Proposed Section 899 and Its Potential Impact on BEAT and Transfer Pricing Adjustments

Introduction

On May 22nd, the U.S. House of Representatives approved proposed Section 899 of the Internal Revenue Code—“Enforcement of Remedies Against Unfair Foreign Taxes”—though it still awaits Senate approval. While the bill has broad implications, this article focuses on its potential interaction with the Base Erosion and Anti-Abuse Tax (BEAT), particularly regarding transfer pricing adjustments for tangible goods.

Introduced under the 2017 tax reform, BEAT imposes a 10% minimum tax (in 2025) on certain deductible payments to foreign affiliates to curb profit-shifting. Notably, BEAT currently excludes transfer pricing adjustments related to cost of goods sold (COGS) and certain low-margin services qualifying under the Services Cost Method (SCM). However, Section 899 could disrupt this status quo, escalating BEAT liabilities for U.S. taxpayers engaged with "discriminatory" foreign jurisdictions.

Proposed Section 899: Key Changes and BEAT Implications

Section 899 targets foreign governments imposing digital services taxes (DSTs), diverted profits taxes, or Undertaxed Profits Rules (UTPRs) by:

1. Defining “discriminatory foreign countries” (e.g., those with UTPRs or DSTs).

2. Identifying “applicable persons” (foreign corporations, governments, or individuals) subject to gradually increasing U.S. tax rates (up to 20 percentage points above standard rates).

Impact on BEAT:If a U.S. taxpayer (e.g., a limited-risk distributor) transacts with a related entity in a "discriminatory" country (e.g., one with UTPR rules), BEAT liabilities could rise. For example:

• Scenario: A U.S. distributor (Co A) sources goods from a related foreign supplier (Co B) in a UTPR-adopting country.

• Risk: COGS-related transfer pricing adjustments to align Co A’s profits with its target PLI could trigger an additional 10% BEAT tax on those adjustments if profitability exceeds thresholds.

Operational Transfer Pricing Takes Center Stage

The potential for higher BEAT exposure underscores the need for:

1. Real-time monitoring of transfer prices to avoid year-end adjustments.

2. Proactive profit-level management to minimize BEAT-triggering discrepancies.

3. Documentation rigor to defend against audits, especially for transactions with UTPR countries.

Conclusion

Section 899 could significantly increase BEAT liabilities for U.S. distributors with related-party transactions in "discriminatory" jurisdictions. To mitigate risks, businesses must prioritize dynamic transfer pricing controls and align intercompany pricing with tax compliance strategies before year end adjustments become costly.