The IRS issued final regulations on Thursday on determining the amount of the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) under Sec. 250 (T.D. 9901). The final regulations also detail how taxpayers coordinate the FDII and GILTI provisions with other provisions in the Code. The regulations finalize with revisions proposed regulations (REG-104464-18) issued in March 2019.
The final rules also contain amendments to regulations issued under Secs. 962 (election by individuals to be taxed at corporate tax rates), 1502 (how the deduction applies to consolidated groups), 6038 (information reporting for certain controlled foreign corporations (CFCs) and partnerships), and 6038A (information reporting for certain foreign-owned corporations).
Sec. 250 was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and is effective for tax years beginning after Dec. 31, 2017. Sec. 250 is designed counteract the effect of providing a lower U.S. effective tax rate for the active earnings of a CFC of a domestic corporation through the GILTI deduction by providing a lower effective U.S. tax rate for FDII earned directly by the domestic corporation through a 37.5% deduction. The Sec. 250 deduction for both GILTI and FDII helps to neutralize the role that tax considerations play when a domestic corporation chooses the location of intangible income attributable to foreign-market activity; that is, whether to earn that income through its U.S.-based operations or through its CFCs.
The final regulations, which adopt the proposed regulations with a few revisions in response to comments, mostly about the burdensome substantiation requirements, contain the following provisions under Sec. 250:
- Regs. Sec. 1.250(a)-1 provides rules for determining the amount of the FDII deduction, including how to apply the taxable income limitation in Sec. 250(a)(2);
- Regs. Sec. 1.250(b)-1 contains general rules for computing a domestic corporation's FDII;
- Regs. Sec. 1.250(b)-2 explains how to determine a domestic corporation's qualified business asset investment (QBAI), a component of FDII;
- Regs. Sec. 1.250(b)-3 contains the rules for determining gross income included in gross foreign-derived deduction eligible income (gross FDDEI), a component of the computation of FDII;
- Regs. Sec. 1.250(b)-4 explains how to determine gross FDDEI from sales of property;
- Regs. Sec. 1.250(b)-5 explains how to determine gross FDDEI from the provision of a service; and
- Regs. Sec. 1.250(b)-6 provides rules about the treatment of sale of property or the provision of a service to a related party.
Most of the comments about the proposed regulations objected to the burdensome substantiation requirements imposed on foreign transactions. In response, the final regulations remove the specific documentation requirements to establish foreign person status and foreign use with respect to certain sales of general property and the location of a consumer of a general service. Instead, the general requirement for taxpayers to substantiate their deductions will apply without any additional specific requirements as to the content of information or documents.
The final regulations also adopt a more flexible approach on the types of substantiation required for foreign use for sales of general property to non-end users, for foreign use with respect to sales of intangible property, and for determining whether services are performed for business recipients located outside the United States. The regulations have also eliminated the reliability requirement.
To provide flexibility to taxpayers, the IRS is permitting them to apply the proposed regulations for tax years before the final regulations apply. In addition, except for Regs. Sec. 1.250(b)-2(h) (the anti-avoidance rule), the rules in Regs. Secs. 1.250(a)-1 through 1.250(b)-6 apply to tax years beginning on or after Jan. 1, 2021. Regs. Sec. 1.250(b)-2(h), containing an anti-abuse rule for certain transfers of property, applies to tax years ending on or after March 4, 2019, consistent with the proposed regulations' applicability date. A transition period is provided for the QBAI anti-avoidance rule in Prop. Regs. Sec. 1.250(b)-2(h)(3) for transactions entered into before the date that the proposed regulations were issued.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.