65956 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

REG–104259–18] 

RIN 1545–BO56 

Base Erosion and Anti-Abuse Tax 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations that provide 

guidance regarding the tax on base 

erosion payments of taxpayers with 

substantial gross receipts and reporting 

requirements thereunder. The proposed 

regulations would affect corporations 

with substantial gross receipts that make 

payments to foreign related parties. The 

proposed regulations under section 

6038A would affect any reporting 

corporations within the meaning of 

section 6038A or 6038C. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by February 19, 2019. 

ADDRESSES: Send submissions to 

CC:PA:LPD:PR (REG–104259–18), room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–104259– 

18), Courier’s desk, Internal Revenue 

Service, 1111 Constitution Avenue NW, 

Washington, DC 20224, or sent 

electronically, via the Federal 

eRulemaking Portal at 

www.regulations.gov (IRS REG–104259– 

18). 

FOR FURTHER INFORMATION CONTACT: 

Concerning §§ 1.59A–1 through 1.59A– 

10 of the proposed regulations, Sheila 

Ramaswamy or Karen Walny at (202) 

317–6938; concerning the services cost 

method exception, L. Ulysses Chatman 

at (202) 317–6939; concerning 

§§ 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 of the proposed 

regulations, Julie Wang at (202) 317– 

6975 or John P. Stemwedel at (202) 317– 

5024; concerning §§ 1.6038A–1, 

1.6038A–2, and 1.6038A–4 of the 

proposed regulations, Brad McCormack 

or Anand Desai at (202) 317–6939; 

concerning submissions of comments 

and requests for a public hearing, 

Regina Johnson at (202) 317–6901 (not 

toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains proposed 

amendments to 26 CFR part 1 under 

sections 59A, 383, 1502, 6038A, 6038C, 

and 6655 of the Internal Revenue Code 

(the ‘‘Code’’). The Tax Cuts and Jobs 

Act, Public Law 115–97 (2017) (the 

‘‘Act’’), which was enacted on December 

22, 2017, added section 59A to the 

Code. Section 59A imposes on each 

applicable taxpayer a tax equal to the 

base erosion minimum tax amount for 

the taxable year (the ‘‘base erosion and 

anti-abuse tax’’ or ‘‘BEAT’’). 

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 

and addressed other issues for which 

information reporting under those 

sections is important to tax 

administration. 

Explanation of Provisions 

I. Overview 

These proposed regulations provide 

guidance under section 59A regarding 

the determination of the tax on base 

erosion payments for certain taxpayers 

with substantial gross receipts. In 

general, the proposed regulations 

provide rules for determining whether a 

taxpayer is an applicable taxpayer on 

which the BEAT may be imposed and 

rules for computing the taxpayer’s 

BEAT liability. 

Part II of this Explanation of 

Provisions section describes the rules in 

proposed § 1.59A–2 for determining 

whether a taxpayer is an applicable 

taxpayer on which the BEAT may be 

imposed. Part III of this Explanation of 

Provisions section describes the rules in 

proposed § 1.59A–3(b) for determining 

the amount of base erosion payments. 

Part IV of this Explanation of Provisions 

section describes the rules in proposed 

§ 1.59A–3(c) for determining base 

erosion tax benefits arising from base 

erosion payments. Part V of this 

Explanation of Provisions section 

describes the rules in proposed 

§ 1.59A–4 for determining the amount of 

modified taxable income, which is 

computed in part by reference to a 

taxpayer’s base erosion tax benefits and 

base erosion percentage of any net 

operating loss deduction. Part VI of this 

Explanation of Provisions section 

describes the rules in proposed § 1.59A– 

5 for computing the base erosion 

minimum tax amount, which is 

computed by reference to modified 

taxable income. Part VII of this 

Explanation of Provisions section 

describes general rules in proposed 

§ 1.59A–7 for applying the proposed 

regulations to partnerships. Part VIII of 

this Explanation of Provisions section 

describes certain rules in the proposed 

regulations that are specific to banks 

and registered securities dealers. Part IX 

of this Explanation of Provisions section 

describes certain rules in the proposed 

regulations that are specific to insurance 

companies. Part X of this Explanation of 

Provisions section describes the antiabuse rules in proposed § 1.59A–9. 

Parts XI–XIII of this Explanation of 

Provisions section address rules in 

proposed § 1.1502–59A regarding the 

general application of the BEAT to 

consolidated groups. Part XIV of this 

Explanation of Provisions section 

addresses proposed amendments to 

§ 1.383–1 to address limitations on a 

loss corporation’s items under section 

382 and 383 in the context of the BEAT. 

Part XV of this Explanation of 

Provisions section describes reporting 

and record keeping requirements. 

II. Applicable Taxpayer 

The BEAT applies only to a taxpayer 

that is an applicable taxpayer. Proposed 

§ 1.59A–2 provides rules for 

determining if a taxpayer is an 

applicable taxpayer. 

Generally, an applicable taxpayer is a 

corporation (other than (1) a regulated 

investment company (‘‘RIC’’), (2) a real 

estate investment trust (‘‘REIT’’), or (3) 

an S corporation) that satisfies the gross 

receipts test and the base erosion 

percentage test. Section 59A and the 

proposed regulations provide that the 

taxpayer and certain other corporations 

that are related to the taxpayer are 

treated as one person for purposes of 

determining whether a taxpayer satisfies 

these tests. 

Part II.A of this Explanation of 

Provisions section describes the 

proposed rules for determining the 

aggregate group for applying the gross 

receipts test and the base erosion 

percentage test. Part II.B of this 

Explanation of Provisions section 

describes the proposed rules for 

applying the gross receipts test. Part II.C 

of this Explanation of Provisions section 

describes the proposed rules for 

applying the base erosion percentage 

test. Part II.D of this Explanation of 

Provisions section describes the 

proposed rules for applying these tests 

on an aggregate group basis when 

members of the aggregate group have 

different taxable years. Part II.E of this 

Explanation of Provisions section 

describes proposed rules for computing 

the base erosion percentage for a 

taxpayer with deductions taken into 

account under a mark-to-market method 

of accounting. 


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A. Determining the Aggregate Group for 

Purposes of Applying the Gross Receipts 

Test and the Base Erosion Percentage 

Test 

Section 59A(e)(3) aggregates 

corporations (‘‘aggregate group’’) on the 

basis of persons treated as a single 

employer under section 52(a), which 

treats members of the ‘‘same controlled 

group of corporations’’ (as defined in 

section 1563(a) with certain 

modifications) as one person. Although 

a section 1563(a) controlled group can 

include both foreign and domestic 

corporations, the proposed regulations 

treat foreign corporations as outside of 

the controlled group for purposes of 

applying the aggregation rules, except to 

the extent that the foreign corporation 

has effectively connected income. This 

limitation on the extent to which foreign 

corporations are included in the 

aggregate group ensures that payments 

made by a domestic corporation, or a 

foreign corporation with respect to its 

effectively connected income, to a 

foreign related corporation are not 

inappropriately excluded from the base 

erosion percentage test. Accordingly, 

the proposed regulations provide that a 

taxpayer must apply the gross receipts 

test and the base erosion percentage test 

using the aggregate group consisting of 

members of the same controlled group 

of corporations for purposes of section 

52(a) that are (i) domestic corporations 

and (ii) foreign corporations, but only 

with regard to gross receipts taken into 

account in determining income which is 

effectively connected with the conduct 

of a trade or business in the United 

States and subject to tax under section 

882(a). The proposed regulations limit 

the aggregate group to corporations that 

benefit from deductions, and 

accordingly may have base erosion tax 

benefits, while excluding foreign 

corporations that are not subject to U.S. 

income tax (except on a gross basis 

under section 881, with respect to 

income that is not effectively connected 

with a trade or business in the United 

States) and do not benefit from 

deductions. In the case of a foreign 

corporation that determines its net 

taxable income under an applicable 

income tax treaty of the United States, 

the foreign corporation is a member of 

the aggregate group with regard to gross 

receipts taken into account in 

determining its net taxable income. 

The proposed regulations generally 

provide that payments between 

members of the aggregate group are not 

included in the gross receipts of the 

aggregate group, consistent with the 

single entity concept in section 

59A(e)(3). Similarly, the proposed 

regulations generally provide that 

payments between members of the 

aggregate group are also not taken into 

account for purposes of the numerator 

or the denominator in the base erosion 

percentage calculation. 

Payments between the aggregate 

group and any foreign corporation that 

is not within the aggregate group with 

respect to the payment are taken into 

account in applying both the gross 

receipts test and the base erosion 

percentage test. However, because a 

foreign corporation is considered within 

the aggregate group to the extent it is 

subject to net income tax in the United 

States, payments to a foreign 

corporation from within the aggregate 

group that are subject to net income tax 

in the United States are eliminated and 

not taken into account in applying the 

gross receipts test and the base erosion 

percentage test. Thus, it may be the case 

that a payment by a domestic 

corporation to a foreign corporation is 

not taken into account in determining 

applicable taxpayer status because the 

payee is subject to net income tax in the 

United States on that payment, while 

another payment by the same domestic 

corporation to the same foreign 

corporation is taken into account in 

determining applicable taxpayer status 

because the payee is not subject to net 

income tax in the United States on that 

payment. The Treasury Department and 

the IRS welcome comments on the 

proposed regulations addressing the 

aggregate group for purposes of the gross 

receipts test and the base erosion 

percentage test. 

B. Gross Receipts Test 

A taxpayer satisfies the gross receipts 

test if the taxpayer, or the aggregate 

group of which the taxpayer is a 

member, has $500 million or more of 

average annual gross receipts during the 

three prior taxable years. In the case of 

a foreign corporation, the gross receipts 

test only takes into account gross 

receipts that are taken into account in 

determining income that is subject to 

net income tax as income effectively 

connected with the conduct of a trade 

or business within the United States, or 

taken into account in determining net 

taxable income under an applicable U.S. 

income tax treaty. 

In the case of an aggregate group, the 

proposed regulations measure gross 

receipts of a taxpayer by reference to the 

taxpayer’s aggregate group determined 

as of the end of the taxpayer’s taxable 

year for which BEAT liability is being 

computed, and takes into account gross 

receipts of those aggregate group 

members during the three-year period 

preceding that taxable year. 

The proposed regulations further 

clarify how a taxpayer computes gross 

receipts, including providing rules for 

corporations that have been in existence 

for fewer than three years or have short 

years. These proposed rules are 

generally consistent with rules set forth 

in section 448(c). See section 

59A(e)(2)(B) (providing that rules 

similar to the rules of section 

448(c)(3)(B) through (D) apply in 

determining gross receipts for purposes 

of section 59A). The proposed 

regulations also clarify how gross 

receipts are determined if members of 

the aggregate group have different 

taxable years, as discussed in Part II.D 

of this Explanation of Provisions 

section. 

In addition, the proposed regulations 

clarify how gross receipts are 

determined for corporations subject to 

tax under subchapter L (including a 

foreign corporation subject to tax under 

section 842(a)). 

If a member of an aggregate group 

owns an interest in a partnership, the 

proposed regulations provide that the 

group includes its share of the gross 

receipts of the partnership in its gross 

receipts computation. The aggregate 

group’s share of the gross receipts of the 

partnership is proportionate to its 

distributive share of items of gross 

income from the partnership. See Part 

VII of this Explanation of Provisions 

section for a more detailed description 

of the application of section 59A to 

partnerships. 

C. 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, the aggregate 

group of which the taxpayer is a 

member) has a base erosion percentage 

of three percent or more. Generally, a 

lower threshold of two percent applies 

if the taxpayer, or a member of the 

taxpayer’s aggregate group, is a member 

of an affiliated group (as defined in 

section 1504(a)(1)) that includes a 

domestic bank or registered securities 

dealer. The proposed regulations 

provide that the lower two percent 

threshold does not apply, however, in 

the case of an aggregate group or 

consolidated group that has de minimis 

bank or registered securities dealer 

activities. See Part VIII of this 

Explanation of Provisions section for a 

more detailed description of these rules. 

The proposed regulations provide that 

the base erosion percentage for a taxable 

year is computed by dividing (1) the 

aggregate amount of base erosion tax 

benefits (the ‘‘numerator’’) by (2) the 

sum of the aggregate amount of 


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deductions plus certain other base 

erosion tax benefits (the 

‘‘denominator’’). As described in Part 

II.A of this Explanation of Provisions 

section, in the case of a taxpayer that is 

a member of an aggregate group, the 

base erosion percentage is measured by 

reference to the deductions or certain 

reductions in gross income of the 

taxpayer and members of the taxpayer’s 

aggregate group as of the end of the 

taxpayer’s taxable year. Base erosion tax 

benefits are generally the deductions or 

reductions in gross income that result 

from base erosion payments. Part III of 

this Explanation of Provisions section 

describes the proposed rules for 

determining the amount of base erosion 

payments, and Part IV of this 

Explanation of Provisions section 

describes the proposed rules for 

determining the base erosion payments 

that give rise to base erosion tax 

benefits. 

The numerator of the base erosion 

percentage excludes deductions for (i) 

amounts paid or accrued to foreign 

related parties for services qualifying for 

the exception in proposed § 1.59A– 

3(b)(3)(i) (the ‘‘services cost method 

(‘‘SCM’’) exception’’), (ii) payments 

covered by the qualified derivatives 

payments (‘‘QDP’’) exception in 

proposed § 1.59A–3(b)(3)(ii), and (iii) 

amounts excluded pursuant to the total 

loss-absorbing capacity (‘‘TLAC’’) 

exception in proposed § 1.59A– 

3(b)(3)(v). See Parts III.B.1, III.B.2, and 

III.B.5 of this Explanation of Provisions 

section, for discussions of the SCM 

exception, QDP exception, and TLAC 

exception, respectively. Generally, these 

deductions are also excluded from the 

denominator of the base erosion 

percentage. 

An applicable taxpayer may make a 

payment to a foreign related party that 

is not a member of the aggregate group, 

if, for example, the recipient of the 

payment is a 25-percent owner as 

described in proposed § 1.59A–1(b)(17) 

who does not own more than 50 percent 

of the applicable taxpayer, and that 

payment may qualify for the ECI 

exception described in proposed 

§ 1.59A–3(b)(3)(iii). If so, and if that 

payment also qualifies for either the 

SCM exception described in proposed 

§ 1.59A–3(b)(3)(i), the QDP exception 

described in proposed § 1.59A– 

3(b)(3)(ii), or the TLAC exception 

described in proposed § 1.59A– 

3(b)(3)(v), the payment will be included 

in the denominator for purposes of the 

base erosion percentage. For example, if 

an applicable taxpayer makes a 

deductible payment to a foreign related 

person who is a 25-percent owner and 

that payment is both a QDP and subject 

to 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, that 

deductible payment is included in the 

denominator of the base erosion 

percentage. However, if the applicable 

taxpayer makes a deductible payment to 

a foreign related person and that 

payment is a QDP, but not otherwise 

subject to federal income taxation, that 

deductible payment is excluded from 

the denominator of the base erosion 

percentage. 

The proposed regulations also 

exclude any section 988 losses from the 

numerator and the denominator in 

determining the base erosion 

percentage. See Part III.B.4 of this 

Explanation of Provisions section, 

describing the exception for section 988 

losses from the definition of base 

erosion payments. 

The numerator of the base erosion 

percentage only takes into account base 

erosion tax benefits, which generally are 

base erosion payments for which a 

deduction is allowed under the Code for 

a taxable year. See Part IV of this 

Explanation of Provisions section. 

Similarly, the proposed regulations 

ensure that the denominator of the base 

erosion percentage only takes into 

account deductions allowed under the 

Code by providing that the denominator 

of the base erosion percentage does not 

include deductions that are not allowed 

in determining taxable income for the 

taxable year. 

Finally, because a deduction allowed 

under section 965(c) to a United States 

shareholder of a deferred foreign income 

corporation is not one of the categories 

of deductions specifically excluded 

from the denominator under section 

59A(c)(4)(B), that deduction is included 

in the denominator. 

In general, as discussed in more detail 

in Part IV.A of this Explanation of 

Provisions section, if tax is imposed by 

section 871 or 881 and that tax has been 

deducted and withheld under section 

1441 or 1442 on a base erosion payment, 

the base erosion payment is not treated 

as a base erosion tax benefit for 

purposes of calculating a taxpayer’s 

modified taxable income. If an income 

tax treaty reduces the amount of 

withholding imposed on the base 

erosion payment, the base erosion 

payment is treated as a base erosion tax 

benefit to the extent of the reduction in 

withholding under rules similar to those 

in section 163(j)(5)(B) as in effect before 

the Act. 

The proposed regulations apply the 

same rule concerning withholding taxes 

for purposes of the base erosion 

percentage computation. Accordingly, a 

base erosion tax benefit is not included 

in the numerator when the payment was 

subject to tax under section 871 or 881 

and that tax has been deducted and 

withheld under section 1441 or 1442. In 

addition, the proposed regulations 

provide that for any base erosion 

payment subject to a reduced rate of 

withholding tax under an income tax 

treaty, the associated amount of base 

erosion tax benefits eliminated from the 

numerator of the base erosion 

percentage calculation is determined 

using rules similar to those in section 

163(j)(5)(B) as in effect before the Act. 

The base erosion percentage also takes 

into account the two categories of base 

erosion tax benefits that result from 

reductions in gross income rather than 

deductions allowed under the Code 

(that is, (1) certain premium or other 

consideration paid to a foreign related 

party for reinsurance, and (2) amounts 

paid or accrued by the taxpayer to 

certain surrogate foreign corporations 

that result in a reduction in gross 

receipts to the taxpayer). Section 

59A(c)(4)(A)(ii)(II) provides that those 

base erosion tax benefits that result from 

reductions in gross income are included 

in the both the numerator and the 

denominator in the same amount. Other 

payments that reduce gross income but 

that are not base erosion payments are 

not included in the denominator of the 

base erosion percentage. 

D. Taxpayers in an Aggregate Group 

with Different Taxable Years 

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 member must compute 

the aggregate group amount of gross 

receipts and base erosion payments 

based on its own taxable year and based 

on those corporations that are members 

of the aggregate group at the end of such 

taxable year. Therefore, members with 

different taxable years may have 

different base erosion percentages. 

However, each corporation that is an 

applicable taxpayer computes its 

modified taxable income and base 

erosion minimum tax amount on a 

separate taxpayer basis. In the case of a 

group of affiliated corporations filing a 

consolidated tax return, the 

consolidated group is treated as a single 

taxpayer for purposes of section 59A, 

and its modified taxable income and 

base erosion minimum tax amount are 

determined on a consolidated group 

basis. 


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The proposed regulations provide 

rules for determining whether the gross 

receipts test and base erosion percentage 

test are satisfied with respect to a 

specific taxpayer when other members 

of its aggregate group have different 

taxable years. See proposed § 1.59A– 

2(e)(3)(vii). In general, the proposed 

regulations provide that 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, for purposes of 

determining the gross receipts, base 

erosion tax benefits, and deductions of 

the aggregate group, the taxpayer must 

include those amounts that occur during 

the course of the taxpayer’s own taxable 

year, not another member of the 

aggregate group’s taxable year, if 

different. The proposed regulations 

adopt this approach to provide 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 of this 

rule, two related taxpayers with 

different taxable years will compute 

their applicable gross receipts and base 

erosion percentage by reference to 

different periods, even though in each 

case the calculations are done on an 

aggregate group basis that takes into 

account other members of the controlled 

group. Taxpayers may use a reasonable 

method to determine the gross receipts 

and base erosion percentage information 

for the time period of the member of the 

aggregate group with a different taxable 

year. For an illustration of this rule, see 

proposed § 1.59A–2(f)(2) (Example 2). 

The proposed regulations also provide 

that when determining the base erosion 

percentage for a taxpayer that is a 

member of an aggregate group with 

other members that have a different 

taxable year, the effective date in section 

14401(e) of the Act, as it applies to the 

taxpayer making the return, controls 

whether that taxpayer takes into account 

transactions of other members of its 

aggregate group. (Section 14401(e) of the 

Act provides that section 59A applies 

only to base erosion payments paid or 

accrued in taxable years beginning after 

December 31, 2017.) 

Thus, if one corporation (US1) that 

has a calendar year is a member of an 

aggregate group with another 

corporation (US2) that has a taxable year 

ending November 30, when US1 

computes its base erosion percentage for 

its calendar year ending December 31, 

2018, the base erosion payments made 

by US2 during the period from January 

1, 2018, through December 31, 2018, are 

taken into account with respect to US1 

for its computations even though US2’s 

base erosion payments in its taxable 

year ending November 30, 2018, are not 

base erosion payments with respect to 

US2 because of section 14401(e) of the 

Act. Correspondingly, US2’s taxable 

year beginning December 1, 2017, and 

ending November 30, 2018, is not 

subject to section 59A because US2’s 

base erosion payments occur in a year 

beginning before January 1, 2018, and 

base erosion payments made by US1 

during the period from December 1, 

2017 through November 30, 2018, do 

not change that result. For a general 

discussion of the Act’s effective date for 

section 59A, see Part III.C of this 

Explanation of Provisions section. 

E. Mark-to-Market Deductions 

As discussed in Part II.C of this 

Explanation of Provisions section, 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 

to determine the base erosion 

percentage for the year. The proposed 

regulations provide rules for 

determining the amount of base erosion 

tax benefits in the case of transactions 

that are marked to market. These 

proposed rules also apply for 

determining the total amount of the 

deductions that are included in the 

denominator of the base erosion 

percentage computation. 

Specifically, to ensure that only a 

single deduction is claimed with respect 

to each transaction, the proposed 

regulations combine all income, 

deduction, gain, or loss on each 

transaction for the year to determine the 

amount of the deduction that is used for 

purposes of the base erosion percentage 

test. This rule does not modify the net 

amount allowed as a deduction 

pursuant to the Code and regulations. 

This rule is intended 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. 

III. Base Erosion Payments 

The proposed regulations define a 

base erosion payment as a payment or 

accrual by the taxpayer to a foreign 

related party (as defined in § 1.59A– 

1(b)(12)) 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. 

A payment or accrual that is not 

within one of the categories may be a 

base erosion payment described in one 

of the other categories. For example, a 

deductible payment related to 

reinsurance that does not meet the 

requirements for the third category of 

base erosion payments may still be a 

base erosion payment under the first 

category because the payment is 

deductible. Nonetheless, to the extent 

all or a portion of a payment or accrual 

is described in more than one of these 

categories, the amount is only taken into 

account once as a base erosion payment. 

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 

described in one of these four categories 

is made under general U.S. federal 

income tax law. For example, the 

proposed regulations do not explicitly 

address whether a royalty payment is 

classified as deductible under section 

162 or as a cost includible in inventory 

under sections 471 and 263A resulting 

in a reduction in gross income under 

section 61. 

In general, the treatment of a payment 

as deductible, or as other than 

deductible, such as an amount that 

reduces gross income or is excluded 

from gross income because it is 

beneficially owned by another person, 

generally will have federal income tax 

consequences that will affect the 

application of section 59A and will also 

have consequences for other provisions 

of the Code. In light of existing tax law 

dealing with identifying who is the 

beneficial owner of income, who owns 

an asset, and the related tax 

consequences (including under 

principal-agent principles, 

reimbursement doctrine, case law 

conduit principles, assignment of 

income or other principles of generally 

applicable tax law), the proposed 

regulations do not establish any specific 

rules for purposes of section 59A for 

determining whether a payment is 

treated as a deductible payment or, 

when viewed as part of a series of 

transactions, should be characterized in 

a different manner. 

Part III.A of this Explanation of 

Provisions section discusses the 


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operating rules for certain specific types 

of base erosion payments and Part III.B 

of this Explanation of Provisions section 

describes certain exceptions to the 

definition of base erosion payments. 

A. Certain Specific Types of Base 

Erosion Payments 

This Part III.A of this Explanation of 

Provisions describes proposed operating 

rules for determining whether there is a 

payment or accrual that can give rise to 

a base erosion payment. This part also 

discusses proposed rules coordinating 

the definition of base erosion payment 

with rules that allocate deductions for 

purposes of determining a foreign 

corporation’s effectively connected 

income. 

1. Payments or Accruals That Consist of 

Non-Cash Consideration 

The proposed regulations clarify that 

a payment or accrual by a taxpayer to 

a foreign related party may be a base 

erosion payment regardless of whether 

the payment is in cash or in any form 

of non-cash consideration. See proposed 

§ 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. The 

Treasury Department and the IRS have 

determined that neither the 

nonrecognition of gain or loss to the 

transferor nor the absence of a step-up 

in basis to the transferee establishes a 

basis to create a separate exclusion from 

the definition of a base erosion 

payment. The statutory definition of this 

type of base erosion payment that 

results from the acquisition of 

depreciable or amortizable assets in 

exchange for a payment or accrual to a 

foreign related party is based on the 

amount of imported basis in the asset. 

That amount of basis is imported 

regardless of whether the transaction is 

a recognition transaction or a 

transaction subject to rules in 

subchapter C or elsewhere in the Code. 

In contrast, 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. Thus, there is no 

payment or accrual. 

In addition, because section 59A(d)(1) 

defines the first category of base erosion 

payment 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 allowable under this 

chapter,’’ 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. The Treasury Department and the 

IRS welcome comments about the 

treatment of payments or accruals that 

consist of non-cash consideration. See 

Part III.B.4 of this Explanation of 

Provisions section for a specific 

exception from the base erosion 

payment definition for exchange loss 

from a section 988 transaction. 

2. Interest Expense Allocable to a 

Foreign Corporation’s Effectively 

Connected Income 

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. These 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 

a base erosion payment depends on the 

method used under § 1.882–5. 

If a foreign corporation uses the 

method described in § 1.882–5(b) 

through (d), 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. If U.S.-booked 

liabilities exceed U.S.-connected 

liabilities, a foreign corporation 

computing its interest expense under 

this method must apply the scaling ratio 

to all of its interest expense on a prorata basis to determine the amount that 

is a base erosion payment. Interest on 

excess U.S.-connected liabilities also 

may be a base erosion payment if the 

foreign corporation has liabilities with a 

foreign related party. 

If a foreign corporation determines its 

interest expense under the separate 

currency pools method described in 

§ 1.882–5(e), 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. The 

base erosion payment exceptions 

discussed in Part III.B of this 

Explanation of Provisions section may 

apply and may lower the amount of 

interest expense that is a base erosion 

payment. 

The Treasury Department and the IRS 

recognize that § 1.882–5 provides 

certain simplifying elections for 

determining the interest deduction of a 

foreign corporation. In particular, 

§ 1.882–5(c) generally provides that the 

amount of U.S.-connected liabilities 

equals the total value of U.S. assets 

multiplied by the taxpayer’s worldwide 

leverage ratio. However, § 1.882–5(c)(4) 

allows a taxpayer to elect to use a fixed 

ratio instead of its actual worldwide 

leverage ratio. Similarly, § 1.882– 

5(d)(5)(ii)(A) provides a general rule that 

the deduction for interest on excess 

U.S.-connected liabilities is determined 

by reference to the average rate of 

interest on U.S.-dollar liabilities that are 

not U.S.-booked liabilities. However, 

§ 1.882–5(d)(5)(ii)(B) allows certain 

taxpayers to elect to determine the 

deduction by reference to the 30-day 

London Interbank Offering Rate. The 

Treasury Department and the IRS 

request comments about similar 

simplifying elections for determining 

the portion of U.S.-connected liabilities 

that are paid to a foreign related party. 

3. Other Deductions Allowed With 

Respect to Effectively Connected 

Income 

Like excess interest expense, the 

proposed regulations provide that the 

amount of a foreign corporation’s other 

deductions properly allocated and 

apportioned to effectively connected 

gross income under § 1.882–4 are base 

erosion payments to the extent that 


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those deductions are paid or accrued to 

a foreign related party. Section 1.882– 

4(a)(1) generally provides that a foreign 

corporation engaged in a trade or 

business within the United States is 

allowed the deductions which are 

properly allocated and apportioned to 

the foreign corporation’s gross income 

which is effectively connected its 

conduct of a trade or business within 

the United States. The proposed 

regulations follow the approach under 

§ 1.882–4. Accordingly, the regulations 

identify base erosion payments by 

tracing each item of deduction, and 

determining whether the deduction 

arises from a payment to a foreign 

related party. 

If a foreign corporation engaged in a 

trade or business within the United 

States acquires property of a character 

subject to the allowance for depreciation 

(or amortization in lieu of depreciation) 

from a foreign related party, the amount 

paid or accrued by the taxpayer to the 

foreign related party is a base erosion 

payment to the extent the property is 

used, or held for use, in the conduct of 

a trade or business within the United 

States. 

4. Income Tax Treaties 

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. The use of 

a treaty-based expense allocation or 

attribution method does not, in and of 

itself, create legal obligations between 

the U.S. permanent establishment and 

the rest of the enterprise. These 

proposed regulations recognize that as a 

result of 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, which generally allow 

deductions only for allocable and 

apportioned costs incurred by the 

enterprise as a whole. The proposed 

regulations require that these 

deductions from internal dealings 

allowed in computing the business 

profits of the permanent establishment 

be treated in a manner consistent with 

their treatment under the treaty-based 

position and be included as base erosion 

payments. 

The proposed regulations include 

rules to recognize the distinction 

between the allocations of expenses that 

are addressed in Parts III.A.2 and 3 of 

this Explanation of Provisions section, 

and internal dealings. In the first 

instance, the allocation and 

apportionment of expenses of the 

enterprise to the branch or permanent 

establishment is not itself 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. In the second instance, 

internal dealings are not mere divisions 

of enterprise expenses, but rather 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 approach in the proposed 

regulations creates 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 rules in the 

proposed regulations applicable to 

foreign corporations using this approach 

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 § 1.59A–3(b)(4)(v)(A). 

5. Certain Payments to Domestic 

Passthrough Entities With Foreign 

Owners or to Another Aggregate Group 

Member 

The proposed regulations also provide 

rules for certain payments to a domestic 

trust, REIT or RIC, and for certain 

payments to a related domestic 

corporation that is not part of a 

consolidated group. Proposed § 1.59A– 

3(b)(2)(v) provides a rule that applies 

when a domestic trust, REIT or RIC 

receives a payment that otherwise 

would be a base erosion payment. 

Proposed § 1.59A–3(b)(2)(vi) applies 

when a taxpayer transfers certain 

property to a member of an aggregate 

group that includes the taxpayer, to 

ensure that any deduction for 

depreciation (or amortization in lieu of 

deprecation) by the transferee taxpayer 

remains a base erosion tax benefit to the 

same extent as the amount that would 

have been a base erosion tax benefit in 

the hands of the transferor. 

B. Exceptions From the Base Erosion 

Payment Definition 

1. Exception for Certain Amounts With 

Respect to Services 

The SCM exception described in 

section 59A(d)(5) provides that section 

59A(d)(1) (which sets forth the general 

definition of a base erosion payment) 

does not apply to any amount paid or 

accrued by a taxpayer for services if (A) 

the services are eligible for the services 

cost method under section 482 

(determined without regard to the 

requirement that the services not 

contribute significantly to fundamental 

risks of business success or failure) and 

(B) the amount constitutes the total 

services cost with no markup 

component. The Treasury Department 

and the IRS interpret ‘‘services cost 

method’’ to refer to the services cost 

method described in § 1.482–9(b), 

interpret the requirement regarding 

‘‘fundamental risks of business success 

or failure’’ to refer to the test in § 1.482– 

9(b)(5) commonly called the business 

judgment rule, and interpret ‘‘total 

services cost’’ to refer to the definition 

of ‘‘total services costs’’ in § 1.482–9(j). 

Section 59A(d)(5) is ambiguous as to 

whether the SCM exception applies 

when an amount paid or accrued for 

services exceeds the total services cost, 

but the payment otherwise meets the 

other requirements for the SCM 

exception set forth in section 59A(d)(5). 

Under one interpretation of section 

59A(d)(5), the SCM exception does not 

apply to any portion of a payment that 

includes any mark-up component. 

Under another interpretation of section 

59A(d)(5), the SCM exception is 

available if there is a markup, but only 

to the extent of the total services costs. 

Under the former interpretation, any 

amount of markup would disqualify a 

payment, in some cases resulting in 

dramatically different tax effects based 

on a small difference in charged costs. 

In addition, if any markup were 

required, for example because of a 

foreign tax law or non-tax reason, a 

payment would not qualify for the SCM 

exception. Under the latter approach, 

the services cost would continue to 

qualify for the SCM exception provided 

the other requirements of the SCM 

exception are met. The latter approach 

to the SCM exception is more expansive 

because it does not limit qualification to 

payments made exactly at cost. 

The proposed regulations provide that 

the SCM exception is available if there 

is a markup (and if other requirements 

are satisfied), but that the portion of any 

payment that exceeds the total cost of 

services is not eligible for the SCM 

exception and is a base erosion 


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payment. The Treasury Department and 

the IRS have determined that this 

interpretation is more consistent with 

the text of section 59A(d)(5). Rather 

than require an all-or-nothing approach 

to service payments, section 59A(d)(5) 

provides an exception for ‘‘any amount’’ 

that meets the specified test. This 

language suggests that a service 

payment may be disaggregated into its 

component amounts, just as the general 

definition of base erosion payment 

applies to the deductible amount of a 

foreign related party payment even if 

the entire payment is not deductible. 

See section 59A(d)(1). The most logical 

interpretation is that a payment for a 

service that satisfies subparagraph (A) is 

excepted up to the qualifying amount 

under subparagraph (B), but amounts 

that do not qualify (i.e., the markup 

component) are not excepted. This 

interpretation is reinforced by the fact 

that section 59A(d)(5)(A) makes the 

SCM exception available to taxpayers 

that cannot apply the services cost 

method described in § 1.482–9(b) 

(which permits pricing a services 

transaction at cost for section 482 

purposes) because the taxpayer cannot 

satisfy the business judgment rule in 

§ 1.482–9(b)(5). Because a taxpayer in 

that situation cannot ordinarily charge 

cost, without a mark-up, for transfer 

pricing purposes, failing to adopt this 

approach would render the 

parenthetical reference in section 

59A(d)(5)(A) a nullity. The 

interpretation the proposed regulations 

adopt gives effect to the reference to the 

business judgment rule in section 

59A(d)(5). The Treasury Department 

and the IRS welcome comments on 

whether the regulations should instead 

adopt the interpretation of section 

59A(d)(5) whereby the SCM exception is 

unavailable to a payment that includes 

any mark-up component. 

To be eligible for the SCM exception, 

the proposed regulations require that all 

of the requirements of § 1.482–9(b) must 

be satisfied, except as modified by the 

proposed regulations. Therefore, a 

taxpayer’s determination that a service 

qualifies for the SCM exception is 

subject to review under the 

requirements of § 1.482–9(b)(3) and 

(b)(4), and its determination of the 

amount of total services cost and 

allocation and apportionment of costs to 

a particular service is subject to review 

under the rules of § 1.482–9(j) and 

§ 1.482–9(k), respectively. 

Although the proposed regulations do 

not require a taxpayer to maintain 

separate accounts to bifurcate the cost 

and markup components of its services 

charges to qualify for the SCM 

exception, the proposed regulations do 

require that taxpayers maintain books 

and records adequate to permit 

verification of, among other things, the 

amount paid for services, the total 

services cost incurred by the renderer, 

and the allocation and apportionment of 

costs to services in accordance with 

§ 1.482–9(k). Because payments for 

certain services that are not eligible for 

the SCM due to the business judgment 

rule or for which taxpayers select 

another transfer pricing method may 

still be eligible for the SCM exception to 

the extent of total services cost, the 

record-keeping requirements in the 

proposed regulations differ from the 

requirements in § 1.482–9(b)(6). See 

§ 1.59A–3(b)(3)(i)(B)(2). Unlike § 1.482– 

9(b)(6), the proposed regulations do not 

require that taxpayers ‘‘include a 

statement evidencing [their] intention to 

apply the services cost method to 

evaluate the arm’s length charge for 

such services,’’ but the proposed 

regulations do require that taxpayers 

include a calculation of the amount of 

profit mark-up (if any) paid for the 

services. For purposes of qualifying for 

the SCM exception under section 

59A(d)(5), taxpayers are required to 

comply with the books and records 

requirements under these proposed 

regulations but not § 1.482–9(b)(6). 

The proposed regulations also clarify 

that the parenthetical reference in 

section 59A(d)(5) to the business 

judgment rule prerequisite for 

applicability of the services cost 

method—‘‘(determined without regard 

to the requirement that the services not 

contribute significantly to fundamental 

risks of business success or failure)’’— 

disregards the entire requirement set 

forth in § 1.482–9(b)(5) solely for 

purposes of section 59A(d)(5). 

2. Qualified Derivative Payments 

Section 59A(h) provides that a 

qualified derivative payment (QDP) is 

not a base erosion payment. Proposed 

§ 1.59A–6 defines a QDP as any 

payment made by a taxpayer to a foreign 

related party pursuant to a derivative for 

which the taxpayer recognizes gain or 

loss on the derivative on a mark-tomarket basis (treats the derivative as 

sold on the last business day of the 

taxable year), the gain or loss is 

ordinary, and any gain, loss, income or 

deduction on a payment made pursuant 

to the derivative is also treated as 

ordinary. 

The QDP exception applies only if the 

taxpayer satisfies reporting 

requirements in proposed § 1.6038A– 

2(b)(7)(ix). If a taxpayer satisfies the 

reporting requirements for some QDPs, 

but not all, then only the payments for 

which the taxpayer fails to satisfy the 

reporting requirements will be ineligible 

for the QDP exception. Section 

1.6038A–2(b)(7)(ix) will first apply to 

taxable years beginning after final 

regulations are published, which 

provides taxpayers additional time to 

meet those reporting requirements. The 

proposed regulations provide that before 

final regulations are published, 

taxpayers satisfy the reporting 

requirements for QDPs by reporting the 

aggregate amount of QDPs for the 

taxable year on Form 8991, Tax on Base 

Erosion Payments of Taxpayers With 

Substantial Gross Receipts. 

Section 59A(h)(3) provides two 

exceptions to the QDP exception. 

Specifically, the QDP exception does 

not apply (1) to a payment that would 

be treated as a base erosion payment if 

it were not made pursuant to a 

derivative or (2) with respect to a 

contract that has derivative and 

nonderivative components, to a 

payment that is properly allocable to the 

nonderivative component. The 

proposed regulations do not specifically 

address or modify these statutory 

provisions. For the avoidance of doubt, 

the Treasury Department and the IRS 

observe that these rules in section 

59A(h)(3) are self-executing; thus, 

taxpayers must apply these two rules to 

determine whether any of their 

payments pursuant to derivatives fail to 

qualify for the QDP exception. The 

Treasury Department and the IRS 

request comments on whether 

regulations should further clarify the 

statutory provisions in section 

59A(h)(3). 

Proposed § 1.59A–6(d) defines a 

derivative as any contract, the value of 

which, or any payment with respect to 

which, is determined by reference to 

any stock, evidence of indebtedness, 

actively traded commodity, currency, or 

any rate, price, amount, index, formula 

or algorithm. However, direct 

ownership of any of these items is not 

ownership of a derivative. The proposed 

regulations clarify that for purposes of 

section 59A(h)(4), a derivative does not 

include an insurance contract, a 

securities lending transaction, a salerepurchase transaction, or any 

substantially similar transaction. 

For federal tax purposes, a salerepurchase transaction satisfying certain 

conditions is treated as a secured loan. 

Sections 59A(h)(3) and 59A(h)(4) 

explicitly exclude from qualified 

derivatives payment status any payment 

that would be treated as a base erosion 

payment if it were not made pursuant to 

a derivative, such as a payment of 

interest on a debt instrument. 

Accordingly, for purposes of section 

59A(h), the proposed regulations 


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provide that sale-repurchase 

transactions are not treated as 

derivatives. Because 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. 

The Treasury Department and the IRS 

request comments on whether securities 

lending transactions and salerepurchase transactions have been 

properly excluded from the definition of 

a derivative, including whether certain 

transactions lack a significant financing 

component such that those transactions 

should be treated as derivatives for 

purposes of section 59A(h). The 

Treasury Department and the IRS also 

request comments regarding whether 

any additional transactions or financial 

instruments should be explicitly 

excluded from the definition of a 

derivative. 

3. Exception to Base Erosion Payment 

Status for Payments the Recipient of 

Which is Subject to U.S. Tax 

In general, for a payment or accrual to 

be treated as a base erosion payment, 

the recipient must be a foreign person 

(within the meaning of section 

6038A(c)(3)) that is a related party with 

respect to the taxpayer, and a deduction 

must be allowable with respect to the 

payment or accrual. See section 59A(f). 

Section 6038A(c)(3) defines ‘‘foreign 

person’’ as any person that is not a 

United States person within the 

meaning of section 7701(a)(30), but for 

this purpose the term ‘‘United States 

person’’ does not include any individual 

who is a citizen of any U.S. territory 

(but not otherwise a citizen of the 

United States) and who is not a resident 

of the United States. See proposed 

§ 1.59A–1(b)(10). The Treasury 

Department and the IRS have 

determined that it is appropriate in 

defining a base erosion payment to 

consider the U.S. tax treatment of the 

foreign recipient. In particular, the 

Treasury Department and the IRS have 

determined that a payment to a foreign 

person should not be taxed as a base 

erosion payment to the extent that 

payments to the foreign related party are 

effectively connected income. Those 

amounts are subject to tax under 

sections 871(b) and 882(a) on a net basis 

in substantially the same manner as 

amounts paid to a United States citizen 

or resident or a domestic corporation. 

Accordingly, the proposed regulations 

include an exception from the definition 

of base erosion payment for amounts 

that are subject to tax as income 

effectively connected with the conduct 

of a U.S. trade or business. In the case 

of a foreign recipient that determines its 

net taxable income under an applicable 

income tax treaty, the exception from 

the definition of base erosion payment 

applies to payments taken into account 

in determining net taxable income 

under the treaty. 

4. Exchange Loss From a Section 988 

Transaction 

Proposed § 1.59A–3(b)(3)(iv) provides 

that exchange losses from section 988 

transactions described in § 1.988–1(a)(1) 

are not base erosion payments. The 

Treasury Department and the IRS have 

determined that these 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. Accordingly, under these 

proposed regulations, section 988 losses 

are excluded from the numerator. 

The proposed regulations also provide 

that section 988 losses are excluded 

from the denominator of the base 

erosion percentage. Specifically, 

proposed § 1.59A–2(e)(3)(ii)(D) provides 

that an exchange loss from a section 988 

transaction (including with respect to 

persons other than foreign related 

parties) is not included in the 

denominator when calculating the base 

erosion percentage. Exchange gain from 

a section 988 transaction, however, is 

included as a gross receipt for purposes 

of the gross receipts test under proposed 

§ 1.59A–2(d). 

The Treasury Department and the IRS 

request comments on the treatment of 

section 988 losses in the context of 

section 59A, including whether the rule 

relating to section 988 losses in the 

denominator of the base erosion 

percentage calculation should be 

limited to transactions with a foreign 

related party. 

5. Exception for Interest on Certain 

Instruments Issued by Globally 

Systemically Important Banking 

Organizations 

The Federal Reserve requires that 

certain global systemically important 

banking organizations (GSIBs) issue 

TLAC securities as part of a global 

framework for bank capital that has 

sought to minimize the risk of 

insolvency. In particular, the Board of 

Governors of the Federal Reserve (the 

Board) has issued regulations that 

prescribe the amount and form of 

external TLAC securities that domestic 

GSIBs must issue and internal TLAC 

securities that certain foreign GSIBs 

must issue. In the case of internal TLAC 

securities, the Board regulations require 

the domestic intermediate holding 

company of a foreign GSIB to issue a 

specified minimum amount of TLAC to 

its foreign parent. Section 59A(i) 

provides that the Secretary shall 

prescribe such regulations or other 

guidance as may be necessary or 

appropriate to carry out the provisions 

of section 59A, including regulations 

addressing specifically enumerated 

situations. The Treasury Department 

and the IRS have determined that 

because of the special status of TLAC as 

part of a global system to address bank 

solvency and the precise limits that 

Board regulations place on the terms of 

TLAC securities and structure of 

intragroup TLAC funding, it is 

necessary and appropriate to include an 

exception to base erosion payment 

status for interest paid or accrued on 

TLAC securities required by the Federal 

Reserve. 

Specifically, the proposed regulations 

include a TLAC exception that applies 

only to the extent of the amount of 

TLAC securities required by the Federal 

Reserve under subpart P of 12 CFR part 

252. As a result, the exception is scaled 

back if the adjusted issue price of the 

average amount of TLAC securities 

issued and outstanding exceeds the 

average amount of TLAC long-term debt 

required by the Federal Reserve for the 

taxable year. The TLAC exception 

applies only to securities required by 

the Federal Reserve, and as a result 

generally does not apply to securities 

issued by a foreign corporation engaged 

in a U.S. trade or business because the 

applicable Federal Reserve requirement 

applies only to domestic institutions. 

However, the Treasury Department and 

the IRS acknowledge that foreign 

regulators may impose similar 

requirements on the financial 

institutions they regulate. The Treasury 

Department and the IRS request 

comments regarding a similar exception 

for foreign corporations that are 

required by law to issue a similar type 

of loss-absorbing instrument, including 

the appropriate scope of an exception 

that would provide parity between the 

treatment of domestic corporations and 

foreign corporations engaged in a U.S. 

trade or business. 

C. Base Erosion Payments Occurring 

Before the Effective Date and Pre-2018 

Disallowed Business Interest 

Section 14401(e) of the Act provides 

that section 59A applies only to base 

erosion payments paid or accrued in 

taxable years beginning after December 

31, 2017. The statutory definition of a 

base erosion tax benefit is based upon 

the definition of a base erosion 

payment. Accordingly, the proposed 


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regulations confirm the exclusion of a 

deduction described in section 

59A(c)(2)(A)(i) (deduction allowed 

under Chapter 1 for the taxable year 

with respect to any base erosion 

payment) or section 59A(c)(2)(A)(ii) 

(deduction allowed under Chapter 1 for 

the taxable year for depreciation or 

amortization with respect to any 

property acquired with such payment) 

that is allowed in a taxable year 

beginning after December 31, 2017, if it 

relates to a base erosion payment that 

occurred in a taxable year beginning 

before January 1, 2018. 

For example, if in 2015, a calendar 

year taxpayer makes a payment or 

accrual to a foreign related party to 

acquire depreciable property, the 2015 

payment is excluded from the definition 

of a base erosion payment because of 

section 14401(e) of the Act. As a result, 

the taxpayer’s depreciation deduction 

allowed in 2018 with respect to this 

property is not a base erosion tax 

benefit. 

Similarly, if in 2016, a taxpayer with 

a calendar year had paid or accrued 

interest on an obligation to a foreign 

related party, but the interest was not 

deductible in 2016 due to the 

application of section 267(a), the 2016 

accrual of the interest amount is 

excluded from the definition of a base 

erosion payment because of section 

14401(e) of the Act. As a result, if the 

interest amount becomes deductible in 

2018, the taxpayer’s deduction allowed 

in 2018 with respect to this item is not 

a base erosion tax benefit. 

In the case of business interest 

expense that is not allowed as a 

deduction under section 163(j)(1), the 

proposed regulations provide a rule that 

clarifies that the effective date rules 

apply in a similar manner as with other 

base erosion payments that initially 

arose before the effective date in section 

14401(e) of the Act. Section 163(j), as 

modified by the Act, provides that the 

deduction for business interest expense 

is limited to the sum of business interest 

income, 30 percent of adjusted taxable 

income (‘‘ATI’’), and the amount of any 

floor plan financing interest. Section 

163(j)(2) further provides that any 

disallowed business interest is carried 

forward to the succeeding year, and that 

the carryforward amount is treated as 

‘‘paid or accrued’’ in the succeeding 

taxable year. 

In Notice 2018–28, 2018–16 I.R.B. 

492, Section 3, the Treasury Department 

and the IRS stated that business interest 

carried forward from a taxable year 

beginning before January 1, 2018, will 

be treated in the same manner as 

interest paid or accrued in a taxable year 

beginning after December 31, 2017, for 

purposes of section 59A. Under this 

approach, business interest expense that 

was initially paid or accrued in a 

taxable year beginning before January 1, 

2018, could nonetheless be a base 

erosion payment in a taxable year 

beginning after December 31, 2017, 

because section 163(j)(2) deems a 

recurring ‘‘payment or accrual’’ for such 

item in each carryforward year. 

Comments requested that the Treasury 

Department and the IRS reconsider the 

position taken in Notice 2018–28, on the 

basis that the determination of whether 

a payment is a base erosion payment 

should be made as of the date of the 

actual payment of interest rather than 

the date that a deduction is allowed 

under section 163(j). 

The Treasury Department and the IRS 

agree and have determined that the 

approach described in Notice 2018–28 

is not consistent with the general 

effective date provision in Section 

14401(e) of the Act because the language 

in section 163(j)(2) deeming a recurring 

‘‘payment or accrual’’ is primarily to 

implement the carryforward mechanism 

in section 163(j), rather than to treat 

interest that is carried forward to a 

subsequent taxable year as paid or 

accrued for all tax purposes in that 

subsequent taxable year. Accordingly, 

the proposed regulations do not follow 

the approach described in Notice 2018– 

28. Instead, the proposed regulations 

provide that any disallowed disqualified 

interest under section 163(j) that 

resulted from a payment or accrual to a 

foreign related party and that is carried 

forward from a taxable year beginning 

before January 1, 2018, is not a base 

erosion payment. The proposed 

regulations also clarify that any 

disallowed business interest 

carryforward under section 163(j) that 

resulted from a payment or accrual to a 

foreign related party is treated as a base 

erosion payment in the year that the 

interest was paid or accrued even 

though the interest may be deemed to be 

paid or accrued again in the year in 

which it is actually deducted. The rule 

in the proposed regulations generally is 

consistent with excluding interest paid 

or accrued before January 1, 2018 

(generally under financing arranged 

prior to the Act) from treatment as a 

base erosion payment. The Treasury 

Department and the IRS welcome 

comments with respect to the treatment 

of disallowed disqualified interest 

under section 163(j) from a taxable year 

beginning before January 1, 2018. See 

Part IV.B of this Explanation of 

Provisions section for proposed rules 

determining the amount of business 

interest expense for which a deduction 

is allowed when section 163(j) applies 

to limit interest deductions. 

IV. Base Erosion Tax Benefits 

The amount of base erosion tax 

benefits is an input in (i) the 

computation of the base erosion 

percentage test (discussed in Part II.C of 

this Explanation of Provisions section) 

and (ii) the determination of modified 

taxable income (discussed in Part V of 

this Explanation of Provisions section). 

Generally, a base erosion tax benefit is 

the amount of any deduction relating to 

a base erosion payment that is allowed 

under the Code for the taxable year. 

Base erosion tax benefits are defined in 

proposed § 1.59A–3(c). 

A. Withholding Tax on Payments 

As discussed in Part II.C of this 

Explanation of Provisions section, 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. If an income tax treaty 

reduces the amount of withholding 

imposed on the base erosion payment, 

the base erosion payment is treated as 

a base erosion tax benefit to the extent 

of the reduction in withholding under 

rules similar to those in section 

163(j)(5)(B) as in effect before the Act. 

B. Rules for Classifying Interest for 

Which a Deduction Is Allowed When 

Section 163(j) 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 person as opposed to a 

domestic related person. Proposed 

§ 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 


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interest paid or accrued to related 

parties for purposes of section 59A. 

More specifically, the proposed 

regulations provide that when a 

corporation has business interest 

expense paid or accrued to both 

unrelated parties and related parties, 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, and then as 

business interest expense paid to 

unrelated 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. 

Because section 163(j) and the 

proposed regulations thereunder 

provide an ordering rule that allocates 

business interest expense deductions 

first to business interest expense 

incurred in the current year and then to 

business interest expense carryforwards 

from prior years (starting with the 

earliest year) in order to separately track 

the attributes on a year-by-year layered 

approach for subchapter C purposes, 

these proposed regulations follow that 

convention. Accordingly, the proposed 

regulations also follow a year-by-year 

convention in the allocation of business 

interest expense and carryovers among 

the related and unrelated party 

classifications. See also the discussion 

of singular tax attributes in Part V.A of 

this Explanation of Provisions section. 

The proposed regulations adopt a 

similar approach for business interest 

expense and excess business interest of 

a partnership that is allocated to a 

corporate partner by separately tracking 

and ordering items allocated from a 

partnership. 

V. Modified Taxable Income 

For any taxable year, section 59A 

imposes a tax on each applicable 

taxpayer equal to the base erosion 

minimum tax amount for that year. 

Section 59A(b)(1) provides that the base 

erosion minimum tax amount is 

determined based on an applicable 

taxpayer’s modified taxable income for 

the taxable year. Part V.A of this 

Explanation of Provisions section 

discusses how an applicable taxpayer 

computes its modified taxable income. 

Part V.B of this Explanation of 

Provisions section describes how 

modified taxable income is calculated if 

an applicable taxpayer has an overall 

taxable loss for a taxable year. Finally, 

Part V.C of this Explanation of 

Provisions section describes the base 

erosion percentage that is used when 

the base erosion percentage of a net 

operating loss deduction (‘‘NOL 

deduction’’) is added back to taxable 

income for purposes of the modified 

taxable income calculation. 

A. Method of Computation 

Section 59A(c)(1) provides that the 

term modified taxable income means 

the taxable income of the taxpayer 

computed under Chapter 1 for the 

taxable year, determined without regard 

to base erosion tax benefits and the base 

erosion percentage of any NOL 

deduction under section 172 for the 

taxable year. The proposed regulations 

clarify that the computation of modified 

taxable income and the computation of 

the base erosion minimum tax amount 

(which is discussed in Part VI of this 

Explanation of Provisions section) are 

made on a taxpayer-by-taxpayer basis. 

That is, under the proposed regulations, 

the aggregate group concept is used 

solely for determining whether a 

taxpayer is an applicable taxpayer and 

the base erosion percentage of any NOL 

deduction. This approach is consistent 

with section 59A(a)’s imposition of a tax 

equal to the base erosion minimum tax 

amount, which is in addition to the 

regular tax liability of a taxpayer. 

The proposed regulations also provide 

that the computation of modified 

taxable income is done on an add-back 

basis. The computation starts with 

taxable income (or taxable loss) of the 

taxpayer as computed for regular tax 

purposes, and adds to that amount (a) 

the gross amount of base erosion tax 

benefits for the taxable year and (b) the 

base erosion percentage of any NOL 

deduction under section 172 for the 

taxable year. 

The proposed regulations do not 

provide for the recomputation of income 

under an approach similar to the 

alternative minimum tax, which the Act 

repealed for corporations. See section 

12001(a) of the Act. Under a 

recomputation approach, attributes that 

are limited based on taxable income 

would be subject to different annual 

limitations, and those attributes would 

have to be re-computed for purposes of 

section 59A. Applying this approach in 

a manner that reflects the results of the 

BEAT-basis recomputation to 

subsequent years would lead to parallel 

attributes that are maintained separately 

in a manner similar to the pre-Act 

corporate alternative minimum tax. For 

example, the amount of the net 

operating loss used to reduce modified 

taxable income would differ from the 

amount used in computing regular tax 

liability, and the carryforward of unused 

net operating loss that is used to 

compute regular tax liability would not 

reflect the net operating loss amount 

used to reduce modified taxable income 

(absent a separate BEAT-basis 

carryover). The annual limitation under 

section 163(j)(1), which generally limits 

a corporation’s annual deduction for 

business interest expense, would 

present similar issues under a 

recomputation approach. Consequently, 

the add-back approach also provides 

simplification relative to the 

recomputation approach because the 

add-back approach eliminates the need 

to engage in the more complex tracking 

of separate attributes on a BEAT basis in 

a manner similar to the repealed 

corporate AMT. The Treasury 

Department and the IRS welcome 

comments on the add-back approach 

provided in the proposed regulations, 

and the practical effects of an alternative 

recomputation-based approach. 

B. Conventions for Computing Modified 

Taxable Income—Current Year Losses 

and Excess Net Operating Loss 

Carryovers 

If a taxpayer has an excess of 

deductions allowed by Chapter 1 over 

gross income, computed without regard 

to the NOL deduction, the taxpayer has 

negative taxable income for the taxable 

year. Generally, the proposed 

regulations provide that a negative 

amount is the starting point for 

computing modified taxable income 

when there is no NOL deduction from 

net operating loss carryovers and 

carrybacks. 

The proposed regulations further 

provide a rule applicable to situations in 

which there is a NOL deduction from a 

net operating loss carryover or carryback 

to the taxable year and that NOL 

deduction exceeds the amount of 

positive taxable income before that 

deduction (because, for example, the 

loss arose in a year beginning before 

January 1, 2018). The proposed 

regulations provide that the excess 

amount of NOL deduction does not 

reduce taxable income below zero for 

determining the starting point for 

computing modified taxable income. 

The Treasury Department and the IRS 

have determined that this rule is 

necessary because section 172(a) could 

be read to provide that, for example, if 

a taxpayer has a net operating loss of 

$100x that arose in a taxable year 

beginning before January 1, 2018, that is 

carried forward, and in a subsequent 

year the taxpayer has taxable income of 

$5x before taking into account the $100x 

net operating loss carryover deduction, 

the taxpayer may nonetheless have a 

$100x NOL deduction in that year or a 


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$95x taxable loss (even though $95x of 

the net operating loss would remain as 

a carryforward to future years, as well). 

Because the proposed regulations 

recognize the notion of a taxable loss 

when deductions other than the NOL 

deduction exceed gross income (as 

discussed earlier in this Part V), this 

rule clarifies that the taxpayer’s starting 

point for computing modified taxable 

income in this situation is zero, rather 

than negative $95x. 

The proposed regulations further 

clarify that the NOL deduction taken 

into account for purposes of adding the 

base erosion percentage of the NOL 

deduction to taxable income under 

section 59A(c)(1)(B) is determined in 

the same manner. Accordingly, in the 

example above, the base erosion 

percentage of the NOL deduction added 

to taxable income is computed based on 

the $5x NOL deduction that reduces 

regular taxable income to zero, rather 

than the entire $100x of net operating 

loss carryforward, $95x of which is not 

absorbed in the current taxable year. 

Finally, the proposed regulations 

provide that an applicable taxpayer’s 

taxable income is determined according 

to section 63(a) without regard to the 

rule in section 860E(a)(1). That rule 

generally provides that a holder of a 

residual interest in a real estate 

mortgage investment conduit (‘‘REMIC’’) 

may not have taxable income less than 

its excess inclusion amount. As a result 

of section 860E(a)(1), a holder of a 

REMIC residual interest may have 

taxable income for purposes of 

computing its regular tax liability even 

though it has a current year loss. The 

proposed regulations provide that the 

limitation in section 860E(a)(1) is 

disregarded for purposes of calculating 

modified taxable income under section 

59A. The rule described in this 

paragraph is relevant, for example, in 

situations when the taxpayer would 

have negative taxable income 

attributable to a current year loss, as 

described in this Part V.B, or no taxable 

income as a result of a net operating 

loss. Because section 860E(a)(1) ensures 

that the excess inclusion is subject to 

tax under section 11, the Treasury 

Department and the IRS have 

determined that it is not appropriate to 

apply the rule in section 860E(a)(1) for 

the purpose of calculating modified 

taxable income under section 59A. 

C. Conventions for Computing Modified 

Taxable Income—Determining the Base 

Erosion Percentage of NOL Deductions 

Section 59A(c)(1)(B) provides that 

modified taxable income includes the 

base erosion percentage of any NOL 

deduction allowed under section 172 for 

the taxable year. In this context, the 

relevant base erosion percentage could 

be either the base erosion percentage in 

the year that the net operating loss 

arose, or alternatively, the base erosion 

percentage in the year in which the 

taxpayer takes the NOL deduction. 

Proposed § 1.59A–4(b)(2)(ii) applies the 

base erosion percentage of the year in 

which the loss arose, or vintage year, 

because the base erosion percentage of 

the vintage year reflects the portion of 

base eroding payments that are reflected 

in the net operating loss carryover. In 

addition, because the vintage-year base 

erosion percentage is a fixed percentage, 

taxpayers will have greater certainty as 

to the amount of the future add-back to 

modified taxable income (as compared 

to using the utilization-year base erosion 

percentage). 

Based on this approach, the proposed 

regulations also provide that 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 base 

erosion percentage is zero because 

section 59A applies only to base erosion 

payments that are paid or accrued in 

taxable years beginning after December 

31, 2017. See section 14401(e) of the 

Act. As a result, there is no add-back to 

modified taxable income for the use of 

those net operating loss carryovers. The 

Treasury Department and the IRS 

welcome comments on the vintage-year 

approach as well as the alternative 

utilization-year approach. 

The proposed regulations also clarify 

that in computing the add-back for NOL 

deductions for purposes of the modified 

taxable income calculation, the relevant 

base erosion percentage is the base 

erosion percentage for the aggregate 

group that is used to determine whether 

the taxpayer is an applicable taxpayer, 

rather than a separate computation of 

base erosion percentage computed 

solely by reference to the single 

taxpayer. 

VI. Base Erosion Minimum Tax Amount 

An applicable taxpayer computes its 

base erosion minimum tax amount 

(‘‘BEMTA’’) for the taxable year to 

determine its liability under section 

59A(a). Proposed § 1.59A–5 describes 

the calculation of the BEMTA. 

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. See Part VIII of 

this Explanation of Provisions section 

for a discussion of the higher BEAT rate 

for certain banks and registered 

securities dealers. 

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. 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 federal income tax paid for the 

current or previous year. 

For taxable years beginning before 

January 1, 2026, under section 

59A(b)(1)(B), 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. 

For taxable years beginning after 

December 31, 2025, this special 

treatment of the research credit and 

applicable section 38 credits no longer 

applies. As a result, an applicable 

taxpayer may have a greater BEMTA 

than would be the case in taxable years 

beginning before January 1, 2026. In 

general, foreign tax credits are taken 

into account in computing a taxpayer’s 

regular tax liability before other credits. 

See section 26(a). As a result, a taxpayer 

with foreign tax credits that reduce its 

regular tax liability to, or close to, zero 

may not use its section 41(a) credits or 

its applicable section 38 credits in 

computing its regular tax liability. In 

these situations, those credits will not 

be taken into account in computing the 

taxpayer’s BEMTA even in a pre-2026 

year. Instead, those credits will reduce 

(or, put differently, will prevent an 

increase in) the BEMTA in the year 

when those credits are used for regular 

tax purposes (provided that the taxable 

year begins before January 1, 2026). 

VII. Application of Section 59A to 

Partnerships 

A partnership is not an ‘‘applicable 

taxpayer’’ as defined in Section 59A; 

only corporations can be applicable 

taxpayers. In general, however, a 

partnership also is not subject to the 

income tax imposed by Chapter 1 of 

Subtitle A of the Code. Instead, partners 

are liable for income tax only in their 

separate capacities. Each taxpayer that 

is a partner in a partnership takes into 

account separately the partner’s 

distributive share of the partner’s 

income or loss in determining its 

taxable income. Accordingly, an item of 

income is subject to federal income 


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taxation based on the status of the 

partners, and not the partnership as an 

entity. Similarly, a partnership does not 

itself benefit from a deduction. Instead, 

the tax benefit from a deduction is taken 

by the taxpayer that is allocated the 

deduction under section 704. Section 

702(b) provides that the character of any 

item be taken into account as if such 

item were realized directly from the 

source from which realized by the 

partnership, or incurred in the same 

manner as incurred by the partnership. 

Section 702(b) acknowledges that 

differences in partner tax characteristics 

(for example, whether the partner is a 

corporation or an individual, or 

domestic or foreign) may result in 

differences in the tax consequences of 

items the partnership allocates to its 

partners. 

The proposed regulations generally 

apply an aggregate approach in 

conjunction with the gross receipts test 

for evaluating whether a corporation is 

an applicable taxpayer and in 

addressing the treatment of payments 

made by a partnership or received by a 

partnership for purposes of section 59A. 

The proposed regulations generally 

provide that partnerships are treated as 

an aggregate of the partners in 

determining whether payments to or 

payments from a partnership are base 

erosion payments consistent with the 

approach described in subchapter K as 

well as the authority provided in section 

59A(i)(1) to prescribe such regulations 

that are necessary or appropriate to 

carry out the provisions of section 59A, 

including through the use of 

intermediaries or by characterizing 

payments otherwise subject to section 

59A as payments not subject to 59A. 

Thus, when determining whether a 

corporate partner that is an applicable 

taxpayer has made a base erosion 

payment, amounts paid or accrued by a 

partnership are treated as paid by each 

partner to the extent an item of expense 

is allocated to the partner under section 

704. Similarly, any amounts received by 

or accrued to a partnership are treated 

as received by each partner to the extent 

the item of income or gain is allocated 

to each partner under section 704. The 

rules and exceptions for base erosion 

payments and base erosion tax benefits 

then apply accordingly on an aggregate 

basis. 

The Treasury Department and the IRS 

have determined that a rule that applies 

the aggregate principle consistently is 

necessary to align the treatment of 

economically similar transactions. The 

proposed rule prevents an applicable 

taxpayer from (a) paying a domestic 

partnership that is owned by foreign 

related parties, rather than paying those 

foreign partners directly, to circumvent 

the BEAT and (b) causing a partnership 

in which an applicable taxpayer is a 

partner to make a payment to a foreign 

related party, rather than paying that 

foreign related party directly. The rule 

applies consistently when a payment is 

to a foreign partnership that is owned, 

for example, by domestic corporations. 

This rule also addresses situations in 

which a partnership with an applicable 

taxpayer partner makes a payment to a 

foreign related party. Partners with 

certain small ownership interests are 

excluded from this aggregate approach 

for purposes of determining base 

erosion tax benefits from the 

partnership. This small ownership 

interests exclusion generally applies to 

partnership interests that represent less 

than ten percent of the capital and 

profits of the partnership and less than 

ten percent of each item of income, gain, 

loss, deduction, and credit; and that 

have a fair market value of less than $25 

million. See proposed § 1.59A–7(b)(4). 

The Treasury Department and the IRS 

determined that a threshold of ten 

percent appropriately balanced the 

administrative burdens of determining 

whether deductions allocated to a 

partner with a small ownership interest 

in a partnership are base erosion 

payments with the Treasury Department 

and IRS’s interest in maintaining a 

consistent aggregate approach to 

partnerships in applying to the BEAT. 

In determining the appropriate 

threshold for a small ownership interest, 

the Treasury Department and the IRS 

considered the treatment of small 

ownership interests in partnerships in 

analogous situations in other Treasury 

regulations. The Treasury Department 

and the IRS welcome comments on the 

aggregate approach to partnerships as 

well as the exception for small 

ownership interests, including the 

specific thresholds for the exception. 

The proposed regulations do not 

provide for special treatment of base 

erosion tax benefits attributable to a 

partnership or to partnership 

nonrecognition transactions. Instead, 

the aggregate principle generally applies 

to these situations. For example, if a 

partnership acquires property from a 

foreign related party of a taxpayer that 

is a partner in the partnership, 

deductions for depreciation of the 

property allocated to the taxpayer 

generally are base erosion tax benefits. 

Similarly, if a foreign related party and 

a taxpayer form a partnership, and the 

foreign related party contributes 

depreciable property, deductions for 

depreciation of the property generally 

are base erosion tax benefits, in part, 

because the partnership is treated as 

acquiring the property in exchange for 

an interest in the partnership under 

section 721. This approach is consistent 

with the approach taken with respect to 

subchapter C transactions, as described 

in Part III.A.1 of this Explanation of 

Provisions section. 

The proposed regulations provide that 

with respect to any person that owns an 

interest in a partnership, the related 

party determination under section 

59A(g) applies at the partner level. 

VIII. Rules Relating to Banks and 

Dealers for Purposes of Computing the 

Base Erosion Percentage and 

Determining the BEAT Rate for 

Computing BEMTA 

Section 59A modifies two general 

rules in the case of certain banks or 

registered securities dealers. First, 

section 59A(e)(1)(C) lowers the base 

erosion percentage threshold for certain 

banks and registered securities dealers 

from three percent or more to two 

percent or more. See Part II.C of this 

Explanation of Provisions section for 

additional discussion of this rule. 

Second, section 59A(b)(3) provides that 

the BEAT rate is one percentage point 

higher for those banks or registered 

securities dealers. 

The proposed regulations do not 

modify the statutory definition of the 

term ‘‘bank’’ for these purposes from its 

reference to section 581, which defines 

a bank by reference to a bank or trust 

company incorporated and doing 

business under the laws of United States 

(including laws related to the District of 

Columbia) or of any state. Thus, a 

foreign corporation licensed to conduct 

a banking business in the United States 

and subject to taxation with respect to 

income that is, or is treated as, 

effectively connected with the conduct 

of a trade or business in the United 

States is not included in this definition. 

The proposed regulations clarify that 

the term ‘‘registered securities dealer’’ is 

limited to a 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. 

The proposed regulations also 

confirm that the operative rules that 

lower the base erosion percentage 

threshold and that increase the BEAT 

rate apply only to a taxpayer that is a 

member of an affiliated group as defined 

in section 1504(a)(1), and thus do not 

apply, for example, if the taxpayer is not 

affiliated with another includible 

corporation (within the meaning of 

section 1504(b)(1)), or if the taxpayer is 

not itself an includible corporation (for 


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example, a foreign corporation that is an 

applicable taxpayer). 

For purposes of applying the lower 

base erosion percentage threshold to 

banks and registered securities dealers, 

the proposed regulations clarify that 

because the base erosion percentage is 

determined on an aggregate group basis, 

the lower threshold applies if any 

member of the aggregate group is a 

member of an affiliated group that 

includes a bank or registered securities 

dealer. The proposed regulations 

provide a limited exception for 

members of an affiliated group that 

includes a bank or registered securities 

dealer where the bank or registered 

securities dealer activities are de 

minimis. This de minimis rule provides 

that a consolidated group, or a member 

of the aggregate group of which the 

taxpayer is a member, is not subject to 

the lower base erosion percentage 

threshold if its gross receipts 

attributable to the bank or the registered 

securities dealer are less than two 

percent of the aggregate group’s total 

gross revenue. This de minimis rule 

uses the same threshold measurement 

for exclusion from the special rule for 

banks and registered securities dealers 

(two percent) that is used as the base 

erosion percentage threshold for banks 

or registered securities dealers to 

determine whether such taxpayers are 

applicable taxpayers that are subject to 

the BEAT, with the latter test 

functioning in a manner similar to a de 

minimis threshold for the application of 

the BEAT. See Part II.C of this 

Explanation of Provisions section. The 

Treasury Department and the IRS 

welcome comments on the scope of the 

de minimis rule for banks and registered 

securities dealers. See also Part III.B.5 of 

this Explanation of Provisions section 

for a discussion of an exception to base 

erosion payment status for interest on 

TLAC securities. 

IX. Rules Relating to Insurance 

Companies 

The definition of a base erosion 

payment in section 59A(d) includes any 

premiums or other consideration paid or 

accrued by a taxpayer to a foreign 

related party for any reinsurance 

payments taken into account under 

section 803(a)(1)(B) or 832(b)(4)(A). 

Generally, section 803(a)(1) defines 

gross income for a life insurance 

company to include the gross amount of 

premiums and other consideration on 

insurance and annuity contracts less 

return premiums and premiums and 

other consideration arising out of 

indemnity reinsurance. For an 

insurance company other than a life 

insurance company, under section 

832(b), gross income generally includes 

underwriting income, which is 

comprised of premiums earned during 

the taxable year less losses incurred and 

expenses incurred. Section 832(b)(4)(A) 

provides that the amount of premiums 

earned on insurance contracts is the 

amount of gross premiums written on 

insurance contracts during the taxable 

year less return premiums and 

premiums paid for reinsurance. 

The Treasury Department and the IRS 

are aware that certain reinsurance 

agreements provide that amounts paid 

to and from a reinsurer are settled on a 

net basis or netted under the terms of 

the agreement. The Treasury 

Department and the IRS are also aware 

that other commercial agreements with 

reciprocal payments may be settled on 

a net basis or netted under the terms of 

those agreements. The proposed 

regulations do not provide a rule 

permitting netting in any of these 

circumstances because the BEAT 

statutory framework is based on 

including the gross amount of 

deductible and certain other payments 

(base erosion payments) in the BEAT’s 

expanded modified taxable income base 

without regard to reciprocal obligations 

or payments that are taken into account 

in the regular income tax base, but not 

the BEAT’s modified taxable income 

base. Generally, the amounts of income 

and deduction are determined on a 

gross basis under the Code; however, as 

discussed in Part III of this Explanation 

of Provisions section, if there are 

situations where an application of 

otherwise generally applicable tax law 

would provide that a deduction is 

computed on a net basis (because an 

item received reduces the item of 

deduction rather than increasing gross 

income), the proposed regulations do 

not change that result. The Treasury 

Department and the IRS request 

comments addressing whether a 

distinction should be made between 

reinsurance contracts entered into by an 

applicable taxpayer and a foreign 

related party that provide for settlement 

of amounts owed on a net basis and 

other commercial contracts entered into 

by an applicable taxpayer and a foreign 

related party that provide for netting of 

items payable by one party against items 

payable by the other party in 

determining that net amount to be paid 

between the parties. 

The proposed regulations also do not 

provide any specific rules for payments 

by a domestic reinsurance company to 

a foreign related insurance company. In 

the case of a domestic reinsurance 

company, claims payments for losses 

incurred and other payments are 

deductible and are thus potentially 

within the scope of section 59A(d)(1). 

See sections 803(c) and 832(c). In the 

case of an insurance company other 

than a life insurance company (non-life 

insurance company) that reinsures 

foreign risk, certain of these payments 

may also be treated as reductions in 

gross income under section 832(b)(3), 

which are not deductions and also not 

the type of reductions in gross income 

described in sections 59A(d)(3). The 

Treasury Department and the IRS 

request comments on the appropriate 

treatment of these items under 

subchapter L. The Treasury Department 

and the IRS also recognize that to the 

extent that the items are not treated as 

deductions for non-life insurance 

companies this may lead to asymmetric 

treatment for life insurance companies 

that reinsure foreign risk because part I 

of subchapter L (the rules for life 

insurance companies) refers to these 

costs only as deductions (that is, does 

not also refer to the costs as reductions 

in gross income in a manner similar to 

section 832(b)(3)). The Treasury 

Department and the IRS request 

comments on whether the regulations 

should provide that a life insurance 

company that reinsures foreign risk is 

treated in the same manner as a non-life 

insurance company that reinsures 

foreign risk. 

The proposed regulations do not 

address a foreign insurance company 

that has in effect an election to be 

treated as a domestic corporation for 

purposes of the Code. Amounts paid or 

accrued to such a company are not base 

erosion payments because the 

corporation is treated as a domestic 

corporation for purposes of the Code. 

X. Anti-Abuse and Recharacterization 

Rules 

Proposed § 1.59A–9(b) provides that 

certain transactions that have a 

principal purpose of avoiding section 

59A will be disregarded or deemed to 

result in a base erosion payment. This 

proposed anti-abuse rule addresses the 

following types of transactions: (a) 

Transactions involving intermediaries 

acting as a conduit to avoid a base 

erosion payment; (b) transactions 

entered into to increase the deductions 

taken into account in the denominator 

of the base erosion percentage; and (c) 

transactions among related parties 

entered into to avoid 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 that it be a 

member of such a group). 


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XI. Consolidated Groups as Taxpayers 

Affiliated groups of domestic 

corporations that elect to file a 

consolidated income tax return 

generally compute their income tax 

liability on a ‘‘single-entity’’ basis. 

Because the regular tax liability is 

computed on a single entity basis, the 

additional tax imposed by section 59A 

must also be imposed on the same basis 

(because it is an addition to that regular 

tax liability). Accordingly, the proposed 

regulations provide that for affiliated 

corporations electing to file a 

consolidated income tax return, the tax 

under section 59A is determined at the 

consolidated group level, rather than 

determined separately for each member 

of the group. The BEAT is an addition 

to the regular corporate income tax 

under section 11, and the regular 

corporate income tax is applied to a 

consolidated group on a consolidated 

basis. Further, application of the BEAT 

on a group level eliminates the 

differences in the aggregate amount of 

taxation to a consolidated group that 

would otherwise occur, based on the 

location of deductions, including, for 

example, the location of related party 

interest payments within the group. 

Accordingly, the BEAT is also applied 

on a consolidated basis. This single 

taxpayer treatment for members of a 

consolidated group applies separately 

from the aggregate group concept in 

proposed § 1.59A–2(c), which also treats 

all members of the aggregate group as a 

single entity, but in that case, only for 

purposes of applying the gross receipts 

test and base erosion percentage test for 

determining whether a particular 

taxpayer is an applicable taxpayer. See 

generally, Part II of this Explanation of 

Provisions section. 

To properly reflect the taxable income 

of the group, consolidated return 

regulations generally determine the tax 

treatment of items resulting from 

intercompany transactions (as defined 

in § 1.1502–13(b)(1)(i)) by treating 

members of the consolidated group as 

divisions of a single corporation (single 

entity treatment). In general, the 

existence of an intercompany 

transaction should not change the 

consolidated taxable income or 

consolidated tax liability of a 

consolidated group. Consistent with 

single entity treatment, items from 

intercompany transactions are not taken 

into account for purposes of making the 

computations under section 59A. For 

example, any increase in depreciation 

deductions resulting from intercompany 

sales of property are disregarded for 

purposes of determining the taxpayer’s 

base erosion percentage. Similarly, 

interest payments on intercompany 

obligations (as defined in § 1.1502– 

13(g)(2)(ii)) are not taken into account in 

making the computations under section 

59A. 

XII. Coordinating Consolidated Group 

Rules for Sections 59A(c)(3) and 163(j) 

Section 59A(c)(3) and proposed 

§ 1.59A–3(c)(4) coordinate the 

application of section 163(j) with the 

determination of the amount of base 

erosion tax benefits when a taxpayer has 

business interest expense paid to both 

unrelated parties and related parties. 

Those rules provide that, where section 

163(j) applies to limit the amount of a 

taxpayer’s business interest that is 

deductible in a taxable year, the 

taxpayer is required to treat all 

disallowed business interest as allocable 

first to interest paid or accrued to 

persons who are not related parties, and 

then to related parties. See Part IV.B of 

this Explanation of Provisions section. 

Proposed § 1.1502–59A provides rules 

regarding application of section 

59A(c)(3) to consolidated groups. These 

rules are required for the allocation of 

the BEMTA among members of the 

group under section 1552. In addition, 

apportionment of the domestic related 

party status and foreign related party 

status (defined later in this Part XII) of 

section 163(j) carryforwards among 

members of the group is necessary when 

a member deconsolidates from the 

group. 

The proposed regulations implement 

the classification approach of proposed 

§ 1.59A–3(c)(4) on a consolidated basis 

(the ‘‘classification rule’’), to identify 

which interest deductions are allocable 

to domestic related party payments, 

foreign related party payments, and 

unrelated party payments. Slightly 

different rules apply to the deduction of 

current year business interest expense 

than to the deduction of section 163(j) 

carryforwards. A consolidated group 

applies these rules to the amount of 

business interest expense (either from 

current year business interest expense 

or from carryforward amounts) that is 

actually deducted pursuant to section 

163(j) and proposed §§ 1.163(j)-4(d) and 

1.163(j)-5(b)(3). If the group deducts 

business interest expense paid or 

accrued in different taxable years (for 

example, both current year business 

interest expense and section 163(j) 

carryforwards), the classification rule 

applies separately to business interest 

expense incurred in each taxable year. 

For purposes of the proposed 

regulations, a member’s current year 

business interest expense 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. 

The classification rule applies on a 

single-entity basis to deductions of 

current year business interest expense. 

The consolidated group classifies its 

aggregate business interest deduction 

from current year business interest 

expense based on the aggregate current 

year business interest expense of all 

types (related or unrelated) paid by 

members of the group to nonmembers. 

Business interest deductions are treated 

as from payments or accruals to related 

parties first, and then from payments or 

accruals to unrelated parties. If there are 

payments to both foreign related parties 

and domestic related parties, the 

deductions are classified as to the 

related parties on a pro-rata basis. 

Recognizing the flexibility of relatedparty financing, these proposed 

regulations provide that, if the group 

has aggregate business interest 

deductions classified as payments or 

accruals to a domestic related party 

(domestic related party status) or foreign 

related party (foreign related party 

status), the status of such payments or 

accruals is spread among members of 

the group (the allocation rule). 

Specifically, the domestic related party 

status and foreign related party status of 

the deduction is allocated among 

members of the group in proportion to 

the amount of each member’s deduction 

of its current year business interest 

expense. Similarly, if any part of a 

section 163(j) carryforward is from a 

payment or accrual to a domestic related 

party or a foreign related party, the 

related party status of the section 163(j) 

carryforwards for the year will be 

allocated among members of the group. 

The allocation is in proportion to the 

relative amount of each member’s 

section 163(j) carryforward from that 

year. Members’ additional section 163(j) 

carryforward amounts are treated as 

payments or accruals to unrelated 

parties. The allocation rule applies 

separately to each carryforward year. 

With regard to the deduction of any 

member’s section 163(j) carryforward, 

the classification rule applies on an 

entity-by-entity basis. As discussed, 

before a member’s section 163(j) 

carryforward moves forward into 

subsequent years, it is allocated a 

domestic related party status, foreign 

related party status, or unrelated party 

status. This allocation ensures that 

business interest deductions drawn 

from any carryforward originating in the 

same consolidated return year bear the 

same ratio of domestic related, foreign 

related, and unrelated statuses. When a 


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member deducts any portion of its 

section 163(j) carryforward, the member 

applies section 59A(c)(3) and proposed 

§ 1.59A–3(c)(4) to determine the status 

of the deducted carryforward, based on 

the status previously allocated to the 

member’s section 163(j) carryforward for 

the relevant tax year. The tax liability 

imposed under section 59A on the 

consolidated group is allocated among 

the members of the consolidated group 

pursuant to the consolidated group’s tax 

allocation method, taking into account 

these allocations. See section 1552. 

If a member that is allocated a foreign 

related party status or domestic related 

party status to its section 163(j) 

carryforward deconsolidates from the 

group, the departing member’s 

carryforward retains the allocated 

status. The departing member (and not 

the original consolidated group) takes 

into account the status of that 

carryforward for purposes of computing 

the BEAT in future years. 

XIII. Consolidated Tax Liability 

In § 1.1502–2, a reference is added to 

the base erosion anti-abuse tax as a tax 

included in the computation of 

consolidated tax liability. Additionally, 

the proposed regulations make the 

following changes: (1) Remove 

paragraph (j) of this regulation section 

because section 1333, relating to war 

loss recoveries, was repealed by section 

1901(a)(145)(A) of the Tax Reform Act 

of 1976, Public Law 94–455, (2) remove 

paragraph (h) of this regulation section 

because section 1201, relating to the 

alternative tax for corporations, was 

repealed by section 13001(b)(2)(A) of 

the Act, and (3) update the cross 

reference to life insurance taxable 

income to section 801, following the 

revision of subchapter L of chapter 1 of 

the code in section 211 of the Deficit 

Reduction Act of 1984, Public Law 98– 

369. 

In addition, the proposed regulations 

also make nonsubstantive changes to 

reorganize the structure of current 

§ 1.1502–2. Specifically, the proposed 

regulations reorganize the current 

§ 1.1502–2 to properly designate the 

unnumbered paragraphs. The proposed 

regulations also update other regulation 

sections that reference § 1.1502–2. 

Finally, the proposed regulations 

correct an error in § 1.6655–5(e) 

Example 10. The proposed regulations 

replace the reference to ‘‘§ 1.1502–2(h)’’ 

with a reference to ‘‘1.1502–1(h)’’ 

because the context of Example 10 

demonstrates that the intended 

reference was to the definition of a 

consolidated group. 

XIV. Sections 382 and 383 

Section 1.383–1 provides that only 

otherwise currently allowable prechange losses and pre-change credits 

will result in the absorption of the 

section 382 limitation and the section 

383 credit limitation. The limitations 

under sections 382 and 383 are applied 

after the application of all other 

limitations contained in subtitle A of 

the Code. If the pre-change losses or prechange credits cannot be deducted or 

otherwise used, they are carried forward 

to the next taxable year. The BEAT is 

not a modification to the normal 

computation of income tax under 

Subtitle A of the Code but an addition 

to that income tax. Therefore, these 

proposed regulations clarify that 

additions to tax under section 59A do 

not affect whether a loss, deduction, or 

credit is absorbed under section 382 or 

section 383. 

XV. Reporting and Recordkeeping 

Requirements Pursuant to Section 

6038A 

Section 6038A imposes reporting and 

recordkeeping requirements on 

domestic corporations that are 25- 

percent foreign-owned. Section 6038C 

imposes the same reporting and 

recordkeeping requirements on certain 

foreign corporations engaged in a U.S. 

trade or business. These corporations 

are collectively known as ‘‘reporting 

corporations.’’ 

Reporting corporations are required to 

file an annual return on Form 5472, 

Information Return of a 25% ForeignOwned 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), 

with respect to each related party with 

which the reporting corporation has had 

any ‘‘reportable transactions.’’ See 

§ 1.6038A–2. Reporting corporations are 

also subject to specific requirements 

under sections 6038A and 6038C to 

maintain and make available the 

permanent books of account or records 

as required by section 6001 that are 

sufficient to establish the accuracy of 

the federal income tax return of the 

corporation, including information, 

documents, or records to the extent they 

may be relevant to determine the correct 

U.S. tax treatment of transactions with 

related parties. See § 1.6038A–3. 

The Act amended section 6038A by 

adding paragraph (b)(2), which 

authorizes regulations requiring 

information from a reporting 

corporation that is also a section 59A 

‘‘applicable taxpayer’’ for purposes of 

administering section 59A. Section 

6038A(b)(2) applies to taxable years 

beginning after December 31, 2017. 

These proposed regulations identify 

certain types of information that will be 

required to be reported on Form 5472 

and Form 8991, Tax on Base Erosion 

Payments of Taxpayers With 

Substantial Gross Receipts, and also 

provide the time and manner for 

reporting. While an applicable taxpayer 

that is not a reporting corporation 

would not be subject to monetary 

penalties and collateral provisions 

specific to sections 6038A and 6038C, 

the taxpayer remains subject to BEATrelated reporting obligations, including 

Form 8991, and applicable 

consequences for noncompliance. 

Under section 59A(d)(4), the status of 

a foreign shareholder as a surrogate 

foreign corporation as defined in section 

7874(a)(2)(B) or as a member of the same 

expanded affiliated group, as defined in 

section 7874(c)(1), as the surrogate 

foreign corporation can affect the 

treatment of payments from a taxpayer 

to that corporation under section 

59A(d). If the reporting corporation is an 

expatriated entity as defined in section 

7874(a)(2), the taxation of certain 

transactions between it and its foreign 

related persons as defined in section 

7874(d)(3) may be affected. 

Consequently, the proposed regulations 

require all reporting corporations to 

state whether a foreign shareholder 

required to be listed on Form 5472 is a 

surrogate foreign corporation. The form 

may provide for reporting of whether 

the shareholder is a member of an 

expanded affiliated group including the 

surrogate foreign corporation. 

In addition, to facilitate screening for 

important tax compliance concerns 

under section 59A as well as other 

provisions at the return filing stage, 

these proposed regulations clarify that 

the IRS may require by form or by form 

instructions the following information: 

(1) Reporting of particular details of the 

reporting corporation’s relationships 

with related parties in regard to which 

it is required to file a Form 5472, (2) 

reporting of transactions within certain 

categories on a more detailed basis, (3) 

reporting of the manner (such as type of 

transfer pricing method used) in which 

the reporting corporation determined 

the amount of particular reportable 

transactions and items, and (4) 

summarization of a reporting 

corporation’s reportable transactions 

and items with all foreign related parties 

on a schedule to its annual Form 5472 

filing. 

XVI. Partial Withdrawal of Proposed 

Regulations 

The proposed regulations also 

withdraw, in part, a notice of proposed 


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rulemaking. Because of statutory 

changes in section 12001 of the Act, the 

proposed regulations would not 

incorporate the substance of § 1.1502–2, 

relating to the computation of a 

consolidated group’s alternative 

minimum tax, of the notice of proposed 

rulemaking (IA–57–89) published in the 

Federal Register on December 30, 1992 

(57 FR 62251). Accordingly, the Partial 

Withdrawal of Proposed Regulations 

section in this document withdraws that 

section of the notice of proposed 

rulemaking. 

Proposed Applicability Date 

Under section 7805(b)(2), and 

consistent with the applicability date of 

section 59A, these regulations (other 

than the proposed reporting 

requirements for QDPs in proposed 

§ 1.6038A–2(b)(7)) are proposed to 

apply to taxable years beginning after 

December 31, 2017. Until finalization, a 

taxpayer may rely on these proposed 

regulations for taxable years beginning 

after December 31, 2017, provided the 

taxpayer and all related parties of the 

taxpayer (as defined in proposed 

§ 1.59A–1(b)(17)) consistently apply the 

proposed regulations for all those 

taxable years that end before the 

finalization date. 

With respect to the reporting 

requirements for QDPs, proposed 

§ 1.6038A–2(b)(7)(ix) applies to taxable 

years beginning one year after final 

regulations are published in the Federal 

Register, although simplified QDP 

reporting requirements provided in 

§ 1.6038A–2(g) are also proposed to 

apply to taxable years beginning after 

December 31, 2017. 

If any provision is finalized after June 

22, 2019, the Treasury Department and 

the IRS generally expect that such 

provision will apply only to taxable 

years ending on or after December 17, 

2018. See section 7805(b)(1)(B). 

Special Analyses 

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 

reducing costs, of harmonizing rules, 

and of promoting flexibility. The 

preliminary Executive Order 13771 

designation for this proposed rule is 

regulatory. 

The proposed regulations have been 

designated by the Office of Management 

and Budget’s (‘‘OMB’’) Office of 

Information and Regulatory Affairs 

(‘‘OIRA’’) as subject to review under 

Executive Order 12866 pursuant to the 

Memorandum of Agreement (April 11, 

2018) between the Treasury Department 

and OMB regarding review of tax 

regulations. OIRA has determined that 

the proposed rulemaking is 

economically significant under section 

1(c) of the Memorandum of Agreement 

and thereby subject to review. 

Accordingly, the proposed regulations 

have been reviewed by OMB. 

A. Overview 

The proposed regulations provide 

guidance under section 59A regarding 

the determination of the tax on 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. 

Among other benefits, this clarity helps 

ensure that all taxpayers apply section 

59A in a similar manner, which 

promotes efficiency and equity with 

respect to the provisions of the overall 

Code. 

The proposed regulations under 

sections 59A (proposed §§ 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, 

including the amount of base erosion 

payments, the amount of base erosion 

tax benefits arising from base erosion 

payments, and modified taxable income. 

The proposed regulations also provide 

guidance for banks, registered securities 

dealers, and insurance companies and 

provide guidance attributing 

partnership income and deductions 

involving partnerships to the owners of 

the partnerships (amounts paid by and 

to partnerships). These proposed 

regulations also establish anti-abuse 

rules to prevent taxpayers from taking 

measures to inappropriately avoid 

section 59A. 

The proposed regulations under 

sections 383, 1502 and 6038A (proposed 

§§ 1.383–1, 1.502–2, 1.502–59A, 

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. This 

economic analysis describes the 

economic benefits and costs of the 

proposed regulations. The Treasury 

Department and the IRS anticipate that 

any final rule will contain the analysis 

prescribed by the Memorandum of 

Agreement (April 11, 2018) between the 

Treasury Department and OMB. 

B. Economic Analysis of the Proposed 

Regulations 

1. Background 

Congress was concerned, in part, that 

foreign-owned U.S. subsidiaries are able 

to reduce their U.S. tax liability by 

making deductible payments to a 

foreign parent or foreign affiliates, 

eroding the U.S tax base if the payments 

are subject to little or no U.S. 

withholding tax. This result may favor 

foreign-headquartered companies over 

U.S. headquartered companies, creating 

a tax-driven incentive for foreign 

takeovers of U.S. firms and enhancing 

the pressure for U.S headquartered 

companies to re-domicile abroad and 

shift income to low-tax jurisdictions. 

Senate Committee on Finance, 

Explanation of the Bill, S. Rpt. 115–20, 

at 391. Section 59A was introduced, in 

part, as a minimum tax to prevent 

excessive reduction in corporate tax 

liability using deductible and certain 

other payments to foreign related 

parties. 

The Treasury Department views 

section 59A as largely self-executing, 

which means that it is binding on 

taxpayers and the IRS without any 

regulatory action. The Treasury 

Department and the IRS recognize, 

however, that section 59A, while selfexecuting, provides interpretive latitude 

for taxpayers and the IRS that could, 

without further implementation 

guidance, prompt a variety of responses. 

Consequently, many of the details 

behind the relevant terms and necessary 

calculations required for the 

computation of an applicable taxpayer’s 

BEAT liability would benefit from 

greater specificity. As is expected after 

the passage of major tax reform 

legislation, the proposed regulations 

answer unresolved questions and 

provide detail and specificity for the 

definitions and concepts described in 

section 59A, so that taxpayers can 

readily and accurately determine if they 

are applicable taxpayers and, if so, 

compute their BEMTA. For example, the 

proposed regulations define the scope of 

crucial terms such as applicable 

taxpayer, base erosion payments, base 

erosion tax benefits, de minimis 

exemptions, and modified taxable 


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income. Specific examples of where 

these proposed regulations provide 

clarification of the statute are discussed 

in this Part B of the Special Analyses 

section. 

As explained in Part VI of the 

Explanation of Provisions section, an 

applicable taxpayer computes its 

BEMTA for the taxable year to 

determine its liability under section 

59A(a). In general, the taxpayer’s 

BEMTA is equal to the excess of (1) the 

applicable tax rate for the year at issue 

multiplied by the taxpayer’s modified 

taxable income over (2) the taxpayer’s 

adjusted regular tax liability for that 

year. 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. 

In general, the proposed regulations 

interpret the statute by answering two 

important questions: (1) To which 

taxpayers does the BEAT apply, and (2) 

how do the rules apply to those 

taxpayers? 

a. Applicable Taxpayer 

In order for the BEAT to apply, a 

taxpayer must be an applicable 

taxpayer, as described in Part II of the 

Explanation of Provisions section. 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 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. As 

discussed in Part II.A of the Explanation 

of Provisions section, 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). Upon 

aggregation of domestic and foreign 

controlled groups of corporations, intraaggregate group transactions are 

eliminated. If aggregation were defined 

to include both domestic and all foreign 

persons (i.e., a ‘‘single employer’’ under 

section 52(a)), this elimination would 

include 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 aggregated 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 

BEMTA. 

A taxpayer, or the aggregate group of 

which the taxpayer is a member, 

satisfies the gross receipts test if it has 

average annual gross receipts of at least 

$500 million for the three taxable years 

ending with the preceding taxable year. 

The base erosion percentage test is 

satisfied if the taxpayer (or aggregated 

group) has a base erosion percentage of 

three percent or more. A lower two 

percent base erosion percentage applies 

for banks and registered securities 

dealers. As explained in proposed 

§ 1.52A–2(e), the base erosion 

percentage is computed by dividing (1) 

the aggregate amount of base erosion tax 

benefits by (2) the sum of the aggregate 

amount of deductions plus certain other 

base erosion tax benefits. 

The statute is ambiguous or silent on 

certain details for determining whether 

a taxpayer is an applicable taxpayer, 

including the aggregation rule described 

in Part II.A. of the Explanation of 

Provisions section. Absent these 

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 (as 

discussed in this Part B.2.b. of the 

Special Analyses section). The proposed 

regulations provide clarity by (1) 

defining the aggregate group to which 

the gross receipts and base erosion 

percentage tests apply, and (2) 

providing guidance on the definitions 

and computations necessary to apply 

those tests. 

b. BEAT Calculation 

Part III of the Explanation of 

Provisions section discusses the rules 

regarding the types of payments that are 

base erosion payments (as defined in 

proposed § 1.52A–3(b)). 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 as discussed in Part B.2.b. of 

this Special Analyses section. 

As discussed in Part III.B.3 of the 

Explanation of Provisions section, the 

proposed regulations provide an 

exception from the definition of base 

erosion payment for payments to the 

U.S. branch of a foreign person to the 

extent that payments to the foreign 

related party are treated as effectively 

connected income. In general, whether 

a 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, and whether the payment is 

deductible to the payor. See section 

59A(f). A foreign person means any 

person who is not a United States 

person. However, as discussed in Part 

III.B.3. of the Explanation of Provisions 

section, the Treasury Department and 

the IRS determined 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. 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. Proposed § 1.52A– 

3(b)(3)(iii) adopts an exception for such 

amounts. 

As described in this Part B.1. of the 

Special Analyses section, 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 Explanation of Provisions section, 

modified taxable income is not 

calculated by recomputing the tax base 

without base erosion tax benefits under 

an approach similar to the alternative 

minimum tax, which the Act repealed 


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for corporations. To do so 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. 

As discussed in Part VII of the 

Explanation of Provisions section, the 

proposed regulations apply the 

aggregate approach to base erosion 

payments involving partnerships 

because partnerships are pass-through 

entities that are not themselves subject 

to U.S. income tax, but rather the 

income of the partnership is taxed to the 

partners in the partnership. 

Accordingly, the proposed regulations 

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. For 

example, in the absence of this aggregate 

approach rule, 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 this rule, which applies 

an aggregate approach to partnerships, 

the payment by the applicable taxpayer 

(corporation) to a related foreign 

partnership is only treated as a base 

erosion payment to the extent that the 

partners in the foreign partnership are 

themselves foreign related parties. 

Conversely, also in the absence of this 

aggregate approach rule, a payment by 

an applicable taxpayer (corporation) to 

a related domestic partnership could not 

be a base erosion payment even if some 

or all of the partners in the partnership 

are foreign related parties. Under the 

aggregate approach, the payment by an 

applicable taxpayer (corporation) to a 

related domestic partnership is treated 

as a base erosion payment to the extent 

that the partners in the domestic 

partnership are foreign related parties. 

This approach is thus neutral in both 

preventing potential abuse and 

preventing potential over breadth. The 

regulations thus eliminate a distortion 

that would otherwise be present if the 

status of base erosion payments is made 

by reference to the partnership, rather 

than by reference to the partners. For 

example, in the absence of the proposed 

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 proposed 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. The Treasury 

Department requests comments on the 

approach to partnerships in the 

proposed regulations. 

c. Anti-Abuse and Reporting 

Requirements 

Section 59A(i) provides the Secretary 

authority to issue regulations and other 

guidance to prevent the avoidance of the 

purposes of section 59A. As such, 

proposed § 1.59A–9 provides rules 

recharacterizing certain specified 

transactions as necessary to prevent the 

avoidance of section 59A, and provides 

examples. 

The proposed 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 5472, 

Information Return of a 25% ForeignOwned 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. Further 

detail regarding anticipated paperwork 

burdens can be found in Part C 

(Paperwork Reduction Act) of this 

Special Analyses section, which 

includes a link to draft forms and 

guidance for providing comment on the 

proposed forms. 

2. Anticipated Benefits and Costs of the 

Proposed Regulations 

a. Baseline 

The Treasury Department and the IRS 

have assessed the impacts, benefits, and 

costs of the proposed regulations against 

a ‘‘no action’’ baseline that reflects 

projected tax-related and other behavior 

in the absence of the proposed 

regulations. 

The Treasury Department projects 

that the proposed regulations will have 

a non-revenue effect on the economy of 

at least $100 million per year ($2018) 

measured against this baseline. The 

Treasury Department requests 

comments on this conclusion. 

b. Anticipated Benefits 

The Treasury Department and IRS 

expect that the certainty and clarity 

provided by these proposed regulations, 

relative to the baseline, will enhance 

U.S. economic performance under the 

statute. Because a tax has not previously 

been imposed on base-eroding payments 

in this manner and the statute is silent 

on certain aspects of definitions and 

calculations, taxpayers can particularly 

benefit from enhanced specificity 

regarding the relevant terms and 

necessary calculations they are required 

to apply under the statute. In the 

absence of this enhanced specificity, 

similarly situated taxpayers might 

interpret the statutory rules of section 

59A differently. For example, different 

taxpayers might pursue intercompany 

investment and payment policies based 

on different assumptions about whether 

such investments and payments are base 

eroding payments subject to section 

59A, and some taxpayers may forego 

specific investments and payments that 

other taxpayers deem worthwhile based 

on different interpretations of the tax 

consequences alone. The guidance 

provided in these proposed regulations 

helps to ensure that taxpayers face more 

uniform incentives when making 

economic decisions, a tenet of economic 

efficiency. Consistent reporting across 

taxpayers also increases the IRS’s ability 

to consistently enforce the tax rules, 

thus increasing equity and decreasing 

opportunities for tax evasion. 

For example, as described in Part 

III.B.3 of the Explanation of Provisions 

section, the proposed regulations 

exclude from base erosion payments 

those payments made to a foreign 

related party that are treated as 

effectively connected income of the 

foreign payee. 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. The payments are not base 

eroding because their receipt is taxable 

by the United States. 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. 


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The Treasury Department and the IRS 

also considered the benefits and costs of 

providing the specific proposed terms, 

calculations, and other details regarding 

the BEAT. In developing these proposed 

regulations, the Treasury Department 

and the IRS have generally aimed to 

apply the principle that an 

economically efficient tax system would 

treat income derived from similar 

economic decisions similarly, to the 

extent consistent with the statute and 

considerations of administrability of the 

tax system. For example, as noted in 

Part B.1.b. of this Special Analyses 

section, section 59A(d)(5) provides an 

exception to the definition of a base 

erosion payment for certain payments 

made to foreign related parties for 

services that meet the eligibility 

requirements for use of the SCM (under 

section 482). The proposed regulations 

adopt an approach that allows an SCM 

exception for the total cost of services 

even if there is a profit markup so long 

as a transaction meets certain other 

requirements for using the SCM (under 

section 482). The proposed regulations 

provide that the portion of any payment 

that exceeds the total cost of services is 

not eligible for the SCM exception and 

is a base eroding payment. 

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 § 1.482–9(b)(5). At arm’s length, 

such services would generally 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. 

To promote the consistent application 

by taxpayers of a SCM exception to the 

BEAT, and to provide greater clarity, 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. The Treasury 

Department and IRS expect that 

approximately one-half of taxpayers 

filing Form 8991 would avail 

themselves of the SCM exception. The 

Treasury Department and the IRS 

request comments about application of 

the SCM exception. 

As discussed in Part V.A of the 

Explanation of Provisions section, the 

Treasury Department and the IRS also 

considered alternatives regarding the 

method by which modified taxable 

income could be calculated for purposes 

of the BEAT. The proposed regulations 

could have followed an add-back 

approach or an approach more similar 

to that used for the alternative minimum 

tax. As noted in Part B.1.b. of this 

Special Analyses section, the proposed 

regulations adopt the former approach, 

which is expected to be less costly for 

taxpayers to apply since 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. 

In addition, the proposed regulations 

clarify 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. In the absence 

of these clarifying definitions, taxpayers 

could calculate the BEMTA differently 

depending on their differing views of 

the base on which the BEAT should be 

calculated (i.e., aggregated group, 

consolidated group, individual 

company), leading to inequitable results 

across otherwise similar taxpayers. 

Under the proposed regulations’ 

approach for the calculation of modified 

taxable income and BEMTA, it is also 

expected to be less costly for taxpayers 

to calculate BEMTA since the statutory 

framework of section 59A applies in 

addition to the regular tax liability of a 

taxpayer. Calculation of BEAT liability 

at an aggregate level, for example, 

would require taxpayers to first 

aggregate regular taxable liabilities of 

the different taxpayers, calculate the 

BEMTA on an aggregated basis, and 

then reallocate any BEAT liability 

among the separate taxpayers. The 

approach of the proposed regulations, 

which clarify that the tax should be 

calculated on a separate taxpayer basis, 

simplifies these calculations. 

The proposed regulations also include 

de minimis thresholds for partnerships 

and for registered securities dealers. In 

general, such thresholds reduce 

compliance costs for the large number of 

small taxpayers that would fall below 

such threshold without substantially 

affecting the BEAT base. For the de 

minimis exception for banks and 

registered securities dealers, in the 

absence of an exception, affiliated 

groups that are not principally engaged 

in banking or securities dealing would 

be incentivized to alter their business 

structure to eliminate minimal banks or 

registered securities dealers from their 

aggregate groups. These changes would 

give rise to tax-motivated, inefficient 

restructuring costs. A de minimis 

threshold reduces this potential 

inefficiency again without substantially 

affecting the BEAT base. In both cases, 

the thresholds were chosen to balance 

these competing concerns and to adhere 

to generally similar standards elsewhere 

in the Code. The Treasury Department 

and IRS request comment on the impact 

of this approach. 

3. Anticipated Impacts on 

Administrative and Compliance Costs 

Because the statute requires payment 

of tax regardless of the issuance of 

regulations or instructions, the new 

forms, revisions to existing forms, and 

other proposed regulations can lower 

the burden on taxpayers of determining 

their tax liability. The Treasury 

Department and the IRS expect that the 

proposed regulations will reduce the 

costs for taxpayers to comply with the 


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Act, on balance, relative to the baseline 

of no promulgated regulations. 

Certain record-keeping requirements 

added by the proposed regulations 

derive directly from statutory changes 

that require information from a 

reporting corporation that is also a 

section 59A applicable taxpayer. 

Proposed § 1.6038A–2 increases recordkeeping requirements for taxpayers 

because additional information is to be 

reported on Form 5472 and Form 8991. 

Proposed § 1.59A–3(b)(3) also 

increases record-keeping requirements 

for taxpayers because additional 

information is required for taxpayers to 

satisfy a regulatory requirement of the 

SCM exception. The requirement added 

by these proposed regulations is 

consistent with the requirements for 

eligibility for the services cost method 

under section 482, including the 

existing requirements of § 1.482–9(b). 

C. Paperwork Reduction Act 

1. Collections of Information—Forms 

8991, 5471, 5472, and 8858 

The collections of information in 

these proposed regulations with respect 

to section 59A are in proposed §§ 1.59– 

3(b)(3) and 1.6038A–2. The information 

collection requirements pursuant to 

proposed § 1.59A–3(b)(3)(i)(C) are 

discussed further below. The IRS 

intends that the collections of 

information pursuant to section 59A, 

except with respect to information 

collected under proposed § 1.59A– 

3(b)(3), 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% ForeignOwned 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 proposed 

§ 1.59A–3(b)(3), 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 proposed 

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 TCJA. No burden 

estimates specific to the proposed 

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 proposed 

regulations. Those estimates would 

capture both changes made by the Act 

and those that arise out of discretionary 

authority exercised in the proposed 

regulations. The Treasury Department 

and the IRS request comment on all 

aspects of information collection 

burdens related to the proposed 

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 FRN on 10/8/18. Public Comment period 

closes on 12/10/18. 

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-requestfor-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 FRN not published yet for full collection. 

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031. 

Form 5472 (including Part VIII) Business (NEW Model) .......... 1545–0123 Published in the FRN on 10/11/18. Public Comment period

closes on 12/10/18. 

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-requestfor-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd. 

Form 8858 ............................... All other Filers (mainly trusts 

and estates) (Legacy system).

1545–1910 Published in the FRN on 10/30/18. Public Comment period 

closes 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-activitiessubmission-for-omb-review-comment-request-multiple-irs. 

Business (NEW Model) .......... 1545–0123 Published in the FRN on 10/8/18. Public Comment period 

closes on 12/10/18. 


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Form Type of filer OMB No.(s) Status 

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-requestfor-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 FRN not published yet for full collection. 

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031. 

Form 8991 ............................... Business (NEW Model) .......... 1545–0123 Published in the FRN on 10/11/18. Public Comment period 

closes on 12/10/18. 

Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-requestfor-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd. 

RELATED NEW OR REVISED TAX FORMS

New Revision of 

existing form 

Number of 

respondents 

(2018, 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. 

2. Collection of Information—Proposed 

§ 1.59A–3(b)(3) 

In contrast to the collections of 

information pursuant to other 

provisions of section 59A (as discussed 

above), the IRS intends that the 

information collection requirements 

pursuant to proposed § 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 

contained in proposed § 1.59A–3(b)(3) 

has been submitted to the Office of 

Management and Budget for review in 

accordance with the Paperwork 

Reduction Act of 1994 (44 U.S.C. 

3507(d)). Comments on the collection of 

information should be sent to the Office 

of Management and Budget, Attn: Desk 

Officer for the Department of the 

Treasury, Office of Information and 

Regulatory Affairs, Washington, DC 

20503, with copies to the Internal 

Revenue Service, Attn: IRS Reports 

Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. Comments on the collection of 

information should be received by 

February 19, 2019. 

Comments are specifically requested 

concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the duties of the IRS, 

including whether the information will 

have practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information (including underlying 

assumptions and methodology); 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collection of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchases of services to provide 

information. 

The collection of information in 

proposed § 1.59A–3(b)(3) 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’’, as discussed this Part B.2.b. 

of the Special Analyses section). 

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, 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 × 2000/3, 

converted to millions). 


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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. 

D. 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). Accordingly, a regulatory 

flexibility analysis is not required. 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. 

Notwithstanding this certification, the 

Treasury Department and the IRS invite 

comments from the public about the 

impact of this proposed rule on small 

entities. 

Pursuant to section 7805(f), these 

regulations will be submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on their impact on small business. 

E. 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 2018, that 

threshold is approximately $150 

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. 

F. 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 

proposed 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. 

Comments and Request for Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ‘‘Addresses’’ heading. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed rules. 

All comments will be available at 

www.regulations.gov or upon request. A 

public hearing will be scheduled if 

requested in writing by any person that 

timely submits written comments. If a 

public hearing is scheduled, notice of 

the date, time, and place for the public 

hearing will be published in the Federal 

Register. 

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. 

Drafting Information 

The principal authors of the proposed 

regulations are Sheila Ramaswamy and 

Karen Walny of the Office of Associate 

Chief Counsel (International) and Julie 

Wang and John P. Stemwedel of the 

Office of Associate Chief Counsel 

(Corporate). However, other personnel 

from the Treasury Department and the 

IRS participated in their development. 

Partial Withdrawal of Proposed 

Regulations 

Accordingly, under the authority of 

26 U.S.C. 7805 and 26 U.S.C. 1502, 

§ 1.1502–2 of the notice of proposed 

rulemaking (IA–57–89) published in the 

Federal Register on December 30, 1992 

(57 FR 62251) is withdrawn. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by revising the 

entry for § 1.6038A–2 and adding 

entries for §§ 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, 1.1502–100, 1.6038A–2, and 

1.6038A–2(a)(3) and (b)(7) to read in 

part as follows: 

Authority: 26 U.S.C. 7805 * * * 

* * * * * 

§ 1.59A–1 also issued under 26 U.S.C. 

59A(i). 

§ 1.59A–2 also issued under 26 U.S.C. 

59A(i). 

§ 1.59A–3 also issued under 26 U.S.C. 

59A(i). 

§ 1.59A–4 also issued under 26 U.S.C. 

59A(i). 

§ 1.59A–5 also issued under 26 U.S.C. 

59A(i). 

§ 1.59A–6 also issued under 26 U.S.C. 

59A(i). 

§ 1.59A–7 also issued under 26 U.S.C. 

59A(i). 

§ 1.59A–8 also issued under 26 U.S.C. 

59A(i). 

§ 1.59A–9 also issued under 26 U.S.C. 

59A(i). 

§ 1.59A–10 also issued under 26 U.S.C. 

59A(i). 

* * * * * 

§ 1.1502–59A also issued under 26 U.S.C. 

1502. 

* * * * * 

§ 1.1502–100 also issued under 26 U.S.C. 

1502. 

* * * * * 

§ 1.6038A–2 also issued under 26 U.S.C. 

6001, 6038A, and 6038C. 

§§ 1.6038A–2(a)(3) and (b)(7) also issued 

under 26 U.S.C. 6038A(b)(2). 

* * * * * 

■ Par. 2. Sections 1.59A–1 through 

1.59A–10 are added to read as follows: 

§ 1.59A–1 Base erosion and anti-abuse 

tax. 

(a) Purpose. This section and 

§§ 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 


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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 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 an anti-abuse rule to prevent 

avoidance of section 59A. Finally, 

§ 1.59A–10 provides the applicability 

date for the section 59A regulations. 

(b) Definitions. For purposes of this 

section and §§ 1.59A–2 through 1.59A– 

10, the following terms have the 

meanings described 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 

regulations published under 26 CFR 

chapter I. Notwithstanding the 

foregoing, if a foreign corporation 

determines its net taxable income under 

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 

§ 1.59A–2(b). 

(4) Bank. The term bank means an 

entity defined in section 581. 

(5) Base erosion and anti-abuse tax 

rate. The term base erosion and antiabuse 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 § 1.59A–5(c) for the base 

erosion and anti-abuse tax rate 

applicable to 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 § 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 § 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 

§ 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 § 1.59A– 

3(b)(4)(v)(B), a foreign related party also 

includes the foreign corporation’s home 

office or a foreign branch of the foreign 

corporation. See § 1.59A–7(c) for rules 

applicable to partnerships. 

(13) Gross receipts. The term gross 

receipts has the meaning provided in 

§ 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 § 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 § 1.1275– 

1(b)) of all TLAC securities issued and 

outstanding by the taxpayer. 

(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. 

§ 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 


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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 calculation. 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. 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 as of the end of the 

taxpayer’s taxable year. 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 corporation that 

is a member of an aggregate group, only 

transactions 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 disregarded for this purpose. 

In the case of a foreign corporation that 

is a member of an aggregate group and 

that determines its net taxable income 

under an applicable income tax treaty of 

the United States, only transactions that 

are taken into account in determining its 

net taxable income are disregarded for 

this purpose. 

(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 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) Period for measuring gross receipts 

for an aggregate group—(i) Calendar 

year taxpayers that are members of an 

aggregate group. In the case of a 

corporation that has a calendar year and 

that is a member of an aggregate group, 

the corporation applies the gross 

receipts test in paragraph (d)(1) of this 

section on the basis of the gross receipts 

of the aggregate group for the threecalendar-year period ending with the 

preceding calendar year, without regard 

to the taxable year of any other member 

of the aggregate group. 

(ii) Fiscal year taxpayers that are 

members of an aggregate group. In the 

case of a corporation that has a fiscal 

year and that is a member of an 

aggregate group, the corporation applies 

the gross receipts test in paragraph 

(d)(1) of this section on the basis of the 

gross receipts of the aggregate group for 

the three-fiscal-year period ending with 

the preceding fiscal year of the 

corporation, without regard to the 

taxable year of any other member of the 

aggregate group. 

(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 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 

determines its net taxable income under 

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. 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, but are not reduced by any 

reinsurance premiums paid or accrued. 

(5) Gross receipts from partnerships. 

See § 1.59A–7(b)(5)(ii). 

(6) Taxpayer not in existence for 

entire three-year period. If a taxpayer 

was not in existence for the entire threeyear 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, 

taking into account paragraph (d)(7) of 

this section. 

(7) Treatment of short taxable year. If 

a taxpayer has a taxable year of fewer 

than 12 months (a short period), gross 

receipts are annualized by multiplying 

the gross receipts for the short period by 

365 and dividing the result by the 

number of days in the short period. 

(8) Treatment of predecessors. For 

purposes of determining gross receipts 

under this paragraph (d), any reference 

to a taxpayer includes a reference to any 

predecessor of the taxpayer. For this 

purpose, a predecessor includes the 

distributor or transferor corporation in a 

transaction described in section 381(a) 

in which the taxpayer is the acquiring 

corporation. 

(9) Reductions in gross receipts. Gross 

receipts for any taxable year are reduced 

by returns and allowances made during 

that taxable year. 

(10) Gross receipts of consolidated 

groups. For purposes of section 59A, the 

gross receipts of a consolidated group 

are determined by aggregating the gross 

receipts of all of the members of the 

consolidated group. See § 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 § 1.59A– 

1(b)(4)) or a registered securities dealer 

(as defined in section § 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)) will be 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, in that taxable year, 

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, 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, in that 

taxable year, the total gross receipts of 

the consolidated group attributable to 

the bank or the registered securities 

dealer represent less than two percent of 

the total gross receipts of the 

consolidated group, as determined 

under paragraph (d) of this section. 


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(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 § 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 

§ 1.59A–3(c)(1)(i) and base erosion tax 

benefits described in § 1.59A–3(c)(1)(ii)) 

allowable to the taxpayer (or in the case 

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 § 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 § 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 § 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 

§ 1.59A–3(b)(3)(ii); 

(D) Any exchange loss within the 

meaning of § 1.988–2 from a section 988 

transaction as described in § 1.988– 

1(a)(1); 

(E) Any deduction for amounts paid 

or accrued to foreign related parties 

with respect to TLAC securities that are 

not treated as base erosion payments by 

reason of § 1.59A–3(b)(3)(v); and 

(F) Any deduction not allowed in 

determining taxable income from the 

taxable year. 

(iii) Effect of treaties on base erosion 

percentage determination. In computing 

the base erosion percentage, the amount 

of the base erosion tax benefit with 

respect to a base erosion payment on 

which tax is imposed by section 871 or 

881 and with respect to which tax has 

been deducted and withheld under 

section 1441 or 1442 is equal to the 

gross amount of the base erosion tax 

benefit before the application of the 

applicable treaty multiplied by a 

fraction equal to— 

(A) The rate of tax imposed without 

regard to the treaty, reduced by the rate 

of tax imposed under the treaty; over 

(B) The rate of tax imposed without 

regard to the treaty. 

(iv) Amounts paid or accrued between 

members of a consolidated group. See 

§ 1.1502–59A(b). 

(v) Deductions and base erosion tax 

benefits from partnerships. See § 1.59A– 

7(b). 

(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 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-tomarket 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 § 1.59A– 

3(b)(2)(iii) for the application of this 

rule for purposes of determining the 

amount of base erosion payments. 

(vii) Computing the base erosion 

percentage when members of an 

aggregate group have different taxable 

years—(A) Calendar year taxpayers that 

are members of an aggregate group. In 

the case of a taxpayer that has a 

calendar year and that is a member of 

an aggregate group, the taxpayer applies 

the base erosion percentage in 

paragraph (e)(1) or (2) of this section 

(and determines the base erosion 

percentage used in § 1.59A–4(b)(2)(ii)) 

on the basis of the base erosion 

percentage for the calendar year in the 

manner set forth in paragraph (e)(3) of 

this section, without regard to the 

taxable year of any other member of the 

aggregate group. See paragraph (f)(2) of 

this section (Example 2) for an 

illustration of this rule. For purposes of 

applying paragraph (e)(3)(vi) of this 

section, all members of the aggregate 

group are treated as having a calendar 

year. 

(B) Fiscal year taxpayers that are 

members of an aggregate group. In the 

case of a taxpayer that has a fiscal year 

and that is a member of an aggregate 

group, the taxpayer applies the base 

erosion percentage test in paragraph 

(e)(1) or (2) of this section (and 

determines the base erosion percentage 

used in § 1.59A–4(b)(2)(ii)) on the basis 

of the base erosion percentage for its 

fiscal year in the manner set forth in 

paragraph (e)(3) of this section, without 

regard to the taxable year of any other 

member of the aggregate group. See 

paragraph (f)(2) of this section (Example 

2) for an illustration of this rule. For 

purposes of applying paragraph 

(e)(3)(vi) of this section, all members of 

the aggregate group are treated as having 

the taxpayer’s fiscal year. 

(C) Transition rule for aggregate group 

members with different taxable years. 

For purposes of this paragraph 

(e)(3)(vii), if the taxpayer has a different 

taxable year than another member of the 

taxpayer’s aggregate group, each 

taxpayer that is a member of the 

aggregate group determines the 

availability of the exception in § 1.59A– 

3(b)(3)(vi) (amounts paid or accrued in 

taxable years beginning before January 

1, 2018) by using the taxpayer’s taxable 

year for all members of the taxpayer’s 

aggregate group. 

(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 § 1.59A–3(b)(3)(iii) and 

either the service cost method exception 

described in § 1.59A–3(b)(3)(i), the 

qualified derivative payment exception 

described in § 1.59A–3(b)(3)(ii), or the 

TLAC exception described in § 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. 


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(f) Examples. The following examples 

illustrate the rules of this section. 

(1) Example 1: Mark-to-market. (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 § 1.59A–1(b)(12) 

but not members of the aggregate group. 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 federal income tax purposes. DC is a 

calendar year taxpayer. 

(B) For position A in year 1, DC makes a 

payment of $150 on June 30, and receives a 

payment of $50 on December 31. There are 

no other payments in year 1. On December 

31, position A has a value to DC of $110 (that 

is, position A is in-the-money by $110). 

(C) For position B in year 1, DC receives 

a payment of $120 on June 30, and makes a 

payment of $30 on December 31. There are 

no other payments in year 1. On December 

31, position B has a value to DC of ($130) 

(that is, position B is out-of-the-money by 

$130). 

(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 $100. In addition, DC has a 

mark-to-market gain of $110. As described in 

paragraph (e)(3)(vi) of this section, the markto-market gain of $110 is combined with the 

net deduction of $100 resulting from the 

payments. Therefore, with respect to position 

A, DC has a gain of $10, 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 $90. In 

addition, DC has a mark-to-market loss of 

$130. As described in paragraph (e)(3)(vi) of 

this section, the mark-to-market loss of $130 

is combined with the net income of $90 

resulting from the payments. Therefore, with 

respect to position B, DC has a loss of $40, 

and thus has a $40 deduction in year 1 for 

purposes of section 59A. 

(2) Example 2: Determining gross receipts 

test and base erosion percentage when 

aggregate group members have different 

taxable years. (i) Facts. Foreign Parent (FP) 

is a foreign corporation that owns all of the 

stock of a domestic corporation that uses a 

calendar year (DC1) and a domestic 

corporation that uses a fiscal year ending on 

January 31 (DC2). FP does not have income 

effectively connected with the conduct of a 

trade or business within the United States. 

DC2 is a member of DC1’s aggregate group, 

and DC1 is a member of DC2’s aggregate 

group. 

(ii) Analysis. (A) For DC1’s tax return filed 

for the calendar year ending December 31, 

2026, DC1 determines its gross receipts based 

on gross receipts of DC1 and DC2 for the 

calendar years ending December 31, 2023, 

December 31, 2024, and December 31, 2025. 

Further, DC1 determines its base erosion 

percentage for the calendar year ending 

December 31, 2026, on the basis of 

transactions of DC1 and DC2 for the calendar 

year ending December 31, 2026. 

(B) For DC2’s tax return filed for the fiscal 

year ending January 31, 2027, DC2 

determines its gross receipts based on gross 

receipts of DC2 and DC1 for the fiscal years 

ending January 31, 2024, January 31, 2025, 

and January 31, 2026. Further, DC2 

determines its base erosion percentage for the 

fiscal year ending January 31, 2027, on the 

basis of transactions of DC2 and DC1 for the 

fiscal year ending January 31, 2027. 

§ 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 

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) 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, or the assumption of a 

liability. 

(ii) Transactions providing for net 

payments. Except as otherwise provided 

in paragraph (b)(2)(iii) 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. 

(iii) 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 federal income 

tax purposes, the rules set forth in 

§ 1.59A–2(e)(3)(vi) apply to determine 

the amount of base erosion payment. 

(iv) 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. 

(v) Certain domestic passthrough 

entities—(A) In general. If an applicable 

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 applicable taxpayer will be treated 

as making a base erosion payment to 

each specified foreign related party for 

purposes of section 59A and §§ 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 applicable taxpayer to 

or for the benefit of the specified 


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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)(v), 

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 § 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 § 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)(v), 

specified foreign related party means, 

with respect to a specified domestic 

passthrough, any foreign related party of 

an applicable taxpayer that is a direct or 

indirect beneficiary or shareholder of 

the specified domestic passthrough. 

(vi) 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, any deduction for 

depreciation (or amortization in lieu of 

deprecation) 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. 

(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 (vii) 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 

§ 1.482–9(l)(2) performed by a foreign 

related party (the renderer) that 

provides a benefit as defined in § 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 § 1.482–9(b) must be 

satisfied, except that: 

(1) The requirements of § 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 § 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 § 1.482–9(k). 

(D) Total services cost. For purposes 

of this section, total services cost has the 

same meaning as total services costs in 

§ 1.482–9(j). 

(ii) Qualified derivative payments. 

Any qualified derivative payment as 

described in § 1.59A–6. 

(iii) Effectively connected income— 

(A) In general. Amounts paid or accrued 

to a foreign related party that are subject 

to 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. This 

paragraph (b)(3)(iii) 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. Notwithstanding paragraph 

(b)(3)(iii)(A) of this section, if a foreign 

related party determines its net taxable 

income under an applicable income tax 

treaty, amounts paid or accrued to the 

foreign related party taken into account 

in determining its net taxable income. 

(iv) Exchange loss on a section 988 

transaction. Any exchange loss within 

the meaning of § 1.988–2 from a section 

988 transaction described in § 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 of the taxpayer. 

(v) Amounts paid or accrued with 

respect to TLAC securities—(A) In 

general. Except as provided in 

paragraph (b)(3)(v)(B) of this section, 

amounts paid or accrued to foreign 

related parties with respect to 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 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 amounts 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. 

(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. 


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(4) Rules for determining the amount 

of certain base erosion payments. The 

following rules apply in determining the 

deductible amount that is a base erosion 

payment. 

(i) Interest expense allocable to a 

foreign corporation’s effectively 

connected income—(A) Method 

described in § 1.882–5(b) through (d). 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 

§ 1.882–5(b) through (d) 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 § 1.882–5(a)(1)(ii)(A) or (B) 

(direct allocations) or interest expense 

on U.S.-booked liabilities, as described 

in § 1.882–5(d)(2), that is paid or 

accrued by the foreign corporation to a 

foreign related party; and 

(2) The interest expense on U.S.- 

connected liabilities in excess of U.S.- 

booked liabilities (hereafter, excess U.S.- 

connected liabilities), as described in 

§ 1.882–5(d)(5), multiplied by a fraction, 

the numerator of which is the foreign 

corporation’s average worldwide 

liabilities due to a foreign related party, 

and the denominator of which is the 

foreign corporation’s average total 

worldwide liabilities. For purposes of 

this fraction, any liability that is a U.S.- 

booked liability or is subject to a direct 

allocation is excluded from both the 

numerator and the denominator of the 

fraction. 

(B) Separate currency pools method. 

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 separate currency 

pools method described in § 1.882–5(e) 

has a base erosion payment 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 § 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; and 

(2) The interest expense attributable 

to each currency pool, as described in 

§ 1.882–5(e)(1)(iii), multiplied by a 

fraction equal to the foreign 

corporation’s average worldwide 

liabilities denominated in that currency 

and that is due to a foreign related party 

over the foreign corporation’s average 

total worldwide liabilities denominated 

in that currency. For purposes of this 

fraction, any liability that has a direct 

allocation is excluded from both the 

numerator and the denominator. 

(C) U.S.-booked liabilities in excess of 

U.S.-connected liabilities. A foreign 

corporation that is computing its 

interest expense under the method 

described in § 1.882–5(b) through (d) 

and that has U.S.-booked liabilities in 

excess of U.S.-connected liabilities must 

apply the scaling ratio pro-rata to all 

interest expense consistent with 

§ 1.882–5(d)(4) for purposes of 

determining the amount of allocable 

interest expense that is a base erosion 

payment. 

(D) Liability reduction election. A 

foreign corporation that elects to reduce 

its liabilities under § 1.884–1(e)(3) must 

reduce its liabilities on a pro-rata basis, 

consistent with the requirements under 

§ 1.884–1(e)(3)(iii), for purposes of 

determining the amount of allocable 

interest expense that is a base erosion 

payment. 

(ii) Other deductions allowed with 

respect to effectively connected income. 

A deduction allowed under § 1.882–4 

for an amount paid or accrued by the 

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 treated as a base 

erosion payment under paragraph (b)(1) 

of this section. 

(iii) Depreciable property. Any 

amount paid or accrued by the 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 this paragraph (b)(4), 

amounts paid or accrued to a foreign 

related party treated as effectively 

connected income (or, in the case of 

foreign related party that determines net 

taxable income under an applicable 

income tax treaty, such amounts that are 

taken into account in determining net 

taxable income) are not treated as paid 

to a foreign related party. Additionally, 

for purposes of paragraph (b)(4)(i)(A)(2) 

or (b)(4)(i)(B)(2) of this section, a 

liability with interest paid or accrued to 

a foreign related party that is treated as 

effectively connected income (or, in the 

case of foreign related party that 

determines net taxable income under an 

applicable income tax treaty, interest 

taken into account in determining net 

taxable income) is treated as a liability 

not due to a foreign related party. 

(v) Coordination with certain tax 

treaties—(A) Allocable expenses. 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 §§ 1.882–5 

and 1.861–8 to allocate interest and 

other deductions, then in applying 

paragraphs (b)(4)(i) and (ii) of this 

section, the foreign corporation must 

determine whether each allowable 

deduction attributed to the permanent 

establishment in its determination of 

business profits is a base erosion 

payment under paragraph (b)(1) of this 

section. 

(B) Internal dealings under certain 

income tax treaties. 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 such 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 

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 


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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 

insurance, 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) Withholding tax exception to base 

erosion tax benefit. 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. 

(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 without 

regard to the treaty, reduced by 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 

that is subject to the exception for 

effectively connected income. 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. 

(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 

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 § 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 

§ 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 § 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 § 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 


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partner in a partnership is allocated 

excess business interest expense from a 

partnership under the rules set forth in 

§ 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 yearby-year basis. Corresponding 

adjustments to the classification of 

disallowed business interest expense 

carryforwards are made consistent with 

this year-by-year and partnership-bypartnership 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 § 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, 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 § 1.59A– 

2 for the application of the aggregation rule 

with respect to DC and FP’s USTB. 

(2) Example 2: Interest allocable under 

§ 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 §§ 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 total liabilities (that are not 

U.S.-booked liabilities) of $10,000x and of 

that number $2000x are liabilities held by 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 § 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)(1) of 

this section. Additionally, $5x of the $25x of 

interest on excess U.S.-connected liabilities 

is treated as a base erosion payment under 

paragraph (b)(4)(i)(A)(2) of this section ($25x 

* ($2000x/$10,000x)). 

(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. 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 only permitted to 

deduct $300x of business interest expense 

under section 163(j)(1) ($1000x × 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 

taxable year for purposes of § 1.59A– 

4(b)(2)(i). 

(B) Ordering rules for 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 interest carryforward is 

correspondingly treated first as unrelated 

business interest expense, and second prorata as foreign related business interest 

expense and domestic related business 

interest expense. As a result, $420x of the 

$480x business interest expense carryforward 

is treated first as business interest expense 

paid to Bank and the remaining $60x of the 

$480x 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 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 × 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 


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modified taxable income for the Year 2 

taxable year for purposes of § 1.59A– 

4(b)(2)(i). 

(B) Ordering rules for business interest 

expense carryforward. The disallowed 

business interest expense carryforward of 

$20x from Year 2 is correspondingly treated 

first as interest 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 × 

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 

§ 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 § 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 § 1.59A–1(b)(17). 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 × 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 § 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 

§ 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 § 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 

(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)(vi) 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. 

§ 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 § 1.59A–3(c)(1). 

(ii) Certain net operating loss 

deductions. The base erosion 

percentage, as described in § 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 


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paragraph (b)(1) of this section, the 

limitation in section 860E(a)(1) is not 

taken into account for 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. 

§ 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 antiabuse tax rate applicable to the taxable 

year. 

(b) In general. With respect to any 

applicable taxpayer, the base erosion 

minimum tax amount for any taxable 

year is, the excess (if any) of— 

(1) 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 

(2) An amount equal to the regular tax 

liability as defined in § 1.59A–1(b)(16) 

of the taxpayer for the taxable year, 

reduced (but not below zero) by the 

excess (if any) of— 

(i) The credits allowed under chapter 

1 of subtitle A of the Code against 

regular tax liability over 

(ii) 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) 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 and 37. 

(ii) Taxable years beginning after 

December 31, 2025. For any taxable year 

beginning after December 31, 2025, any 

credits allowed under sections 33 and 

37. 

(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 antiabuse 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 

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. 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. 

(3) Application of section 15. Section 

15 does not apply to any taxable year 

that includes January 1, 2018. See 

§ 1.15–1(d). For a taxpayer using a 

taxable year other than the calendar 

year, section 15 applies to any taxable 

year beginning after January 1, 2018. 

§ 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 an 

example 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 reports the 

information required in § 1.6038A– 

2(b)(7)(ix) for the taxable year. 

(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 will not be eligible for the 

qualified derivative payment exception 

described in § 1.59A–3(b)(3)(ii). 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. 

(3) Amount of any qualified derivative 

payment. The amount of any qualified 

derivative payment excluded from the 

denominator of the base erosion 

percentage as provided in § 1.59A– 

2(e)(3)(ii)(C) is determined as provided 

in § 1.59A–2(e)(3)(vi). 

(c) Exceptions for payments otherwise 

treated as base erosion payments. A 


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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 salerepurchase transactions. A derivative 

contract does not include any securities 

lending transaction, sale-repurchase 

transaction, or substantially similar 

transaction. Securities lending 

transaction and sale-repurchase 

transaction have the same meaning as 

provided in § 1.861–2(a)(7). 

(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) Example. The following example 

illustrates the rules of this section. 

(1) 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 $50 million. 

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 § 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 § 1.6038A–2(b)(7)(ix). 

(2) 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 § 1.59A–3(b)(3)(ii), the 

payments to FP are not base erosion 

payments. 

§ 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 

section 59A. Paragraph (b) of this 

section provides the general application 

of an aggregate approach to partnerships 

for purposes of section 59A, including 

specific rules addressing the application 

of section 59A to amounts paid or 

accrued by a partnership to a related 

party, rules addressing the application 

of section 59A to amounts paid or 

accrued to a partnership from a related 

party, and other operating rules. 

Paragraph (c) of this section provides 

rules for determining whether a party is 

a foreign related party. 

(b) Application of section 59A to a 

partnership—(1) In general. Except as 

otherwise provided in this section, 

section 59A is applied at the partner 

level in the manner described in this 

section. The provisions of section 59A 

must be interpreted in a manner 

consistent with this approach. 

(2) Payment made by a partnership. 

Except as provided in paragraph (b)(4) 

of this section, for purposes of 

determining whether a payment or 

accrual by a partnership is a base 

erosion payment, 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). 

(3) Payment received by a 

partnership. For purposes of 

determining whether a payment or 

accrual to a partnership is a base erosion 

payment of the payor, any amount paid 

or accrued to a partnership is treated as 

paid or accrued to each partner based on 

the partner’s distributive share of the 

income or gain with respect to that 

amount (as determined under section 

704). 

(4) Exception for base erosion tax 

benefits of certain partners—(i) In 

general. For purposes of determining a 

partner’s amount of base erosion tax 

benefits, a partner does not take into 

account its distributive share of any 

partnership amount of base erosion tax 

benefits 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 (b)(4)(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). 

(5) Other relevant items—(i) In 

general. For purposes of section 59A, 

subject to paragraph (b)(4) of this 

section, 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. For items that are allocated 

to the partners, the partner is treated as 

owning its distributive share (including 

of deductions and base erosion tax 


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benefits). For items that are not 

allocated to the partners, the partner is 

treated as owning an interest 

proportionate with the partner’s 

distributive share of partnership 

income. 

(ii) Gross receipts—(A) 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 section 704) of items 

of gross income that were taken into 

account by the partnership under 

section 703. 

(B) Foreign corporation. A foreign 

corporation takes into account a share of 

gross receipts only with regard to 

receipts that produce income that is 

effectively connected with the conduct 

of a trade or business within the United 

States. In the case of a foreign 

corporation that determines its net 

taxable income under an applicable 

income tax treaty, the foreign 

corporation takes into account its share 

of gross receipts only with regard to 

such gross receipts that are taken into 

account in determining its net taxable 

income. 

(iii) 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 

(b)(4) of this section. For purposes of 

applying the de minimis exception in 

§ 1.59A–2(e)(2)(iii), the partner takes 

into account its distributive share of the 

relevant partnership items. 

(iv) Application of sections 163(j) and 

59A(c)(3) to partners of partnerships. 

See § 1.59A–3(c)(4). 

(6) Tiered partnerships. If the partner 

of a partnership is a partnership, then 

paragraphs (b) and (c) of this section are 

applied again at the level of the partner, 

applying this paragraph successively 

until the partner is not a partnership. 

Paragraph (b)(4) of this section is only 

applied at the level where the partner is 

not itself a partnership. 

(c) 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. 

§ 1.59A–8 Application of base erosion and 

anti-abuse tax to certain expatriated 

entities. [Reserved] 

§ 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 antiabuse 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 

§ 1.59A–2(e)(3)(i)(B) (the denominator of 

the base erosion percentage 

computation) is disregarded for 

purposes of § 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 § 1.59A–2(e)(2) 

(base erosion percentage test for banks 

and registered securities dealers) or 

§ 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 § 1.59A– 

2(e)(2) or § 1.59A–5(c)(2). 

(c) Examples. The following examples 

illustrate the application of paragraph 

(b) of this section. For purposes of all of 

the examples, assume that FP, a foreign 

corporation, owns all the stock of DC, a 

domestic corporation and an applicable 

taxpayer and that none of the foreign 

corporations are subject to federal 

income taxation with respect 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 regulations 

thereunder. Also assume that all 

payments occur in a taxable year 

beginning after December 31, 2017. 

(1) 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 person, 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. 

(2) Example 2: Alternative transaction to 

base erosion payment. (i) Facts. The facts are 

the same as in paragraph (c)(1)(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. 

(3) 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 § 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. 

(4) Example 4: Alternative financing source 

that is a conduit. (i) Facts. The facts are the 

same as in paragraph (c)(3)(i) of this section 

(the facts in Example 3) except that in 


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addition, with a principal purpose of 

avoiding a base erosion payment, and as part 

of the same plan or arrangement as the Note 

B transaction, 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 person, 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. 

(5) Example 5: 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 § 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 and the transactions between 

DC and Financial Institution 1 and DC and 

Financial Institution 2. These transactions 

are not taken into account for purposes of 

§ 1.59A–2(e)(3)(i)(B) because the transactions 

have a principal purpose of increasing the 

deductions taken into account for purposes 

of § 1.59A–2(e)(3)(i)(B). 

§ 1.59A–10 Applicability date. 

Sections 1.59A–1 through 1.59A–9 

apply to taxable years beginning after 

December 31, 2017. 

■ Par. 3. Section 1.383–1 is amended by 

adding two sentences at the end of 

paragraph (d)(3)(i) to read as follows: 

§ 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 prechange 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. 

* * * * * 

■ Par. 4. Section 1.1502–2 is revised to 

read as follows: 

§ 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 

§ 1.1502–43); 

(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) (except for paragraph 

(a)(9) of this section) of this section: the 

general business credit under section 38 

(see § 1.1502–3), the foreign tax credit 

under section 27 (see § 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—(1) Except as 

provided in paragraph (d)(2) of this 

section, this section applies to any 

consolidated return year for which the 

due date of the income tax return 

(without regard to extensions) is on or 

after the date of publication of the 

Treasury Decision adopting these rules 

as final regulations in the Federal 

Register. 

(2) Paragraph (a)(9) of this section 

applies to consolidated return years 

beginning after December 31, 2017. 

■ Par.5. Section 1.1502–4 is amended 

by revising paragraph (d)(3) to read as 

follows: 

§ 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 § 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. 

* * * * * 

■ Par.6. Section 1.1502–43 is amended 

by revising paragraph (b)(2)(i)(A) to read 

as follows: 

§ 1.1502–43 Consolidated accumulated 

earnings tax. 

* * * * * 

(b) * * * 

(2) * * * 

(i) * * * 

(A) The consolidated liability for tax 

determined without § 1.1502–2(a)(2) 

through (a)(4), and without the foreign 

tax credit provided by section 27, over 

* * * * * 

■ Par.7. Section 1.1502–47 is amended 

by revising paragraph (f)(7)(iii) to read 

as follows. 

§ 1.1502–47 Consolidated returns by lifenonlife groups. 

* * * * * 

(f) * * * 

(7) * * * 

(iii) Any taxes described in § 1.1502– 

2 (other than by paragraphs (a)(1) and 

(d)(6) of that section). 

* * * * * 

■ Par.8. Section 1.1502–59A is added to 

read as follows: 

§ 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 


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59A regulations, see §§ 1.59A–1 through 

1.59A–10) to consolidated groups and 

their members (as defined in § 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 

§ 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 sets forth definitions. 

Paragraph (f) of this section provides 

examples. Paragraph (g) of this section 

provides the applicability date and a 

transition rule. 

(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 

§ 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, items 

resulting from intercompany 

transactions (as defined in § 1.1502– 

13(b)(1)(i)) are disregarded for purposes 

of making the required computations. 

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 § 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 

§ 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 § 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 § 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 

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 separateentity 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 

§§ 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 § 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 


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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 

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 § 1.381(c)(20)–1. 

(6) Member deconsolidates from a 

consolidated group. 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, no other member of the 

original group is treated as possessing 

the domestic related BIE carryforward 

status, foreign related BIE carryforward 

status, or unrelated BIE carryforward 

status that is carried forward by the 

departing member. 

(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) 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 § 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 § 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 § 1.163(j)– 

1(b)(2), and with respect to a 

consolidated group and a taxable year, 

has the meaning provided in § 1.163(j)– 

4(d)(2)(iii). 


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(7) Consolidated group’s disallowed 

BIE carryforwards. The term 

consolidated group’s disallowed BIE 

carryforwards has the meaning provided 

in § 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 § 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 § 1.59A–1(b)(12). 

(19) Related party. The term related 

party has the meaning provided in 

§ 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 § 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 § 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. 

(f) 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 

§ 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 § 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 times 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 × 10%¥$150x × 21%). 

(ii) The consolidated group engages in 

intercompany transactions. (A) Facts. The 

facts are the same as in paragraph (f)(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 (f)(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 § 1.59A–2(d) and base 

erosion percentage under § 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 § 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 


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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 

the rules in § 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, prorata, 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 


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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 (f)(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 

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 × 

$8x/($8x + $5.33x)), and $4x of its allocated 

foreign related BIE carryforward ($10x × 

$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 × $12x/($12x 

+ $8x)), and $4x of its allocated foreign 

related BIE carryforward ($10x × $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. 

(g) Applicability date—(1) In general. 

Except as provided in this paragraph (g), 

this section applies to taxable years 

beginning after December 31, 2017. 

(2) Application of section 59A if S 

joins a consolidated group with a 

taxable year beginning before January 1, 

2018. If during calendar year 2018 a 

corporation (S) joins a consolidated 

group during a consolidated return year 

beginning before January 1, 2018, then 

section 59A will not apply to S’s short 

taxable year that is included in the 

group’s consolidated return year, even 

though S’s short taxable year begins 

after December 31, 2017. 

■ Par. 9. Section 1.1502–100 is 

amended by revising paragraph (b) to 

read as follows: 

§ 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 

§ 1.1502–2(b). 

* * * * * 

■ Par. 10. Section 1.6038A–1 is 

amended by adding a sentence to the 

end of paragraph (n)(2) and revising the 

last sentence of paragraph (n)(3) to read 

as follows: 

§ 1.6038A–1 General requirements and 

definitions. 

* * * * * 

(n) * * * 

(2) * * * Section 1.6038A–2(a)(3), 

(b)(6), and (b)(7) apply for taxable years 

beginning after December 31, 2017. 

(3) * * * For taxable years ending on 

or before December 31, 2017, see 

§ 1.6038A–4 as contained in 26 CFR part 

1 revised as of April 1, 2018. 

* * * * * 

■ Par. 11. Section 1.6038A–2 is 

amended by 

■ 1. Revising the headings for 

paragraphs (a) and (a)(1). 

■ 2. Revising paragraph (a)(2). 

■ 3. Adding paragraph (a)(3). 

■ 4. Revising paragraphs (b)(1)(ii), 

(b)(2)(iv), and the second sentence of 

paragraph (b)(3). 

■ 5. Redesignating paragraphs (b)(6) 

through (b)(9) as paragraphs (b)(8) 

through (b)(11). 

■ 6. Adding new paragraphs (b)(6) and 

(7). 

■ 7. Revising paragraph (c) and the first 

sentence of paragraph (d). 

■ 8. Removing the language ‘‘Paragraph 

(b)(8)’’ from the second sentence of 

paragraph (g) and adding the language 

‘‘Paragraph (b)(10)’’ in its place. 

■ 9. Adding two sentences to the end of 

paragraph (g). 

The revisions and additions read as 

follows: 

§ 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 

§ 1.59A–2(b), any other arrangement 


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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 § 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 § 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 

description, categorization, or listing of 

transactions within these types, must be 

reported on Form 5472, in the manner 

the form prescribes. * * * 

* * * * * 

(6) Compilation of reportable 

transactions across multiple related 

parties. A reporting corporation must, to 

the extent and in the manner Form 5472 

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 § 1.59A–2(b), it must report the 

information required by Form 8991 and 

by any Form 5472 it is required to file, 

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 § 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 § 1.59A–9; 

(ix) Any qualified derivative payment, 

including: 

(A) The aggregate amount of qualified 

derivative payments for the taxable year, 

including as determined by type of 

derivative contract; 

(B) The identity of each counterparty 

and the aggregate amount of qualified 

derivative payments made to that 

counterparty; and 

(C) A representation that all payments 

satisfy the requirements of § 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 § 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 one year after final 

regulations are published in the Federal 

Register. Before these regulations are 

applicable, a taxpayer will be treated as 

satisfying the reporting requirement 

described in § 1.59A–6(b)(2) only to the 

extent that it reports the aggregate 

amount of qualified derivative payments 

on Form 8991. 

§ 1.6038A–4 [Amended] 

■ 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: 

Section Remove Add 

Section 1.6038A–4(a)(1) .......................................................................................................................................... $10,000 $25,000 

Section 1.6038A–4(a)(3) .......................................................................................................................................... 10,000 25,000 

Section 1.6038A–4(d)(1) .......................................................................................................................................... 10,000 25,000 

Section 1.6038A–4(d)(4) .......................................................................................................................................... 10,000 25,000 

Section 1.6038A–4(f) ............................................................................................................................................... 10,000 25,000 

Section 1.6038A–4(f) ............................................................................................................................................... 30,000 75,000 


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Section Remove Add 

Section 1.6038A–4(f) ............................................................................................................................................... 90,000 225,000 

§ 1.6655–5 [Amended] 

■ Par. 13. Section 1.6655–5 is amended 

by removing the language ‘‘§ 1.1502– 

2(h)’’ in paragraph (e) Example 10 and adding the language‘‘§ 1.1502–1(h)’’ in 

its place. 

Kirsten Wielobob, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2018–27391 Filed 12–17–18; 4:15 pm] 

BILLING CODE 4830–01–P 


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