What types of payments count as base erosion payments under BEAT?

Under IRC 59A(d), a base erosion payment is any amount paid or accrued by the taxpayer to a foreign person that is a related party (25%+ ownership or control), where the amount results in a deduction. This includes royalties, management fees, service fees, interest, rents, and similar deductible payments. The payment must be to a foreign related person — payments to unrelated foreign persons or to domestic related persons are not base erosion payments.

Amounts paid for cost of goods sold (COGS) are generally NOT base erosion payments. This is a critical exception. If you purchase inventory or raw materials from your foreign parent and the cost is reflected in COGS (not as a deduction below the line), it does not count. However, the IRS has scrutinized situations where payments characterized as COGS actually include embedded service or royalty components. The distinction between payments properly allocable to COGS and payments that are actually deductible expenses can be fact-intensive.

Inventory payments (COGS): Generally excluded from base erosion payments under the COGS exception. IP royalties: These are deductible payments to a foreign related person — they are base erosion payments. Management services: Deductible service fees to a foreign parent are base erosion payments, unless they qualify for the services cost method (SCM) exception. Interest on intercompany loans: Deductible interest to a foreign related person is a base erosion payment. Reinsurance premiums: Premiums paid to a related foreign reinsurer are base erosion payments under IRC 59A(d)(3).

IRC 59A(d)(5) provides an exception for payments for services that meet the requirements of the services cost method (SCM) under the Section 482 transfer pricing regulations. Under the SCM, services that are supportive in nature (not integral to the taxpayer's core business) can be charged at cost with no markup. If your management service fees qualify for the SCM — meaning they cover routine, non-integral services charged at the service provider's cost — they may be excluded from base erosion payments. This exception requires careful documentation and compliance with the Section 482 SCM requirements.

In addition to deductible payments, base erosion payments also include amounts paid to a related foreign person in connection with acquiring depreciable or amortizable property. Even though the purchase price itself is capitalized (not immediately deducted), the depreciation or amortization deductions are treated as base erosion tax benefits. For example, if you purchase a patent from your foreign parent, the amortization deductions over the patent's useful life are added back in the BEAT calculation, even though the purchase price was a capital expenditure.