On March 6, the U.S. Department of the Treasury and the IRS issued proposed regulations on the deductions under IRC Section 250 for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) enacted as part of the Tax Cuts and Jobs Act (TCJA). Section 250 currently allows corporate taxpayers a 37.5 percent deduction against FDII and a 50 percent deduction against the GILTI inclusion under Section 951A, including the gross-up for foreign taxes under Section 78. The proposed regulations provide rules for computing FDII, which is the portion of a domestic corporation’s intangible income derived from foreign markets, and the deductions against FDII and GILTI. Proposed regulations published in September of 2018 provide rules for computing GILTI. The key takeaways from the proposed regulations are summarized here.
Section 1.250(a)-1 deductions for FDII and GILTI
- An individual electing to be taxed as a corporation under Section 962 will be eligible for the 50 percent GILTI deduction under Section 250.
- A domestic corporation’s FDII is based on taxable income determined without regard to Section 250 but taking into account the application of Sections 163(j) and 172(a). In order to avoid a circular calculation, an ordering rule is provided for applying Sections 163(j) and 172 in conjunction with Section 250.
- FDII is the corporation’s deemed intangible income (DII) multiplied by its foreign-derived ratio. DII is the excess of a corporation’s deduction-eligible income (DEI) over its deemed tangible income return (DTIR), which is 10 percent of the corporation’s qualified business asset investment (QBAI). The foreign-derived ratio is the corporation’s ratio of foreign-derived deduction eligible income (FDDEI) to its DEI.
- The Section 250 deduction is not treated as giving rise to exempt income or assets for purposes of computing FDII.
- A domestic corporate partner takes into account its distributive share of a partnership’s FDII components, such as QBAI, DEI, and FDDEI, when calculating its own FDII.
- For purposes of determining a domestic corporate partner’s deemed tangible income return (DTIR), a domestic corporation’s QBAI is increased by its share of the partnership’s adjusted basis in partnership-specified tangible property.
- Sales of property or services to the U.S. government for the ultimate benefit of a foreign government under the Arms Export Control Act of 1976 are treated as sales of property or provisions of services to a foreign government and therefore are taken into account as part of a domestic corporation’s DEI, potentially expanding FDII benefits for defense contractors.
- A seller that has less than $10 million of gross receipts in the prior taxable year, or less than $5,000 in gross receipts from a single recipient during the current taxable year, treats a recipient as a foreign person if the seller has a shipping address for the recipient that is outside the U.S.
- For determining foreign use for sales of property that, because of their fungible nature, cannot be specifically traced to the location of use (“fungible mass”), a seller may use market research, including statistical sampling, economic modeling, and other similar methods, to establish that some, but not all, of the property is for a foreign use. However, at least 10 percent of the fungible mass must be for foreign use.
- A sale of intangible property is for a foreign use to the extent revenue is earned from exploiting the intangible property outside the U.S.
- Location of the performance of the service for proximate services, the location of the property for property services, the origin and destination of transportation services, and the location of the recipient for general services determine whether a service qualifies as FDDEI.
- If both the origin and destination of a transportation service are outside of the U.S., then the service is an FDDEI service. In the event either the origin or the destination, but not both, of the transportation service is outside of the U.S., then 50 percent of the service is an FDDEI service.
- If a foreign related party resells purchased property from a domestic corporation, the sale to the foreign related party qualifies as an FDDEI sale only if an unrelated party transaction with respect to such sale occurs and the unrelated party transaction qualifies as an FDDEI sale. The unrelated party sale generally must occur on or before the FDII filing date to qualify for FDII, but if the unrelated party transaction occurs after the FDII filing date, the domestic corporation may file an amended return if certain criteria are met.
A hearing on these proposed regulations has not been scheduled, but requests for hearing and comment submissions are due by May 6, 2019. It is anticipated that Treasury and the IRS will receive a significant number of comments that will need to be addressed as part of the final regulations.