The IRS issued guidance on determining the amount of the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) under Sec. 250 (REG-104464-18). Tuesday’s proposed regulations also detail how taxpayers coordinate the FDII and GILTI provisions with other provisions in the Code. The proposed 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. According to the preamble to the proposed regulations, to neutralize 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, Sec. 250 provides a lower effective U.S. tax rate for FDII earned directly by the domestic corporation through a 37.5% deduction for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026. 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 proposed Sec. 250 regulations cover the following topics:
- Prop. 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).
- Prop. Regs. Sec. 1.250(b)-1 contains general rules for computing a domestic corporation’s FDII.
- Prop. Regs. Sec. 1.250(b)-2 explains how to determine a domestic corporation’s qualified business asset investment (QBAI), a component of FDII.
- Prop. 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.
- Prop. Regs. Sec. 1.250(b)-4 explains how to determine gross FDDEI from sales of property.
- Prop. Regs. Sec. 1.250(b)-5 explains how to determine gross FDDEI from the provision of a service.
- Prop. 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.
The IRS is requesting comments on the proposed regulations within 60 days after they are published in the Federal Register. (They are scheduled to be published March 6.) The proposed regulations state that all taxpayers with a Sec. 250 deduction will be required to file new Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.