The COGS Exception Should BEAT It

Abstract

Conflicting theories of international taxation have led countries to adopt differing approaches to taxing multinational corporations (“MNCs”). MNCs, seizing upon these mismatches, employ base erosion and profit shifting (“BEPS”) strategies that shift profit to low tax jurisdictions and minimize global tax liability. Amid a global struggle to combat BEPS, the United States (“U.S.”) introduced the Base Erosion and Anti-Abuse Tax (“BEAT”). The U.S.’s most recent effort, while promising, provides a significant exception for BEPS strategies that manipulate cost of goods sold (“COGS”). This Note argues that the BEAT would better serve tax policy considerations if the U.S. removed its COGS exception. This Note begins by describing countries’ competing approaches to international taxation, the BEPS problem that results, and difficulties in combating BEPS. Next, this Note discusses the BEAT, specifically exploring the U.S.’s new territorial tax regime of which the BEAT is a part, the BEAT’s calculation, and the BEAT’s COGS exception. Finally, this Note argues that the BEAT would better serve tax policy considerations if the U.S. removed its COGS exception because the COGS exception: (1) undermines the U.S.’s territorial tax regime and capital import neutrality, (2) violates neutrality and fairness, and (3) hinders the BEAT’s effectiveness in combating BEPS.