Clark Armitage Comments on BEAT Calculations and Changes in U.S. Transfer Pricing

Changes to the transfer pricing statute in the 2017 U.S. tax overhaul verify the need to compensate a U.S. entity for transfers of assets regardless of how the assets are characterized, a Treasury official.

The changes are consistent with the way the government has interpreted the statute in the underlying regulations, where the principle has existed for years, according to Deputy International Tax Counsel Brian Jenn at a conference hosted by Bloomberg Tax and KPMG LLP on Thursday.

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Clark Armitage of Caplin & Drysdale, who was on the panel with Jenn, tackled an unresolved question in another international provision of the tax act - Section 59A, which sets forth the base erosion and anti-abuse tax, known as the BEAT.

The BEAT, essentially a minimum tax, limits deductions on payments by a U.S. company to its foreign related parties to ensure it doesn't reduce its U.S. taxable income to less than 10 percent. The tax targets payments by large U.S. companies whose base erosion percentage - basically, foreign payments divided by deductions - is 3 percent or higher.

The BEAT calculation draws on concepts in the transfer pricing regulations governing intercompany services transactions, Armitage noted. Services that can be charged at cost - generally defined as those eligible for the "services cost method" under those regulations - are exempt from the tax, while those with a markup are subject to it.

For services bearing a markup, the legislation isn't clear about whether the entire payment or just the markup component is subject to the BEAT. Armitage said his view is that "paying some kind of a markup shouldn't cause you to run afoul of the basic exception."

Foreign governments are going to require a "plus" element on services provided to U.S. companies, he said - a position he suggested is reasonable.

"This is a service provided by a foreign entity in a foreign country subject to a foreign taxing jurisdiction that doesn't have a services cost method, and in the vast majority, or perhaps in almost all circumstances, will not allow you to charge this for a service value," he said. "They're going to require a plus."

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Excerpt taken from the article “US Transfer Pricing Changes Focus on Value, Not Character” by Molly Moses for Law360 Tax Authority.