If related-party services meet certain eligibility requirements for the use of the services cost method (SCM), U.S. taxpayers could qualify for an exception to the base erosion and anti-abuse tax (BEAT).
However, determining the scope of the new BEAT SCM exception can be a complex undertaking. The good news is that mark-ups, commissions, and combined service prices alone do not preclude eligibility for the exception.
The BEAT provisions under section 59A provide an exemption for certain amounts paid or accrued for services that meet (with one exception) the requirements for eligibility for SCM use—the BEAT SCM exception. The section 59A proposed regulations would allow the BEAT SCM exception even if a mark-up is paid, assuming the other applicable requirements for the BEAT SCM exception were satisfied. Much has been written about the availability of the BEAT SCM exception for services that meet the relevant SCM-eligibility requirements but for which the transfer price equals the sum of the total costs of providing the services and a mark-up. This report:
- Evaluates the availability of the BEAT SCM exception for services for which the price is not explicitly set as total services costs plus a mark-up but takes a different form, such as a commission on sales, and concludes that the service payments can qualify for the BEAT SCM exception. The payment amount that can be excluded from the BEAT will equal the lesser of the actual charge for the qualifying services and the total services cost associated with the services.
- Discusses certain other considerations related to the pricing method and the BEAT SCM exception—such as whether an aggregate price for SCM eligible and non-SCM eligible services can be disaggregated for purposes of the BEAT exception. Generally, a combined service price can be disaggregated for BEAT exception purposes.