On July 9, 2020, the IRS and Treasury released final regulations regarding the foreign-derived intangible income (FDII) and global intangible low-tax income (GILTI) deduction. The final regulations address taxpayer comments to the March 4, 2019, proposed regulations and provide additional guidance on a broad range of FDII topics, including FDII computations, consolidated returns, loss transactions, documentation requirements, electronic services, tiered partnerships, related party dealings, intellectual property transactions, hedges, and commodities. The final regulations generally apply for taxable years beginning on or after January 1, 2021, helpfully giving taxpayers time to digest and apply the lengthy regulations. Highlighted below are certain key provisions that are expected to impact international taxpayers.
Eased Documentation Requirements
The proposed regulations required taxpayers to maintain specific documentation to support the taxpayer's FDII position. Under the final regulations, specific substantiation requirements are now only mandatory for sales of intangible property, sales of general property to resellers and manufacturers, and the provision of general services to business recipients. In these situations that would otherwise require specific substantiation, the small business exception was increased from $10 million in gross receipts to $25 million in gross receipts.
In addition, substantiation documents no longer need to be in place at the time the taxpayer's tax return is filed, though contemporaneous documentation will be viewed as having higher credibility.
Treatment of SaaS & Advertising
The final regulations add two new subcategories of general services: (i) electronically supplied services; and (ii) advertising. For electronically supplied services, the consumer is deemed to reside in the location where their device is used to receive the service (i.e., IP address). If their IP address is unavailable, then the analysis looks to billing address unless the service provider has reason to know that the consumer does not reside outside the U.S. Advertising services are deemed to be provided in the location where ads are viewed, with IP addresses being the determining factor for internet ads.
Section 962 Election
A Section 962 election enables an individual taxpayer to take a corporate deduction against his or her GILTI inclusion, thereby reducing his or her effective tax rate on GILTI. The final regulations resolved uncertainty regarding whether a Section 962 election can be made on an amended tax return by specifically allowing taxpayers to make Section 962 elections for the 2018 tax year via amended returns.
How Venable Can Help
The final FDII and GILTI regulations are robust and impact a broad range of taxpayers and industries. Prior FDII planning and computations should be revisited to ensure compliance with the updated analysis and rules. Further, individuals with offshore subsidiaries who have not made Section 962 elections should reconsider whether an election is appropriate for the 2018 tax year. Venable's international tax team can help update existing FDII and GILTI analysis and explore structuring alternatives that take advantage of these highly nuanced international tax regimes.