IRS Releases Proposed Guidance on Corporate Deductions Meant to Promote Repatriation of Intellectual Property

Chris Gaetano
Published Date:
Mar 5, 2019

The IRS has released proposed guidance on the treatment of deductions for the Foreign Derived Intangibles Income (FDII) and Global Intangible Low-Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act. Both provisions have the purpose of encouraging U.S. corporations to repatriate intellectual property.

The IRS said that, before the TCJA, foreign business income earned indirectly by a U.S. person through a foreign corporation was not generally subject to U.S. tax until such income was distributed as a dividend to the U.S. person. However, because subpart F does not generally apply to active foreign business income of a controlled foreign corporation, U.S. shareholders could indefinitely defer taxation with respect to their foreign business income—in particular, mobile income arising from the exploitation of intangible property, such as intellectual property—by allocating such income to its controlled foreign corporations operating in low-or zero-tax jurisdictions. In response, the TCJA enacted the GILTI tax and the FDII 

The GILTI tax is essentially a tax on foreign-sourced intangible income. It applies to income that exceeds 10 percent of a controlled foreign corporation’s Qualified Business Asset Investment, broadly defined as fixed assets that are depreciable as trade or business assets excluding intangible property like patents or trademarks. This income is taxed at a 21 percent rate, though corporations can get a 50 percent deduction on GILTI income until 2026. 

The IRS said that Congress believed that, "absent a deduction with respect to intangible income attributable to foreign market activity earned directly by a domestic corporation, the lower effective tax rate applicable to GILTI... would perpetuate the pre-Act incentive for domestic corporations to allocate intangible income to [controlled foreign corporations] formed in low- or zero-tax jurisdictions." With this in mind, the TCJA also includes a 37.5 percent deduction on FDII until the year 2026. 

The proposed regulations include guidance on determining the amount of the deductions, computing a corporation's FDII, deciding whether something is a Qualified Business Asset Investment, determining gross income included in gross foreign-derived deduction eligible income (FDDEI), determining gross FDDEI from sales of property, determining gross FDDEI from the provision of a service, and rules relating to the sale of property or the provision of a service to a related party.

Interested parties have 60 days to commend on the proposed regulations. 

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