'Just BEAT It' Do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA?

54 Pages Posted: 17 Feb 2021

See all articles by Stacie Kelley Laplante

Stacie Kelley Laplante

University of Wisconsin - Madison

Christina Lewellen

North Carolina State University - Department of Accounting

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

David M. P. Samuel

University of Wisconsin-Madison; Vienna University of Economics and Business

Date Written: February 1, 2021

Abstract

This study examines whether multinational corporations (MNCs) reclassify related-party payments to avoid the new base erosion and anti-abuse tax (BEAT). The Tax Cuts & Jobs Act of 2017 included the BEAT to combat income shifting from the U.S. to foreign entities. An exclusion in the tax law provides MNCs an incentive to reclassify related-party payments as cost of goods sold. We use a triple-difference design that leverages the BEAT filing threshold of $500 million in revenue and the parent company’s location to document increases in the unconsolidated sales of foreign subsidiaries of MNCs subject to BEAT relative foreign subsidiaries of MNCs not subject to BEAT consistent with cost reclassification. We also find this effect is strongest in MNCs with more related-party payments. Overall, our results imply that firms use the subjectivity inherent in cost classification to reclassify costs as cost of goods sold to avoid the BEAT.

Keywords: Tax planning, income shifting, cost reclassification, foreign tax, tax, TCJA, BEAT

JEL Classification: H26, H71, H72

Suggested Citation

Laplante, Stacie Kelley and Lewellen, Christina and Lynch, Dan and Samuel, David, 'Just BEAT It' Do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA? (February 1, 2021). WU International Taxation Research Paper Series No. 2021-03, Available at SSRN: https://ssrn.com/abstract=3784739 or http://dx.doi.org/10.2139/ssrn.3784739

Stacie Kelley Laplante (Contact Author)

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States
608-265-3494 (Phone)
608-265-3494 (Fax)

Christina Lewellen

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

David Samuel

University of Wisconsin-Madison ( email )

975 University Avenue
Madison, WI 53706
United States

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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