In new paper, Sanchirico argues that key provision of 2017 tax reform law fails to curb tax avoidance by multinational corporations
In a new paper, University of Pennsylvania Law School professor Chris William Sanchirico argues that the Base Erosion and Anti-Abuse Tax (“BEAT”) fails to achieve its intended purpose of preventing earnings stripping, a method of tax avoidance employed by multinational corporations. Earnings stripping occurs when multinationals “engage in tax-saving transactions with related parties in low-tax jurisdictions,” he writes.
Passed as part of the Tax Cuts and Jobs Act of 2017, “one of the most important pieces of tax legislation in the last several decades,” the BEAT is structured similarly to the alternative minimum tax (“AMT”) provision of the tax code in that it “prevents certain ‘bad deductions’ from having too great an impact on tax liability by recalculating tax without those deductions, but at a lower tax rate, charging the recalculated amount if it ends up being greater.” The BEAT deems a deduction “bad” if “it arises from payments or accruals to foreign persons that are related parties” to the taxpayer, which includes any 25 percent owner of the taxpayer, a family member, a business partner, and a number of other potential connections.
In the paper, “Earnings Stripping under the BEAT,” Sanchirico evaluates the tax code provision itself along with newly proposed regulations, and finds that although the BEAT “is apparently targeted at earnings stripping,” he argues, “it does not appear to be clearly grounded in a coherent view of what earnings stripping is.” As a result, the tax has the effect of “harming taxpayers who are inadvertently caught in situations where the BEAT goes too far, while benefiting taxpayers who purposely exploit situations where the BEAT does not go far enough.” Sanchirico’s analysis includes insights into “the nature of earnings stripping, the interaction of the BEAT with the new limitation on deducting business interest, the treatment of costs of goods sold under the BEAT, and the BEAT’s approach to depreciable or amortizable property whether purchased, leased or licensed.”
“The Treasury has done a terrific job over the last 18 months filling in the many missing details in the new tax law, hastily passed at the end of 2017,” said Sanchirico. “But the problems with the BEAT are structural and conceptual, and fixing them will probably require further Congressional action.”
Sanchirico is Penn Law’s Samuel A. Blank Professor of Law, Business, and Public Policy, and Co-Director of the Center for Tax Law and Policy. He is an expert on tax law and policy, with a special emphasis on international issues. Sanchirico has been published widely on issues related to tax law, with his scholarship appearing in the Columbia Law Review, the University of Chicago Law Review, the Tax Law Review, the Journal of Legal Studies, and elsewhere.
Click here to download the paper from Sanchirico’s SSRN page.