 and welcome to this session. This is Professor Farhad. In this session, we would look at the US tax reform of 2017, specifically about the base erosion, anti-abuse tax, which is known as BEAT. The government's going to try to beat you up to get more taxes out of you. This topic is covered in international accounting and taxation CPA exam, as well as the ACCA exam. As always, if you have not connected with me on LinkedIn, please do so. YouTube is where I house all my 1,500 plus accounting audit tax and finance lectures. This is a list of all the courses that I cover. Please check it out on my website. I do have additional resources such as PowerPoint slides, notes, multiple choice questions, and 2,000 plus CPA questions. If you are planning to study with a buddy, check out studypal.co. It's an artificial intelligence study buddy platform that matches you with a CPA candidate or a CFA candidate. They are available in 85 countries. They have members in 85 countries in 2,800 cities. An important prerequisite for this session is guilty. If you don't know what guilty is, you want to get an idea of what guilty is because it will help you understand BEAT. Also, you want to understand the control for incorporation, subpart, F-income. Anyhow, I put the description, the playlist for the script for these videos in the description below. It will help you tremendously for this session. Back to the Tax Cuts and Jobs Act of 2017. It made the most extensive changes to international tax provision in the U.S. tax law since 1986. The objective was to make U.S. corporation more competitive internationally and to prevent erosion of U.S. tax space. Now, the U.S. government did reduce the tax for the corporation that was up to 35%. They reduced it down to 21%. But what they tried to do with this law, prevent the erosion of U.S. tax space. And this is what guilty did, and this is what BEAT would did. So in guilty, we talked about this. Indeed, it's going to take another shot at it, prevent the erosion of U.S. tax space. So the most significant change to international taxation was the adoption of the participation exemption, which is partial territory system in which most foreign subsidiary income is exempt from U.S. taxation. We already discussed that in detail. But at the same time, the government introduced those guilty and beat to get some taxes out of you. So simply the three most international tax provisions of the new law were the deemed repatriation of accumulated foreign earnings. We covered that. Taxation of global intangible low tax income, guilty. And in this session, we're going to look at BEAT, the imposition of a base erosion, anti-abuse tax. So this is the second provision to combat the base erosion after guilty. So guilty was the first provision. This is a new tax system that's intended to apply to companies that significantly reduced their U.S. tax liability by making payment to foreign affiliate. So here's what they're targeting here. They're not targeting your revenue. They're going to be examining your expenses. So that's specifically your deductible, your tax deductible expenses. That's what they're trying to find out. They're going to try to find out how much are you paying to your foreign parent, foreign subsidiary and foreign branch. In a sense, if they think you're paying too much, or if they think you are paying unreasonable amount, they're going to come back and say, take those deduction out. Let's compute the taxes again. And the BEAT only apply to specific type of corporation and those that have an average revenue of at least 500 million over the previous three years. So they have to be part of a group. So it's not like one company, if they're part of the aggregate of the whole group, they have to have more than 500 million. So it doesn't really apply to small company, but again, 500 million for large companies, that's not a lot. And they have a base erosion payment exceeding 3% of the company's total deductible expenses. And your base erosion payments. Now, what is the base erosion payment? Well, you have to look at payment made to foreign affiliate, such as royalties and management fees. The key here is royalties are management fees, basically your shift in expenses from one company to the other. That's what the government is assuming here. That's the assumption behind this. So you are paying your foreign affiliates a lot of expenses that you don't really have to pay them because it's like shifting expenses from the parent to the sub or from one sub to the other, or from the sub to the parent, so on and so forth. So that this is what they called base erosion payments. So certain payments, royalties and management fees are notorious for that. In a sense, they are the main target. So how to determine if beat is owned? How do you determine if this tax is owned? Here's what we have to do. First, we have to compute the company's tax liability. When the base erosion payments are deducted, so basically simply put compute your tax bill. What is your tax bill? Then you're going to compare this against 10% of the company's income when the base erosion payment are not deducted. Now we're going to go ahead and recompute your taxes again, taking those erosion payment out, which are not deducted, and we're going to multiply that by 10%. Your taxable income multiply by 10%, not counting those base erosion payment. Well, guess what? If the 10% amount is larger than beat, then beat is owned. So the amount of beat is the difference between A and B. Assuming this amount is 10% greater, the 10% amount is larger, just simply B is larger than A. It doesn't have to be 10%. The 10% is for the tax computation, which would look at an example. Simply put, if B is greater than A, let me put it here because I think I misspoke. If B is greater than A, you have beat. Simply put. How do we compute A? Very simply compute your taxes as you do it usually. How do you compute B? Well, take those deductions out. So remove the deduction, remove the deduction. Simply put, compute a new taxable income, multiply the new taxable income by 10%, then compare the results to A. If they are greater than A, then guess what? That's your tax bill. That's your new tax bill. Simply put, the best way to explain this is to actually work an example. Let's assume in 2019, extra large corporation, a US taxpayer generated revenues of $800 million in the United States and incurred tax-adaptable expenses of $700 million, resulting in US source taxable income of $100 million, pretty straightforward. And let's assume this company, their average revenue for the past three years is $500 million. So this corporation is subject to beat. Now, simply put, what did we say here? $800 million in revenues, $700 million in deductible expenses. They have $100 million in taxable income, US taxable income. Now, here's what happened. Expenses include royalty and management fees made to foreign affiliates in the amount of $200 million. Simply put, this amount here, the $700 million include $200 million, include $200 million that is paid to foreign affiliates in form of management fees, management fee payment, and royalty. Well, what does that mean? Well, that means let's see if this, what do we call those management fees and the royalties? We call them base erosion payments. Now, let's see if they represent more than 3%. Let's see. Well, because extra large revenue exceeds $500 million for the past three years and its base erosion payment, $200 million are greater than 3% of total expenses. Well, $200 divided by $700, well, that's 28.6%. So yes, those base erosion payment, they are more than 3% of their total expenses. Then hold on a second, we're going to have to recompute your taxes to determine if you have beat. So this is, so we're basically, we already determined that this company is subject to beat for two reasons. One, the revenue for the past three years, the average revenue exceed 500 million per year. I already told you, you can make this assumption here for our purposes. Then they take the expenses, divide them by the total expenses, the erosion base payment divided by total expenses. All what they have to do is greater than 3%, which is our 28.6%. Now, the uncle Sam says, go back and recompute your taxes, taking those payment out. So here's what's going to happen. So your regular tax liability, 100 million times 21% is 21 million. Let's call it your regular. Then we're going to compute now your modified taxable income, which is your modified taxable income is 300 million, which is 800 million of revenue minus 500 million. Why minus 500 million? You remember your original deduction was 700. We have to take out 200 million, those that base erosion payments. So what's going to end up happening, you have 500 million in deductions under the new rules. You have 500 million. Well, your revenue is 800. Your deductions are 500 million. So therefore, you have a modified taxable income of 300 million. Now we're going to take this modified taxable income and multiply it by 10%. Where is that 10% coming from? Uncle Sam, this is the rate that you will use. You're going to multiply this under the new rules of 10%. And simply put, this is A. If you remember, this is A and this is B. Well, is B greater than A? Sure, 30 million is greater than 21 million. Well, guess what? You have to pay the 30 million, which is, it's simply put, you have to pay an additional 9 million in taxes. That's basically it. 21 plus 9, 30, you have to pay 30. Okay. So basically, they came back and they got more taxes out of you. That's basically what happened. Now notice, as I mentioned earlier, the beat is based on US corporation, US source income and its payment to affiliate. So it's not based on income. It's really based on expenses. They look at the expenses and they change the rules for the expenses. It's not you are making the money overseas and it's just, it's you are paying expenses. You are making deductions because they are for foreign affiliates. The US government said, well, they're not red flags, but they're saying, you might be just shifting money. They're making this assumption and they're saying, hold on a second, come back here and let's recompute your taxes. I'm not sure if you know about the corporate AMT. I hope you don't because you don't have to. It was repealed by, and basically I would say this new law, the beat, is a replacement of the corporate AMT because under the corporate AMT, you have to compute your corporate income tax, then the US government say, come back again and we're going to take some deductions from you. We're going to change the rules, change the rate to recompute your taxes and see what your what your tax bill is and we're going to make you pay the higher bill of the two. But the good thing is repealed corporate AMT is gone. I believe from a student's perspective, beat is easier than the corporate AMT. I do have lessons about corporate AMT on my YouTube channel. You really don't want to go there because if you're studying for your CPA exam, don't even touch it. It's not there anymore. It's repealed, but it's just out of interest. You can go to my YouTube channel or you could just Google or YouTube Farhat corporate AMT if you're interested, but it's gone. You don't need this. Okay, but I believe this is a replacement. Anyhow, if you have any questions, any comments about this topic, please email me. If you happen to visit my website, which I strongly suggest you do so, please consider investing in your career. You can subscribe. Good luck, study hard and stay motivated.