United States

A guide to foreign-derived intangible income provisions

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Internal Revenue Code section 250 is one of several significant international provisions enacted under the 2017 Tax Cut and Jobs Act. Section 250 allows domestic C corporations a deduction regarding a special category of income referred to as foreign-derived intangible income, which is essentially income derived from serving foreign markets.

Effective for tax years beginning after Dec. 31, 2017, domestic C corporations are allowed a deduction equal to 37.5% of their FDII (this rate will be lowered to 21.875% starting in 2026). This equates to a U.S. federal income tax rate of 13.125% on qualifying domestic C corporation FDII. The reduced tax rate for FDII is intended to stimulate U.S. manufacturing activities, encourage the relocation of existing intellectual property assets to the United States, and to broaden the U.S. tax base by attracting new IP investment in the United States.

Domestic C corporations must perform a complex, multi-step calculation to determine the FDII that qualifies for the 13.125% tax rate. Generally, a domestic corporation first calculates its deduction eligible income and then reduces such amount by 10% of its basis in tangible property. This net amount is then apportioned between foreign and domestic sales of products and services based on the ratio of foreign gross sales to total sales. The resulting foreign income portion is then multiplied by 37.5% to determine the deduction from taxable income.

On Mar. 4, 2019, Internal Revenue Service and the Department of the Treasury released proposed regulations  regarding the FDII provisions. The proposed regulations provide guidance on both the computation of the deductions available under section 250 and the determination of FDII. The proposed regulations also introduce documentation requirements that taxpayers must satisfy to qualify for the deduction and details how taxpayers coordinate the FDII provisions with other provisions in section 250. New reporting rules requiring the filing of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, are also described in the proposed regulations.

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