Treasury and the IRS on March 4 released proposed regulations under Section 250, added to the Code by the 2017 tax reform legislation. The proposed regulations provide guidance regarding the deduction allowed under Section 250(a), which is equal to the sum of (i) 37.5% of a domestic corporation’s foreign-derived intangible income (FDII) and (ii) 50% of its global intangible low-taxed income (GILTI) plus Section 78 inclusions, with a limit on the overall deduction amount based on taxable income.
The proposed regulations also define and provide mechanics to calculate several key FDII components, including deduction eligible income (DEI), foreign-derived deduction eligible income (FDDEI), and deemed intangible income (DII).
The proposed regulations raise a number of important issues. PwC on March 14 hosted a webcast featuring PwC specialists who discussed some of these issues. This Insight highlights those discussions. Watch the webcast replay and register for future webcasts in PwC’s Tax Readiness series, which addresses other important current tax topics.
The proposed regulations provide needed guidance with respect to the determination of the Section 250 deduction and its various components. This guidance includes detailed categories of sales and services that are eligible for FDDEI treatment, each with their own rules.
The proposed regulations also impose fairly significant documentation requirements that may prove burdensome for some taxpayers. Other documentation requirements on which taxpayers traditionally have focused -- specifically, for intercompany transactions -- generally have consequences in relation to accuracy-related penalties and protection therefrom. In contrast, the documentation requirements in the proposed regulations constitute necessary conditions that must be met in order for an eligible taxpayer to include income from the sale of property or provision of a service in FDDEI. Taxpayers should be mindful of these requirements and pay close attention to the technical requirements for FDDEI treatment of the various sale and service categories.
Observations: When participants in the March 14 webcast were asked whether they expect to benefit from the FDII regime, of those that have undertaken the analysis, 30% said significant benefit; 29% said limited or no benefit because of significant QBAI; 15% said limited or no benefit because of documentation requirements; and 26% said limited or no benefit because of expense or computational issues.
Partner, Washington National Tax Services ITS Leader, PwC US