Question

Please review the following article and provide your opinion on the equity of these new provisions. Defend your position. Foreign-derived intangible income deduction: Tax reform’s overlooked new benefit for U.S. corporate exporters By Frank J. Vari, CPA, J.D. August 2, 2018 The foreign-derived intangible income deduction provides C corporations that sell goods or services to foreign customers an effective 13.125% tax rate on qualifying income. https://www.thetaxadviser.com/newsletters/2018/aug/foreign-derived-intangible-income-deduction.html

Answer 1

The clear beneficiaries of these new provisions are U.S.-based corporate exporters of goods and services with no CFC ownership. These corporations have long been subject to higher tax rates than their multinational competitors that have been able to move intellectual property outside the United States to lower tax jurisdictions. The FDII deduction is a big step toward eliminating this tax advantage. Furthermore, because FDII does not require the taxpayer to identify intangible assets, it avoids cumbersome and expensive valuation and segregation studies and other complex legal and tax undertakings.

The bigger winners will certainly include technology corporations, including software developers, pharmaceutical manufacturers, and similar industries. These corporations generate foreign sales, including FDII-eligible licensing and royalty income, with minimal tangible assets. These types of industries generally also produce higher margins, which will further increase the FDII benefits.

FDII is certainly good for U.S. C corporations that export goods and services but do not own a CFC. This is particularly true for technology companies with higher margins and limited tangible assets. As with any new comprehensive tax law, uncertainties abound and guidance is limited but there is no doubt that FDII is a benefit worth pursuing.