US: IRS clarifies BEAT exception rules; states services cost method not mandatory, documentation essential

The IRS clarified that under BEAT rules, taxpayers may exclude the cost portion of service payments to foreign related parties using the Section 59A(d)(5) exception, even without applying the specific transfer pricing method. 

The US Internal Revenue Service (IRS), in a recent Chief Counsel Advice (CCA) memorandum, clarified that under the Base Erosion and Anti-Abuse Tax (BEAT) rules, taxpayers can exclude the cost portion of payments made to foreign related parties for services under the IRC Section 59A(d)(5) “services cost method” exception, even if they do not use the specific transfer pricing method detailed in Treasury Regulation §1.482-9(b).

The IRS also cautioned that documentation supporting alternative transfer pricing methods under Section 482 does not automatically meet BEAT’s separate substantiation requirements.

Section 482 of the Code authorises the IRS to adjust the income, deductions, credits, or allowances of commonly controlled taxpayers to prevent evasion of taxes or to clearly reflect their income. The regulations under section 482 generally provide that prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles, yield results that are consistent with the results that would have been realised if uncontrolled taxpayers had engaged in the same transaction under the same circumstances.

The IRS Chief Counsel clarified that for the Section 59A(d)(5) exception under the BEAT rules, taxpayers are not required to actually apply the services cost method (SCM) under Treasury Regulation §1.482-9(b). Instead, it is sufficient if the service meets the eligibility criteria for SCM, and the “business judgment rule” does not apply for BEAT purposes.

The IRS released a memorandum (issued on 6 June 2025, and publicly released on 18 July 2025) clarifying that, under the BEAT framework (Section 59A), “base erosion payments” generally include deductible payments to foreign related parties. However, payments for qualifying services priced without a markup, as specified in Section 59A(d)(5), are excluded.

The Services Cost Method under Treasury Regulation §1.482-9(b) supports this exclusion, provided that certain conditions, like the business judgment rule and detailed recordkeeping, are met.