated group so as to avoid the requirement th 
at it be a member of such a group).
    Comments generally requested more guidance on when a transaction 
has ``a principal purpose'' of avoiding a provision of section 59A. 
Comments expressed a concern that any transaction that would result in 
a lower BEAT liability could be viewed as having ``a principal 
purpose'' of avoiding a provision of the section 59A regulations. 
Comments also expressed a concern that the anti-abuse rules could be 
interpreted as applying to transactions undertaken in the ordinary 
course of a taxpayer's business. One comment requested that the 
Treasury Department and the IRS consider whether existing anti-abuse 
rules and judicial doctrines, including section 7701(o), are sufficient 
to address abuse of section 59A.
    Consistent with the grant of authority in section 59A(i), the 
Treasury Department and the IRS believe that anti-abuse rules specific 
to section 59A are needed. The final regulations address the requests 
for clarity regarding the ``principal purpose'' standard in the final 
regulations by adding new examples that illustrate the differences 
between transactions that the Treasury Department and the IRS find to 
be abusive or non-abusive. See Sec.  1.59A-9(c)(5), (7), (8), (9).
    A comment requested that the anti-abuse rule for transactions 
involving intermediaries acting as a conduit be modified so that it 
would not apply to transactions where taxpayers restructure their 
operations in a way that reduces their base erosion payments because 
they have moved operations to the United States. The comment asserted 
that proposed Sec.  1.59A-9(b)(1) should not apply where taxpayers 
restructure their operations for business reasons even if, under the 
resulting structure, payments are made to a foreign related party 
through an intermediary. As an example, the comment suggested that 
taxpayers might restructure their business so that a domestic related 
party performs functions previously performed by a foreign related 
party. However, if the foreign related party continues to perform some 
functions that benefit the taxpayer, and payments for those functions 
are made through the

[[Page 67003]]

domestic related party, the comment suggested that proposed Sec.  
1.59A-9(b)(1) could apply to the transaction. The determination of 
whether proposed Sec.  1.59A-9(b)(1) will apply to a transaction is 
dependent, in part, on whether the transaction has a principal purpose 
of avoiding a base erosion payment or reducing the amount of a base 
erosion payment. The requested exception could lead to inappropriate 
results where the change in the taxpayer's operations is insignificant 
compared to the impact of reducing the taxpayer's base erosion 
payments. Accordingly, the final regulations do not include the 
requested exception.
    Another comment requested clarification on when the anti-abuse rule 
in proposed Sec.  1.59A-9(b)(1) could apply to a ``corresponding 
payment'' to an intermediary that would have been a base erosion 
payment if made to a foreign related party. The final regulations do 
not modify this rule because the rule is already clear that it applies 
to a corresponding payment that is part of a transaction, plan, or 
arrangement that has a principal purpose of avoiding a base erosion 
payment, and the final regulations include examples of transactions 
with such a purpose. Another similar comment requested clarification on 
when the anti-abuse rule in proposed Sec.  1.59A-9(b)(1) could apply to 
an ``indirect'' corresponding payment. The final regulations do not 
modify this rule because it is already clear that transactions 
involving conduits and intermediaries can include transactions 
involving multiple intermediaries, for example, multiple intermediary 
lenders in a fact pattern similar to that in proposed Sec.  1.59A-
9(c)(4) (Example 4), and thus expanding that example to involve another 
intermediary would be redundant.
    Other comments asked for a clarification that the anti-abuse rule 
for transactions designed to inflate the denominator of the base 
erosion percentage applies only to non-economic deductions such as 
those described in the example in proposed Sec.  1.59A-9(c)(5) (Example 
5). One comment recommended that the rule be limited to deductions and 
losses incurred for ``the'' principal purpose of increasing the 
denominator. The comment expressed a concern that the rule could be 
interpreted as applying to deductions and losses on transactions 
undertaken in the ordinary course of a taxpayer's business. The final 
regulations do not change the standard for determining whether 
transactions that increase the denominator of the base erosion 
percentage are abusive. Narrowing the rule to apply only to 
transactions where the single principal purpose is to increase the 
denominator of the base erosion percentage would make it difficult to 
administer in all but the most egregious cases. Further, it is a common 
formulation for anti-abuse rules to apply when ``a principal purpose'' 
or ``one of the principal purposes'' of a transaction is to avoid a 
particular provision. See, for example, section 954(h)(7)(A), (C), and 
(D); section 965(c)(3)(F); see also 60 FR 46500, 46501 (rejecting 
comments requesting that an anti-avoidance rule of Sec.  1.954-1(b)(4) 
apply only if a purpose of first importance, rather than a principal 
purpose, was to avoid the de minimis test of Sec.  1.954-1(b)(1)(i) 
because the suggested standard would be ``significantly more 
subjective'' than the test adopted and therefore inadministrable). 
However, the final regulations address the requests for clarity 
regarding the treatment of transactions entered into in the ordinary 
course of a taxpayer's business by adding a new example of the 
application of Sec.  1.59A-9(b)(2). See Sec.  1.59A-9(c)(7).
    One comment requested that the anti-abuse rule with respect to the 
disaffiliation of banks and registered securities dealers be removed. 
The comment expressed a concern that proposed Sec.  1.59A-9(b)(3) could 
effectively prevent taxpayers from disaffiliating a bank or registered 
securities dealer, notwithstanding the fact that disaffiliation could 
have other non-tax effects. The comment suggested that if a 
disaffiliation made sense from a business perspective and is 
permissible under applicable banking and securities rules, the Treasury 
Department and the IRS should not treat disaffiliation as abusive. The 
Treasury Department and the IRS have determined that disaffiliation of 
a bank or registered securities dealer could be abusive in certain 
circumstances, such as the interposition of entities other than 
``includible corporations'' (as defined in section 1504(b)) with a 
principal purpose of avoiding the rules applicable to banks and 
registered securities dealers. Moreover, in developing guidance under 
various Code provisions, the Treasury Department and IRS often consider 
that disaffiliation could potentially avoid the purposes of a 
provision. See, for example, Sec.  1.904(i)-1, which similarly limits 
the use of deconsolidation to avoid foreign tax credit limitations. See 
59 FR 25584. Therefore, the final regulations retain Sec.  1.59A-
9(b)(3). However, the final regulations address the concern raised by 
the comment by providing examples to clarify the types of transactions 
that the Treasury Department and the IRS consider to be abusive. See 
Sec.  1.59A-9(c)(8) and (9).
    Finally, a comment recommended excluding from the anti-abuse rule 
transactions entered into, or pursuant to a binding commitment that was 
in effect, before the date of public announcement of certain provisions 
in section 59A. The final regulations do not adopt this recommendation. 
The anti-abuse rule in Sec.  1.59A-9 is based on the specific grant of 
authority in section 59A(i), and the Treasury Department and the IRS 
decline to adopt a grandfathering rule when no such rule was adopted by 
statute.

X. Rules Relating to Insurance Companies

    Section 59A(d)(3) provides that the term ``base erosion payment'' 
includes any premium or other consideration paid or accrued by a 
taxpayer to a foreign related party for any reinsurance payments that 
are taken into account under sections 803(a)(1)(B) or 832(b)(4)(A). The 
preamble to the proposed regulations requests comments regarding 
several issues relating to insurance companies. Specifically, the 
preamble to the proposed regulations requests comments regarding 
certain reinsurance agreements and other commercial agreements with 
reciprocal payments that are settled on a net basis. REG-104259-18, 83 
FR 65968 (December 21, 2018).
    Comments were also requested with respect to whether claims 
payments for losses incurred and other deductible payments made by a 
domestic reinsurance company to a foreign related insurance company are 
base erosion payments within the scope of section 59A(d)(1). REG-
104259-18, 83 FR 65968 (December 21, 2018). The proposed regulations, 
however, did not provide any exceptions specific to the insurance 
industry.
    Comments received generally addressed whether (1) claims payments 
for losses incurred (claims payments) under reinsurance contracts 
should be treated as base erosion payments, and (2) certain payments 
made pursuant to reinsurance contracts should be netted. For a 
discussion of comments relating to life/non-life consolidated returns, 
see Part XI of this Summary of Comments and Explanation of Revisions.

A. Reinsurance Claims Payments to a Related Foreign Insurance Company

    The proposed regulations do not provide specific rules for payments 
by

[[Page 67004]]

a domestic reinsurance company to a related foreign insurance company. 
The preamble to the proposed regulations notes the treatment of claims 
payments for purposes of section 59A may be different for life 
insurance companies and non-life insurance companies. REG-104259-18, 83 
FR 65968 (December 21, 2018). For a life insurance company, payments 
for claims or losses incurred are deductible pursuant to sections 
805(a)(1); therefore, these payments are potentially within the scope 
of section 59A(d)(1). With respect to non-life insurance companies, 
however, the preamble to the proposed regulations notes that certain 
claims payments for losses incurred may be treated as reductions in 
gross income under section 832(b)(3), rather than deductions under 
section 832(c). To the extent not covered by section 59A(d)(3), these 
payments treated as reductions in gross income may not be within scope 
of section 59A.
    Generally, comments requested that the final regulations provide an 
exception to the term ``base erosion payment'' for claims payments made 
by a domestic reinsurance company to a related foreign insurance 
company. Some comments recommended that the exception should apply only 
to claims payments with respect to reinsurance that ultimately relates 
to the risk of unrelated third parties. Comments also stated that there 
was no apparent policy reason for treating life and non-life insurance 
claims payments differently for purposes of section 59A, although one 
comment noted that this distinction between life and non-life insurance 
claims payments results from the different approaches taken in drafting 
section 801(b) and section 832(b)(3), and that the Code sometimes 
provides disparate results.
    Comments explained that an exception for claims payments by a 
domestic reinsurance company to a related foreign insurance company 
would provide symmetrical treatment for life insurance companies and 
non-life insurance companies. In addition, comments noted that 
reinsurance transactions with respect to which outbound claims payments 
are made do not base erode because they result from insurance business 
that is moved into the United States; therefore, it is appropriate to 
provide an exception similar to the TLAC exception and the exception 
for foreign currency losses. As noted, several comments requested an 
exception for reinsurance claims payments only to the extent that the 
claims payments are with respect to policies ultimately insuring third-
party risks. Comments stated that because the reinsurance claims 
payments are payable only when an unrelated third party makes a claim 
under an insurance policy that the domestic insurance company has 
reinsured (and the nature of those claims payments are non-routine and 
often large and unpredictable), the timing and amount of the claims 
payment are not controlled by the related parties. Finally, comments 
noted that foreign regulatory requirements generally require that a 
local entity provide insurance to its residents; as a result of these 
regulatory requirements, domestic companies that want to provide 
insurance in many jurisdictions must do so by reinsuring a subsidiary 
established in the local jurisdiction.
    Comments also addressed how an exception for claims payments should 
impact the base erosion percentage calculation. Generally, comments 
recommended that claims payments be excluded from the numerator, but 
included in the denominator. If claims payments were eliminated from 
the denominator, comments noted that a significant amount of business 
expenses would be removed from the base erosion percentage calculation. 
Several comments acknowledged that the final regulations may adopt an 
exception that applies to both the numerator and the denominator; in 
that case, comments recommended that claims payments should be 
eliminated from the denominator of the base erosion percentage only to 
the extent that the payments are made to a foreign related party. 
Comments also indicated that the ambiguity regarding whether a claims 
payment is a deduction or a reduction in gross income for non-life 
insurance companies could result in taxpayers taking inconsistent 
positions and may lead to controversy regarding the calculation of the 
denominator for the base erosion percentage.
    Finally, several comments noted that certain self-help remedies 
with respect to claims payments are not available for insurance 
companies. First, because insurance companies are per se corporations 
under Sec.  301.7701-2(b)(4), an election under Sec.  301.7701-3 to 
treat a related foreign insurance company as a disregarded entity for 
U.S. tax purposes is unavailable. In addition, comments stated that 
regulators in some jurisdictions would prohibit a local insurance 
company from making an election to be treated as a U.S. taxpayer 
pursuant to section 953(d) if the election would result in U.S. 
withholding tax with respect to payments to policyholders.
    Section 1.59A-3(b)(3)(ix) adopts the recommendation from these 
comments and provides a specific exception for deductible amounts for 
losses incurred (as defined in section 832(b)(5)) and claims and 
benefits under section 805(a) (``claims payments'') paid pursuant to 
reinsurance contracts that would otherwise be within the definition of 
section 59A(d)(1), to the extent that the amounts paid or accrued to 
the related foreign insurance company are properly allocable to amounts 
required to be paid by such company (or indirectly through another 
regulated foreign insurance company), pursuant to an insurance, 
annuity, or reinsurance contract, to a person other than a related 
party. The final regulations also clarify that all claims payments are 
included in the denominator of the base erosion percentage, except to 
the extent excepted from the definition of a base erosion payment under 
Sec.  1.59A-3(b)(3)(ix). This treatment in the denominator is 
consistent with the treatment in the final regulations of derivatives 
and QDPs (discussed in Part VII of this Summary of Comments and 
Explanation of Revisions), section 988 foreign exchange losses 
(discussed in Part IV.C.4 of this Summary of Comments and Explanation 
of Revisions), and deductions for services eligible for the SCM 
exception (discussed in Part IV.C.1 of this Summary of Comments and 
Explanation of Revisions).

B. Netting With Respect to Insurance Contracts

    As discussed in Part IV.A.2 of this Summary of Comments and 
Explanation of Revisions, the amount of any base erosion payment is 
generally determined on a gross basis, regardless of any contractual or 
legal right to make or receive payments on a net basis. The proposed 
regulations do not provide an exception to this general rule with 
respect to reinsurance agreements.
    Several comments recommended that the final regulations permit 
netting with respect to reinsurance contracts to better reflect the 
economics of the transactions. One comment suggested that the final 
regulations permit netting with respect to a single economic 
transaction where the parties exchange net value in the form of a 
single payment, which would include many reinsurance transactions. 
Other comments identified specific types of reinsurance transactions 
for which netting should or should not be permitted. For quota share 
reinsurance arrangements, comments noted that the proposed regulations 
provide that the gross amount of reinsurance premium is a base erosion 
payment without considering any inbound payments such

[[Page 67005]]

as reserve adjustments, ceding commissions, and claims payments. Other 
comments suggested that the amount of base erosion payments with 
respect to modified coinsurance (``modco'') and funds withheld 
reinsurance be determined on a net basis (particularly when settlement 
is on a net basis) in the final regulations to be consistent with the 
norm of paying tax on a net basis.
    As background, reinsurance is the transfer from an insurer 
(referred to as the ``ceding'' company) to a reinsurer of all or part 
of the risk assumed under a policy or a group of policies. A 
traditional reinsurance agreement typically requires the ceding company 
to pay a reinsurance premium to the reinsurance company and the 
reinsurance company to pay a ceding commission to the ceding company. 
The reinsurance premium compensates the reinsurer for acquiring the 
reinsured obligations. The ceding commission compensates the ceding 
company for its expenses incurred in acquiring and managing the 
reinsured policies, and may include a profit margin. When the risks are 
transferred, the ceding company may reduce its reserves for the 
reinsured obligations, and the reinsurance company establishes its own 
reserves for the reinsured obligations. In terms of payment flows, it 
is common for the ceding commission owed under the reinsurance 
agreement to be netted against the reinsurance premium owed, such that 
the ceding company remits the reinsurance premium net of the ceding 
commission amount. However, both flows are typically separately 
identified in the contract and in any case represent reciprocal 
economic obligations. When losses are paid under the reinsured 
policies, depending on the terms of the reinsurance agreement, the 
reinsurer will have corresponding obligations to make payments to the 
ceding company (for example, the agreement may require the reinsurer to 
reimburse a percentage of total losses, or losses above a certain 
dollar threshold).
    Under modco and similar funds-withheld reinsurance agreements, the 
ceding company retains the assets with respect to the policies 
reinsured and generally does not transmit an initial premium payment to 
the reinsurer under the agreement. The reinsuring company in a modco 
agreement is entitled to premiums and a share of investment earnings on 
certain assets, and the ceding company is entitled to expense 
allowances (similar to ceding commissions) and reimbursement for losses 
paid under the reinsured policies, but the parties make net settlement 
payments based on each party's overall entitlement under the agreement 
on a periodic basis. Comments noted that in this respect, the 
arrangement is similar to making settlement payments under a derivative 
contract. In both the modco and traditional reinsurance context, 
comments asserted that imposing tax on one leg of a reinsurance 
transaction (the premium payment) is not equitable and does not reflect 
the economics of the transaction.
    A comment recommended that the final regulations exclude ceding 
commissions paid by a domestic insurance company to a foreign affiliate 
in exchange for the domestic insurance company's reinsurance of foreign 
risk from the definition of a base erosion payment. The comment 
suggested that this exception would be similar to the exception for 
section 988 foreign currency losses and for TLAC securities because an 
insurance group should not have a base erosion payment when insurance 
regulators dictate the structure of reinsurance agreements. The 
comments noted that reinsurance involves substantial payments in both 
directions, including premiums, ceding commissions, and claims. The 
comment explained that a ceding commission compensates the reinsured 
for its policy acquisition costs plus a small profit component and 
noted that a substantial amount of the commissions are reimbursements 
for third party expenses for many lines of business. For most 
reinsurance contracts, a comment noted that ceding commissions and 
premiums are separately stated in the reinsurance contract, but not 
separately paid. Instead, premiums are paid to the reinsurer net of the 
ceding commission.
    Several comments expressed strong support for the determination in 
the proposed regulations that netting is not permitted with respect to 
reinsurance arrangements. Comments indicated that the result from the 
proposed regulations is appropriate under current law and necessary to 
achieve the legislative goals for the BEAT. Before the enactment of the 
BEAT, comments explained that foreign insurance groups had a 
significant competitive advantage over U.S.-based insurance companies 
because foreign groups were allowed to shift their U.S. earnings into 
low-tax jurisdictions using affiliated reinsurance payments. Comments 
asserted that section 59A identified reinsurance as a base erosion 
payment to close the loophole. Comments also noted that using gross 
amounts is consistent with the statutory annual statement that is the 
basis for determining taxable income under subchapter L. Comments 
explained that the use of gross reinsurance premium, rather than net, 
is consistent with the excise tax imposed under section 4371, which 
computes the excise tax as a percentage of gross reinsurance payments, 
even for a funds-withheld or modco contract (where only net amounts are 
transferred between the contracting insurance companies). Finally, 
comments noted that when Congress determines that netting is 
appropriate with respect to insurance, it specifically permits netting. 
See sections 848(d)(1), 72(u)(2)(B), and 834(e); see also sections 
803(a) and 832.
    Some comments asserted that the statutory language of section 
59A(d)(3), which provides that base erosion payments include 
consideration paid or accrued ``for any reinsurance payments which are 
taken into account under sections 803(a)(1)(B) or 832(b)(4)(A),'' 
requires treating only the net amounts paid by a domestic company under 
a modco-type reinsurance contract as base erosion payments. For 
example, in the life insurance context, section 803(a)(1) defines 
``premiums'' as:
    (A) The gross amount of premiums and other consideration on 
insurance and annuity contracts, less
    (B) return premiums, and premiums and other consideration arising 
out of indemnity reinsurance.
    Further, section 59A(c)(2)(A)(iii)(I) closely tracks section 
803(a)(1) in its definition of base erosion tax benefit in the life 
insurance context as the amount by which ``gross premiums and other 
consideration on insurance and annuity contracts'' are reduced by 
``premiums and other consideration arising out of indemnity 
reinsurance.'' These comments suggested that the phrase ``consideration 
arising out of indemnity reinsurance'' suggests a broader view of the 
transaction than just reinsurance premiums and is best interpreted as 
referring to the net cash settlement payments under a modco-type 
reinsurance contract, rather than the gross amount identified in the 
contract as reinsurance premium.
    Other comments disagreed with this characterization and noted that 
section 59A(d)(3) is describing consideration paid or accrued for 
reinsurance--that is, payments moving in one direction from the 
taxpayer to foreign related party--without describing offsetting or 
reciprocal payments. The comments noted that the phrase ``arising out 
of indemnity reinsurance'' was merely lifted from preexisting section 
803(a)(1)(B), rather than being selected deliberately by Congress to 
account for both inflows and outflows under a reinsurance contract. 
They noted further that section 803(a)(1)(B) and its non-life 
counterpart, section 832(b)(4), use

[[Page 67006]]

parallel structures for measuring the amount of premiums included in 
insurance company gross income, starting with total premiums received, 
and reducing that total by premiums paid for reinsurance and by return 
premiums (that is, premium amounts refunded to the policyholder). The 
two provisions do not provide for additional offsets based on 
obligations flowing in the other direction, such as ceding commissions 
or reinsurance claim payments owed.
    Some comments asserted that foreign insurers may decide to reduce 
their capacity, discontinue lines of business, or increase pricing as a 
result of section 59A. Those comments acknowledged that domestic 
reinsurers may pick up the increased capacity, but warned that the 
shift to domestic reinsurers would concentrate the insured risk in the 
United States rather than spreading it globally, resulting in less risk 
diversification (a key element of insurance risk management). Other 
comments disagreed with this contention, noting that global reinsurance 
capacity has remained strong and that premium increases have been 
negligible since the enactment of section 59A.
    In contrast, a comment asserted in the context of reinsurance that 
it was clear that the law applies on a gross basis, both based on the 
plain language of the statute and the intent of Congress, and that 
relevant policy considerations weigh heavily in favor of applying the 
BEAT on a gross basis. The comment explained that because the 
reinsurance transactions at issue are between related parties, they are 
not necessarily at arm's length. Further, according to the comment, the 
legislative purpose of section 59A was to level the playing field 
between U.S. and foreign-owned companies, which can only be advanced if 
section 59A is applied on a gross basis.
    The final regulations do not adopt the recommendations that 
payments made under a reinsurance contract be netted for purposes of 
determining the amount of a base erosion payment, unless netting would 
otherwise be permitted for U.S. federal income tax purposes. Section 
59A's requirements are best interpreted in the context of the existing 
body of tax law and regulations. As discussed in Part IV.A.3 of this 
Summary of Comments and Explanation of Revisions, amounts of income and 
deduction are generally determined on a gross basis under the Code, and 
unless a rule permits netting (so that there is no deduction or the 
deduction is a reduced amount, as opposed to a deduction offset by an 
item of income), no netting is permitted.
    Although comments asserted that section 59A(d)(3) (defining a base 
erosion payment as including certain reinsurance payments) requires the 
netting of ceding commissions and other payments from the related 
foreign reinsurance company against reinsurance premiums, the Treasury 
Department and IRS are not persuaded by arguments that the language of 
section 59A(d)(3) mandates that result. Whether payments under 
particular types of reinsurance contracts (for example, modco) may be 
netted for purposes of section 59A is determined based on the existing 
rules in the Code and regulations regarding netting. The subchapter L 
provisions cited in section 59A(d)(3) (section 803(a)(1)(B) for life 
insurance companies and section 832(b)(4)(A) for non-life insurance 
companies) do not provide for netting of ceding commissions, claims 
payments or other expenses against premiums.
    With respect to the comment that modco and other reinsurance 
contracts that are periodically settled on a net basis are 
substantially similar to derivative contracts, the Treasury Department 
and IRS note that Congress specified in section 59A(h)(4)(C) that the 
term ``derivative'' does not include insurance contracts. This 
indicates that Congress did not intend for agreements with derivative-
like characteristics that are also insurance contracts to be treated as 
derivatives for purposes of section 59A.
    With respect to comments that ceding commissions should be broken 
down into components and not treated as base erosion payments to the 
extent that they reimburse amounts paid to third parties, this scenario 
is not materially different from those described in comments received 
from taxpayers in other industries and discussed in Part IV.A.1 of this 
Summary of Comments and Explanation of Revisions. These other comments 
described various scenarios in which a domestic corporation makes a 
deductible payment to a foreign related party, and that foreign related 
party in turn makes deductible payments to unrelated third parties. 
Therefore, the final regulations do not adopt a narrower regulatory 
exception for payments to foreign related insurance companies that 
arise in connection with a regulatory requirement.

XI. Comments and Changes to Sec.  1.1502-59A

A. In General

    Proposed Sec.  1.1502-59A provides rules regarding the application 
of section 59A and the regulations thereunder to consolidated groups. 
Under these rules, all members of a consolidated group are treated as a 
single taxpayer for purposes of determining whether the group is an 
applicable taxpayer and the amount of tax due under section 59A. For 
example, items resulting from intercompany transactions (as defined in 
Sec.  1.1502-13(b)(1)(i)) are disregarded for purposes of making the 
required computations.
    Some comments requested clarification on what it means for 
intercompany transactions to be ``disregarded'' in making the required 
computations under section 59A. Generally, intercompany transactions 
should not change the consolidated taxable income or consolidated tax 
liability of a consolidated group. For example, where one member (S) 
sells depreciable property to another member (B) at a gain, S's gain on 
the sale is deferred. Every year, as B depreciates the property, S 
recognizes a portion of its deferred gain. As a result, the 
depreciation expense deducted by B that exceeds the depreciation 
expense the group would have deducted if S and B were divisions of a 
single entity (``additional depreciation'') is offset by the amount of 
gain S recognizes each year, and the intercompany sale does not change 
the consolidated taxable income.
    However, the base erosion percentage is generally computed based 
solely on deductions; income items are not relevant. Therefore, under 
the foregoing example, B's depreciation deduction would include the 
additional depreciation amount, but S's offsetting gain inclusion would 
be excluded from the base erosion percentage computation.
    To make clear that intercompany transactions may not impact the 
BEAT consequences of a consolidated group, these final regulations 
clarify in Sec.  1.1502-59A(b)(1) that items resulting from 
intercompany transactions are not taken into account in computing the 
group's base erosion percentage and BEMTA. Consequently, in the 
foregoing example, B's additional depreciation is not taken into 
account in computing the group's base erosion percentage.
    In addition, some comments raised concerns that the proposed 
section 59A regulations and proposed Sec.  1.1502-59A may be 
incompatible with the rules and framework of Sec.  1.1502-47 for life-
nonlife consolidated groups. The

[[Page 67007]]

Treasury Department and the IRS are analyzing these concerns and expect 
to address the issues in future proposed regulations, and thus reserve 
on this matter in the final regulations.

B. New Rules Under Sec.  1.1502-59A(c) When a Member Deconsolidates 
From a Consolidated Group With a Section 163(j) Carryforward

    Proposed section 1.1502-59A(c)(3) provides rules to determine 
whether a consolidated group's business interest deduction permitted 
under section 163(j) is a base erosion tax benefit. Due to the 
fungibility of money, these rules generally treat the consolidated 
group as a single entity and aggregate all members' current-year 
business interest expense paid to nonmembers. The current-year business 
interest expense deducted by members is then classified as an amount 
paid or accrued to a domestic related party, foreign related party, or 
unrelated party based on specified allocation ratios, which are based 
on the entire group's business interest expense paid. If members cannot 
fully deduct their current-year business interest expense, then the 
members' section 163(j) carryforwards are allocated a status as a 
domestic related carryforward, foreign related carryforward, or 
unrelated carryforward based on specified allocation ratios. Such 
status is taken into account for BEAT purposes in future years when the 
member deducts its section 163(j) disallowed business interest expense 
carryforward, whether the member remains in the group or 
deconsolidates.
    A comment requested a special rule under Sec.  1.1502-59A(c)(3) for 
certain situations in which a member (T) deconsolidates from a 
consolidated group (the original group) that was not an applicable 
taxpayer under section 59A and joins an unrelated consolidated group. 
Assume that, during the time T was a member of the original group, T 
incurred business interest expense that could not be fully deducted and 
has a section 163(j) disallowed business interest expense carryforward. 
T then deconsolidates from the original group and joins the new group, 
which is an applicable taxpayer under section 59A. The comment 
recommended allowing T to use the special allocation ratios under Sec.  
1.1502-59A(c)(3) of the new group for the taxable year of the 
acquisition (rather than the allocation ratios of the original group). 
The comment posited that the original group would not have determined 
or maintained information pertaining to the allocation ratios because 
the original group was not an applicable taxpayer.
    The final regulations do not adopt this special rule. Whether a 
business interest expense deducted by members of a consolidated group 
is a base erosion tax benefit is determined on a single-entity basis, 
without regard to which member actually incurred the payment to the 
domestic related, foreign related, or unrelated party. Therefore, in 
the foregoing example, whether T's deduction of its section 163(j) 
disallowed business interest expense carryforward is a base erosion tax 
benefit must be determined by reference to the original group, not the 
new group.
    Furthermore, to determine whether a consolidated group is an 
applicable taxpayer, the group generally must determine its base 
erosion percentage for the year. In order to do so, the group must 
apply the classification rule under Sec.  1.1502-59A(c)(3) to its 
aggregate current-year business interest expense that was deducted. 
Therefore, the original group should have the information relevant to 
the classification rule under Sec.  1.1502-59A(c)(3), regardless of 
whether it was an applicable taxpayer. Consequently, the final 
regulations do not adopt the rule recommended by the comment.
    However, the final regulations provide two rules for situations in 
which a member deconsolidates from the original consolidated group with 
a section 163(j) carryforward. The first rule is an exception that 
applies if the original group was not an applicable taxpayer because it 
did not meet the gross receipts test in the year the business interest 
expense at issue was incurred. Under these circumstances, application 
of the classification rule under Sec.  1.1502-59A(c)(3) would have been 
unnecessary within the original consolidated group with regard to the 
year in which the interest was paid or accrued. This special rule 
permits the deconsolidating member (and any acquiring consolidated 
group) to apply the classification rule on a separate-entity basis to 
determine the status of the deconsolidating member's section 163(j) 
disallowed business interest expense carryforward as a payment or 
accrual to a domestic related, foreign related, or unrelated party. The 
second rule applies if the deconsolidating member (or its acquiring 
consolidated group) fails to substantiate the status of its section 
163(j) disallowed business interest expense carryforward from the 
original group. In that case, the section 163(j) disallowed business 
interest expense carryforward is treated as a payment or accrual to a 
foreign related party.

Applicability Dates

    Pursuant to section 7805(b)(1)(B), these final regulations (other 
than the reporting requirements for QDPs in Sec.  1.6038A-2(b)(7), 
Sec.  1.1502-2, and Sec.  1.1502-59A) apply to taxable years ending on 
or after December 17, 2018. However, taxpayers may apply these final 
regulations in their entirety for taxable years ending before December 
17, 2018. Taxpayers may also apply provisions matching Sec. Sec.  
1.59A-1 through 1.59A-9 from the Internal Revenue Bulletin (IRB) 2019-
02 (https://www.irs.gov/pub/irs-irbs/irb19-02.pdf) in their entirety 
for all taxable years ending on or before December 6, 2019. Taxpayers 
choosing to apply the proposed regulations must apply them consistently 
and cannot selectively choose which particular provisions to apply.
    Section 1.6038A-2(b)(7)(ix) applies to taxable years beginning 
Monday, June 7, 2021. No penalty under sections 6038A(d) or 6038C(c) 
will apply to a failure solely under Sec.  1.6038A-2(a)(3), (b)(6), or 
(b)(7) that is corrected by March 6, 2020.
    Pursuant to sections 1503(a) and 7805(b)(1)(A), Sec.  1.1502-2 and 
Sec.  1.1502-59A apply to taxable years for which the original 
consolidated Federal income tax return is due (without extensions) 
after December 6, 2019. However, taxpayers may apply Sec.  1.1502-2 and 
Sec.  1.1502-59A in their entirety for taxable years for which such a 
return is due (without extensions) before December 6, 2019.

Statement of Availability of IRS Documents

    IRS revenue procedures, revenue rulings, notices, and other 
guidance cited in this preamble are published in the Internal Revenue 
Bulletin and are available from the Superintendent of Documents, U.S. 
Government Publishing Office, Washington, DC 20402, or by visiting the 
IRS website at http://www.irs.gov.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of

[[Page 67008]]

reducing costs, of harmonizing rules, and of promoting flexibility. For 
purposes of Executive Order 13771, this rule is regulatory.
    These final regulations have been designated as subject to review 
under Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget (OMB) regarding review of tax regulations. The 
Office of Information and Regulatory Affairs has designated these 
regulations as economically significant under section 1(c) of the MOA. 
Accordingly, the OMB has reviewed these regulations.

A. Background

    The Tax Cuts and Jobs Act of 2017 (the ``Act'') added new section 
59A, which applies to large corporations that have the ability to 
reduce U.S. tax liabilities by making deductible payments to foreign 
related parties. The Base Erosion and Anti-Abuse Tax (``BEAT'') is 
generally levied on certain large corporations that have deductions 
paid or accrued to foreign related parties that are greater than three 
percent of their total deductions (two percent in the case of certain 
banks or registered securities dealers), a determination referred to as 
the base erosion percentage test. Large corporations are those with 
gross receipts of $500 million or more, as calculated under the rules 
of section 59A, a determination referred to as the gross receipts test. 
By taxing these corporations' base erosion tax benefits, the BEAT 
``aims to level the playing field between U.S. and foreign-owned 
multinational corporations in an administrable way.'' Senate Committee 
on Finance, Explanation of the Bill, S. Prt. 115-20, at 391 (November 
22, 2017). The BEAT operates as a minimum tax, so a taxpayer is only 
subject to additional tax under the BEAT if the BEAT tax rate 
multiplied by the taxpayer's modified taxable income exceeds the 
taxpayer's regular tax liability adjusted for certain credits.

B. Need for the Final Regulations

    Section 59A is largely self-executing, which means that it is 
binding on taxpayers and the IRS without any regulatory action. 
Although it is self-executing, the Treasury Department and the IRS 
recognize that section 59A provides interpretive latitude for taxpayers 
and the IRS which could create uncertainty and prompt a variety of 
taxpayer responses without further guidance. The final regulations are 
needed to address questions regarding the application of section 59A 
and to reduce compliance burden and economic inefficiency that would be 
caused by uncertainty about how to calculate tax liability.

C. Overview of the Final Regulations

    These final regulations provide guidance under section 59A 
regarding the determination of the tax with respect to base erosion 
payments for certain taxpayers with substantial gross receipts. They 
provide guidance for applicable taxpayers to determine the amount of 
BEAT liability and how to compute the components of the tax 
calculation.
    Regulations under section 59A (Sec. Sec.  1.59A-1 through 1.59A-10) 
provide details for taxpayers regarding whether a taxpayer is an 
applicable taxpayer and the computation of certain components of the 
base erosion minimum tax amount, including the amount of base erosion 
payments, the amount of base erosion payments that are treated as base 
erosion tax benefits, and modified taxable income. The regulations also 
provide specific guidance for banks, registered securities dealers, and 
insurance companies, and provide guidance in applying section 59A to 
amounts paid by and to partnerships. These regulations also establish 
anti-abuse rules to prevent taxpayers from taking measures to 
inappropriately circumvent section 59A.
    Regulations under sections 383, 1502 and 6038A (Sec. Sec.  1.383-1, 
1.1502-2, 1.1502-59A, 1.6038A-1, 1.6038A-2, and 1.6038-4) provide rules 
for the application of section 59A with respect to limitations on 
certain capital losses and excess credits, consolidated groups and 
their members, and reporting requirements, which include submitting, in 
certain cases, new Form 8991, Tax on Base Erosion Payments of Taxpayers 
With Substantial Gross Receipts.

D. Economic Analysis

1. Baseline
    The Treasury Department and the IRS have assessed the benefits and 
costs of these final regulations compared to a no-action baseline that 
reflects anticipated Federal income tax-related behavior in the absence 
of these final regulations.
2. Summary of Economic Effects
    These final regulations provide certainty and clarity to taxpayers 
regarding the meaning of terms and calculations they are required to 
apply under the BEAT provisions of the Act. In the absence of the 
enhanced specificity provided by these regulations, similarly situated 
taxpayers might interpret the statutory rules of section 59A 
differently, potentially resulting in inefficient patterns of economic 
activity. For example, two otherwise similar taxpayers might structure 
an income-generating activity differently based solely on different 
assumptions about whether that activity will involve payments that are 
subject to the BEAT. If this tax-driven difference in business 
structures confers a competitive advantage on the less profitable 
enterprise, U.S. economic performance may suffer. This final regulatory 
guidance thus provides value by helping to ensure that economic agents 
face similar tax incentives, a tenet of economic efficiency.
    The Treasury Department and the IRS project that under these final 
regulations, 3,500-4,500 taxpayers may be applicable taxpayers under 
the BEAT because those taxpayers (1) are U.S. shareholders of a foreign 
corporation, 25 percent foreign-owned corporations, or foreign 
corporations engaged in a trade or business within the United States 
and (2) have gross receipts of $500 million or more without taking into 
account the gross receipts of members of its aggregate group. As many 
as 100,000-110,000 additional taxpayers may be applicable taxpayers as 
a result of being members of an aggregate group.\5\
---------------------------------------------------------------------------

    \5\ These estimates are based on current tax filings for taxable 
year 2017 and do not yet include the BEAT. At this time, the 
Treasury Department and the IRS do not have readily available data 
to determine whether a taxpayer that is a member of an aggregate 
group will meet all tests to be an applicable taxpayer for purposes 
of the BEAT.
---------------------------------------------------------------------------

    The Treasury Department and the IRS recognize that in response to 
these final regulations, these businesses may alter the way they 
transact with related versus unrelated parties. They may make changes 
to financial arrangements, supply chain arrangements, or the locations 
of business activity, each in ways that increase or reduce the volume 
of payments made to a foreign affiliate that qualify as base erosion 
payments, relative to the decisions they would make under alternative 
regulatory approaches, including the no-action baseline. These 
differences in business activities may have economic effects beyond 
their effects on taxpayers' tax liability.
    The Treasury Department and the IRS have not attempted to quantify 
the economic effects of any changes in business activity stemming from 
these final regulations. The Treasury Department and the IRS do not 
have readily available data or models that predict with reasonable 
precision the decisions that businesses would make under the final 
regulations versus

[[Page 67009]]

alternative regulatory approaches. Nor do they have readily available 
data or models that would measure with reasonable precision the loss or 
gain in economic surplus resulting from these business decisions 
relative to the business decisions that would be made under an 
alternative regulatory approach. Such estimates would be necessary to 
quantify the economic effects of the final regulations versus 
alternative approaches.
    Within these limitations, part I.D.3 of these Special Analyses (and 
the Summary of Comments and Explanation of Revisions) explains the 
rationale behind the final regulations and provides a qualitative 
assessment of the economic effects of the final regulations relative to 
the alternative regulatory approaches that were considered.
    The Treasury Department and the IRS welcome comments on these 
conclusions and on the economic effects of the provisions described in 
the following sections.
3. Economic Effects of Provisions Substantially Revised From the 
Proposed Regulations
a. Securities Lending Transactions
    Section 59A(h) includes an exception to base erosion payment status 
for certain payments by a corporation to a foreign related party 
pursuant to certain derivative contracts (qualified derivative 
payments, or QDPs). The statute further provides that the QDP exception 
does not apply to a payment pursuant to a derivative contract that 
would be treated as a base erosion payment if the payment was not made 
pursuant to a derivative contract. The final regulations specify how 
the QDP exception applies to securities lending transactions, a 
particular form of financial transaction. In this regard, the final 
regulations generally provide parity in the treatment of securities 
lending transactions and sale-repurchase transactions, a similar, 
alternative form of financial transaction. This part I.D.3.a discusses 
the treatment of securities lending transactions and sale-repurchase 
transactions under the final regulations. For a further description of 
securities lending transactions and sale-repurchase transactions, see 
Part VII.B of the Summary of Comments and Explanation of Revisions.
    In general, a sale-repurchase transaction is an agreement under 
which a person transfers a security in exchange for cash and 
simultaneously agrees to receive substantially identical securities 
from the transferee in the future in exchange for cash. Certain sale-
repurchase transactions are treated as secured debt for federal tax 
purposes; that is, the nominal seller of the securities in the sale-
repurchase transaction is treated as transferring securities as 
collateral for a loan from the nominal buyer to the nominal seller. The 
fee paid by the nominal seller to the nominal buyer pursuant to this 
type of sale-repurchase contract is one example of a payment that does 
not qualify for the QDP exception.
    In this type of sale-repurchase transaction, the nominal seller 
remains the beneficial owner of the securities for federal income tax 
purposes and is treated as a cash borrower from the nominal buyer. 
Because the nominal seller remains the beneficial owner of the 
securities for federal income tax purposes, when the nominal buyer 
receives any payments with respect to the securities and passes those 
payments through to the nominal seller (known as substitute payments), 
such as interest or dividends, the nominal seller is treated as 
receiving that payment directly from the issuer of the security for 
federal income tax purposes. Thus, the substitute payment is not 
considered a payment between the nominal seller and the nominal buyer 
for federal tax purposes. Consequently, even if the nominal buyer is a 
U.S. person and the nominal seller is a foreign related party, the 
substitute payments on the sale-repurchase agreement that is treated as 
a loan for federal tax purposes generally are not base erosion payments 
for the BEAT.
    Certain securities lending transactions are economically similar to 
sale-repurchase transactions but are treated differently for federal 
income tax purposes. In some securities lending transactions, a 
securities lender also transfers securities to a securities borrower in 
exchange for an obligation that the securities borrower make certain 
payments to the securities lender and also return identical (though not 
necessarily the same) securities to the securities lender. In 
connection with the transfer of securities in this type of transaction, 
the securities borrower may also provide cash or other form of 
collateral to the securities lender, often with the same or greater 
value as the lent security. Economically, the securities lender in 
these transactions can be viewed as both a lender of securities to the 
counterparty, and a borrower of cash from the counterparty. In these 
respects, the securities lending transaction is economically similar to 
a sale-repurchase transaction.
    However, in these securities lending transactions, the securities 
lender is no longer treated as the beneficial owner of the securities 
for federal income tax purposes. As a result, when the securities 
borrower makes substitute payments (with respect to the securities) in 
the securities lending transaction, those substitute payments may be 
base erosion payments (without regard for the QDP exception) if the 
securities lender is a foreign related party because the substitute 
payments are treated as payments from the securities borrower to the 
securities lender for federal income tax purposes.
    The proposed regulations state that sale-repurchase transactions 
are not eligible for the QDP exception. The proposed regulations 
further provide that securities lending transactions are not eligible 
for the QDP exception because the securities lending transactions are 
economically similar to sale-repurchase transactions. However, as 
discussed in this part I.D.3.a, substitute payments on a sale-
repurchase transaction are not a base erosion payment because the 
nominal seller of the securities is treated as remaining the beneficial 
owner of the securities for federal income tax purposes. Comments 
observed that the proposed regulations thus failed to take into account 
the disparate tax treatment of substitute payments for sale-repurchase 
transactions and securities lending transactions for purposes of the 
BEAT.
    To take into account the disparate treatment of the substitute 
payments in securities lending transactions, the final regulations 
remove the per se exclusion of securities lending transactions from the 
QDP exception. Instead, the final regulations more narrowly exclude the 
borrowing of cash pursuant to a securities lending transaction (``cash 
leg'') from the QDP exception. This change provides symmetry with the 
treatment of a sale-repurchase transaction that is treated as a secured 
loan for federal income tax purposes. Under the final regulations, both 
a sale-repurchase transaction and the cash leg of a securities lending 
transaction are excluded from the QDP exception to the extent that they 
are treated as financings, and thus may be base erosion payments.
    The final regulations no longer exclude payments attributable to 
the borrowing of securities pursuant to a securities lending 
transaction from qualifying for the QDP exception; as a result, 
substitute payments on the security may qualify for the QDP exception. 
This change in the final regulations provides general symmetry in the 
treatment of substitute payments made pursuant to sale-repurchase

[[Page 67010]]

transactions and securities lending transactions for purposes of the 
BEAT.
    The final regulations also provide an anti-abuse rule to address a 
potentially abusive transaction characterized by an uncollateralized 
borrowing of securities that can be liquidated for cash in a multiple-
step transaction that is economically similar to an uncollateralized 
cash loan.
    Specifically, the Treasury Department and the IRS adopted an anti-
abuse rule that takes into account two factors: (a) Whether the 
securities lending transaction or substantially similar transaction 
provides the taxpayer with the economic equivalent of a substantially 
unsecured cash borrowing and (b) whether the transaction is part of an 
arrangement that has been entered into with a principal purpose of 
avoiding the treatment of any payment with respect to the transaction 
as a base erosion payment.
    The Treasury Department and the IRS considered an alternative anti-
abuse rule that would have applied solely on the basis of the 
securities loan being undercollateralized. The Treasury Department and 
the IRS did not adopt this alternative in the final regulations because 
the Treasury Department and the IRS are cognizant that an objective 
mechanical rule based solely on the level of collateralization may be 
difficult for both taxpayers and the IRS to apply, in particular due to 
the high volume of transactions issued under varying conditions. 
Accordingly, the final regulations further provide that for the anti-
abuse rule to apply, the transactions must also be part of an 
arrangement that has been entered into with a principal purpose of 
avoiding the treatment of any payment with respect to the transaction 
as a base erosion payment. See Sec. Sec.  1.59A-6(d)(2)(iii)(C); 1.59A-
6(e)(2) (Example 2).
    The Treasury Department and the IRS recognize that in response to 
these final regulations, businesses may increase the volume of certain 
securities lending transactions relative to the volume that would occur 
under alternative anti-abuse rules. The Treasury Department and the IRS 
project, however, that taxpayer response to these rules, and the 
relative economic effects of adoption of the final rule, will be minor 
given the wide range of financial transactions that applicable 
taxpayers currently engage in, the various roles that securities 
lending transactions play, and the relatively small difference in 
regulatory treatment between the final regulations and alternative 
anti-abuse rules.
    The Treasury Department and the IRS have not attempted to provide a 
quantitative prediction of the change in the volume of securities 
lending transactions nor to quantify the economic effects of this 
potential shift that may result from the final regulations, relative to 
alternative regulatory approaches. The Treasury Department and the IRS 
do not have readily available data or models that predict with 
reasonable precision the types of intercompany arrangements that 
businesses would adopt under the final regulations versus alternative 
regulatory approaches. Nor do they have readily available data or 
models that would measure with reasonable precision the difference in 
returns or risk that would occur as a result of this shift in the 
volume of securities lending transactions relative to the alternative 
regulatory approach. Such estimates would be necessary to quantify the 
economic effects of these final regulations over the treatment of 
securities lending transactions versus alternative regulatory 
approaches.
    Profile of affected taxpayers. The taxpayers affected by these 
provisions of the final regulations are domestic banks and broker-
dealers that engage in securities lending transactions with a foreign 
related party where the domestic bank or broker-dealer is the 
securities borrower that makes substitute payments to the foreign 
related party. The taxpayers affected are also foreign banks and 
broker-dealers that engage in these securities lending transactions 
with a foreign related party as part of their conduct of a U.S. trade 
or business.
    To provide an estimate of taxpayers affected by the change to the 
QDP rule, the Treasury Department and the IRS used current tax filings 
for taxable year 2017 and examined the set of filers who marked-to-
market securities and were (1) U.S. shareholders of a foreign 
corporation as indicated by the filing of Form 5471 or (2) otherwise 
potentially applicable taxpayers as indicated by the filing of Form 
5472. This marked-to-market proxy is reasonable because the QDP 
exception applies only if a taxpayer recognizes gain or loss as if the 
derivative were sold for fair market value on the last day of the 
taxable year and treats that gain or loss as ordinary. Based on these 
tax data, the number of taxpayers estimated to be affected by these 
provisions of the final regulations is 900, based on counts of the 
forms shown in the accompanying table.

                   Taxpayers Affected by Sec.   1.59A
      [Estimate based on current tax filings for taxable year 2017]
------------------------------------------------------------------------
                                                             Estimated
                                                             impacted
                                                           filer  counts
------------------------------------------------------------------------
Form 1120 with mark-to-market on Form M3 and Form 5471               750
 and/or 5472............................................
Form 1120F who completed line u of the Additional                    150
 Information and Form 5471 and/or 5472..................
------------------------------------------------------------------------

b. Section 988 Losses in the Denominator of the Base Erosion Percentage
    Under section 59A, a taxpayer is subject to the BEAT only if the 
taxpayer meets the statutory tests to be an applicable taxpayer, 
including the base erosion percentage test. The base erosion percentage 
test is satisfied with respect to a taxpayer if the taxpayer (or, if 
the taxpayer is a member of an aggregate group, that aggregate group) 
has a base erosion percentage of three percent or more. A lower 
threshold of two percent generally applies if the taxpayer, or a member 
of the taxpayer's aggregate group, is a member of an affiliated group 
that includes a domestic bank or registered securities dealer. The 
final regulations specify how losses from certain currency exchange 
transactions should be included in the base erosion percentage test.
    Proposed Sec.  1.59A-3(b)(3)(iv) provides that exchange losses from 
section 988 transactions described in Sec.  1.988-1(a)(1) are excluded 
from the definition of base erosion payments. Section 988 transactions 
are generally transactions in which the amount that the taxpayer is 
entitled to receive (or required to pay) is denominated in terms of a 
nonfunctional currency or is determined by reference to one or more 
nonfunctional currencies. In the

[[Page 67011]]

proposed regulations, the Treasury Department and the IRS determined 
that this section 988 exception from the definition of a base erosion 
payment is appropriate because those losses do not present the same 
base erosion concerns as other types of losses that arise in connection 
with payments to a foreign related party. Because exchange losses from 
section 988 transactions are excluded from the definition of base 
erosion payments in the proposed regulations, those losses are not 
included in the numerator of the base erosion percentage under the 
proposed regulations. The final regulations retain the exclusion of 
section 988 losses from the definition of base erosion payments and 
from the numerator of the base erosion percentage.
    Proposed Sec.  1.59A-2(e)(3)(ii)(D) also provides that exchange 
losses from section 988 transactions (including with respect to 
transactions with persons other than foreign related parties) are not 
included in the denominator when calculating the base erosion 
percentage for purposes of the base erosion percentage test. In 
response to comments, the final regulations restore the section 988 
losses to the denominator when calculating the base erosion percentage, 
except to the extent of the amount of section 988 losses from 
transactions with foreign related parties that is also excluded from 
the numerator of the base erosion percentage.
    As an alternative, the Treasury Department and the IRS considered 
removing all section 988 losses from the denominator of the base 
erosion percentage test. However, the Treasury Department and the IRS 
determined that it was appropriate to exclude from the denominator only 
the amounts that are excluded from the numerator because that is how 
other statutory exceptions from the BEAT are addressed in the base 
erosion percentage calculations. Specifically, for the QDP exception 
(discussed in Part I.D.3.a of this Special Analysis) and the services 
cost method exception (discussed in Part IV.C.1 of the Summary of 
Comments and Explanation of Revisions) the amounts in the denominator 
of the base erosion percentage are also accounted for in this manner. 
That is, the denominator does include the amount of QDP deductions or 
services cost method deductions that are also excluded from the 
numerator of the base erosion percentage because of those exceptions.
    The Treasury Department and the IRS project that under these final 
regulations, fewer taxpayers would be expected to satisfy the base 
erosion percentage test and therefore fewer would be liable for the 
BEAT, relative to the alternative regulatory approach as specified in 
the proposed regulations. These final regulations include in the 
denominator of the base erosion percentage section 988 losses arising 
from foreign currency transactions with unrelated parties. Inclusion of 
such losses in the denominator, all else equal, reduces the base 
erosion percentage, and may increase the likelihood that businesses 
engage in incremental section 988 transactions with unrelated parties 
to reduce the base erosion percentage, relative to the proposed 
regulations. However, regulations under Sec.  1.59A-9(b)(2) (anti-abuse 
rule addressing transactions to increase the amount of deductions taken 
into account in the denominator of the base erosion percentage 
computation) are expected to limit this behavior.
    The Treasury Department and the IRS have not attempted to provide a 
quantitative prediction of the change in the volume of section 988 
transactions nor to quantify the economic effects of this change 
resulting from the final regulations, relative to the alternative 
regulatory approach. The Treasury Department and the IRS do not have 
readily available data or models that predict with reasonable precision 
the volume of section 988 transactions that businesses might engage in 
under the final regulations versus the alternative regulatory approach 
because of the complex role that currency exchange plays for these 
businesses. The Treasury Department and the IRS further do not have 
readily available data or models that would measure with reasonable 
precision the difference in economic returns or volatility that these 
businesses would experience as a result of this shift in section 988 
transactions relative to the alternative regulatory approach, again 
because of the complex role that currency exchange plays for these 
businesses. Such estimates would be necessary to quantify the economic 
effects of these final regulations over the treatment of section 988 
transactions versus the alternative regulatory approach.
    Profile of affected taxpayers. The taxpayers affected by these 
provisions of the final regulations generally are those taxpayers that 
engage in foreign currency transactions with unrelated parties and have 
section 988 losses that will be included in the denominator of the base 
erosion percentage under the final regulations.
    The Treasury Department and the IRS have not estimated the number 
of these taxpayers because the Form 1120 series does not separately 
break out gains or losses from section 988 transactions. The sole form 
that breaks out section 988 gain and loss is Form 5471, which is filed 
by U.S. shareholders of a CFC. Information from Form 5471 is unlikely 
to be informative because a CFC is unlikely to be an applicable 
taxpayer.
4. Economic Effects of Provisions Not Substantially Revised From the 
Proposed Regulations
a. Applicable Taxpayer for Aggregate Groups
    A taxpayer is liable for the BEAT only if the taxpayer is an 
applicable taxpayer. In general, an applicable taxpayer is a 
corporation, other than a RIC, REIT, or an S corporation, that 
satisfies the gross receipts test and the base erosion percentage test. 
For purposes of these tests, members of a group of corporations related 
by certain specified percentages of stock ownership are aggregated. 
Section 59A(e)(3) refers to aggregation on the basis of persons treated 
as a single taxpayer under section 52(a) (controlled group of 
corporations), which includes both domestic and foreign persons. In the 
proposed regulations, the Treasury Department and the IRS determined 
that to implement the provisions of section 59A, it was necessary to 
treat foreign corporations as outside of the controlled group for 
purposes of applying the aggregation rules, except to the extent that 
the foreign corporation is subject to net income tax under section 
882(a) (tax on income of foreign corporations connected with U.S. 
business). The final regulations also adopt this position.
    Upon aggregation of domestic and foreign controlled groups of 
corporations, intra-aggregate group transactions are eliminated for 
purposes of the gross receipts test and base erosion percentage test. 
If aggregation were defined to include both domestic and all related 
foreign persons (i.e., a ``single employer'' under section 52(a)), 
regardless of whether the foreign person was subject to tax in the 
United States, this would eliminate most base erosion payments, which 
are defined by section 59A(d)(1) as ``any amount paid or accrued by the 
taxpayer to a foreign person which is a related party of the taxpayer 
and with respect to which a deduction is allowed under this chapter.'' 
Without these base erosion payments, virtually no taxpayer or aggregate 
group would satisfy the base erosion percentage test; thus 
substantially all taxpayers (or the aggregate group of which the 
taxpayer was a member) would be excluded from the requirement to pay a 
tax equal to the base erosion minimum tax amount (BEMTA).

[[Page 67012]]

    In the proposed regulations, the Treasury Department and the IRS 
considered an alternative of not providing guidance on the aggregation 
rule in the statute. Absent the proposed regulations, there would be 
uncertainty among taxpayers as to whether the tax equal to the BEMTA 
would apply to them. Without guidance, different taxpayers would likely 
take different positions regarding the determination of their status as 
an applicable taxpayer, which would result in inefficient decision-
making and inconsistent application of the statute as taxpayers engage 
in corporate restructurings, or adjust investment and spending policies 
based on tax planning strategies to manage BEAT liability. No 
substantive comments objected to the general approach set forth in the 
proposed regulations.
b. Service Cost Method Exception
    Section 59A(d)(5) provides an exception from the definition of a 
base erosion payment for an amount paid or accrued by a taxpayer for 
services if the services are eligible for the services cost method 
under section 482 (without regard to certain requirements under the 
section 482 regulations) and the amount constitutes the total services 
cost with no markup component. The statute is ambiguous as to whether 
the SCM exception (1) does not apply to a payment or accrual that 
includes a markup component, or (2) does apply to such a payment or 
accrual that includes a markup component, but only to the extent of the 
total services costs. The proposed regulations follow the latter 
approach. See REG-104259-18, 83 FR 65961 (December 21, 2018). The final 
regulations retain the same approach. See part IV.C.1 of the Summary of 
Comments and Explanation of Revisions.
    Alternatives would have been to disallow the SCM exception for the 
entire amount of any payment that includes a markup component, or to 
not provide any guidance at all regarding the SCM exception. The 
Treasury Department and the IRS rejected the former approach. The 
section 482 regulations mandate intercompany pricing under an ``arm's 
length standard.'' Under specific circumstances, the section 482 
regulations provide that intercompany payments for services can be set 
by a taxpayer at the cost of providing the service with no profit 
markup. However, the section 482 regulations prohibit use of this cost-
only SCM approach for services ``that contribute significantly to 
fundamental risks of business success or failure'' (the ``business 
judgment rule''). See Sec.  1.482-9(b)(5). At arm's length, such 
services generally would be priced to include a profit element to 
satisfy the market's demand for, and supply of, services among 
recipients and providers. Section 59A(d)(5)(A) explicitly allows an 
exception from the BEAT for services that would be eligible for the 
SCM, ``determined without regard to [the business judgment rule].'' By 
allowing an exception from the BEAT for intercompany service payments 
that do not include a profit markup (i.e., under the SCM transfer 
pricing method), but also for intercompany service payments that must 
apply a different transfer pricing method, and therefore generally 
would include a profit markup at arm's length (i.e., those subject to 
the business judgment rule), the statute creates ambiguity about the 
SCM exception's application with respect to the portion of intercompany 
prices paid for services reflecting the cost of providing the services, 
when there is also a mark-up component. Thus, the proposed regulations 
provide that the SCM exception is available if there is a profit markup 
(provided that other requirements are satisfied), but the portion of 
any payment exceeding cost is not eligible for the SCM exception.
    The Treasury Department and the IRS also rejected the option of not 
providing any guidance at all regarding the SCM exception because if 
taxpayers relied on statutory language alone, taxpayers would adopt 
different approaches due to ambiguity in the statute, leaving it open 
to differing statutory interpretations and an inconsistent application 
of the statute. Comments supported the SCM exception and recommended 
that final regulations adopt the approach from the proposed 
regulations.
c. Effectively Connected Income
    The final regulations provide an exception from the definition of 
base erosion payment for payments to the U.S. branch of a foreign 
related person to the extent that the payments are treated as 
effectively connected income.
    Under section 59A, whether a deductible payment is a base erosion 
payment is determined based on whether the recipient is a foreign 
person (as defined in section 6038A(c)(3)) and a related party. See 
section 59A(f). A foreign person means any person who is not a United 
States person. However, the Treasury Department and the IRS determined 
in the proposed regulations that establishing whether a payment is a 
base erosion payment based solely on the status of the recipient as a 
foreign person is inconsistent with the statute's intent of eliminating 
base erosion. As a result, deductible payments to a foreign person that 
are treated as effectively connected income are subject to tax under 
section 871(b) and 882(a) in substantially the same manner as payments 
to a U.S. citizen or resident, or a domestic corporation, and, thus, 
such payments do not result in base erosion. Thus, such payments are 
treated as income to the recipient and subject to U.S. tax, 
substantially similar to any payment between related U.S. corporations. 
Further, treatment of effectively connected income payments to a 
foreign related party would produce different tax results for two 
similarly situated U.S. taxpayers. That is, if the taxpayer were to 
make a payment to a related U.S. corporation, the payment generally 
would not be subject to the BEAT, but if a taxpayer were to make a 
payment to a foreign person with respect to its effectively connected 
income, it would give rise to BEAT liability, despite the fact that in 
both cases the recipients include the payment in U.S. taxable income. 
The final regulations retain the same approach as the proposed 
regulations. See Sec.  1.59A-3(b)(3)(iii). This approach provides 
consistency with the approach in the regulations to determining the 
applicable taxpayer for aggregate groups, which is discussed in part 
I.D.4.a of this Special Analysis, because this provision excludes from 
the definition of a base erosion payment those payments to members of 
the aggregate group that are also excluded from the base erosion 
percentage because the payments are also within the aggregate group.
    The Treasury Department and the IRS considered an alternative of 
not providing this exception to the definition of a base erosion 
payment, but determined that it would be inconsistent to exclude a 
payment to the U.S. branch of a foreign related person from the base 
erosion percentage (a condition to the application of the BEAT) but not 
also exclude the same payment from the amount of base erosion payments 
(a factor in determining the amount of BEAT tax liability).
d. Modified Taxable Income
    Modified taxable income is a taxpayer's taxable income for the year 
calculated without regard to any base erosion tax benefit or the base 
erosion percentage of any allowable net operating loss deductions under 
section 172 (net operating loss deduction). As discussed in Part V.A. 
of the Summary of Comments and Explanation of Revisions, the proposed 
regulations

[[Page 67013]]

provide that modified taxable income is computed under the add-back 
method of adding back to taxable income the base erosion tax benefits 
and base erosion percentage of any net operating loss deductions. The 
regulations do not provide for computing modified taxable income by 
recomputing the tax base without base erosion tax benefits under an 
approach similar to the alternative minimum tax, which the Act repealed 
for corporations. Applying the recomputation method would require 
taxpayers to maintain records for separate carryforward balances for 
attributes, such as net operating loss deductions and business interest 
expense carryovers. These items are limited based on taxable income, so 
under the recomputation or alternative minimum tax-approach, there 
would most likely be different annual limitations and other 
computational differences for regular tax purposes and section 59A 
purposes. The final regulations retain the same approach as the 
proposed regulations. This add-back approach is expected to be less 
costly for taxpayers to apply than the recomputation approach because 
under the add-back approach, where amounts are only added to taxable 
income, taxpayers will not have to recompute their entire tax return on 
a different basis or maintain separate sets of records to track annual 
limitations on attributes such as net operating loss carryforwards or 
business interest expense carryforwards (and the IRS will not have to 
administer such a system). See Part V.A. of the Summary of Comments and 
Explanation of Revisions for a detailed discussion of the comments that 
were not adopted.
e. Payments to or From Partnerships
    As discussed in Part VIII of the Summary of Comments and 
Explanation of Revisions section, these final regulations apply the 
``aggregate'' approach to base erosion payments involving partnerships, 
which is to say that the regulations generally treat the partnership as 
an aggregation of its partners, with the partners viewed as entering 
into transactions. This aggregate approach is in contrast to the 
alternative ``entity'' approach that treats the partnership as an 
entity that engages in transactions. Because partnerships are 
passthrough entities that are not themselves subject to U.S. income tax 
and because the income of the partnership is taxable to the partners in 
the partnership, these final regulations apply the aggregate approach 
and provide that payments by a corporation to a partnership, and 
payments by a partnership to a corporation, are treated in the first 
instance as payments to the partners in the partnership and in second 
instance as payments by the partners in the partnership. Under the 
alternative entity approach that assesses the partnership as a separate 
entity, a payment by an applicable taxpayer (corporation) to a related 
foreign partnership could be a base erosion payment even if all of the 
partners in the partnership are domestic persons.
    Under the aggregate approach adopted in these final regulations, 
the applicable taxpayer (corporation) that makes a payment to a related 
foreign partnership with a partner or partners that are related foreign 
parties will determine whether it has made a base erosion payment by 
treating the amount as having been paid to each partner of the 
partnership. Conversely, also in the absence of this aggregate 
approach, a payment by an applicable taxpayer (corporation) to a 
related domestic partnership would not be a base erosion payment even 
if some or all of the partners in the partnership are foreign related 
parties. As with a payment to a related foreign partnership, under the 
aggregate approach adopted in these final regulations, the applicable 
taxpayer (corporation) that makes a payment to a related domestic 
partnership with a partner or partners that are related foreign parties 
will determine whether it has made a base erosion payment by treating 
the amount as having being paid to each partner of the partnership. 
This approach is thus neutral in both preventing potential abuse and 
preventing potential over-breadth.
    The final regulations retain the same general approach that was 
provided in the proposed regulations. See Part VIII of the Summary of 
Comments and Explanation of Revisions. The Treasury Department and the 
IRS considered an alternative of not providing guidance on transactions 
involving partnerships; however, as discussed in this part I.D.4.e, 
these final regulations eliminate the distortion that would otherwise 
be present if determination of whether a payment is a base erosion 
payment is made by reference to the partnership, rather than by 
reference to the partners. For example, in the absence of these final 
regulations, taxpayers might be incentivized to route payments through 
a domestic partnership that is formed by foreign persons as an 
intermediary to avoid the BEAT. Conversely, in the absence of the final 
regulations, taxpayers would be incentivized to restructure to avoid 
making any payments to a foreign partnership that has partners that are 
solely domestic because such payment could be inappropriately 
classified as a base erosion payment.
f. Anti-Abuse and Reporting Requirements
    Section 59A(i) provides the Secretary authority to issue 
regulations and other guidance including for the purposes of preventing 
the avoidance of the purposes of section 59A. Pursuant to this specific 
grant of regulatory authority, Sec.  1.59A-9 provides rules 
recharacterizing certain specified transactions as necessary to prevent 
the avoidance of section 59A, and provides examples. The Treasury 
Department and the IRS have determined that any compliance burdens or 
other economic costs created by the anti-abuse provisions are necessary 
to further the purposes of section 59A.
    These final regulations also provide reporting requirements 
necessary to properly administer and enforce section 59A. In 
particular, the Treasury Department and the IRS have identified certain 
types of information from taxpayers who are applicable taxpayers for 
purposes of section 59A that will be required to be reported on Form 
5471, Information Return of U.S. Persons With Respect to Certain 
Foreign Corporations, Form 5472, Information Return of a 25% Foreign-
Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade 
or Business (Under Sections 6038A and 6038C of the Internal Revenue 
Code), and a new Form 8991, Tax on Base Erosion Payments of Taxpayers 
With Substantial Gross Receipts. The regulations increase record 
keeping requirements for taxpayers relative to the baseline because 
additional information is to be reported on Form 5472 and Form 8991. 
The requirements added by the proposed regulations, however, derive 
directly from statutory changes that require information from 
applicable taxpayers and are necessary for the effective administration 
of section 59A.

II. Paperwork Reduction Act

1. Collections of Information--Forms 8991, 5471, 5472, and 8858

    The collections of information in the final regulations with 
respect to section 59A are in Sec. Sec.  1.59A-3(b)(3)(i)(C), 1.59A-
3(b)(4)(i)(D), and 1.6038A-2. In response to comments addressing the 
notice of proposed rulemaking preceding the final regulations, the 
Treasury Department and the IRS have revised the collection of 
information with respect to section 6038A. The revised collection of 
information with respect to sections 59A and 6038A is in Sec.  1.6038A-
2(b)(7)(ix).

[[Page 67014]]

    The collection of information in Sec.  1.59A-6(b)(2)(i) and Sec.  
1.6038A-2(b)(7)(ix) requires an applicable taxpayer that makes 
qualified derivative payments to report information regarding its 
qualified derivative payments on Form 8991 in order for the QDP 
exception from base erosion payment status to apply to any particular 
payment. In response to comments, Sec.  1.59A-6(b)(2)(i) provides that 
a taxpayer satisfies the reporting requirement by reporting the 
aggregate amount of all QDPs (rather than the aggregate amount as 
determined by type of derivative contract as provided in proposed Sec.  
1.6038A-2(b)(7)(ix)(A)) on Form 8991 or its successor form. To comply 
with these reporting requirements, taxpayers will need to develop 
systems to collect and report the relevant information. To separately 
determine the aggregate amount of QDPs by each specific type of 
derivative contract would add to the complexity of those systems. That 
additional complexity and compliance burden outweighs the utility to 
the IRS of receiving that information for each specific type of 
derivative contract. Section 1.59A-6(b)(2)(iv) also provides that 
during the transition period before Sec.  1.59A-6(b)(2)(i) is 
applicable, taxpayers will not be deemed to have failed to satisfy the 
reporting requirement if the taxpayer reports the aggregate amount of 
qualified derivative payments in good faith. For purposes of the PRA, 
the reporting burden associated with Sec.  1.59A-3(b)(4)(i)(D), Sec.  
1.59A-6(b)(2)(i) and Sec.  1.6038A-2(b)(7)(ix) will be reflected in the 
PRA submission associated with the Form 8991 series (see chart at the 
end of this Part II of the Special Analysis section for the status of 
the PRA submission for this form).

                            Tax Form Impacted
------------------------------------------------------------------------
                                 Number of        Forms to which the
  Collection of information     respondents       information may  be
                                (estimated)            attached
------------------------------------------------------------------------
Sec.   1.59A-3(b)(4)(i)(D)           105,600  Form 8991 series.
 election to use-applicable
 financial statements.
Sec.   1.59A-6(b)(2)(i) and          105,600  Form 8991 series.
 Sec.   1.6038A-2(b)(7)(ix)
 requirement to report
 qualified derivative
 payments.
------------------------------------------------------------------------
CDW.

    The information collection requirements pursuant to Sec.  1.59A-
3(b)(3)(i)(C) are discussed further below. The collections of 
information pursuant to section 59A, except with respect to information 
collected under Sec.  1.59A-3(b)(3)(i)(C), will be conducted by way of 
the following:
     Form 8991, Tax on Base Erosion Payments of Taxpayers With 
Substantial Gross Receipts;
     Schedule G to the Form 5471, Information Return of U.S. 
Persons With Respect to Certain Foreign Corporations;
     Part VIII of the updated Form 5472, Information Return of 
a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged 
in a U.S. Trade or Business;
     Revised Form 8858, Information Return of U.S. Persons With 
Respect to Foreign Disregarded Entities.
    For purposes of the Paperwork Reduction Act, the reporting burden 
associated with the collections of information with respect to section 
59A, other than with respect to Sec.  1.59A-3(b)(3)(i)(C), will be 
reflected in the IRS Forms 14029 Paperwork Reduction Act Submission, 
associated with Forms 5471 (OMB control numbers 1545-0123, and 1545-
0074), 5472 (OMB control number 1545-0123), 8858 (OMB control numbers 
1545-0123, 1545-0074, and 1545-1910), and 8991 (OMB control number 
1545-0123).
    The current status of the Paperwork Reduction Act submissions 
related to BEAT is provided in the following table. The BEAT provisions 
are included in aggregated burden estimates for the OMB control numbers 
listed below which, in the case of 1545-0123, represents a total 
estimated burden time, including all other related forms and schedules 
for corporations, of 3.157 billion hours and total estimated monetized 
costs of $58.148 billion ($2017) and, in the case of 1545-0074, a total 
estimated burden time, including all other related forms and schedules 
for individuals, of 1.784 billion hours and total estimated monetized 
costs of $31.764 billion ($2017). The burden estimates provided in the 
OMB control numbers below are aggregate amounts that relate to the 
entire package of forms associated with the OMB control number, and 
will in the future include but not isolate the estimated burden of only 
the BEAT requirements. These numbers are therefore unrelated to the 
future calculations needed to assess the burden imposed by the final 
regulations. The Treasury Department and IRS urge readers to recognize 
that these numbers are duplicates and to guard against overcounting the 
burden that international tax provisions imposed prior to the Act. No 
burden estimates specific to the final regulations are currently 
available. The Treasury Department has not estimated the burden, 
including that of any new information collections, related to the 
requirements under the final regulations. Those estimates would capture 
both changes made by the Act and those that arise out of discretionary 
authority exercised in the final regulations. The Treasury Department 
and the IRS request comment on all aspects of information collection 
burdens related to the final regulations. In addition, when available, 
drafts of IRS forms are posted for comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.htm.

----------------------------------------------------------------------------------------------------------------
                 Form                         Type of filer          OMB No.(s)                Status
----------------------------------------------------------------------------------------------------------------
Form 5471 (including Schedule G)......  Business (NEW Model).....       1545-0123  Published in the Federal
                                                                                    Register on 10/8/18. Public
                                                                                    Comment period closed on 12/
                                                                                    10/18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
----------------------------------------------------------------------------------------------------------------

[[Page 67015]]

 
                                        Individual (NEW Model)...       1545-0074  Limited Scope submission
                                                                                    (1040 only) on 10/11/18 at
                                                                                    OIRA for review. Full ICR
                                                                                    submission for all forms in
                                                                                    3/2019. 60 Day Federal
                                                                                    Register notice not
                                                                                    published yet for full
                                                                                    collection.
                                       -------------------------------------------------------------------------
                                        Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031 031.
----------------------------------------------------------------------------------------------------------------
Form 5472 (including Part VIII).......  Business (NEW Model).....       1545-0123  Published in the Federal
                                                                                    Register on 10/11/18. Public
                                                                                    Comment period closed on 12/
                                                                                    10/18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
----------------------------------------------------------------------------------------------------------------
Form 8858.............................  All other Filers (mainly        1545-1910  Published in the Federal
                                         trusts and estates)                        Register on 10/30/18. Public
                                         (Legacy system).                           Comment period closed on11/
                                                                                    30/18. ICR in process by the
                                                                                    Treasury Department as of 9/
                                                                                    6/18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/10/30/2018-23644/agency-information-collection-activities-submission-for-omb-review-comment-request-multiple-irs.
                                       -------------------------------------------------------------------------
                                        Business (NEW Model).....       1545-0123  Published in the Federal
                                                                                    Register on 10/8/18. Public
                                                                                    Comment period closed on 12/
                                                                                    10/18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
                                       -------------------------------------------------------------------------
                                        Individual (NEW Model)...       1545-0074  Limited Scope submission
                                                                                    (1040 only) on 10/11/18 at
                                                                                    OIRA for review. Full ICR
                                                                                    submission for all forms in
                                                                                    3-2019. 60 Day Federal
                                                                                    Register notice not
                                                                                    published yet for full
                                                                                    collection.
                                       -------------------------------------------------------------------------
                                        Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031 031.
----------------------------------------------------------------------------------------------------------------
Form 8991.............................  Business (NEW Model).....       1545-0123  Published in the Federal
                                                                                    Register on 10/11/18. Public
                                                                                    Comment period closed on 12/
                                                                                    10/18.
                                       -------------------------------------------------------------------------
                                        Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
----------------------------------------------------------------------------------------------------------------


                                        Related New or Revised Tax Forms
----------------------------------------------------------------------------------------------------------------
                                                                                                  Number of
                                                                New           Revision of    respondents  (2018,
                                                                             existing form        estimated)
----------------------------------------------------------------------------------------------------------------
Form 8991..............................................                Y   ................          3,500-4,500
Form 5471, Schedule G..................................  ................                Y         15,000-25,000
Form 5472, Part VIII...................................                Y   ................       80,000-100,000
Form 8858..............................................  ................                Y         15,000-25,000
----------------------------------------------------------------------------------------------------------------

    The numbers of respondents in the Related New or Revised Tax Forms 
table were estimated by Treasury's Office of Tax Analysis based on data 
from IRS Compliance Planning and Analytics using tax return data for 
tax years 2015 and 2016. Data for Form 8991 represent preliminary 
estimates of the total number of taxpayers which may be required to 
file the new Form 8991. Only certain large corporate taxpayers with 
gross receipts of at least $500 million are expected to file this form. 
Data for each of the Forms 5471, 5472, and 8858 represent preliminary 
estimates of the total number of taxpayers that are expected to file 
these information returns regardless of whether that taxpayer must also 
file Form 8991.
    The Treasury Department and the IRS project that 3,500-4,500 
taxpayers may be applicable taxpayers under the BEAT. This estimate is 
based on the number of filers that (1) filed the Form 1120 series of 
tax returns (except for the Form 1120-S), (2) filed a Form 5471 or Form 
5472, and (3) reported gross receipts of at least $500 million. Because 
an applicable taxpayer is defined under section 59A(e)(1)(A) as a 
corporation other than a regulated investment company, a real estate 
investment trust, or an S corporation, the Treasury Department and the 
IRS have determined that taxpayers who filed the Form 1120 series of 
tax returns will be most likely to be affected by these proposed 
regulations. Additionally, the Treasury Department and the IRS 
estimated the number of filers likely to make payments to a foreign 
related party based on filers of the Form 1120 series of tax returns 
who also filed a Form 5471 or Form 5472 to determine the number of 
respondents. Finally, because an applicable taxpayer is defined under 
section 59A(e)(1)(B) as a taxpayer with average annual gross receipts 
of at least $500 million for the 3-taxable-year period ending with the 
preceding taxable year, the Treasury Department and the IRS estimated 
the scope of respondents based on the amount of gross receipts reported 
by taxpayers filing the Form 1120 series of tax returns.
    These projections are based solely on data with respect to the 
taxpayer, without taking into account any

[[Page 67016]]

members of the taxpayer's aggregate group. As many as 105,600 
additional taxpayers may be applicable taxpayers as a result of being 
members of an aggregate group.\6\ This estimate is based on the number 
of taxpayers who filed a Form 1120 and also filed a Form 5471 or a Form 
5472, but without regard to the gross receipts test.
---------------------------------------------------------------------------

    \6\ These estimates are based on current tax filings for taxable 
year 2017 and do not yet include the BEAT. At this time, the 
Treasury Department and the IRS do not have readily available data 
to determine whether a taxpayer that is a member of an aggregate 
group will meet all tests to be an applicable taxpayer for purposes 
of the BEAT.
---------------------------------------------------------------------------

2. Collection of Information--Sec.  1.59A-3(b)(3)(i)(C)

    The information collection requirements pursuant to Sec.  1.59A-
3(b)(3)(i)(C) will be satisfied by the taxpayer maintaining permanent 
books and records that are adequate to verify the amount charged for 
the services and the total services costs incurred by the renderer, 
including a description of the services in question, identification of 
the renderer and the recipient of the services, calculation of the 
amount of profit mark-up (if any) paid for the services, and sufficient 
documentation to allow verification of the methods used to allocate and 
apportion the costs to the services.
    The collection of information in Sec.  1.59A-3(b)(3)(i)(C) is 
mandatory for taxpayers seeking to exclude certain amounts paid or 
accrued to a foreign related party for services from treatment as base 
erosion payments for purposes of section 59A (the ``SCM exception to 
the BEAT''). Taxpayers seeking to rely on the SCM exception to the BEAT 
are aggregate groups of corporations with average annual gross receipts 
of at least $500 million and that make payments to foreign related 
parties. The information required to be maintained will be used by the 
IRS for tax compliance purposes.
    Estimated total annual reporting burden: 5,000 hours.
    Estimated average annual burden hours per respondent: 2.5 hours.
    Estimated average cost per respondent ($2017): $238.00.
    Estimated number of respondents: 2,000. This estimate is based on 
the assumption that only a portion of taxpayers will qualify for the 
SCM exception to the BEAT, multiplied by the number of respondents 
shown above.
    Estimated annual frequency of responses: Once.
    Based on these estimates, the annual three-year reporting burden 
for those electing the SCM exemption is $0.16 mn/yr ($2017) ($238 x 
2,000/3, converted to millions).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

III. Regulatory Flexibility Act

    It is hereby certified that these regulations will not have a 
significant economic impact on a substantial number of small entities 
within the meaning of section 601(6) of the Regulatory Flexibility Act 
(5 U.S.C. chapter 6). This certification is based on the fact that 
these regulations will primarily affect aggregate groups of 
corporations with average annual gross receipts of at least $500 
million and that make payments to foreign related parties. Generally 
only large businesses both have substantial gross receipts and make 
payments to foreign related parties.
    Pursuant to section 7805(f), the proposed regulations preceding 
these final regulations (REG-104259-18) were submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
state, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2019, that threshold is approximately $154 million. This 
rule does not include any Federal mandate that may result in 
expenditures by state, local, or tribal governments, or by the private 
sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

VI. Congressional Review Act

    The Administrator of the Office of Information and Regulatory 
Affairs of the Office of Management and Budget has determined that this 
is a major rule for purposes of the Congressional Review Act (5 U.S.C. 
801 et seq.) (``CRA''). Under section 801(3) of the CRA, a major rule 
takes effect 60 days after the rule is published in the Federal 
Register. Notwithstanding this requirement, section 808(2) of the CRA 
allows agencies to dispense with the requirements of 801 when the 
agency for good cause finds that such procedure would be impracticable, 
unnecessary, or contrary to the public interest and the rule shall take 
effect at such time as the agency promulgating the rule determines.
    Pursuant to section 808(2) of the CRA, the Treasury Department and 
the IRS find, for good cause, that a 60-day delay in the effective date 
is unnecessary and contrary to the public interest. The Treasury 
Department and the IRS have determined that the rules in this Treasury 
decision (other than the reporting requirements for QDPs in Sec.  
1.6038A-2(b)(7), Sec.  1.1502-2(a)(9), and Sec.  1.1502-59A) shall take 
effect for taxable years ending on or after December 17, 2018. Section 
14401(e) of the Act provides that section 59A applies to base erosion 
payments paid or accrued in taxable years beginning after December 31, 
2017. This means that the statute is currently effective, and taxpayers 
may be required to make payments under section 59A on a U.S. federal 
income tax return for 2018 tax years. These final regulations provide 
crucial guidance for taxpayers on how to apply the rules of section 
59A, correctly calculate their liability under section 59A, and 
accurately file their U.S. federal income tax returns. Because the 
statute already requires taxpayers to comply with section 59A, a 60-day 
delay in the effective date is unnecessary and contrary to the public 
interest.

Drafting Information

    The principal authors of these final regulations are Azeka J. 
Abramoff, Sheila Ramaswamy, and Karen Walny of the Office of Associate 
Chief Counsel (International) and Julie Wang and John

[[Page 67017]]

P. Stemwedel of the Office of Associate Chief Counsel (Corporate). 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by revising 
the entry for Sec.  1.6038A-2 and adding entries for Sec. Sec.  1.59A-
0, 1.59A-1, 1.59A-2, 1.59A-3, 1.59A-4, 1.59A-5, 1.59A-6, 1.59A-7, 
1.59A-8, 1.59A-9, 1.59A-10, 1.1502-59A, and 1.1502-100 to read in part 
as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Sec.  1.59A-0 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-1 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-2 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-3 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-4 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-5 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-6 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-7 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-8 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-9 also issued under 26 U.S.C. 59A(i).
    Sec.  1.59A-10 also issued under 26 U.S.C. 59A(i).
* * * * *
    Sec.  1.1502-59A also issued under 26 U.S.C. 1502.
* * * * *
    Sec.  1.1502-100 also issued under 26 U.S.C. 1502.
* * * * *
    Sec.  1.6038A-2 also issued under 26 U.S.C. 6001, 6038A, and 
6038C.
* * * * *


0
Par. 2. Sections 1.59A-0 through 1.59A-10 are added to read as follows:
* * * * *
Sec.
1.59A-0 Table of contents.
1.59A-1 Base erosion and anti-abuse tax.
1.59A-2 Applicable taxpayer.
1.59A-3 Base erosion payments and base erosion tax benefits.
1.59A-4 Modified taxable income.
1.59A-5 Base erosion minimum tax amount.
1.59A-6 Qualified derivative payment.
1.59A-7 Application of base erosion and anti-abuse tax to 
partnerships.
1.59A-8 [Reserved]
1.59A-9 Anti-abuse and recharacterization rules.
1.59A-10 Applicability date.
* * * * *


Sec.  1.59A-0  Table of contents.

    This section contains a listing of the headings for Sec. Sec.  
1.59A-1, 1.59A-2, 1.59A-3, 1.59A-4, 1.59A-5, 1.59A-6, 1.59A-7, 1.59A-8, 
1.59A-9, 1.59A-10.


Sec.  1.59A-1  Base erosion and anti-abuse tax.

    (a) Purpose.
    (b) Definitions.
    (1) Aggregate group.
    (2) Applicable section 38 credits.
    (3) Applicable taxpayer.
    (4) Bank.
    (5) Base erosion and anti-abuse tax rate.
    (6) Business interest expense.
    (7) Deduction.
    (8) Disallowed business interest expense carryforward.
    (9) Domestic related business interest expense.
    (10) Foreign person.
    (11) Foreign related business interest expense.
    (12) Foreign related party.
    (13) Gross receipts.
    (14) Member of an aggregate group.
    (15) Registered securities dealer.
    (16) Regular tax liability.
    (17) Related party.
    (i) In general.
    (ii) 25-percent owner.
    (iii) Application of section 318.
    (18) TLAC long-term debt required amount.
    (19) TLAC securities amount.
    (20) TLAC security.
    (21) Unrelated business interest expense.


Sec.  1.59A-2  Applicable taxpayer.

    (a) Scope.
    (b) Applicable taxpayer.
    (c) Aggregation rules.
    (1) In general.
    (2) Aggregate group determined with respect to each taxpayer.
    (i) In general.
    (ii) Reserved.
    (3) Taxable year of members of an aggregate group.
    (4) Reserved.
    (5) Reserved.
    (6) Reserved.
    (7) Partnerships.
    (8) Transition rule for aggregate group members with different 
taxable years.
    (d) Gross receipts test.
    (1) Amount of gross receipts.
    (2) Taxpayer not in existence for entire three-year period.
    (3) Gross receipts of foreign corporations.
    (4) Gross receipts of an insurance company.
    (5) Reductions in gross receipts.
    (6) Gross receipts of consolidated groups.
    (e) Base erosion percentage test.
    (1) In general.
    (2) Base erosion percentage test for banks and registered 
securities dealers.
    (i) In general.
    (ii) Aggregate groups.
    (iii) De minimis exception for banking and registered securities 
dealer activities.
    (3) Computation of base erosion percentage.
    (i) In general.
    (ii) Certain items not taken into account in denominator.
    (iii) Effect of treaties on base erosion percentage 
determination.
    (iv) Amounts paid or accrued between members of a consolidated 
group.
    (v) Deductions and base erosion tax benefits from partnerships.
    (vi) Mark-to-market positions.
    (vii) Reinsurance losses incurred and claims payments.
    (viii) Certain payments that qualify for the effectively 
connected income exception and another base erosion payment 
exception.
    (f) Examples.
    (1) Mark-to-market.
    (i) Facts.
    (ii) Analysis.
    (2) [Reserved]


Sec.  1.59A-3  Base erosion payments and base erosion tax benefits.

    (a) Scope.
    (b) Base erosion payments.
    (1) In general.
    (2) Operating rules.
    (i) In general.
    (ii) Amounts paid or accrued in cash and other consideration.
    (iii) Transactions providing for net payments.
    (iv) Amounts paid or accrued with respect to mark-to-market 
position.
    (v) Coordination among categories of base erosion payments.
    (vi) Certain domestic passthrough entities.
    (A) In general.
    (B) Amount of base erosion payment.
    (C) Specified domestic passthrough.
    (D) Specified foreign related party.
    (vii) Transfers of property to related taxpayers.
    (viii) Reductions to determine gross income.
    (ix) Losses recognized on the sale or transfer of property.
    (3) Exceptions to base erosion payment.
    (i) Certain services cost method amounts.
    (A) In general.
    (B) Eligibility for the services cost method exception.
    (C) Adequate books and records.
    (D) Total services cost.
    (ii) Qualified derivative payments.
    (iii) Effectively connected income.
    (A) In general.
    (B) Application to certain treaty residents.
    (iv) Exchange loss on a section 988 transaction.
    (v) Amounts paid or accrued with respect to TLAC securities and 
foreign TLAC securities.
    (A) In general.
    (B) Limitation on exclusion for TLAC securities.
    (C) Scaling ratio.
    (D) Average domestic TLAC securities amount.
    (E) Average TLAC long-term debt required amount.

[[Page 67018]]

    (F) Limitation on exclusion for foreign TLAC securities.
    (1) In general.
    (2) Foreign TLAC long-term debt required amount.
    (3) No specified minimum provided by local law.
    (4) Foreign TLAC security.
    (vi) Amounts paid or accrued in taxable years beginning before 
January 1, 2018.
    (vii) Business interest carried forward from taxable years 
beginning before January 1, 2018.
    (viii) Specified nonrecognition transactions.
    (A) In general.
    (B) Other property transferred to a foreign related party in a 
specified nonrecognition transaction.
    (C) Other property received from a foreign related party in 
certain specified nonrecognition transactions.
    (D) Definition of other property
    (E) Allocation of other property.
    (ix) Reinsurance losses incurred and claims payments.
    (A) In general.
    (B) Regulated foreign insurance company.
    (4) Rules for determining the amount of certain base erosion 
payments.
    (i) Interest expense allocable to a foreign corporation's 
effectively connected income.
    (A) Methods described in Sec.  1.882-5.
    (B) U.S.-booked liabilities determination.
    (C) U.S.-booked liabilities in excess of U.S.-connected 
liabilities.
    (D) Election to use financial statements.
    (E) Coordination with certain tax treaties.
    (1) In general.
    (2) Hypothetical Sec.  1.882-5 interest expense defined.
    (3) Consistency requirement.
    (F) Coordination with exception for foreign TLAC securities.
    (ii) Other deductions allowed with respect to effectively 
connected income.
    (iii) Depreciable property.
    (iv) Coordination with ECI exception.
    (v) Coordination with certain tax treaties.
    (A) Allocable expenses.
    (B) Internal dealings under certain income tax treaties.
    (vi) Business interest expense arising in taxable years 
beginning after December 31, 2017.
    (c) Base erosion tax benefit.
    (1) In general.
    (2) Exception to base erosion tax benefit.
    (i) In general.
    (ii) Branch-level interest tax.
    (3) Effect of treaty on base erosion tax benefit.
    (4) Application of section 163(j) to base erosion payments.
    (i) Classification of payments or accruals of business interest 
expense based on the payee.
    (A) Classification of payments or accruals of business interest 
expense of a corporation.
    (B) Classification of payments or accruals of business interest 
expense by a partnership.
    (C) Classification of payments or accruals of business interest 
expense paid or accrued to a foreign related party that is subject 
to an exception.
    (1) ECI exception.
    (2) TLAC interest and interest subject to withholding tax.
    (ii) Ordering rules for business interest expense that is 
limited under section 163(j)(1) to determine which classifications 
of business interest expense are deducted and which classifications 
of business interest expense are carried forward.
    (A) In general.
    (B) Ordering rules for treating business interest expense 
deduction and disallowed business interest expense carryforwards as 
foreign related business interest expense, domestic related business 
interest expense, and unrelated business interest expense.
    (1) General ordering rule for allocating business interest 
expense deduction between classifications.
    (2) Ordering of business interest expense incurred by a 
corporation.
    (3) Ordering of business interest expense incurred by a 
partnership and allocated to a corporate partner.
    (d) Examples.
    (1) Example 1: Determining a base erosion payment.
    (i) Facts.
    (ii) Analysis.
    (2) Example 2: Interest allocable under Sec.  1.882-5.
    (i) Facts.
    (ii) Analysis.
    (3) Example 3: Interaction with section 163(j).
    (i) Facts.
    (ii) Analysis.
    (A) Classification of business interest.
    (B) Ordering rules for disallowed business interest expense 
carryforward.
    (4) Example 4: Interaction with section 163(j); carryforward.
    (i) Facts.
    (ii) Analysis.
    (A) Classification of business interest.
    (B) Ordering rules for disallowed business interest expense 
carryforward.
    (5) Example 5: Interaction with section 163(j); carryforward.
    (i) Facts.
    (ii) Analysis.
    (6) Example 6: Interaction with section 163(j); partnership.
    (i) Facts.
    (ii) Partnership level analysis.
    (iii) Partner level allocations analysis.
    (iv) Partner level allocations for determining base erosion tax 
benefits.
    (v) Computation of modified taxable income.
    (7) Example 7: Transfers of property to related taxpayers.
    (i) Facts.
    (ii) Analysis.
    (A) Year 1.
    (B) Year 2.


Sec.  1.59A-4  Modified taxable income.

    (a) Scope.
    (b) Computation of modified taxable income.
    (1) In general.
    (2) Modifications to taxable income.
    (i) Base erosion tax benefits.
    (ii) Certain net operating loss deductions.
    (3) Rule for holders of a residual interest in a REMIC.
    (c) Examples.
    (1) Example 1: Current year loss.
    (i) Facts.
    (ii) Analysis.
    (2) Example 2: Net operating loss deduction.
    (i) Facts.
    (ii) Analysis.


Sec.  1.59A-5  Base erosion minimum tax amount.

    (a) Scope.
    (b) Base erosion minimum tax amount.
    (1) In general.
    (2) Calculation of base erosion minimum tax amount.
    (3) Credits that do not reduce regular tax liability.
    (i) Taxable years beginning on or before December 31, 2025.
    (ii) Taxable years beginning after December 31, 2025.
    (c) Base erosion and anti-abuse tax rate.
    (1) In general.
    (i) Calendar year 2018.
    (ii) Calendar years 2019 through 2025.
    (iii) Calendar years after 2025.
    (2) Increased rate for banks and registered securities dealers.
    (i) In general.
    (ii) De minimis exception to increased rate for banks and 
registered securities dealers.
    (3) Application of section 15 to tax rates in section 59A.
    (i) New tax.
    (ii) Change in tax rate pursuant to section 59A(b)(1)(A).
    (iii) Change in rate pursuant to section 59A(b)(2).


Sec.  1.59A-6  Qualified derivative payment.

    (a) Scope.
    (b) Qualified derivative payment.
    (1) In general.
    (2) Reporting requirements.
    (i) In general.
    (ii) Failure to satisfy the reporting requirement.
    (iii) Reporting of aggregate amount of qualified derivative 
payments.
    (iv) Transition period for qualified derivative payment 
reporting.
    (3) Amount of any qualified derivative payment.
    (i) In general.
    (ii) Net qualified derivative payment that includes a payment 
that is a base erosion payment.
    (c) Exceptions for payments otherwise treated as base erosion 
payments.
    (d) Derivative defined.
    (1) In general.
    (2) Exceptions.
    (i) Direct interest.
    (ii) Insurance contracts.
    (iii) Securities lending and sale-repurchase transactions.
    (A) Multi-step transactions treated as financing.
    (B) Special rule for payments associated with the cash 
collateral provided in a securities lending transaction or 
substantially similar transaction.
    (C) Anti-abuse exception for certain transactions that are the 
economic equivalent of substantially unsecured cash borrowing.
    (3) American depository receipts.
    (e) Examples.

[[Page 67019]]

    (1) Example 1: Notional principal contract as QDP.
    (i) Facts.
    (ii) Analysis.
    (2) Example 2: Securities lending anti-abuse rule.
    (i) Facts.
    (ii) Analysis.


Sec.  1.59A-7  Application of base erosion and anti-abuse tax to 
partnerships.

    (a) Scope.
    (b) Application of section 59A to partnerships.
    (c) Base erosion payment.
    (1) Payments made by or to a partnership.
    (2) Transfers of certain property.
    (3) Transfers of a partnership interest.
    (i) In general.
    (ii) Transfers of a partnership interest by a partner.
    (iii) Certain issuances of a partnership interest by a 
partnership.
    (iv) Partnership interest transfers defined.
    (4) Increased basis from a distribution.
    (5) Operating rules applicable to base erosion payments.
    (i) Single payment characterized as separate transactions.
    (ii) Ordering rule with respect to transfers of a partnership 
interest.
    (iii) Consideration for base erosion payment or property 
resulting in base erosion tax benefits.
    (iv) Non-cash consideration.
    (d) Base erosion tax benefit for partners.
    (1) In general.
    (2) Exception for base erosion tax benefits of certain small 
partners.
    (i) In general.
    (ii) Attribution.
    (e) Other rules for applying section 59A to partnerships.
    (1) Partner's distributive share.
    (2) Gross receipts.
    (i) In general.
    (ii) Foreign corporation.
    (3) Registered securities dealers.
    (4) Application of sections 163(j) and 59A(c)(3) to partners.
    (5) Tiered partnerships.
    (f) Foreign related party.
    (g) Examples.
    (1) Facts.
    (2) Examples.
    (i) Example 1: Contributions to a partnership on partnership 
formation.
    (A) Facts.
    (B) Analysis.
    (ii) Example 2: Section 704(c) and remedial allocations.
    (A) Facts.
    (B) Analysis.
    (iii) Example 3: Sale of a partnership interest without a 
section 754 election.
    (A) Facts.
    (B) Analysis.
    (iv) Example 4: Sale of a partnership interest with section 754 
election.
    (A) Facts.
    (B) Analysis.
    (v) Example 5: Purchase of depreciable property from a 
partnership.
    (A) Facts.
    (B) Analysis.
    (vi) Example 6: Sale of a partnership interest to a second 
partnership.
    (A) Facts.
    (B) Analysis.
    (vii) Example 7: Distribution of cash by a partnership to a 
foreign related party.
    (A) Facts.
    (B) Analysis.
    (viii) Example 8: Distribution of property by a partnership to a 
taxpayer.
    (A) Facts.
    (B) Analysis.
    (ix) Example 9: Distribution of property by a partnership in 
liquidation of a foreign related party's interest.
    (A) Facts.
    (B) Analysis.


Sec.  1.59A-8   [Reserved]


Sec.  1.59A-9   Anti-abuse and recharacterization rules.

    (a) Scope.
    (b) Anti-abuse rules.
    (1) Transactions involving unrelated persons, conduits, or 
intermediaries.
    (2) Transactions to increase the amount of deductions taken into 
account in the denominator of the base erosion percentage 
computation.
    (3) Transactions to avoid the application of rules applicable to 
banks and registered securities dealers.
    (4) Nonrecognition transactions.
    (c) Examples.
    (1) Facts.
    (2) Example 1: Substitution of payments that are not base 
erosion payments for payments that otherwise would be base erosion 
payments through a conduit or intermediary.
    (i) Facts.
    (ii) Analysis.
    (3) Example 2: Alternative transaction to base erosion payment.
    (i) Facts.
    (ii) Analysis.
    (4) Example 3: Alternative financing source.
    (i) Facts.
    (ii) Analysis.
    (5) Example 4: Alternative financing source that is a conduit.
    (i) Facts.
    (ii) Analysis.
    (6) Example 5: Intermediary acquisition.
    (i) Facts.
    (ii) Analysis.
    (7) Example 6: Offsetting transactions to increase the amount of 
deductions taken into account in the denominator of the base erosion 
percentage computation.
    (i) Facts.
    (ii) Analysis.
    (8) Example 7: Ordinary course transactions that increase the 
amount of deductions taken into account in the denominator of the 
base erosion percentage computation.
    (i) Facts.
    (ii) Analysis.
    (9) Example 8: Transactions to avoid the application of rules 
applicable to banks and registered securities dealers.
    (i) Facts.
    (ii) Analysis.
    (10) Example 9: Transactions that do not avoid the application 
of rules applicable to banks and registered securities dealers.
    (i) Facts.
    (ii) Analysis.
    (11) Example 10: Acquisition of depreciable property in a 
nonrecognition transaction.
    (i) Facts.
    (ii) Analysis.
    (12) Example 11: Transactions between related parties with a 
principal purpose of increasing the adjusted basis of property.
    (i) Facts.
    (ii) Analysis.


Sec.  1.59A-10  Applicability date.


Sec.  1.59A-1  Base erosion and anti-abuse tax.

    (a) Purpose. This section and Sec. Sec.  1.59A-2 through 1.59A-10 
(collectively, the ``section 59A regulations'') provide rules under 
section 59A to determine the amount of the base erosion and anti-abuse 
tax. Paragraph (b) of this section provides definitions applicable to 
the section 59A regulations. Section 1.59A-2 provides rules regarding 
how to determine whether a taxpayer is an applicable taxpayer. Section 
1.59A-3 provides rules regarding base erosion payments and base erosion 
tax benefits. Section 1.59A-4 provides rules for calculating modified 
taxable income. Section 1.59A-5 provides rules for calculating the base 
erosion minimum tax amount. Section 1.59A-6 provides rules relating to 
qualified derivative payments. Section 1.59A-7 provides rules regarding 
the application of section 59A to partnerships. Section 1.59A-8 is 
reserved for rules regarding the application of section 59A to certain 
expatriated entities. Section 1.59A-9 provides anti-abuse rules to 
prevent avoidance of section 59A. Finally, Sec.  1.59A-10 provides the 
applicability date for the section 59A regulations.
    (b) Definitions. For purposes of this section and Sec. Sec.  1.59A-
2 through 1.59A-10, the following terms have the meanings provided in 
this paragraph (b).
    (1) Aggregate group. The term aggregate group means the group of 
corporations determined by--
    (i) Identifying a controlled group of corporations as defined in 
section 1563(a), except that the phrase ``more than 50 percent'' is 
substituted for ``at least 80 percent'' each place it appears in 
section 1563(a)(1) and the determination is made without regard to 
sections 1563(a)(4) and (e)(3)(C), and
    (ii) Once the controlled group of corporations is determined, 
excluding foreign corporations except with regard to income that is, or 
is treated as, effectively connected with the conduct of a trade or 
business in the United States under an applicable provision of the 
Internal Revenue Code or

[[Page 67020]]

regulations published under 26 CFR chapter I. Notwithstanding the 
foregoing, if a foreign corporation is subject to tax on a net basis 
pursuant to an applicable income tax treaty of the United States, it is 
excluded from the controlled group of corporations except with regard 
to income taken into account in determining its net taxable income.
    (2) Applicable section 38 credits. The term applicable section 38 
credits means the credits allowed under section 38 for the taxable year 
that are properly allocable to--
    (i) The low-income housing credit determined under section 42(a),
    (ii) The renewable electricity production credit determined under 
section 45(a), and
    (iii) The investment credit determined under section 46, but only 
to the extent properly allocable to the energy credit determined under 
section 48.
    (3) Applicable taxpayer. The term applicable taxpayer means a 
taxpayer that meets the requirements set forth in Sec.  1.59A-2(b).
    (4) Bank. The term bank has the meaning provided in section 581.
    (5) Base erosion and anti-abuse tax rate. The term base erosion and 
anti-abuse tax rate means the percentage that the taxpayer applies to 
its modified taxable income for the taxable year to calculate its base 
erosion minimum tax amount. See Sec.  1.59A-5(c) for the base erosion 
and anti-abuse tax rate applicable for the relevant taxable year.
    (6) Business interest expense. The term business interest expense, 
with respect to a taxpayer and a taxable year, has the meaning provided 
in Sec.  1.163(j)-1(b)(2).
    (7) Deduction. The term deduction means any deduction allowable 
under chapter 1 of subtitle A of the Internal Revenue Code.
    (8) Disallowed business interest expense carryforward. The term 
disallowed business interest expense carryforward has the meaning 
provided in Sec.  1.163(j)-1(b)(9).
    (9) Domestic related business interest expense. The term domestic 
related business interest expense for any taxable year is the 
taxpayer's business interest expense paid or accrued to a related party 
that is not a foreign related party.
    (10) Foreign person. The term foreign person means any person who 
is not a United States person. For purposes of the preceding sentence, 
a United States person has the meaning provided in section 7701(a)(30), 
except that any individual who is a citizen of any possession of the 
United States (but not otherwise a citizen of the United States) and 
who is not a resident of the United States is not a United States 
person. See Sec.  1.59A-7(b) for rules applicable to partnerships.
    (11) Foreign related business interest expense. The term foreign 
related business interest expense for any taxable year is the 
taxpayer's business interest expense paid or accrued to a foreign 
related party.
    (12) Foreign related party. The term foreign related party means a 
foreign person, as defined in paragraph (b)(10) of this section, that 
is a related party, as defined in paragraph (b)(17) of this section, 
with respect to the taxpayer. In addition, for purposes of Sec.  1.59A-
3(b)(4)(v)(B) (relating to internal dealings under certain income tax 
treaties), a foreign related party also includes the foreign 
corporation's home office or a foreign branch of the foreign 
corporation. See Sec.  1.59A-7(b), (c), and (f) for rules applicable to 
partnerships.
    (13) Gross receipts. The term gross receipts has the meaning 
provided in Sec.  1.448-1T(f)(2)(iv).
    (14) Member of an aggregate group. The term member of an aggregate 
group means a corporation that is included in an aggregate group, as 
defined in paragraph (b)(1) of this section.
    (15) Registered securities dealer. The term registered securities 
dealer means any dealer as defined in section 3(a)(5) of the Securities 
Exchange Act of 1934 that is registered, or required to be registered, 
under section 15 of the Securities Exchange Act of 1934.
    (16) Regular tax liability. The term regular tax liability has the 
meaning provided in section 26(b).
    (17) Related party--(i) In general. A related party, with respect 
to an applicable taxpayer, is--
    (A) Any 25-percent owner of the taxpayer;
    (B) Any person who is related (within the meaning of section 267(b) 
or 707(b)(1)) to the taxpayer or any 25-percent owner of the taxpayer; 
or
    (C) A controlled taxpayer within the meaning of Sec.  1.482-1(i)(5) 
together with, or with respect to, the taxpayer.
    (ii) 25-percent owner. With respect to any corporation, a 25-
percent owner means any person who owns at least 25 percent of--
    (A) The total voting power of all classes of stock of the 
corporation entitled to vote; or
    (B) The total value of all classes of stock of the corporation.
    (iii) Application of section 318. Section 318 applies for purposes 
of paragraphs (b)(17)(i) and (ii) of this section, except that--
    (A) ``10 percent'' is substituted for ``50 percent'' in section 
318(a)(2)(C); and
    (B) Section 318(a)(3)(A) through (C) are not applied so as to 
consider a United States person as owning stock that is owned by a 
person who is not a United States person.
    (18) TLAC long-term debt required amount. The term TLAC long-term 
debt required amount means the specified minimum amount of debt that is 
required pursuant to 12 CFR 252.162(a).
    (19) TLAC securities amount. The term TLAC securities amount is the 
sum of the adjusted issue prices (as determined for purposes of Sec.  
1.1275-1(b)) of all TLAC securities issued and outstanding by the 
taxpayer, without regard to whether interest thereunder would be a base 
erosion payment absent Sec.  1.59A-3(b)(3)(v).
    (20) TLAC security. The term TLAC security means an eligible 
internal debt security, as defined in 12 CFR 252.161.
    (21) Unrelated business interest expense. The term unrelated 
business interest expense for any taxable year is the taxpayer's 
business interest expense paid or accrued to a party that is not a 
related party.


Sec.  1.59A-2  Applicable taxpayer.

    (a) Scope. This section provides rules for determining whether a 
taxpayer is an applicable taxpayer. Paragraph (b) of this section 
defines an applicable taxpayer. Paragraph (c) of this section provides 
rules for determining whether a taxpayer is an applicable taxpayer by 
reference to the aggregate group of which the taxpayer is a member. 
Paragraph (d) of this section provides rules regarding the gross 
receipts test. Paragraph (e) of this section provides rules regarding 
the base erosion percentage test. Paragraph (f) of this section 
provides examples illustrating the rules of this section.
    (b) Applicable taxpayer. For purposes of section 59A, a taxpayer is 
an applicable taxpayer with respect to any taxable year if the 
taxpayer--
    (1) Is a corporation, but not a regulated investment company, a 
real estate investment trust, or an S corporation;
    (2) Satisfies the gross receipts test of paragraph (d) of this 
section; and
    (3) Satisfies the base erosion percentage test of paragraph (e) of 
this section.
    (c) Aggregation rules--(1) In general. Solely for purposes of this 
section and Sec.  1.59A-4, a taxpayer that is a member of an aggregate 
group determines its gross receipts and its base erosion percentage on 
the basis of the aggregate group. For these purposes, transactions that 
occur between members of the taxpayer's aggregate group that were 
members of the aggregate group as of the time of the transaction are 
not taken into account. In the case of a foreign

[[Page 67021]]

corporation that is a member of an aggregate group, only transactions 
that occur between members of the aggregate group and that relate to 
income effectively connected with, or treated as effectively connected 
with, the conduct of a trade or business in the United States are not 
taken into account for this purpose. In the case of a foreign 
corporation that is a member of an aggregate group and that is subject 
to tax on a net basis pursuant to an applicable income tax treaty of 
the United States, only transactions that occur between members of the 
aggregate group and that relate to income that is taken into account in 
determining its net taxable income are not taken into account for this 
purpose.
    (2) Aggregate group determined with respect to each taxpayer--(i) 
In general. Solely for purposes of this section, an aggregate group is 
determined with respect to each taxpayer. As a result, the aggregate 
group of one taxpayer may be different than the aggregate group of 
another member of the taxpayer's aggregate group.
    (ii) [Reserved]
    (3) Taxable year of members of an aggregate group. Solely for 
purposes of this section, a taxpayer that is a member of an aggregate 
group measures the gross receipts and base erosion percentage of the 
aggregate group for a taxable year by reference to the taxpayer's gross 
receipts, base erosion tax benefits, and deductions for the taxable 
year and the gross receipts, base erosion tax benefits, and deductions 
of each member of the aggregate group for the taxable year of the 
member that ends with or within the taxpayer's taxable year.
    (4) through (6) [Reserved]
    (7) Partnerships. For the treatment of partnerships for purposes of 
determining gross receipts and base erosion tax benefits, see Sec.  
1.59A-7(e)(2) and (d), respectively.
    (8) Transition rule for aggregate group members with different 
taxable years. If the taxpayer has a different taxable year than 
another member of the taxpayer's aggregate group (other member), and 
the other member is eligible for the exception in Sec.  1.59A-
3(b)(3)(vi) (amounts paid or accrued in taxable years beginning before 
January 1, 2018) with respect to a taxable year ending with or within 
the taxpayer's taxable year (``excepted taxable year''), the excepted 
taxable year of the other member is not taken into account for purposes 
of paragraph (e) of this section. This rule applies solely for purposes 
of determining whether a taxpayer is an applicable taxpayer under this 
section.
    (d) Gross receipts test--(1) Amount of gross receipts. A taxpayer, 
or the aggregate group of which the taxpayer is a member, satisfies the 
gross receipts test of this section if it has average annual gross 
receipts of at least $500,000,000 for the three-taxable-year period 
ending with the preceding taxable year.
    (2) Taxpayer not in existence for entire three-year period. If a 
taxpayer was not in existence for the entire three-year period referred 
to in paragraph (d)(1) of this section, the taxpayer determines a gross 
receipts average for the period that it was in existence (which 
includes gross receipts in the current year).
    (3) Gross receipts of foreign corporations. With respect to any 
foreign corporation, only gross receipts that are taken into account in 
determining income that is, or is treated as, effectively connected 
with the conduct of a trade or business within the United States are 
taken into account for purposes of paragraph (d)(1) of this section. In 
the case of a foreign corporation that is a member of an aggregate 
group and that is subject to tax on a net basis pursuant to an 
applicable income tax treaty of the United States, the foreign 
corporation includes only gross receipts that are attributable to 
transactions taken into account in determining its net taxable income.
    (4) Gross receipts of an insurance company. Solely for purposes of 
this section, for any corporation that is subject to tax under 
subchapter L or any corporation that would be subject to tax under 
subchapter L if that corporation were a domestic corporation, gross 
receipts are reduced by return premiums (within the meaning of section 
803(a)(1)(B) and section 832(b)(4)(A)), but are not reduced by any 
reinsurance premiums paid or accrued.
    (5) Reductions in gross receipts. For purposes of this section, 
gross receipts for any taxable year are reduced by returns and 
allowances made during that taxable year.
    (6) Gross receipts of consolidated groups. For purposes of this 
section, the gross receipts of a consolidated group are determined by 
aggregating the gross receipts of all of the members of the 
consolidated group. See Sec.  1.1502-59A(b).
    (e) Base erosion percentage test--(1) In general. A taxpayer, or 
the aggregate group of which the taxpayer is a member, satisfies the 
base erosion percentage test if its base erosion percentage is three 
percent or higher.
    (2) Base erosion percentage test for banks and registered 
securities dealers--(i) In general. A taxpayer that is a member of an 
affiliated group (as defined in section 1504(a)(1)) that includes a 
bank (as defined in Sec.  1.59A-1(b)(4)) or a registered securities 
dealer (as defined in section Sec.  1.59A-1(b)(15)) satisfies the base 
erosion percentage test if its base erosion percentage is two percent 
or higher.
    (ii) Aggregate groups. An aggregate group of which a taxpayer is a 
member and that includes a bank or a registered securities dealer that 
is a member of an affiliated group (as defined in section 1504(a)(1)) 
is subject to the base erosion percentage threshold described in 
paragraph (e)(2)(i) of this section.
    (iii) De minimis exception for banking and registered securities 
dealer activities. An aggregate group that includes a bank or a 
registered securities dealer that is a member of an affiliated group 
(as defined in section 1504(a)(1)) is not treated as including a bank 
or registered securities dealer for purposes of paragraph (e)(2)(i) of 
this section for a taxable year, if, for that taxable year, the total 
gross receipts of the aggregate group attributable to the bank or the 
registered securities dealer (or attributable to all of the banks and 
registered securities dealers in the group, if more than one) represent 
less than two percent of the total gross receipts of the aggregate 
group, as determined under paragraph (d) of this section. When there is 
no aggregate group, a consolidated group that includes a bank or a 
registered securities dealer is not treated as including a bank or 
registered securities dealer for purposes of paragraph (e)(2)(i) of 
this section for a taxable year, if, for that taxable year, the total 
gross receipts of the consolidated group attributable to the bank or 
the registered securities dealer (or attributable to all of the banks 
or registered securities dealers in the group, if more than one) 
represent less than two percent of the total gross receipts of the 
consolidated group, as determined under paragraph (d) of this section.
    (3) Computation of base erosion percentage--(i) In general. The 
taxpayer's base erosion percentage for any taxable year is determined 
by dividing--
    (A) The aggregate amount of the taxpayer's (or in the case of a 
taxpayer that is a member of an aggregate group, the aggregate group's) 
base erosion tax benefits (as defined in Sec.  1.59A-3(c)(1)) for the 
taxable year, by
    (B) The sum of--
    (1) The aggregate amount of the deductions (including deductions 
for base erosion tax benefits described in Sec.  1.59A-3(c)(1)(i) and 
base erosion tax benefits described in Sec.  1.59A-3(c)(1)(ii)) 
allowable to the taxpayer (or in the case

[[Page 67022]]

of a taxpayer that is a member of an aggregate group, any member of the 
aggregate group) under chapter 1 of Subtitle A for the taxable year;
    (2) The base erosion tax benefits described in Sec.  1.59A-
3(c)(1)(iii) with respect to any premiums or other consideration paid 
or accrued by the taxpayer (or in the case of a taxpayer that is a 
member of an aggregate group, any member of the aggregate group) to a 
foreign related party for any reinsurance payment taken into account 
under sections 803(a)(1)(B) or 832(b)(4)(A) for the taxable year; and
    (3) Any amount paid or accrued by the taxpayer (or in the case of a 
taxpayer that is a member of an aggregate group, any member of the 
aggregate group) resulting in a reduction of gross receipts described 
in Sec.  1.59A-3(c)(1)(iv) for the taxable year.
    (ii) Certain items not taken into account in denominator. Except as 
provided in paragraph (e)(3)(viii) of this section, the amount under 
paragraph (e)(3)(i)(B) of this section is determined by not taking into 
account--
    (A) Any deduction allowed under section 172, 245A, or 250 for the 
taxable year;
    (B) Any deduction for amounts paid or accrued for services to which 
the exception described in Sec.  1.59A-3(b)(3)(i) applies;
    (C) Any deduction for qualified derivative payments that are not 
treated as base erosion payments by reason of Sec.  1.59A-3(b)(3)(ii);
    (D) Any exchange loss within the meaning of Sec.  1.988-2 from a 
section 988 transaction as described in Sec.  1.988-1(a)(1) that is not 
treated as a base erosion payment by reason of Sec.  1.59A-3(b)(3)(iv);
    (E) Any deduction for amounts paid or accrued to foreign related 
parties with respect to TLAC securities and foreign TLAC securities 
that are not treated as base erosion payments by reason of Sec.  1.59A-
3(b)(3)(v);
    (F) Any reinsurance losses incurred and claims payments described 
in Sec.  1.59A-3(b)(3)(ix); and
    (G) Any deduction not allowed in determining taxable income for the 
taxable year.
    (iii) Effect of treaties on base erosion percentage determination. 
See Sec.  1.59A-3(c)(2) and (3).
    (iv) Amounts paid or accrued between members of a consolidated 
group. See Sec.  1.1502-59A(b).
    (v) Deductions and base erosion tax benefits from partnerships. See 
Sec.  1.59A-7(b), (d), and (e).
    (vi) Mark-to-market positions. For any position with respect to 
which the taxpayer (or in the case of a taxpayer that is a member of an 
aggregate group, a member of the aggregate group) applies a mark-to-
market method of accounting for U.S. federal income tax purposes, the 
taxpayer must determine its gain or loss with respect to that position 
for any taxable year by combining all items of income, gain, loss, or 
deduction arising with respect to the position during the taxable year, 
regardless of how each item arises (including from a payment, accrual, 
or mark) for purposes of paragraph (e)(3) of this section. See 
paragraph (f)(1) of this section (Example 1) for an illustration of 
this rule. For purposes of section 59A, a taxpayer computes its losses 
resulting from positions subject to a mark-to-market regime under the 
Internal Revenue Code based on a single mark for the taxable year on 
the earlier of the last business day of the taxpayer's taxable year and 
the disposition (whether by sale, offset, exercise, termination, 
expiration, maturity, or other means) of the position, regardless of 
how frequently a taxpayer marks to market for other purposes. See Sec.  
1.59A-3(b)(2)(iii) for the application of this rule for purposes of 
determining the amount of base erosion payments.
    (vii) Reinsurance losses incurred and claims payments. Except as 
provided in paragraph (e)(3)(ii)(F) of this section, amounts paid for 
losses incurred (as defined in section 832(b)(5)) and claims and 
benefits under section 805(a)(1) are taken into account for purposes of 
paragraph (e)(3)(i)(B)(1) of this section.
    (viii) Certain payments that qualify for the effectively connected 
income exception and another base erosion payment exception. Subject to 
paragraph (c) of this section (transactions that occur between members 
of the taxpayer's aggregate group), a payment that qualifies for the 
effectively connected income exception described in Sec.  1.59A-
3(b)(3)(iii) and either the service cost method exception described in 
Sec.  1.59A-3(b)(3)(i), the qualified derivative payment exception 
described in Sec.  1.59A-3(b)(3)(ii), or the TLAC exception described 
in Sec.  1.59A-3(b)(3)(v) is not subject to paragraph (e)(3)(ii)(B), 
(C), or (E) of this section and those amounts are included in the 
denominator of the base erosion percentage if the foreign related party 
who received the payment is not a member of the aggregate group.

    (f) Examples. The following examples illustrate the rules of 
this section.
    (1) Mark-to-market--(i) Facts. (A) Foreign Parent (FP) is a 
foreign corporation that owns all of the stock of domestic 
corporation (DC). FP is a foreign related party of DC under Sec.  
1.59A-1(b)(12). DC is a registered securities dealer that does not 
hold any securities for investment. On January 1 of year 1, DC 
enters into two interest rate swaps for a term of two years, one 
with unrelated Customer A as the counterparty (position A) and one 
with unrelated Customer B as the counterparty (position B). Each of 
the swaps provides for semiannual periodic payments to be made or 
received on June 30 and December 31. No party makes any payment to 
any other party upon initiation of either of the swaps (that is, 
they are entered into at-the-money). DC is required to mark-to-
market positions A and B for U.S. federal income tax purposes. DC is 
a calendar year taxpayer.
    (B) For position A in year 1, DC makes a payment of $150x on 
June 30, and receives a payment of $50x on December 31. There are no 
other payments in year 1. On December 31, position A has a value to 
DC of $110x (that is, position A is in-the-money by $110x).
    (C) For position B in year 1, DC receives a payment of $120x on 
June 30, and makes a payment of $30x on December 31. There are no 
other payments in year 1. On December 31, position B has a value to 
DC of ($130x) (that is, position B is out-of-the-money by $130x).
    (ii) Analysis. (A) With respect to position A, based on the 
total amount of payments made and received in year 1, DC has a net 
deduction of $100x. In addition, DC has a mark-to-market gain of 
$110x. As described in paragraph (e)(3)(vi) of this section, the 
mark-to-market gain of $110x is combined with the net deduction of 
$100x resulting from the payments. Therefore, with respect to 
position A, DC has a gain of $10x, and thus has no deduction in year 
1 for purposes of section 59A.
    (B) With respect to position B, based on the total amount of 
payments made and received in year 1, DC has net income of $90x. In 
addition, DC has a mark-to-market loss of $130x. As described in 
paragraph (e)(3)(vi) of this section, the mark-to-market loss of 
$130x is combined with the net income of $90x resulting from the 
payments. Therefore, with respect to position B, DC has a loss of 
$40x, and thus has a $40x deduction in year 1 for purposes of 
section 59A.

    (2) [Reserved]


Sec.  1.59A-3  Base erosion payments and base erosion tax benefits.

    (a) Scope. This section provides definitions and related rules 
regarding base erosion payments and base erosion tax benefits. 
Paragraph (b) of this section provides definitions and rules regarding 
base erosion payments. Paragraph (c) of this section provides rules for 
determining the amount of base erosion tax benefits. Paragraph (d) of 
this section provides examples illustrating the rules described in this 
section.
    (b) Base erosion payments--(1) In general. Except as provided in 
paragraph (b)(3) of this section, a base erosion payment means--
    (i) Any amount paid or accrued by the taxpayer to a foreign related 
party of the taxpayer and with respect to which a deduction is 
allowable under chapter 1

[[Page 67023]]

of subtitle A of the Internal Revenue Code;
    (ii) Any amount paid or accrued by the taxpayer to a foreign 
related party of the taxpayer in connection with the acquisition of 
property by the taxpayer from the foreign related party if the 
character of the property is subject to the allowance for depreciation 
(or amortization in lieu of depreciation);
    (iii) Any premium or other consideration paid or accrued by the 
taxpayer to a foreign related party of the taxpayer for any reinsurance 
payments that are taken into account under section 803(a)(1)(B) or 
832(b)(4)(A); or
    (iv) Any amount paid or accrued by the taxpayer that results in a 
reduction of the gross receipts of the taxpayer if the amount paid or 
accrued is with respect to--
    (A) A surrogate foreign corporation, as defined in section 
59A(d)(4)(C)(i), that is a related party of the taxpayer (but only if 
the corporation first became a surrogate foreign corporation after 
November 9, 2017); or
    (B) A foreign person that is a member of the same expanded 
affiliated group, as defined in section 59A(d)(4)(C)(ii), as the 
surrogate foreign corporation.
    (2) Operating rules--(i) In general. The determination of the 
amount paid or accrued, and the identity of the payor and recipient of 
any amount paid or accrued, is made under general U.S. federal income 
tax law.
    (ii) Amounts paid or accrued in cash and other consideration. For 
purposes of paragraph (b)(1) of this section, an amount paid or accrued 
includes an amount paid or accrued using any form of consideration, 
including cash, property, stock, a partnership interest, or the 
assumption of a liability, including any exchange transaction. A 
distribution of property that is not part of an exchange (such as a 
distribution under section 301, without regard to whether section 
301(c)(1), (c)(2), or (c)(3) applies), is not received with respect to 
an amount paid or accrued and does not give rise to a base erosion 
payment. In contrast, a redemption of stock by a corporation within the 
meaning of section 317(b) (such as a redemption described in section 
302(a) or (d) or section 306(a)(2)), or a transaction in which there is 
an exchange for stock (such as a section 304 or section 331 
transaction), is an amount paid or accrued by the shareholder to the 
corporation (or by the acquiring corporation to the transferor in a 
section 304 transaction), without regard to the treatment of such 
transaction for U.S. federal income tax purposes. See paragraph 
(b)(3)(viii) of this section for an exception for specified 
nonrecognition transactions (as defined in paragraph (b)(3)(viii)(A) of 
this section).
    (iii) Transactions providing for net payments. Except as otherwise 
provided in paragraph (b)(2)(iv) of this section or as permitted by the 
Internal Revenue Code or the regulations, the amount of any base 
erosion payment is determined on a gross basis, regardless of any 
contractual or legal right to make or receive payments on a net basis. 
For this purpose, a right to make or receive payments on a net basis 
permits the parties to a transaction or series of transactions to 
settle obligations by offsetting any amounts to be paid by one party 
against amounts owed by that party to the other party. For example, any 
premium or other consideration paid or accrued by a taxpayer to a 
foreign related party for any reinsurance payments is not reduced by or 
netted against other amounts owed to the taxpayer from the foreign 
related party or by reserve adjustments or other returns.
    (iv) Amounts paid or accrued with respect to mark-to-market 
position. For any transaction with respect to which the taxpayer 
applies the mark-to-market method of accounting for U.S. federal income 
tax purposes, the rules set forth in Sec.  1.59A-2(e)(3)(vi) apply to 
determine the amount of the base erosion payment.
    (v) Coordination among categories of base erosion payments. A 
payment that does not satisfy the criteria of one category of base 
erosion payment may be a base erosion payment described in one of the 
other categories.
    (vi) Certain domestic passthrough entities--(A) In general. If a 
taxpayer pays or accrues an amount that would be a base erosion payment 
except for the fact that the payment is made to a specified domestic 
passthrough, then the taxpayer will be treated as making a base erosion 
payment to each specified foreign related party for purposes of section 
59A and Sec. Sec.  1.59A-2 through 1.59A-10. This rule has no effect on 
the taxation of the specified domestic passthrough under subchapter J 
or subchapter M of the Code (as applicable).
    (B) Amount of base erosion payment. The amount of the base erosion 
payment is equal to the lesser of the amount paid or accrued by the 
taxpayer to or for the benefit of the specified domestic passthrough 
and the amount of the deduction allowed under section 561, 651, or 661 
to the specified domestic passthrough with respect to amounts paid, 
credited, distributed, deemed distributed, or required to be 
distributed to a specified foreign related party.
    (C) Specified domestic passthrough. For purposes of this paragraph 
(b)(2)(vi), specified domestic passthrough means:
    (1) A domestic trust that is not a grantor trust under subpart E of 
subchapter J of chapter 1 of the Code (``domestic trust'') and which 
domestic trust is allowed a deduction under section 651 or section 661 
with respect to amounts paid, credited, or required to be distributed 
to a specified foreign related party;
    (2) A real estate investment trust (as defined in Sec.  1.856-1(a)) 
that pays, or is deemed to pay, a dividend to a specified foreign 
related party for which a deduction is allowed under section 561; or
    (3) A regulated investment company (as defined in Sec.  1.851-1(a)) 
that pays, or is deemed to pay, a dividend to a specified foreign 
related party for which a deduction is allowed under section 561.
    (D) Specified foreign related party. For purposes of this paragraph 
(b)(2)(vi), specified foreign related party means, with respect to a 
specified domestic passthrough, any foreign related party of a taxpayer 
that is a direct or indirect beneficiary or shareholder of the 
specified domestic passthrough.
    (vii) Transfers of property to related taxpayers. If a taxpayer 
owns property of a character subject to the allowance for depreciation 
(or amortization in lieu of depreciation) with respect to which 
paragraph (c)(1)(ii) of this section applies, and the taxpayer sells, 
exchanges, or otherwise transfers the property to another taxpayer that 
is a member of an aggregate group that includes the taxpayer (taking 
into account Sec.  1.59A-7), any deduction for depreciation (or 
amortization in lieu of depreciation) by the transferee taxpayer 
remains subject to paragraph (c)(1)(ii) of this section to the same 
extent the amounts would have been so subject in the hands of the 
transferor. See paragraph (d)(7) of this section (Example 7) for an 
illustration of this rule.
    (viii) Reductions to determine gross income. For purposes of 
paragraphs (b)(1)(i) and (ii) of this section, any amount resulting in 
a reduction to determine gross income under section 61, including an 
amount properly treated as cost of goods sold under the Code, is not a 
base erosion payment.
    (ix) Losses recognized on the sale or transfer of property. If a 
taxpayer recognizes a loss on a sale or transfer of property to a 
foreign related party, the loss recognized with respect to the sale or 
transfer is not a deduction that would cause the payment to be treated 
as a base erosion payment under paragraph

[[Page 67024]]

(b)(1)(i) of this section. However, if a taxpayer uses property to make 
a payment to a foreign related party and the payment otherwise meets 
the requirements of paragraph (b)(1) of this section, the amount of the 
payment that is treated as a base erosion payment equals the fair 
market value of the property at the time of the transfer.
    (3) Exceptions to base erosion payment. Paragraph (b)(1) of this 
section does not apply to the types of payments or accruals described 
in paragraphs (b)(3)(i) through (ix) of this section.
    (i) Certain services cost method amounts--(A) In general. Amounts 
paid or accrued by a taxpayer to a foreign related party for services 
that meet the requirements in paragraph (b)(3)(i)(B) of this section, 
but only to the extent of the total services cost of those services. 
Thus, any amount paid or accrued to a foreign related party in excess 
of the total services cost of services eligible for the services cost 
method exception (the mark-up component) remains a base erosion 
payment. For this purpose, services are an activity as defined in Sec.  
1.482-9(l)(2) performed by a foreign related party (the renderer) that 
provides a benefit as defined in Sec.  1.482-9(l)(3) to the taxpayer 
(the recipient).
    (B) Eligibility for the services cost method exception. To be 
eligible for the services cost method exception, all of the 
requirements of Sec.  1.482-9(b) must be satisfied, except that:
    (1) The requirements of Sec.  1.482-9(b)(5) do not apply for 
purposes of determining eligibility for the service cost method 
exception in this section; and
    (2) Adequate books and records must be maintained as described in 
paragraph (b)(3)(i)(C) of this section, instead of as described in 
Sec.  1.482-9(b)(6).
    (C) Adequate books and records. Permanent books of account and 
records must be maintained for as long as the costs with respect to the 
services are incurred by the renderer. The books and records must be 
adequate to permit verification by the Commissioner of the amount 
charged for the services and the total services costs incurred by the 
renderer, including a description of the services in question, 
identification of the renderer and the recipient of the services, 
calculation of the amount of profit mark-up (if any) paid for the 
services, and sufficient documentation to allow verification of the 
methods used to allocate and apportion the costs to the services in 
question in accordance with Sec.  1.482-9(k). For example, where a 
renderer incurs costs that are attributable to performing a service for 
the taxpayer that includes services eligible for the services cost 
method exception under this section (regardless of whether the taxpayer 
determined its payments for those services based on the services cost 
method) and another service that is not eligible for the services cost 
method exception, books and records must be maintained that show, among 
other things: the total amount of costs that are attributable to each 
of those services, the method chosen under Sec.  1.482-9(k) to 
apportion the costs between the service eligible for the services cost 
method under this section and the other service, and the application of 
that method in calculating the amount eligible for the services cost 
method exception. This paragraph (b)(3)(i)(C) does not affect the 
recordkeeping requirements imposed by any other provision, including 
Sec.  1.6001-1.
    (D) Total services cost. For purposes of this section, total 
services cost has the same meaning as total services costs in Sec.  
1.482-9(j).
    (ii) Qualified derivative payments. Any qualified derivative 
payment as described in Sec.  1.59A-6.
    (iii) Effectively connected income--(A) In general. Except as 
provided in paragraph (b)(3)(iii)(B) of this section, amounts paid or 
accrued to a foreign related party that are subject to U.S. federal 
income taxation as income that is, or is treated as, effectively 
connected with the conduct of a trade or business in the United States 
under an applicable provision of the Internal Revenue Code or 
regulations. Paragraph (b)(3)(iii) of this section applies only if the 
taxpayer receives a withholding certificate on which the foreign 
related party claims an exemption from withholding under section 1441 
or 1442 because the amounts are effectively connected income.
    (B) Application to certain treaty residents. If a foreign related 
party determines its taxable income pursuant to the business profits 
provisions of an applicable income tax treaty, amounts paid or accrued 
to the foreign related party that are taken into account in determining 
its taxable income.
    (iv) Exchange loss on a section 988 transaction. Any exchange loss 
within the meaning of Sec.  1.988-2 from a section 988 transaction 
described in Sec.  1.988-1(a)(1) that is an allowable deduction and 
that results from a payment or accrual by the taxpayer to a foreign 
related party.
    (v) Amounts paid or accrued with respect to TLAC securities and 
foreign TLAC securities--(A) In general. Except as provided in 
paragraph (b)(3)(v)(B) and (F) of this section, amounts paid or accrued 
to foreign related parties with respect to TLAC securities and foreign 
TLAC securities.
    (B) Limitation on exclusion for TLAC securities. The amount 
excluded under paragraph (b)(3)(v)(A) of this section is no greater 
than the product of the scaling ratio and amounts paid or accrued to 
foreign related parties with respect to TLAC securities for which a 
deduction is allowed.
    (C) Scaling ratio. For purposes of this paragraph (b)(3)(v), the 
scaling ratio for a taxable year of a taxpayer is a fraction the 
numerator of which is 115 percent of the average TLAC long-term debt 
required amount and the denominator of which is the average TLAC 
securities amount. The scaling ratio may in no event be greater than 
one.
    (D) Average TLAC securities amount. The average TLAC securities 
amount for a taxable year is the average of the TLAC securities amounts 
for the year, computed at regular time intervals in accordance with 
this paragraph. The TLAC securities amount used in calculating the 
average TLAC securities amount is computed on a monthly basis.
    (E) Average TLAC long-term debt required amount. The average TLAC 
long-term debt required amount for a taxable year is the average of the 
TLAC long-term debt required amounts, computed on a monthly basis.
    (F) Limitation on exclusion for foreign TLAC securities--(1) In 
general. The amount excluded under paragraph (b)(3)(v)(A) of this 
section for foreign TLAC securities is limited to the extent that 
interest deducted by a U.S. trade or business or permanent 
establishment with respect to foreign TLAC securities exceeds the 
interest expense associated with the foreign TLAC long-term debt 
required amount, applying the scaling ratio principles set forth under 
paragraphs (b)(3)(v)(B) through (E) of this section.
    (2) Foreign TLAC long-term debt required amount. For purposes of 
paragraph (b)(3)(v) of this section, the term foreign TLAC long-term 
debt required amount means in the case of a trade or business or a 
permanent establishment in the United States, the lesser of--
    (i) The specified minimum amount of debt, if any, required pursuant 
to a bank regulatory requirement imposed under the laws or regulations 
of a foreign country that are comparable to 12 CFR 252.160-167; or
    (ii) The specified minimum amount of debt, if any, that would be 
required pursuant to 12 CFR 252.162(a) if the trade or business or 
permanent establishment were a U.S. person (as determined under Federal 
Reserve regulations).

[[Page 67025]]

    (3) No specified minimum provided by local law. For purposes of 
paragraph (b)(3)(v)(F)(2)(ii) of this section, if the bank regulatory 
requirements imposed under the laws or regulations of a foreign country 
do not specify a minimum amount, the limitation for purposes of 
paragraph (b)(3)(v)(F)(2) of this section is determined by reference 
solely to paragraph (b)(3)(v)(F)(2)(ii) of this section.
    (4) Foreign TLAC security. For purposes of paragraph (b)(3)(v) of 
this section, the term foreign TLAC security means an internal debt 
security issued under a bank regulatory requirement imposed under the 
laws or regulations of a foreign country that is comparable to 12 CFR 
252.160-167. The laws or regulations of a foreign country are 
comparable to 12 CFR 252.160-167 if the requirement is imposed by a 
Financial Stability Board member state and those laws or regulations 
are substantially consistent with TLAC standards of the Financial 
Stability Board.
    (vi) Amounts paid or accrued in taxable years beginning before 
January 1, 2018. Any amount paid or accrued in taxable years beginning 
before January 1, 2018.
    (vii) Business interest carried forward from taxable years 
beginning before January 1, 2018. Any disallowed business interest 
described in section 163(j)(2) that is carried forward from a taxable 
year beginning before January 1, 2018.
    (viii) Specified nonrecognition transactions--(A) In general. 
Subject to paragraph (b)(3)(viii)(B) and (C) of this section, any 
amount transferred to, or exchanged with, a foreign related party 
pursuant to a transaction to which sections 332, 351, 355, or 368 apply 
(``specified nonrecognition transaction''). See Sec.  1.59A-9(b)(4) for 
anti-abuse rules.
    (B) Other property transferred to a foreign related party in a 
specified nonrecognition transaction. If a taxpayer transfers other 
property (as defined in paragraph (b)(3)(viii)(D) of this section) to a 
foreign related party pursuant to a specified nonrecognition 
transaction, the other property is treated as an amount paid or accrued 
to which paragraph (b)(3) of this section does not apply, regardless of 
whether gain is recognized on the transaction.
    (C) Other property received from a foreign related party in certain 
specified nonrecognition transactions. If, in a transaction described 
in section 351, 355, or 368, the taxpayer transfers property and 
receives other property (as defined in paragraph (b)(3)(viii)(D) of 
this section) from a foreign related party, the property transferred by 
the taxpayer is treated as an amount paid or accrued to which paragraph 
(b)(3) of this section does not apply, regardless of whether gain is 
recognized on the transaction.
    (D) Definition of other property. Solely for purposes of this 
paragraph (b)(3)(viii), the term other property has the meaning of the 
phrase ``other property or money'' as used in section 351(b), with 
respect to a transaction to which section 351 applies, and as used in 
sections 356(a)(1)(B) and 361(b), with respect to a transaction to 
which sections 355 or 368 apply, as applicable, including liabilities 
treated as money under section 357(b). However, the term other property 
does not include the sum of any money and the fair market value of any 
other property to which section 361(b)(3) applies. The term other 
property also includes liabilities that are assumed by the taxpayer in 
the specified nonrecognition transaction, but only to the extent of the 
amount of gain recognized under section 357(c).
    (E) Allocation of other property. Other property is treated as 
exchanged for property in a specified nonrecognition transaction in a 
manner consistent with U.S. federal income tax law. For purposes making 
the allocation under this paragraph (b)(3)(viii)(E), liabilities 
described in paragraph (b)(3)(viii)(D) of this section are treated as 
money received.
    (ix) Reinsurance losses incurred and claims payments--(A) In 
general. Any amounts paid by a taxpayer subject to tax under subchapter 
L to a foreign related party that is a regulated insurance company 
under a reinsurance contract between the taxpayer and the regulated 
foreign insurance company for losses incurred (as defined in section 
832(b)(5)) and claims and benefits under section 805(a)(1), to the 
extent that the amounts paid or accrued are properly allocable to 
amounts required to be paid by the regulated foreign insurance company 
(or indirectly through another regulated foreign insurance company), 
pursuant to an insurance, annuity, or reinsurance contract, to a person 
other than a related party. For purposes of this paragraph (b)(3)(ix), 
the determination of whether a contract is an insurance contract or an 
annuity contract is made without regard to sections 72(s), 101(f), 
817(h), and 7702, provided that the contract is regulated as a life 
insurance or annuity contract in its jurisdiction of issuance and no 
policyholder, insured, annuitant or beneficiary with respect to the 
contract is a United States person.
    (B) Regulated foreign insurance company. The term regulated foreign 
insurance company means any foreign corporation which--
    (1) Is subject to regulation as an insurance (or reinsurance) 
company by the country in which the corporation is created, organized, 
or maintains its registered office, and is licensed, authorized, or 
regulated by the applicable insurance regulatory body for that country 
to sell insurance, annuity, or reinsurance contracts to persons other 
than related parties in that country, and
    (2) Would be subject to tax under subchapter L if it were a 
domestic corporation.
    (4) Rules for determining the amount of certain base erosion 
payments. The following rules apply in determining the amount that is a 
base erosion payment.
    (i) Interest expense allocable to a foreign corporation's 
effectively connected income--(A) Methods described in Sec.  1.882-5. A 
foreign corporation that has interest expense allocable under section 
882(c) to income that is, or is treated as, effectively connected with 
the conduct of a trade or business within the United States applying 
the method described in Sec.  1.882-5(b) through (d) or the method 
described in Sec.  1.882-5(e) has base erosion payments under paragraph 
(b)(1)(i) of this section for the taxable year equal to the sum of--
    (1) The interest expense on a liability described in Sec.  1.882-
5(a)(1)(ii)(A) or (B) (direct allocations) that is paid or accrued by 
the foreign corporation to a foreign related party;
    (2) The interest expense on U.S.-booked liabilities, as described 
in Sec.  1.882-5(d)(2), determined by taking into account paragraph 
(b)(4)(i)(B) of this section, that is paid or accrued by the foreign 
corporation to a foreign related party; and
    (3) The interest expense on U.S.-connected liabilities, as 
described in Sec.  1.882-5(d) or 1.882-5(e), in excess of interest 
expense on U.S.-booked liabilities as described in Sec.  1.882-5(d)(2), 
if any (hereafter, excess U.S.-connected liabilities), multiplied by a 
fraction, the numerator of which is the foreign corporation's average 
worldwide interest expense due to a foreign related party, and the 
denominator of which is the foreign corporation's average total 
worldwide interest expense. The numerator and denominator of this 
fraction are determined by translating interest expense into the 
functional currency of the foreign corporation using any reasonable 
method, consistently applied. Any interest expense that is interest 
expense on a U.S.-booked liability or is subject to a direct allocation 
is excluded from both

[[Page 67026]]

the numerator and the denominator of the fraction.
    (B) U.S.-booked liabilities determination. For purposes of 
paragraph (b)(4)(i)(A) of this section, the determination of the 
interest expense on U.S.-booked liabilities, as described in Sec.  
1.882-5(d)(2), is made without regard to whether the foreign 
corporation applies the method described in Sec.  1.882-5(b) through 
(d) or the method described in Sec.  1.882-5(e) for purposes of 
determining interest expense.
    (C) U.S.-booked liabilities in excess of U.S.-connected 
liabilities. For purposes of paragraph (b)(4)(i)(A)(2) of this section, 
if a foreign corporation has U.S.-booked liabilities, as described in 
Sec.  1.882-5(d)(2), in excess of U.S.-connected liabilities, as 
described in Sec.  1.882-5(d) or Sec.  1.882-5(e), the foreign 
corporation applies the scaling ratio pro-rata to all interest expense 
on U.S.-booked liabilities consistent with Sec.  1.882-5(d)(4) for 
purposes of determining the amount of allocable interest expense on 
U.S.-booked liabilities that is a base erosion payment. This paragraph 
(b)(4)(i)(C) applies without regard to whether the foreign corporation 
applies the method described in Sec.  1.882-5(b) through (d) or the 
method described in Sec.  1.882-5(e) for purposes of determining its 
interest expense.
    (D) Election to use financial statements. A foreign corporation may 
elect to calculate the fraction described in paragraph (b)(4)(i)(A)(3) 
of this section on the basis of its applicable financial statement 
rather than U.S. tax principles. For purposes of this section, an 
applicable financial statement has the meaning provided in section 
451(b)(3). The applicable financial statement must be the applicable 
financial statement of the foreign corporation, not a consolidated 
applicable financial statement. A foreign corporation makes this 
election in accordance with the requirements of Form 8991 (or 
successor).
    (E) Coordination with certain tax treaties--(1) In general. If a 
foreign corporation elects to determine its taxable income pursuant to 
business profits provisions of an income tax treaty rather than 
provisions of the Internal Revenue Code, or the regulations published 
under 26 CFR chapter I, for determining effectively connected income, 
and the foreign corporation does not apply Sec.  1.882-5 to allocate 
interest expense to a permanent establishment, then paragraph 
(b)(4)(i)(A) through (D) of this section applies to determine the 
amount of hypothetical Sec.  1.882-5 interest expense that is a base 
erosion payment under paragraph (b)(1) of this section. Interest 
expense allowed to the permanent establishment in excess of the 
hypothetical Sec.  1.882-5 interest expense, if any, is treated as an 
amount paid or accrued by the permanent establishment to the foreign 
corporation's home office or to another branch of the foreign 
corporation and is a base erosion payment to the extent that the 
payment or accrual is described under paragraph (b)(1) of this section.
    (2) Hypothetical Sec.  1.882-5 interest expense defined. The 
hypothetical Sec.  1.882-5 interest expense is equal to the amount of 
interest expense that would have been allocable under section 882(c) to 
income that is, or is treated as, effectively connected with the 
conduct of a trade or business within the United States if the foreign 
corporation determined interest expense in accordance with section 
Sec.  1.882-5. However, the hypothetical Sec.  1.882-5 interest expense 
shall not exceed the amount of interest expense allowed to the 
permanent establishment.
    (3) Consistency requirement. For purposes of determining the amount 
described in paragraph (b)(4)(i)(E)(2) of this section and applying 
paragraph (b)(4)(i)(A) through (D) of this section, the elections of 
Sec.  1.882-5 must be applied consistently and are subject to the rules 
and limitations of Sec.  1.882-5, including limitations on the time 
period in which an election may be made or revoked. If a foreign 
corporation otherwise meets the requirements for making or revoking an 
election under Sec.  1.882-5, then solely for purposes of this section, 
the foreign corporation is treated as making or revoking the election 
in accordance with the requirements of Form 8991 (or successor) and its 
instructions.
    (F) Coordination with exception for foreign TLAC securities. For 
purposes of paragraph (b)(4)(i)(A) of this section, amounts paid or 
accrued to a foreign related party with respect to securities that are 
eligible for the foreign TLAC exception in paragraph (b)(3)(v) of this 
section are not treated as paid to a foreign related party.
    (ii) Other deductions allowed with respect to effectively connected 
income. A deduction allowed under Sec.  1.882-4 for an amount paid or 
accrued by a foreign corporation to a foreign related party (including 
a deduction for an amount apportioned in part to effectively connected 
income and in part to income that is not effectively connected income) 
is a base erosion payment under paragraph (b)(1) of this section.
    (iii) Depreciable property. Any amount paid or accrued by a foreign 
corporation to a foreign related party of the taxpayer in connection 
with the acquisition of property by the foreign corporation from the 
foreign related party if the character of the property is subject to 
the allowance for depreciation (or amortization in lieu of 
depreciation) is a base erosion payment to the extent the property so 
acquired is used, or held for use, in the conduct of a trade or 
business within the United States.
    (iv) Coordination with ECI exception. For purposes of paragraph 
(b)(4) of this section, amounts paid or accrued to a foreign related 
party treated as effectively connected income (or, in the case of a 
foreign related party that determines taxable income pursuant to the 
business profits provisions of an applicable income tax treaty, such 
amounts that are taken into account in determining taxable income) are 
not treated as paid to a foreign related party.
    (v) Coordination with certain tax treaties--(A) Allocable expenses. 
Except as provided in paragraph (b)(4)(i)(E) of this section with 
respect to interest, if a foreign corporation determines its taxable 
income on a net basis pursuant to an applicable income tax treaty 
rather than provisions of the Internal Revenue Code, or the regulations 
published under 26 CFR chapter I, for determining effectively connected 
income, then the foreign corporation must determine whether each 
allowable deduction is a base erosion payment under paragraph (b)(1) of 
this section.
    (B) Internal dealings under certain income tax treaties. Except as 
provided in paragraph (b)(4)(i)(E) of this section with respect to 
interest, if, pursuant to the terms of an applicable income tax treaty, 
a foreign corporation determines the profits attributable to a 
permanent establishment based on the assets used, risks assumed, and 
functions performed by the permanent establishment, then any deduction 
attributable to any amount paid or accrued (or treated as paid or 
accrued) by the permanent establishment to the foreign corporation's 
home office or to another branch of the foreign corporation (an 
``internal dealing'') is a base erosion payment to the extent that the 
payment or accrual is described under paragraph (b)(1) of this section.
    (vi) Business interest expense arising in taxable years beginning 
after December 31, 2017. Any disallowed business interest expense 
described in section 163(j)(2) that resulted from a payment or accrual 
to a foreign related party that first arose in a taxable year beginning 
after December 31, 2017, is treated as a base erosion payment under 
paragraph (b)(1)(i) of this section in the year that the business 
interest expense

[[Page 67027]]

initially arose. See paragraph (c)(4) of this section for rules that 
apply when business interest expense is limited under section 163(j)(1) 
in order to determine whether the disallowed business interest is 
attributed to business interest expense paid to a person that is not a 
related party, a foreign related party, or a domestic related party.
    (c) Base erosion tax benefit--(1) In general. Except as provided in 
paragraph (c)(2) of this section, a base erosion tax benefit means:
    (i) In the case of a base erosion payment described in paragraph 
(b)(1)(i) of this section, any deduction that is allowed under chapter 
1 of subtitle A of the Internal Revenue Code for the taxable year with 
respect to that base erosion payment;
    (ii) In the case of a base erosion payment described in paragraph 
(b)(1)(ii) of this section, any deduction allowed under chapter 1 of 
subtitle A of the Internal Revenue Code for the taxable year for 
depreciation (or amortization in lieu of depreciation) with respect to 
the property acquired with that payment;
    (iii) In the case of a base erosion payment described in paragraph 
(b)(1)(iii) of this section, any reduction under section 803(a)(1)(B) 
in the gross amount of premiums and other consideration on insurance 
and annuity contracts for premiums and other consideration arising out 
of indemnity reinsurance, or any deduction under section 832(b)(4)(A) 
from the amount of gross premiums written on insurance contracts during 
the taxable year for premiums paid for reinsurance; or
    (iv) In the case of a base erosion payment described in paragraph 
(b)(1)(iv) of this section, any reduction in gross receipts with 
respect to the payment in computing gross income of the taxpayer for 
the taxable year for purposes of chapter 1 of subtitle A of the 
Internal Revenue Code.
    (2) Exception to base erosion tax benefit--(i) In general. Except 
as provided in paragraph (c)(3) of this section, any base erosion tax 
benefit attributable to any base erosion payment is not taken into 
account as a base erosion tax benefit if tax is imposed on that payment 
under section 871 or 881, and the tax has been deducted and withheld 
under section 1441 or 1442. If a payment is taken into account for 
purposes of the fraction described in paragraph (b)(4)(i)(A)(3) of this 
section, and tax is imposed on the payment under section 871 or 881, 
and the tax has been deducted and withheld under section 1441 or 1442, 
the payment is treated as not paid or accrued to a foreign related 
party.
    (ii) Branch-level interest tax. Except as provided in paragraph 
(c)(3) of this section, any base erosion tax benefit of a foreign 
corporation attributable to any base erosion payment determined under 
paragraph (b)(4)(i)(A)(3) of this section or attributable to interest 
expense in excess of the hypothetical section 1.882-5 interest expense 
determined under paragraph (b)(4)(i)(E)(1) of this section is not taken 
into account as a base erosion tax benefit to the extent of the amount 
of excess interest, as defined in Sec.  1.884-4(a)(2), if any, on which 
tax is imposed on the foreign corporation under section 884(f) and 
Sec.  1.884-4, if the tax is properly reported on the foreign 
corporation's income tax return and paid in accordance with Sec.  
1.884-4(a)(2)(iv).
    (3) Effect of treaty on base erosion tax benefit. If any treaty 
between the United States and any foreign country reduces the rate of 
tax imposed by section 871 or 881, the amount of base erosion tax 
benefit that is not taken into account under paragraph (c)(2) of this 
section is equal to the amount of the base erosion tax benefit before 
the application of paragraph (c)(2) of this section multiplied by a 
fraction of--
    (i) The rate of tax imposed under the treaty; over
    (ii) The rate of tax imposed without regard to the treaty.
    (4) Application of section 163(j) to base erosion payments--(i) 
Classification of payments or accruals of business interest expense 
based on the payee. The following rules apply for corporations and 
partnerships:
    (A) Classification of payments or accruals of business interest 
expense of a corporation. For purposes of this section, in the year 
that business interest expense of a corporation is paid or accrued the 
business interest expense is classified as foreign related business 
interest expense, domestic related business interest expense, or 
unrelated business interest expense.
    (B) Classification of payments or accruals of business interest 
expense by a partnership. For purposes of this section, in the year 
that business interest expense of a partnership is paid or accrued, the 
business interest expense that is allocated to a partner is classified 
separately with respect to each partner in the partnership as foreign 
related business interest expense, domestic related business interest 
expense, or unrelated business interest expense.
    (C) Classification of payments or accruals of business interest 
expense paid or accrued to a foreign related party that is subject to 
an exception--(1) ECI exception. For purposes of paragraph (c)(4)(i)(A) 
and (B) of this section, business interest expense paid or accrued to a 
foreign related party to which the exception in paragraph (b)(3)(iii) 
of this section (effectively connected income) applies is classified as 
domestic related business interest expense.
    (2) TLAC interest and interest subject to withholding tax. For 
purposes of paragraph (c)(4)(i)(A) and (B) of this section, if the 
exception in paragraph (b)(3)(v) of this section (TLAC securities) or 
paragraph (c)(2) or (3) of this section (withholding tax) applies to 
business interest expense paid or accrued to a foreign related party, 
that business interest expense remains classified as foreign related 
business interest expense, and retains its classification as eligible 
for those exceptions, on a pro-rata basis with other foreign related 
business interest expense.
    (ii) Ordering rules for business interest expense that is limited 
under section 163(j)(1) to determine which classifications of business 
interest expense are deducted and which classifications of business 
interest expense are carried forward--(A) In general. Section 163(j) 
and the regulations published under 26 CFR chapter I provide a 
limitation on the amount of business interest expense allowed as a 
deduction in a taxable year by a corporation or a partner in a 
partnership. In the case of a corporation with a disallowed business 
interest expense carryforward, the regulations under section 163(j) 
determine the ordering of the business interest expense deduction that 
is allowed on a year-by-year basis by reference first to business 
interest expense incurred in the current taxable year and then to 
disallowed business interest expense carryforwards from prior years. To 
determine the amount of base erosion tax benefit under paragraph (c)(1) 
of this section, this paragraph (c)(4)(ii) sets forth ordering rules 
that determine the amount of the deduction of business interest expense 
allowed under section 163(j) that is classified as paid or accrued to a 
foreign related party for purposes of paragraph (c)(1)(i) of this 
section. This paragraph (c)(4)(ii) also sets forth similar ordering 
rules that apply to disallowed business interest expense carryforwards 
for which a deduction is permitted under section 163(j) in a later 
year.
    (B) Ordering rules for treating business interest expense deduction 
and disallowed business interest expense carryforwards as foreign 
related

[[Page 67028]]

business interest expense, domestic related business interest expense, 
and unrelated business interest expense--(1) General ordering rule for 
allocating business interest expense deduction between classifications. 
For purposes of paragraph (c)(1) of this section, if a deduction for 
business interest expense is not subject to the limitation under 
section 163(j)(1) in a taxable year, the deduction is treated first as 
foreign related business interest expense and domestic related business 
interest expense (on a pro-rata basis), and second as unrelated 
business interest expense. The same principle applies to business 
interest expense of a partnership that is deductible at the partner 
level under Sec.  1.163(j)-6(f).
    (2) Ordering of business interest expense incurred by a 
corporation. If a corporation's business interest expense deduction 
allowed for any taxable year is attributable to business interest 
expense paid or accrued in that taxable year and to disallowed business 
interest expense carryforwards from prior taxable years, the ordering 
of business interest expense deduction provided in paragraph 
(c)(4)(ii)(B)(1) of this section among the classifications described 
therein applies separately for the carryforward amount from each 
taxable year, following the ordering set forth in Sec.  1.163(j)-
5(b)(2). Corresponding adjustments to the classification of disallowed 
business interest expense carryforwards are made consistent with this 
year-by-year approach. For purposes of section 59A and this section, an 
acquiring corporation in a transaction described in section 381(a) will 
succeed to and take into account the classification of any disallowed 
business interest expense carryforward. See Sec.  1.381(c)(20)-1.
    (3) Ordering of business interest expense incurred by a partnership 
and allocated to a corporate partner. For a corporate partner in a 
partnership that is allocated a business interest expense deduction 
under Sec.  1.163(j)-6(f), the ordering rule provided in paragraph 
(c)(4)(ii)(B)(1) of this section applies separately to the corporate 
partner's allocated business interest expense deduction from the 
partnership; that deduction is not comingled with the business interest 
expense deduction addressed in paragraph (c)(4)(ii)(B)(1) or (2) of 
this section or the corporate partner's items from any other 
partnership. Similarly, when a corporate partner in a partnership is 
allocated excess business interest expense from a partnership under the 
rules set forth in Sec.  1.163(j)-6(f) and the excess interest expense 
becomes deductible to the corporate partner, that partner applies the 
ordering rule provided in paragraph (c)(4)(ii)(B)(1) of this section 
separately to that excess interest expense on a year-by-year basis. 
Corresponding adjustments to the classification of disallowed business 
interest expense carryforwards are made consistent with this year-by-
year and partnership-by-partnership approach.
    (d) Examples. The following examples illustrate the application of 
this section. For purposes of all the examples, assume that the 
taxpayer is an applicable taxpayer and all payments apply to a taxable 
year beginning after December 31, 2017.

    (1) Example 1: Determining a base erosion payment--(i) Facts. FP 
is a foreign corporation that owns all of the stock of FC, a foreign 
corporation, and DC, a domestic corporation. FP has a trade or 
business in the United States with effectively connected income 
(USTB). DC owns FDE, a foreign disregarded entity. DC pays interest 
to FDE and FC. FDE pays interest to USTB. All interest paid by DC to 
FC and by FDE to USTB is deductible by DC in the current year for 
regular income tax purposes. FDE also acquires depreciable property 
from FP during the taxable year. FP's income from the sale of the 
depreciable property is not effectively connected with the conduct 
of FP's trade or business in the United States. DC and FP (based 
only on the activities of USTB) are applicable taxpayers under Sec.  
1.59A-2(b).
    (ii) Analysis. The payment of interest by DC to FC is a base 
erosion payment under paragraph (b)(1)(i) of this section because 
the payment is made to a foreign related party and the interest 
payment is deductible. The payment of interest by DC to FDE is not a 
base erosion payment because the transaction is not a payment to a 
foreign person and the transaction is not a deductible payment. With 
respect to the payment of interest by FDE to USTB, if FP's USTB 
treats the payment of interest by FDE to USTB as income that is 
effectively connected with the conduct of a trade or business in the 
United States pursuant to section 864 or as profits attributable to 
a U.S. permanent establishment of a tax treaty resident, and if DC 
receives a withholding certificate from FP with respect to the 
payment, then the exception in paragraph (b)(3)(iii) of this section 
applies. Accordingly, the payment from DC, through FDE, to USTB is 
not a base erosion payment even though the payment is to the USTB of 
FP, a foreign related party. The acquisition of depreciable property 
by DC, through FDE, from FP is a base erosion payment under 
paragraph (b)(1)(ii) of this section because there is a payment to a 
foreign related party in connection with the acquisition by the 
taxpayer of property of a character subject to the allowance for 
depreciation and the exception in paragraph (b)(3)(iii) of this 
section does not apply because FP's income from the sale of the 
depreciable property is not effectively connected with the conduct 
of FP's trade or business in the United States. See Sec.  1.59A-2 
for the application of the aggregation rule with respect to DC and 
FP's USTB.
    (2) Example 2: Interest allocable under Sec.  1.882-5--(i) 
Facts. FC, a foreign corporation, has income that is effectively 
connected with the conduct of a trade or business within the United 
States. FC determines its interest expense under the three-step 
process described in Sec.  1.882-5(b) through (d) with a total 
interest expense of $125x. The total interest expense is comprised 
of interest expense of $100x on U.S.- booked liabilities ($60x paid 
to a foreign related party and $40x paid to unrelated persons) and 
$25x of interest on excess U.S.-connected liabilities. FC has 
average worldwide interest expense (not including interest expense 
on U.S.-booked liabilities) of $500x, of which $100x is interest 
expense paid to a foreign related party. FC is an applicable 
taxpayer with respect to its effectively connected income. Assume 
all of the interest expense is deductible in the current taxable 
year and that none of the interest is subject to the effectively 
connected income exception in paragraph (b)(3)(iii) of this section.
    (ii) Analysis. Under paragraph (b)(4)(i) of this section, the 
total amount of interest expense determined under Sec.  1.882-5 that 
is a base erosion payment is $65x ($60x + 5x). FC has $60x of 
interest on U.S.-booked liabilities that is paid to a foreign 
related party and that is treated as a base erosion payment under 
paragraph (b)(4)(i)(A)(2) of this section. Additionally, $5x of the 
$25x of interest expense on excess U.S.-connected liabilities is 
treated as a base erosion payment under paragraph (b)(4)(i)(A)(3) of 
this section ($25x * ($100x/$500x)).
    (3) Example 3: Interaction with section 163(j)--(i) Facts. 
Foreign Parent (FP) is a foreign corporation that owns all of the 
stock of DC, a domestic corporation that is an applicable taxpayer. 
DC does not conduct a utility trade or business as described in 
section 163(j)(7)(A)(iv), an electing real property trade or 
business as described in section 163(j)(7)(B), or an electing 
farming business as described in section 163(j)(7)(C). In Year 1, DC 
has adjusted taxable income, as defined in section 163(j)(8), of 
$1000x and pays the following amounts of business interest expense: 
$420x that is paid to unrelated Bank, and $360x that is paid to FP. 
DC does not earn any business interest income or incur any floor 
plan financing interest expense in Year 1. None of the exceptions in 
paragraph (b)(3) of this section apply, and the interest is not 
subject to withholding.
    (ii) Analysis--(A) Classification of business interest. In Year 
1, DC is permitted to deduct only $300x of business interest expense 
under section 163(j)(1) ($1000x x 30%). Paragraph (c)(4)(ii)(B) of 
this section provides that for purposes of paragraph (c)(1) of this 
section the deduction is treated first as foreign related business 
interest expense and domestic related business interest expense 
(here, only FP); and second as unrelated business interest expense 
(Bank). As a result, the $300x of business interest expense that is 
permitted under section 163(j)(1) is treated entirely as the 
business interest paid to the related foreign party, FP. All of DC's 
$300x deductible interest is treated as an add-back to modified 
taxable income in the Year 1

[[Page 67029]]

taxable year for purposes of Sec.  1.59A-4(b)(2)(i).
    (B) Ordering rules for disallowed business interest expense 
carryforward. Under section 163(j)(2), the $480x of disallowed 
business interest ($420x + $360x-$300x) is carried forward to the 
subsequent year. Under paragraph (c)(4)(ii)(B)(1) and (2) of this 
section, the disallowed business interest carryforward is 
correspondingly treated first as unrelated business interest 
expense, and second pro-rata as foreign related business interest 
expense and domestic related business interest expense. As a result, 
$420x of the $480x disallowed business interest expense carryforward 
is treated first as business interest expense paid to Bank and the 
remaining $60x of the $480x disallowed business interest expense 
carryforward is treated as interest paid to FP and as an add-back to 
modified taxable income.
    (4) Example 4: Interaction with section 163(j); carryforward--
(i) Facts. The facts are the same as in paragraph (d)(3) of this 
section (the facts in Example 3), except that in addition, in Year 
2, DC has adjusted taxable income of $250x, and pays the following 
amounts of business interest expense: $50x that is paid to unrelated 
Bank, and $45x that is paid to FP. DC does not earn any business 
interest income or incur any floor plan financing interest expense 
in Year 2. None of the exceptions in paragraph (b)(3) of this 
section apply.
    (ii) Analysis--(A) Classification of business interest. In Year 
2, for purposes of section 163(j)(1), DC is treated as having paid 
or accrued total business interest expense of $575x, consisting of 
$95x business interest expense actually paid in Year 2 and $480x of 
business interest expense that is carried forward from Year 1. DC is 
permitted to deduct $75x of business interest expense in Year 2 
under the limitation in section 163(j)(1) ($250x x 30%). Section 
1.163(j)-5(b)(2) provides that, for purposes of section 163(j), the 
allowable business interest expense is first attributed to amounts 
paid or accrued in the current year, and then attributed to amounts 
carried over from earlier years on a first-in-first-out basis from 
the earliest year. Accordingly, the $75x of deductible business 
interest expense is deducted entirely from the $95x business 
interest expense incurred in Year 2 for section 163(j) purposes. 
Because DC's business interest expense deduction is limited under 
section 163(j)(1) and because DC's total business interest expense 
is attributable to more than one taxable year, paragraph 
(c)(4)(ii)(B)(2) of this section provides that the ordering rule in 
paragraph (c)(4)(ii)(B)(1) of this section is applied separately to 
each annual amount of section 163(j) disallowed business interest 
expense carryforward. With respect to the Year 2 layer, which is 
deducted first, paragraph (c)(4)(ii)(B) of this section provides 
that, for purposes of paragraph (c)(1) of this section, the Year 2 
$75x deduction is treated first as foreign related business interest 
expense and domestic related business interest expense (here, only 
FP, $45x); and second as unrelated business interest expense (Bank, 
$30x). Consequentially, all of the $45x deduction of business 
interest expense that was paid to FP in Year 2 is treated as a base 
erosion tax benefit and an add-back to modified taxable income for 
the Year 2 taxable year for purposes of Sec.  1.59A-4(b)(2)(i).
    (B) Ordering rules for disallowed business interest expense 
carryforward. The disallowed business interest expense carryforward 
of $20x from Year 2 is correspondingly treated first as business 
interest expense paid to Bank under paragraph (c)(4)(i) of this 
section. The disallowed business interest expense carryforward of 
$480x from the Year 1 layer that is also not allowed as a deduction 
in Year 2 remains treated as $420x paid to Bank and $60 paid to FP.
    (5) Example 5: Interaction with section 163(j); carryforward--
(i) Facts. The facts are the same as in paragraph (d)(4) of this 
section (the facts in Example 4), except that in addition, in Year 
3, DC has adjusted taxable income of $4000x and pays no business 
interest expense. DC does not earn any business interest income or 
incur any floor plan financing interest expense in Year 3.
    (ii) Analysis. In Year 3, DC is treated as having paid or 
accrued total business interest expense of $500x, consisting of 
$480x of business interest expense that is carried forward from Year 
1 and $20x of business interest expense that is carried forward from 
Year 2 for purposes of section 163(j)(1). DC is permitted to deduct 
$1200x of business interest expense in Year 3 under the limitation 
in section 163(j)(1) ($4000x x 30%). For purposes of section 163(j), 
DC is treated as first deducting the business interest expense from 
Year 1 then the business interest expense from Year 2. See Sec.  
1.163(j)-5(b)(2). Because none of DC's $500x business interest 
expense is limited under section 163(j), the stacking rule in 
paragraph (c)(4)(ii) of this section for allowed and disallowed 
business interest expense does not apply. For purposes of Sec.  
1.59A-4(b)(2)(i), DC's add-back to modified taxable income is $60x 
determined by the classifications in paragraph (c)(4)(i)(A) of this 
section ($60x treated as paid to FP from Year 1).
    (6) Example 6: Interaction with section 163(j); partnership--(i) 
Facts. The facts are the same as in paragraph (d)(4) of this section 
(the facts in Example 4), except that in addition, in Year 2, DC 
forms a domestic partnership (PRS) with Y, a domestic corporation 
that is not related to DC within the meaning of Sec.  1.59A-
1(b)(17). PRS does not conduct a utility trade or business as 
described in section 163(j)(7)(A)(iv), an electing real property 
trade or business as described in section 163(j)(7)(B) or an 
electing farming business as described in section 163(j)(7)(C) 
subject to section 163(j). PRS is not a small business described in 
section 163(j)(3). DC and Y are equal partners in partnership PRS. 
In Year 2, PRS has ATI of $100x and $48x of business interest 
expense. $12x of PRS's business interest expense is paid to Bank, 
and $36x of PRS's business interest expense is paid to FP. PRS 
allocates the items comprising its $100x of ATI $50x to DC and $50x 
to Y. PRS allocates its $48x of business interest expense $24x to DC 
and $24x to Y. DC classifies its $24x of business interest expense 
as $6x unrelated business interest expense (Bank) and $18x as 
foreign related business interest expense (FP) under paragraph 
(c)(4)(i)(B) of this section. Y classifies its $24x of business 
interest expense as entirely unrelated business interest expense of 
Y (Bank and FP) under paragraph (c)(4)(i)(B) of this section. None 
of the exceptions in paragraph (b)(3) of this section apply.
    (ii) Partnership level analysis. In Year 2, PRS's section 163(j) 
limit is 30 percent of its ATI, or $30x ($100x x 30 percent). Thus, 
PRS has $30x of deductible business interest expense and $18x of 
excess business interest expense ($48x-$30x). The $30x of deductible 
business interest expense is includible in PRS's non-separately 
stated income or loss, and is not subject to further limitation 
under section 163(j) at the partners' level.
    (iii) Partner level allocations analysis. Pursuant to Sec.  
1.163(j)-6(f)(2), DC and Y are each allocated $15x of deductible 
business interest expense and $9x of excess business interest 
expense. At the end of Year 2, DC and Y each have $9x of excess 
business interest expense from PRS, which under Sec.  1.163(j)-6 is 
not treated as paid or accrued by the partner until such partner is 
allocated excess taxable income or excess business interest income 
from PRS in a succeeding year. Pursuant to Sec.  1.163(j)-6(e), DC 
and Y, in computing their limit under section 163(j), do not 
increase any of their section 163(j) items by any of PRS's section 
163(j) items.
    (iv) Partner level allocations for determining base erosion tax 
benefits. The $15x of deductible business interest expense allocated 
to DC is treated first as foreign related business interest expense 
(FP) under paragraph (c)(4)(ii)(B) of this section. DC's excess 
business interest expense from PRS of $9x is classified first as the 
unrelated business interest expense with respect to Bank ($6x) and 
then as the remaining portion of the business interest expense paid 
to FP ($3x, or $18x-$15x). Under paragraph (c)(4)(ii)(B)(3) of this 
section, these classifications of the PRS items apply irrespective 
of the classifications of DC's own interest expense as set forth in 
paragraph (d)(4) of this section (Example 4).
    (v) Computation of modified taxable income. For Year 2, DC is 
treated as having incurred base erosion tax benefits of $60x, 
consisting of the $15x base erosion tax benefit with respect to its 
interest in PRS that is computed in paragraph (d)(6)(iii) of this 
section (Example 6) and $45x that is computed in paragraph (d)(4) of 
this section (Example 4).
    (7) Example 7: Transfers of property to related taxpayers--(i) 
Facts. FP is a foreign corporation that owns all of the stock of DC1 
and DC2, both domestic corporations. DC1 and DC2 are both members of 
the same aggregate group but are not members of the same 
consolidated tax group under section 1502. In Year 1, FP sells 
depreciable property to DC1. On the first day of the Year 2 tax 
year, DC1 sells the depreciable property to DC2.
    (ii) Analysis--(A) Year 1. The acquisition of depreciable 
property by DC1 from FP is a base erosion payment under paragraph

[[Page 67030]]

(b)(1)(ii) of this section because there is a payment to a foreign 
related party in connection with the acquisition by the taxpayer of 
property of a character subject to the allowance for depreciation.
    (B) Year 2. The acquisition of the depreciable property in Year 
2 by DC2 is not itself a base erosion payment because DC2 did not 
acquire the property from a foreign related party. However, under 
paragraph (b)(2)(viii) of this section any depreciation expense 
taken by DC2 on the property acquired from DC1 is a base erosion 
payment and a base erosion tax benefit under paragraph (c)(1)(ii) of 
this section because the acquisition of the depreciable property was 
a base erosion payment by DC1 and the property was sold to a member 
of the aggregate group; therefore, the depreciation expense 
continues as a base erosion tax benefit to DC2 as it would have been 
to DC1 if it continued to own the property.


Sec.  1.59A-4  Modified taxable income.

    (a) Scope. Paragraph (b)(1) of this section provides rules for 
computing modified taxable income. Paragraph (b)(2) of this section 
provides rules addressing how base erosion tax benefits and net 
operating losses affect modified taxable income. Paragraph (b)(3) of 
this section provides a rule for a holder of a residual interest in a 
REMIC. Paragraph (c) of this section provides examples illustrating the 
rules described in this section.
    (b) Computation of modified taxable income--(1) In general. The 
term modified taxable income means a taxpayer's taxable income, as 
defined in section 63(a), determined with the additions described in 
paragraph (b)(2) of this section. Notwithstanding the foregoing, the 
taxpayer's taxable income may not be reduced to an amount less than 
zero as a result of a net operating loss deduction allowed under 
section 172. See paragraphs (c)(1) and (2) of this section (Examples 1 
and 2).
    (2) Modifications to taxable income. The amounts described in this 
paragraph (b)(2) are added back to a taxpayer's taxable income to 
determine its modified taxable income.
    (i) Base erosion tax benefits. The amount of any base erosion tax 
benefit as defined in Sec.  1.59A-3(c)(1).
    (ii) Certain net operating loss deductions. The base erosion 
percentage, as described in Sec.  1.59A-2(e)(3), of any net operating 
loss deduction allowed to the taxpayer under section 172 for the 
taxable year. For purposes of determining modified taxable income, the 
net operating loss deduction allowed does not exceed taxable income 
before taking into account the net operating loss deduction. See 
paragraph (c)(1) and (2) of this section (Examples 1 and 2). The base 
erosion percentage for the taxable year that the net operating loss 
arose is used to determine the addition under this paragraph 
(b)(2)(ii). For a net operating loss that arose in a taxable year 
beginning before January 1, 2018, the base erosion percentage for the 
taxable year is zero.
    (3) Rule for holders of a residual interest in a REMIC. For 
purposes of paragraph (b)(1) of this section, the limitation in section 
860E(a)(1) is not taken into account in determining the taxable income 
amount that is used to compute modified taxable income for the taxable 
year.
    (c) Examples. The following examples illustrate the rules of 
paragraph (b) of this section.

    (1) Example 1: Current year loss--(i) Facts. A domestic 
corporation (DC) is an applicable taxpayer that has a calendar 
taxable year. In 2020, DC has gross income of $100x, a deduction of 
$80x that is not a base erosion tax benefit, and a deduction of $70x 
that is a base erosion tax benefit. In addition, DC has a net 
operating loss carryforward to 2020 of $400x that arose in 2016.
    (ii) Analysis. DC's starting point for computing modified 
taxable income is $(50x), computed as gross income of $100x, less a 
deduction of $80x (non-base erosion tax benefit) and a deduction of 
$70x (base erosion tax benefit). Under paragraph (b)(2)(ii) of this 
section, DC's starting point for computing modified taxable income 
does not take into account the $400x net operating loss carryforward 
because the allowable deductions for 2020, not counting the NOL 
deduction, exceed the gross income for 2020. DC's modified taxable 
income for 2020 is $20x, computed as $(50x) + $70x base erosion tax 
benefit.
    (2) Example 2: Net operating loss deduction--(i) Facts. The 
facts are the same as in paragraph (c)(1)(i) of this section (the 
facts in Example 1), except that DC's gross income in 2020 is $500x.
    (ii) Analysis. DC's starting point for computing modified 
taxable income is $0x, computed as gross income of $500x, less: A 
deduction of $80x (non-base erosion tax benefit), a deduction of 
$70x (base erosion tax benefit), and a net operating loss deduction 
of $350x (which is the amount of taxable income before taking into 
account the net operating loss deduction, as provided in paragraph 
(b)(2)(ii) of this section ($500x-$150x)). DC's modified taxable 
income for 2020 is $70x, computed as $0x + $70x base erosion tax 
benefit. DC's modified taxable income is not increased as a result 
of the $350x net operating loss deduction in 2020 because the base 
erosion percentage of the net operating loss that arose in 2016 is 
zero under paragraph (b)(2)(ii) of this section.


Sec.  1.59A-5   Base erosion minimum tax amount.

    (a) Scope. Paragraph (b) of this section provides rules regarding 
the calculation of the base erosion minimum tax amount. Paragraph (c) 
of this section describes the base erosion and anti-abuse tax rate 
applicable to the taxable year.
    (b) Base erosion minimum tax amount--(1) In general. For each 
taxable year, an applicable taxpayer must determine its base erosion 
minimum tax amount.
    (2) Calculation of base erosion minimum tax amount. With respect to 
any applicable taxpayer, the base erosion minimum tax amount for any 
taxable year is, the excess (if any) of--
    (i) An amount equal to the base erosion and anti-abuse tax rate 
multiplied by the modified taxable income of the taxpayer for the 
taxable year, over
    (ii) An amount equal to the regular tax liability as defined in 
Sec.  1.59A-1(b)(16) of the taxpayer for the taxable year, reduced (but 
not below zero) by the excess (if any) of--
    (A) The credits allowed under chapter 1 of subtitle A of the Code 
against regular tax liability over
    (B) The sum of the credits described in paragraph (b)(3) of this 
section.
    (3) Credits that do not reduce regular tax liability. The sum of 
the following credits are used in paragraph (b)(2)(ii)(B) of this 
section to limit the amount by which the credits allowed under chapter 
1 of subtitle A of the Internal Revenue Code reduce regular tax 
liability--
    (i) Taxable years beginning on or before December 31, 2025. For any 
taxable year beginning on or before December 31, 2025--
    (A) The credit allowed under section 38 for the taxable year that 
is properly allocable to the research credit determined under section 
41(a);
    (B) The portion of the applicable section 38 credits not in excess 
of 80 percent of the lesser of the amount of those applicable section 
38 credits or the base erosion minimum tax amount (determined without 
regard to this paragraph (b)(3)(i)(B)); and
    (C) Any credits allowed under sections 33, 37, and 53.
    (ii) Taxable years beginning after December 31, 2025. For any 
taxable year beginning after December 31, 2025, any credits allowed 
under sections 33, 37, and 53.
    (c) Base erosion and anti-abuse tax rate--(1) In general. For 
purposes of calculating the base erosion minimum tax amount, the base 
erosion and anti-abuse tax rate is--
    (i) Calendar year 2018. For taxable years beginning in calendar 
year 2018, five percent.
    (ii) Calendar years 2019 through 2025. For taxable years beginning 
after December 31, 2018, through taxable

[[Page 67031]]

years beginning before January 1, 2026, 10 percent.
    (iii) Calendar years after 2025. For taxable years beginning after 
December 31, 2025, 12.5 percent.
    (2) Increased rate for banks and registered securities dealers--(i) 
In general. In the case of a taxpayer that is a member of an affiliated 
group (as defined in section 1504(a)(1)) that includes a bank or a 
registered securities dealer, the percentage otherwise in effect under 
paragraph (c)(1) of this section is increased by one percentage point.
    (ii) De minimis exception to increased rate for banks and 
registered securities dealers. Paragraph (c)(2)(i) of this section does 
not apply to a taxpayer that is a member of an affiliated group (as 
defined in section 1504(a)(1)) that includes a bank or registered 
securities dealer if, in that taxable year, the total gross receipts of 
the affiliated group attributable to the bank or the registered 
securities dealer (or attributable to all of the banks and registered 
securities dealers in the group, if more than one) represent less than 
two percent of the total gross receipts of the affiliated group, as 
determined under Sec.  1.59A-2(d).
    (3) Application of section 15 to tax rates in section 59A--(i) New 
tax. Section 15 does not apply to any taxable year that includes 
January 1, 2018.
    (ii) Change in tax rate pursuant to section 59A(b)(1)(A). Section 
15 does not apply to any taxable year that includes January 1, 2019.
    (iii) Change in rate pursuant to section 59A(b)(2). Section 15 
applies to the change in tax rate pursuant to section 59A(b)(2)(A).


Sec.  1.59A-6  Qualified derivative payment.

    (a) Scope. This section provides additional guidance regarding 
qualified derivative payments. Paragraph (b) of this section defines 
the term qualified derivative payment. Paragraph (c) of this section 
provides guidance on certain payments that are not treated as qualified 
derivative payments. Paragraph (d) defines the term derivative for 
purposes of section 59A. Paragraph (e) of this section provides 
examples illustrating the rules of this section.
    (b) Qualified derivative payment--(1) In general. A qualified 
derivative payment means any payment made by a taxpayer to a foreign 
related party pursuant to a derivative with respect to which the 
taxpayer--
    (i) Recognizes gain or loss as if the derivative were sold for its 
fair market value on the last business day of the taxable year (and any 
additional times as required by the Internal Revenue Code or the 
taxpayer's method of accounting);
    (ii) Treats any gain or loss so recognized as ordinary; and
    (iii) Treats the character of all items of income, deduction, gain, 
or loss with respect to a payment pursuant to the derivative as 
ordinary.
    (2) Reporting requirements--(i) In general. No payment is a 
qualified derivative payment under paragraph (b)(1) of this section for 
any taxable year unless the taxpayer (whether or not the taxpayer is a 
reporting corporation as defined in Sec.  1.6038A-1(c)) reports the 
information required in Sec.  1.6038A-2(b)(7)(ix) for the taxable year. 
To report its qualified derivative payments, a taxpayer must include 
the payment in the aggregate amount of qualified derivative payments on 
Form 8991 (or successor).
    (ii) Failure to satisfy the reporting requirement. If a taxpayer 
fails to satisfy the reporting requirement described in paragraph 
(b)(2)(i) of this section with respect to any payments, those payments 
are not eligible for the qualified derivative payment exception 
described in Sec.  1.59A-3(b)(3)(ii) and are base erosion payments 
unless an exception in Sec.  1.59A-3(b)(3) otherwise applies. A 
taxpayer's failure to report a payment as a qualified derivative 
payment does not impact the eligibility of any other payment which the 
taxpayer properly reported under paragraph (b)(2)(i) of this section 
from being a qualified derivative payment.
    (iii) Reporting of aggregate amount of qualified derivative 
payments. The aggregate amount of qualified derivative payments is the 
sum of the amount described in paragraph (b)(3) of this section for 
each derivative. To the extent that the taxpayer is treated as 
receiving a payment, as determined in Sec.  1.59A-2(e)(3)(vi), for the 
taxable year with respect to a derivative, the payment is not included 
in the aggregate qualified derivative payments.
    (iv) Transition period for qualified derivative payment reporting. 
Before paragraph (b)(2)(i) of this section is applicable, a taxpayer 
will be treated as satisfying the reporting requirement described 
section 59A(h)(2)(B) to the extent that the taxpayer reports the 
aggregate amount of qualified derivative payments on Form 8991 (or 
successor). See Sec.  1.6038A-2(g) (applicability date for Sec.  
1.6038A-2(b)(7)(ix)). Until paragraph (b)(2)(i) of this section is 
applicable, paragraph (b)(2)(ii) of this section will not apply to a 
taxpayer who reports the aggregate amount of qualified derivative 
payments in good faith.
    (3) Amount of any qualified derivative payment--(i) In general. The 
amount of any qualified derivative payment excluded from the 
denominator of the base erosion percentage as provided in Sec.  1.59A-
2(e)(3)(ii)(C) is determined as provided in Sec.  1.59A-2(e)(3)(vi).
    (ii) Net qualified derivative payment that includes a payment that 
is a base erosion payment. Any net amount determined in paragraph 
(b)(3)(i) of this section must be reduced by any gross items that are 
treated as a base erosion payment pursuant to paragraph (c) of this 
section.
    (c) Exceptions for payments otherwise treated as base erosion 
payments. A payment does not constitute a qualified derivative payment 
if--
    (1) The payment would be treated as a base erosion payment if it 
were not made pursuant to a derivative, including any interest, 
royalty, or service payment; or
    (2) In the case of a contract that has derivative and nonderivative 
components, the payment is properly allocable to the nonderivative 
component.
    (d) Derivative defined--(1) In general. For purposes of this 
section, the term derivative means any contract (including any option, 
forward contract, futures contract, short position, swap, or similar 
contract) the value of which, or any payment or other transfer with 
respect to which, is (directly or indirectly) determined by reference 
to one or more of the following:
    (i) Any share of stock in a corporation;
    (ii) Any evidence of indebtedness;
    (iii) Any commodity that is actively traded;
    (iv) Any currency; or
    (v) Any rate, price, amount, index, formula, or algorithm.
    (2) Exceptions. The following contracts are not treated as 
derivatives for purposes of section 59A.
    (i) Direct interest. A derivative contract does not include a 
direct interest in any item described in paragraph (d)(1)(i) through 
(v) of this section.
    (ii) Insurance contracts. A derivative contract does not include 
any insurance, annuity, or endowment contract issued by an insurance 
company to which subchapter L applies (or issued by any foreign 
corporation to which the subchapter would apply if the foreign 
corporation were a domestic corporation).
    (iii) Securities lending and sale-repurchase transactions--(A) 
Multi-step transactions treated as financing. For purposes of paragraph 
(d)(1) of this section, a derivative does not include any securities 
lending transaction, sale-

[[Page 67032]]

repurchase transaction, or substantially similar transaction that is 
treated as a secured loan for federal tax purposes. Securities lending 
transaction and sale-repurchase transaction have the meanings provided 
in Sec.  1.861-2(a)(7).
    (B) Special rule for payments associated with the cash collateral 
provided in a securities lending transaction or substantially similar 
transaction. For purposes of paragraph (d)(1) of this section, a 
derivative does not include the cash collateral component of a 
securities lending transaction (or the cash payments pursuant to a 
sale-repurchase transaction, or similar payments pursuant to a 
substantially similar transaction).
    (C) Anti-abuse exception for certain transactions that are the 
economic equivalent of substantially unsecured cash borrowing. For 
purposes of paragraph (d)(1) of this section, a derivative does not 
include any securities lending transaction or substantially similar 
transaction that is part of an arrangement that has been entered into 
with a principal purpose of avoiding the treatment of any payment with 
respect to that transaction as a base erosion payment and that provides 
the taxpayer with the economic equivalent of a substantially unsecured 
cash borrowing. The determination of whether the securities lending 
transaction or substantially similar transaction provides the taxpayer 
with the economic equivalent of a substantially unsecured cash 
borrowing takes into account arrangements that effectively serve as 
collateral due to the taxpayer's compliance with any U.S. regulatory 
requirements governing such transaction.
    (3) American depository receipts. For purposes of section 59A, 
American depository receipts (or any similar instruments) with respect 
to shares of stock in a foreign corporation are treated as shares of 
stock in that foreign corporation.
    (e) Examples. The following examples illustrate the rules of this 
section.

    (1) Example 1: Notional principal contract as QDP--(i) Facts. 
Domestic Corporation (DC) is a dealer in securities within the 
meaning of section 475. On February 1, 2019, DC enters into a 
contract (Interest Rate Swap) with Foreign Parent (FP), a foreign 
related party, for a term of five years. Under the Interest Rate 
Swap, DC is obligated to make a payment to FP each month, beginning 
March 1, 2019, in an amount equal to a variable rate determined by 
reference to the prime rate, as determined on the first business day 
of the immediately preceding month, multiplied by a notional 
principal amount of $50x. Under the Interest Rate Swap, FP is 
obligated to make a payment to DC each month, beginning March 1, 
2019, in an amount equal to 5% multiplied by the same notional 
principal amount. The Interest Rate Swap satisfies the definition of 
a notional principal contract under Sec.  1.446-3(c). DC recognizes 
gain or loss on the Interest Rate Swap pursuant to section 475. DC 
reports the information required to be reported for the taxable year 
under Sec.  1.6038A-2(b)(7)(ix).
    (ii) Analysis. The Interest Rate Swap is a derivative as 
described in paragraph (d) of this section because it is a contract 
that references the prime rate and a fixed rate for determining the 
amount of payments. The exceptions described in paragraph (c) of 
this section do not apply to the Interest Rate Swap. Because DC 
recognizes ordinary gain or loss on the Interest Rate Swap pursuant 
to section 475(d)(3), it satisfies the condition in paragraph 
(b)(1)(ii) of this section. Because DC satisfies the requirement 
relating to the information required to be reported under paragraph 
(b)(2) of this section, any payment to FP with respect to the 
Interest Rate Swap will be a qualified derivative payment. 
Therefore, under Sec.  1.59A-3(b)(3)(ii), the payments to FP are not 
base erosion payments.
    (2) Example 2: Securities lending anti-abuse rule--(i) Facts. 
(A) Foreign Parent (FP) is a foreign corporation that owns all of 
the stock of domestic corporation (DC) and foreign corporation (FC). 
FP and FC are foreign related parties of DC under Sec.  1.59A-
1(b)(12) but not members of DC's aggregate group. On January 1 of 
year 1, with a principal purpose of providing financing to DC 
without DC making a base erosion payment to FC, FC lends 100x U.S. 
Treasury bills with a remaining maturity of 11 months (Securities A) 
to DC (Securities Lending Transaction 1) for a period of six months. 
Pursuant to the terms of Securities Lending Transaction 1, DC is 
obligated to make substitute payments to FC corresponding to the 
interest payments on Securities A. DC does not post cash collateral 
with respect to Securities Lending Transaction 1, and no other 
arrangements of FC or DC effectively serve as collateral under any 
U.S. regulatory requirements governing the transaction. Immediately 
thereafter, DC sells Securities A for cash.
    (B) On June 30 of year 1, FC lends 100x U.S. Treasury bills with 
a remaining maturity of 11 months (Securities B) to DC (Securities 
Lending Transaction 2) for a period of six months. Pursuant to the 
terms of Securities Lending Transaction 2, DC is obligated to make 
substitute payments to FC corresponding to the interest payments on 
Securities B. Immediately thereafter, DC sells Securities B for cash 
and uses the cash to purchase U.S. Treasury bills with a remaining 
maturity equal to the Securities A bills that DC then transfers to 
FC in repayment of Securities Lending Transaction 1.
    (ii) Analysis. Securities Lending Transaction 1 and Securities 
Lending Transaction 2 are not treated as derivatives for purposes of 
paragraph (d)(1) of this section because the transactions are part 
of an arrangement that has been entered into with a principal 
purpose of avoiding the treatment of any payment with respect to 
Securities Lending Transaction 1 and Securities Lending Transaction 
2 as a base erosion payment and provides DC with the economic 
equivalent of a substantially unsecured cash borrowing by DC. As a 
result, pursuant to paragraph (d)(2)(iii)(C) of this section, the 
substitute payments made by DC to FC with respect to Securities A 
and Securities B are not eligible for the exception in Sec.  1.59A-
3(b)(3)(ii) (qualified derivative payment).


Sec.  1.59A-7  Application of base erosion and anti-abuse tax to 
partnerships.

    (a) Scope. This section provides rules regarding how partnerships 
and their partners are treated for purposes of making certain 
determinations under section 59A, including whether there is a base 
erosion payment or base erosion tax benefit. All references to 
partnerships in this section include domestic and foreign partnerships. 
This section applies to payments to a partnership and payments from a 
partnership as well as transfers of partnership interests (as defined 
in paragraph (c)(3)(iv) of this section). The aggregate principle 
described in this section does not override the treatment of 
partnership items under any Code section other than section 59A. The 
aggregate principles provided in this section apply without regard to 
any tax avoidance purpose relating to a particular partnership. See 
Sec.  1.701-2(e). Paragraph (b) of this section describes how the 
aggregate approach to partnerships applies for purposes of certain 
section 59A determinations. Paragraph (c) of this section provides 
rules for determining whether there is a base erosion payment with 
respect to a payment to or from a partnership. Paragraph (d) of this 
section provides rules for determining the base erosion tax benefits of 
a partner. Paragraph (e) of this section provides additional rules 
relating to the application of section 59A to partnerships. Paragraph 
(f) of this section provides a rule for determining whether a person is 
a foreign related party. Paragraph (g) of this section provides 
examples that illustrate the application of the rules of this section.
    (b) Application of section 59A to partnerships. The purpose of this 
section is to provide a set of operating rules for the application of 
section 59A to partnerships and partners in a manner consistent with 
the purposes of section 59A. Except for purposes of determining a 
partner's base erosion tax benefits under paragraph (d)(1) of this 
section and whether a taxpayer is a registered securities dealer under 
paragraph (e)(3) of this section, section 59A determinations are made 
at the

[[Page 67033]]

partner level in the manner described in this section. The provisions 
of section 59A must be interpreted in a manner consistent with this 
approach. If a transaction is not specifically described in this 
section, whether the transaction gives rise to a base erosion payment 
or base erosion tax benefit is determined in accordance with the 
principles of this section and the purposes of section 59A.
    (c) Base erosion payment. For purposes of determining whether a 
taxpayer has made a base erosion payment as described in Sec.  1.59A-
3(b), the taxpayer must treat a payment to or from a partnership as 
made to or from each partner and the assets and liabilities of the 
partnership as assets and liabilities of each partner. This paragraph 
(c) provides specific rules for determining whether a partner has made 
or received a payment, including as a result of a partnership interest 
transfer (as defined in paragraph (c)(3)(iv) of this section).
    (1) Payments made by or to a partnership. For purposes of 
determining whether a payment or accrual by a partnership is a base 
erosion payment described in Sec.  1.59A-3(b)(1)(i), any amount paid or 
accrued by the partnership (including any guaranteed payment described 
in section 707(c)) is treated as paid or accrued by each partner based 
on the partner's distributive share of the item of deduction with 
respect to that amount. For purposes of determining whether a payment 
or accrual to a partnership is a base erosion payment described in 
Sec.  1.59A-3(b)(1)(i) or (iii), any amount paid or accrued to the 
partnership (including any guaranteed payment described in section 
707(c)) is treated as paid or accrued to each partner based on the 
partner's distributive share of the item of income with respect to that 
amount. See paragraph (e)(1) of this section to determine the partner's 
distributive share.
    (2) Transfers of certain property. When a partnership transfers 
property, each partner is treated as transferring its proportionate 
share of the property transferred for purposes of determining whether 
there is a base erosion payment described in Sec.  1.59A-3(b)(1)(ii) or 
(iv). When a partnership acquires property, each partner is treated as 
acquiring its proportionate share of the property acquired for purposes 
of determining whether there is a base erosion payment described in 
Sec.  1.59A-3(b)(1)(ii) or (iv). For purposes of this paragraph (c)(2), 
a transfer of property does not include a transfer of a partnership 
interest (as defined in paragraph (c)(3)(iv) of this section). See 
paragraph (c)(3) of this section for rules applicable to transfers of 
partnership interests. See paragraphs (g)(2)(v) and (vi) of this 
section (Example 5 and Example 6) for examples illustrating the 
application of this paragraph (c)(2).
    (3) Transfers of a partnership interest--(i) In general. A transfer 
of a partnership interest (as defined in paragraph (c)(3)(iv) of this 
section) is generally treated as a transfer by each partner in the 
partnership of its proportionate share of the partnership's assets to 
the extent of any change in its proportionate share of any partnership 
asset, as well as any assumption of associated liabilities by the 
partner. Paragraphs (c)(3)(ii) and (iii) of this section provide rules 
for applying the general rule to transfers of a partnership interest by 
a partner and issuances of a partnership interest by the partnership 
for contributed property, respectively. See paragraph (g)(2)(vii) of 
this section (Example 7) for an example illustrating the application of 
this paragraph (c)(3)(i).
    (ii) Transfers of a partnership interest by a partner. A transfer 
of a partnership interest (as defined in paragraph (c)(3)(iv) of this 
section) by a partner is treated as a transfer by the transferor to the 
recipient of the transferor's proportionate share of each of the 
partnership assets and an assumption by the recipient of the 
transferor's proportionate share of the partnership liabilities. If the 
partner's entire partnership interest is not transferred, only the 
proportionate share of each of the partnership assets and liabilities 
associated with the transferred partnership interest is treated as 
transferred and assumed. See paragraphs (g)(2)(iii), (iv), and (vi) of 
this section (Example 3, Example 4, and Example 6) for examples 
illustrating the application of this paragraph (c)(3)(ii).
    (iii) Certain issuances of a partnership interest by a partnership. 
If a partnership issues an interest in the partnership in exchange for 
a contribution of property to the partnership, the contributing partner 
is treated as exchanging a portion of the contributed property and 
assuming any liabilities associated with the transferred partnership 
interest for a portion of the partners' pre-contribution interests in 
the partnership's assets and the partners' assumption of any 
liabilities transferred to the partnership. For purposes of this 
paragraph (c)(3)(iii), a reference to the ``partnership's assets'' 
includes the assets contributed by the contributing partner and any 
other assets that are contributed to the partnership at the same time. 
Each partner whose proportionate share in a partnership asset 
(including the assets contributed to the partnership as part of the 
transaction) is reduced as a result of the transaction is treated as 
transferring the asset to the extent of the reduction, and each person 
who receives a proportionate share or an increased proportionate share 
in an asset as a result of the transaction is treated as receiving an 
asset to the extent of the increase, proportionately from the partners' 
reduced interests. For example, if a person contributes property to a 
partnership in which each of two existing partners has a 50 percent 
pro-rata interest in the partnership in exchange for a one-third pro-
rata partnership interest, each of the pre-contribution partners is 
treated as transferring a one-third interest in their share of existing 
partnership assets to the contributing partner, and the contributing 
partner is treated as transferring a one-third interest in the 
contributed assets to each of the original partners. See paragraphs 
(g)(2)(i) and (ii) of this section (Example 1 and Example 2) for 
additional examples illustrating the application of this paragraph 
(c)(3)(iii).
    (iv) Partnership interest transfers defined. For purposes of 
paragraphs (c)(3) and (4) of this section, a transfer of a partnership 
interest includes any issuance of a partnership interest by a 
partnership; any sale of a partnership interest; any increase or 
decrease in a partner's proportionate share of any partnership asset as 
a result of a contribution of property or services to a partnership, a 
distribution, or a redemption; or any other transfer of a proportionate 
share of any partnership asset (other than a transfer of a partnership 
asset that is not a partnership interest by the partnership to a person 
not acting in a partner capacity), whether by a partner or the 
partnership (including as a result of a deemed or actual sale or a 
capital shift).
    (4) Increased basis from a distribution. If a distribution of 
property from a partnership to a partner results in an increase in the 
tax basis of either the distributed property or other partnership 
property, such as under section 732(b) or 734(b), the increase in tax 
basis attributable to a foreign related party is treated as if it was 
newly purchased property acquired by the taxpayer (to the extent of its 
proportionate share) from the foreign related party that is placed in 
service when the distribution occurs. See Sec.  1.734-1(e). This 
increased basis treated as newly purchased property is treated as 
acquired with a base erosion payment, unless an exception in Sec.  
1.59A-3(b) applies. For this purpose,

[[Page 67034]]

in the case of a distribution to a foreign related party, the increased 
basis in the remaining partnership property that is treated as newly 
purchased property is entirely attributable to the foreign related 
party. In the case of a distribution to a taxpayer, the increased basis 
in the distributed property that is treated as newly purchased property 
is attributable to each foreign related party in proportion to the 
foreign related party's proportionate share of the asset immediately 
before the distribution. If the distribution is to a person other than 
a taxpayer or a foreign related party, there is no base erosion payment 
caused by the distribution under this paragraph (c)(4). See paragraphs 
(g)(2)(vii), (viii), and (ix) of this section (Example 7, Example 8, 
and Example 9) for examples illustrating the application of this 
paragraph (c)(4).
    (5) Operating rules applicable to base erosion payments--(i) Single 
payment characterized as separate transactions. If a single transaction 
is partially characterized in one manner and partially characterized in 
another manner, each part of the transaction is separately analyzed. 
For example, if a contribution of property to a partnership is 
partially treated as a contribution and partially treated as a 
disguised sale, the contribution and sale are separately analyzed under 
paragraph (c) of this section.
    (ii) Ordering rule with respect to transfers of a partnership 
interest. If a partnership interest is transferred (within the meaning 
of paragraph (c)(3)(iv) of this section), paragraph (c)(3) of this 
section first applies to determine the assets deemed transferred by the 
transferor(s) to the transferee(s) and liabilities deemed assumed by 
the parties. Then, to the extent applicable (such as where a 
partnership makes a contribution in exchange for an interest in another 
partnership or when a partnership receives an interest in another 
partnership as a contribution to it), paragraph (c)(2) of this section 
applies for purposes of determining the proportionate share of the 
property received by the partners in a partnership. See paragraph 
(g)(2)(vi) of this section (Example 6) for an illustration of this 
rule.
    (iii) Consideration for base erosion payment or property resulting 
in base erosion tax benefits. When a partnership pays or receives 
property, services, or other consideration, each partner is deemed to 
pay or receive the property, services, or other consideration paid or 
received by the partnership for purposes of determining if there is a 
base erosion payment, except as otherwise provided in paragraph (c) of 
this section. See paragraphs (g)(2)(v) and (vi) of this section 
(Example 5 and Example 6) for illustrations of this rule.
    (iv) Non-cash consideration. When both parties to a transaction use 
non-cash consideration, each party must separately apply paragraph (c) 
of this section to determine its base erosion payment with respect to 
each property. For example, if two partnerships, each with a domestic 
corporation and a foreign corporation as partners, all of whom are 
related, exchange depreciable property, each transfer of property would 
be separately analyzed to determine whether it is a base erosion 
payment.
    (d) Base erosion tax benefit for partners--(1) In general. A 
partner's distributive share of any deduction or reduction in gross 
receipts attributable to a base erosion payment (including as a result 
of sections 704(b) and (c), 707(a) and (c), 732(b) and (d), 734(b) and 
(d), 737, 743(b) and (d), and 751(b)) is the partner's base erosion tax 
benefit, subject to the exceptions in Sec.  1.59A-3(c)(2). See 
paragraph (e)(1) of this section to determine the partner's 
distributive share for purposes of section 59A. A partner's base 
erosion tax benefit may be more than the partner's base erosion 
payment. For example, if a partnership makes a payment to a foreign 
related party of its domestic partner to acquire a depreciable asset, 
and the partnership specially allocates more depreciation deductions to 
a partner than its proportionate share of the asset, the partner's base 
erosion tax benefit includes the specially allocated depreciation 
deduction even if the total allocated deduction exceeds the partner's 
share of the base erosion payment made to acquire the asset. Base 
erosion tax benefits are determined separately for each asset, payment, 
or accrual, as applicable, and are not netted with other items. A 
taxpayer determines its base erosion tax benefits for non-partnership 
items pursuant to Sec.  1.59A-3(c).
    (2) Exception for base erosion tax benefits of certain small 
partners--(i) In general. For purposes of determining a partner's 
amount of base erosion tax benefits attributable to a base erosion 
payment made by a partnership, a partner does not take into account its 
distributive share of any base erosion tax benefits from the 
partnership for the taxable year if--
    (A) The partner's interest in the partnership represents less than 
ten percent of the capital and profits of the partnership at all times 
during the taxable year;
    (B) The partner is allocated less than ten percent of each 
partnership item of income, gain, loss, deduction, and credit for the 
taxable year; and
    (C) The partner's interest in the partnership has a fair market 
value of less than $25 million on the last day of the partner's taxable 
year, determined using a reasonable method.
    (ii) Attribution. For purposes of paragraph (d)(2)(i) of this 
section, a partner's interest in a partnership or partnership item is 
determined by adding the interests of the partner and any related party 
of the partner (as determined under section 59A), taking into account 
any interest owned directly, indirectly, or through constructive 
ownership (applying the section 318 rules as modified by section 59A 
(except section 318(a)(3)(A) through (C) will also apply so as to 
consider a United States person as owning stock that is owned by a 
person who is not a United States person), but excluding any interest 
to the extent already taken into account).
    (e) Other rules for applying section 59A to partnerships--(1) 
Partner's distributive share. For purposes of section 59A, each 
partner's distributive share of an item of income or deduction of the 
partnership is determined under sections 704(b) and (c) and takes into 
account amounts determined under other provisions of the Code, 
including but not limited to sections 707(a) and (c), 732(b) and (d), 
734(b) and (d), 737, 743(b) and (d), and 751(b). See Sec.  1.704-
1(b)(1)(iii) regarding the application of section 482. These amounts 
are calculated separately for each payment or accrual on a property-by-
property basis, including for purposes of section 704(c), and are not 
netted. For purposes of section 59A, a partner's distributive share of 
a reduction to determine gross income is equal to a proportionate 
amount of the partnership's reduction to determine gross income 
corresponding to the partner's share of the partnership gross receipts 
(as determined under paragraph (e)(2)(i) of this section) related to 
that reduction.
    (2) Gross receipts--(i) In general. For purposes of section 59A, 
each partner in the partnership includes a share of partnership gross 
receipts in proportion to the partner's distributive share (as 
determined under sections 704(b) and (c)) of items of gross income that 
were taken into account by the partnership under section 703 or 704(c) 
(such as remedial or curative items under Sec.  1.704-3(c) or (d)).
    (ii) Foreign corporation. See Sec.  1.59A-2(d)(2) for gross 
receipts of foreign corporations.

[[Page 67035]]

    (3) Registered securities dealers. If a partnership, or a branch of 
the partnership, is a registered securities dealer, each partner is 
treated as a registered securities dealer unless the partner's interest 
in the registered securities dealer would satisfy the criteria for the 
exception in paragraph (d)(2) of this section. For purposes of applying 
the de minimis exception in Sec.  1.59A-2(e)(2)(iii), a partner takes 
into account its distributive share of the relevant partnership items.
    (4) Application of sections 163(j) and 59A(c)(3) to partners. See 
Sec.  1.59A-3(c)(4).
    (5) Tiered partnerships. In the case of one or more partnerships 
owning an interest in another partnership (or partnerships), the rules 
of this section apply successively to each partnership and its partners 
in the chain of ownership. Paragraphs (d)(2) and (f) of this section 
and the small partner exception in paragraph (e)(3) of this section 
apply only to a partner that is not itself a partnership.
    (f) Foreign related party. With respect to any person that owns an 
interest in a partnership, the related party determination in section 
59A(g) applies at the partner level.
    (g) Examples. The following examples illustrate the application of 
this section.
    (1) Facts. The following facts are assumed for purposes of the 
examples.
    (i) DC is a domestic corporation that is an applicable taxpayer for 
purposes section 59A.
    (ii) FC is a foreign corporation that is a foreign related party 
with respect to DC.
    (iii) UC is a domestic corporation that is not related to DC and 
FC.
    (iv) Neither FC nor any partnership in the examples is (or is 
treated as) engaged in a U.S. trade or business or has a permanent 
establishment in the United States.
    (v) All payments apply to a taxable year beginning after December 
31, 2017.
    (vi) Unless otherwise stated, all allocations are pro-rata and 
satisfy the requirements of section 704(b) and all the partners have 
equal interests in the partnership.
    (vii) Unless otherwise stated, depreciable property acquired and 
placed in service by the partnership has a remaining recovery period of 
five years and is depreciated under the alternative depreciation system 
of section 168(g) using the straight line method. Solely for purposes 
of simplifying the calculations in these examples, assume the 
applicable convention rules in section 168(d) do not apply.
    (viii) No exception under Sec.  1.59A-3(b) or (c) applies to any 
amount paid or accrued.
    (2) Examples--(i) Example 1: Contributions to a partnership on 
partnership formation--(A) Facts. DC and FC form partnership PRS, with 
each contributing depreciable property that has a fair market value and 
tax basis of $100x, Property A and Property B, respectively. Therefore, 
the property contributed by FC, Property B, will generate $20x of 
annual section 704(b) and tax depreciation deductions for five years. 
The depreciation deductions will be allocated $10x to each of DC and FC 
each year. Before the transactions, for purposes of section 59A, DC is 
treated as owning a 100 percent interest in Property A and a zero 
percent interest in Property B, and FC is treated as owning a 100 
percent interest in Property B and a zero percent interest in Property 
A. After the formation of PRS, for purposes of section 59A, DC and FC 
are each treated as owning a 50 percent proportionate share of each of 
Property A and Property B.

    (B) Analysis. The treatment of contributions of property in 
exchange for an interest in a partnership is described in paragraph 
(c)(3)(iii) of this section. Under paragraph (c)(3)(iii) of this 
section, DC is treated as exchanging a 50 percent interest in 
Property A for a 50 percent proportionate share of Property B. Under 
Sec.  1.59A-3(b)(1)(ii), the payment to acquire depreciable 
property, Property B, from FC is a base erosion payment. The base 
erosion tax benefit is the amount of depreciation allocated to DC 
with respect to Property B ($10x per year) and is not netted with 
any other partnership item pursuant to paragraph (d)(1) of this 
section.
    (ii) Example 2: Section 704(c) and remedial allocations--(A) 
Facts. The facts are the same as in paragraph (g)(2)(i)(A) of this 
section (the facts in Example 1), except that Property B has a tax 
basis of $40x and PRS adopts the remedial method under Sec.  1.704-
3(d).
    (B) Analysis. The analysis and results are the same as in 
paragraph (g)(2)(i)(B) of this section (the analysis in Example 1), 
except that annual tax depreciation is $8x ($40x/5) and annual 
remedial tax deduction allocation to DC is $2x (with $2x of remedial 
income to FC) for five years. Both the tax depreciation and the 
remedial tax allocation to DC are base erosion tax benefits to DC 
under paragraph (d)(1) of this section.
    (iii) Example 3: Sale of a partnership interest without a 
section 754 election--(A) Facts. UC and FC are equal partners in 
partnership PRS, the only asset of which is Property A, a 
depreciable property with a fair market value of $200x and a tax 
basis of $120x. PRS does not have any section 704(c) assets. DC 
purchases 50 percent of FC's interest in PRS for $50x. Prior to the 
sale, for section 59A purposes, FC is treated as owning a 50 percent 
proportionate share of Property A and DC is treated as owning no 
interest in Property A. Following the sale, for section 59A 
purposes, DC is treated as owning a 25 percent proportionate share 
of Property A, all of which is treated as acquired from FC. The 
partnership does not have an election under section 754 in effect. 
Property A will generate $24x of annual tax and section 704(b) 
depreciation deductions for five years. The depreciation deductions 
will be allocated $12x to UC and $6x to both FC and DC each year.
    (B) Analysis. The sale of a partnership interest by a partner is 
analyzed under paragraph (c)(3)(ii) of this section. Under section 
(c)(3)(ii) of this section, FC is treated as selling to DC 25 
percent of Property A. Under Sec.  1.59A-3(b)(1)(ii), the payment to 
acquire depreciable property is a base erosion payment. Under 
paragraph (d)(1) of this section, the base erosion tax benefit is 
the amount of depreciation allocated to DC with respect to the base 
erosion payment, which would be the depreciation deductions 
allocated to DC with respect to Property A. DC's annual $6x 
depreciation deduction is its base erosion tax benefit with respect 
to the base erosion payment.
    (iv) Example 4: Sale of a partnership interest with section 754 
election--(A) Facts. The facts are the same as in paragraph 
(g)(2)(iii)(A) of this section (the facts in Example 3), except that 
the partnership has an election under section 754 in effect. As a 
result of the sale, there is a $20x positive adjustment to the tax 
basis in Property A with respect to DC under section 743(b) (DC's 
$50x basis in the PRS interest less DC's $30x share of PRS's tax 
basis in Property A). The section 743(b) step-up in tax basis is 
recovered over a depreciable recovery period of five years. 
Therefore, DC will be allocated a total of $10x in annual 
depreciation deductions for five years, comprised of $6x with 
respect to DC's proportionate share of PRS's common tax basis in 
Property A ($30x over 5 years) and $4x with respect to the section 
743(b) adjustment ($20x over 5 years).
    (B) Analysis. The analysis is the same as in paragraph 
(g)(2)(iii)(B) of this section (the analysis in Example 3); however, 
because section 743(b) increases the basis in Property A for DC by 
$20x, DC is allocated additional depreciation deductions of $4x per 
year as a result of the section 743(b) adjustment and has an annual 
base erosion tax benefit of $10x ($6x plus $4x) for five years under 
paragraph (d)(1) of this section.
    (v) Example 5: Purchase of depreciable property from a 
partnership--(A) Facts. The facts are the same as in paragraph 
(d)(2)(iii)(A) of this section (the facts in Example 3), except that 
instead of DC purchasing an interest in the partnership, DC 
purchases Property A from the partnership for $200x.
    (B) Analysis. DC must analyze whether the purchase of the 
depreciable property from the partnership is a base erosion payment 
under paragraph (c)(2) of this section. Under paragraph (c)(2) of 
this section, DC is treated as acquiring FC's proportionate share of 
Property A from FC. Because DC paid the partnership for the 
partnership's interest in Property A, under paragraph (c)(5)(iii) of 
this section, DC is treated as paying FC for FC's proportionate 
share of Property A. Under

[[Page 67036]]

Sec.  1.59A-3(b)(1)(ii), the payment to FC to acquire depreciable 
property is a base erosion payment. DC's base erosion tax benefit is 
the amount of depreciation allocated to DC with respect to the base 
erosion payment, which in this case is the amount of depreciation 
deductions with respect to the property acquired with a base erosion 
payment, or the depreciation deductions from FC's (but not UC's) 
proportionate share of the asset. See Sec.  1.59A-7(d)(1).
    (vi) Example 6: Sale of a partnership interest to a second 
partnership--(A) Facts. FC, UC1, and UC2 are equal partners in 
partnership PRS1. DC and UC3 are equal partners in partnership PRS2. 
UC1, UC2, and UC3 are not related to DC or FC. PRS1's sole asset is 
Property A, which is depreciable property with a fair market value 
and tax basis of $300x. FC sells its entire interest in PRS1 to PRS2 
for $100. For section 59A purposes, FC's proportionate share of 
Property A prior to the sale is one-third. Following the sale, for 
section 59A purposes, PRS2's proportionate share of Property A is 
one-third and DC's proportionate share of Property A (through PRS2) 
is one-sixth (50 percent of one-third).
    (B) Analysis. Under paragraph (c)(5)(ii) of this section (the 
ordering rule), FC's transfer of its interest in PRS1 is first 
analyzed under paragraph (c)(3) of this section to determine how the 
transfer of the partnership interest is treated. Then, paragraph 
(c)(2) of this section applies to analyze how the acquisition of 
property by PRS2 is treated. Under paragraph (c)(3)(ii) of this 
section, FC is deemed to transfer its proportionate share of PRS1's 
assets, which is one-third of Property A. Then, under paragraph 
(c)(2) of this section, DC is treated as acquiring its proportionate 
share of PRS2's proportionate share of Property A from FC, which is 
one-sixth (50 percent of one-third). Under paragraph (c)(5)(iii) of 
this section, DC is treated as paying for the property it is treated 
as acquiring from FC. Therefore, DC's deemed payment to FC to 
acquire depreciable property is a base erosion payment under Sec.  
1.59A-3(b)(1)(ii). DC's base erosion tax benefit is equal to DC's 
distributive share of depreciation deductions that PRS2 allocates to 
DC attributable to Property A. See Sec.  1.59A-7(d)(1).
    (vii) Example 7: Distribution of cash by a partnership to a 
foreign related party--(A) Facts. DC, FC, and UC are equal partners 
in a partnership, PRS, the assets of which consist of cash of $90x 
and a depreciable asset (Property A) with a fair market value of 
$180x and a tax basis of $60x. Each partner's interest in PRS has a 
fair market value of $90x ($270x/3) and a tax basis of $50x. Assume 
that all non-depreciable assets are capital assets, all depreciable 
assets are nonresidential real property under section 168, and that 
no depreciation has been claimed prior to the transaction below. PRS 
has an election under section 754 in effect. PRS distributes the 
$90x of cash to FC in complete liquidation of its interest, 
resulting in gain to FC of $40x ($90x minus its tax basis in PRS of 
$50x) under section 731(a)(1) and an increase to the tax basis of 
Property A under section 734(b) of $40x. Prior to the distribution, 
for section 59A purposes, each partner had a one-third proportionate 
share of Property A. After the distribution, for section 59A 
purposes, the remaining partners each have a 50 percent 
proportionate share of Property A. Each partner's pro-rata 
allocation of depreciation deductions with respect to Property A is 
in proportion to each partner's proportionate share of Property A 
both before and after the distribution. Half of the depreciation 
deductions attributable to the $40x section 734(b) step-up will be 
allocated to DC. In addition, DC's proportionate share of Property A 
increased from one-third to one-half and therefore DC will be 
allocated depreciation deductions with respect to half of the 
original basis of $60x (or $30x) instead of one-third of $60x (or 
$20x).
    (B) Analysis. Distributions of property that cause an increase 
in the tax basis of property that continues to be held by the 
partnership are analyzed under paragraph (c)(4) of this section. The 
$40x increase in the tax basis of Property A as a result of the 
distribution of cash to FC is treated as newly purchased property 
acquired from FC under paragraph (c)(4) of this section and 
therefore acquired with a base erosion payment under Sec.  1.59A-
3(b)(1)(ii) to DC to the extent of DC's proportionate share. DC's 
base erosion tax benefit is the amount of DC's depreciation 
deductions attributable to that base erosion payment, which is DC's 
distributive share of the depreciation deductions with respect to 
the $40x increase in the tax basis of Property A. See Sec.  1.59A-
7(d)(1). In addition, FC transferred a partnership interest to DC 
(as defined in paragraph (c)(3)(iv) of this section), which is 
analyzed under paragraph (c)(3)(i) of this section. Under paragraph 
(c)(3)(i) of this section, DC is deemed to acquire a one-sixth 
interest in Property A from FC (the increase in DC's proportionate 
share from one-third to one-half). DC's base erosion tax benefit 
from this additional one-sixth interest in Property A is the amount 
of DC's depreciation deductions attributable to this interest.
    (viii) Example 8: Distribution of property by a partnership to a 
taxpayer--(A) Facts. The facts are the same as paragraph 
(g)(2)(vii)(A) of this section (the facts of Example 7), except that 
PRS's depreciable property consists of two assets, Property A having 
a fair market value of $90x and a tax basis of $60x and Property B 
having a fair market value of $90x and a tax basis of zero. Instead 
of distributing cash to FC, PRS distributes Property B to DC in 
liquidation of its interest, resulting in an increase in the basis 
of the distributed Property B to DC of $50x (from zero to $50x) 
under section 732(b) because DC's tax basis in the PRS interest was 
$50x. For section 59A purposes, prior to the distribution, each 
partner had a one-third proportionate share of Property B and after 
the distribution, the property is wholly owned by DC.
    (B) Analysis. Distributions of property that cause an increase 
in the tax basis of property that is distributed to a taxpayer are 
analyzed under paragraph (c)(4) of this section. Under paragraph 
(c)(4) of this section, the $50x increase in tax basis is treated as 
newly purchased property that was acquired with a base erosion 
payment to the extent that the increase in tax basis is attributable 
to FC. Under paragraph (c)(4) of this section, the portion of the 
increase that is attributable to FC is the proportionate share of 
the Property B immediately before the distribution that was treated 
as owned by FC. Immediately before the distribution, FC had a one-
third proportionate share of Property B. Accordingly, one-third of 
the $50x increase in the tax basis of Property B is treated as if it 
was newly purchased property acquired by DC from FC with a base 
erosion payment under Sec.  1.59A-3(b)(1)(ii). DC's base erosion tax 
benefit is the amount of DC's depreciation deductions with respect 
to the base erosion payment, which in this case is the depreciation 
deductions with respect to the one-third interest in the increased 
basis treated as newly purchased property deemed acquired from FC. 
See Sec.  1.59A-3(c)(1). In addition, PRS transferred Property B to 
DC, which is analyzed under paragraph (c)(2) of this section. Prior 
to the distribution, DC, FC, and UC each owned one-third of Property 
B. After the distribution, DC entirely owned Property B. Therefore, 
under paragraph (c)(2) of this section, DC is treated as acquiring 
one-third of Property B from FC. DC's depreciation deductions with 
respect to the one-third of Property B acquired from FC (without 
regard to the basis increase) is also a base erosion tax benefit.
    (ix) Example 9: Distribution of property by a partnership in 
liquidation of a foreign related party's interest--(A) Facts. The 
facts are the same as paragraph (g)(2)(viii)(A) (the facts of 
Example 8), except that Property B is not distributed to DC and, 
instead, Property A is distributed to FC in liquidation of its 
interest, resulting in a tax basis in Property A of $50x in FC's 
hands under section 732(b) and a section 734(b) step-up in Property 
B of $10x (because Property A's tax basis was reduced from $60x to 
$50x), allocable to DC and UC. For section 59A purposes, prior to 
the distribution, each partner had a one-third proportionate share 
of Property B and after the distribution, DC and UC each have a one-
half proportionate share of Property B.
    (B) Analysis. Distributions of property that cause an increase 
in the tax basis of property that continues to be held by the 
partnership are analyzed under paragraph (c)(4) of this section. 
Under paragraph (c)(4) of this section, because the distribution of 
Property A to FC from PRS caused an increase in the tax basis of 
Property B, the entire $10x increase in tax basis is treated as 
newly purchased property that was acquired with a base erosion 
payment under Sec.  1.59A-3(b)(1)(ii). DC's base erosion tax benefit 
is the amount of DC's depreciation deductions attributable to the 
base erosion payment, which is DC's distributive share of the 
depreciation deductions with respect to the $10x increase in the tax 
basis of Property B. See Sec.  1.59A-7(d)(1). In addition, under 
paragraph (c)(3)(i) of this section, DC is deemed to acquire a one-
sixth interest in Property B from FC (the increase in DC's 
proportionate share from one-third to one-half). While this increase 
is a base erosion payment under Sec.  1.59A-3(b)(1)(ii), there is no 
base erosion tax benefit from this additional one-sixth interest in 
Property B because the

[[Page 67037]]

tax basis in Property B (without regard to the basis) is zero and 
therefore the increase in DC's proportionate share does not result 
in any additional depreciation deductions.


Sec.  1.59A-8  [Reserved]


Sec.  1.59A-9  Anti-abuse and recharacterization rules.

    (a) Scope. This section provides rules for recharacterizing certain 
transactions according to their substance for purposes of applying 
section 59A and the section 59A regulations. Paragraph (b) of this 
section provides specific anti-abuse rules. Paragraph (c) of this 
section provides examples illustrating the rules of paragraph (b) of 
this section.
    (b) Anti-abuse rules--(1) Transactions involving unrelated persons, 
conduits, or intermediaries. If a taxpayer pays or accrues an amount to 
one or more intermediaries (including an intermediary unrelated to the 
taxpayer) that would have been a base erosion payment if paid or 
accrued to a foreign related party, and one or more of the 
intermediaries makes (directly or indirectly) corresponding payments to 
or for the benefit of a foreign related party as part of a transaction 
(or series of transactions), plan or arrangement that has as a 
principal purpose avoiding a base erosion payment (or reducing the 
amount of a base erosion payment), the role of the intermediary or 
intermediaries is disregarded as a conduit, or the amount paid or 
accrued to the intermediary is treated as a base erosion payment, as 
appropriate.
    (2) Transactions to increase the amount of deductions taken into 
account in the denominator of the base erosion percentage computation. 
A transaction (or component of a transaction or series of 
transactions), plan or arrangement that has a principal purpose of 
increasing the deductions taken into account for purposes of Sec.  
1.59A-2(e)(3)(i)(B) (the denominator of the base erosion percentage 
computation) is disregarded for purposes of Sec.  1.59A-2(e)(3).
    (3) Transactions to avoid the application of rules applicable to 
banks and registered securities dealers. A transaction (or series of 
transactions), plan or arrangement that occurs among related parties 
that has a principal purpose of avoiding the rules applicable to 
certain banks and registered securities dealers in Sec.  1.59A-2(e)(2) 
(base erosion percentage test for banks and registered securities 
dealers) or Sec.  1.59A-5(c)(2) (increased base erosion and anti-abuse 
tax rate for banks and registered securities dealers) is not taken into 
account for purposes of Sec.  1.59A-2(e)(2) or Sec.  1.59A-5(c)(2).
    (4) Nonrecognition transactions. If a transaction (or series of 
transactions), plan or arrangement, has a principal purpose of 
increasing the adjusted basis of property that a taxpayer acquires in a 
specified nonrecognition transaction, then Sec.  1.59A-3(b)(3)(viii)(A) 
will not apply to the specified nonrecognition transaction. For 
purposes of this paragraph (b)(4), if a transaction (or series of 
transactions), plan or arrangement between related parties increases 
the adjusted basis of property within the six month period before the 
taxpayer acquires the property in a specified nonrecognition 
transaction, the transaction (or series of transactions), plan or 
arrangement is deemed to have a principal purpose of increasing the 
adjusted basis of property that a taxpayer acquires in a nonrecognition 
transaction.
    (c) Examples. The following examples illustrate the application of 
this section.
    (1) Facts. The following facts are assumed for purposes of the 
examples.
    (i) DC is a domestic corporation that is an applicable taxpayer for 
purposes section 59A.
    (ii) FP is a foreign corporation that owns all the stock of DC.
    (iii) None of the foreign corporations have income that is, or is 
treated as, effectively connected with the conduct of a trade or 
business in the United States under an applicable provision of the 
Internal Revenue Code or regulations thereunder.
    (iv) All payments occur in a taxable year beginning after December 
31, 2017.

    (2) Example 1: Substitution of payments that are not base 
erosion payments for payments that otherwise would be base erosion 
payments through a conduit or intermediary--(i) Facts. FP owns 
Property 1 with a fair market value of $95x, which FP intends to 
transfer to DC. A payment from DC to FP for Property 1 would be a 
base erosion payment. Corp A is a domestic corporation that is not a 
related party with respect to DC. As part of a plan with a principal 
purpose of avoiding a base erosion payment, FP enters into an 
arrangement with Corp A to transfer Property 1 to Corp A in exchange 
for $95x. Pursuant to the same plan, Corp A transfers Property 1 to 
DC in exchange for $100x. Property 1 is subject to the allowance for 
depreciation (or amortization in lieu of depreciation) in the hands 
of DC.
    (ii) Analysis. The arrangement between FP, DC, and Corp A is 
deemed to result in a $95x base erosion payment under paragraph 
(b)(1) of this section because DC's payment to Corp A would have 
been a base erosion payment if paid to a foreign related party, and 
Corp A makes a corresponding payment to FP as part of the series of 
transactions that has as a principal purpose avoiding a base erosion 
payment.
    (3) Example 2: Alternative transaction to base erosion payment--
(i) Facts. The facts are the same as in paragraph (c)(2)(i) of this 
section (the facts in Example 1), except that DC does not purchase 
Property 1 from FP or Corp A. Instead, DC purchases Property 2 from 
Corp B, a domestic corporation that is not a related party with 
respect to DC and that originally produced or acquired Property 2 
for Corp B's own account. Property 2 is substantially similar to 
Property 1, and DC uses Property 2 in substantially the same manner 
that DC would have used Property 1.
    (ii) Analysis. Paragraph (b)(1) of this section does not apply 
to the transaction between DC and Corp B because Corp B does not 
make a corresponding payment to or for the benefit of FP as part of 
a transaction, plan or arrangement.
    (4) Example 3: Alternative financing source--(i) Facts. On Date 
1, FP loaned $200x to DC in exchange for Note A. DC pays or accrues 
interest annually on Note A, and the payment or accrual is a base 
erosion payment within the meaning of Sec.  1.59A-3(b)(1)(i). On 
Date 2, DC borrows $200x from Bank, a corporation that is not a 
related party with respect to DC, in exchange for Note B. The terms 
of Note B are substantially similar to the terms of Note A. DC uses 
the proceeds from Note B to repay Note A.
    (ii) Analysis. Paragraph (b)(1) of this section does not apply 
to the transaction between DC and Bank because Bank does not make a 
corresponding payment to or for the benefit of FP as part of the 
series of transactions.
    (5) Example 4: Alternative financing source that is a conduit--
(i) Facts. The facts are the same as in paragraph (c)(4)(i) of this 
section (the facts in Example 3) except that in addition, as part of 
the same plan or arrangement as the Note B transaction and with a 
principal purpose of avoiding a base erosion payment, FP deposits 
$250x with Bank. The difference between the interest rate paid by 
Bank to FP on FP's deposit and the interest rate paid by DC to Bank 
is less than one percentage point. The interest rate charged by Bank 
to DC would have differed absent the deposit by FP.
    (ii) Analysis. The transactions between FP, DC, and Bank are 
deemed to result in a base erosion payment under paragraph (b)(1) of 
this section because DC's payment to Bank would have been a base 
erosion payment if paid to a foreign related party, and Bank makes a 
corresponding payment to FP as part of the series of transactions 
that has as a principal purpose avoiding a base erosion payment. See 
Rev. Rul. 87-89, 1987-2 C.B. 195, Situation 3.
    (6) Example 5: Intermediary acquisition--(i) Facts. FP owns all 
of the stock of DC1 and DC2, each domestic corporations. FP is a 
manufacturer of lawn equipment. DC1 is in the trade or business of 
renting equipment to unrelated third parties. DC2 is a dealer in 
property that capitalizes its purchases into inventory and recovers 
the amount through cost of goods sold. Before Date 1, in the 
ordinary course of DC1's business, DC1 acquired depreciable property 
from FP that DC1 in turn rented to unrelated third parties. DC1's 
purchases from FP were base erosion payments within the meaning of 
Sec.  1.59A-3(b)(1)(ii). On Date 1, with a principal purpose of 
avoiding a base erosion payment,

[[Page 67038]]

FP and DC2 reorganized their operations so that DC2 acquires the 
lawn equipment from FP and immediately thereafter, DC2 resells the 
lawn equipment to DC1.
    (ii) Analysis. The transactions between FP, DC1, and DC2 are 
deemed to result in a base erosion payment under paragraph (b)(1) of 
this section because DC1's payment to DC2 would have been a base 
erosion payment if paid directly to FP, and DC2 makes a 
corresponding payment to FP as part of a series of transactions, 
plan, or arrangement that has a principal purpose of avoiding a base 
erosion payment from DC1 to FP.
    (7) Example 6: Offsetting transactions to increase the amount of 
deductions taken into account in the denominator of the base erosion 
percentage computation--(i) Facts. With a principal purpose of 
increasing the deductions taken into account by DC for purposes of 
Sec.  1.59A-2(e)(3)(i)(B), DC enters into a long position with 
respect to Asset with Financial Institution 1 and simultaneously 
enters into a short position with respect to Asset with Financial 
Institution 2. Financial Institution 1 and Financial Institution 2 
are not related to DC and are not related to each other.
    (ii) Analysis. Paragraph (b)(2) of this section applies to the 
transactions between DC and Financial Institution 1 and DC and 
Financial Institution 2. These transactions are not taken into 
account for purposes of Sec.  1.59A-2(e)(3)(i)(B) because the 
transactions have a principal purpose of increasing the deductions 
taken into account for purposes of Sec.  1.59A-2(e)(3)(i)(B).
    (8) Example 7: Ordinary course transactions that increase the 
amount of deductions taken into account in the denominator of the 
base erosion percentage computation--(i) Facts. DC, a financial 
institution, enters into a long position with respect to stock in 
Corporation with Person 1 and later on the same day enters into a 
short position with respect to stock in Corporation with Person 2. 
Person 1 and Person 2 are not related to DC and are not related to 
each other. DC entered into the positions in the ordinary course of 
its business and did not have a principal purpose of increasing the 
deductions taken into account by DC for purposes of Sec.  1.59A-
2(e)(3)(i)(B).
    (ii) Analysis. Paragraph (b)(2) of this section does not apply 
because the transactions between DC and Person 1 and Person 2 were 
not entered into with a principal purpose of increasing the 
deductions taken into account by DC for purposes of Sec.  1.59A-
2(e)(3)(i)(B).
    (9) Example 8: Transactions to avoid the application of rules 
applicable to banks and registered securities dealers--(i) Facts. DC 
owns all of the stock of DC1 and Bank (an entity defined in section 
581). DC, DC1, and Bank are members of an affiliated group of 
corporations within the meaning of section 1504(a) that elect to 
file a consolidated U.S. federal income tax return. With a principal 
purpose of avoiding the rules of Sec.  1.59A-2(e)(2) or Sec.  1.59A-
5(c)(2), DC and DC1 form a new partnership (PRS). DC contributes all 
of its stock of Bank, and DC1 contributes cash, to PRS. DC, DC1, and 
Bank do not materially change their business operations following 
the formation of PRS.
    (ii) Analysis. Paragraph (b)(3) of this section applies to 
transactions with respect to Bank because the transactions with 
respect to PRS were entered into with a principal purpose of 
avoiding the rules of Sec.  1.59A-2(e)(2) or Sec.  1.59A-5(c)(2). 
The contribution of Bank to a PRS is not taken into account, and 
Bank will be deemed to be part of the affiliated group including DC 
and DC1 for purposes of Sec.  1.59A-2(e)(2) and Sec.  1.59A-5(c)(2).
    (10) Example 9: Transactions that do not avoid the application 
of rules applicable to banks and registered securities dealers--(i) 
Facts. The facts are the same as the facts of paragraph (c)(9)(i) of 
this section (the facts of Example 8), except that DC sells 90 
percent of the stock of Bank to an unrelated party in exchange for 
cash.
    (ii) Analysis. Paragraph (b)(3) of this section does not apply 
to DC's sale of the stock of Bank because the sale was not made with 
a principal purpose of avoiding the rules of Sec.  1.59A-2(e)(2) or 
Sec.  1.59A-5(c)(2). Bank will not be treated as part of the 
affiliated group including DC and DC1 for purposes of Sec.  1.59A-
2(e)(2) and Sec.  1.59A-5(c)(2).
    (11) Example 10: Acquisition of depreciable property in a 
nonrecognition transaction--(i) Facts. U, which is not a related 
party with respect to FP or DC, owns Property 1 with an adjusted 
basis of $50x and a fair market value of $100x. On Date 1, FP 
purchases property, including Property 1, from U in exchange for 
cash, and then FP contributes Property 1 to DC in an exchange 
described in section 351. Following the exchange, DC's basis in 
Property 1 is $100x.
    (ii) Analysis. Paragraph (b)(4) of this section does not apply 
to DC's acquisition of Property 1 because the purchase of Property 1 
from U (along with the purchase of other property from U that FP did 
not contribute to DC) did not have a principal purpose of increasing 
the adjusted basis of property that was subsequently transferred to 
DC. The transaction is economically equivalent to an alternative 
transaction under which FP contributed $100x to DC and then DC 
purchased Property 1 from U. Further, the second sentence of 
paragraph (b)(4) of this section (providing that certain 
transactions are deemed to have a principal purpose of increasing 
the adjusted basis of property that a taxpayer acquires in a 
nonrecognition transaction) does not apply because FP purchased 
Property 1 from an unrelated party.
    (12) Example 11: Transactions between related parties with a 
principal purpose of increasing the adjusted basis of property--(i) 
Facts. The facts are the same as paragraph (c)(11)(i) of this 
section (the facts in Example 10), except that U is related to FP 
and DC.
    (ii) Analysis. Paragraph (b)(4) of this section applies to DC's 
acquisition of Property 1 because the transaction that increased the 
adjusted basis of Property 1 (the purchase of Property 1 from U) was 
between related parties, and within six months DC acquired Property 
1 from FP in a specified nonrecognition transaction. Accordingly, 
the purchase of property from U is deemed to have a principal 
purpose of increasing the adjusted basis of Property 1, the 
exception in Sec.  1.59A-3(b)(3)(viii)(A) for specified 
nonrecognition transactions will not apply to the contribution of 
Property 1 to DC, and DC's depreciation deductions with respect to 
Property 1 will be base erosion tax benefits.


Sec.  1.59A-10  Applicability date.

    Sections 1.59A-1 through 1.59A-9 apply to taxable years ending on 
or after December 17, 2018. However, taxpayers may apply these final 
regulations in their entirety for taxable years beginning after 
December 31, 2017, and ending before December 17, 2018. In lieu of 
applying these final regulations, taxpayers may apply the provisions 
matching Sec. Sec.  1.59A-1 through 1.59A-9 from the Internal Revenue 
Bulletin (IRB) 2019-02 (https://www.irs.gov/pub/irs-irbs/irb19-02.pdf) 
in their entirety for all taxable years ending on or before December 6, 
2019.

0
Par. 3. Section 1.383-1 is amended by adding two sentences at the end 
of paragraph (d)(3)(i) to read as follows:


Sec.  1.383-1  Special limitations on certain capital losses and excess 
credits.

* * * * *
    (d) * * *
    (3) * * *
    (i) * * * The application of section 59A is not a limitation 
contained in subtitle A for purposes of this paragraph (d)(3)(i). 
Therefore, the treatment of pre-change losses and pre-change credits in 
the computation of the base erosion minimum tax amount will not affect 
whether such losses or credits result in absorption of the section 382 
limitation and the section 383 credit limitation.
* * * * *

0
 Par. 4. Section 1.1502-2 is revised to read as follows:


Sec.  1.1502-2  Computation of tax liability.

    (a) Taxes imposed. The tax liability of a group for a consolidated 
return year is determined by adding together--
    (1) The tax imposed by section 11(a) in the amount described in 
section 11(b) on the consolidated taxable income for the year (reduced 
by the taxable income of a member described in paragraphs (a)(5) 
through (8) of this section);
    (2) The tax imposed by section 541 on the consolidated 
undistributed personal holding company income;
    (3) If paragraph (a)(2) of this section does not apply, the 
aggregate of the taxes imposed by section 541 on the separate 
undistributed personal holding company income of the members which are 
personal holding companies;
    (4) If neither paragraph (a)(2) nor (3) of this section apply, the 
tax imposed by section 531 on the consolidated accumulated taxable 
income (see Sec.  1.1502-43);

[[Page 67039]]

    (5) The tax imposed by section 594(a) in lieu of the taxes imposed 
by section 11 on the taxable income of a life insurance department of 
the common parent of a group which is a mutual savings bank;
    (6) The tax imposed by section 801 on consolidated life insurance 
company taxable income;
    (7) The tax imposed by section 831(a) on consolidated insurance 
company taxable income of the members which are subject to such tax;
    (8) Any increase in tax described in section 1351(d)(1) (relating 
to recoveries of foreign expropriation losses); and
    (9) The tax imposed by section 59A on base erosion payments of 
taxpayers with substantial gross receipts.
    (b) Credits. A group is allowed as a credit against the taxes 
described in paragraph (a) of this section (except for paragraph (a)(9) 
of this section) of this section: The general business credit under 
section 38 (see Sec.  1.1502-3), the foreign tax credit under section 
27 (see Sec.  1.1502-4), and any other applicable credits provided 
under the Internal Revenue Code. Any increase in tax due to the 
recapture of a tax credit will be taken into account. See section 59A 
and the regulations thereunder for credits allowed against the tax 
described in paragraph (a)(9) of this section.
    (c) Allocation of dollar amounts. For purposes of this section, if 
a member or members of the consolidated group are also members of a 
controlled group that includes corporations that are not members of the 
consolidated group, any dollar amount described in any section of the 
Internal Revenue Code is apportioned among all members of the 
controlled group in accordance with the provisions of the applicable 
section and the regulations thereunder.
    (d) Applicability date--This section applies to taxable years for 
which the original consolidated Federal income tax return is due 
(without extension) after December 6, 2019.

0
Par. 5 Section 1.1502-4 is amended by revising paragraph (d)(3) to read 
as follows:


Sec.  1.1502-4  Consolidated foreign tax credit.

* * * * *
    (d) * * *
    (3) Computation of tax against which credit is taken. The tax 
against which the limiting fraction under section 904(a) is applied 
will be the consolidated tax liability of the group determined under 
Sec.  1.1502-2, but without regard to paragraphs (a)(2), (3), (4), (8), 
and (9) of that section, and without regard to any credit against such 
liability.
* * * * *

0
Par. 6. Section 1.1502-43 is amended by revising paragraph (b)(2)(i)(A) 
to read as follows:


Sec.  1.1502-43  Consolidated accumulated earnings tax.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (A) The consolidated liability for tax determined without Sec.  
1.1502-2(a)(2) through (4), and without the foreign tax credit provided 
by section 27, over
* * * * *

0
Par. 7. Section 1.1502-47 is amended by revising paragraph (f)(7)(iii) 
to read as follows.


Sec.  1.1502-47   Consolidated returns by life-nonlife groups.

* * * * *
    (f) * * *
    (7) * * *
    (iii) Any taxes described in Sec.  1.1502-2 (other than by 
paragraphs (a)(1) and (6) of that section).
* * * * *

0
Par. 8. Section 1.1502-59A is added to read as follows:


Sec.  1.1502-59A  Application of section 59A to consolidated groups.

    (a) Scope. This section provides rules for the application of 
section 59A and the regulations thereunder (the section 59A 
regulations) to consolidated groups and their members (as defined in 
Sec.  1.1502-1(h) and (b), respectively). Rules in the section 59A 
regulations apply to consolidated groups except as modified in this 
section. Paragraph (b) of this section provides rules treating a 
consolidated group (rather than each member of the group) as a single 
taxpayer, and a single applicable taxpayer, as relevant, for certain 
purposes. Paragraph (c) of this section coordinates the application of 
the business interest stacking rule under Sec.  1.59A-3(c)(4) to 
consolidated groups. Paragraph (d) of this section addresses how the 
base erosion minimum tax amount is allocated among members of the 
consolidated group. Paragraph (e) of this section coordinates the 
application of this section and Sec.  1.1502-47. Paragraph (f) of this 
section sets forth definitions. Paragraph (g) of this section provides 
examples. Paragraph (h) of this section provides the applicability 
date.
    (b) Consolidated group as the applicable taxpayer--(1) In general. 
For purposes of determining whether the consolidated group is an 
applicable taxpayer (within the meaning of Sec.  1.59A-2(b)) and the 
amount of tax due pursuant to section 59A(a), all members of a 
consolidated group are treated as a single taxpayer. Thus, for example, 
members' deductions are aggregated in making the required computations 
under section 59A. In addition, to ensure that intercompany 
transactions (as defined in Sec.  1.1502-13(b)(1)(i)) do not affect the 
consolidated group's base erosion percentage or base erosion minimum 
tax amount, items resulting from intercompany transactions are not 
taken into account in making such computations under section 59A. For 
example, additional depreciation deductions resulting from intercompany 
asset sales are not taken into account for purposes of applying the 
base erosion percentage test under Sec.  1.59A-2(e).
    (2) Consolidated group as member of the aggregate group. The 
consolidated group is treated as a single member of an aggregate group 
for purposes of Sec.  1.59A-2(c).
    (3) Related party determination. For purposes of section 59A and 
the section 59A regulations, if a person is a related party with 
respect to any member of a consolidated group, that person is a related 
party of the group and of each of its members.
    (c) Coordination of section 59A(c)(3) and section 163(j) in a 
consolidated group--(1) Overview. This paragraph (c) provides rules 
regarding the application of Sec.  1.59A-3(c)(4) to a consolidated 
group's section 163(j) interest deduction. The classification rule in 
paragraph (c)(3) of this section addresses how to determine if, and to 
what extent, the group's section 163(j) interest deduction is a base 
erosion tax benefit. These regulations contain a single-entity 
classification rule with regard to the deduction of the consolidated 
group's aggregate current year business interest expense (``BIE''), but 
a separate-entity classification rule for the deduction of the 
consolidated group's disallowed BIE carryforwards. Paragraph (c)(3) of 
this section classifies the group's aggregate current year BIE 
deduction, in conformity with Sec.  1.59A-3(c)(4), as constituting 
domestic related current year BIE deduction, foreign related current 
year BIE deduction, or unrelated current year BIE deduction. The 
allocation rules in paragraph (c)(4) of this section then allocate to 
specific members of the group the domestic related current year BIE 
deduction, foreign related current year BIE deduction, and unrelated 
current year BIE deduction taken in the taxable year. Any member's 
current year BIE that is carried forward to the succeeding taxable year 
as a disallowed BIE carryforward is allocated a status as domestic 
related BIE carryforward, foreign related BIE carryforward, or 
unrelated BIE carryforward under

[[Page 67040]]

paragraph (c)(5) of this section. The status of any disallowed BIE 
carryforward deducted by a member in a later year is classified on a 
separate-entity basis by the deducting member under paragraph (c)(3) of 
this section, based on the status allocated to the member's disallowed 
BIE carryforward under paragraph (c)(5) of this section. This paragraph 
(c) also provides rules regarding the consequences of the 
deconsolidation of a corporation that has been allocated a domestic 
related BIE carryforward status, a foreign related BIE carryforward 
status, or an unrelated BIE carryforward status; and the consolidation 
of a corporation with a disallowed BIE carryforward classified as from 
payments to a domestic related party, foreign related party, or 
unrelated party.
    (2) Absorption rule for the group's business interest expense. To 
determine the amount of the group's section 163(j) interest deduction, 
and to determine the year in which the member's business interest 
expense giving rise to the deduction was incurred or accrued, see 
Sec. Sec.  1.163(j)-4(d) and 1.163(j)-5(b)(3).
    (3) Classification of the group's section 163(j) interest 
deduction--(i) In general. Consistent with Sec.  1.59A-3(c)(4)(i) and 
paragraph (b) of this section, the classification rule of this 
paragraph (c)(3) determines whether the consolidated group's section 
163(j) interest deduction is a base erosion tax benefit. To the extent 
the consolidated group's business interest expense is permitted as a 
deduction under section 163(j)(1) in a taxable year, the deduction is 
classified first as from business interest expense paid or accrued to a 
foreign related party and business interest expense paid or accrued to 
a domestic related party (on a pro-rata basis); any remaining deduction 
is treated as from business interest expense paid or accrued to an 
unrelated party.
    (ii) Year-by-year application of the classification rule. If the 
consolidated group's section 163(j) interest deduction in any taxable 
year is attributable to business interest expense paid or accrued in 
more than one taxable year (for example, the group deducts the group's 
aggregate current year BIE, the group's disallowed BIE carryforward 
from year 1, and the group's disallowed BIE carryforward from year 2), 
the classification rule in paragraph (c)(3)(i) of this section applies 
separately to each of those years, pursuant to paragraphs (c)(3)(iii) 
and (iv) of this section.
    (iii) Classification of current year BIE deductions. Current year 
BIE deductions are classified under the section 59A regulations and 
this paragraph (c) as if the consolidated group were a single taxpayer 
that had paid or accrued the group's aggregate current year BIE to 
domestic related parties, foreign related parties, and unrelated 
parties. The rules of paragraph (c)(4) of this section apply for 
allocating current year BIE deductions among members of the 
consolidated group. To the extent the consolidated group's aggregate 
current year BIE exceeds its section 163(j) limitation, the rules of 
paragraph (c)(5) of this section apply.
    (iv) Classification of deductions of disallowed BIE carryforwards. 
Each member of the group applies the classification rule in this 
paragraph (c)(3) to its deduction of any part of a disallowed BIE 
carryforward from a year, after the group applies paragraph (c)(5) of 
this section to the consolidated group's disallowed BIE carryforward 
from that year. Therefore, disallowed BIE carryforward that is actually 
deducted by a member is classified based on the status of the 
components of that carryforward, assigned pursuant to paragraph (c)(5) 
of this section.
    (4) Allocation of domestic related current year BIE deduction 
status and foreign related current year BIE deduction status among 
members of the consolidated group--(i) In general. This paragraph 
(c)(4) applies if the group has domestic related current year BIE 
deductions, foreign related current year BIE deductions, or both, as a 
result of the application of the classification rule in paragraph 
(c)(3) of this section. Under this paragraph (c)(4), the domestic 
related current year BIE, foreign related current year BIE, or both, 
that is treated as deducted in the current year are deemed to have been 
incurred pro-rata by all members that have current year BIE deduction 
in that year, regardless of which member or members actually incurred 
the current year BIE to a domestic related party or a foreign related 
party.
    (ii) Domestic related current year BIE deduction--(A) Amount of 
domestic related current year BIE deduction status allocable to a 
member. The amount of domestic related current year BIE deduction 
status that is allocated to a member is determined by multiplying the 
group's domestic related current year BIE deduction (determined 
pursuant to paragraph (c)(3) of this section) by the percentage of 
current year BIE deduction allocable to such member in that year.
    (B) Percentage of current year BIE deduction allocable to a member. 
The percentage of current year BIE deduction allocable to a member is 
equal to the amount of the member's current year BIE deduction divided 
by the amount of the group's aggregate current year BIE deduction.
    (iii) Amount of foreign related current year BIE deduction status 
allocable to a member. The amount of foreign related current year BIE 
deduction status that is allocated to a member is determined by 
multiplying the group's foreign related current year BIE deduction 
(determined pursuant to paragraph (c)(3) of this section) by the 
percentage of current year BIE deduction allocable to such member 
(defined in paragraph (c)(4)(ii)(B) of this section).
    (iv) Treatment of amounts as having unrelated current year BIE 
deduction status. To the extent the amount of a member's current year 
BIE that is absorbed under paragraph (c)(2) of this section exceeds the 
domestic related current year BIE deduction status and foreign related 
current year BIE deduction status allocated to the member under 
paragraph (c)(4)(ii) and (iii) of this section, such excess amount is 
treated as from payments or accruals to an unrelated party.
    (5) Allocation of domestic related BIE carryforward status and 
foreign related BIE carryforward status to members of the group--(i) In 
general. This paragraph (c)(5) applies in any year the consolidated 
group's aggregate current year BIE exceeds its section 163(j) 
limitation. After the application of paragraph (c)(4) of this section, 
any remaining domestic related current year BIE, foreign related 
current year BIE, and unrelated current year BIE is deemed to have been 
incurred pro-rata by members of the group pursuant to the rules in 
paragraph (c)(5)(ii), (iii), and (iv) of this section, regardless of 
which member or members actually incurred the business interest expense 
to a domestic related party, foreign related party, or unrelated party.
    (ii) Domestic related BIE carryforward--(A) Amount of domestic 
related BIE carryforward status allocable to a member. The amount of 
domestic related BIE carryforward status that is allocated to a member 
equals the group's domestic related BIE carryforward from that year 
multiplied by the percentage of disallowed BIE carryforward allocable 
to the member.
    (B) Percentage of disallowed BIE carryforward allocable to a 
member. The percentage of disallowed BIE carryforward allocable to a 
member for a taxable year equals the member's disallowed BIE 
carryforward from that year divided by the consolidated group's 
disallowed BIE carryforwards from that year.
    (iii) Amount of foreign related BIE carryforward status allocable 
to a member. The amount of foreign related

[[Page 67041]]

BIE carryforward status that is allocated to a member equals the 
group's foreign related BIE carryforward from that year multiplied by 
the percentage of disallowed BIE carryforward allocable to the member 
(as defined in paragraph (c)(5)(ii)(B) of this section).
    (iv) Treatment of amounts as having unrelated BIE carryforward 
status. If a member's disallowed BIE carryforward for a year exceeds 
the amount of domestic related BIE carryforward status and foreign 
related BIE carryforward status that is allocated to the member 
pursuant to paragraphs (c)(5)(ii) and (iii) of this section, 
respectively, the excess carryforward amount is treated as from 
payments or accruals to an unrelated party.
    (v) Coordination with section 381. If a disallowed BIE carryforward 
is allocated a status as a domestic related BIE carryforward, foreign 
related BIE carryforward, or unrelated BIE carryforward under the 
allocation rule of paragraph (c)(5) of this section, the acquiring 
corporation in a transaction described in section 381(a) will succeed 
to and take into account the allocated status of the carryforward for 
purposes of section 59A. See Sec.  1.381(c)(20)-1.
    (6) Member deconsolidates from a consolidated group--(i) General 
rule. When a member deconsolidates from a group (the original group), 
the member's disallowed BIE carryforwards retain their allocated 
status, pursuant to paragraph (c)(5) of this section, as a domestic 
related BIE carryforward, foreign related BIE carryforward, or 
unrelated BIE carryforward (as applicable). Following the member's 
deconsolidation, the status of the disallowed BIE carryforwards of the 
remaining members is not redetermined.
    (ii) Gross receipts exception. This paragraph (c)(6)(ii) applies if 
the original group had insufficient gross receipts to satisfy the gross 
receipts test under Sec.  1.59A-2(d) and thus was not an applicable 
taxpayer in the year in which the deconsolidating member's disallowed 
BIE carryforward was incurred. If this paragraph (c)(6)(ii) applies, 
the deconsolidating member may determine the status of its disallowed 
BIE carryforward from that year by applying the classification rule of 
Sec.  1.59A-3(c)(4) solely to the interest payments or accruals of the 
deconsolidating member, rather than by applying Sec.  1.1502-59A(c)(3).
    (iii) Failure to substantiate. If the deconsolidating member fails 
to substantiate a disallowed BIE carryforward as a domestic related BIE 
carryforward, foreign related BIE carryforward, or unrelated BIE 
carryforward, then the disallowed BIE carryforward is treated as a 
foreign related BIE carryforward.
    (7) Corporation joins a consolidated group. If a corporation joins 
a consolidated group (the acquiring group), and that corporation was 
allocated a domestic related BIE carryforward status, foreign related 
BIE carryforward status, or unrelated BIE carryforward status pursuant 
to paragraph (c)(5) of this section from another consolidated group 
(the original group), or separately has a disallowed BIE carryforward 
that is classified as from payments or accruals to a domestic related 
party, foreign related party, or unrelated party, the status of the 
carryforward is taken into account in determining the acquiring group's 
base erosion tax benefit when the corporation's disallowed BIE 
carryforward is absorbed.
    (d) Allocation of the base erosion minimum tax amount to members of 
the consolidated group. For rules regarding the allocation of the base 
erosion minimum tax amount, see section 1552. Allocations under section 
1552 take into account the classification and allocation provisions of 
paragraphs (c)(3) through (5) of this section.
    (e) [Reserved]
    (f) Definitions. The following definitions apply for purposes of 
this section--
    (1) Aggregate current year BIE. The consolidated group's aggregate 
current year BIE is the aggregate of all members' current year BIE.
    (2) Aggregate current year BIE deduction. The consolidated group's 
aggregate current year BIE deduction is the aggregate of all members' 
current year BIE deductions.
    (3) Applicable taxpayer. The term applicable taxpayer has the 
meaning provided in Sec.  1.59A-2(b).
    (4) Base erosion minimum tax amount. The consolidated group's base 
erosion minimum tax amount is the tax imposed under section 59A.
    (5) Base erosion tax benefit. The term base erosion tax benefit has 
the meaning provided in Sec.  1.59A-3(c)(1).
    (6) Business interest expense. The term business interest expense, 
with respect to a member and a taxable year, has the meaning provided 
in Sec.  1.163(j)-1(b)(2), and with respect to a consolidated group and 
a taxable year, has the meaning provided in Sec.  1.163(j)-
4(d)(2)(iii).
    (7) Consolidated group's disallowed BIE carryforwards. The term 
consolidated group's disallowed BIE carryforwards has the meaning 
provided in Sec.  1.163(j)-5(b)(3)(i).
    (8) Current year BIE. A member's current year BIE is the member's 
business interest expense that would be deductible in the current 
taxable year without regard to section 163(j) and that is not a 
disallowed business interest expense carryforward from a prior taxable 
year.
    (9) Current year BIE deduction. A member's current year BIE 
deduction is the member's current year BIE that is permitted as a 
deduction in the taxable year.
    (10) Domestic related BIE carryforward. The consolidated group's 
domestic related BIE carryforward for any taxable year is the excess of 
the group's domestic related current year BIE over the group's domestic 
related current year BIE deduction (if any).
    (11) Domestic related current year BIE. The consolidated group's 
domestic related current year BIE for any taxable year is the 
consolidated group's aggregate current year BIE paid or accrued to a 
domestic related party.
    (12) Domestic related current year BIE deduction. The consolidated 
group's domestic related current year BIE deduction for any taxable 
year is the portion of the group's aggregate current year BIE deduction 
classified as from interest paid or accrued to a domestic related party 
under paragraph (c)(3) of this section.
    (13) Domestic related party. A domestic related party is a related 
party that is not a foreign related party and is not a member of the 
same consolidated group.
    (14) Disallowed BIE carryforward. The term disallowed BIE 
carryforward has the meaning provided in Sec.  1.163(j)-1(b)(9).
    (15) Foreign related BIE carryforward. The consolidated group's 
foreign related BIE carryforward for any taxable year, is the excess of 
the group's foreign related current year BIE over the group's foreign 
related current year BIE deduction (if any).
    (16) Foreign related current year BIE. The consolidated group's 
foreign related current year BIE for any taxable year is the 
consolidated group's aggregate current year BIE paid or accrued to a 
foreign related party.
    (17) Foreign related current year BIE deduction. The consolidated 
group's foreign related current year BIE deduction for any taxable year 
is the portion of the consolidated group's aggregate current year BIE 
deduction classified as from interest paid or accrued to a foreign 
related party under paragraph (c)(3) of this section.
    (18) Foreign related party. A foreign related party has the meaning 
provided in Sec.  1.59A-1(b)(12).
    (19) Related party. The term related party has the meaning provided 
in

[[Page 67042]]

Sec.  1.59A-1(b)(17), but excludes members of the same consolidated 
group.
    (20) Section 163(j) interest deduction. The term section 163(j) 
interest deduction means, with respect to a taxable year, the amount of 
the consolidated group's business interest expense permitted as a 
deduction pursuant to Sec.  1.163(j)-5(b)(3) in the taxable year.
    (21) Section 163(j) limitation. The term section 163(j) limitation 
has the meaning provided in Sec.  1.163(j)-1(b)(31).
    (22) Unrelated BIE carryforward. The consolidated group's unrelated 
BIE carryforward for any taxable year is the excess of the group's 
unrelated current year BIE over the group's unrelated current year BIE 
deduction.
    (23) Unrelated current year BIE. The consolidated group's unrelated 
current year BIE for any taxable year is the consolidated group's 
aggregate current year BIE paid or accrued to an unrelated party.
    (24) Unrelated current year BIE deduction. The consolidated group's 
unrelated current year BIE deduction for any taxable year is the 
portion of the group's aggregate current year BIE deduction classified 
as from interest paid or accrued to an unrelated party under paragraph 
(c)(3) of this section.
    (25) Unrelated party. An unrelated party is a party that is not a 
related party.
    (g) Examples. The following examples illustrate the general 
application of this section. For purposes of the examples, a foreign 
corporation (FP) wholly owns domestic corporation (P), which in turn 
wholly owns S1 and S2. P, S1, and S2 are members of a consolidated 
group. The consolidated group is a calendar year taxpayer.

    (1) Example 1: Computation of the consolidated group's base 
erosion minimum tax amount. (i) The consolidated group is the 
applicable taxpayer--(A) Facts. The members have never engaged in 
intercompany transactions. For the 2019 taxable year, P, S1, and S2 
were permitted the following amounts of deductions (within the 
meaning of section 59A(c)(4)), $2,400x, $1,000x, and $2,600x; those 
deductions include base erosion tax benefits of $180x, $370x, and 
$230x. The group's consolidated taxable income for the year is 
$150x. In addition, the group satisfies the gross receipts test in 
Sec.  1.59A-2(d).
    (B) Analysis. Pursuant to paragraph (b) of this section, the 
receipts and deductions of P, S1, and S2 are aggregated for purposes 
of making the computations under section 59A. The group's base 
erosion percentage is 13% (($180x + $370x + $230x)/($2,400x + 
$1,000x + $2,600x)). The consolidated group is an applicable 
taxpayer under Sec.  1.59A-2(b) because the group satisfies the 
gross receipts test and the group's base erosion percentage (13%) is 
higher than 3%. The consolidated group's modified taxable income is 
computed by adding back the members' base erosion tax benefits (and, 
when the consolidated group has consolidated net operating loss 
available for deduction, the consolidated net operating loss allowed 
multiplied by the base erosion percentage) to the consolidated 
taxable income, $930x ($150x + $180x + $370x + $230x). The group's 
base erosion minimum tax amount is then computed as 10 percent of 
the modified taxable income less the regular tax liability, $61.5x 
($930x x 10%-$150x x 21%).
    (ii) The consolidated group engages in intercompany 
transactions--(A) Facts. The facts are the same as in paragraph 
(g)(1)(i)(A) of this section (the facts in Example 1(i)), except 
that S1 sold various inventory items to S2 during 2019. Such items 
are depreciable in the hands of S2 (but would not have been 
depreciable in the hands of S1) and continued to be owned by S2 
during 2019.
    (B) Analysis. The result is the same as paragraph (g)(1)(i)(A) 
of this section (the facts in Example 1(i)). Pursuant to paragraph 
(b)(2) of this section, items resulting from the intercompany sale 
(for example, gross receipts, depreciation deductions) are not taken 
into account in computing the group's gross receipts under Sec.  
1.59A-2(d) and base erosion percentage under Sec.  1.59A-2(e)(3).
    (2) Example 2: Business interest expense subject to section 
163(j) and the group's domestic related current year BIE and foreign 
related current year BIE for the year equals its section 163(j) 
limitation--(i) Facts. During the current year (Year 1), P incurred 
$150x of business interest expense to domestic related parties; S1 
incurred $150x of business interest expense to foreign related 
parties; and S2 incurred $150x of business interest expense to 
unrelated parties. The group's section 163(j) limitation for the 
year is $300x. After applying the rules in Sec.  1.163(j)-5(b)(3), 
the group deducts $150x of P's Year 1 business interest expense, and 
$75x each of S1 and S2's Year 1 business interest expense. Assume 
the group is an applicable taxpayer for purposes of section 59A.
    (ii) Analysis--(A) Application of the absorption rule in 
paragraph (c)(2) of this section. Following the rules in section 
163(j), the group's section 163(j) interest deduction for Year 1 is 
$300x, and the entire amount is from members' Year 1 business 
interest expense.
    (B) Application of the classification rule in paragraph (c)(3) 
of this section. Under paragraph (c)(3) of this section, the group's 
aggregate current year BIE deduction of $300x is first classified as 
payments or accruals to related parties (pro-rata among domestic 
related parties and foreign related parties), and second as payments 
or accruals to unrelated parties. For Year 1, the group has $150x of 
domestic related current year BIE and $150x of foreign related 
current year BIE, and the group's aggregate current year BIE 
deduction will be classified equally among the related party 
expenses. Therefore, $150x of the group's deduction is classified as 
domestic related current year BIE deduction and $150x is classified 
as a foreign related current year BIE deduction.
    (C) Application of the allocation rule in paragraph (c)(4) of 
this section. After the application of the classification rule in 
paragraph (c)(3) of this section, the group has $150x each of 
domestic related current year BIE deduction and foreign related 
current year BIE deduction from the group's aggregate current year 
BIE in Year 1. The domestic related current year BIE deduction and 
foreign related current year BIE deduction will be allocated to P, 
S1, and S2 based on each member's deduction of its Year 1 business 
interest expense.
    (1) Allocations to P. The percentage of current year BIE 
deduction attributable to P is 50% (P's deduction of its Year 1 
current year BIE, $150x, divided by the group's aggregate current 
year BIE deduction for Year 1, $300x). Thus, the amount of domestic 
related current year BIE deduction status allocated to P is $75x 
(the group's domestic related current year BIE deduction, $150x, 
multiplied by the percentage of current year BIE deduction allocable 
to P, 50%); and the amount of foreign related current year BIE 
deduction status allocated to P is $75x (the group's foreign related 
current year BIE deduction, $150x, multiplied by the percentage of 
current year BIE deduction allocable to P, 50%).
    (2) Allocations to S1 and S2. The percentage of current year BIE 
deduction attributable to S1 is 25% (S1's deduction of its Year 1 
current year BIE, $75x, divided by the group's aggregate current 
year BIE deduction for Year 1, $300x). Thus, the amount of domestic 
related current year BIE deduction status allocated to S1 is $37.5x 
(the group's domestic related current year BIE deduction, $150x, 
multiplied by the percentage of current year BIE deduction allocable 
to S1, 25%); and the amount of foreign related current year BIE 
deduction status allocated to S1 is $37.5x (the group's foreign 
related current year BIE deduction, $150x, multiplied by the 
percentage of current year BIE deduction allocable to S1, 25%). 
Because S2 also deducted $75 of its Year 1 current year BIE, S2's 
deductions are allocated the same pro-rata status as those of S1 
under this paragraph (f)(2)(ii)(C)(2).
    (D) Application of the allocation rule in paragraph (c)(5) of 
this section. Although the group will have disallowed BIE 
carryforwards after Year 1 (the group's aggregate current year BIE 
of $450x ($150x + $150x + $150x) exceeds the section 163(j) 
limitation of $300x), all of the domestic related current year BIE 
and foreign related current year BIE in Year 1 has been taken into 
account pursuant to the classification rule in paragraph (c)(3) of 
this section. Thus, under paragraph (c)(5)(iv) of this section, each 
member's disallowed BIE carryforward is treated as from payments or 
accruals to unrelated parties.
    (3) Example 3: Business interest expense subject to section 
163(j)--(i) The group's domestic related current year BIE and 
foreign related current year BIE for the year exceeds its section 
163(j) limitation. (A) Facts. During the current year (Year 1), P 
incurred $60x of business interest expense to domestic related 
parties; S1 incurred $40x of business interest expense to foreign 
related parties; and S2 incurred $80x of business interest expense 
to unrelated parties. The group's section 163(j) limitation for the 
year is $60x. After applying

[[Page 67043]]

the rules in Sec.  1.163(j)-5(b)(3), the group deducts $20x each of 
P, S1, and S2's current year business interest expense. Assume the 
group is an applicable taxpayer for purposes of section 59A.
    (B) Analysis--(1) Application of the absorption rule in 
paragraph (c)(2) of this section. Following the rules in section 
163(j), the group's section 163(j) interest deduction is $60x, and 
the entire amount is from members' Year 1 business interest expense.
    (2) Application of the classification rule in paragraph (c)(3) 
of this section. Under paragraph (c)(3) of this section, the group's 
$60x of aggregate current year BIE deduction is first classified as 
payments or accruals to related parties (pro-rata among domestic 
related parties and foreign related parties), and second as payments 
or accruals from unrelated parties. The group's total related party 
interest expense in Year 1, $100x (sum of the group's Year 1 
domestic related current year BIE, $60x, and the group's Year 1 
foreign related current year BIE, $40x), exceeds the group's 
aggregate current year BIE deduction of $60x. Thus, the group's 
aggregate current year BIE deduction will be classified, pro-rata, 
as from payments or accruals to domestic related parties and foreign 
related parties. Of the group's aggregate current year BIE deduction 
in Year 1, $36x is classified as a domestic related current year BIE 
deduction (the group's aggregate current year BIE deduction, $60x, 
multiplied by the ratio of domestic related current year BIE over 
the group's total Year 1 related party interest expense ($60x/($60x 
+ $40x))); and $24x of the group's aggregate current year BIE 
deduction is classified as a foreign related current year BIE 
deduction (the group's section 163(j) interest deduction, $60x, 
multiplied by the ratio of foreign related current year BIE over the 
group's total Year 1 related party interest expense ($40x/($60x + 
$40x))).
    (3) Application of the allocation rule in paragraph (c)(4) of 
this section. After the application of the classification rule in 
paragraph (c)(3) of this section, the group has $36x of domestic 
related current year BIE deduction and $24x of foreign related 
current year BIE deduction from the group's aggregate current year 
BIE in Year 1. The domestic related current year BIE deduction and 
foreign related current year BIE deduction will be allocated to P, 
S1, and S2 based on each member's current year BIE deduction in Year 
1.
    (i) Allocation of the group's domestic related current year BIE 
deduction status. Because each member is deducting $20x of its Year 
1 business interest expense, all three members have the same 
percentage of current year BIE deduction attributable to them. The 
percentage of current year BIE deduction attributable to each of P, 
S1, and S2 is 33.33% (each member's current year BIE deduction in 
Year 1, $20x, divided by the group's aggregate current year BIE 
deduction for Year 1, $60x). Thus, the amount of domestic related 
current year BIE deduction status allocable to each member is $12x 
(the group's domestic related current year BIE deduction, $36x, 
multiplied by the percentage of current year BIE deduction allocable 
to each member, 33.33%).
    (ii) Allocations of the group's foreign related current year BIE 
deduction status. The amount of foreign related current year BIE 
deduction status allocable to each member is $8x (the group's 
foreign related current year BIE deduction, $24x, multiplied by the 
percentage of current year BIE deduction allocable to each member, 
33.33%, as computed earlier in paragraph (f)(3) of this section 
(Example 3).
    (4) Application of the allocation rule in paragraph (c)(5) of 
this section. In Year 1 the group has $60x of domestic related 
current year BIE, of which $36x is deducted in the year (by 
operation of the classification rule). Therefore, the group has $24x 
of domestic related BIE carryforward. Similarly, the group has $40x 
of foreign related current year BIE in Year 1, of which $24x is 
deducted in the year. Therefore, the group has $16x of foreign 
related BIE carryforward. The $24x domestic related BIE carryforward 
status and $16x foreign related BIE carryforward status will be 
allocated to P, S1, and S2 in proportion to the amount of each 
member's disallowed BIE carryforward.
    (i) Allocation to P. The percentage of disallowed BIE 
carryforward allocable to P is 33.33% (P's Year 1 disallowed BIE 
carryforward, $40x ($60x - $20x), divided by the group's Year 1 
disallowed BIE carryforward, $120x ($60x + $40x + 80x - $60x)). 
Thus, the amount of domestic related BIE carryforward status 
allocated to P is $8x (the group's domestic related BIE 
carryforward, $24x, multiplied by the percentage of disallowed BIE 
carryforward allocable to P, 33.33%); and the amount of foreign 
related BIE carryforward status allocated to P is $5.33x (the 
group's foreign related BIE carryforward, $16x, multiplied by the 
percentage of disallowed BIE carryforward allocable to P, 33.33%). 
Under paragraph (c)(5)(iv) of this section, P's disallowed BIE 
carryforward that has not been allocated a status as either a 
domestic related BIE carryforward or a foreign related BIE 
carryforward will be treated as interest paid or accrued to an 
unrelated party. Therefore, $26.67x ($40x P's disallowed BIE 
carryforward -$8x domestic related BIE carryforward status allocated 
to P -$5.33x foreign related BIE carryforward status allocated to P) 
is treated as interest paid or accrued to an unrelated party.
    (ii) Allocation to S1. The percentage of disallowed BIE 
carryforward allocable to S1 is 16.67% (S1's Year 1 disallowed BIE 
carryforward, $20x ($40x - $20x), divided by the group's Year 1 
disallowed BIE carryforward, $120x ($60x + $40x + 80x - $60x). Thus, 
the amount of domestic related BIE carryforward status allocated to 
S1 is $4x (the group's domestic related BIE carryforward, $24x, 
multiplied by the percentage of disallowed BIE carryforward 
allocable to S1, 16.67%); and the amount of foreign related BIE 
carryforward status allocated to S1 is $2.67x (the group's foreign 
related BIE carryforward, $16x, multiplied by the percentage of 
disallowed BIE carryforward allocable to S1, 16.67%). Under 
paragraph (c)(5)(iv) of this section, S1's disallowed BIE that has 
not been allocated a status as either a domestic related BIE 
carryforward or a foreign related BIE carryforward will be treated 
as interest paid or accrued to an unrelated party. Therefore, 
$13.33x ($20x S1's disallowed BIE carryforward -$4x domestic related 
BIE carryforward status allocated to S1 - $2.67x foreign related BIE 
carryforward status allocated to S1) is treated as interest paid or 
accrued to an unrelated party.
    (iii) Allocation to S2. The percentage of disallowed BIE 
carryforward allocable to S2 is 50% (S2's Year 1 disallowed BIE 
carryforward, $60x ($80x - $20x), divided by the group's Year 1 
disallowed BIE carryforward, $120x ($60x + $40x + 80x - $60x). Thus, 
the amount of domestic related BIE carryforward status allocated to 
S2 is $12x (the group's domestic related BIE carryforward, $24x, 
multiplied by the percentage of disallowed BIE carryforward 
allocable to S2, 50%); and the amount of foreign related BIE 
carryforward status allocated to S2 is $8x (the group's foreign 
related BIE carryforward, $16x, multiplied by the percentage of 
disallowed BIE carryforward allocable to S2, 50%). Under paragraph 
(c)(5)(iv) of this section, S2's disallowed BIE that has not been 
allocated a status as either a domestic related BIE carryforward or 
a foreign related BIE carryforward will be treated as interest paid 
or accrued to an unrelated party. Therefore, $40x ($60x S2's 
disallowed BIE carryforward -$12x domestic related BIE carryforward 
status allocated to S2 - $8x foreign related BIE carryforward status 
allocated to S2) is treated as interest paid or accrued to an 
unrelated party.
    (ii) The group deducting its disallowed BIE carryforwards--(A) 
Facts. The facts are the same as in paragraph (g)(3)(i)(A) of this 
section (the facts in Example 3(i)), and in addition, none of the 
members incurs any business interest expense in Year 2. The group's 
section 163(j) limitation for Year 2 is $30x.
    (B) Analysis--(1) Application of the absorption rule in 
paragraph (c)(2) of this section. Following the rules in section 
163(j), each member of the group is deducting $10x of its disallowed 
BIE carryforward from Year 1. Therefore, the group's section 163(j) 
deduction for Year 2 is $30x.
    (2) Application of the classification rule in paragraph (c)(3) 
of this section. Under paragraph (c)(3)(iv) of this section, to the 
extent members are deducting their Year 1 disallowed BIE 
carryforward in Year 2, the classification rule will apply to the 
deduction in Year 2 after the allocation rule in paragraph (c)(5) of 
this section has allocated the related and unrelated party status to 
the member's disallowed BIE carryforward in Year 1. The allocation 
required under paragraph (c)(5) of this section is described in 
paragraph (f)(3)(i)(B)(4) of this section.
    (i) Use of P's allocated domestic related BIE carryforward 
status and foreign related BIE carryforward status. P has $40x of 
Year 1 disallowed BIE carryforward, and P was allocated $8x of 
domestic related BIE carryforward status and $5.33x of foreign 
related BIE carryforward status. In Year 2, P deducts $10x of its 
Year 1 disallowed BIE carryforward. Under the classification rule of 
paragraph (c)(3) of this section, P is treated as deducting pro-rata 
from its allocated status

[[Page 67044]]

of domestic related BIE carryforward and foreign related BIE 
carryforward. Therefore, P is treated as deducting $6x of its 
allocated domestic related BIE carryforward ($10x x $8x/($8x + 
$5.33x)), and $4x of its allocated foreign related BIE carryforward 
($10x x $5.33x/$8x + $5.33x)). After Year 2, P has remaining $30x of 
Year 1 disallowed BIE carryforward, of which $2x has a status of 
domestic related BIE carryforward, $1.33x has the status of foreign 
related BIE carryforward, and $26.67x of interest treated as paid or 
accrued to unrelated parties.
    (ii) Use of S1's allocated domestic related BIE carryforward 
status and foreign related BIE carryforward status. S1 has $20x of 
Year 1 disallowed BIE carryforward, and S1 was allocated $4x of 
domestic related BIE carryforward status and $2.67x of foreign 
related BIE carryforward status. In Year 2, S2 deducts $10x of its 
Year 1 disallowed BIE carryforward. Because S2's deduction of its 
Year 1 disallowed BIE carryforward, $10x, exceeds its allocated 
domestic related BIE carryforward status ($4x) and foreign related 
BIE carryforward status ($2.67x), all of the allocated related party 
status are used up. After Year 2, all of S1's Year 1 disallowed BIE 
carryforward, $10x, is treated as interest paid or accrued to an 
unrelated party.
    (iii) Use of S2's allocated domestic related BIE carryforward 
status and foreign related BIE carryforward status. S2 has $60x of 
Year 1 disallowed BIE carryforward, and S2 was allocated $12x of 
domestic related BIE carryforward status and $8x of foreign related 
BIE carryforward status. In Year 2, S2 deducts $10x of its Year 1 
disallowed BIE carryforward. Under the classification rule of 
paragraph (c)(3) of this section, S2 is treated as deducting $6x of 
its allocated domestic related BIE carryforward ($10x x $12x/($12x + 
$8x)), and $4x of its allocated foreign related BIE carryforward 
($10x x $8x/$8x + $12x)). After Year 2, P has remaining $50x of Year 
1 disallowed BIE carryforward, of which $6x has a status of domestic 
related BIE carryforward, $4x has the status of foreign related BIE 
carryforward, and $40x of interest treated as paid or accrued to 
unrelated parties.

    (h) Applicability date. This section applies to taxable years for 
which the original consolidated Federal income tax return is due 
(without extensions) after December 6, 2019.

0
Par. 9. Section 1.1502-100 is amended by revising paragraph (b) to read 
as follows:


Sec.  1.1502-100  Corporations exempt from tax.

* * * * *
    (b) The tax liability for a consolidated return year of an exempt 
group is the tax imposed by section 511(a) on the consolidated 
unrelated taxable income for the year (determined under paragraph (c) 
of this section), and by allowing the credits provided in Sec.  1.1502-
2(b).
* * * * *

0
Par. 10. Section 1.6038A-1 is amended by
0
1. Re-designating paragraph (n)(2) as paragraph (n)(2)(i) and adding a 
subject heading for newly re-designated paragraph (n)(2)(i).
0
2. Adding a sentence to the end of newly re-designated paragraph 
(n)(2)(i).
0
3. Adding paragraph (n)(2)(ii).
0
4. Revising the last sentence of paragraph (n)(3).
    The additions and revision read as follows:


Sec.  1.6038A-1  General requirements and definitions.

* * * * *
    (n) * * *
    (2) Section 1.6038A-2--(i) In general. * * * Section 1.6038A-
2(a)(3), (b)(6), and (b)(7) apply to taxable years ending on or after 
December 17, 2018. However, taxpayers may apply these final regulations 
in their entirety for taxable years ending before December 17, 2018.
    (ii) Transition rule. No penalty under sections 6038A(d) or 
6038C(c) will apply to a failure solely under Sec.  1.6038A-2(a)(3), 
(b)(6), or (b)(7) that is corrected by March 6, 2020.
    (3) * * * For taxable years ending on or before December 31, 2017, 
see Sec.  1.6038A-4 as contained in 26 CFR part 1 revised as of April 
1, 2018.
* * * * *

0
Par. 11. Section 1.6038A-2 is amended by
0
1. Revising the subject headings for paragraphs (a) and (a)(1).
0
2. Revising paragraph (a)(2).
0
3. Adding paragraph (a)(3).
0
4. Revising paragraphs (b)(1)(ii), (b)(2)(iv), and the second sentence 
of paragraph (b)(3).
0
5. Redesignating paragraphs (b)(6) through (9) as paragraphs (b)(8) 
through (11).
0
6. Adding new paragraphs (b)(6) and (7).
0
7. Revising paragraph (c) and the first sentence of paragraph (d).
0
8. Removing the language ``Paragraph (b)(8)'' from the second sentence 
of paragraph (g) and adding the language ``Paragraph (b)(10)'' in its 
place.
0
9. Adding three sentences to the end of paragraph (g).
    The revisions and additions read as follows:


Sec.  1.6038A-2  Requirement of return.

    (a) Forms required--(1) Form 5472. * * *
    (2) Reportable transaction. A reportable transaction is any 
transaction of the types listed in paragraphs (b)(3) and (4) of this 
section, and, in the case of a reporting corporation that is an 
applicable taxpayer, as defined under Sec.  1.59A-2(b), any other 
arrangement that, to prevent avoidance of the purposes of section 59A, 
is identified on Form 5472 as a reportable transaction. However, except 
as the Secretary may prescribe otherwise for an applicable taxpayer, 
the transaction is not a reportable transaction if neither party to the 
transaction is a United States person as defined in section 7701(a)(30) 
(which, for purposes of section 6038A, includes an entity that is a 
reporting corporation as a result of being treated as a corporation 
under Sec.  301.7701-2(c)(2)(vi) of this chapter) and the transaction--
    (i) Will not generate in any taxable year gross income from sources 
within the United States or income effectively connected, or treated as 
effectively connected, with the conduct of a trade or business within 
the United States, and
    (ii) Will not generate in any taxable year any expense, loss, or 
other deduction that is allocable or apportionable to such income.
    (3) Form 8991. Each reporting corporation that is an applicable 
taxpayer, as defined under Sec.  1.59A-2(b), must make an annual 
information return on Form 8991. The obligation of an applicable 
taxpayer to report on Form 8991 does not depend on applicability of tax 
under section 59A or obligation to file Form 5472.
    (b) * * *
    (1) * * *
    (ii) The name, address, and U.S. taxpayer identification number, if 
applicable, of all its direct and indirect foreign shareholders (for an 
indirect 25-percent foreign shareholder, explain the attribution of 
ownership); whether any 25-percent foreign shareholder is a surrogate 
foreign corporation under section 7874(a)(2)(B) or a member of an 
expanded affiliated group as defined in section 7874(c)(1); each 
country in which each 25-percent foreign shareholder files an income 
tax return as a resident under the tax laws of that country; the places 
where each 25-percent shareholder conducts its business; and the 
country or countries of organization, citizenship, and incorporation of 
each 25-percent foreign shareholder.
* * * * *
    (2) * * *
    (iv) The relationship of the reporting corporation to the related 
party (including, to the extent the form may prescribe, any 
intermediate relationships).
    (3) * * * The total amount of such transactions, as well as the 
separate amounts for each type of transaction described below, and, to 
the extent the form may prescribe, any further

[[Page 67045]]

description, categorization, or listing of transactions within these 
types, must be reported on Form 5472, in the manner the form or its 
instructions may prescribe. * * *
* * * * *
    (6) Compilation of reportable transactions across multiple related 
parties. A reporting corporation must, to the extent and in the manner 
Form 5472 or its instructions may prescribe, include a schedule 
tabulating information with respect to related parties for which the 
reporting corporation is required to file Forms 5472. The schedule will 
not require information (beyond totaling) that is not required for the 
individual Forms 5472. The schedule may include the following:
    (i) The identity and status of the related parties;
    (ii) The reporting corporation's relationship to the related 
parties;
    (iii) The reporting corporation's reportable transactions with the 
related parties; and
    (iv) Other items required to be reported on Form 5472.
    (7) Information on Form 5472 and Form 8991 regarding base erosion 
payments. If any reporting corporation is an applicable taxpayer, as 
defined under Sec.  1.59A-2(b), it must report the information required 
by Form 8991 and by any Form 5472 it is required to file (including the 
information required by their accompanying instructions), regarding:
    (i) Determination of whether a taxpayer is an applicable taxpayer;
    (ii) Computation of base erosion minimum tax amount, including 
computation of regular tax liability as adjusted for purposes of 
computing base erosion minimum tax amount;
    (iii) Computation of modified taxable income;
    (iv) Base erosion tax benefits;
    (v) Base erosion percentage calculation;
    (vi) Base erosion payments;
    (vii) Amounts with respect to services as described in Sec.  1.59A-
3(b)(3)(i), including a breakdown of the amount of the total services 
cost and any mark-up component;
    (viii) Arrangements or transactions described in Sec.  1.59A-9;
    (ix) Any qualified derivative payment, including:
    (A) The aggregate amount of qualified derivative payments for the 
taxable year; and
    (B) A representation that all payments satisfy the requirements of 
Sec.  1.59A-6(b)(2); and
    (x) Any other information necessary to carry out section 59A.
* * * * *
    (c) Method of reporting. All statements required on or with the 
Form 5472 or Form 8991 under this section and Sec.  1.6038A-5 must be 
in the English language. All amounts required to be reported under 
paragraph (b) of this section must be expressed in United States 
currency, with a statement of the exchange rates used, and, to the 
extent the forms may require, must indicate the method by which the 
amount of a reportable transaction or item was determined.
    (d) * * * A Form 5472 and Form 8991 required under this section 
must be filed with the reporting corporation's income tax return for 
the taxable year by the due date (including extensions) of that return. 
* * *
* * * * *
    (g) * * * Paragraph (b)(7)(ix) of this section applies to taxable 
years beginning June 7, 2021. Before these final regulations are 
applicable, a taxpayer will be treated as satisfying the reporting 
requirement described in Sec.  1.59A-6(b)(2) only to the extent that it 
reports the aggregate amount of qualified derivative payments on Form 
8991. See Sec.  1.59A-6(b)(2)(iv) (transition period for qualified 
derivative payment reporting).


Sec.  1.6038A-4  [Amended]

0
Par. 12. For each paragraph listed in the table, remove the language in 
the ``Remove'' column from wherever it appears and add in its place the 
language in the ``Add'' column as set forth below and in paragraph (f), 
designate Examples 1 and 2 as paragraphs (f)(1) and (2), respectively.

------------------------------------------------------------------------
                      Paragraph                        Remove      Add
------------------------------------------------------------------------
(a)(1)..............................................   $10,000   $25,000
(a)(3)..............................................    10,000    25,000
(d)(1)..............................................    10,000    25,000
(d)(4)..............................................    10,000    25,000
(f).................................................    10,000    25,000
(f).................................................    30,000    75,000
(f).................................................    90,000   225,000
------------------------------------------------------------------------

Sec.  1.6655-5   [Amended]

0
Par. 13. Section 1.6655-5 is amended in paragraph (e) by designating 
Examples 1 through 13 as paragraphs (e)(1) through (13), respectively, 
and by removing the language ``Sec.  1.1502-2(h)'' in newly designated 
paragraph (e)(10) and adding the language ``Sec.  1.1502-1(h)'' in its 
place.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: November 13, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-25744 Filed 12-2-19; 4:15 pm]
 BILLING CODE 4830-01-P