In the midst of it all, Treasury issued Final Regulations that provide guidance on deductions for Foreign-Derived Intangible Income (“FDII”) allowed to domestic C-corporations under the Internal Revenue Code. These final regulations provide guidance on both the computation of the deductions available and the determination of FDII. In addition, the guidance provides rules for the computation of FDII in the consolidated return context.
The Section 250 FDII provision allows for a deduction for U.S. C-corporations that have FDII. This deduction results in an effective tax rate of 13.125% on this foreign derived income. For a more detailed discussion of the FDII basics please see https://www.withum.com/resources/what-the-fdii-and-gilti-provisions-will-mean-to-you/.
Some of the differences between the Proposed Regulations issued in May 2019, and the Final Regulations issued in July 2020 are:
- The effective date of the Regulations: The Final Regulations allow a taxpayer to choose which Regulations to apply for all tax years prior to 2021.
- Documentation: The Final Regulations relax the burdensome documentation requirements of the Proposed Regulations and only require taxpayers to obtain “credible evidence” that can be gathered through the ordinary course of the taxpayer’s business.
- Presumption of Foreign Use: For certain transactions, the IRS will accept that a sale qualifies for foreign :
- Foreign retail sales
- Sales of general property delivered (e.g., by a freight carrier) to a shipping address outside the U.S.
- Other sales of general property for which the billing address of the recipient is outside the U.S.
- Intangible property sales for which the billing address of the recipient is outside the U.S.
Companies with sales of goods to and/or provision of services for non-U.S. users searching for additional cash during the economic downturn should review their 2017, 2018 and 2019 tax returns to determine whether they can file an amended return to claim the FDII deduction if not already claimed.
- Review purchase orders from those three years to determine if any foreign sales were not properly counted
- Determine if any sales to domestic parties are actually going to be used outside of the U.S. or further sold to non-U.S. users
- Review allocation of expenses to determine if calculations made at time of original filing properly apportioned costs between domestic and foreign sales
Author: Josh Gelernter, JD, [email protected]
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International Services Tax
