The Internal Revenue Service has proposed final regulations governing a new tax break aimed at encouraging U.S. multinationals to locate more of their assets and operations used in serving overseas markets back to the U.S.
The FDII (Foreign-Derived Intangible Income) deduction is part of the Trump administration’s tax reform package. The final regulations, which will be published in the Federal Register on Wednesday, provide guidance on how to determine the amount of the deduction.
“Congress created FDII to encourage companies to put intellectual property in the U.S., and the break could nudge corporations toward serving foreign markets from the U.S.,” The Wall Street Journal said.
Under FDII, companies that produce goods and services in the U.S. and sell abroad can claim a 37.5% deduction, resulting in a 13.125% effective tax rate, as compared with a 21% corporate rate, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, after which the deduction is reduced to 21.875%, resulting in an effective tax rate of 16.406%.
According to the Atlanta Business Chronicle, lawmakers wanted FDII to be the “carrot” that prompts companies to increase investment in their U.S. operations relative to foreign operations because it eliminates the incentive to locate intangible assets in their low-tax foreign subsidiaries when they sell to foreign markets.
The companion “stick” provision in the tax law, known as Global Intangible Low-Taxed Income (GILTI), essentially penalizes U.S. corporations that earn income through offshore entities that had avoided U.S. taxes in the past.
Boeing, Archer Daniels Midland, and Intel are among the companies that have already listed FDII-related benefits in their financial statements.
The credit, however, could be challenged at the World Trade Organization as an impermissible export subsidy.