Why The IRS Just Made It Easier To Reduce BEAT Exposure On Intercompany Services

Key Takeaways:

• The IRS has confirmed that the BEAT SCM exception can apply, even when SCM is not used as the primary transfer pricing method.

• Only the cost portion of an intercompany service payment may be excluded from BEAT; any markup remains subject to the base erosion calculation.

• Changes under the OBBBA may lower regular U.S. tax liability, increasing BEAT exposure for companies in 2025 and future tax years.

New IRS guidance could shift how multinational businesses reduce exposure to the Base Erosion and Anti-Abuse Tax (BEAT), particularly those with significant intercompany service activity. The recent clarification affirms that companies can benefit from the Services Cost Method (SCM) exception to BEAT—even if they don't apply SCM for transfer pricing purposes.

For many finance and tax leaders, this creates a planning opportunity that didn't exist before. It also arrives at a critical moment. Legislative changes under the One Big Beautiful Bill Act (OBBBA) are reshaping regular tax liability for U.S. companies, with ripple effects that could leave more businesses vulnerable to BEAT in 2025 and beyond.

Understanding BEAT and Its Reach

Originally introduced in the 2017 Tax Cuts and Jobs Act, BEAT targets multinational companies that reduce U.S. taxable income by making deductible payments to foreign affiliates. When a company crosses certain thresholds—including $500 million or more in average annual gross receipts over a three-year period and a base erosion percentage of at least three percent—it may be subject to BEAT.

In practice, BEAT functions as a minimum tax on certain outbound payments, especially those for services, royalties, and interest. But not all payments are treated equally. The rules carve out a key exception for certain types of services that qualify under the Services Cost Method.

What the Services Cost Method Allows

The Services Cost Method simplifies transfer pricing for routine intercompany services. It permits businesses to charge for certain services at cost—without a markup—so long as the services fall into qualifying categories.

Covered services typically include functions like HR, payroll, IT support, accounting, and legal—what the IRS refers to as "specified covered services." These services must be documented and substantiated with detailed cost tracking, and they cannot be part of the company's core revenue-generating capabilities or competitive differentiation, a concept known in the regulations as the "business judgment rule."

However, the treatment of SCM under BEAT rules differs from how it operates in traditional transfer pricing.

The Key Differences in BEAT Application

Under BEAT-specific regulations, the IRS has intentionally separated the SCM exception from its transfer pricing roots. Most notably, the business judgment rule—which limits which services can qualify under transfer pricing—does not apply when determining whether a service payment is excluded from BEAT.

In other words, even if a service would not qualify for SCM treatment under standard transfer pricing because it's considered strategic or high value, the cost portion of that service may still be excluded from BEAT. The caveat is that only the cost component is excluded; any markup included in the intercompany charge remains subject to BEAT.

This nuanced difference allows companies to take advantage of the SCM exception for BEAT even if they rely on another method—such as the transactional net margin method (TNMM)for transfer pricing purposes.

What the IRS Just Clarified

In July 2025, the IRS released Chief Counsel Advice Memorandum ILM 202529008, providing clear direction on how taxpayers can apply the SCM exception under BEAT. The memo confirms that businesses are not required to use SCM for transfer pricing to benefit from the SCM exception for BEAT purposes.

The guidance also reinforces the documentation requirements. To support the use of the exception, taxpayers must maintain records showing the total cost of the relevant services, how those costs were allocated, and how the SCM exception was applied. These records must comply with BEAT-specific rules under Section 59A, not the broader transfer pricing documentation standards under Section 482.

This distinction is important for companies whose global operations may default to non-U.S. standards, such as the OECD's 5 percent markup for low-value-adding services. The IRS's position signals flexibility in BEAT treatment but also places more weight on proper documentation under U.S. rules.

Why This Guidance Matters Now

Recent legislative developments have increased the relevance of this clarification. The OBBBA reinstated full expensing for domestic research and development costs and restored 100 percent bonus depreciation for certain property placed in service after January 19, 2025. These changes are likely to lower regular U.S. tax liability for many companies.

While that may appear beneficial on the surface, lower regular tax liability increases the risk that a company could fall into BEAT territory, especially if it's making payments to foreign affiliates that would otherwise be deductible.

For companies that haven't previously been exposed to BEAT, 2025 could be a turning point. In that context, the SCM exception becomes more than a compliance nuance—it becomes a valuable planning tool.

What Finance and Tax Leaders Should Consider

This is a suitable time for CFOs and tax directors to take a closer look at their intercompany service structures. Even if your current transfer pricing method involves a markup, the cost component of those services may still qualify for exclusion from BEAT under this clarified rule.

Tax leaders should begin by identifying relevant intercompany service flows and reviewing whether they meet the IRS's definition of covered services. Equally important is assessing whether existing documentation is sufficient under Section 59A standards—not just for transfer pricing purposes.

If intercompany service charges include a markup, it's important to understand how much of that payment remains exposed to BEAT and whether alternative structuring or pricing could reduce that exposure. For businesses with narrow margins or newly reduced U.S. tax liability, this could have a material impact on their effective tax rate.