ACRO testifies before IRS and Treasury Department on proposed Base Erosion and Anti-Abuse Tax (BEAT) regulation
On Monday, March 25, 2019 ACRO provided testimony at a public hearing held by the Internal Revenue Service (IRS) and Treasury Department regarding the recently released Base Erosion and Anti-Abuse Tax (BEAT) proposed regulation. Representing ACRO at the hearing were Candice Whitehurst, Associate Director of Tax at Syneos Health, and John Benoit, Corporate Vice President, Tax and Treasury at PAREXEL International.
ACRO recommended four modifications to the proposed BEAT regulation that was released on December 21, 2018:
- Pass-through Payments – The definition for a base erosion payment under Proposed Regulation §1.59A-3(b)(1)(i) should not include payments made by a US taxpayer to reimburse a foreign related party at cost and without a markup for amounts it paid to third parties on behalf of a customer.
- Revenue Sharing Payments – The definition of a base erosion payments under Proposed Regulation §1.59A-3(b)(1)(i) should not include payments made by a US taxpayer to share revenue received from a customer with a foreign related party.
- Netting – The operating rules under Proposed Regulation §1.59A-3(b)(2)(ii) for base erosion payments should not include payments when there is a contractual relationship between the US taxpayer and a foreign related party which allows the parties to make or receive payments on a net basis.
- Bifurcated Year – The base erosion minimum tax amount underProposed Regulation §1.59A-5(c)(3) should be modified so that section 15 does not apply to taxable years beginning in calendar year 2018.
For ACRO’s detailed concerns about these issues, please read our comment letter that was submitted to the IRS on February 19.
As proposed, the BEAT regulation would impose a substantial burden on ACRO members, particularly where pass-through payments are concerned. ACRO is requesting a carve out for these pass-through payments as CROs merely act as middlemen and do not incur any accession to wealth when they receive indirect fees from sponsors as they are then obligated to repay a third party, which CROs do with zero markup.
If these pass-through payments were subject to BEAT, it would have a significant impact on the industry. As Candice Whitehurst noted in her portion of ACRO’s testimony, “For example, if a CRO remitted $50M of pass-through payments related to indirect fees to its foreign affiliates, and if subject to BEAT, it would result in $5M of tax at the 10% rate for which there was zero margin on those indirect fees. Further, depending on the size and operating model of the CRO, those pass-through payments may be upwards of $200M.”
In addition to pass-through payments, ACRO is also concerned with direct fees under CRO revenue sharing agreements being deemed base-eroding, and have asked that base erosion payments not include revenue sharing with foreign parties.
ACRO encourages its members to submit any additional comments they may have on the proposed regulation that can be used in our advocacy efforts going forward.
A final rule on BEAT is expected to be released before June 22, 2019, 18 months after the passage of the Tax Cuts and Jobs Act of 2017.