Foreign-derived intangible income Deduction (“FDII”): The new tax benefit for corporate exporters

International Tax Insider

Background

The 2017 Tax Cuts a Jobs Act (“2017 TCJA”) was one of the most sweeping tax reforms in the past 30 years. The new tax law provided tremendous corporate tax planning opportunities. One exciting new corporate tax planning opportunity was prescribed under IRC §250(a), the Foreign-derived intangible income deduction (“FDII”).

This new tax deduction was included in the 2017 TCJA with the intention of encouraging United States exports. The essence of this new regulation is that U.S. “C” Corporations that sell goods and services to foreign customers may be eligible to reduce the effective tax rate on certain qualifying income to 13.125%.

Conceptually, the United States Congress set the stage for this new “FDII” tax deduction to work in tandem with the new “GILTI” tax regime in order to make a favorable impact to the United States economy.

As you may be aware, the new “GILTI” regulations impose U.S. taxes on certain foreign income earned by foreign corporations that are controlled by U.S. taxpayers. This was implemented as a deterrent to U.S. taxpayers from making foreign investments and to encourage the repatriation of foreign earnings. Conversely, the new “FDII” regulations prescribe certain tax benefits to U.S. taxpayers that sell goods and services to foreign customers. As a result, this two-pronged approach of taxing certain overseas profits and implementation of tax benefits for certain U.S. exports was designed to impact the paradigm of global fiscal policy.