Tax Reform Deduction: What Foreign-Derived Intangible Income Means to C-Corporations
The information in BDO alerts is dependent on tax policies at the time they are published. The subject matter of this alert has since been updated. To find the latest information on this topic, read Eagerly Anticipated Proposed FDII Regulations Provide Taxpayers with Guidance.What is FDII?
Enacted as part of the Tax Cuts and Job Act, the Foreign-Derived Intangible Income (FDII) deduction is a permanent deduction for domestic C-corporations that generate certain types of foreign income. It is effective for years beginning after December 31, 2017.
How does it work?
The name of the deduction is perhaps a bit of a misnomer, as the incentive is not necessarily tied to a specific revenue stream derived from a taxpayer’s ownership of intangible property. Rather, the deduction generally applies to U.S. taxpayers that generate income from export sales or services. For taxable years beginning after December 31, 2017, but before January 1, 2026, the deduction generally reduces a taxpayer’s effective tax rate on FDII to 13.125 percent; for taxable years beginning after December 31, 2025, the effective tax rate on FDII is generally 16.406 percent.
What qualifies for the deduction?
At a high level, U.S. taxpayers that generate gross receipts from the following activities may qualify for the deduction:
- Sale, lease, license, exchange or other disposition of property sold by a taxpayer to a non-U.S. party for foreign use.
- Services provided by taxpayer to any person, or with respect to property, not located in the U.S.
Special rules apply if the property or services are provided to foreign related parties.
What should companies do?
While taxpayers await further guidance from the IRS and Treasury providing specifics on the FDII deduction, it is prudent for corporations to begin assessing whether they may qualify for the benefit immediately for quarterly estimated payments and financial reporting purposes. At the same time, taxpayers should also determine whether they may be subject to the Global Intangible Low Tax Income (GILTI) provision, and undertake the proper planning procedures for estimating the potential impact of the income inclusion and corresponding deduction for certain taxpayers.
How can BDO help?
Calculating the FDII deduction involves a multi-step process with numerous data inputs. Further, determining whether certain transactions qualify for the deduction is highly nuanced and can factor in specifics related to intercompany transactions, what is deemed foreign use, as well as structure considerations. To address these complexities, BDO employs a collaborative team consisting of specialists from International Tax, R&D/199, Accounting Methods, and Corporate to help taxpayers maximize their benefit, while considering other ancillary tax matters as a result of tax reform changes. Additionally, BDO can assist with preparing detailed FDII calculations, along with any qualitative and quantitative support necessary to substantiate the benefit, as well as estimates for purposes of estimated tax payments and/or quarterly and annual financial statement disclosures.
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