Treasury released proposed regulations (the Proposed Regulations) under Section 250 on March 4. The Proposed Regulations are the first comprehensive form of administrative guidance with respect to the FDII regime and the Section 250 deduction following enactment of the 2017 tax reform act (the Act). Of relevance to the Proposed Regulations, the Act allowed domestic corporations a deduction equal to the sum of 50% of their global intangible low-taxed income (GILTI) inclusion and Section 78 gross-up amount and 37.5% of their foreign-derived intangible income (FDII).
The Proposed Regulations provide needed guidance related to the mechanics of determining a domestic corporation’s FDII, including detailed guidance on determining deemed eligible income (DEI), deemed intangible income (DII), and foreign-derived deduction eligible income (FDDEI). The Proposed Regulations also provide guidance on the application of the Section 250 deduction in the consolidated group and partnership settings and the interplay of Sections 163(j), 172(a), and 250.
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 introduce stringent documentation requirements that may prove burdensome for some taxpayers. Taxpayers and their advisors should be mindful of these requirements and pay close attention to the technical requirements for FDDEI treatment of the various sale and service categories.
Treasury and the IRS are likely to receive comments on many issues, including those identified above. As a result, it is possible certain aspects of the Proposed Regulations will change prior to finalization.
Partner, Washington National Tax Services ITS Leader, PwC US