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Final FDII and Section 250 Regulations: Substantiation Standards, Digital Sales, and Retroactive Application

Mechanics of Calculating the Deduction: Determining FDII, DII, DEI, FDDEI, and QBAI

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Thursday, November 5, 2020

Recorded event now available

This course will discuss the final Section 250 regulations issued July 2020, including pointing out the many modifications made to the proposed regulations. Our panel of international tax experts will explain the mechanics of the calculations and provide hands-on examples of how the deduction is calculated for tax practitioners and businesses utilizing this deduction.

Description

The Section 250 deduction was implemented to minimize tax differences attributable to the location of intangible income earned from serving foreign markets. This section allows domestic corporations a deduction of 50 percent on their GILTI inclusion and associated Section 78 gross-up amount and 37.5 percent on their FDII. On July 9, 2020, the IRS released final regulations (TD 9901) to clarify the determination of this complicated deduction. In addition to grasping the components of these regulations, businesses must decide whether to implement the final regulations when they take effect, taxable years beginning on or after Jan. 1, 2021, or whether to apply the final regulations retroactively.

The final regulations modify documentation standards introduced in the proposed regulations and explain, to some degree, what specifically fulfills the substantiation requirements. They also confirm a taxpayer's ability to claim the Section 250 deduction with respect to its GILTI inclusion and associated Section 78 gross-up amount when an individual taxpayer elects, under Section 962, to be taxed as a corporation.

Many items in the proposed regulations were finalized with changes. The method of establishing foreign use via manufacturing outside the United States, for example, remains with substantial modifications. Additional modifications were made to the determination of foreign persons and foreign branch income, whether sales of general property through related parties and sales of intangible property generate foreign-derived deduction eligible income (FDDEI), and new rules have been added for the sale of digital property and the provision of certain services.

While certain changes were made with respect to the actual calculation of the deduction, the formula generally remains complex. The mechanics of the calculation can be brutal and require the determination of DEI (deduction eligible income), DII (deduction intangible income), DTIR (deemed tangible income return) and FDDEI. Understanding the components of the calculation and how to maximum the Section 250 deduction is critical for tax professionals working with companies doing business abroad.

Listen as our panel of international tax veterans provides an in-depth analysis of the final Section 250 regulations. They will review the modifications made to the proposed regulations, how the deduction and its components are calculated, and cover when it is best to apply the final regulations retroactively.

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Outline

  1. Development and underlying policies
  2. The Section 250 deduction
  3. FDII mechanics
  4. COGS, allocable expenses, ordering
  5. FDDEI sales
  6. FDDEI services
  7. Domestic intermediary rules
  8. Documentation
  9. Partnerships and consolidated groups
  10. Conclusion

Benefits

The panel will review these and other critical issues:

  • New rules for sales of digital content
  • Relaxation of authentication standards
  • Areas where clarification is still needed and how to handle in the meantime
  • Which businesses may benefit from electing to apply the final regulations retroactively
  • How foreign use is determined in the final regulations
  • How the regulations are applied to partnerships and consolidated groups

Faculty

Gottlieb, Daren
Daren J. Gottlieb
International Tax Senior Manager, Washington National Tax
KPMG US

Mr. Gottlieb specializes in domestic and cross-border transactions involving complex international tax issues. He has...  |  Read More

Zemil, Nick
Nick Zemil
Director
PwC

Mr. Zemil focuses his practice on assisting taxpayers with large-scale international tax issues, with an emphasis on...  |  Read More