On Monday, March 4, 2019, the I.R.S. released 177 pages of proposed regulations under the foreign-derived intangible income (“F.D.I.I.”) and global intangible low-taxed income (“G.I.L.T.I.”) regimes. They are scheduled to be published in the Federal Register today, March 6.
When adopted in final version, the proposed regulations will provide guidance regarding the following (and other) topics of importance when computing F.D.I.I. and G.I.L.T.I.:
- Ordering rules will address the order of application of various intertwined provisions, including the Code §250 deduction, the Code §163(j) interest expense limitation, and the Code §172 net operating loss deduction.
- Guidance will be provided concerning the application of expense allocation and apportionment rules when determining the deductions allowed in computing deduction eligible income (“D.E.I.”). Those rules appear in Treas. Reg. §§1.861-8 to 1.861-14T and 1.861-17.
- When determining the scope of sales or services constituting foreign-derived deduction eligible income (“F.D.D.E.I.”), a V.A.T.-like approach will be used to determine whether services are provided to customers outside the U.S. Other rules will explain how F.D.D.E.I. is determined when a taxpayer uses domestic intermediaries or related parties.
- The regulations will include long-awaited confirmation allowing individuals subject to a G.I.L.T.I. inclusion in income under Code §951A to claim the Code §250 deduction when making an election under Code §962. This will ensure that an individual’s tax burden with respect to the undistributed foreign earnings of a C.F.C. is not greater than the tax that would apply if the individual actually owned the C.F.C. through a domestic corporation. This should result in most individuals being in the same situation, for Federal income tax purposes, as before the enactment of G.I.L.T.I. When combined with the indirect 80% foreign tax credit allowed to corporate shareholders under G.I.L.T.I. and assuming that the C.F.C. is not operated in a low-tax or no-tax jurisdiction, the real cost of G.I.L.T.I. may be limited to the U.S. accounting and filing cost in many instances.
- The regulations will clarify the application of Code §250 in the context of consolidated groups. Guidance will explain how F.D.I.I. and G.I.L.T.I. amounts should be computed on an aggregate basis to determine an overall Code §250 deduction for the group. This overall deduction will then be allocated to the various group members based on their contributions to the group’s aggregate F.D.D.E.I. and G.I.L.T.I.
- Guidance will address the method for claiming the Code §250 deduction on a new annual Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).