The COGS Exception Should BEAT It: A Policy Analysis of the Base Erosion and Anti-Abuse Tax’s COGS Exception

ALEXANDER C. BAVIS*

Conflicting theories of international taxation have led countries to adopt differing approaches to taxing multinational corporations (“MNCs”). MNCs, seizing upon resulting mismatches in countries’ tax rules, 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 introduced the Base Erosion and Anti-Abuse Tax (“BEAT”). The United States’ 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 United States 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 United States’ 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 United States removed its COGS exception because the COGS exception: (1) undermines the United States’ territorial tax regime and capital import neutrality, (2) violates tax policy considerations of neutrality and fairness, and (3) hinders the BEAT’s effectiveness in combating BEPS.

* 2020 Juris Doctor Graduate, Columbia Law School. Huge thanks to Rob Wentland for introducing me to the complexities of international taxation, Stuart Rosow for his topic suggestion and guidance, and Abby Bavis for her time, intelligence, and enthusiasm throughout my lengthy and often monotonous writing process. Thanks also to the editors of the Columbia Journal of Transnational Law for their invaluable feedback and Jordan Bavis for his illustrative hamburger sketch. Most of all, thank you Dad—your love and support were always limitless, whether that meant visiting a homesick basketball camper, reminding a near college graduate to be true to himself with his career choice, or journeying to the East Coast to support your son’s ambition to become a lawyer or see him marry his best friend. You are missed, but your love and support endure.