Treasury and the IRS, on July 9, 2020, released 295 pages of final regulations (the Final Regulations) addressing the Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income (the Section 250 deduction) as enacted by the 2017 tax reform legislation (the Act). The Section 250 deduction generally provides taxpayers a deduction with respect to deemed intangible income earned from servicing foreign markets directly from the US or through controlled foreign corporations (CFCs).
The Final Regulations deviate from the Proposed Regulations, issued in March of 2019, in some notable respects. One significant change is a relaxation of the documentation rules required for substantiating that certain transactions generate foreign-derived deemed intangible income (FDDEI). Another change is a revision of the FDDEI sales and services rules to address additional types of transactions (such as those involving digital content) and to provide more specific rules for sales of both general and intangible property. The Final Regulations also address certain issues related to the computation of FDII and the Section 250 deduction, including the taxable income limitation, certain expense allocation rules, and the definition of foreign branch income.
Also noteworthy is that almost the entirety of the Final Regulation package has a delayed effective date, applying for taxable years beginning on or after January 1, 2021, thereby allowing taxpayers some time to prepare before the rules take effect. In the meantime, taxpayers are permitted to rely on the Final Regulations or the Proposed Regulations) for taxable years beginning before such date.
PwC is in the process of reviewing the Final Regulations in detail; some of the key highlights we have identified thus far are set forth below. An in-depth Insight on the Final Regulations will be published in the coming days. In addition, we will discuss the Section 250 deduction guidance on a PwC Webcast scheduled for July 21 at 2pm ET.
· Insight: Treasury issues proposed rules related to Section 250 deduction (March 14, 2019)
The Final Regulations modify the Proposed Regulations in several respects, including providing helpful additional guidance related to the documentation and substantiation requirements with respect to the Section 250 deduction, providing additional and more specific rules for applying the FDDEI sales and services rules to certain types of transactions (including sales of intangible property and electronically provided sales and services), and addressing certain rules related to the computation of FDII and the Section 250 deduction.
The above-mentioned highlights are not an exhaustive list of the provisions in the Final Regulations. Keep a look out for our in-depth Insight in the coming days, which will provide a more detailed summary of the Final Regulations as well as PwC insights and observations.