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Foreign-Derived Intangible Income Deduction

CAREFUL CONSIDERATION FOR A SIZABLE DEDUCTION

The 2017 Tax Cuts and Jobs Act (TCJA) provides US companies with a new permanent deduction: Foreign-Derived Intangible Income (FDII). An incentive for U.S. C-corporations to generate revenue from serving foreign markets, the provision applies a preferential tax rate to eligible income.

Don’t let the name fool you. FDII is a new category of income and it does not have to be generated from intangible assets (i.e. royalties). Instead, the new tax law assumes a fixed rate of return on a corporation’s U.S. fixed assets and any remaining foreign source income (i.e. exports) above that fixed asset return is deemed to be generated by intangible assets. The deduction is applicable to sales of most any product or service where the buyer is foreign.

The formula to determine FDII is complex and requires the identification of specific data, but the benefit of a 37.5% deduction against taxable income deserves careful consideration.

Could your company benefit from FDII?

FDII may represent a significant deduction for your C-corporation if you generate income from:

  • Sale of property to a non-US person for foreign use. A sale may also include any lease, license, exchange, or other disposition.
  • Services provided to a foreign party or with respect to any property outside of the United States

Many related-party property and service transactions are also eligible for the deduction, although special rules may apply that could reduce the eligible deduction.

If you are already claiming the R&D Tax Credit, there is tremendous overlap of the required information and collection process that could be leveraged to claim the FDII deduction.

News

  • Anchin Alert
    Key Tax Provisions in the BBBA for International CompaniesDecember 23, 2021

    On Friday, November 19th, the United States House of Representatives passed the Build Back Better Act (BBBA). This legislation contains many provisions that will affect companies of all sizes, including multi-national corporations (MNCs). Some key areas of interest for MNCs include the new corporate minimum tax rate as well as changes to the calculation, rate and Qualified Business Asset (QBAI) of the Global Intangible Low-Tax Income (GILTI), the Foreign Derived Intangible Income (FDII) deduction and the Base Erosion and Anti-Abuse Tax (BEAT). In this article, we will take a closer look at the proposed changes to these provisions (summarized in the chart below), the impetus behind them, and how they might affect small- and medium-sized MNCs.

  • Anchin in the News
    INSIGHT: Taking Another Look at the Foreign-Derived Intangible Income DeductionJuly 24, 2020

    The Foreign-Derived Intangible Income (FDII) income deduction is not the simplest of calculations. Gwayne Lai, Amanda Scott, and Yair Holtzman of Anchin show how some taxpayers can use existing R&D data to get a head start.

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