Unfair Tax Prevention Act: New Rules Automatically Hit Foreign-Owned Firms with BEAT Tax, Mandating 50% COGS Inclusion

The newly proposed Unfair Tax Prevention Act targets multinational corporations by dramatically changing how the Base Erosion and Anti-Abuse Tax (BEAT) applies to specific foreign-owned entities. This bill creates a new category of taxpayer—the “foreign-owned extraterritorial tax regime entity”—and subjects them to immediate and stricter BEAT rules. Essentially, this is a highly targeted effort to close a perceived loophole used by companies connected to foreign tax systems that operate outside their normal jurisdiction, making it much harder for them to shift profits out of the U.S. tax base.

The BEAT Trap: Who Gets Caught and Why

For most companies, the BEAT is a complex calculation, but this bill simplifies it for the targeted group—in the worst possible way. A U.S. company is defined as one of these special entities if it’s controlled by a foreign entity that is subject to an “extraterritorial tax.” This “extraterritorial tax” is a foreign tax imposed based on income received by someone indirectly connected to the corporation. If a company fits this definition, it’s automatically deemed an “applicable taxpayer” for BEAT purposes, meaning it can’t use certain existing BEAT exceptions that other companies rely on to lower their liability (specifically those in subsections (c)(2)(B), (c)(4)(B)(ii), and (d)(5)).

The 50% COGS Hammer

Here’s the provision that will make tax lawyers sweat: For these newly targeted entities, 50 percent of the cost of goods sold (COGS) will automatically be treated as a “base erosion tax benefit.” COGS is the direct cost of producing the goods a company sells—things like raw materials and direct labor. Under the BEAT, a “base erosion tax benefit” is essentially a payment made to a foreign affiliate that reduces the U.S. tax base. By mandating that half of a company’s COGS is automatically considered this benefit, the bill significantly inflates the tax base for these entities, leading to a much higher BEAT liability. This is a massive, immediate financial hit for any company that falls under this narrow definition, essentially penalizing them for their specific corporate structure and foreign tax connections.

Real-World Impact: Accelerated Costs and Increased Complexity

These changes kick in for tax years starting after the Act becomes law, and the deadline for calculating certain BEAT aspects is moved up to the date of enactment. For the targeted multinational corporations, this means an immediate and substantial increase in their U.S. tax burden. Imagine a U.S. manufacturing facility owned by a foreign parent company that meets this complex definition. That company suddenly loses valuable tax exceptions and must treat half the cost of its production materials—the steel, the chips, the components—as a taxable benefit, even if those costs were legitimate business expenses. This creates a significant economic burden and introduces a high level of complexity, as the definition of “extraterritorial tax” is highly specialized and likely to be challenged in court. While the goal is to prevent tax avoidance, the mechanism used—the automatic 50% COGS inclusion—is a blunt instrument that imposes steep financial consequences on a very specific group of international businesses.