The Tax Cut and Jobs Act (TCJA), has brought us a new significant opportunity called foreign-derived intangible income (FDII) deduction in IRC Sec. 250(a). For U.S. C-Corporations that sell goods and/or provide services to foreign customers, this deduction reduces the effective tax rate on qualifying income to from 21% to 13.125%.
- The FDII incentive is only available to C Corporations.
- FDII is taxed at 13.125% (vs. current corporate rate of 21%)
- FDII is a new category of income that is not specifically traced to intangible assets, rather TCJA assumes a fixed rate of return on U.S. business assets and the residual income is the income deemed to be generated by the IP.
- Particularly, FDII is income that is more than 10% of a taxpayer’s Qualified Business Asset Investment (QBAI). A taxpayer’s QBAI are the assets used by the taxpayer in a trade or business that are depreciable under IRC Section 167. Income in excess of 10% of the QBAI is the Deemed Intangible Income of that taxpayer and to the extent this income is foreign sourced it is the taxpayer’s FDII.
- The FDII is projected to function in tandem with newly enacted IRC Sec. 951A, which includes global intangible low-taxed income (GILTI) in the income of U.S. shareholders. GILTI is a new category of income for U.S. taxpayers owning a controlled foreign corporation (CFC). GILTI, similar to the existing Subpart F provisions, is a deemed income inclusion.
- Taxpayers who undertake the rigorous analysis to compute the FDII deduction may potentially recognize a cash benefit in current and future tax years lowering quarterly estimated tax payments and a positive financial statement impact due to a lower effective tax rate.
Our Export Incentives Team assists clients by:
1. Conducting detailed analysis of components of FDII formula and properly allocable expenses to various classes of gross income.
- Calculation of DEI and QBAI
- Analyze ability to properly allocate items of expense to non-DEI.
- Consider and identify accounting method changes on revenue and deductions.
- Separation of DEI into foreign and other eligible income
2. Evaluating foreign use or consumption of your goods and services.
3. Analyzing transfer pricing issues
4. Tracking of data and required characteristics
- Understanding where the constraints are in Client’s IT systems.
- Evaluating data analytics tools to extract the data from various systems within Client’s company (e.g., accounts receivable, transactional-level general ledgers).
- Consider how to update Client’s tax system to consistently track necessary attributes going forward.
5. Analyzing supply chain, IP, and product flows for location of income, expenses.
6. Creating transparent calculations and detailed procedural/technical backup to substantiate positions taken.