The US Department of the Treasury and the Internal Revenue Service issued final regulations relating to the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) allowed to domestic corporations under IRC Section 250 on July 9, 2020. The final regulations are generally more favorable to taxpayers.
Congress intends the FDII deduction to be an incentive for US corporations to provide goods and services to foreign customers. The theoretical result is to create a 13.125% income tax rate for qualifying income.
Key Revisions
The final regulations retain the basic approach and structure of the proposed regulations with certain revisions.
Following are key highlights.
Documentation Flexibility
The final regulations provide a more flexible approach to the FDII-specific documentation rules. For example, in certain cases, foreign person status is presumed based on the place of sale or shipping or billing address.
Documentation requirements were replaced with substantiation guidelines. The substantiation guidelines focus on types of information instead of the form of information needed to substantiate the deduction.
More Time to Meet Requirements
The final regulations generally apply to tax years beginning on or after January 1, 2021. This gives taxpayers more time to develop procedures to meet the new substantiation requirements. Please note that the proposed regulation documentation requirements must still be used until January 1, 2021.
Modified Sales and Services Rules
Additional substantiation requirements were added for certain transactions involving intangible property and sales for further manufacture.
New rules were introduced for certain types of sales and services to address the following:
- Digital content
- Electronically supplied services
- Advertising services
- Military sales and services
Property services can now include, in certain circumstances, services with respect to property temporarily located in the US.
The rules for determining foreign use were modified to eliminate the no domestic use period. Instead, taxpayers will determine foreign use based on the type of general property or the end user of the property.
Eliminated Rules
The proposed ordering rules for taxable income limitations were eliminated. Taxpayers can now use “any reasonable method” until additional guidance is issued.
The final regulations remove a rule from the proposed regulations that the sale of an interest in a foreign branch is treated as giving rise to foreign branch income. As a result, the interest in a branch is treated as general property, and the disposition of such interest could qualify for FDII benefits.
The final regulations no longer specify that in related party transactions the ultimate sale to a foreign third-party needs to occur prior to the tax return filing date.
The final regulations can be adopted prior to their effective date, however the documentation rules under the proposed regulations must still be followed.
Reporting Requirements
The final regulations clarify that a partnership with one or more direct or indirect partners that are domestic corporations must furnish certain FDII-related information on Schedule K-1 of Form 1065.
The regulations also finalize the reporting rules requiring the filing of Form 8993.
We’re Here to Help
Taxpayers should evaluate whether they can benefit from the FDII deduction and assess their internal process for substantiating qualifying transactions. For more information on how this might affect your company, contact your Moss Adams professional.