On Thursday of last week, the IRS released proposed regulations on the base erosion and anti-abuse tax (BEAT). This guidance provides answers to several outstanding questions regarding this new minimum tax, but notably does not address one of the most highly anticipated areas, the question regarding the cost of goods sold (COGS) analogue for services companies.

 

A critique of certain statutory language in the new BEAT regime is that it unfairly discriminates against companies that sell services and in favor of companies that sell products by allowing the latter a major exception from BEAT for the cost of goods sold, while denying an analogous exception to the services sector for the cost of services sold. While that seemed to be the result produced by the language of the statute, many believed that the IRS had sufficient authority to carve out a similar exception for service providers in the regulations; and, therefore, services companies have been anxiously awaiting these regulations in hopes of that relief. In short, these regulations dash those hopes.

 

On the positive side, the proposed regulations do provide welcome clarification surrounding certain other areas of taxpayer concern. The following is a brief overview of some of the highlights, the first two of which provide benefits to services companies.